Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 36364-HT PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDGRANT INTHE AMOUNT OF SDR4.1 MILLION (US$6.0MILLIONEQUIVALENT) TO THE REPUBLIC OF HAITI FORAN ELECTRICITY LOSS REDUCTIONPROJECT June 29,2006 CentralAmerica ManagementUnit Finance,PrivateSector and InfrastructureDepartment LatinAmerica andthe CaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwisebe disclosed without World Bank authorization. CURRENCY EQUIVALENTS (ExchangeRateEffectiveApril 13,2006) Currency Unit = Gourdes (HTG) 43.29 HTG = US$1 1 SDR = US$1.5054 FISCALYEAR October 1 September 30 ABBREVIATIONS AND ACRONYMS AFD Agence Franqaise pour le LCU Large Customer Unit Dtveloppement BPM Bureau du Premier Ministre (Office of LICUS Low-income Country under Stress the Prime Minister) BRH Banque de la Republique d'Haiti (Haiti MEF Ministry of Economy and Finance Central Bank) CBO Community Based organization MIS Management Information System CMS Customer Management System M o U Memorandum o f Understanding CDD Community-Driven Development CIDA Canadian International Development MTPTC Ministkre des Travaux Publics, Agency Transports et Communications CMEP Conseil de Modernisation des Entreprises N C Neighborhood Committees Publiques EGRO Economic Governance and Recovery NGO Non-Governmental Organization Operation ESMAP Energy Sector Management Assistance OED Operations Evaluation Department Program (World Bank), now named IEG ESW Economic and Sector Work PADF PanAmerican Development Foundation EU European Union PCU Project Coordination Unit EDH Electricit6 d 'Hai'ti PDO Project Development Objective GOH Government of Haiti PPIAF Private Participation in Infrastructure Advisory Facility GRET Groupe pour la Recherche et 1'Echange PREPSEL Projet pour la reduction des pertes dans Technologique le secteur klectrique IDB Inter-AmericanDevelopment Bank PTUiEDH Project Technical Unit inEDH ICF Interim Cooperation Framework (CCI) ssc Strategic Steering Committee ICR Implementation Completion Report TSE Table Sectorielle de I'Eltctricite IDA InternationalDevelopment Association TSMS Technical Service Management System IMF InternationalMonetary Fund USAID United States Agency for International IPP Independent Power Producers Development L A C Latin America and Caribbean L C A Local Commercial Agency L C M Large Customer Unit Manager Vice President: - PamelaCox Country Director: Caroline Anstey Sector Director: MakhtarDiop Task TeamLeader: --- Clemencia Torres de Mastle HAITI ElectricityLoss ReductionProject CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 8 1. Country and sector issues.................................................................................................... 8 2. Multi-Donor Support Strategy to the Electricity Sector ................................................... 10 3. Rationale for Bank involvement....................................................................................... 11 4. Higher level objectives to which the project contributes .................................................. 12 B. PROJECT DESCRIPTION ............................................................................................... 13 I. Lending instrument........................................................................................................... 13 2. Project development objective and key indicators............................................................ 13 3. Project components ........................................................................................................... 14 4. Lessons learned and reflected in the project design.......................................................... 21 5. Alternatives considered and reasons for rejection............................................................ 23 C. IMPLEMENTATION ........................................................................................................ 24 I. Coordination with the IDB Project ................................................................................... 24 2. Institutional and implementation arrangements................................................................ 25 3. Monitoring and evaluation o f outcomes/results ................................................................ 27 4. Sustainabillty..................................................................................................................... . . 27 5. Critical risks and possible controversial aspects............................................................... 28 6. Grant conditions and covenants ........................................................................................ 29 D APPRAISAL SUMMARY . ................................................................................................. 30 1. Economic beneficiaries ..................................................................................................... 30 2. Economic and financial analyses ...................................................................................... 32 3. Technical ........................................................................................................................... 33 4. Fiduciary ........................................................................................................................... 33 5. Social................................................................................................................................. 34 6. Environment...................................................................................................................... 36 a. Safeguard policies............................................................................................................. 36 b. Policy Exceptions and Readiness...................................................................................... 37 Annex 1: Country and Sector or Program Background ......................................................... 38 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................45 Annex 3: Results Framework and Monitoring ........................................................................ 49 Annex 4: Detailed Project Description ...................................................................................... 53 Annex 5: Project Costs ............................................................................................................... 86 Annex 6: Implementation Arrangements ................................................................................. 87 Annex 7: Financial Management and DisbursementArrangements ..................................... 90 Annex 8: Procurement Arrangements ...................................................................................... 95 Annex 9:Economic and Financial Analysis ........................................................................... 100 Annex 10: Safeguard Policy Issues .......................................................................................... 106 Annex 11: Project Preparation and Supervision ................................................................... 107 Annex 12: Documents in the Project File ............................................................................... 109 Annex 13: Statement of Loans and Credits ............................................................................ 110 Annex 14: Country at a Glance ............................................................................................... 111 Annex 15: Maps ......................................................................................................................... 113 HAITI HT ELECTRICITY PROJECT PROJECT APPRAISAL DOCUMENT LATINAMERICA AND CARIBBEAN LCSFE Date: June 29, 2006 Team Leader: Clemencia Torres De Matle Country Director: Caroline D.Anstey Sectors: Power (100%) Sector ManagedDirector: Susan G. Goldmark Themes: Infrastructure services for private sector development (P) Project ID: PO98531 Environmental screening category: Not Required Lending Instrument: Specific Investment Loan Project FinancingData [ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 6.00 Prouosed terms: Financing Plan (US$m) Source Local Foreign Total BORROWEWRECIPIENT 1.47 0.00 1.47 IDA Grant 0.57 5.43 6.00 Total: 2.04 5.43 7.47 Borrower: Ministry o f Economy and Finance (MEF) Palais des Ministeres Port au Prince, Haiti ResponsibleAgency: Project Coordination Unit : (TBD) EDH's Project Technical Unit: ELECTRICITE D'HAITI(EDH) Martin Camille Cange, Directeur de Planification et Chef de Projet, EDH Angle Rue Charenton et H,Truman Port au Prince, Haiti B.P1753 Tel: (509) 223 2201 email: 5 FY 2007 2008 2009 2010 Annual 2.88 2.83 0.26 0.03 0.00 0.00 0.00 0.00 0.00 Cumulative 2.88 5.71 5.97 6.00 6.00 6.00 6.00 6.00 6.00 Which safeguard policies are triggered, ifany? Re$ PAD D.6, TechnicalAnnex 10 None. 6 ISignificant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: None. Loadcredit effectiveness: The Subsidiary Agreement has been executed on behalf o f the Recipient and o f EDH. The Government o f Haiti has adopted the operational manual interms and scope acceptable to the Bank. The P C U has been constituted and i s operational; EDHhas appointed the Project Chief, and a consultant has been recruited to prepare the terms o f reference and the recruitment guidelines for the manager and staff o f the local commercial agency inthe selected mixed project area, and for the manager and staff o f the Large Consumer Unit in EDH. A financial management system, capable o f recording and reporting on the project?s expenditures following the format specified in the operations manual, has been established in the PCU. Covenants applicable to project implementation: Disbursement conditions The staff and the manager o f the Local Commercial Agency will have been selected and appointed before disbursement takes place for sub-component 2.2 The manager for the Large Customers Unit (LCU) will be appointed and his contract signed before disbursement takes place for sub-components 2.3.2 and 2.3.4 Dated Covenants The Strategic Steering Committee will convene its first meeting not later than 2 weeks after project effectiveness and, thereafter, quarterly duringthe course o f Project implementation. The MEF will provide a written report with supporting documents, satisfactory to the Association, about the status o f its payments to EDH, including the amounts billed by EDHfor the Government's consumption o f electricity, the transfers from the MEF to cover the purchase of the fuel and the costs o f energy paid to independent power producers, as well as the net amount effectively transferred to EDH, (i) not later than 2 weeks after effectiveness, and, thereafter (ii)semiannually duringthe course o f Project implementation;. The Board o f EDH will provide not later than 2 weeks after effectiveness for the first year during project implementation ,and thereafter, 4 months prior to the beginning o f each subsequent fiscal year during the course o f project implementation, an annual plan previously agreed upon with MTPTC and EDH and presenting the minimumelectricity supply o f hours per day that i t intends to finance and that will be supplied either by EDH or by third parties to serve customers (i)inthe capital city o f Port-au-Prince, with further details showing the electricity provided to Port-au-Prince mixed neighborhood and the industrial zone and (ii) inthe main cities o f the Provinces. 7 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues 1. Haiti is the poorest country in the Western Hemisphere and one of the most disadvantaged countries in the world. Average per capita income i s comparable to the poorest countries o f Sub-Saharan Africa, and Haiti ranks 153 out o f 177 countries in the Human Development Index. About 78 percent o f its population o f 8.6 million lives below the poverty line, with 54 percent in extreme poverty. Income inequality is among the highest in the world, with the poorest 20 percent accounting for 1.5 percent o f total income and the wealthiest 20 percent accounting for 68 percent. 2. The economic situation is worsening. Over the past twenty years, Haiti has struggled to emerge from a cycle o f political instability and internal conflicts that has devastated its economy, further weakened state institutions, exacerbated poor governance practices and augmented levels o f poverty. Throughout the 1990s and early 2000s, this socio-economic situation continued to worsen, and external assistance to the government withdrew to a large extent. Between 1980 and 2003, the economy declined by a real average annual rate o f about 0.8 percent. 3. Key elements of the Government and donors' development strategy. In March 2004, following the resignation o f President Jean Bertrand Aristide, a Transition Government headed by President Boniface Alexandre and Prime Minister Gerard Latortue was put in place. The Transition Government, with the donor community, prepared the Interim Cooperation Framework (ICF), which set a strategy for increasing political and social stability and promoting economic growth. The Framework guides investments o f the international community until September 2007. The Government's immediate priorities were: (i)strengthening political governance and promoting national dialogue; (ii)strengthening economic governance and contributing to institutional development; (iii) promoting economic recovery; and (iv) improving access to basic services. Under item (iv), the Haitian Government (GoH) singled out the re-establishment o f continuous and reliable electricity services as a top priority. 4. Implementationof Government's strategy.According to the ICF report o f October 2005, progress has been mixed and slower than expected, mainly due to a lack o f resources. This i s particularly true of the electricity sector. While the needs were assessed at US$ 92 million, less than US$20 million has been disbursed by the international donors since the end o f 2004. Progress was the highest in economic recovery, thanks to the good performance o f the agriculture sector and the generation o f new employment with the support o f micro-finance activities. Political governance was the second area where progress has been the greatest, followed by the promotion o f access to basic services. Nevertheless, this performance was offset by mixed results in the infrastructure sectors, in environmental protection and in the promotion o f private sector development. In the electricity sector, the above mentioned report noted that only 25% o f objectives were met. Finally, the fourth pillar o f the Government's strategy, economic governance and institutional development, showed the least progress in terms o f implementation performance. 5. The institutional framework of the electricity sector is weak. The Ministry o f Public Works, Transport and Communications (MTPTC) i s the responsible entity for the sector, and the Minister i s the President o f the Executive Board for the state-owned power company, Haiti Electricity Company (EDH). Since the position o f Secretary for Energy, Mines and 8 Telecommunications (SEEMT) was eliminated in May 2005, the absence o f a technical unit responsible for the electricity sector within the MTPTC has hindered the Government's capacity to design and implement measures to address the crisis in the sector in a timely manner. With its broader and long-term vision o f the sector, but no supervisory responsibility, the role o f the Bureau o f Miningand Energy (BME) could be further developed inthe future. 6. On the other hand, the Counsel o f Modernization o f Public Enterprises (CMEP), which was created as a technical entity to oversee the reform process o f public enterprises, i s officially in charge o f following up on the medium term program to rehabilitate EDH.A technical expert for the electricity sector was recently appointed to CMEP. Finally, since September 2005, the Board o f Directors o f EDH has formed again, and meets on a regular basis, creating the foundations for better transparency for the management o f the public utility. 7. Electricity services reach only a small fraction of the Haitian population, and are of poor quality and often unreliable. Less than 10 percent o f the Haitian population has access to electricity and those who have access received on average 10 hours o f electricity a day in the last two years, with very large disparities among the areas covered. Over the past 20 years, EDH, which holds the monopoly o f electricity generation, transmission, and distribution, has been unable to meet demand. Electricity coverage and quality o f service are unsatisfactory. 8. Despite the paucity of the service, the Electricity sector represents a heavy burden for the State budget. EDH has a negative cash flow and could not function without government financial transfers. It i s technically bankrupt since assets are smaller than liabilities. The Government o f Haiti, through the Ministry o f Finance i s assisting the sector by paying for the monthly purchase of fuel and for the purchase o f electricity from two Independent Power Producers (IPPs). The resulting heavy fiscal burden makes this situation very costly and unsustainable for the Government. In FY2005, Government budget support for EDH was US$47 million, just below the budget earmarked for debt service at USSS1 million. 9. Organizational weaknesses, financial insolvency and poor asset maintenance are the main problems faced by E D H . A limited pool o f sector experts in Haiti, political interference, weakness in the institutional framework, fragmentation o f the main actors and lack o f strategic coordination and leadership remain some o f the crucial problems o f this sector. Historic causes may be a combination o f lack o f investment, poor management practices, cases o f fraud or corruption that reduce the collection rate and/or increase the costs o f electricity services for the country, political interference and others. For the country as a whole and for Port-au-Prince in particular, structural problems translate into poor and unreliable provision o f electricity services to end users. The terms of the contracts with third parties for purchase o f energy (PPAs) inherited from past governments were very onerous for the company, partly due to a poor negotiation strategy and partly reflecting the risk o f the country for private investors. Lack o f willingness o f affected consumers to pay for mediocre or at time non-existent services i s a natural consequence. A notable exception has been the case o f Jacmel, where since 1998, CIDA has financially supported a new semi-autonomous management scheme. The Canadian agency started by repairing the production capacity, and offered technical assistance focusing on the guarantee o f a high-level o f service and continuous dialogue with the customer base. This has allowed the center to balance revenues and operating costs since March 2000, although this equilibrium i s currently been jeopardized by tariff adjustments that are lagging behind the increase in cost, mainly due to higher oil prices. For the country as a whole, a "low level trap" or vicious circle i s therefore present and progressively reinforced: poor quality o f 9 service discourages customers to pay for electricity, leading to increase in fraud and reduction in EDH revenues, leading to worse maintenance, reduced operating capacity and further service deterioration. 10. High electricity losses affect directly EDH's financial situation. The utility bills cover less than 50 percent of energy generated. In some instances third parties install transformers to steal electricity from EDH high voltage lines and charge consumers for the stolen electricity. A potent combination o f a culture o f non-payment for electricity services, relatively high consumer tariffs, a low base o f metered customers, a lack o f support from the authorities to combat corruption and fraud, a weak anti-fraud unit in EDH and rampant theft o f electricity has led to extremely low levels o f cost recovery, an inefficient and dilapidated electricity network, and a high level o f financial losses. 11. The most urgent task should be to have a power sector providing an acceptable service to EDH customers, which could lend credibility to the other equally urgent task of improving the financial health of the firm to alleviate the fiscal burden that it represents. Improving the level and quality of electricity services in Hayti i s essential for the economic recovery o f the country, the improvement o f the standard o f living o f its population and the level o f security in public areas. However, achieving this turn around will require resources and a cultural change in the habits o f both users and employees o f EDH. Improvement o f services to end users can be expected to bring about a higher rate of cost recovery because satisfied users will be more willing to pay for the services, but this satisfaction in turn will only happen if there are deliberate efforts to change things within the firm. This is why efforts in the electricity sector would need first to show tangible benefits for the population, albeit modest ones, and then almost simultaneously focus on improving EDH's internal, operational and financial performance through better governance and the adoption o f a coherent result driven, medium term strategy for the firm. This will require short term measures, but within a longer term perspective o f structural changes within the firm. The current non-existent commercial orientation o f the company's management needs to be reversed. 2. Multi-Donor Support Strategy to the Electricity Sector . 12. Multi-donor approach. To support the electricity sector, the international community, the Government and EDH developed in July 2004 a multi-donor strategy under the Interim Cooperation Framework (ICF). An essential part o f the approach was based on the decision to coordinate all the actions financed by the donors within a wider sector strategy with both short term and longer term objectives. To facilitate this coordinated approach, an Electricity Sector Working Group (Table Sectorielle d'Electricite, TSE) has been meeting on a monthly basis, to exchange information and facilitate better communications between the parties involved (amongst Haitian agencies and international donors alike). 13. Short term support. In the short term, the donors initially focused on the generation segment and on the purchase o f oil to maintain some level o f electricity services in the cities. USAID subsidized oil purchases for EDH from M a y 2004 to February 2005 and several donors (AFD, USAID) started the rehabilitation o f generation units. Nevertheless, it became obvious that a more articulated strategy was needed in order to move beyond the cycle o f recurring crises and alleviate the fiscal burden o f the sector to the State. As a result, a "Memorandum o f Understanding on a Rescue Strategy for the Electricity Sector" (MoU) was signed in Brussels on October 21, 2005. Under this MoU, the Government and EDH committed to implement specific actions that would 10 improve the transparency o f the sector and increase the efficiency o f the investments while the donors committed resources to finance a minimum package o f investments and technical assistance requested by EDH to emerge from the current catastrophic situation. A t the time o f the signing, US$ 14.6Mhad been secured out o f a request of approximately US$ 27.7M, and subsequently other funds have been committed. The Haitian government (MEF, MTPTC, Planning), CIDA, AFD, USAID, the EU and the WB signed the MoU. Soon after, the IDB expressed interest in supporting the sector within the framework o f this MoU. In parallel, the dialogue o f the Government with the IMF has also included some o f the actions stated in the M o U that have a direct impact in reducing the financial burden o f the sector for the Government. 14. MediumTerm Support. Inparallel with the short-term actions described above, there was a consensus on the need to have a clearer assessment o f the situation in EDH and a better understanding o f the conditions o f the sector in Hai'ti in order to design a credible medium term solution for the sector. The EU agreed to finance the reconstruction o f EDH's financial accounts (which has not had standard financial statements for many years), and C I D A committed to finance the financial audit o f the resulting accounts by a reputed international firm. In addition, the Private Public Infrastructure Advisory Facility (PPIAF) approved the financing o f a series o f studies under the supervision of the World Bank, in order to understand the environment in which EDH operates and explore the viability o f long-term solutions for the utility, such as the option of a management contract. To date, the account reconstruction i s completed, save for the inventory and the valorization o f technical assets; the auditing firm for EDH accounts o f 2004-2005 has started; and several o f the PPIAF studies have been launched. Last, it i s important to note that other efforts by different donors are also under way to assist the Government in the broader agenda o f the Energy Sector, exploring how to expand access to electricity services through renewable sources (EU, UNEP), and addressing the pressing problems o f use and production o f woodfuels (World Bank, ESMAP). A priority in the near future should be for all actors involved to bring those additional initiatives within the coordinated framework already in place, and develop a comprehensive national strategy for the Energy Sector in the country. 3. Rationalefor Bank involvement 15. The World Bank proposed project (PREPSEL,Projetpour fa Reduction des Pertes dans le Secteur Efectrique), for reduction of electricity losses in Port-au-Prince and in the main cities, fits the Bank strategy outlined in the Transitional Support Strategy (TSS), which was endorsed by the Bank's Board of Directors on January 6, 2005. The TSS includes up to $150 million in credit and bank commitments over a two-year period. A key aspect o f the Bank's transitional strategy i s poverty alleviation through improved access to basic services and infrastructure. The two-year strategy aims at restoring hope by supporting: (i)basic services provision; (ii)job creation; (iii) rehabilitation o f areas devastated by floods in 2004; (iv) community initiatives in local development. The strategy also seeks to restore credibility in Haiti's public institutions by strengthening economic governance and institutions, bolstering efforts to fight corruption, improving transparency and promoting inclusion and consensus-building on development priorities. PREPSEL fits into this strategy by focusing on: (i)improving the quality of electricity services to selected consumers; (ii) fostering the development o f community initiatives in the bidonvilles through a partnership with neighborhood communities in those areas; (iii) concentrating a component on large customers, who sustain economic activity; (iv) contributing to the improvement in the operational and financial performance o f EDH, thereby helping to restore credibility in public services; and (v) enhancing transparence and reducing incentives for fraud 11 within EDH through the implementation o f a new customer oriented approach supported by clear procedures and automated systems, and a broad training program with new career opportunities for the staff. 16. The World Bank proposed project i s an integral part of the multi-donor coordinated efforts to exit the crisis. The World Bank initially focused on the medium-term strategy through the preparation and supervision o f the PPIAF studies. However, in the face o f the crisis, the Government and EDH requested short-term actions to show tangible results o f a better service from EDH to the population, particularly in Port au Prince. Inthis context, the WB and IDB have decided to focus on the distribution and commercialization issues o f EDH in Port-au-Prince and in the main cities in the Provinces, while USAID and AFD have been working on the rehabilitation o f various diesel units in the capital, and CIDA, with EU, have focused on repairing EDH's generation capacity in the Provinces. 17. The World Bank's proposed project is an integral part of the multi-donor coordinated strategy of support to the electricity sector. While advancing the specific activities described in the previous paragraphs (PPIAF studies and PREPSEL project), the World Bank has also played a key role from the donors' side, in the practical follow up o f the activities currently in place or committed in the MoU. Such follow up i s essential, not only for its impact on the electric sector in general, but also for the success o f the specific actions to be financed by the Bank. Indeed, as spelled out below in the `risks' section, the actual pace o f implementation o f some o f the projects developed by other donors, and the Government's commitment to implement the measures agreed upon under the MoUhave a direct impact on the Bank's interventions. Two cases inpoint are the need to ensure a minimum o f reliable electricity supply in the country and the inclusion by the Government a budget line for the consumption o f energy for all public entities in the next national budget (FY07) so that EDH can have a better track record o f one o f its most important large customers, the Government. 18. The World Bank's comparative advantage in the project i s drawn from its experience and leverage capacity with other donors. The Bank has a comparative advantage for implementing the commercial reorientation o f a public utility company because of: (i)the know-how gained from similar projects, such as the power projects in the Dominican Republic, (ii) its experience in post conflict countries through LICUS trust funds, that have financed projects in Haiti in other infrastructure sectors such as water, and projects for the electricity sector in other countries similar to Haiti, (iii) its knowledge o f EDH and the many lessons learnt through five power projects from 1976 to 1998, (iv) the use o f World Bank's procurement rules, which will improve transparency and governance within the management o f EDH; and (v) its considerable leverage in the sector, that stems from a constant interaction with the other donors involved in the project and from the availability o f highly-powered tools in our dialogue with the Haitian authorities, such as EGRO Iand other possible forms o f support. A direct result o f this joint effort was the signature o f the MoU that leveraged a total o f $14.6 million additional financing from donors, including the Bank. Furthermore, after the Bank announced its intention to undertake the proposed PREPSEL, the IDB indicated its intention to finance a similar project but on a larger scale. 4. Higher level objectives to which the project contributes 19. The project will contribute to the improvement of living standards of a representative sample of EDH's customers that could be replicated on a larger scale. It will have a positive 12 impact on the economic activity in the main urban areas of the country and it will help restore the image of public services among the generalpopulation.The project will constitute a first step to improve the quality o f service to regular customers and offer electricity services for those EDH customers that today still lack electricity, including the residents o f some bidonvilles. This will contribute to the improvement o f the living standards o f the population within the socio- economically mixed area o f the project in many aspects, from longer study periods in the evening to greater opportunities for undertakingproductive activities. Furthermore, the focus o f one component on large customers could positively affect employment and economic activity in Port-au-Prince and in the main cities in the Provinces, since out of the 2,208 customers targeted inthe selected zone, 52 percent are commercial or industrial customers. Furthermore, by demonstrating that EDH can deliver better services, the project i s likely to help restore the image o f public services among the general population. An improvement in the perception o f what a public utility can achieve would likely benefit all programs aimed at improving public services. 