Document of The World Bank FOR OFFICIAL USE ONLY Report No: 56454 - BI EMERGENCY PROJECT PAPER ON A PROPOSED EMERGENCY RECOVERY GRANT IN THE AMOUNT OF SDR 10.2 MILLION (US$15.4 MILLION EQUIVALENT) IN PILOT CRISIS RESPONSE WINDOW RESOURCES TO THE REPUBLIC OF BURUNDI FOR AN EMERGENCY ENERGY PROJECT September 16, 2010 Energy Group Sustainable Development Department Africa Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank's Policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective July 31, 2010) Currency Unit = Burundian franc (FBu) FBu 1,230.9 = US$1 US$1.51852 = SDR 1 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank BMZ German Federal Ministry for Economic Cooperation and Development CAS Country Assistance Strategy CEM Country Economic Memorandum CFAA Country Financial Accountability Assessment CFL Compact Fluorescent Lights CRW Crisis Response Window DGHER General Directorate of Water Supply and Energy DRC Democratic Republic of the Congo DTS Special Drawing Rights (SDR) (Droits de Tirage Spéciaux) EBITDA Earnings Before Interest, Tax, Depreciation and Amortization EIRR Economic Internal Rate of Return EPP Emergency Project Paper ERL Emergency Recovery Loan ERP Enterprise Resource Planning ERR Economic Rate of Return ESMF Environmental and Social Management Framework FM Financial Management GoB Government of Burundi GTZ German Technical Cooperation (Gesellschaft fuer Technische Zusammenarbeit) GWh Gigawatt hour HFO Heavy Fuel Oil HIPC Heavily Indebted Poor Countries HIV/AIDS Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome HV/MV/LV High Voltage / Middle Voltage / Low Voltage IDA International Development Association ICRC International Committee of the Red Cross IFR Interim Unaudited Financial Reports ISDS Integrated Safeguard Data Sheet KfW German financial cooperation (Kreditanstalt fuer Wiederaufbau) LFO Light Fuel Oil MDG Millennium Development Goals MIS Management Information System MW Megawatt MSWEIP Multi-Sectoral Water and Electricity Infrastructure Project MWEM Ministry of Water, Energy and Mines NGO Non-Governmental Organization O&M Operation and Maintenance PDO Project Development Objective PFM Public Financial Management PIC Public Information Center PID Public Information Document PIM Project Implementation Manual PIU Project Implementation Unit PPF Project Preparation Facility PREBU Program for the Rehabilitation of Burundi PRSP Poverty Reduction Strategy Paper REGIDESO State-owned water and power utility (Régie de Production et de Distribution d'Eau et d'Electricité) RPF Resettlement Policy Framework RPM Revolutions per minute SINELAC Joint international entity for electricity generation of Burundi, Democratic Republic of the Congo (DRC) and Rwanda (Société Internationale d'Electricité des Pays des Grands LACS) SNEL DRC's National Electricity Company (Société Nationale d'Electricité) TA Technical Assistance Vice President: Obiageli K. Ezekwesili Country Director: John Murray McIntire Sector Director: Jamal Saghir Sector Manager: Subramaniam V. Iyer Country Manager: Mercy Tembon Task Team Leader: Erik Fernstrom REPUBLIC OF BURUNDI EMERGENCY ENERGY PROJECT CONTENTS Page I. INTRODUCTION................................................................................................................. 1 II. THE EMERGENCY CHALLENGE .................................................................................. 2 A. Country Context .................................................................................................................. 2 B. Sector Context ..................................................................................................................... 4 C. Government Strategy .......................................................................................................... 7 D. Complimentarity with other Bank- and donor-financed projects ....................................... 8 III. PROJECT DESCRIPTION ............................................................................................. 9 A. World Bank's strategy of emergency support .................................................................... 9 B. Project Development Objectives......................................................................................... 9 C. Summary of Project Components ..................................................................................... 10 D. Eligibility for Processing under OP/BP 8.00 .................................................................... 11 E. Consistency with Country Assistance Strategy ................................................................ 11 F. Consistency with Crisis Response Window Objectives ................................................... 12 G. Expected Outcomes .......................................................................................................... 12 IV. APPRAISAL OF PROJECT ACTIVITIES ................................................................. 13 A. Technical ........................................................................................................................... 13 B. Economic Analysis ........................................................................................................... 13 C. Financial Analysis............................................................................................................. 13 D. Environmental and Social Safeguards .............................................................................. 14 V. IMPLEMENTATION ARRANGEMENTS AND FINANCING PLAN ....................... 15 A. Institutional and implementation arrangements ................................................................ 15 B. Project costs and financing plan ....................................................................................... 15 C. Procurement arrangements................................................................................................ 15 D. Financial management, reporting and auditing ................................................................. 16 E. Disbursement arrangements .............................................................................................. 16 F. Supervision, Monitoring and Evaluation .......................................................................... 16 G. Implementation schedule .................................................................................................. 17 VI. PROJECT RISKS AND MITIGATING MEASURES ............................................... 17 VII. TERMS AND CONDITIONS FOR PROJECT FINANCING................................... 19 Annex 1: Detailed Description of Project Components ........................................................... 21 Annex 2: Results Framework and Monitoring ........................................................................ 34 Annex 3: Project Costs ............................................................................................................... 38 Annex 4: Financial Management and Disbursement Arrangements ..................................... 39 Annex 5: Procurement Arrangements ...................................................................................... 44 Annex 6: Implementation Arrangements ................................................................................. 48 Annex 7: Project Preparation and Appraisal Team Members ............................................... 50 Annex 8: Environmental and Social Safeguards Framework ................................................ 51 Annex 9: Economic and Financial Analysis ............................................................................. 54 Annex 10: Summary of MSWEIP Status.................................................................................. 70 Annex 11: Documents in Project Files ...................................................................................... 76 Annex 12: Statement of Loans and Credits .............................................................................. 77 Annex 13: Country at a Glance ................................................................................................. 78 Annex 14: Map IBRD 33380 ...................................................................................................... 80 Tables Table 1: Key risks and risk mitigation measures .......................................................................... 18 Table 2: Burundi National and Regional Power Production in 2009 ........................................... 23 Table 3: Results Framework ......................................................................................................... 34 Table 4: Arrangements for results monitoring .............................................................................. 36 Table 5: Proposed IDA allocation................................................................................................. 38 Table 6: Procurement Overview ................................................................................................... 45 Table 7: List of Contract Packages for Goods and Works............................................................ 46 Table 8: List of Consulting Assignments...................................................................................... 47 Table 9: Estimate of key milestones for implementation of contracts.......................................... 47 Table 10: Results of EIRR Sensitivity Analysis ........................................................................... 55 Table 11: EIRR Analysis ­ Base Case.......................................................................................... 56 Table 12: Electricity Sector Investment Program ......................................................................... 57 Table 13: REGIDESO's Sales and Production Forecast .............................................................. 57 Table 14: Scenarios for the extension of the Bujumbura thermal power plant ............................ 