20. The success of the project will help to alleviate EDH's financial burden for the State. If the project i s successful and it lends itself to replication, and if the conditions are given to ensure the sustainability o f the results beyond the life time o f the project, then it i s more likely that other donors, will step in, as IDB i s doing already, and assist EDH in replicating the strategy for the firm as a whole. This outcome should allow EDH to improve its overall financial and operational performance, thereby increasing the generation o f its own revenues, as would be expected for a firm that i s collecting revenues by providing a service to customers. It should also attract other donor support by building the credibility o f EDH and the Government as serious partners in development. This, in tum, should allow the MEF to reduce its subsidies to EDH, which represented 7 percent of the total budget in 2005. B. PROJECT DESCRIPTION 1, Lending instrument 21. An IDA-funded grant o f US$ 6.00 million equivalent is proposed to finance the proposed project and EDH will contribute with US$ 1.47 M, bringing the cost o f the project to a total o f US$ 7.47 M. 2. Project development objective and key indicators 22. Project Development Objective. Contribute to the sustainable improvement in the quality o f electricity services to customers and to the strengthening o f the financial and operational performance o f the electricity public utility (EDH). 23. SpeciJic Objectives. T o this end, the proposed Project will design and implement a strategy for reduction o f technical and non-technical losses with the following objectives: 0 Adopt and implement modem commercial and service management systems for EDH as the basis for a more customer-oriented approach to providing electricity services. 0 Improve services to clients in a selected socio-economically mixed area in Port au Prince with a view to broader replication nationwide, and increase EDH's revenues with higher collection rates from more satisfied customers. 0 Improve service to, and increase revenues billed and collected from, large customers. 0 Improve customers' perception o f EDH through timely dissemination o f information on the project and continuous attention to public opinion. 0 Establish trustful relationships among EDH's management, staff and workers to ensure commitment towards implementation o f the project's approach and sustainability o f the results. 0 Lay the foundation for replication o f the approach and results o f this project to the rest o f the country. 24. Key indicatovs Improved quality o f service provided by EDH to the socio-economically mixed zone and to large customers. Number o f consumers regularized in the socio-economical1y mixed area and among large customers. Improvement in customer satisfaction in the socio-economically mixed zone and among large customers. Satisfaction with and ownership o f the project by EDH employees as measured by periodic surveys and focus groups throughout project implementation. Increase in the revenues billed and collected by EDH in the socio-economically mixed zone and among large customers. Endorsement by EDH and the Government o f a final proposal on how to replicate the pilot project to reduce losses in the other areas deserved by EDH. Number o f consumers in the whole country incorporated in the new customer database and served with the support o f the Customer Management System (CMS) and Technical Service Management System (TSMS). Number o f EDH employees successfully trained inthe use o f the new CMS and TSMS. 3. Project components 25. The project adopts a strategic approach to improve the quality o f electricity services to end users and increase revenues o f EDH through the reduction o f technical and non-technical losses in the firm, whereby it focuses on: (i)achieving quick substantive success that will have a demonstration effect; (ii) preparing the ground for replication o f the approach on a greater scale; and (iii) ensuring sustainability o f the results through systematic training o f EDH's employees in each o f the project components, and through a communication strategy aimed at both employees and EDH customers. 26. Project Rationale and Overview: The three-prong focus o f the project described in the previous paragraph i s reflected in the design o f the various components o f the project. Quick results and demonstration effects are achieved with Component 2, which adopts a selective approach. Inone case, the focus i s on a particular area o f Port-au-Prince with a sample o f EDH customers from varied socio-economic backgrounds and electricity consumption patterns-a socio-economically mixed zone- where a pilot project will be developed (Component 2.2.). In the other, the focus i s on a category o f clients, namely large consumers, who are the most promising group in terms o f capacity to pay (Component 2.3.). In parallel with this selective approach, the project also implements 14 activities that benefit EDH as a whole because they cannot be implemented in a piecemeal manner. This refers to the acquisition and implementation o f modern tools for managing commercial activities and client accounts (Component 1). With these new systems, the project will already be taking a step to building up a favorable environment to replicate the results o f the pilot project on a broader scale. This ultimate objective o f scaling up the results o f the project i s taken further under a separate component, aimed at preparing a detailed plan to replicate the approach o f the pilot project inthe other areas served by EDH,taking into account the lessons learned during the implementation o f the project (Component 3.3). Additionally, to facilitate effective results o f the various components already described, the Project includes a communication component that will provide the necessary support to achieve effective dissemination of information on the project among all relevant actors and timely feedback from these actors throughout the design and implementation o f the project (Component 3.1). Finally, the Project comprises a component for Project Management and Monitoring and Evaluation, which will support the implementation o f the Project and monitor its impact on the services for electricity users and on the financial and operational performance o f EDH (Component 3.2). 27. The Project will implement the following three components over a three year period: 28. Component 1: Improvement in EDH management systems and practices towards a more customer oriented approach(US$2,640,000). The objective o f this component is to improve the operational (technical and commercial) performance o f EDH in a sustainable manner, by giving the company the information tools for a modern and efficient management o f the customers and o f the services that it provides. New operational procedures for a more customer oriented approach in the execution o f activities using these new systems will also be developed, and EDH's employees will be trained in the use o f the system and in the utilization o f these new procedures. The project will also finance technical assistance to guide EDH in how to build the corresponding reliable databases. Since these are highly specialized systems, the project will finance two experts in customer and technical service systems for utilities to assist EDH in the procurement of the systems and in the supervision o f the work o f the selected provider. Finally, as part o f its contribution to the project, EDH will finance the construction, next to its headquarters, o f separate facilities to locate the hardware necessary to the operation o f the CMS and TSMS, as well as the call center, which will be implemented as part o f Component 2.2. (See paragraph 3 1). 29. The first system financed by the project will be a new "state o f the art" corporate commercial management system (CMS) allowing proper execution and monitoring all of the commercial activities in the firm. This will strengthen the commercial division o f EDH which now suffers from inadequate operational procedures and poor information on commercial the situation o f customers. The second system will be a new Technical Service Management System (TSMS), aimed at optimizing attention to customer claims. Current management o f the claims i s precarious, based on manual records and procedures that are poorly organized and difficult to monitor and supervise. This will help reduce the time between receipt o f the claim and restoration o f regular electricity supply, which is the critical parameter defining quality o f electricity supply. A t the same time, EDH's efficiency in execution of these activities will be maximized. Development o f new procedures, training o f employees and assistance to build up the data bases will ensure that the project provides all the means to EDH for making the best use o f the new information systems. At the same time, due to the size o f the project, further follow up on how these systems will be actually used to better serve 15 clients and help in increasing billing and collection will be done not for the whole company, but specifically for some targeted customers, as explained below. 30. As part o f the objective to improve management o f clients' accounts, it i s important to actively support the strengthening o f EDH's Anti-Fraud Unit, under the new procedures described above. T o this end, the same approach as the one adopted inComponent 2 with the Unit o f Large Users and the Personnel o f the Local Commercial Agency (see below) for the selection o f personnel will be used for this unit. Appropriate training and improvement in procedures applied by such Unit will also take place. In defining this activity, it will be important for the Project to benefit from the experiences learnt in the going effort o f the Central Government for stepping up the fight against corruption. It will be equally useful to incorporate the recommendations developed for the same purpose in other infrastructure projects supported by the Bank, such as the Haiti Transport and Territorial Project. 31. Component 2: Improvement in quality and reliability of services and increased revenue collection of EDH for selected groups of customers (US$ 3,245,000). The objective o f this component i s three fold. First, it intends to have a demonstration effect o f the benefits o f adopting this new `customer management approach' on the quality and reliability o f services to end users, with two groups o f customers: a socio-economically mixed zone in Port-au-Prince, and the group o f large customers in the main cities. Second, it intends to show how to increase the revenues o f EDH, thereby lessening the fiscal burden on the State, by targeting those who account for 70% o f EDH's total revenues. i.e. the large customers. Indeed, the reduction o f non-technical losses (non-payment and/or fraud) will focus especially on the large customers, both because they represent the largest share o f EDH's potential revenues, but also because, contrary to what i s usually thought, non- technical losses are a more important problem for the firm amongst this type o f customers than among the poorest segments o f the population which does not weigh much in terms o f revenues and which in various instances pays already for their electricity, albeit not to EDH but to middle-men. Third, this component aims to provide an intensive training opportunity and career development alternatives to EDH's employees as well as to recruit new personnel, for the use and application o f more modern commercial and technical practices in the area o f distribution and commercialization o f electricity. 32. Sub-Component 2.1. Selection of personnel for the socio-economically mixed zone and for the Large Customers Unit (LCU) (US$ 80,000) This sub-component seeks to ensure that component 2 will be implemented by a qualified and motivated group o f EDH employees, because this i s the first necessary step for the viability, let alone the success, o f the project. This i s why a transparent and competitive recruitment process will be initiated by the administrative unit o f EDH with the assistance o f a top senior level consultant hired by the project to select the employees in charge o f the various activities o f the component. EDH has recently inaugurated a new commercial agency in this socio-economically mixed zone and has appointed temporary personnel. The process o f selection o f the manager o f the local agency and o f its personnel will constitute the first activity to start the implementation o f the component. All employees o f EDH will be able to compete, and the current employees o f the zone will be relocated to other agencies in the event that they do not apply or are not selected. If vacancies remain to be filled after the first round o f hiring, then external candidates will also be accepted. The recruited employees will receive the appropriate training that will enable them to efficiently assist consumers in the area. 33. Similarly, the selection o f a skilled manager and o f the staff o f a unit exclusively devoted to large consumers that will be created within EDH, i s essential to start implementing the new approach 16 for the large customers. The importance o f large consumers in EDH's revenues justifies the creation o f a new organizational unit within the commercial department for the specific purpose o f managing all aspects o f the relation (technical and commercial) o f the utility with its large consumers. The unit will be embedded in the normal practice o f the firm. The manager o f that unit must be an expert with wide professional expertise in commercial management o f large customers. Potential candidates for the position should be EDH managers and external experts, as experience in the electricity business i s desirable, but not a requirement. The first round o f the selection process will be reserved for EDH employees only. If no suitable candidate i s found, external candidates will be considered. Once appointed, the manager o f LCU will elaborate a proposal for the organizational structure o f the unit and related human and material resources needed, and a plan on how to implement the rest o f the sub-component, and submit them to EDH's top management. The first task o f the Large Customers manager (LCM) will thus be in turn to supervise the selection o f the personnel for the unit with the assistance o f the consultant cited above. Since large customers also include all public entities, the manager o f the LCU will also have the responsibility to liaise with the working group in the Ministry o f Finance which would be implementing the inclusion o f a specific line for consumption o f electricity in the annual budget o f each public entity (action inthe MOU). 34. Sub-component 2.2. Improve quality of service to, and increase EDH's revenue from the socio-economically mixed zone through the application of a new customer oriented management approach (US$ 1,620,000) This subcomponent aims to improve the quality o f the service provided to EDH's users and increase the revenues for the firm in a specific zone o f Port-au- Prince, To this end, the new systems and procedures developed under Component 1 will be implemented and monitored in EDH's local commercial agency. Equally important, the design o f this component emphasizes the need for a cultural change both from EDH's employees and from the customers in the zone, as the only effective way to effect and sustain a change in commercial practices on both sides. This sub-component also includes investments in equipment and tools required in the commercial agency o f the zone to optimize execution o f the activities re-engineered following the new procedures. There will be some investments in the distribution network and connections to the clients needed to ensure reliability o f the supply. Specific approaches would be defined and implemented according to the socio-economic characteristics o f the users, including those in the poor, marginalized neighborhoods o f the selected zone ("bidonvilles"). Activities focusing on the latter will be financed by IDA and by EDH, who will invest US$ 100,000 in investment benefiting these poor neighborhoods. This component constitutes a pilot project whose success could later be replicated on a larger scale. 35. Selection of the project socio-economically mixed area. The project zone sits in a vibrant and socio-economically diverse area o f Port-au-Prince, consisting o f medium and small size businesses, poor and affluent residents, private and public universities, hospitals and government institutions. This zone was selected for project execution based on various indicators that would maximize the likelihood o f successful implementation of the project. These criteria included, among others: the access to a continued and reliable supply o f electricity, the existence o f a distribution network in sufficiently good condition, the presence o f different types o f customers including poor areas (bidonvilles) that could benefit first hand from the Bank's support to EDH through this project, and the absence o f negative externalities such as safety constraints. Of the 16 areas scrutinized, only this one met all the criteria. 36. EDH's local commercial agency. As mentioned above, a new commercial agency has recently been installed in the area where the pilot project will be implemented. The objective of this 17 sub-component i s to show how the local presence o f EDH can be put to best use to improve the firm's technical and financial performance which should result in a better provision o f services to end users. This said, if EDH i s performing well, there i s no reason for regular customers to go to a commercial agency. This i s why the sub-component includes also, as a test, the creation o f a call center for the attention o f customers by phone. The scope o f this service addresses customers' claims related to both bad quality o f electricity supply and commercial matters, supported by the new CMS and TSMS. 37. EDH's Partnerships with NeighborhoodCommittees. Contrary to general belief, EDHhas an ongoing relationship with customers in many o f the marginalized zones, (it has in fact a unit specifically to address those clients). Neighborhoods Committees (NC) have served as intermediaries managing electricity operations and collecting bills in these marginalized areas. The project will build on this model, and on other experiences such as the work already done by GRET (Groupe pour la Recherche et I'Echange Technologique) for the provision o f water to poor neighborhoods, to improve electricity service and build a stable commercial relationship with those clients. More specifically, the project will seek to (i)establish new contracts to guarantee service standards by EDH and payment collection by the NC; (ii)strengthen partnerships between these communities and EDH; (iii) assist and train community members to improve the managerial capacity o f NC, namely to improve collection methods and accounting; and (iv) strengthen the capacity o f the community liaison office in EDHto better respond to this type o f customer. 38. Sub-Component 2.3: Regularization of EDH's large consumers through the application of the new customer-oriented management approach (US$ 1,545,000). The dollar amount currently billed to around 2,350 customers (1.3 percent of total) in the whole country with a monthly unit consumption above 1,000 kWh represents close to 70 percent of EDH revenues (inmost other countries, large customers amount to 30 percent o f total bill on average). Furthermore, EDH databases show more than 1,300 "non-active" customers and around 1,500 "0 kWh recorded consumption" large customers (December 2005 figures). It i s therefore crucial for EDH's financial health to regularize the commercial condition o f 100 percent o f its large consumers, regardless o f their current situation. Since many o f these customers have opted for self-generation, EDH would need to convince them o f the quality and reliability o f its service before they agree to subscribe or re- subscribe as regular customers. A t the same time, experience shows in Hayti and in other countries that the decrease of non-payments by these types o f customers can lower significantly non-technical losses o f the company. A significant improvement in the billing coverage and collection rates of large customers has been achieved by almost all the utilities in Latin America, through a combination o f good management practices and application o f IT tools, which facilitates better services and better attention to the client, and also leads to greater transparency and accountability o f clients accounts, making fraud and non-payment practices much more difficult to conceal. 39. There will be a detailed field assessment o f the situation o f all large consumers, an activity that will provide a good opportunity to revitalize EDH staff and, at the same time, improve the company's public image. It i s proposed to organize special purpose crews, formed by a student o f the school o f engineering or o f business administration and an EDH employee with some skills in customer connections. As the assessment i s not a permanent activity, students should be recruited temporarily (stage regime). Those showing the best performance could be incorporated to the permanent staff, once the assessment i s concluded. Project financing will also include the short-term technical services o f an expert in remote metering to assist LCU in the elaboration o f the technical specifications for a call for bids for supply, installation and commissioning o f remote metering 18 devices. The project will also finance the renovation o f distribution lines and customer connections as well as the installation o f remote metering and disconnection and reconnection devices in all points o f supply to regularized large customers. Renovation o f distribution lines and customer connections will allow EDH to improve the reliability o f service. Remote disconnection avoids the usually conflictive situation created with the customer when this operation must be executed at the site and, by reducing the contacts between the firm's employees and recalcitrant customers, it also eliminates potential sources o f corruption. Investing in resilient connection equipment will make it extremely difficult to attach irregular connections to this cable. 40. Component 3: Participatory approach, project management, monitoring and impact evaluation, and replication strategy (US$ 1,579,760). This component groups all the supporting activities necessary for the successful implementation o f the first two components. It includes a communication strategy with a pro-active participatory approach towards clients and employees o f EDH. It also focuses on the importance of an efficient project management and careful monitoring and an evaluation o f the results, their impact and their sustainability beyond the duration o f the project. Lastly, i t includes a proposal to be endorsed by the Government and EDH on how to scale up and replicate the project inother zones o f Port-au-Prince and o f the rest of the country inan effort to expand the benefits o f the model proposed here to EDH as a whole. 41, The component includes a pro-active participation and communication strategy towards clients and employees o f EDH intended to promote the behavioral changes to achieve the project's objectives. This strategy, to be tested under the pilot, comprises a combination o f (i)reaching quality standards for customer satisfaction as identified by consumers; (ii)enforcement and social control mechanisms; and (iii)a communication program to reach out to the various stakeholders to obtain their feedback, and disseminate information about the project outcomes. 42. The participation strategy will promote cultural changes to address negative practices both within EDH and among customers, that might hinder project success. Project design includes features to promote this change in culture (competitive selection among EDH's employees o f key personnel to implement the pilot project, remote disconnection, etc.). The main actions to be tested under the project are summarized below: a Low-incomecommunity residents:(i)to strengthen Neighboring Committees (NC) to play a key role in the establishment o f better practices; (ii)to facilitate complaint processing and responsiveness standards; and (iii) to assess the feasibility to install house-meters in selected neighborhoods. a High income residents and businesses: (i)to regularize contracts and ensure service . standards are reached; (ii)to offer alternatives to save electricity consumption to reduce billing; and to inform them periodically o f improvements and potential savings; (iii)to disseminate good practices and give public recognition to good customers: and (iv) to seek customer collaboration to eliminate illegal activities with the use o f positive incentives (discount for faster payments, for instance) and with the application o f stricter enforcement mechanisms. 0 Government institutions: (i)to include a line in the budget o f each institution for their consumption o f electricity; (ii)to work with the authorities, with the support o f the Strategic Steering Committee, to ensure timely payment o f electricity bills, and corrective measures in case o f delays to avoid a negative impact on EDH's revenues; and (iii) give public to recognition to good customers. 19 e Proposed changes in E D H : (i) promote project ownership through the involvement o f to key staff as offering opportunities for career development; (ii) to engage the EDH Union in the proposed changes thereby overcoming fears and conveying the need to embrace the changes as a critical step for EDH's survival; (iii) to establish a recruitment process to hire personnel on the basis o f qualifications; (iv) to define an incentives system based on participation in training, recognition and non-monetary compensation to ensure engagement inthe proposed changes; and (v) to establish and enforce a monitoring system to identify and punishillegal activities. 43. The communication strategy will disseminate the project's results and good practices among the different customers through newspaper articles and/or press releases that will inform the population in detail about the project. There will also be an information note/brochure for all targeted EDH customers in the selected zone and for all larger customers, describing in detail the foreseen implementation process; a dissemination system will be established to enhance community partnerships with EDH. Surveys to customers in the project zone of the various income levels, large consumers in the country and EDH's employees will be undertaken at various stages o f project implementation to define a baseline and then monitor the impact o f the project on these groups. Other dissemination activities will be carried out as required with EDH, customers and other groups o f civil society, including but not limited to the media, government officials, other donors, and other sectors. 44. As part o f the project management sub component, the project will finance expenditures for project administration by the PTU/EDH team and the PCU. Eligible expenditures will include: (1) consultant costs o f the PCU; (2) studies and consultancies; (3) training activities, and (4) acquisition o f goods and equipment needed for project implementation (computers, software). EDH will contribute to this component by providing logistical support, among which: facilities for the PCU, maintenance o f amenities, payment o f salaries to the PTU-EDH team etc. This component will also finance monitoring and evaluation (M&E) activities others than those already considered under Component 3.2, and the project's impact evaluation. 45. A long-term strategy will be developed to replicate the model described inthe three project components above. Through the project's expected improvements in the areas of intervention, the credibility o f the sector should be revived, increasing the chances for obtaining additional donor financing for the scale-up. A t the same time, it i s clear that replication will entail more than just a replication o f what will be done in Component 2, for these other areas face more challenging constraints o f different sorts that the pilot project. Thus, the design o f this replication strategy will be based on an evaluation o f the progress in the execution o f the pilot project and an analysis o f the project impact, but also on an assessment o f current conditions on the key aspects that need to be contemplated to enable a successful replication inthe rest o f Port-au-Prince and inthe Provinces. 20 Component US$ Mn World Bank EDH Total Component I:Installation of CMSlTSMS 2.19 0.45 2.64 1.IIncorporation of CMS 1.38 1.38 1.2 Incorporation of TSMS 0.71 0.71 1.3Application of new procedures and rules 0.05 0.05 1.4. Support for restructuration of EDH anti-fraud unit 0.06 0.06 1.5 Construction of new facilities for CMS, TSMS, call center 0.45 0.45 `Component 2: Improvement in quality ot service and increase in 3.15 0.10 3.25 2.1 Selection of personnel for the socio-economically mixed area and 0.08 0.08 forthe LCM 2.2: Improve quality of service to, and increase EDH revenue from, the 1.52 0.10 1.62 socio-economically mixed zone 2.3: Regularisation of large consumers through the application if the 1.55 1.55 new customer oriented management approach. Component 3: Participatory approach, project management, M&E 0.66 0.92 1.58 and impact evaluation and replication strategy Component 3.1: Participatory approach (surveys, press releases, round 0.08 0.08 tables etc) Component 3.2. Project management, M&E, impact evaluation 0.42 0.92 1.34 Component 3.3: Replication Strategy 0.16 0.16 Continaencies 0.01 0.01 4. Lessons learned and reflected in the project design 46. The project design builds on lessons learned from the implementation o f previous World Bank projects in Haiti and especially from the five power projects implemented from 1976 to 1999. Out of the five projects, only the last one included a component specifically analyzing technical and non-technical losses; the first four projects focused on technical losses, generation capacity and institutional improvement o f EDH. The table below summarizes the main lessons learned from these past Bank interventions in the electricity sector in Haiti that were incorporated in the design and preparation o f the proposed project. 21 Lessons Learned from Previoi WB Power Projects inHai'ti Need for detailed preparation of the project, from the Achieving implementation objectives while gradually design of the components and the definition of a building institutional capacity. For the third power procurement plan to the schedule of implementation and project, EDH relied heavily on consultants for its day-to- cost estimates. The ICR o f the Fifth Power Project points day operation, but this did not help the company become out that "the failure in achieving the loss-reduction more self-reliant. + The project was designed in close objective in this project and in the previous ones has been collaboration with EDH, which will play a key role due in part to lack o f an adequate preparation o f a during project implementation. This will ensure internal comprehensive program which includes detailed design o f ownership o f the project and transfer o f know how. The its components, list o f equipment, implementation project also includes training activities to foster wide schedule and complete cost estimates o f the spread capacity building within EDH. Finally, the Bank implementation o f follow up actions".