58 Table 15: NPV comparison of extension of Bujumbura power plant (Scenario 1) ...................... 61 Table 16: NPV comparison of the extension of Bujumbura power plant (Scenario 2) ................ 61 Table 17: NPV comparison of extension of Bujumbura power plant compared (Scenario 3) ..... 62 Table 18: Financial compensation between REGIDESO and GoB .............................................. 63 Table 19: Financial compensation between REGIDESO and GoB .............................................. 64 Table 20: Pro-forma balance sheet after financial restructuring of REGIDESO.......................... 65 Table 21: Summary REGIDESO's 2007-2009 financial statements (part 1) ............................... 67 Table 22: Summary REGIDESO's 2007-2009 financial statements (part 2) ............................... 68 REPUBLIC OF BURUNDI EMERGENCY ENERGY PROJECT AFRICA AFTEG DATA SHEET Date: September 16, 2010 Team Leader: Erik Fernstrom Country Director: John Murray McIntire Sectors: Power (100%) Country Manager: Mercy Tembon Themes: Infrastructure services for private Sector Manager: Subramaniam V. Iyer sector development (90%); Rural services and infrastructure (10%) Project ID: P122217 Environmental category: Partial Assessment Lending Instrument: Emergency Recovery Joint IFC: Loan Joint Level: Project Financing Data [ ] Loan [ ] Credit [X] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 15.40 Proposed terms: IDA Grant Financing Plan (US$m) Source Local Foreign Total BORROWER/RECIPIENT 0.00 0.00 0.00 International Development Association 1.50 13.90 15.40 (IDA) Total: 1.50 13.90 15.40 Borrower: Republic of Burundi Responsible Agency: REGIDESO Estimated disbursements (Bank FY/US$m) FY 2011 2012 2013 2014 Annual 1.00 7.50 4.50 2.40 Cumulative 1.00 8.50 13.00 15.40 Project implementation period: Start: September 30, 2010 End: January 31, 2014 Expected effectiveness date: December 31, 2010 Expected closing date: January 31, 2014 Does the project require any exceptions from Bank policies? Ref. Section Appraisal of Project Activities [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Does the project include any critical risks rated "substantial" or "high"? [X]Yes [ ] No Ref. Section Project Risks and Mitigating Measures Project development objective Ref. Section Bank Response The project's development objective (PDO) is to improve the capacity and reliability of electricity generation, transmission, and distribution. Project description Ref. Section Bank Response The project consists of the following five electricity infrastructure components: (i) Extension of the Bujumbura Thermal Generation Plant (ii) Rehabilitation of Hydro Power Plants (iii) Rehabilitation of Electricity Transmission and Distribution Network (iv) Pre-payment Meters (v) Fuel Procurement and support to Project Management Which safeguard policies are triggered, if any? Ref. Section Appraisal of Project Activities Two safeguards policies will be applied: Environmental Assessment (OP/BP 4.01) and Involuntary Resettlement (OP/BP 4.12). Significant, non-standard conditions, if any, for: Ref. PAD VII. Board presentation: none Loan/credit effectiveness: (a) The Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity. Covenants applicable to project implementation: (a) REGIDESO shall earn, for each of its fiscal years after its fiscal year ending on December 31, 2011 or a later date if the Recipient has modified the length of its fiscal year, an annual return of not less than zero percent (0%) of the average current net value of the its fixed assets in operation; i. Before June 30 in each of its fiscal years, the Project Implementing Entity shall, on the basis of forecasts prepared by the Project Implementing Entity and satisfactory to the Association, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Association the results of such review upon its completion. ii. If any such review shows that the Project Implementing Entity would not meet the requirements set forth in paragraph (a) for the Project Implementing Entity's fiscal years covered by such review, the Project Implementing Entity shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its tariffs) in order to meet such requirements. (b) No later than six (6) months after the Effective Date, the Project Implementing Entity shall establish and enforce a mechanism acceptable to the Association to enable the Project Implementing Entity to pass on to its customers the cost of purchasing the fuel used to generate energy and the cost of purchasing energy provided by other producers including, without limitation, through adjustments in the structure or levels of the Project Implementing Entity's tariffs, if necessary (the "Fuel Cost Pass-Though Mechanism"). i. Each year starting from the date of establishment of the Fuel Cost Pass- Though Mechanism and thereafter, the Recipient shall (with inputs from the Project Implementing Entity), for each