+ For PREPSEL, a i s pursuing discussion with other donors, namely the complete procurement plan has been prepared prior to I,DB,to build a sound financial management system for negotiations. In addition, the list o f equipment to be EDH, which will contribute to enhancing its management repaired was submitted by EDH before appraisal. EDH- capacity. PREPSEL team has committed to provide semi-annual Importance of a strong involvement of E D H for the reports to the PCU on the follow-up o f indicators. success of the project. A lack o f involvement from the Design simple and well-defined operations with modest counterpart, and lack o f incentives for staff seemed to be objectives (OED Report, 2002). The reality and the important reasons for failures o f past projects, and low complexity o f the Haitian environment have demonstrated salaries and political interference were singled out as the importance o f having a clear project design, to particularly important issues to address. +The proposed facilitate preparation and implementation. +The proposed project, through the effectiveness conditions and dated project keeps its objectives simple and well targeted by covenants will ensure that EDH achieves the key actions focusing on one issue in EDH (loss reduction in needed prior to the detailed implementation o f each distribution) and two types o f clients (clients in a pilot component. Regarding staff motivation, the employees zone and large consumers as a whole). directly responsible for the implementation o f the project Need to minimize costs of sustaining the new approach. (in the socio-economically mixed area and in the large The fifth power project was able to reduce losses in the customers unit) will be selected competitively within zone selected, but not in a sustainable way, notably EDH, after applying for the different positions available, because o f the high supervision costs needed to guarantee and there will be an intensive training o f employees its sustainability.+The new CMS and TSMS (for EDH through the use o f CMS and TSMS as a whole) will be financed by the project, as well as the Need for Government effective support to E D H in its procedures related to them. Because customer management fight against fraud and non payment. The ICR o f the will become automated, costs associated should remain fourth Power project highlights as one o f the reasons for limited. In addition, the replication component will assess failing to achieve the expected results the fact that "the the needs for replication o f the strategy throughout EDH, a Government did not endorse a program to reduce thefts necessary condition for the sustainability o f the project. through appropriate legislation and corresponding Importance of adopting a gradual and realistic approach enforcement". + The World Bank has already raised for the achievement of results. The ICR for the 1'` Power with the authorities the importance o f the role o f the Project notes that "the Bank Group should not hope for government as an enforcing power. They are fully aware major improvements in one operation in institutions, o f the consequences o f theft on EDH's financial which, like EDHat the time o f project appraisal, are very performance, and its resulting fiscal impact. weak in all aspects, Le. technically, financially and Need to improve coordination between donors. The organizationally". + The proposed project is a pilot implementation o f the CCI and o f the M o U o f Brussels project. I t seeks to demonstrate that with an array of has shown that substantial progress in the sector require! technical and institutional measures, it is possible to a coordinated dialogue o f all donors with the Haitiar increase the financial revenues to EDH in the project authorities and with EDH. + The World Bank wil intervention framework. Nevertheless, given its limited maintain this coordination through: (1) information or financing, and the stakes involved (in terms of the project and dissemination o f the results through the governance for example), the project in itself can not communications component, (2) participation in thc improve the financial performance o f EDH as a whole. I t "Table Sectorielle de l'Electricite", an effective f o r m will need to be replicated to ensure that the results affect for communication among all parties involved in tht positively the whole company, in a sustainable way. sector, and (3) close collaboration throughout the desigr Need to build realistic expectations about the project and implementation phases with IDB to maximize tht outcome to develop credibility and ensure sustainability synergies between the two projects. Unrealistic expectations o f what can be achieved under a 22 pilot project can undermine the credibility o f the project Needfor institutional changes within EDH to ensure the ~~~~~ and jeopardize its sustainability in the long-term. +The sustainability ofproject. The fifth power project outlined proposed project includes a communication strategy that a change in the institutional framework o f EDH was aimed at raising awareness among the various groups essential to ensure sustainability o f the results.+While affected by the project (electricity users, EDH, donors the recommendationsfor an in depth institutional change and the public in general) about the objectives o f the within EDH can only be achieved through a broader project. This communications strategy also emphasizes intervention than just a pilot project as PREPSEL, the the responsibility o f each actor in the implementation o f proposed project already signals some o f the key issues the project and its subsequent replication on a larger that EDH's Board and the Government will have to scale. In addition, the World Bank and the Country address to ensure the sustainability o f the results Management Unit (CMU) have maintained a continuous achieved under this project. This i s notably the need for dialogue with the Sector Ministry and the MEF to appropriate compensation to attract and maintain skilled highlight the expected role o f these institutions and the workers. Furthermore, to support these efforts, one o f rest o f the Government to ensure the viability o f the the PPIAF feasibility studies for the establishment o f a project and the sustainability o f the results. management contract, will perform an assessment o f Need for EDH to have adequate customer system. The personnel within EDH, with the aim to offer possible fourth and fifth power project ICRs mention the poor solutions to revive the weak institutional capability o f monitoring o f billings and collections was identified as EDH. one o f the causes for the high non technical losses. + Importance of sector policy objectives in parallel with PREPSEL is specifically financing the incorporation o f a project. During implementation o f the fifth project, the new state o f the art customer management system (CMS) deterioration o f the electricity sector made the need for and technical service management system (TSMS) to substantial sector policy reforms evident. + As stated ensure improved monitoring o f and attention to EDH already, the dated covenants o f the project include customers, Training to users o f the system will be actions to be taken by the government seeking to available so as to ensure sustainability o f the system. In improve transparency o f the sector and greater addition, consultants will assist EDH and students in awareness by the authorities o f their responsibility building up a new, reliable database. towards the sector. Furthermore, the project is part o f a Support transparent and timely implementation of the larger multi-donor strategy, promoting better governance project with adequate procurement expertise. Previous and transparency in the sector, through concrete actions projects have shown that the lack o f clarity in by the authorities and EDH outlined in the M o U ol procurement procedures and in respect o f WB Brussels. procurement rules can delay project implementation and eventually undermine its success. + The project will provide EDH with the necessary support by hiring local experts in procurement and financial management, assisted by specialized Bank staff in Headquarters. They will ensure timely. procurement - and financial management o f the project in line with WB rules. 5. Alternatives considered and reasons for rejection 47. Three main alternatives were considered during project preparation: 48. Expansion of Electricity Coverage. Haiti has a very low coverage for the whole country. Most statistics refer to a rate o f IO%, but recent estimates from EDH calculate this rate to reach 24.9% percent. Even with the adjusted calculations, the need to expand the services i s obvious in Haiti. Furthermore, the World Bank has a comparative advantage in executing electrification projects through its past experience in similar operations invarious other countries. Notwithstanding this acute need, the situation o f the electricity sector in Haiti as a whole i s so dire and the needs of the country so pressing, that World Bank had to establish priorities, and tackle first the sector's issues that have the strongest impact on the economic potential of the country. The possibility to develop an electrification project with EDH or with other providers was rejected given that EDH i s not even able to service those consumers that are in covered areas, mostly in Port au Prince. 23 49. Generation versus Distribution. A key problem in the electricity sector is the inability o f the public utility to provide sufficient and reliable electricity to consumers, mostly due to serious technical issues in EDH's generation capacity, which needs to be rehabilitated and the high economic burden o f purchase power agreements negotiated under previous governments (see paragraph 9). It could also be argued that, unless the generation issue i s properly tackled, nothing can be done at the distribution and commercialization levels. Nevertheless, the poor conditions o f the distribution network and the scant attention to the customers are equally important factors to explain the unsatisfactory performance o f EDH. Furthermore, the fiscal burden that EDH, which i s technically bankrupt, imposes on the Government could not ever be reversed unless increased revenues from customers allow the firm to generate its own sources o f funds. This shift, however, will not happen until there is an improvement o f service to the end users. Solving the generation problems are therefore necessary but not sufficient conditions for a sustainable improvement o f the services and o f the financial health o f EDH. In addition, the rehabilitation o f EDH's generation capacity i s already being financially supported by many donors. On this basis, the World Bank adopted a three-prong approach: (1) improve distribution and commercialization through the project itself; (2) maintain a dialogue with the highest authorities and the other donors in the framework o f the MoU, which emphasizes the need to secure reliable generation capacity; and (3) mitigate the risks associated with lack o f adequate generation by focusing within the project, on a zone where supply is continuous and on large customers, who can be directly targeted and serviced. 50. Scope: Three possible options: EDH as a whole, a selected zone, or a hybrid project. The decision not to tackle the distribution and commercialization issues for the whole o f EDH was based on the limited resources available for the project. A t the same time, the obvious alternative o f focusing only on one or several zones was also ruled out, as some o f the core instruments for a successful commercial strategy, namely the new CMS and TSMS, could not be acquired on a piecemeal basis. Furthermore, as one o f the objectives o f this project was to improve financial resources to EDH, the need to target large customers, who account for more than 70 percent o f EDH billed revenues, made it impossible to limit the coverage o f the project to a specific geographical area. This i s why a hybrid design was adopted in the project, and particular attention was paid to the selection o f performance indicators o f each component, to make sure that they would reflect accurately the results that can be expected in each case from implementing the project. C. IMPLEMENTATION 1. Coordination with the IDB Project 51. The IDB and the WB agreed to work very closely to support EDH's efforts to improve the distribution and the commercialization o f electricity, as part o f the multi donor strategy for the sector. Given the financing available and the different timing o f project preparation and implementation for the two institutions, the WB grant would be smaller and come first, while the IDB project will be implemented later on a larger scale in other zones o f Port-au-Prince. Project design i s expected to be very similar and special care has been taken during project preparation to maximize the synergies between the two projects. Similarly, the implementation arrangements presented in the following section have been discussed with the IDB team, and it i s expected that a similar approach will be adopted for the implementation o f their own project, leading even to the sharing o f the same executing unit by the two projects. 24 2. Institutionaland implementationarrangements 2.1. ImplementationPeriod: 3 years. 2.2. Institutionaland implementationarrangements 52. The approach taken to implement this project will be one that combines (i)program management and accountability at the highest level o f Government; (ii)full involvement o f EDH in all substantial issues pertaining to the design and implementation o f the project to ensure that the project addresses the right issues, that it has real ownership from the beneficiary and serves the purpose o f building institutional capacity within the firm to strengthen its capacity to provide good services in a sustainable manner; and (iii)efficient procurement and financial management arrangements that will guarantee timely execution and full compliance with the WB rules without imposing an excessive burden on the administrative capacity o f EDH. 53. Based on the institutional analysis o f the sector to date, it was agreed that the best way to achieve the various objectives above was to entrust EDH with the responsibility and leadership for the technical content o f the Project and establish a Project Coordination Unit (PCU) that will gather all the required fiduciary expertise without diverting too many resources o f the beneficiary, EDH, from the actual implementation o f the project. This PCU will be composed o f a project coordinator, a procurement specialist and a financial management specialist. The PCU will work throughout the implementation o f the project with EDH, who will appoint a team o f experts that will follow up the project on a continuous basis, the Project Technical Unit (PTU/EDH team). The PCU will have the fiduciary responsibility for the project, namely the responsibility for the management o f the funds, and for the compliance o f all PREPSEL's transactions with the procurement and financial management guidelines o f the Bank. The PCU will also have the responsibility to provide support to the PTU/EDH team to ensure that all the progress reports and any project document elaborated by the PTU/EDH team complies with the guidelines o f the Bank and the requirements stated in the Operations Manual o f the PREPSEL. Finally, the PCU will have to be available, upon requests from the PTU/EDH team and/or the Strategic Steering Committee, to provide feedback on a wide array o f issues related to the project, including administrative, technical or public relations aspects and any others that either EDH or the Steering Committee may want feedback on. The capacity o f the PCU to fulfill this latter wider role will be ensured through the appropriate selection o f the PCU Coordinator, and with the possibility for this Coordinator to tap on other experts on a short term basis (either through contact with the Bank or other donors, or through hiringo f short term experts). Given its fiduciary responsibilities, the P C U will report to the Minister of MTPTC. T o ensure seamless coordination between the PCU and the PTU/EDH team, and a process o f transfer o f know- how during project implementation, it has been agreed with EDH that the PCU will be housed in EDH's headquarters. Finally, while the day-to-day implementation will be the responsibility o f the PTU/EDH team and o f the PCU, as explained above, a short term consultant will be hired to undertake an independent verification o f the progress achieved under the main components once per year, and make recommendations on how to remain on track to achieve the objectives o f the project. 54. More specifically, through its technical experts, EDH will have the responsibility o f implementing all substantial matters related to the project, while benefiting from the support o f the two experts in fiduciary matters, and from the advice o f the Coordinator. The PTU/EDH team will be composed o f the Chief o f Project, hidher Assistant Chief, the manager of the LCU, the manager o f the Local Commercial Agency, and any other EDH specialists that may be required. 25 55. With respect to the PCU, the responsibilities o f the Project Coordinator correspond to those already spelled out in the previous paragraph when referring to the PCU as a whole, with the exception o f the specific fiduciary tasks that will be the responsibility o f the specialists in the World Bank. Actual procurement processes and corresponding reporting activities will be the main responsibility o f the procurement specialist, once the TORSand short lists are defined by EDH with the support o f external consultants as needed. The financial management specialist will have the main responsibility o f ensuring proper management o f the resources allocated to the project and compliance with the required reporting procedures. 56. This simple division o f responsibilities between the PCU and the technical team o f EDHwill make it possible for EDH to focus at this stage on strengthening its core business (providing electricity to the people), rather than dispersing their scarce human resources over many important, but competing areas o f expertise. It will also ensure that all fiduciary safeguards are respected and that project implementationwould happen without undue delays. 57. A high level Strategic Steering Committee comprised o f representatives from the main government entities that intervene in the sector: Ministers o f MTPTC, MEF, Planning and External Cooperation; as well as EDH and the CMEP, will provide guidance to the PCU on strategic issues. Other entities could be part of, or invited to the meetings o f the Steering Committee, if the members o f the Committee so desire. The presence o f this Committee i s particularly important in the context o f the M o U o f Brussels where various actions that are under the control o f either the MTPTC or the MEF rather than o f EDH affect nevertheless the likelihood o f success o f the project and the overall performance o f the firm, as indicated in section A.2. and in section C.5. on risks and mitigation measures o f the project. 58. Financial management and disbursement for the project will be handled by the PCU through the recruitment o f a financial management specialist, as indicated above. Funds will be disbursed via a Designated Account opened at the Central Bank (Banque de la Republique d'Hai`ti or BRH) and managed by the PCU for the small contracts, and through Direct Payments from the World Bank for the largest contracts. T o strengthen transparency and control over the use o f the project's resources, two signatories to the Designated Account will be required. The detailed financial management arrangements are discussed inAnnex 7. 59. The key issues and risks concerning procurement implementation for the project arise from the many weaknesses in the Haitian public procurement system. These weaknesses were identified by a CPAR prepared by Bank in 1999 and confirmed by the Government and multiple donors in the context o f the Interim Cooperation Framework (ICF) adopted in 2004. The Bank's Economic Governance Reform Operation (EGRO) and Economic Governance Technical Assistance grants (EGTAG 1 and 2), seek to address many o f these problems through their procurement components and the Government has already taken several actions to improve procurement institutions and practices. These include the adoption o f a new Procurement Decree which creates a Commission Nationale des March& Publics (CNMP) with a mandate, inter alia, to improve procurement practices and develop standard bidding documents for use in all public procurement. The new Decree also formally establishes that competitive bidding practices are the norm and direct contracting the exception for government procurement and includes new provisions governing the procurement o f intellectual (consulting) services. 26 60. Inaddition to the reforms supported by the EGRO and the EGTAGgrants, procurement risks will be mitigated in the case o f the proposed project through the use o f close and frequent supervision, including full prior review o f all contracts financed by the grant. Further, as a result o f the Government's commitment to reform and the application o f the Bank's Guidelines in various recent Bank-financed operations, some government agencies such as PL-480, the Ministry o f Finance and the Direction de la Protection Civile (DPC), are becoming increasinglyfamiliar with the basic principles of open and fair procurement. This familiarity, combined with the expected broad dissemination o f information on new procurement procedures to all purchasing agencies, i s expected to mitigate some risks. 61. Nonetheless, the procurement risk i s still considered high. After the PCU staffhas been recruited and the project implementation manual completed, the PCU's capacity will be further assessed during the course o f the Bank's intensive supervision o f the project. 3. Monitoring and evaluation of outcomes/results 62. A panel of SMART (Strategic, Measurable, Achievable, Realistic, and Timely) performance indicators will be selected as part o f an M&E strategy to track project results. They cover the areas of power generation, distribution services, customer-care services, revenue cycle management, and loss reduction initiatives. It i s proposed to calculate the value o f each parameter on a monthly basis. A crucial element to be contemplated is to define measurable indicators and, at the same time, provide EDH with the tools to actually measure those indicators. The incorporation o f the corporate commercial (CMS) and technical service (TSMS) management systems will measure in a timely manner key performance parameters for the distribution business. 4. Sustainability 63. Sustainability o f the results achieved under the project will depend on: (i)reliable electricity supply to the Project zone and to large customers: (ii)capacity o f EDH's personnel to use and maintain the new equipment and apply the new procedures; (iii) capacity o f EDH's Board to retain the newly trained managers and employees under the project, by providing remuneration packages competitive with those offered by the private sector, and (iv) capacity o f EDH to expand the customer-oriented approach to EDH as a whole. To maximize the likelihood that these conditions will be met, the project design has been discussed with EDH throughout project preparation and training activities are incorporated in each component o f the project to ensure transfer o f know-how. In addition, the communication strategy aims to ensure local ownership o f the approach by the different stakeholders. The replication component, on the other hand aims to prepare a blueprint o f what would need to be done to replicate the project on a larger scale, provided that additional financing i s secured and other requirements are met. This will be the case with the IDB project, which will start shortly after this proposed Project. Finally, sustainability o f the results achieved under this project will be facilitated by the development o f a long term strategy to strengthen EDH, which will be developed with the financing o f PPIAF (Feasibility Studies for a Management Contract o f EDH), and by the commitment o f the donors and the Government to the measures included in the M o U of Brussels. 27 5. Critical risks and possible controversial aspects RISK I Risk Minimization Measure(s) IRating OVERALLCOUNTRY RISK: Insecurity and civil unrest increase Risk largely outside the Bank's control. Participatory process set by again in the country, delaying project transition Government under the Interim Cooperation Framework F is preparation and increasing building partnerships and mitigating social tensions. New Government H implementation risks. expected to pursuethe same strategy. To PDO: Shift of Sector Policy by the new The new Government, through the President himself, has explicitly Government away from objectives o f manifested to the World Bank and its Representative in Haiti, his efficiency, cost recovery and financial commitment to the objectives o f efficiency, cost recovery and financial discipline in the provision o f services. discipline advocated in the project. This commitment will become evident once the Government officially endorses the Project, as the Project document includes dated covenants that require an active participation o f the Ministryo f Finance and it also includes the creation H o f a high level Strategic Steering Committee from the Government that would oversee and guide EDH and the Project Coordination Unit. Ultimately, o f course, it will be the Government's decisive support throughout project implementation that will effectively eliminate this risk. Disruptions of electricity supply to There has been a continuous dialogue on these topics at the highest level users due to (i)the failure o f Haitian with the Haitian authorities and with other donors (CIDA, IMF, IDB, authorities to pay on timely basis for etc...) in the context o f actions agreed in the MOU o f Brussels. More the fuel (MEF) and (ii)the failure o f specifically, the World Bank will ask Management to raise some o f the the Haitian authorities to secure new issues at a higher level, specifically the need to complete the reparations and more efficient sources o f supply o f the groups inPort-au-Prince b y eitherior USAID and ADF. that will replace the existent contracts H once these expire. (Board o f EDH, In addition, the World Bank will actively support the inclusion of the MTPTC, MEF), (iii)the failure o f the most important o f these actions under the control o f the Government donors to conclude on time the within the ongoing policy dialogue with the World Bank on the energy reparations o f EDH's groups. sector and on economic governance. Lack of political willingness by the The World Bank has discussed explicitly during project preparation the GoH to effectively endorse EDH's content o f the project with the different Government entities that could Loss Reduction strategy by (i) affect the outcome o f the project as explained in the previous column. supporting efforts to enforce payments This dialogue has taken place with MEF, MTPC, CMEP during from users and (ii)giving the example missions, and could be conducted as well in an indirect manner through as a user for timely payment and the CMUs dialogue with the offices o f the Prime Minister and President. efficient use o f energy. The dialogue with the Haitian authorities and the donors on the M O U includes a condition to add transparency to the role and responsibility o f H the Government as a client by including an energy consumption line in the budgets o f the different ministries and public entities. As this will represent a change in the current practices, more interaction is needed to ensure buy-in from the authorities. Furthermore, it will need an internal working group (MEF, MTPTC, EDH and others) to start working sufficiently before the Budget is completed, to fine tune the implementation details and implications o f adopting this measure. 28 Lack of willingness of EDH's As part o f the pre-appraisal mission, the World Bank sought EDH's Direction Generale to adopt commitment to undertake the necessary actions to ensure the successful necessarychangesin management implementation o f the Project. The initial feedback was positive, and practices to effectively implement the the Bank worked with EDH to fine tune the proposed changes. In new customer oriented management addition, these actions will be included as disbursement conditions for S approachthat is at the heart o f the the different components directly affected by the changes. proposed strategy to achieve the Project's objectives. Lack of willingness of EDH's Board The World Bank has started to raise this issue with the relevant sector to adopt and enforce a structure of authorities and with EDH's management, while being aware that other wages that could retain the personnel factors can intervene (legal constraints, financial ones) that might trained under this project to ensure require a structural change, and thus take time. At the same time, it is sustainabilityof the results and clear that such a change in wages structures for EDH could be feasible possibility of a successful and and sustainable if (a) parts o f the increased revenues are allocated to this H sustainable replicationto EDH as a end; and (b) other expenses are lowered as a result o f a better whole. management, operational and technical performance o f the firm. Insufficient donors' coordination The World Bank is maintaining a continuous dialogue with key donors, hinders the advancement of the multi- around the M O U o f Brussels, the forum provided by the TSE and other donor strategy to strengthen the sector means o f communications. and allow the sustainability o f the M PDO. Inaddition, the WB and IDB teams have been working together during the preparation o f this project to ensure harmonization in the design of the two projects, and maximize the impact o f this coordinated intervention. As mentioned above, special coordination will be needed with those donors working on generation, specially in Port-au-Prince (USAID and AFD) because of the immediate implications for the viability o f the project. - To Components: Insufficientlocal capacity to Systematic efforts have been made to include in the design o f the project implementthe Project (i)training activities for EDH'semployees to ensuretransfer ofknow- how; (ii) punctual assistance o f international experts to EDH to assist in S the elaboration o f TORSand supervision o f specialized tasks, and (iii) recruitment of staff by EDHas needed to fill in critical positions. Insufficient local capacity to ensure Implementation arrangements will ensure that through the PCU, EDH proper applicationof procurement receives the necessary support from local experts in procurement and and financial management WB financial management matters, to ensure efficient and transparent rules, that could result inunnecessary administration o f the Project. delays in the implementation, or impose heavy demands on the WB In turn, allowance will be made for proper training o f these experts on H supervision team. the WB specific procedures, an investment that should pay off as it will alleviate the work load o f WB staff inD C and build local capacity in the long run. Larger contracts will be through direct payments from the WB and this should alleviate the need for local expertise inthese matters. Overall risk rating 6. Grant conditions and covenants 64. Effectiveness conditions 0 The Subsidiary Agreement has been executed on behalf o f the Recipient and o f EDH. 29 The Government o f Haiti has adopted the operational manual in terms and scope acceptable to the Bank. The P C U has been constituted and i s operational; EDHhas appointed the Project Chief, and a consultant has been recruited to prepare the terms o f reference and the recruitment guidelines for the manager and staff o f the local commercial agency in the selected mixed project area, and for the manager and staff o f the Large Consumer Unit in EDH. A financial management system, capable o f recording and reporting on the project's expenditures following the format specified in the operations manual, has been established in the PCU. Disbursement conditions The staff and the manager o f the Local Commercial Agency will have been selected and appointed before disbursement takes place for sub-component 2.2 The manager for the Large Customers Unit (LCU) will be appointed and his contract signed before disbursement takes place for sub-components 2.3.2 and 2.3.4 Dated Covenants The Strategic Steering Committee will convene its first meeting not later than 2 weeks after project effectiveness and, thereafter, quarterly duringthe course o f Project implementation. The M E F will provide a written report with supporting documents, satisfactory to the Association, about the status o f its payments to EDH, including the amounts billed b y EDH for the Government's consumption o f electricity, the transfers from the MEF to cover the purchase o f the fuel and the costs o f energy paid to independent power producers, as well as the net amount effectively transferred to EDH, (i) not later than 2 weeks after effectiveness, and, thereafter (ii) semiannually during the course o f Project implementation;. The Board o f EDH will provide not later than 2 weeks after effectiveness for the first year during project implementation , and thereafter, 4 months prior to the beginning o f each subsequent fiscal year duringthe course o f project implementation, an annual plan previously agreed upon with MTPTC and EDH and presenting the minimum electricity supply o f hours per day that it intends to finance and that will be supplied either by EDH or by third parties to serve customers (i)in the capital city o f Port-au-Prince, with further details showing the electricity provided to Port-au-Prince mixed neighborhood and the industrial zone and (ii)in the main cities o f the Provinces. D. APPRAISAL SUMMARY 1. Economic beneficiaries 67. The project i s a pilot project, whose final results, if replicated, should improve the provision o f electricity in Haiti, therefore improving living standards for the Haitians. Given the importance o f electricity as an input to many economic activities, the improvement o f electricity services that could be achieved by replicating on a larger scale the approach adopted in this project, would have a significant impact also on the economic activity o f the country. 30 68. More specifically, the project will benefit the customers o f EDH as a whole through the expected improvement in quality o f service supported by the incorporation o f CMS and TSMS. In December 2005, EDH registered 184,93 1 active customers, 92% o f which were residential and 6% commercial. I t i s expected that these customers will receive better service and attention from EDH. Nevertheless, because o f the project design, the customers that will benefit most are (1) those located in the socio-economically mixed zone, and (2) the large customers. Thanks to better quality of service, and physical investments to improve both distribution and commercialization, average consumption i s expected to increase for all types o f consumers in the two targets described above by 2% to 4% at least every year. 69. In the socio-economically mixed zone, the population is estimated by EDH at 120,000. In December 2005, there were 9,183 active customers in the zone, a majority o f which (87%) was classified as residential, while 11% were classified as commercial customers. In addition, a total o f 7,483 inactive clients and 908 "0 kwh" clients were registered, and the project i s expected to regularize some o f them every year. Residential customers in the zone had an average monthly consumption o f 83 kwh, while that o f commercial customers was at 301 kwh, In addition, the project will improve quality o f service in the 9 slums ("bidonvilles") o f the zone, where EDH estimates a population o f 18,847. Out o f these 9 slums, 5 already have access to electricity services, or a total o f 7,193 customers. It i s worth noting that a large part o f the inactive and 0 kwh customers - in particular the residential customers living in marginalized areas - already pay middle-men to receive a bad service at a price that i s often higher than EDH. The improvement in service should therefore increase general living standards and possibly free budget for other sectors (education, health etc). 70. According to EDH data, in December 2005 there were 2,208 active large customers in Haiti, 33% o f which were classified as industrial customers, 32% as residential and 19% as commercial. Large customers are overwhelmingly located in Port-au-Prince (78%). Cap-Hai'tien, and Gonaives, the two largest cities after the capital, have 130 and 96 large active customers, respectively. Average consumption for the large customers was estimated at 8,551 kwh a month. The project will help regularize the currently inactive and 0 kwh active customers, who are double the currently active customers - 2,964 in December 2005. Commercial and industrial clients would be able to increase economic activity - until now often limited by the bad quality o f service, or expensive due to the utilization o f autonomous generators, with positive consequences on job creation. Public entities will be able to offer their services on a more continuous basis - this i s particularly important for education and health services, and security. 71. The success o f the project should also help improve the financial situation o f EDH, benefiting EDH employees (2,355 in November 2005). Moreover, it i s expected that the employees will benefit from an improvement in their working environment. Indeed, the project will offer training to all users o f the new CMS and TSMS. Also, through the competitive selection o f the employees who will be working for the socio-economically mixed zone, and for the large customers unit, the project will offer to some EDH employees new career opportunities, supported by training. The participation o f the union, the conduct o f surveys during preparation and implementation o f the project and the dissemination o f lessons learned o f the pilot project through organization o f various participatory events, will encourage dialogue and increase employee involvement into the project, and therefore, in the company's performance. The PCU will discuss on a regular basis the results o f the surveys with all parties involved and, when needed, adjust its strategy accordingly. 31 2. Economic and financial analyses 72. Economic and financial analyses have been performed separately for investment activities to be financed under two components o f the project--investments in the socio-economically mixed zone (Component 2.2) and investments to regularize the situation o f large customers (Component 2.3). Given the pilot nature o f this project and the need to collect an enormous amount o f data related to the EDH operation in a short time fi-ame, development o f a financial model for the entire EDH has not been possible. Nonetheless, such model i s important in order to present a complete picture o f the financial performance o f the utility company and it i s expected to be developed through the full- scale IDB project under preparation. 73. It is important to note that given the limited resources available, the project is designed to focus on the activities with maximum benefits. The selected zone and the large customers on which this pilot project focuses are considered to havethe greatest potential to succeed and to maximize the demonstration effect. The zone was selected based on a set o f criteria as described in Annex 4 to ensure that the component will be implemented successfully in an "externality-free" environment. The large customers with billed consumption greater than 1000 kWh per month represent close to 70% o f the bills due even though they represent only 1.4% o f the total number o f customers. It i s estimated that there may be another couple o f thousand large customers that are getting the electricity service but are not billed or are currently disconnected due to non payment o f bills. Given that large customers provide the majority o f EDH's revenue and the investment needed to regularize them i s not significant, it makes perfect sense to include them in the pilot project. Since the success o f this pilot project i s necessary to showcase the likelihood o f transforming the technically bankrupt EDH into an improvement in operational performance, not surprisingly both components are estimated to generate very high financial returns to EDH, as shown in Annex 9. Nonetheless, achieving the expected project outcomes could still suffer from the likelihood o f continued power shortage, resistance o f EDH management to changes and sizable non-payment. Such a high financial return may be not replicable as future projects would not have the same favorable environment for implementation and would need to take into consideration other external factors such as high investment, security, and lack o f willingness from customers to pay. In addition, the perceived risks in the power sector in Haiti are much larger than what this project addresses. This, in conjunction with the lack o f a supporting market-based regulatory framework, rules out the possibility for EDH to raise commercial capital or attract private sector participation. Interventions from multi- and bi- lateral donors are thus much needed. 74. The project i s estimated to yield a net economic N P V o f US$ 0.5 million and US$ 3.9 million and an EIRR o f 15% and 42% for the selected zone and large customers, respectively. The EIRRs for both components are above the hurdle rate o f 12%. The NPVs o f the project financial return are estimated to be US$ 7.5 million and US$ 13.8 million, and the FIRRs 49% and 91% for the selected zone and large customers, respectively. Note that part o f the financial benefits to EDH i s essentially a transfer o f financial benefits from the customers, thus generating no net benefits to the society as a whole. The sensitivity analysis o f financial rate o f return i s shown in Table 1.1, below. 32 Table 1.1: Sensitivity Analysis of Financial Rate of Return Delay in implementation by one year 36% CRI rises 1O%/year to 50% in2012 and remains stagnant thereafter 15% Energy drops 15% in year 3 and picks up thereafter; CRI constant at 17% year 3 and increases as expected thereafter Delay in implementation by one year; CRI rises to 50% in 2012 and CRI = Cash Recovery Index 3. Technical 75. Any workable approach intended to recover the power sector in Haiti should focus on improving EDH's operational and financial performance through better internal governance and the adoption o f a coherent medium term strategy. The current non-existent commercial orientation o f the company's management needs to be reversed. Inthe current context o f the power sector in Haiti, it i s observed that the reform processes executed in almost all Latin American countries in the 1990s show that the above described vicious circle can be broken if adequate "state o f the art" management strategies and plans are properly designed and executed. These reform measures include some rehabilitation o f the distribution system and implementation o f new approaches for the execution o f the activities o f the commercial cycle (metering, billing and collection) and attention to customers' claims. Willingness of customers to improve their payment behavior will not exist if they do not receive acceptable service. The new management procedures and techniques are supported by the incorporation o f corporate "management information systems (MIS)". These are powerful tools that allow EDH to properly perform the main functions (operation and maintenance o f electricity networks, commercial activities), handling the related information flow with high transparency. As a consequence, governance i s substantially improved, as accountability can be actually implemented. 4. Fiduciary 76. The assessment o f the project's financial management capacity assessment was done taking into account the specific activities and circumstances o f the project to ensure that the entity's 33 financial management system i s commensurate with the needs and the unique nature o f the project, as well as capable o f meeting Bank requirements. The main findings are summarized below. 77. Although there are significant country risks because o f major weaknesses in the public financial management system and also because o f corruption, the impact o f these risks on the project i s likely to be limited given the defined implementation arrangements. These arrangements do not rely on the government's system. Instead they build on a dedicated implementation unit to be established with adequate financial management systems, procedures and staffing. The project itself does not present any significant risk and its overall risk i s rated as moderate. 78. An action plan i s developed based on the conclusions o f the financial management assessment to ensure that the Project Coordination Unit (PCU) will be equipped with an adequate financial management system to comply with the Bank's policy. These measures include preparation o f an Operations Manual including financial management procedures, the recruitment o f a qualified and experienced accountant, annual audits o f the project's accounts and o f the annual financial statements o f EDHby an accredited auditing firm acceptable to the Bank. 5. Social 5.1 Summarizes key social issues relevant for the project objectives and specify the project's social development outcomes 79. The project aims at improving the capacity o f EDH to increase the quality o f the service to the users and improve the financial situation o f the firm to ensure sustainable provision o f the services for current and potential users. Currently, EDH reaches less than a million consumers from a total population o f 8.5 million; the company has only 184,000 active customers and suffers daily blackouts. Poor quality discourages customers from paying for electricity thus affecting EDH revenues, furthering the financial deterioration o f the firm. This situation reduces EDH capacity to serve its current customers well and to expand services to those, mainly poor populations, who do not have access to the service. Moreover, the poor operational and financial performance o f EDH creates an important budgetary problem for the government thus limiting its capacity to promote development; the project will help to address this issue. 80. The project will establish a customer-oriented management model that will increase quality and reliability for customers, reversing current deteriorating trends. This model will be tested in an area which combines different type o f customers, including low income populations. The expected social outcomes comprise: (i) improvement o f the quality o f the service in order to achieve a higher customer satisfaction; (ii)definition o f a commercial management service model for scale-up and replication taking into account the needs o f the various income level customers; and (iii) the increase o f EDH's long term capacity to increase service coverage specifically targeting the poor population. Although the project expects to deliver a better service to large consumers that represent 70% EDH's income; poor consumers in low income neighborhoods in the pilot area will also benefit. Many families in these communities are already paying for electricity; therefore, they will also receive a higher quality and a more reliable service. The project will strengthen the current model o f EDH partnerships with Neighborhood Committees (NC) to ensure a fair agreement for quality and billing. Many families, which are currently using kerosene or candles, can eventually have access once this model improves. The involvement o f poor neighborhoods in the project will avoid the project being perceived as oriented only to affluent customers, therefore reducing possible conflicts. 34 81. The project foresees managerial and organizational changes to achieve results. State o f the art systems will be established to optimize attention to customers and facilitate billing and collection. Workers and staff are involved in this process and will receive training to adapt to new technologies and adopt a client-oriented vision. 5.2 Participatory approach 82. Surveys were carried out during project preparation in order to achieve a better understanding o f the characteristics and perceptions o f current and potential customers comprising large consumers, and identified consumers in the pilot area selected in Port-au-Prince. Surveys in the pilot area in Port-au-Prince comprised: (i)business and high-income residents; (ii)government and institutions; and (iii)residents o f low income communities. The three groups expressed their support for the project and the urgency for improvement o f service that EDH provides. They acknowledged widespread illegal practices and willingness to change and pay for the electricity if the service improves. Surveys with poor communities, the "quartiers populaires," were very useful to dissipate misconceptions and improve project design. 83. Staff, high level officials and the union's representative o f EDH were also consulted during preparation. The World Bank talked directly with the Union representatives and to about 60 highand middle level managers to address their doubts and initial concerns about the project. During consultation, both EDH staff and the union representatives confirmed the urgency to carry out a change in the enterprise and their support to the project. Moreover, a survey was carried out to obtain workers' perceptions and recommendations to improve their and EDH performances. These results have been taken into account in the proposals to ensure ownership and reduce resistance to change. The report presenting findings and assessment o f the surveys i s available in the project file, and a summary o f the results i s included inAnnex 4.4. 5.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? 84. The project's communication component comprises an outreach strategy to disseminate the model and progress in its implementation among civil society organizations. This effort will contribute to improve the image o f EDH and eventually, once results are achieved, re-establish its credibility. Special events will be organized to address issues among poor population within the project area to promote social responsibility and reduce fraud. This component comprises also informative meetings with key stakeholders seeking to promote support among the donor community to endorse the scale up strategy in the country. 5.4 What institutional arrangements have been provided to ensure that the project achieves its social development outcomes? 85. The surveys and consultations carried out during preparation will serve as a baseline to define quality indicators to measure improvements in client satisfaction. The surveys will be carried out three times during project implementation and will target customers in the pilot zone, large customers and EDH staff. The TSMS will be tested under the project to address customer concerns, to promote regularization o f those illegally connected, or not paying. The capacity to replicate the model and scale-up the operation will provide EDH and the Government with the tools to achieve a main social objective of sector policy, which i s to expand better electricity services to a larger 35 number of users. The PCU will oversee project execution, assess and analyze lessons learned to be incorporated into the scale-up model. A Commercial Unit will be established to ensure the consumer-oriented strategy i s successfully implemented. The Community Liaison Unit will be strengthened to improve partnerships with poor neighborhoods in general and N C in particular, to ensure they benefit from the project. 6. Environment 86. The project will establish a customer-oriented management model that will increase quality and reliability for customers and establish a process to improve financial and commercial standards o f EDH. The project's components do not include any activity that might result in environmental impact or require mitigation measures. In fact, to the extent that it contributes to a more efficient use of the electricity by reducing the losses in distribution and promoting awareness among the clients o f the cost o f the electricity, the project i s expected to have a small positive environmental impact through the reduction o f SO2 and C02. Therefore it i s not necessary to prepare an environmental assessment. In this regard the QER meeting has confirmed that the project i s to be rated category C. a. Safeguard policies Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.01) [I [XI Natural Habitats (OP/BP 4.04) 11 [XI Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [XI Involuntary Resettlement (OP/BP 4.12) 11 [XI Indigenous Peoples (OP/BP 4.10) [ I [XI Forests (OP/BP 4.36) [ I [XI Safety of Dams (OP/BP 4.37) [ I [XI Projects in Disputed Areas (OP/BP 7.60)* [ I [XI Projects on International Waterways (OP/BP 7.50) [ I [XI aBy supporting theproposedproject, the Bank does not intend to prejudice thejnal determination ofthe parties' claims on the disputed areas 36 87. The project does not activate any o f the Bank's social or environmental safeguards. The project intends to improve EDH internal operational and financial performance through a new customer oriented management approach comprising a Customer Management System and a Technical Service Management System. Because the project's components are basically o f a managerial and financial nature, requiring the purchase o f mostly information systems (CMS & TSMS) and equipment (meters), no adverse social or environmental impacts linked to Bank safeguard policies are expected. Rather than investing innew infkastructure, the proposed model will focus on improving the quality o f service, reducing technical and commercial losses and increasing payment collection. This approach will be tested in an area in Port au Prince where it i s possible to achieve these results using existing capacity with a minimumo f improvements and no adverse social or environmental impacts. 88. A field assessment conducted during preparation in the selected pilot area identified as the main investments the following: (i)renovation o f low voltage lines and customers connections; (ii) installation o f new consumption meters; (iii)replacement and installation o f new switchgear equipment; and (iv) replacement of damaged poles. None o f these actions i s expected,to have any social or environmental impacts linked to the Bank's safeguard policies. 89. The project also comprises the design o f a scale-up strategy to replicate the model in selected areas, This strategy will select new areas to promote the model, assessing infrastructure requirements and other investments, and selecting those that minimize social and environmental impacts. An environmental and social framework will be prepared, if necessary, as part o f a such scale-up strategy to ensure compliance with the Bank safeguard policies. This approach has been discussed already with the government and an agreement has been reached about a draft safeguards framework, which will be refined during implementation to be incorporated as part o f the scale-up process. 90. Recipient's Institutional Capacity for Safeguard Policies. The implementing agency's institutional capacity for safeguard policies will be strengthened under the project. In particular, EDH staff acting as the technical arm o f the project will be advised and trained in how to ensure contractor compliance with safeguard policies related to the environment. Capacity building related to safeguards will be initiated duringpreparation and continued duringproject implementation. b. Policy Exceptions and Readiness 91. The proposed project would not require any exceptions from Bank policies and would comply with all applicable Bank policies. 37 Annex 1: Country and Sector or ProgramBackground HAITI: ElectricityLoss ReductionProject(PREPSEL) Country background 1. Haiti occupies 27,750 square kilometers o f land in the western third o f the island o f Hispaniola in the Caribbean between Cuba and Puerto Rico. Haiti sits the mountainous portion o f the island and shares a 360-kilometer border with the Dominican Republic. The Caribbean Sea borders Haiti's western and southern shores, while the Atlantic Ocean i s to the north. The country's land area includes numerous small islands as well as four large ones. Due to its relatively small land area and environmental degradation, Haiti has limited natural resources. The country, however, possesses mineral deposits that include bauxite, cooper, gold and lignite. Haiti's rivers give the country access to hydropower, but the fluctuating water volumes make harnessing this resource difficult. 2. In2005, the populationo f Haiti was estimated at more than 8 million, with an annual growth rate o f about 2.2 percent. Among states in the Western Hemisphere, Haiti only trails Barbados as the most densely populated country, with an average o f 248 persons per square kilometer. More than 1.5 million citizens live in Port-au-Prince, the capital and its peripheral districts. Haiti's life expectancy ranks as one o f the lowest in the world. In 2005, the average life expectancy for a Haitian was about 53 years while the country had a birthrate o f 36.6 births per 1000 persons. 3. Haiti's economy remains one o f the least developed in the hemisphere, with 80% o f the population living in poverty. The economy shrank an estimated 1.2% in 2001, 0.9% in 2002 and grew 0.4% in 2003. The country's gross domestic product contracted 3.5% in 2004 from the previous year. The country suffers from rampant inflation, a lack o f investment and a severe trade deficit. Duringthe past fifteen years, purchasing power in Haiti has fluctuated dramatically. In 1994, the rate o f inflation reached forty percent. The inflation fell to a manageable 8.6 percent in 1999. However, exchange rate depreciation pushed inflation back to 40 percent in 2003. In more recent times, the inflation held steady to an estimated 22 percent. 4. Historically, agriculture i s the dominant activity in Haiti's economy. As o f the 1980s, agriculture occupied 35% o f the GDP. The continued migration to the cities, especially Port-au- Prince, and other factors have reduced agriculture's role in the economy. In 2001, production o f agricultural products declined by 5%. The cash crops o f Haiti include coffee, mangoes, sugarcane, rice, corn, sorghum and wood. Coffee i s the primary crop grown among peasants not intended for personal consumption. Though most o f their farming i s subsistence, peasants grow coffee for exporting. By the 1980s, manufacturing became the most prolific sector o f the Haitian economy. Growth in the sector was on average more than 10 percent a year during the decade and replaced agricultural production as Haiti's leading export goods. For instance, manufacturing accounted for 17 percent o f GDP and for 53 percent o f exports. By the late 198Os, the manufacturing sector comprised 500 enterprises, most o f which were small or medium in size and family-owned. During that period, Haiti witnessed a proliferation o f assembly industries in the capital city o f Port-au- Prince. When the sector peaked in 1980, an estimated 200 assembly firms employed nearly 60,000 workers. Political instability, increased regional competition under the Caribbean Basin Initiative (CBI), nascent union activity, and the failure o f government institutions to attract further investment all contributed to a decline in assembly investment and employment after 1986. 38 Sector background 5. The public power system i s under the control o f Electricite d'Haiti (EDH), an autonomous institution o f the government o f Haiti created in 1971, EDH operates under the supervision o f the Ministry o f Public Works, Transportation and Communications (MTPTC) and holds a monopoly in the generation, transmission, distribution and commercialization o f electricity. As o f December 2005, the utility had over 2,300 employees who are categorized as followed: 1,457 regular employees, 225 administrative employees, 340 that are contracted, 247 security agents and about 56 temporary employees. 6. For many years now, the power sector in Haiti has been in a state o f decline. EDH has performed poorly, leaving most of its customers unsatisfied. These customers, at least those with sufficient financial means, often seek alternative methods to meet their electricity needs. Haitian households and businesses often resort to the use o f generators, power inverters and solar panels - all costly equipment - instead o f being able to rely upon consistent service from the power sector. Roughly ten percent of the population has access to electricity. As such, Haiti's poor has had to depend on the harvesting o f trees for the production o f charcoal. In fact, a large proportion o f the country's energy originates from burning wood, the supply o f which has rapidly diminished. Moreover, in various rural and provincial towns, small businesses have had to use wood as a he1 in powering their operations. 7. Many factors contribute to the decline o f the power sector in Haiti. An aging infrastructure, financial insolvency, organizational weaknesses and poor asset maintenance are all factors that have contributed to the decline o f the power sector in recent years. Power outages have become so frequent that many sections o f Port-au-Prince routinely go days without electricity. The following graph shows the average number o f hours o f electricity a day that EDH provides to its clientele in the zone o f the project (circuits TOB 1-111-2 and TOB 2-2) and in the country as a whole. Table 1.1:Average number of electricity hours per day in Haiti and in the project zone 1 1- -cr - Zone - TOB 2-2 Source: EDH 39 GovernmentStrategy 8. Inthe context o fits dialogue with the international community under the Interim Cooperation Framework (May 30, 2004), and as also highlighted in the Transitional Support Strategy (TSS) (December 10, 2004)) the Government o f Haiti singled out the re-establishment o f continuous and reliable electricity services as one o f its priorities. Indeed, electricity i s seen as a crucial factor for improving the living conditions o f the population, providing means for economic activity to re-start, and contributing to the efforts to improve general public security. The Government has emphasized the need to resolve the problems o f EDH as the most urgent task by involving the private sector, while it also seeks to develop a broader Energy strategy for the country as a whole. In this context, the design and implementation o f a management contract o f EDH could be a first hands-on experience o f regulatory by contract that has set the basis for developing later a more comprehensive regulatory framework inaccordance with the broader strategy for the Energy Sector. 