calendar quarter, prepare on the basis of a methodology acceptable to the Association, and furnish to the Association no later than two weeks before the beginning of said calendar quarter, (a) a reasonable forecast of total operating revenues and of total operating expenses (as defined in the Project Agreement) of the Project Implementing Entity during said quarter, including in respect of any changes in fuel and purchased power costs, and (b) details of any necessary tariff revision in order to enable the Project Implementing Entity to meet the targets set out in the Performance Contract, taking into account the views of the Association in the matter. ii. No later than the beginning of each calendar quarter, the Project Implementing Entity shall implement such revision as the Recipient has determined, in accordance with Section V.B of Schedule 2 to the Financing Agreement, is necessary to enable the Project Implementing Entity to meet the targets set out in the Performance Contract for such quarter. I. INTRODUCTION 1. This Emergency Project Paper (EPP) seeks the approval of the Executive Directors to provide an Emergency Recovery Loan (ERL) in an amount of SDR 10.2 million (US$15.4 million equivalent) to the Republic of Burundi for the Emergency Energy Project (EEP) in accordance with the Operational Policy/Bank Policy (OP/BP) 8.00 ­ Rapid Response to Crises and Emergencies. The ERL would be provided as a grant under the International Development Association (IDA) Crisis Response Window (CRW), as approved by the World Bank's Board of Directors on December 10, 2009. 2. Burundi was affected by a severe electricity crisis in the summer of 2009, in which the country's power utility REGIDESO (Régie de Production et de Distribution d'Eau et d'Electricité) lost 40 percent of its generation and the power supply capacity in the Bujumbura capital area was curtailed for a period of four months. During that time, power shortages affected for instance Bujumbura's water supply, hospitals, and public services. The next power supply crisis affecting large areas of Bujumbura occurred during the summer of 2010. Scheduled general technical revision and operation and maintenance works at a key hydro power plant, and unexpected technical problems in a key substation and distribution post resulted in unexpected outages and heavy load shedding for several days. Burundi's ongoing electricity crisis is due to the following two main factors: (i) the increase in electricity demand as a result of the return of refugees and investments in capital area has rapidly exhausted the country's limited available power supply capacity; and (ii) the country's electricity transmission and distribution system is dilapidated due to destruction and lack of investments during the past 13 years of civil war. Therefore major system breakdowns with disastrous effects on the economy risk to occur at any moment. Due to lack of internal resources, the Government of Burundi has appealed to the international community for assistance in reestablishing reliable and affordable power supply to the capital. 3. The proposed project will therefore provide urgent assistance to REGIDESO to recover the capacity and reliability of electricity services with a main focus on the capital Bujumbura. An emergency electricity infrastructure investment program has been identified to quickly address, over the next 12 months, the main risks of power system failure and lack of supply diversification, and alleviate some of the immediate effects of the global financial crisis on the country's fragile post-conflict economic growth. The proposed project is fully aligned with and complimentary to the IDA financed Multi-Sectoral Water and Electricity Infrastructure Program (MSWEIP1) and the African Development Bank (AfDB) Energy Infrastructure Rehabilitation and Extension Project, which finances investments in the electricity and water supply and distribution systems as well as a comprehensive capacity building program for REGIDESO and the Ministry of Water, Energy and Mines (MWEM). 1 The MSWEIP was approved on May 13, 2008, with an original IDA grant of SDR 30.4 million (US$50 million equivalent). The closing date of the MSWEIP is June 30, 2013. See Annex 10 for further details. 1 II. THE EMERGENCY CHALLENGE A. Country Context 4. Development in Burundi has been set back by several years of recurring internal conflict. Burundi is a small, landlocked country that straddles Central and East Africa, with a total land area of 27,834 km2, and approximately 8.5 million inhabitants, about 10.6 percent of whom live in urban areas. Burundi has emerged from a cycle of political-ethnic conflicts that lasted more than 13 years and claimed the lives of about 300,000 people while displacing about 1,200,000 people, or about 16 percent of the population. The 13 years of recurring conflict has had a devastating effect on Burundi's economy. Burundi's per capita income fell by about 40 percent, from US$180 in 1993 to US$110 in 2007. In 2009 Burundi's Gross Domestic Product (GDP) per capita was at US$111, making Burundi one of the poorest countries in the world. A simple estimate of the cost of the war indicates that without the conflict Burundi's GDP per capita would be about double its current level.2 Burundi is not likely to meet many of the Millennium Development Goals (MDGs) by 2015. Nearly all social indicators have sharply deteriorated as a result of the civil war. By most measures of health and human capital, Burundi lags behind the world and other countries in the region. Among children less than five years old, undernourishment reached 57 percent in 2000, but has improved in recent years. An estimated 67 percent of the population lives below the national poverty line and the country ranked towards the bottom of the Human Development Index in 2009. 5. In the time following the Arusha Peace Agreement of 2000, Burundi has experienced both great strides and major setbacks on the road to lasting peace. Following 13 years of civil war, 39 politico-ethnic groups signed a comprehensive peace and reconciliation agreement in Arusha (Tanzania) in August 2000. This significant political turning point paved the way for the establishment of a transitional government in 2002, and the approval of a new constitution in February 2005 providing for appropriate ethnic checks and balances. With the establishment of this basic constitutional framework, presidential and parliamentary elections were held in August 2005, and the new government took office in September 2005. In September 2006, a cease-fire accord was reached with the last hold-out rebel movement, the FNL- PALIPEHUTU faction. 6. Following the remarkable progress made in 2005 and 2006, the political and security situations deteriorated somewhat over the course of 2007 and early 2008. In early 2007, following the removal of the old leadership of the ruling party (CNDD-FDD), the political tensions increased as the government lost its parliamentary majority, leading to a political deadlock. The security situation deteriorated somewhat following the last rebel group's (FNL) withdrawal from the peace negotiations in July 2007. A turning point came in May 2008, when FNL-PALIPEHUTU leadership again declared their willingness to reach a negotiated peace. In June 2008, following pressures from the international community and intervention by regional powers such as South Africa and Tanzania, the FNL leadership returned to Bujumbura, including Agathon Rwasa, the movement's leader. They rejoined the Joint Agreement of Verification and 2 Burundi Country Economic Memorandum, World Bank, December 2009. The CEM draws on a large number of country-specific background studies prepared by the Government of Burundi, the World Bank, other donors and academics. The CEM provides a synthesis of various recommendations, including the prioritization and sequencing of key actions for Burundi to raise its growth path in the next few years. 2 Control Mechanism (JAVC) after the government reiterated the immunity granted to the FNL leadership. A major breakthrough came on December 4, 2008, when the government and the last rebel group, the FNL-PALIPEHUTU, signed a power sharing agreement. On April 21, 2009, FNL became Burundi's 42nd political party. The country held its second presidential and parliamentary elections from May 2010 to August 2010 and a new government was installed on August 30, 2010. 7. Overall, notwithstanding the general progress towards the consolidation of peace, the underlying economic forces leading to recurrent conflicts in Burundi will need to be addressed to achieve lasting peace and stability. While the country is agriculturally rich, there is strong competition for resources, especially for land in rural areas where 90 percent of the population lives. The peace era is seeing the return of large numbers of internal and external refugees to land that has been cultivated by others in their absence. This is leading to tensions about resource ownership and use and affects earning potential of past and present users. Furthermore the risk of unforeseen power supply breakdowns could result in nearly complete lack of electricity supply for a prolonged period, thus resulting in deterioration of the fragile security situation and adversely affecting water supply, hospitals and public services. The 2010 post-election period could be considered as another critical moment in the peace consolidation process. 8. The severe infrastructure deficit aggravates Burundi's constraints resulting from its landlocked and isolated position. Burundi suffers from extreme infrastructure gaps in road access, power generation, communications infrastructure, and access to water and sanitation. Poor roads, bridges and rail infrastructure hinder internal trade and reduce opportunities to exchange between Burundi, the region and the rest of the world. The internal obstacles are compounded by the high costs of use of the sea ports of Dar es Salaam (Tanzania) and Mombasa (Kenya), on which Burundi's trade depends. Electricity supply, covering only two percent of households, is extremely limited. The poor state and coverage of infrastructure imply high costs and delays that lower the expected rate of return on capital, discourage domestic and foreign investment and constrain economic growth. 