9. The Ministry o f Public Works, Transport and Communication (MTPTC) i s the entity in charge o f the Energy Sector. Additionally, the Conseil de Modernisation des Entreprises Publiques (CMEP), which was created as a technical entity to oversee the reform o f public enterprises, i s in charge o f following up on the program to rehabilitate EDH, starting with the reconstruction o f the financial accounts, the financial audit and all the preparatory work for the elaboration o f the management contract. Donor Community strategy 10. To support the electricity sector, the international community, the Government and EDH developed in July 2004 a multi-donor strategy under the Interim Cooperation Framework (ICF). An essential part o f the approach was based on the decision to coordinate all the actions financed by the donors within a wider sector strategy with both short term and longer term objectives. To facilitate this coordinated approach, an Electricity Sector Working Group (Table Sectorielle d'Electricite, TSE) has been meeting on a monthly basis, to exchange information and facilitate better communications between the parties involved (amongst Haitian agencies and international donors alike). 11. Short term support. In the short term, the donors initially focused on the generation issue. USAID subsidized oil purchases for EDH from May 2004 to February 2005 and several donors (AFD, USAID) started the rehabilitation o f generation units.Nevertheless, it became obvious that a more articulated strategy was needed in order to move beyond the cycle o f recurring crises and alleviate the fiscal burden o f the sector to the State. As a result, a "Memorandum o f Understanding on a Rescue Strategy for the Electricity Sector" (MoU) was signed in Brussels on October 21, 2005. Under this MoU, the government and EDH committed to implement specific actions that would improve the transparency of the sector and increase the efficiency o f the investments while the donors committed resources to finance a minimumpackage o f investments and technical assistance requested by EDH to emerge from the current catastrophic situation. A t the time o f the signing, US$ 14.6Mhad been secured out o f a request o f approximately US$ 27.7341, and subsequently other funds have been committed. The Haitian government (MEF, MTPTC, Planning), CIDA, AFD, USAID, the EU and the WB signed the MoU. Soon after, the IDB expressed interest in supporting the sector within the framework o f this MoU. In parallel, the dialogue o f the Government with the IMF has also included some o f the actions stated in the M o U that have a direct impact in reducing the financial burden o f the sector for the Government. 40 12. Medium Term Support. Inparallel with the short-term actions described above, there was a consensus on the necessity to develop a medium-and long-term strategy for the sector. However, it was essential to have a clearer assessment o f the situation in EDH and a better understanding o f the conditions of the sector in Hai'ti in order to design a credible medium term solution for the sector. The EU agreed to finance the account reconstruction o f EDH (which did not have standard financial statements for many years), and CIDA committed to finance the financial audit of the resulting accounts by a reputed international firm. In addition, the Private Public Infrastructure Advisory Facility (PPIAF) approved the financing o f a series o f studies under the supervision o f the World Bank, in order to understand the environment in which EDH operates and explore the viability o f long-term solutions for the utility, such as the option o f a management contract. T o the present date, the account reconstruction i s almost completed, the auditing firm for EDH accounts has been selected, and several o f the PPIAF studies have been launched. Last, it i s important to note that other efforts by different donors are also under way to assist the Government in the broader agenda o f the Energy sector, exploring how to expand access to electricity services through renewable sources (EU, UNEP), and addressing the pressing problems o f use and production o f woodfuels (World Bank, ESMAP). A priority in the near future should be for all actors involved to bring those additional initiatives within the coordinated framework already in place, and to develop a comprehensive national strategy for the Energy Sector in the country. 13. Production.Haiti uses very little energy, about 250 kilograms o f oil equivalent per head, per year. In 2005, the country produced 653.5 million kilowatt-hours o f electricity while consuming 522.8 million kilowatts-hours. The EDH main grid covers the Port-au-Prince area and its peripheries, which are served primarilyby the Centrale de Peligre hydro plant. The Peligre hydro plant possesses a nominal maximum capacity o f 54 MW. It can effectively deliver a maximum capacity o f only 48MW however. The real production capacity o f EDH has considerably diminished during the last two decades. The hydro plant in Peligre, for instance in recent years, has generated on average lOMW per year. Lack o f maintenance, water scarcity during the dry season and the deteriorating condition o f production and transmission equipment all contributed in reducing the productivity o f the hydroelectric dams. 14. In addition to the Centrale Hydro Electrique de Peligre, EDH supplies electricity from two other centers which are the Groupe Thermique de Carrefour with a 50 MW installed capacity and the Groupes Thermiques in Varreux 1&2 with installed capacities o f 3 2 M W and 21 MW respectively. Between the hydro plant in Peligre and the thermal plants, EDHhas an installed capacity o f 157 MW for Port-au-Prince, which falls far below the 220MW demand of that city. The utility routinely operates with just 5 M W in Port-au-Prince, leaving a large portion o f the population without electricity. The table below summarizes installed and available capacity in Port au Prince in April 2006. Available capacity i s not constant due to seasonal changes (as explained above in the case o f Peligre). In addition, current repairs on the thermal and hydro units (financed by EDH and international donors) will increase capacity inthe coming months. 41 MW Installed capacity Available capacity Expected capacity after current repair Carrefour EDH 49.92 4 15 Carrefour Alstom 30 26 Varreux I EDH 32.05 5 10 Varreux II EDH 21 0 Varreux Ill Alstom 20 14 Peiigre' 54 0 36 Total 206.97 49 61 15. Theoretically, the utility has an installed capacity o f around 221 MW for the entire country. The production and distribution capacity o f EDH has declined to such low levels that two Independent Power Producers (IPPs) were contracted to supply electricity in various sections of the country. The company Alstom Power Rental supplies 50MW in Port-au-Prince to supplement the existing installed capacity of EDH. In the provincial towns such as Cap-Haitien, les Cayes, Gonai'ves, Saint-Marc, Petit Gohve and their immediate surroundings, the supply o f electricity i s provided by another private company, SOGENER, which produces about 24MW. 16. EDH is operating with an aging network. Major renovation to the existing network has not occurred since the 1980s. Further, a lack o f maintenance and an anarchist exploitation o f the network have taken its toll on the infrastructure. The figures that follow provide details about the condition o f the three main power plants o f EDH inPort-au-Prince. Table 1.3: Condition of EDH plants -January 2006 lplants GR In service Current status since Carrefour c1, c 4 1985 Operational c2, c 3 1984 Not operational c4, c 5 1985 Not operational C6 1998 Not operational Peligre PI, P2 1971 Operational P3 1973 Not operational Varreux 1 Vll,V12 1978 Operational VI4 1978 Not operational VI5 1996 Not operational VI7 1981 Not operational Varreux 2 V21, V22, 1996 Not operational V23, V24, V25, V26 Source: EDH 17. Financial and Commercial Situation of the Power Sector. The inability o f EDH to supply sufficient electricity to its customers has had detrimental effects on the financial and commercial health o f the utility. Considering the large pool o f active and potential clients, access to electricity i s very limited. As stated earlier, roughly ten percent o f the population has access to electricity. Currently, the utility i s providing service to over 184,000 customers. Residents constitute a majority 42 among EDH customers with almost 170,000 active clients. The other clients o f EDH consist o f commerce, industries, public and autonomous entities. A large percentage o f EDH core customers, 60%, i s located in Port-au-Prince. 18. Additionally, the commercial mechanism currently in use i s vastly inefficient, thus rendering revenue collection very difficult. EDHhas presented net operating losses for over fifteen years. With a loss o f 51%, EDH bills only 49% o f the energy that it supplies. Current technical losses reach 20% while non-technical losses account for 31%. The collection capacity o f EDH has reached such a deplorable state that the utility i s incapable o f honoring most o f its financial obligations. Revenues do not cover maintenance and operation costs, consisting o f mostly fuel costs and energy purchases from private providers (see summary o f profit and loss account below). For instance, 50% o f EDH revenues are automatically withdrawn from EDH accounts and transferred directly to Sogener. The utility i s incapable o f paying the IPPs. 19. EDH financial insolvency is further exacerbated by the fact that the utility buys its electricity from private suppliers for more than the price it in turn charges the general public. For instance, under its current contract with Alstom, EDH pays 10.08 gourdes per KWh supplied, and the utility resells the KWh for only 6.30 gourdes to the public. Payments to Alstom and Sogener average US$ 1.3M and US$0.9M per month, respectively. Table 1.4: Summary of EDHprofit and loss account (unaudited)- 2004/2005 Mn Gourdes Mn US$ YOof revenues Revenues 1.603 37.0 100% Personnel 139 3.2 9Yo Fuel and purchase of energy 900 20.8 56% Purchase of energy 425 9.8 27'/o Operational expenses 106 2.5 7'/o Commercial expenses 569 13.2 36% Networksldistribution 64 1.5 4yo Other -. 642 14.8 40% ~ 'Operating loss (1,243) (28.7) -78% Financial charges 3,272 75.6 204% ther non operating 246 5.7 15% I et loss (4,269), . . (98.6) -266%I Source: BerlioABCEOM 20. Impact on the Budget. To survive, the State, through the Ministry of Finance, has had to provide subsidies and loans to the utility. The state allocates a sizable amount o f its budget to help the electricity sector, as illustrated by the table below. For instance, during the 2004-05 fiscal year, more than 7% o f the state budget was allocated to the electricity sector. The table below highlights the amount o f transfers that the government has had to make to the power sector. These transfers include both the purchase o f fuel for EDH and the payment o f IPPs (see above), but do not comprise the electricity bill paid by the State to EDH. However, given that a compensatory system offsets part o f the bill owed by the State with the transfers, the amount o f subsidies i s likely to be overstated and i s not necessarily indicative o f the real support o f the State to EDH. 43 Gourdes (million) 2000/01 2001/02 2002/03 2003104 2004/05 2005/2006 (1) Electricity subsidy actual - 307 357 616 1,074 1,688 1,454 Total expenditures - actual 8,728 10,772 15,084 16,006 23,410 19,358 Share of budget 4% 3% 4yo 7yo 7`/o 8Yo 21. At the root o f the EDH crisis is an institutional arrangement which has allowed the company to reach such a moribund state. EDH i s neither economically nor technically viable. EDH i s unable to maintain generation capacity and keep electrical losses at reasonable levels. The company i s thus incapable o f generating revenues that can be reinvested inorder to fund increasing demand. 22. There exist several managerial and technical problems at all levels within the utility. On the technical side, some o f the problems are: unreliable service with frequent and prolonged interruptions; sub-par quality o f electricity service with voltage and frequency variations and inadequate or non-existent maintenance o f equipment, theft o f materials on the network and long delays to repair problems. On the managerial side, some o f the problems are: inadequate and deficient operation and maintenance practices; poor commercial and financial management; lengthy administrative procedures; inadequate information systems and poor long-term planning, lack o f skilled labor in human resources and poor information system and financial management. 44 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies HAITI: Electricity Loss ReductionProject (PREPSEL) A. Maior Related Proiects Financed by the Bank Project Name Amount US$ M Latest Sector issues supervision (ISR) Rating Economical 61 S S Project to support economic governance reforms Sovernance Reform identified by the Transitional Government in the ICF, 3peration (EGRO) improving the policy environment for increased Bank and donor-supported investment lending in key sectors. Economical 2.03 Assist the GOH in strengthening its institutional Sovernance Technical capacity in the areas o f budgetary planning and Assistance Grant execution, investment and project planning, internal and (EGTAG I) external control, procurement, accountability, participatory monitoring, and reform constituency building. Haiti Community- 38 Building on the PCF-funded CDD pilot, project will Driven Development scale-up the direct transfer o f public resources to local Project (PRODEP) community organizations in poor rural and peri-urban communities, by: (i)improving access to basic social and economic infrastructure and support income- generating activities by financing small-scale investments proposed, implemented and managed by community organizations; and (ii) improving governance and building social capital o f communities by increasing citizen participation and transparency in oDen decision-making. Drocesses. Haiti Transport and 16 The project will promote income-generating Territorial opportunities for small farmers, who represent the Development majority o f the rural productive population. Linking Project smallholders to markets can lower transactions costs and increase competitiveness, thereby helping them reap the highest returns from their limited assets. There are also consumption-related benefits that translate into increases in household well-being, and improvements in access to social services LICUS Grant 1.5 S Project to promote participatory development in basic infrastructure, rural water and sanitation, and solid waste management Emergency Recovery 11.5 S Project to support the rehabilitation of the areas affectec and Disaster by recent adverse natural disasters; strengthen capacitj Management to manage natural disaster risks and better respond tc emergencies resulting from adverse natural events; anc to reduce the vulnerability o f communities through risk identification and risk mitigation activities. 45 Project Name Amount US$ M Latest Sector issues supervision (ISR) Rating PPIAF Feasibility0.74 NA NA In March -2005, a grant was approved to be Study for a implemented by the Bank in order to begin preparing a management contract feasibility study for a medium term management o f EDH contract for EDH. Under this feasibility study, a thorough analysis o f the state o f the electricity sector will be conducted, including a diagnosis o f EDH existing assets, operations, and human resources, with a view to elaborating a long-term investment plan, a market study o f the electricity sector and a study o f the legal framework (already completed). Haiti Rural Water and 10 NA NA Aims to increase the sustained and effective use of Sanitation Project water and sanitation systems in rural communities in Haiti through providing water services in participating communities, laying the foundations for project sustainability; improving sanitation practices in participating communities; and strengthening the capacity o f Service National d'Eau Potable, local government, local water committees, and professional operators. 46 B. Maior Related Proiects Financed by other Donors Project Name Amount Donor Schedule US%M Rehabilitation o f three (3) diesel units 3.0 AFD AFD has run out of budget to complete the in Carrefour work agreed with USAID (group C6), but the World Bank have continued the dialogue with this entity both at a higher management level and on the field to explore the possibility that ADF will provide the additional funding needed to complete the work and allow those 10 MW to be effectively available. The World Bank will follow-up with the Frenchembassy inHaiti. Rehabilitation o f generation groups in 4.0 CIDA Studies for the evaluation o f works started in the thermal plants o f Cayes and Petit March 2006. They are still being discussed Gorives by EDH and CIDA. A work plan will be finalized late June 2006. Transfer o f Jacmel model to cities in the 16.3 CIDA Approved by the Minister. Evaluation of provinces works to be done i s ongoing; works will start late 2006. Project should last 5 years with possibilities o f co-financing from other donors (EU), International expert based in Haiti to 0.25 CIDA CIDA hopes to discuss the choice o f the coordinate donors' projects consultant with the new government (May 2006). -EDH accounting reconstruction EU -Final report sent on April 24,2006. (excluding technical assets) 0.36 -EU has officially informed the WB that it is -Inventory and valuation of technical preparing a contribution agreement to assets 0.19 transfer funds to WB, who would be responsible for the activity. Transfer should be effective by end July 2006. Reparation o f Saut Mathurine, phase 1 1.5 EU Funds are available, waiting for CIDA to start supervision, probably by June 2006. EU has reiterated in many occasions their concern that the funds can be lost if the work does not start right away. Small scale design of a rehabilitation 0.25 IDB Preparation started inMarch 2006. and financial improvement program for electric distribution in Port au Prince Program for the rehabilitation of energy 14 IDB Board approval i s expected inOctober 2006. infrastructure in Haiti Technical Assistance to prepare the 0.25 IDB Ready to start, once confirmation letter from Program for the rehabilitation o f energy - EDH is received by the IDB (expected date infrastructure in Haiti mid-june 2006). Rehabilitation o f four (4) diesel units in 2.3 USAID Works are expected to be achieved by end Carrefour and Varreux June 2006. 47 Rehabilitation o f four (4) small 4.5 USAID Consultants for the study and execution o f hydroelectric plants inthe provinces works are currently being selected. Study i s expected to start in July, and works in September 2006. Financing is available until September 2007. Fuel financing 22 USAID May 2004 through end February 2005. Diesel unit part financing Feasibility study for the development o f 0.35 USTDA Consulting firm to perform the study was electricity generation, transmission, and selected; the contract was signed in May distribution projects inEDH. l l 2006. Study should be finished within 8 48 Annex 3: Results Framework and Monitoring HAITI: ElectricityLoss ReductionProject(PREPSEL) PDO ProjectOutcome Indicators Use of Project Outcome [nformation Contribute to the sustainable Improved quality o f service provided by 4ssess impact o f improved improvement in the quality o fEDHinthe project zone :ommercial practices on the technical electricity services delivered to ind commercial performance o f EDH. customers in Port-au-Prince and to the Improved quality o f service provided to strengthening o f the financial and large customers operational performance o f the public 4ssess impact o f improved utility in charge o f providing these Increase in the revenues billed by EDH in :ommercial practices on the financial services (EDH), the project zone Jerformance o f EDH. Increase in the revenues collected by EDH inthe project zone 4ssess the impact o f the results Endorsement by EDH and the 2btained under the PREPSEL on the Government o f a final proposal on how to xedibility o f the customer oriented replicate the project pilot to reduce losses management approach adopted in the in the other areas deserved by EDH project, as an effective solution to I achieve the PDO Components ComponentIndicators Use of Component Monitoring Information component 1 +Number o f consumers in the whole Adopt and implement modem country incorporated into the new CMS commercial and service management database. Verify the appropriate installation and systems for EDHas the basis for a +Number of consumers located inthe use o f the CMS and TSMS, as tools to more customer-oriented approach to whole country incorporated into the new build reliable customer and service providing electricity services. customer-installations link database and management data bases. attended through TSMS. +Number o f EDH employees successfully trained in the use o f the new CMS and TSMS. Improving service to clients and + The number o f interruptions suffered Measure the effect o f investment and increasing revenues billed and by each customer improved attention to customers on collected for EDH: (interruptionsimonth) the quality o f service. +duration o f interruptions +Number o f consumers regularized in Measure effectiveness o f the project to the selection zone. increase the credibility o f EDH as a reliable provider o f service +Amount billed inproject zone Verify the effectiveness o f improved *Amount collected inproject zone commercial practices on the capacity o f EDH to increase billing and collection. +Number o f EDHemployees trained to Measure the effectiveness o f the perform commercial activities in the project to transfer know-how and selection zone. build EDHinternal capacity 49 b) Among large consumers +Thenumber o f interruptions suffered by each large customer aeasure the effect o f investment and +Duration mproved attention to customers on o f interruption suffered by :he quality o f service. each large customer +Number o f large consumers regularized. Measure effectiveness o f the project to increase the credibility o f EDH as a reliable provider o f service +Amount billed to large customers Verify the effectiveness o f improved +Amount collected from large customers :ommercial practices on the capacity 3 f EDH to increase billing and collection. I +Number o f EDHemployees trained to attend and follow up on large Consumers. Measure the effectiveness o f the project to transfer know-how and build EDH internal capacity Component 3: +Number Execution, evaluation and replication o f satisfied customers in the o f project through strategic project area as measured by periodic Monitor effectiveness o f the project to participation surveys and focus groups ++Number improve the quality o f service and the Number o f large customers satisfied image o f EDH. o f satisfied EDHemployees Monitor effectiveness o f the project tc provide transfer o f know-how tc EDH's employees, and achieve local ownership o f the proposed customei oriented management approach b] EDH'semployees. Percentage o f disbursement o f the Project Verify the capacity o f the PCU and of funds inrelation to the Project the PTUi EDH team to supervise the implementation schedule. project's implementation in an efficient and timely manner Number and frequency o f project progress reports presented to and approved by the Bank inrelation to what was agreed upon in the Manual o f Operations. Arrangementsfor resultsmonitoring Institutional issues: See description o f the project (Main document: Section 3) and institutional arrangement sections (Main document: Section 2) for a description on how the results and outcomes will be monitored. 0 Data collection: Periodic reports from the PCU and the EDH-PREPSEL team, periodic surveys, and punctual external verification will provide the data needed for measuring project results and outcomes (see table below). Responsibilities .and costing o f these different activities have been presented in detail under the description o f the Project (See Main Text, section 3, and Annex 4) and corresponding Cost Table (Annex 5). 0 Capacitv: A consultant will be hired to assist the EDH-PREPSEL team to monitor indicator performance as defined above at least once a year. In addition, consultants will perform surveys among customers in the project zone, large consumers in the country and EDH's employees 50 under the supervision of the Coordinator o f the PCU and the guidance o f EDHPREPSEL team. The WJ3 supervision team will be available throughout the project implementation to provide assistance to these experts. Finally, data collection will be facilitated by the implementation of CMS and TSMS and the build up of a customer database. Training will be provided for EDH employees to collect the data and learn how to properly use the database. 51 -' 1 E 8 I l3@ 1 Annex 4: Detailed Project Description HAITI: Electricity Loss Reduction Project (PREPSEL) 1. The project adopts a strategic approach to reduce technical and non-technical losses in EDH, whereby it focuses on: (i)achieving quick substantive success that will have a demonstration effect; (ii)preparing the ground for replication o f the approach at a greater scale; and (iii) ensuring sustainability o f the results through systematic training o f EDH's employees in each o f the project components,' and through a communication strategy aimed at both employees and EDH customers. 2. Project Rationale and Overview: The three-prong focus o f the project described in the previous paragraph is reflected in the design o f the various components o f the project. Quick results and demonstration effects are achieved with Component 2, which adopts a selective approach. In one case, the focus i s on a particular area o f Port-au- Prince with a sample o f EDH customers from varied socio economic backgrounds and electricity consumption patterns-a socio-economically mixed zone- where a pilot project will be developed (Component 2.2.). In the other, the focus i s on a category o f clients, namely large consumers, who are the most promising group in terms o f capacity to pay (Component 2.3.). In parallel with this selective approach, the project also implements activities that benefit EDH as a whole because they cannot be implemented ina piecemeal manner. This refers to the acquisition and implementation o fmoderntools for managing commercial activities and client accounts (Component I).With these new systems, the project will already be taking a step to buildingup a favorable environment to replicate the results o f the pilot project on a broader scale. This ultimate objective o f scaling up the results o f the project i s taken further under a separate component, aimed at preparing a detailed plan to replicate the approach o f the pilot project in the other areas served by EDH, taking into account the lessons learned during the implementation o f the project (Component 3.3). Additionally, to facilitate effective results o f the various components already described, the Project includes a communication component that will provide the necessary support to achieve effective dissemination o f information on the project among all relevant actors and timely feedback from these actors throughout the design and implementation o f the project (Component 3.I). Finally, the Project comprises a Project Management and Monitoring and Evaluation component, which will support project implementation and monitor its impact on the services for electricity users and on the financial and operational performance o f EDH (Component 3.2). 53 Haiti: Electricity Loss Reduction Project Project Description EDH's appropriation of the project and willingness to effect changes -Reparations by donors -Efficient purchase and transport of fuel ge Customers in the BE, Replication MBE Replication - A S a customer -Implernentation 3. The Project will implement the following three components over a three year period: 4. Component 1: Improvement in EDH management systems and practices towards a more customer oriented approach (US$ 2,640,000). The objective o f this component i s to improve the operational (technical and commercial) performance o f EDH in a sustainable manner, by giving the company the information tools for a modem and efficient management o f the customers and o f the services that it provides. New operational procedures for a more customer oriented approach in the execution of activities using these new systems will also be developed, and EDH's employees will be trained in the use o f the system and inthe utilization o f these new procedures. The project will also finance technical assistance to guide EDH in how to build the corresponding reliable databases. Since these are highly specialized systems, the project will finance two experts in customer and technical service systems for utilities to assist EDH in the procurement o f the systems and in the supervision o f the work o f the selected provider. Finally, as part o f its contribution to the project, EDH will finance the construction, next to its headquarters, o f separate facilities to locate the hardware necessary to the operation o f the CMS and TSMS, as well as the call center, which will be implemented as part o f Component 2.2. 5. Sub-Component 1.1 Incorporation of a new corporate commercial management system (US$ 1,375,000) The project would finance incorporation o f a new "state o f the art" corporate commercial management system (CMS) allowing proper execution and monitoring o f the activities related to: (a) commercial cycle: regular metering, billing and collection; (b) attention o f customers at commercial agencies or by phone (call centers), (c) disconnection and reconnection o f electricity supply related to commercial debts; (d) connection o f new customers. Information collected and missions performed during project preparation verified that commercial weakness o f EDH is due 54 to the combined existence o f inadequate operational procedures and poor information on the commercial situation o f customers. Both matters are related to limited capabilities o f the completely obsolete existing CMS, which requires urgent replacement by a "state o f the art" system. Project financing would also include execution o f field campaigns needed to build a reliable database inthe area, as well as technical services o f an expert in technical service systems for utilities to assist EDH inthe procurement o f the TSMS. 6. Information Technology (IT) applications developed for utilities and other massive retail companies include CMS as a key tool aimed at supporting execution and supervision o f all the processes and activities involved in the commercial relation between the company and its customers, described in items (a) to (d) above. 7. CMS should be implemented for the whole company (Port-au-Prince and Provinces) in 9 months after the contract with the selected bidder i s signed. This process should involve no more than 3 steps: i)for large consumers; ii)for all customers located at Port au Prince; iii)for all customers located at the Provinces. 8. Incorporation o f the new CMS requires building up and keeping constantly updated a reliable customer database. For that purpose, teams conducted by university students should develop a comprehensive field assessment, based on visits to each and all the points o f supply. New contracts will be signed with all EDH customers and they will contain all the relevant commercial information. Those contents will be the main source for construction of the new customer database. In a first step, this will be done in the area selected for the pilot project. 9. Sequence of activities o f this sub-component would be (times computed in each case from the end o f the previous task, unless otherwise stated): 1- Appointment o f the consultant who will assist EDH in the preparation o f the technical specifications of the tender documents for procurement o f the CMS and related hardware under the World Bank rules (before project start-up). 2- Preparation o f technical specifications for procurement o f CMS (1 month) 3- Development o f the procurement process for incorporation o f CMS (5 months) 4- Implementation o f CMS including field campaigns for build-up o f a new customer database and training o f users as a permanent activity to be executed duringthe implementation process (9 months) 10. Sub-component 1.2 Incorporation of a new corporate technical service management system (US$ 705,000). The project would also finance incorporation o f a new Technical Service Management System (TSMS), aimed at optimizing attention o f customers claims related to bad quality o f electricity supply. The current situation i s precarious, based on manual records and procedures poorly organized and difficult to monitor and supervise. TSMS and related procedures minimize time elapsed between reception o f the claim and restoration o f regular electricity supply, which i s the critical parameter defining quality o f electricity supply. At the same time, efficiency in execution 55 o f the activities that EDH performs for that purpose i s maximized. Project financing would also include field campaigns needed to build a reliable database in the area, as well as technical services o f an expert in technical service systems for utilities to assist EDH inthe procuremento fthe TSMS. 11. TSMS i s another IT application that becomes a highly effective tool for attention o f customers' claims and improvement o f quality in electricity supply. It minimizes time elapsed between reception o f the claim and restoration o f regular electricity supply and, at the same time, maximizes efficiency in execution o f the activities that the company must perform for that purpose. Conceptual design o f TSMS i s based on setting a link between each point of electricity consumption and the electric networks involved in the supply. This allows quick identification o f the potentially faulty components o f the networks related to a claim presented by a customer and sending the operational crews straight to those installations. A t the same time, this allows proper management o f potential overflows inclaims related to faults involving a large number o f consumers. 12. TSMS should be implemented for the whole company (Port au Prince and Provinces) in 6 months after the contract with the selected bidder i s signed. The process should involve 2 stages: i)for all customers located at Port au Prince; ii)for all customers located at the Provinces. 13. As in the case o f the CMS, teams conducted by university students should develop a comprehensive field assessment, based on visits to each and all the points o f supply, in order to identify network assets involved in electricity supply to each customer. These links between customers and network assets are the components o f the database o f the TSMS. 14. Sequence of activities o f this sub-component would be (times computed in each case from the end o f the previous task, unless otherwise stated): 1- Appointment o f the consultant who will assist EDH in the preparation o f the technical specifications o f the tender documents for procurement o f the TSMS and related hardware under the World Bank rules (before project start-up). 2- Preparation o f technical specifications for procurement o f TSMS (1 month) 3- Development o f the procurement process for incorporation o f TSMS (5 months) 4- Implementation o f TSMS, including field campaigns for build up o f the customer- installations link database and training o f users (4 months) 15. Sub-Component 1.3 Application of new procedures and rules for customer oriented management approach for provision of electric service to EDH customers (US$ 50,000) The project would finance consultancy services to assist EDH in the definition and actual application o f new operational procedures for "customer oriented" execution o f all the activities related to technical and commercial attention o f customers related to incorporation o f CMS and TSMS. Activities to be re-engineered include: (a) commercial cycle: metering, billing (including delivery to customers) and collection; (b) 56 detection and regularization o f frauds and not metered connections; (c) disconnection and re-connection o f customers related to debts and/or frauds; (e) attention o f customers at commercial offices; (f) attention by phone o f customers claims related to bad quality o f electricity supply and commercial matters through a call center. Reengineering o f commercial processes will be driven by the concept "every kWh supplied must be metered, billed and collected". They will allow quick recovery o f debts and fast detection and elimination o f losses. 16. The reengineering process applied to the above-described activities should contemplate some specific aspects in each case. 17. Metering; Scope o f the process should include: a) Optimization o f the reading routes; b) Incorporation o f portable reading terminals (PRT) where the consumption data are stored by the operator and automatically transferred to the CMS database at the end of each working day. This minimizes the risk o f mistakes in those operations. In addition, historic consumption data of each customer stored in the memory o f the PRT allow the reader to perform automatic checks on the consumption being recorded and ensure its accuracy. PRTs are comprehensively used for metering purposes by service utilities in Latin America since the beginning o f the 9Os, with excellent results. c) Selection and training o f readers (own staff and/or outsourced). d) Regularmonitoringthrough outsourced audits. 18. Billing; This i s a typical function o f the CMS. Bills are prepared and printed each night following the day the data of consumption are collected at the site, stored in the PRT and downloaded to the CMS database. Bills are ready to be distributed 24 hours after related consumption i s metered. 19. Distribution of bills: Main issues involved are: a) Optimization o f the distribution routes. b) Potential outsourcing o fthe activity. c) Regular monitoring through outsourced audits. 20. Detection and regularization of frauds and non-metered connections. Scope o f reengineering should include: a) Optimization o f operational procedures, supported by information provided by CMS. b) Training o f operators. c) Execution o f field campaigns and outsourced audits. 21. Disconnection and re-connection of customers related to debts and/or frauds. Emphasis must be put on the following aspects: a) Optimization o f operational procedures, supported by information provided by CMS. b) Training of operators. 57 c) Execution o f outsourced audits. 22. Sequence of activities o f this sub-component would be (times computed in each case from the end o f the previous task, unless otherwise stated): 1- Procurement under World Bank rules o f consultancy services for the definition and actual application o f new operational procedures for "customer oriented" execution o f all the activities related to technical and commercial attention o f customers related to incorporation o f CMS and TSMS (3 months from project start-up) 2- Development o f consultancy services (simultaneously with implementation o f the CMS and TSMS). 23. Training o f staff involved in all the activities related to technical and commercial attention o f customers related to incorporation o f CMS and TSMS customer service (simultaneously with implementation o f the CMS and TSMS) 24. Training activities. Consultancy services related to the incorporation o f CMS and TSMS will include systematic training o f EDH employees in the procedures associated with an effective application o f these systems in the interface with the clients. As mentioned above, the project will also finance the technical assistance to guide EDH inhow to buildthe corresponding reliable data bases. 25. Sub-component 1.4: Restructuring of the Anti-Fraud Unit at EDH (US$ 60,000). As part o f the objective to improve management o f clients' accounts, it i s important to actively support the strengthening o f EDH's Anti-Fraud Unit, under the new procedures described above. T o this end, the same approach as the one adopted in Component 2 with the Unit o f Large Users and the Personnel o f the Local Commercial Agency (see below) for the selection o f personnel will be used for this unit. Appropriate training and improvement in procedures applied by such Unit will also take place. It was also agreed that in defining this activity, it will be important for the Project to benefit from the experiences learnt in the going effort o f the Central Government for stepping up the fight against corruption. It will be equally useful to incorporate the recommendations o f the special annex on Renforcement de la Gestion et de la Transparence, appended to the Operation Manual o f the Haiti Transport and Territorial Project. 26. Sub-Component 1.5: Construction of facilities for the CMS, TSMS and the call center (US$ 450,000). EDH will finance the construction o f separated facilities for the CMS, TSMS and call center. These should be located next to the headquarters, but for reasons o f data security not within EDHmain building. 27. Specific outputs of Component 1. - number o f consumers in the whole country incorporated in the new customer database and with the support o f the commercial management system 58 - number o f consumers located in the whole country incorporated in the new customer-installations link database and with the support o f the technical service management system - number o f employees trained within the anti-fraud unit 28. Component 2: Improvement in quality and reliability of services and increased revenue collection of EDH for selected groups of customers (US$ 3,245,000). The objective o f this component i s three fold. First, it intends to have a demonstration effect o f the benefits o f adopting this new `customer management approach' on the quality and reliability o f services to end users, with two groups o f customers: a socio-economically mixed zone in Port-au-Prince, and the group o f large customers in the main cities. Second, it intends to show how to increase the revenues o f EDH,thereby lessening the fiscal burden on the State, by targeting those who account for 70% o f EDH's total revenues. i.e. the large customers. Indeed, the reduction o f non- technical losses (non-payment and/or fraud) will focus especially on the large customers, both because they represent the largest share o f EDH's potential revenues, but also because, contrary to what i s usually thought, non-technical losses are a more important problem for the firm amongst this type o f customers than among the poorest segments o f the population which does not weight much in terms o f revenues and which in various instances pays already for their electricity, albeit not to EDH but to middle-men.. Third, this component aims to provide an intensive training opportunity and career development alternatives to EDH's employees as well as to recruit new personnel, for the use and application of more modern commercial and technical practices in the area o f distribution and commercialization o f electricity. 28. Sub-Component 2.1. Selection of personnel for the socio-economically mixed zone and for the Large Customers Unit (LCU) (US$ 80,000). This sub-component seeks to ensure that component 2 will be implemented by a qualified and motivated group o f EDH employees, because this i s the first necessary steps for the viability, let alone the success, o f the project. 29. 2.1.1. Top senior level consultant to assist EDH in the selection of the staff. A top senior level consultant will be hired to assist the administrative direction o f EDH in the transparent and competitive recruitment process o f the staff for the local commercial agency and for a large customer unit. 30. 2.1.1.1. Selection of staff in the commercial agency. EDH has recently inaugurated a new commercial agency in this socio-economically mixed zone (see below). This new commercial agency will constitute a vital element in the project as it will house the personnel that will have the responsibility to assist the various customer groups in the socio-economically mixed area. In that sense, the selection o f a manager and the personnel for the newly inaugurated commercial agency will be crucial in the success o f the project. In order to select a qualified and motivated group o f employees for the new commercial agency, a transparent and competitive recruitment process will be initiated from within EDH. The recruited employees will receive the appropriate training 59 that will enable them to efficiently assist consumers in the socio-economically mixed area. 31. 2.1.1.2 Selection of staff for the LCU. The manager o f that unit must be an expert with wide professional experience in commercial management o f large customers. The first round o f the selection process will be only reserved to EDH employees. If no suitable candidate i s found, external candidates will be considered. Experience in the electricity business i s desirable, but not essential. The project will finance the consultancy services o f a top senior consultant who will assist the Administrative Department o f EDH to conduct the recruitment process. Once appointed, the manager o f L C U will immediately supervise the selection o f the personnel for the unit with the assistance o f the consultant cited above and elaborate a proposal o f organizational structure o f the unit and related human and material resources needed, and a plan on how to undertake the other sub-components o f this strategic management o f Large Consumers, and submit it to the Director General. 32. Sequence of activities o f this sub-component would be (times computed in each case from the end o f the previous task, unless otherwise stated): 1- Appointment o f the first level consultant specialized in selection o f top managers (before effectiveness) 2- Recruitment process for EDHManager o f L C U (1 month) 3- Elaboration by Manager o f LCU o f the proposal o f organizational structure and related human and material resources and approval by Director General (1 month) 4- Full implementation o f L C U (2 months) 33. Subcomponent 2.2: Improve quality of service to, and increase EDH's revenue from the socio-economically mixed zone through the application of a new customer oriented approach (US$ 1,620,000). This subcomponent aims to improve the quality o f the service provided to EDH's users and increase the revenues for the firm in a specific zone o f Port-au-Prince. T o this end, the new systems and procedures developed under Component 1 will be implemented and monitored in EDH's local commercial agency (see below). Equally important, the design o f this component emphasizes the need for a cultural change both from EDH's employees and from the customers inthe zone, as the only effective way to effect and sustain a change in commercial practices on both sides. This sub-component also includes investments in equipment and tools required in the commercial agency o f the zone (see below) to optimize execution o f the activities re- engineered following the new procedures. There will be some investments in the distribution network and connections to the clients needed to ensure reliability o f the supply. Specific approaches would be defined and implemented according to the socio- . economic characteristics o f the users, including those consumers in the poor, marginalized neighborhoods o f the selected zone. This component constitutes a pilot project whose success could later be replicated on a larger scale. 34. developed in the central area o f Port-au-Prince supplied by the circuits TOB 1-1, TOB 1- Selection of the project implementation area. The pilot project would be 2 and TOB 2-2, which includes the Presidential palace and the University Hospital, and 60 comprises around 10,000 electricity consumers, o f diverse socio economic background. This zone was selected for project execution based on a systematic assessment developed using a set o f 8 criteria that would make it possible to successfully implement the customer management oriented approach described under the previous component to achieve the objectives o f the project. These criteria included among others, the access to continuous and reliable supply o f electricity, the existence o f a distribution network in sufficiently good condition to require only minimal investments, and the absence o f negative externalities such as safety constraints. The detailed assessment and its outcomes are described in Annex I.Of the 16 areas scrutinized, only this one met all the criteria. 35. 2.2.1 Improvement of electric network assets and consumer connections required to fully regularize electricity supply meeting acceptable quality standards in the selected zone of Port au Prince (US$ 1,120,000). Visual inspections o f the zone selected for implementation o f the project evidenced that medium voltage lines are in a good condition. However, in order to ensure reliable electricity supply meeting acceptable standards on quality, it will be necessary to undertake some investments in renovation o f low voltage lines and customer connections, installation o f new consumption meters, replacement and installation o f new switchgear equipment. A detailed field assessment on the condition o f the networks must be undertaken to define the investments actually needed in each specific case to ensure reliable electricity supply meeting acceptable standards on quality 36. High technical and commercial losses are usually linked to a significant number o f irregular connections to consequently damaged low voltage lines, customer connections in poor condition, faulty or non existing consumption meters, etc. Those damaged assets must be replaced by new ones to achieve a sustainable regular electricity supply. However, specific approaches need to be defined and implemented according to the socio-economic characteristics o f the users. 37. For consumers living in areas where EDH can perform regular operations without constraints and showing a regular socio-economic profile, it will be necessary to improve electric networks and install or replace conventional consumptionmeters that will be read periodically by EDH operators at the site. In those areas, EDH must perform the routine operations (technical and commercial) inherent to a electricity distribution company serving normal zones. 38. The Following graph shows actual results obtained with the coordinated and systematic application of the above described procedures for reduction o f losses in the two electricity distribution companies serving the city o f Buenos Aires, capital o f Argentina, and its surrounding areas. 61 Evolution of overalI I 20 15 10 5 *Record at 10 % (2000) Following pictures show typical arrangements of the DAT (Distribution Area Transversal) concept. 62 43 39. Sequence of activities for this sub-component would be (times computed in each case from the end o f the previous task, unless otherwise stated): 1- Field assessment on current condition o f electric networks in the zone selected for the project to be executed by EDH staff (2 months from project start-up). 2- Definition o f the investments in renovation o f low voltage lines and customer connections, installation o f new consumption meters, replacement and installation of new switchgear equipment (2 months). 3- Procurement under World Bank rules o f the materials and works required to execute the investments defined inthe previous task (6 months) 4- Executiono f works (9 months) 40. Sub-component 2.2.2 Detailed implementation and follow-up of the application of new procedures and rules for customer oriented management approach for provision of electric service defined in Sub-component 1.3 (US$ 180,000). This sub-component refers to actual and sustainable implementation o f the new operational procedures for "customer oriented" execution o f all the activities related to technical and commercial attention o f customers in the selected zone. The objective o f this sub-component i s to show how the local presence o f EDH can be put to best use to improve the firm's technical and financial performance. In that sense, the selection o f EDH's Manager o f the local commercial agency, and of its personnel, as well as their proper training would be key factors inthe success o f this sub-component. 41. Activities to be re-engineered are detailed under sub-component 1.3. The sub- component includes also investments in equipment and tools required to optimize execution o f the activities re-engineered following the new procedures. 42. A new commercial agency has recently been installed inthe area where the pilot project will be implemented. It i s a comfortable but not luxurious place that needs to be equipped and connected to the CMS and whose personal needs to be trained for personalized attention o f customers. Scope o f this service comprises both attention to customers claims related to bad quality o f electricity supply and commercial matters, supported by the new CMS and TSMS. 43. Nevertheless, if EDH i s performing well, there i s no reason for regular customers to go to a commercial agency. Thus, the sub-component includes the creation o f a call center for attention o f customers by phone. Scope o f this service comprises both attention o f customers claims related to bad quality o f electricity supply and commercial matters, supported by the new CMS and TSMS. Design o f the call center will include installation o f special purpose phones in several places o f the served area, where the customers can make a toll free call to the EDH call center. Current development o f telecommunications in Port au Prince does this with low related costs, using fixed wireless phones. This option has shown to be an excellent solution to ensure access to call centers o f low income people without own telephone service. 44. The guiding principle o f phone attention must be: "the customer should be able to do all that can be done by phone, without needing to go to a commercial agency". Call 64 center operators should be young students (first or second year o f university studies). They should work under a regime o f stages and their first training should be inthe use o f the new corporate management systems. Those students showing best functional performances should be incorporated to the permanent staff o f the company. 45. Particular emphasis will be put on the creation o f an outsourced network o f collection points, intended to maximize comfortable options available for payment o f bills. Collection is an activity essential for the survival o f any company, but the expertise required (logistics, safety, etc.) i s very specific, and completely different from electricity supply and should be outsourced to specialized entities, such as the companies handling remittances sent by Haitian people living in other countries. This has been done in other Latin American countries with remarkable success. 46. For customers with bank accounts and credit cards, payment o f bills through automatic debit will be strongly promoted. For customers with bank accounts and credit cards, payment o f bills through automatic debit should be promoted. This has significant benefits for EDH and i s comfortable for the customers, provided that they become convinced that they can rely on the accuracy o f the amounts o f the bills. 47. Sequence of activities o f this sub-component would be (times computed in each case from the end o f the previous task, unless otherwise stated): 1- Definition o f the equipment required to execute re-engineered commercial and technical operations (computers, PRTs, equipment for call center and commercial agency, etc.) (2 months). 2- Procurement under World Bank rules o f the equipment defined in the previous task (3 months) 3- Incorporation o f the equipment to EDH regular operations (1 month) 48. Sub-Component 2.2.3. Intervention in the bidonvilles (US$ 320,000). In this sub-component, the approach in the project zone as a whole will be specifically applied to the bidonvilles, with additional contribution from EDH (US$ 100,000). An assessment o f the situation will enable the World Bank to determine what needs to be done in each bidonville. 49. For those consumers located in the bidonvilles, but where EDH can perform regular operations without significant constraints, the solution will involve improving electric networks and installing electronic consumptionmeters allowing remote metering, both at each customer connection and at the transformer supplying a group o f consumers. This enables fast detection o f irregular connections and fraud, making possible to undertake immediate corrective actions at the site and thus promoting consumer discipline in electric service. The concept supporting this approach i s to avoid investments in network assets as much as possible and concentrate them in remote metering devices as, once detected, fraud and theft can be eliminated with operations at the site. Comprehensive experience in almost all Latin American countries show that consumer discipline i s achieved in a quite short time if those irregular consumers are aware that the utility i s able to make fast detection and correction o f fraud and theft 65 50. For those consumers located in bidonvilles where EDH cannot perform regular operations due to hostility or other constraints, regularization will be based on the construction o f shielded networks for electricity supply and application o f remote metering, both at each customer connection and at the transformer supplying a group o f consumers. This approach aims at impeding the construction o f irregular connections to the networks and fraud in consumption meters. It has been recently implemented in dangerous marginalized areas inBrazil with very positive results. Losses were reduced in a sustainable way from 55% to less than 5% in an area where more than 60,000 customers are located, building new shielded networks and metering sets following the concept known as "transverse aerial distribution". It i s quite an expensive solution, as it requires significant investments both in new shielded electric networks and remote meteringdevices. But it is the cheapest actual sustainable solution for electricity supply in those areas. Real experience shows that any other option requiring that the company performs activities at the site i s not valid, as access to the zone i s constrained. To know that there i s fraud and theft inan area i s worthless ifcorrective actions cannot be adopted. 51. Training activities. Training o f EDH staff and contractors involved in all the commercial and technical operations to be re-engineered following the new procedures and systematic follow-up o f the performance o f those human resources i s a permanent and crucial activity o f this sub-component 52. Specific outputs of Component 2.2 - numberof consumptionmeters installed inthe intervention area - kmo flow voltage lines improved inthe interventionarea - number o f new medium voltage (MV) to low voltage (LV) transformers installed inthe interventionarea - amount o f basic investments financed by the project - number o f portable reading terminals (PRTs) incorporated inthe project zone - number o f telephones connecting with the call center installed inthe project zone 53. Sub-component 2.3: Regularization of EDH's large consumers through the application of the new customer oriented management approach (US$ 1,545,000). The dollar amount currently billed to around 2350 customers (1.3 percent of total) in the whole country with a monthly unit consumption above 1000 kWh represents close to 70 percent o f EDH revenues (inmost other countries, large customers amount to 30 percent o f total bill on average). Furthermore, EDHdatabases show more than 1300 "non-active" customers and around 1500 "0 kWh recorded consumption" large customers (December 2005 figures). It i s therefore crucial for EDH's financial health to regularize the commercial condition o f 100 percent o f its large consumers, regardless o f their current situation. Since many o f these customers have opted for self-generation, EDH would need to convince them o f the quality and reliability o f its service before they agree to subscribe or re-subscribe as regular customers. 66 . 54. Experience shows in Haiti and in other countries that reducing non-payments by these types of customers can make a significant contribution to the efforts o f reducing non-technical losses o f the company. A significant improvement in the billing coverage and collection rates of large customers has been achieved by almost all the utilities in Latin America, through a combination o f good management practices and application o f IT tools. This component will include the following sub-components: (a) create a "Large Customers Unit (LCU)" as an organizational unit within EDH Commercial Direction; (b) design and implement a detailed field assessment on the current situation o f all large consumers; (c) define and execute a plan aimed to regularize supply in all individual cases where this i s needed; (d) install remote metering and disconnection and reconnection devices in all points o f supply to regularized large customers and; (e) define and implement operational procedures for systematic monitoring of the situation o f electricity supply to large customers. 55. As indicated above, a unit exclusively devoted to large consumers will be created within EDH, with personnel recruited by the administrative direction o f EDH with the assistance o f the top level consultant (2.1.).The importance o f large consumers in EDH's revenues justifies the creation o f a unit within the commercial department for the specific purpose o f managing all aspects (technical and commercial) o f relations o f the utility with its large consumers. The unit will be embedded in the normal practice o f the firm. Once appointed, the manager o f LCU will elaborate a proposal o f organizational structure o f the unit and related human and material resources needed, and a plan on how to implement the rest of the sub-component, and submit them to EDH's top management. Since large customers also include all public entities, the manager o f the LCU will also have the responsibility to liaise with the working group in the Ministry o f Finance which would be implementing the inclusion o f a specific line for consumption o f electricity in the annual budget o f each public entity (action in the MOU). 56. 2.3.1 Design and implementationof a detailed field assessment on the current situation of all large consumers and improvement of the database (US$ 30,000) It is crucial to accurately know the current condition o f each and all o f the active, non active and "0 kWh" large consumers, through a comprehensive field assessment, based on visits to each and all the points o f supply. Execution o f that activity also provides a good opportunity to revitalize EDH staff and, at the same time, improve company public image. It i s proposed to organize special purpose crews, formed by a student o f the school o f engineering (starting the second half o f their career) and an EDH employee, with some skills in customer connections, who will assist the student in the field assessment and provide logistic support (drive the vehicle, etc.). As the assessment i s not a permanent activity, students should be recruited temporarily (stage regime). Those showing the best performance could be incorporated to the permanent staff, once the assessment i s concluded. 57. A t each point o f supply being visited, the crew must: check the condition o f electric connections (wires, meter, etc.); determine actions to be executed for technical regularization o f the connection; verify commercial condition of supply (active customer, etc.). 67 58. Based on the conclusions o f the assessment, L C U will design a plan aimed at regularizing all the points o f supply to large consumers. Special purpose crews responsible for execution o f the works at each connection point will be required. They may be formed with EDH's own staff or outsourced, as it i s a non permanent activity. Regularization i s not limited to the condition o f the physical connection for electricity supply. It also involves commercial aspects. EDH will sign a new supply contract with each and all large consumer, regardless o f his current condition. 59. L C U will previously define standard procedures to be applied in the different cases (active customers in regular condition, regularized consumers found in fraud, etc). For active consumers found in regular condition, the contract will be signed by the inspecting crew performing the first visit. For regularized consumers, this can be done once the physical connection i s restored. 60. A new database for those consumers will be created through execution o f this campaign, and should be kept permanently updated in the future. LCU will have a staff o f commercial agents. Each o f these agents will manage all the aspects (technical and commercial) o f the contract between EDH and a specific group o f large consumers (around 500). Each large consumer will be informed by the agent in charge that he will receive personal attention and will be encouraged to call him for any issue related to the service provided by EDH. In particular, commercial agents will be responsible for close monitoring o f technical and commercial condition o f the supply to each large consumer inhis list. 61. Regularization o f large consumers does not end with the execution o f these activities. Periodic and systematic follow up o f the condition o f each regularized large consumer i s an absolutely crucial task. Until remote metering i s implemented, it implies that the crews in charge o f regularization perform periodic visits to customers and check that the actual condition o f connection remains regular. For the first 3 months after regularization, weekly visits are advisable as customers need to perceive that EDH is paying close attention to their situation. Crews in charge o f inspections should change periodically customers to be inspected, in order to minimize the chance o f collusive behaviors. 62. Execution of this component should start once L C U i s fully implemented (that is, beginning o f month 5 from project start-up) and be completed in 3 months 1- Appointment o f students and selection o f EDH staff for special purpose crews (before effectiveness) 2- Execution o f field assessment and elaboration o f a large consumer database (3 months). 63. Sub-Component 2.3.2 Technical assistance in remote metering. (US$25,000) Project financing would also include short term technical services o f an expert in remote metering to assist LCU inthe elaboration o f the technical specifications for a call for bids for supply, installation and commissioning o f remote metering devices, under the World Bank procurement rules. 68 64. Sequence o f activities o f this sub-component would be (times computed from full implementation o f LCU, that is, beginning o f month 5 from project start-up): 1- Appointment o f the consultant who will assist EDH in the preparation o f the technical specifications for a call for bids for supply, installation and commissioning o f remote metering devices, under the World Bank procurement rules. 2- Preparation o f technical specifications for procurement o f TSMS (1 month) 65. Sub-Component 2.3.3 Installation of remote metering and disconnection and reconnection devices in all points of supply to regularized large customers (US$ 1,000,000). The project would implement electronic devices at each point o f supply to large consumer, allowing remote metering and disconnection or reconnection o f the clients, Remote disconnection avoids the usually conflictive situation created with the customer when this operation must be executed at the site due to commercial debt and eliminates potential sources o f corruptive practices in this very sensitive activity. The Project would also finance investments required to connect each large consumer to an exclusive MViLV supply transformer, or, at least have an exclusive shielded connection to the LV terminals o f a transformer. This will make it extremely difficult to attach irregular connections to this cable. 66. Current "state o f the art" o f the involved technology allows implementing remote metering o f electricity consumption at each point o f supply with low related investments. Functional performance o f the set to be installed includes: permanent electronic metering of all parameters o f electricity supply (voltage, current, power factor); periodic transfer (daily or with any other desired frequency) o f recorded data to a remote point (typically a commercial agency o f the electric company) using existing facilities o f telecommunications company (wired or wireless links). Usually data are transferred once per day during night time, when communications lines are almost unloaded. This allows the electricity company to optimize costs for use o f those facilities. But meteringi s done "on line". This means that the data can be collected at any moment at the remote point (even permanently), if deemed necessary. Remote disconnection and reconnection o f electricity supply, performed from the same point where the metering data are collected and analyzed. 67. Connection o f each large consumer to its exclusive M V / L V supply transformer or shielded connection to the LV terminals o f a transformer built usingtwisted or concentric cable will be clearly identified by EDH and this information will be provided to the involved large consumer. The metering and disconnection set will be installed in a shielded panel to be located close to the transformer, between the LV terminals and the connecting cable. Components o f the set are electronic meter, disconnection and reconnection switch, communication modem and auxiliary devices. 68. Sequence of activities o f this sub-component would be (times computed from the end o f sub-component 2.3.2 (that is, beginningo f month 4 from project start-up): 69 1- Development o f the procurement process for installation o f remote metering and disconnection and reconnection devices in all points o f supply to regularized large customers (5 months) 2- Installation o f remote meteringand disconnection and reconnection devices in all points o f supply to regularized large customers (6 months). 69. Training activities for EDH employees. Part o f the technical assistance for the application o f new procedures using CMS and TSMS will consist o f training activities to EDH employees to improve attention to Large Clients and achieve effective billing and collection fi-om these clients. 70. 2.3.4. Improvement in networks (US$ 490,000). The project will finance the renovation o f distribution lines and customer connections for large customers. The field assessment o f the situation (2.3.1) will have identified the renovations to be carried out. 71. Specific outputs of Component 2.3 - number of large consumers regularized (new contracts for electricity supply with EDHsigned) - number of remote consumption meters installed for large consumers inthe whole country 72. Component 3: Participatory approach, project management, monitoring and impact evaluation, and replication strategy (US$ 1,579,760). This component regroups all the activities necessary for the successful implementation o f the first two components. It includes a communication strategy with a pro-active participatory approach towards clients and employees o f EDH. It also focuses on the importance o f an efficient project management and careful monitoring and an evaluation o f the results, their impact and their sustainability beyond the duration of the project. Last, it includes a proposal to be endorsed by the Government and EDH on how to scale up and replicate the project in other zones o f Port-au-Prince and o f the rest o f the country in an effort to expand the benefits o f the model proposed here to EDH as a whole. 73. Subcomponent 3.1. Participatory Approach (US$ 75,000). The component includes a pro-active participation and communication strategy towards clients and employees o f EDH intended to promote the behavioral changes to achieve the project's objectives. This strategy, to be tested under the pilot, comprises a combination o f (i) reaching quality standards for customer satisfaction as identified by consumers; (ii) enforcement and social control mechanisms; and (iii) communication program to reach a out to th,e various stakeholders to obtain their feedback, and disseminate information about the project outcomes. 74. The participation strategy will promote cultural changes to address negative practices both within EDH and among customers, that might hinder project success. Project design includes features to promote this change in culture (competitive selection among EDH's employees o f key personnel to implement the pilot project, remote 70 disconnection, etc.). The main actions to be tested under the project are summarized below: 0 Low-income community residents:(i)to strengthen Neighboring Committees (NC) to play a key role in the establishment o f better practices; (ii)to facilitate complaint processing and responsiveness standards; and (iii)to assess the feasibility to install house-meters in selected neighborhoods. 0 High income residents and businesses: (i)to regularize contracts and ensure service standards are reached; (ii)to offer alternatives to save electricity consumption to reduce billing; and to inform them periodically o f improvements and potential savings; (iii)to disseminate good practices and give public recognition to good customers: and (iv) to seek customer collaboration to eliminate illegal activities with the use o f positive incentives (discount for faster payments, for instance) and with the application o f stricter, enforcement mechanisms. 0 Government institutions:(i)to include a line inthe budget o f each institution for their consumption o f electricity; (ii)to work with the authorities, with the support o f the Strategic Steering Committee to ensure timely payment o f electricity bills, and corrective measures in case o f delays to avoid a negative impact on EDH's revenues; and (iii) give public recognition to good customers. to 0 Proposed changes in EDH: (i)to promote project ownership through the involvement o f key staff as offering opportunities for career development; (ii) to engage the Union in the proposed changes thereby overcoming fears and conveying the need to embrace the changes as a critical step for EDH's survival; (iii)to establish a recruitment process to hire personnel on the basis of qualifications,; (iv) to define an incentives system based on participation in training, recognition and non-monetary compensation to ensure engagement in the proposed changes; and (v) to establish and enforce a monitoring system to identify and punish illegal activities. 75. The communication strategy will disseminate the project's results and good practices among the different customers through newspaper articles and/or press releases that will inform the population in detail about the project. There will also be an informationnote/brochurefor all targeted EDH customers in the selected zone and for all larger customers, describing in detail the foreseen implementation process; a dissemination system will be established to enhance community partnerships with EDH. Surveys to customers in the project zone of the various income levels, large consumers in the country and EDH's employees will be undertaken at various stages o f project implementation to define a baseline and then monitor the impact o f the project on these groups. Other dissemination activities will be carried out as required with EDH, customers and other groups o f civil society, includingbut not limitedto the media, government officials, other donors, and other sectors. 76. Component 3.2. Project management, monitoring and Evaluating (US$ 1,344,760). As part o f the project management sub component, the project will finance expenditures for project administration by the PTU/EDH team and the PCU. Eligible expenditures will include: (1) consultant costs o f the PCU; (2) studies and consultancies; 71 (3) training activities, and (4) acquisition o f goods and equipments needed for project implementation (computers, programs). EDH will contribute to this component by providing logistical support, among which: facilities for the PCU, maintenance o f amenities, payment o f salaries to the PTU-EDH team etc. This component will also finance monitoring and evaluation (M&E) activities others than those already considered under Component 3.2, and the project's impact evaluation. 77. Subcomponent 3.3. Development of a plan to scale up the project model in line with a coordinated medium-term strategy for the electricity sector (US$ 160,000). A long-term strategy will be developed to replicate the model described in the three project components above. Through the project's expected improvements in the areas o f intervention, the credibility o f the sector should be revived, increasing the chances for obtaining additional donor financing for the scale up. At the same time, it i s clear that replication will entail more than just a replication o f what will be done in Component 2, for these other areas face more challenging constraints o f different sorts that the pilot project. Thus, the design o f this replication strategy will be based on an evaluation o f the progress in the execution o f the pilot project and an analysis o f the project impact, but also on an assessment o f current conditions on the key aspects that need to be contemplated to enable a successful replication in the rest o f Port-au-Prince and in the Provinces. 78. 3.3.1 Evaluation of the progress in the execution of the pilot project and dissemination of lessons learned within EDH (US$ 100,000). This will provide essential feedback for the optimization o f those projects. 79. 3.3.2. Assessment of current condition of the key aspects that need to be considered to enable a successful replication in the rest of Port-au-Prince and in the Provinces (US$60,000). The main aspects to be evaluated in those areas are summarized in the set o f 8 criteria that were used to select the area for the current pilot project, namely: (a) current conditions o f electricity supply and operational requirements and related costs to achieve a 24 hours per day service; (b) evaluation o f investments required for restoration o f MV and LV networks; (c) willingness to pay for good electricity supply o f population located in the area; (d) current collection rates in the area and potential for improving billing and collection rates; (e) current condition o f consumption meters; ( f ) externalities such as safety constraints for access o f EDH crews to perform their regular technical and commercial operations; (g) operational condition o f the 69h2.5 kV substations involved in wholesale electricity supply to the area. Assessment on each one o f the above-described aspects will involve the execution o f specific field campaigns and consultancy studies. Outcomes o f those actions will offer a precise definition o f the activities to be undertaken in each area to achieve regularization in electricity supply and related costs, time and disbursements schedules. 72 Annex 4.1- Selection of the area for the pilotproject 4.1.1 Criteria for selection A set of criteria for the selection of the area for execution of the pilot project was defined and applied to the zones supplied by 16 MV circuits previously defined by EDHtop management: - Criterion 1: The area must have permanent electricity supply (24 hours per day) meeting acceptable standards on quality and this should be achieved without significant changes in current EDH operational costs. - Criterion 2: Investments required for restoration o f MV networks must be minimum, as budget o f the pilot project i s limited and needs to consider key investments for the incorporation o f the corporate management systems and remote metering o f large consumers. Circuits in bad conditions must be restored in the future, but with the revenues collected through better EDH commercial performance. This criterion reflects the key concept: "there i s no money available for investments in networks until the billing and collection indexes reach acceptable figures". Preliminary information provided by EDH on investments required for restoration o f networks in the different circuits i s included inAnnex 111. - Criterion 3: A significant percentage o f active customers with well demonstrated willingness to pay for good electricity supplymust be located in the area. - Criterion 4: Collection rates in the area must have average values (neither too good, nor too bad). Potential for improving billing and collection rates in the area must be significant, both inrelative and absolute terms. - Criterion 5: The area must contain a significant number o f defective consumption meters. - Criterion 6: No externalities that could potentially affect development o f the project, such as safety constraints for access o f EDH crews to perform their regular technical and commercial operations can exist inthe area. - Criterion 7: The area must include high, medium and low income customers, in order to avoid negative and highly sensitive perception that the project privileges rich people and forgets about other customers. One or more small or medium and well delimited slums ("bidonville") should be located inside the area. A special approach for regularization o f electricity supply inthat slum will be a component o fthe project. 73 - Criterion 8: The area should be directly related to the zone of influence of a 69/12.5 kV substation ingood operational condition, in order to ease metering and energy balance requirements. 4.1.2 Results of the application of the criteria to the zones pre-selected by EDH - Area proposed for execution of the pilot project Detailed application o f the 8 above-described selection criteria to the set o f 16 circuits previously defined by EDH leads to the following key conclusion: Only the central area of Port au Prince supplied by the circuits TOB 1-1, TOB 1-2 and TOB 2-2, with around 10.000electricity consumers (regular customers and others) gets a positive evaluation in all the criteria. Inthe following paragraphs conclusions o f evaluation of the area in each of the 8 defined criteria are presented. - Criterion 1: The area has permanent electricity supply (24 hours per day) meeting acceptable standards on quality. It includes the Presidential Palace and the University Hospital, with supposedly obvious unintemptible supply. - Criterion 2: Investments required for restoration o f MV assets are minimal. MV lines are in a good condition, as a significant percentage o f them was renovated a few years ago, through the execution o f projects with the assistanceo f EDF and HQI. - Criterion 3: A significant percentage of active customers with well demonstrated willingness to pay for good electricity supply i s located in the area, as reported by EDH Commercial Direction. - Criterion 4: Collection rates in the area have average values. As there is no reliable information on billing rates compared to injected energy per area, billing rates cannot be used as an evaluation criterion. - Criterion 5: The area contains a significant number o f defective consumption meters, as reported by EDH Commercial Direction. - Criterion 6: No externalities that could potentially affect development o f the project, such as safety constraints for access of EDH crews to perform their regular technical and commercial operations exist inthe area. It shows a predominantly normal condition, from the points o f view o f access and security. -Criterion 7 : The area includes high, medium and low income consumers. It also contains mediumwell delimited slums ("bidonvilles"). - Criterion 8: The area is directly related to the zone o f influence o f the Toussaint Brave 69112.5 kV substation, which shows a very good operational condition and includes 74 active and reactive energy meters installed both at TOB 1-1, TOB 1-2 and TOB 2-2 outgoing feeders. Implementation o f metering and energy balance requirements i s extremely simple. Electric diagram o f the Toussaint Brave substation i s included in Annex IV. Although information currently provided by EDH for the areas supplied by the other circuits previously defined by that company is incomplete, available data allow to state that all o f them fail to meet at least one o f the 8 above-described criteria. The following table presents some the figures o f a comparison intended exclusively to show the existence o f differences between the areas. The discrete scoring adopted (1: Good, 0: Regular, -1: Bad) should not be interpreted as a quantifier o f the amount o f those differences. This cannot be done with existing information and has no sense for the purpose o f the selection process. MV/LV Criteria distribution 75 79 0 88 3 0 3 2 3 N 98 3 N 3- '0, 3 3 M z m 0 13 13 c3 m - .I Y v1 EL .I U g s g g s P P 0 00 Y 4 vi v) n 0 *E b b 00 b 00 ? 3 I - - -- - 0 0 0 31 0 0 0 0 3 3 3 0 0 0 0 3 3 3 M 00 b 2 00 > x, > E x Q, 2B .L 3 3 - - - 0 0 N 0 N 3 > d- M M * cT\ N vl vl m c, a0LE 0 0 E .I c, m EL 0 00 N -b v) M n N CEi .a U .I 1 b d- 0 M - c4I a N b a 2 M n 38 M +a I M 4E u Annex 4.4. CommunicationSurvey Results As part o f the communication strategy, a set o f tools were used in order to assess the project's major benefits and possible obstacles that it might face during the implementation phase. To that effect, survey questionnaires, targeting the various stakeholders were designed. The stakeholders include : 0 Electricite d'Haiti staff at large (ranging from senior and operational staff to Union representatives and service workers, including technicians, maintenance staff, meter readers and others) 0 Business, residents and NGOs including both current EDH customers and potential customers 0 Government institutions, including government agencies, hospitals and universities 0 Low-income communities residents and community organizations In addition to the survey questionnaire, visits and interviews were conducted with the relevant stakeholders.. This analysis involves summarizing the views and opinions o f the stakeholders and examining the institutional, socio-economic and political context o f the project. The following summary analyzes the results o f the findings. Interviews with EDH Employees EDH senior management team expressed optimism regardingthe project. The directors understand the success o f the project represents a lifeline for EDH, whose conditions have been deteriorating. The senior officers showed a strong willingness to collaborate in order to guarantee the success and sustainability o f the project. They point to an aging infrastructure and organizational weaknesses as the main causes for a decline in revenues and services o f EDH. Many o f the directors also attribute the decline to a history o f cronyism and political influence that have plagued EDH and many other public institutions in Haiti. They complain that the utility i s routinely forced to hire people with inadequate qualifications. Interviews were also conducted with regular employees from key departments. Many o f the same issues explored above resurfaced in the comments o f the employees. The interviewees acknowledged the existence o f widespread corruption throughout the institution. This corruption takes many shapes - ranging from stealing or wasting EDH equipment to employees who clandestinely connect people to the EDH networks for a fee. Many interviewees stated that a large pool o f incompetent employees exists within key departments. They attribute this situation to a hiring practice that is not based on merit. Instead, influence and cronyism dictate the recruiting process. Moreover, the employee interviews revealed that EDH faces major operational issues that contribute to the continuing decline in revenues. For instance, the bill distribution mechanism i s so inefficient that many customers do not receive their bills regularly. This irregularity handicaps EDH from collecting payments. Further, customer care agents lack adequate training, which according to some interviewees i s provided rarely. 81 Consultation with the Union of EDH The Union leaders on behalf o f their members expressed their readiness to collaborate on the project. They appreciated having been included in the dialogue process. They expressed their optimism and offered their support throughout the process so that the project can fully benefit the institution. During the interviews, union representatives conceded that their perception o f the World Bank i s that o f a powerful international institution trying to privatize the utility, hence putting people out o f work. The meeting with the World Bank representatives helped erase some o f that perception. The following table highlights the major trends in the answers provided by EDH personnel in the survey questionnaire. One hundred employees fi-om EDH participated in the survey. The interviewees included senior officers and staff fkom a variety o f departments such as Commercial, Networks and Production. Percentage of Aware of Competent Satisfied D o you D o you employees EDH Employees with favor think who corruption? at E D H ? EDH wI3 clients pay responded services? project ? enough? Yes 100 65 0 95 85 N o 0 35 100 2 13 - N o remonse 0 0 0 3 2 Interview wz2hBusznessesandReszk'ents Residents and businesses in the project area were also interviewed. The scarcity o f electricity from EDH forces virtually every member o f these groups to find alternative methods to satisfy their electricity needs. T o that effect, a great deal o f investment i s usually made to purchase and maintain power equipment. The most common power equipments utilized include generators, solar panels, power inverters and batteries. Business owners and many affluent residents stated that they will continue to buy fuel despite its high cost because EDH has been unreliable and incapable o f meeting their needs. This group of consumers constitutes a viable source o f revenue for EDH if the utility were to offer a more reliable service accompanied by an efficient collection mechanism.. Regular collecting from large consumers can significantly augment EDH revenues. Most consumers are hoping for an improvement in the quality o f service. Many possess the means to pay for the electricity that they are consuming. The interviews demonstrate that most o f them do not object paying a higher price ifthere were continuity, consistency andreliability inthe serviceprovidedby EDH. Stakeholders confirm the existence o f a network o f illegal activities. Many businesses and in some cases prominent residents routinely use fraudulent methods to gain access to EDH electricity. EDH employees had alluded to these activities, and interviews with residents and businesses corroborate the claims. These fraudulent activities pose a danger to the networks and to EDH in terms o f 82 revenue generation. One common fraudulent method i s the use o f fictitious meters. The business or the resident usually possesses a meter properly installed and monitored by EDH. That meter i s often connected to low wattage items such as lights and fans. The high wattage appliances, however, are connected to the EDH network clandestinely. The bill that these consumers receive from EDH does not remotely reflect their actual electricity consumption, thus resulting in financial loss for EDH. Interviews with Government Institutions The consultations with the administrators from all the various public entities in the project zone revealed that EDH has a relationship that works to its detriment. Intheory, these public entities are customers o f the utility; hence they have the responsibility to pay for their electrical consumption. The reality i s far more complex, however. In the case o f the government ministries, the bills are often channeled through the finance ministry, which in turn writes a check for EDH. However, the process i s very inefficient. EDH i s at the mercy o f the state in terms o f debt collection. Unlike private entities, EDH does not suspend services at government ministries regardless o f insolvency. As a result, these agencies routinely ignore their bills. Further, the state does not have a tradition o f training its employees about efficient energy use. Employees routinely fail to turn off electrical appliances, such as costly air conditioner units, at the end o f their workday. Employees at numerous government ministries do not have a tradition o f proper electricity use. The relationship between EDH and the state universities presents fewer problems. Unlike government ministries, the universities for the most part pay their bills when they receive them, which do not happen regularly. Many university deans point out that EDH has not been a reliable partner in terms o f providing electricity. In fact, like most businesses and some residents, virtually all the universities use alternative methods to meet their electricity needs. For instance, the Institute for International Studies and Management (INAGEI) uses at least two generators daily. This institution is not located in the priority zone. As such, they encounter serious shortages o f electricity. Interviews with Low-Income Communities Residents A number o f low-income neighborhoods fall within the project area. A neighborhood committee consisting o f residents o f the area often serves as the intermediary between EDH and the community. The partnership usually works as follows: EDH installs a meter at the entrance o f the community. The meter i s commonly referred to as the Compteur de Tkte. The meter serves the entire neighborhood. EDH has no direct contact with individual households. Instead, the neighborhood committee manages the operations. The committee i s responsible for monitoring household consumption,and disconnectingresidents if need be for debts. EDH sets a tariff scale for the committee to use in evaluating household energy consumption. Residents pay a flat monthly fee depending on the number of electrical appliances within their individual households. 83 Contrary to popular belief, residents o f low-income neighborhoods have a tradition o f paying their electricity bill. Some residents express their desire to have their own meter. The visits and interviews show that some neighborhood committees possess strong organizational and managerial skills. These committees have a good track record on record keeping. For instance, these committees keep copies o f pay stubs, which highlight the dates and amounts paid by individual households. The organizational skills are such in some neighborhoods that the committees often seek finding from donor agencies to purchase their own electrical equipment. Overall, interviews and document reviews demonstrate that the partnership, in its infancy between EDH and neighborhoods committees from the Quartiers Populaives, work relatively well. The agreement i s simple: EDH provides the electricity, and the committee oversees the operations from distribution to collection. There i s evidence, however, that in recent times, the relationship between slum residents, committee members and EDH has deteriorated. Residents complain that the committees try to collect the same flat fee from them even though there i s a drastic reduction in the volume o f electricity received. In some neighborhoods, electricity has been practically non- existent for long periods o f time. Residents complain that EDH attempts to collect despite the absence of electricity. There have been some cases of violence over collection issues. Some residents now routinely resist paying their bill. As many residents put it, neighborhood committees are demanding money for a service that EDH rarely provides. Many o f these committees confirm their uneasiness with demanding money when EDH no longer provides electricity. Committee members interviewed expressed their disappointment and frustration with EDHinthis regard. Similar to businesses and residents from more affluent neighborhoods, residents in Quartiers Populaires spend some o f their income on alternative energy methods. The use o f kerosene, candles and other methods clearly shows that people, regardless o f income, are willing to pay to meet energy needs. This following matrix highlights some of the answers given by business owners, residents, government institutions and NGOs concerning their views on various electricity related questions'. Percentage Satisfied Have stolen Using Will pay Do you Do youthink of w i t h E D H EDH alternative extra for understa you're customers services? Electricity? energy better nd your paying afair who methods? services? bill? price for responded electricity? Yes 0 1 70 68 30 1 N o 100 97 28 30 68 99 N o Answer 10 12 12 12 12 10 1I The survey questionnaire and the' interviews showed that the majority o f stakeholders favor the Haiti Electricity Loss Reduction Project. The perception i s that the project will enable EDH to improve the quality o f service. ' Two hundredconsumers o f EDHparticipated inthe survey. 84 8.5 Annex 5: Project Costs HAITI: Electricity Loss Reduction Project (PREPSEL) Cmtrlbutlon (US 5) Tlmellne: From Duratlon of World Bank EDH Total Project effectiveness Contract I I I I 2,190,0001 450,0001 2,640.0001 1,375,000 1,375,000 25.000 25.000 Effeclhlsnarsoondnbn 18 months 25,ow 35 000 9 months 15.000 Q months .I I , , , 1 1 1 COnsdlsnt srrlrilog the rerirucretlon01 EDH BotAlreud unH lntemstlonal 80,OW 80.000 + 3 months 1 1 menlhs 3 5 Construction inew facilities for CMS. TSMS. call center of 450.000 450.000 Component 2: Improvement in quallty of SBIYICBand Increase In 3,145,000 100,000 3,245,000 revenue colleotlon of EDH for selected grou11sof customers 2 1 Selection of personnel for the soci~economicallymixed area alld tar the 80.ow 80,000 80 000 2 1 1 TOP SanlDI level COOSunant 10 BSsis( EDH In the rabctan 01 the l e f f 1-the Intarnetionel 80,000 Effectiveness candflao 4 months Lmsl Cmmsrcrsl Agency end lo the salsdion of the menage, 01 Ihe large CuSlomtXS unn 2 2 Improve quality of service to, and increase EDH revenue from. the soc~o- 1.520 000 100 000 1,020,000 economically mixed zone 2 2 1 lmpmvement of network 1,120,ow 1.120 000 2 2 1.1 Renovsllonof low voltage liner and curtomet Eonnodions Redona1 300 0001 300,000 + 5 months 8 months 1 2 2 1 2 Purchase of Eonsumptionmeters, DW1lohgeBI equipmentand other cqulpmenl lntsrnationel 7Q0.000 + 5 months 8 monthe 2 2 1 3 Stocks and 8upew18~on~ Local 30,000 + 5 months Throughout lmplemmtstlon 2.2.2 Deteiied implemenlsllon and follow-up of applicstmn of rules and 180.000 procedures denned m 1 3 2 2 2 1 Purohaso 01 compu1ers, PRTl, ~eneialequipment tor call Center and Local 108,000 108.000 *5 month6 I month mmma(cls1sgsncy. phones d c 2 2 2 2 Conwltant to 89sIol In the implementation 01 the procedure. In the soclo- International 72,0001 il,0001+5 months smnomicsly mixed zone Iovtyslmplementall~ r e manthmz 2.2 3 lmemenllonIn the bidonvdles 220.000 100.000 320 000 2.2 3 1 CaNUltant tor the relallons Wlth the bldonvlllDS Local 20.000 * 5 months 8 months 2 2 3.2. N&wh renovatlona. replecsmmt 01 meters etc Regional 2 3' Regular~Sal~on large consumers through the ~ppl~catlon the new Of 11 1,545000 1 545.000 customer Oriented managemenlapproach 2 3 1 Field assessment of wluation 2 3 1 Student8Worhlng In line Wlth EDH staff lor 8peual purpose crew$ L O C a 2 3 2 TA ,n remote metenng 2 3 2 Con8ultanl asslsl EDH In the preparation ot hey documents (TORS) and lnlsrnati~nal 25.ow rupervis1onOf Installstlo" 2 3.3 lnslailation ofremote metenng 1 000 ow 1,000,000 2 3 3 PUIoha98 and ln618118110nOf remote metering (incl training 01 users) lntsl"atlonal 1,000,000 1 000.000 +5 months 0 months 2.3 4 ImDrOYement OInetwDIh 480,000 490.000 2 3 4 1 Renovetion of the dlrlributlon llner and customer mnnectlons Regional 490,000 490.000 +5 months 3 montha Component 3: Paltlclpatoly approach. project mnnagement, MBE and I 655,000 924,760 1,579,760 75,000 75,000 At effectiveness Throughout imdemenfelion 3,000 3.000 420.000 924.780 1,344,760 105,000 105,000 Before effeclrvsnsss Thioughoul implementstmn 50,ow 50,000 Before effeclivensss Throughout rmplementalian 80,ow 80.000 Before effectiveness Throughout rmplementatron 30,OW 30,000 + 4 months Throughout implemenlstian 15,ow 15,000 + 5 monlhs Q months 15,OW 15,000 At effecliveness 3 months 40,OW 40,000 + 0 monlhs Throughoul implemenfstion 815,380 815,380 + 0 monlhs Throughoul implementation 3 2 9 Cos1of equipment of PCU and other BS needed Local 50,OW 50,000 At effectiveness 3 months 3 2 10 Logistics/ support (cars, maintenance of fscii!ties elc) 108,400 1OQ.400AI effectiveness Throughout mplementstian 3 2 11 Three exterm audits for the proisct Internatmnal 45.000 45,000 + 9 months Throughout mplsmenlarion 3 2 12 Misc International 10.000 10.000 Throughoul mplemenlatron Component 3 3 Replication Strategy 160,000 160,000 3 3 1 Consultent for assessment of lessons learned from first 2 components lnlernstionsi 100,000 100,000 8 months before Bmonths propcl end 3 3 2 Consultant for BSSeSSmenl on current conditmns in rest of EDH for International 80 ow 80 000 Before effectrveness 8 months Contingencies I 10.000l I 10,0001 I Total I 6,000,0001 1,474,7601 7,474,7601 86 Annex 6: ImplementationArrangements HAITI: ElectricityLoss ReductionProject(PREPSEL) Institutionaland implementationarrangements 1. The approach taken to implement this project will be one that combines (i)program management and accountability at the highest level o f Government; (ii) full involvement o f EDH in all substantial issues pertaining to the design and implementation o f the project to ensure that the project addresses the right issues, that it has real ownership from the beneficiary and that serves the purpose o f building institutional capacity within the firm to strengthen its capacity to provide good services in a sustainable manner; and (iii)efficient procurement and financial management arrangements that will guarantee timely execution and full compliance with the WB rules without imposing an excessive burden on the administrative capacity of EDH. 2. Based on the institutional analysis o f the sector to date, it was agreed that the best way to achieve the various objectives above was to entrust EDH with the responsibility and leadership for the technical content o f the Project and establish an Project Coordination Unit (PCU) that will gather all the required fiduciary expertise without distracting too many resources o f the beneficiary, EDH, from the actual implementation of the project. This PCU will be composed o f a project coordinator, a procurement specialist and a financial management specialist. The PCU will work throughout the implementation o f the project with EDH, who will appoint a team o f experts that will follow up the project on a continuous basis (the EDH-Project Team). The PCU will have the responsibility to initiate the implementation o f the various components o f the Project, supervise implementation o f the different activities, and, together with the EDH-Project team, prepare progress reports on the status o f the implementation and ensure the proper monitoring and evaluation o f the project throughout its implementation. 3. More specifically, The PCU will be responsible for the financial management o f the Grant funds in coordination with the Ministry o f Public Works, Transportations and Communications (see below), and will report to the Minister o f MTPTC. Through its technical experts, EDH will have the responsibility o f implementing all substantial matters o f the project, while benefiting from the support o f the two experts in fiduciary matters, and from the advice o f the coordinator according to the scope o f his or her responsibilities as already described. Actual procurement processes and corresponding reporting activities will be the main responsibility o f the procurement specialist, once the TORSand short lists are defined by EDH with the support o f external consultants as needed. Furthermore, the financial management specialist will have the main responsibility o f ensuring proper management o f the resources allocated o f the project and compliance with the required reporting procedures. 4. EDH will appoint a Project Team Leader with the skills that will facilitate the successful implementation o f the project. The EDH Project Team Leader will play a vital role as he/she will have the responsibility to carry out a set o f specific duties. They include but not limited to: a) actively participating in the selection and supervision o f EDH personnel for the project; b) monitoring o f project implementation; c) facilitating communications between the EDH Project Team and the PCU; d) identifying and resolving potential problems during implementation; e) preparing periodic reports on project progress; f)informing EDH o f the progress o f the project. 87 5. Finally, while the day to day follow up and update o f performance indicators will be the responsibility o f the PCU staff and o f the EDH- Project Team as part o f the reporting activities on implementation progress, the PCU will hire a short term consultant to undertake an independent verification o f the progress achieved under the main components every six months, and make recommendations on how to remain on track to achieve the objectives o f the project. 6. This simple division o f responsibilities between the PCU and the technical team o f EDH will make it possible for EDH to focus at this stage on strengthening their core business (providing electricity to the people), rather than dispersing their scarce human resources over many important, but competing areas o f expertise. It will also ensure that all fiduciary safeguards are respected and that project implementation could happen without undue delays. 7. A high level steering committee comprised o f representatives fiom the main government entities that intervene in the sector: Ministry of Public Works, Transport and Communications (MTPTC in French), Ministry o f Finances (MEF), Ministry o f Planning and External Cooperation, as well as EDH and the CMEP (Conseil de Modernisation des Entreprises Publiques) will provide guidance to the PCU on strategic issues. This i s particularly important in the context o f the MOU o f Brussels where various actions that are under the control o f either the MTPTC or the MEF rather than o f EDH affect nevertheless the likelihood o f success o f the project and the overall performance o f the sector, as indicated in further detail in the section C.5 on the risk and mitigation measures o f the project. 8. Financial management and disbursement for the project will be handled by the PCU through the recruitment o f a financial management specialist, as indicated above. Funds will be disbursed via a Designated Account opened at the Central Bank (Banque de la Republique d'HaYti or BRH) and managed by the PCU for the small contracts, and through Direct Payments from the World Bank for the largest contracts. T o strengthen transparency and control over the use o f project's resources, two signatories to the Designated Account will be required (the Project Coordinator and the Minister o f MTPTC for amounts equal and above US $100,000; and the Project Coordinator and the financial management specialist o f the PCU for amounts lower than US$ 100,000). . The detailed financial management arrangements will be finalized by appraisal when the capacity assessment i s completed. 88 The following two graphs give a snapshot ofproject implementation. Hai'ti: Electricity Loss Reduction Project Project Management MTPTC- MEF- Planning&Ext.Coop. - CMEP - EDH Steering Committee Monitoring of project implementation and execution of the Br Supervises the work of the PCU Supervises the work of the PTUlEDH Project Coordination Unit (PCU) I v , EDH PREPSEL team (PTUIEDH) Fiduciary Responsibility and Procurement Technical Responsibility of project Support to EDH Team includes: Team includes: - ProjectLeader - PCUcoordinator -- FinancialManagement Expert - ManagerofLocalCommercial Agency. Procurement Specialist - Managerofthe Large Consumer Unit. - OtherTechnicalExperts Haiti: Electricity Loss Reduction Project Financial Accounts Management Designated Account Direct Payments via WB \ * Project Coordinator (PCU) j-ProjectCoordinator (PCU)) 89 Annex 7: FinancialManagementand DisbursementArrangements HAITI: Electricity Loss ReductionProject (PREPSEL) Country Issues 1. The Bank has not carried out a Country Financial Management Assessment in Haiti which would have provided information on the performance o f the country's public financial management. Nevertheless, the information collected through a number o f studies and as part o f the Interim Cooperation Framework exercise and the Economic Governance Reform Operation supported by the Bank, point out significant weaknesses in the budget process, as well as internal and external control. Also, Haiti ranks very low in the Transparency International index, implyingthat corruption is an issue o f concern. However, the Government has made some efforts duringthe past couple o f years at clarifying the framework and improvingprocesses and systems for fiscal management and financial control. Furthermore, the implementation arrangements o f the project including procurement and financial management will not rely on the country's procedures. As specific procedures complying with Bank's policy will be developed and implemented by a unit outside the government ministries and staffed with adequate staff, the current project will not be directly affected by these weaknesses. Financialmanagementand disbursementarrangements Keyfactors affectingfinancial management and disbursement arrangements 2. The activities and implementation arrangements o f the project do not present any particular risk or challenge that warrant specific attention. The main factor that i s likely to affect financial management i s that the PCU which has overall financial management and disbursement responsibility will be a newly created entity. As such it cannot be formally assessed. Instead, the assessment focused on the arrangements that must be in place when the project implementation starts in order to comply with the Bank's financial management requirements and the needs o f the project. These arrangements are described below. 3. The financial management assessment also included the review o f the completion reports o f previous projects financed by the Bank in the electricity sector in Haiti. This review did not identify any significant financial management issue, except for some interference in the procurement process and the fact that EDH failed to improve its financial management procedures and its financial situation. To a large extent, the problems o f the financial management system and procedures and financial situation persist. They are discussed below. Entities 4. As indicated above, the entities directly involved in implementing the project are the PCU and EDH. However, only the PCU will have financial management responsibility. The PCU i s a new entity to be created and as such does not have previous experience that can formally be assessed. However, it will be staffed with a financial management expert. Furthermore, clear financial management and disbursement procedures will be developed in the operations manual to be followed by the project. These measures will compensate the lack o f previous experience o f the PCU inproject implementation. 90 5. The project will benefit EDH although the utility will not be directly involved in the financial management. As an autonomous public entity, EDH has not been able to strengthen its financial management practices. Key financial management positions such as Finance Director and Treasurer have remained vacant for over a year; the accounting system i s obsolete; its accounts were not prepared nor were they audited for a number o f years; the financial situation i s not viable due to insufficient revenues to cover costs. During the last two years, however, EDH has been receiving technical assistance financed by the European Union in collaboration with the Bank to restructure its accounts, prepare an opening balance sheet as o f September 2004 and auditable financial statements as o f September 2005. This work has recently been completed and will be followed by an audit by an international firm. 6. Although they do not directly affect the project's financial management due to EDH non direct involvement, EDH financial performance may to some extent affect the success o f the project. Given the scope and the relatively small amount o f fund allocated to the project, it would not be efficient to focus on improving EDH financial management system. But the Bank i s coordinating with the IDB, which has agreed to finance a new financial management system that will help sustain the recent efforts to bring the accounts up-to-date and closer to international accounting standards. As part o f the current project, EDH will be required to have its accounts audited and submit the audit report to the Bank annually to continuously monitor its overall financial performance. Flow of funds arrangements 7. Funds will be disbursed via a Designated Account opened at the Central Bank (Banque de la Republique d'Hai'ti) and managed by the P C U for the small contracts, and through Direct Payments from the World Bank for the largest contracts. T o strengthen transparency and control over the use o f project's resources, two signatories to the Designated Account will be required (the Project Coordinator and the Minister o f MTPTC for amounts equal and above US $100,000; and the Project Coordinator and the financial management specialist o f the PCU for amounts lower than US$ 100,000). A local currency project account may be opened for payments to be made in local currency. Financial Reporting and auditing 8. The PCU will be required to prepare and submit to the Bank two sets o f financial reports: 0 Quarterly interim financial reports to be submitted no later than 45 days after the end o f each quarter. The format o f the Financial Management Reports (FMR) will be agreed by the Bank and included inthe operations manual. 0 Annual audited financial statements to be submitted to the Bank no later than 4 months after the end of each o f the Recipient's fiscal year (October-September). These statements will be audited by an independent external auditor acceptable to the Bank. The audit opinion will be on the project's annual financial statements, the statements o f expenditures, and the designated account. 9. In addition, and in accordance to its bylaws, EDH will have its annual financial statements audited every year. These annual audits will be done by an accredited auditing firm acceptable to the Bank, and the final audit report will be sent to the Bank.. 91 Disbursementarrangements 10. The project will be implemented over a 3-year period, from October 15, 2006 to October 31, 2009. Procurement will be completed by July 2009. The proposed allocation of the grant i s shown inthe table below. Allocation of grant proceeds Percentage Goods 3.98 100% Consultant Services 1.02 100% 100% Total Project Cost 5.99 100% Unallocated II0.01 100% 1Total I 6.00 I 100% I Designated account 11. The designated account will be opened at the Recipient's central bank (Banque de la Republique d'Haiti) and manageddirectly by the PCU. However, two signatures will be required in order to withdraw hnds from the account. The Project Coordinator from the PCU and the financial management expert of the PCU will have the right of signature for the use of this account, and the Minister of TPTC and the Project Coordinator will have the right of signature for requesting to the Association the replenishment of this account. The authorized allocation i s expectedto be US$400,000. Statements of expenditures (SOE) 12. Eligible expenditures paid from the DesignatedAccount will be reported on the basis of statements of expenditures. RiskAnalysis The following matrix summarizes the financial management risk assessment for the project. RiskAssessment H I S I M I N Comments experience. 2. Funds Flow X Arrangeinents to be clearly defined in the operations manual to be approved by the Bank 92 H- High S - Substantial M- Moderate N- Negligible or Low Country risks 13. Although a Country Financial Management Assessment has not been carried out in Haiti, information on the performance o f the country's public financial management points to significant weaknesses in the budget process, as well as internal and external control. Also, corruption constitutes a major issue as indicated by Haiti's low ranking in the Transparency International Index. However, the Government has made some efforts during the past couple o f years at clarifying the framework and improving processes and systems for fiscal management and financial control. In addition, the current project will not be directly affected by these weaknesses given its institutional arrangements, which rely mainly on a donor funded PCU and financial autonomous entities outside the regular government framework. Consequently, although the country fiduciary risk i s high, its impact on the project i s moderate. Project risk 14. Given the nature o f the project activities and institutional set up, no major inherent fiduciary risk i s identified. The risk i s mainly related to the fact that the PCU will be newly established which makes it more difficult to anticipate how well it will perform in terms o f financial management and control. However, appropriate measures are taken to ensure that an adequate financial management system including internal control i s in place when project implementation starts. For this reason, the risk i s rated moderate. Summary of Strengths and Weaknesses of FMArrangements 15. The key strength o f the project i s that it will be implemented by a unit especially established for this purpose with adequate financial management system and procedures, and staffing, which will make it easier to comply with the Bank's fiduciary requirements. The system i s not yet in place, thus its future performance cannot be anticipated based on past experience. 93 Action Plan The following financial management system has been agreed upon between the Bank and GOH: SupervisionPlan 16. Supervision o f the project's financial management will be based on desk review o f the quarterly interim financial reports and the annual audit reports. Given the risk assessed, the project should be visited twice a year by a financial management specialist. The first such visit i s expected duringthe first two months into effectiveness to provide training to the project's accountant and ensure that the accounting system i s in place to meet the reportingrequirements. 94 Annex 8: ProcurementArrangements HAITI: ElectricityLoss ReductionProject(PREPSEL) A. General 1. Procurement for the proposed project will be carried out in accordance with the World Bank's "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 various items under different expenditure categories are described below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works: Works procured under this project will include repairs to and replacement o f low voltage lines and customer connections, installation o f new consumption meters, and replacement and installation o f new switchgear equipment. It i s expected that these works will be packaged to create two contracts o f roughly $200,000 to $300,000 each to be procured usingNCB procedures. For these and any other small works identified inthe course o f project implementation, procurement will be carried out using national standard bidding documents (SBD) agreed with the Bank for NCB and shopping procedures. Inthe unlikely event that the works can be packaged to attract foreign contractors, the Bank's SBD would be used for any ICB procurement. 3. Procurement of Goods: Goods procured under this project will include: consumption meters and switchgear equipment (estimated contract value $790,000), remote monitoring and other equipment to improve the network (estimated value $1,000,000 installed), as well as computers, portable reading terminals (PRTs), telephones and other general equipment for the call center, the commercial agency, the PTU/EDH and the PCU (estimated value $108,000). Procurement o f these goods will be carried out using the Bank's SBD for all ICB and national SBD agreed with the Bank for other procurement methods. 4. Procurement of non-consulting services: The project will finance the purchase and installatiordimplementationo f software for a Commercial Customer Management System (CMS) and a Technical Service Management System (TSMS). Since these are highly specialized systems and procurement o f non-consulting services i s a complex undertaking, the project will finance two experts in customer and technical service systems for utilities to assist EDH in the procurement o f the systems, in particular the development o f bidding documents for the processes, Non-consulting services may also be required for training events and project information campaigns. These services will be acquired in accordance with the Bank's Procurement Guidelines. In the case o f the CMS and TSMS, the systems will be procured through ICB conducted using bidding documents which will be prepared by the above- mentioned consultants, based on the Bank's Sample Bidding Document for Procurement o f Non- Consulting Services and the Bank's SBD for Goods, and agreed with the Bank. Any smaller 95 contracts for non-consulting services will be carried out using National SBD agreed with the Bank. 5. Selection of Consultants : The project will finance contracts with consulting firms for, inter alia, preparation o f bidding processes, definition o f new operating procedures, installation supervision , customer surveys, communications campaigns, monitoring and evaluation, studies, training, and other capacity building activities. Short lists o f consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely o f national consultants inaccordance with the provisions ofparagraph 2.7 o fthe Consultant Guidelines. 6. Where teams o f consultants are not required, individual consultants will be hired to provide specialized advisory services and services to support project implementation and monitoring, as well as technical assistance to the agencies involved in project implementation. Universities, government research institutions, training institutions, NGOs and other specialized non-commercial organizations may be contracted to provide technical assistance and carry out research in their areas o f specialization. Such service providers will be selected, to the extent possible, through competitive processes based on the Bank's Consultant Guidelines. 7. Operating Costs: Sundry items, utilities and other incremental recurrent costs may be procured by the PCU using the administrative procedures o f the entity in which the PCU i s ultimately housed, although these procedures must first be reviewed and found acceptable to the Bank. 8. Procurement Methods and Thresholds: The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, will be presented inthe project Operational Manual. Recommended thresholds for the use o f the procurement methods specified in the grant agreement are identified in the table below. These thresholds, as well as the requirement for Bank prior review o f all contracts, are common to all World Bank projects in Haiti. In the event that it i s justified by a future assessment o f the procurement capacity o f the Project Coordination Unit, thresholds for prior review may be introduced. In any event, the agreed procurement plan will determine which contracts will be subject to Bank prior review. The negotiated version o f the plan provides for Bank prior review o f 100% o f contracts financed by the Grant. 96 Thresholdsfor ProcurementMethods and Prior Review Expenditure Contract Value Procurement ContractsSubject to Category (Threshold) Method Prior Review US $ thousands 1. Works 21,000 ICB All I I100-1,000 INCB lAll I loo ICB All 25- 100 NCB All <25 Shopping All Regardlesso fvalue Direct Contracting All 3. Consulting Services -3.A Firms Regardlessof value QCBS,QBS,FBS,LCS All , Capital Total debtlGDP 38.4 26.0 34.1 28.0 savings formation Total debt servicelexports .. 2.7 4.1 7.7 t Present valueof debtiGDP 32.6 Present valueof debtlexqorts 76.5 Indebtedness 1984-94 1994-04 2003 2004 2004-08 (average annualgro wth) GDP -15 0.9 0.4 -3.8 3.1 GDP percapila -3.4 .1.2 -14 -5.5 1.5 " Haiti Low-income group Emorts of goods and sewices -6.5 9.8 35.6 5.7 3.7 111 Haiti PRICES and G O V E R N M E N T F I N A N C E 1984 1994 2003 2004 D o m e s t i c p r i c e s (%change) Consumer prices 42.6 32.5 215 Implicit GDP deflator 11.1 83.0 25.5 23 4 Government finance (%of GDP,includescurrent grants) Current revenue 3.8 9 1 8 9 I] 99 00 01 0, 03 Current budget balance -1.1 -0.3 -0 3 Overall surplusldeficit -14 -3.7 -3 8 GDPdeflatar A C P I T R A D E 1984 1994 2003 2004 (US%millions) Export a n d Import levels (US$ mill.) Total exports (fob) 230 138 361 366 Coffee 46 7 Sisal and sisal strings t3 1 Manufactures 125 89 330 3 7 1 GOO Total imports (cif) 352 183 118 184 Food 80 67 500 Fuel and energy 61 46 Capital goods 81 8 372 0 Export price index (2000-00) Import price index(2000=WO) Terms of trade (2000=00J B A L A N C E of P A Y M E N T S 1984 1994 2003 2004 (US$millions) 'Current account balance t o GDP ( O h ) ~ x p o r t sof goods and services u 1 461 502 Imports of goods and Services 281 1,400 1456 Resource balance -150 -939 -953 Net income 2 -a -t3 Net current transfers 52 811 863 Current account balance -97 .140 -98 Financing items (net) 142 230 '66 Changes in net reserves -45 M -59 M e m o : Reserves including gold (US$ millions) 23 41 207 2 0 Conversion rate (DEC,local/US$) 5.0 14.7 40.5 39 7 E X T E R N A L D E B T and RESOURCE FLOWS 1984 1994 2003 2004 (US$ millions) l C o m p o s l t l o n o f 2004 debt (US0 mill.) Total debt outstanding and disbursed 698 631 994 990 IBRD 0 0 0 0 IDA 150 248 212 8 4 G 124 __ 8 194 Total debt Service 34 4 51 136 IBRD 0 0 0 0 IDA 1 0 0 33 Composition of net resourceflow Official grants 44 598 95 Official creditors 52 -3 15 -56 Privatecreditors -5 0 0 0 Foreign direct investment (net inflow) 5 0 8 Portfolio equity(netinflow) 0 0 0 1 D 468 Wodd Bank program Commitments 0 0 0 0 1 A . IBRD E. Bilataai Disbursements 30 0 0 0 1 8 .IDA D - Other rmllilaterd F .Private Principai repayments 0 0 0 27 , C - I M F G Shart-terr - Net f l o w 30 0 0 -27 Interest payments 1 0 0 6 Net transfers 29 0 0 -33 Note:This tablewas producedfromthe Development Economics LDB database. 8/25/05 112 Annex 15: Maps HAITI: ElectricityLoss ReductionProject(PREPSEL) 113 HAITI PREPSEL Project Area Bidonvilles Main Roads Secondary Roads PalaisPalais des ministeres des ministeres PalaisPalais NationalNational P O R T- A U - P R I N C E Annie Annie Relax Relax CUBA ATLANTIC OCEAN Cité André Cité André 20°N Port-de-Paix Kampech/Kampech/ NORD - OUEST NORD OUEST Cap-Haitien BaillèrgeauBaillèrgeau La Grotte La Grotte NORD Fort-Liberte Gonaives NORD- EST Manrèse Manrèse Golfe de ARTIBONITEARTIBONITE la Gonâve DercolineDercoline Hinche H A I T I CENTRECENTRE 19°N Jeremie REPUBLIC PORT-AU-PRINCE DOMINICAN GRANDE- GRANDE- Kamoro Kamoro Cité Canada/ Cité Canada/ ANSE ANSE Miragoâne NIPPES OUEST This map was produced by the Map Design Unit of The World Bank. IBRD SUD The boundaries, colors, denominations and any other information GeorgesGeorges JUNE SUD - EST shown on this map do not imply, on the part of The World Bank Les Cayes Jacmel Group, any judgment on the legal status of any territory, or any 34736 2006 18°N Caribbean Sea endorsement or acceptance of such boundaries. 74°W 73°W 72°W