9. After about 25 years of protracted decline in GDP per capita, Burundi's economy is beginning to experience positive growth with the gradual return of stability. Burundi's per capita income in 2008 was at about one-ninth of the Sub-Saharan Africa average, roughly on par with its 1975 income per capita level. Consolidation of the peace process has helped start reconstruction and created positive prospects, but the country has not experienced the typical post-conflict bounce in GDP growth, in large part due to periodic internal instability and a generally poor investment climate linked to heavily dilapidated infrastructure.3 The agriculture sector currently dominates Burundi's economy, representing 46 percent of GDP and providing 90 percent of the population with income and employment. Recent growth in the service sector, which accounts for 37 percent of GDP, is largely due to a rise in public services. Burundi's industrial sector only contributes to 17 percent of GDP however the construction industry has 3 The lack of post-conflict rebound for Burundi is explained by the continued instability in the country, even after the beginning of relative peace in 2001. This has had adverse consequences on the level of private investment which, unlike that of neighbors like Rwanda, remains low. The difference in growth performance between Burundi and Rwanda five years after the end of conflict can be almost completely attributed to differences in private investment. 3 shown considerable dynamism since 2001. The rate of growth of Burundi's GDP is projected to increase from an estimated 3.5 percent in 2009 to 4.8 percent in 2012. A short term strategy for the country's commercial and industrial development suggests that Burundi should focus on five main export subsectors, namely coffee, tea, tourism, horticulture and mining. 10. The Government of Burundi has requested CRW financing to fight the adverse economic and social impacts of the global financial crisis on the country's fragile post- conflict economy and protect core development spending to the Infrastructure sector. Compared to similar post-conflict economies, Burundi has not been able to attract private sector investment capital and spur non-farm growth to the extent needed to fuel a strong economic recovery. The impact of the global financial crisis should be seen in the context of a prolonged set of sustained economic shocks during 2008-2009 affecting the country's growth prospects and recovery, starting with the effect from the Kenya post election violence on the country's cost of imports, the large oil price fluctuations and the rapid increase in agricultural commodity prices. Strengthened macroeconomic policies have contributed to stabilized and increased growth, although the global financial crisis has led to lower expected growth in 2009 and a reduction of domestic tax and non tax revenues as percentage of GDP by approximately 8% for 2009 and 2010 (WB/IMF estimates). The CRW financing will thus assist the government of Burundi to maintain the core development spending despite this revenue shortfall. Looking forward, the continued global economic crisis is likely to affect Burundi further through declining international aid, as donor countries are likely to cut back assistance to developing countries due to budgetary constraints; delayed private sector investments; and reduction in migrant remittances. To reduce the dependence on increasingly volatile commodity prices and external aid, Burundi would need to rapidly improve the conditions for private sector investment, starting in the Bujumbura capital area. In a recent survey of Burundian businesses 72 percent of the respondents rated poor access and reliability of electricity supply as the primary constraint to new investment and growth. Provision of an adequate electricity supply at competitive prices can be considered as one of the core pillars of Burundi's economic growth path, as identified in the 2009 Country Economic Memorandum (CEM). B. Sector Context 11. Sector Organization: Two main organizations are involved in the supply and distribution of electricity and water in Burundi. The first is REGIDESO, a public water and power utility with autonomous legal and financial status, operating under the supervision of the Ministry of Water, Energy and Mines (MWEM). The second institution is the General Directorate of Water Supply and Energy (DGHER - Direction Générale de l'Hydraulique et des Energies Rurales), also an autonomous entity operating under MWEM's supervision, that is responsible for the provision of electricity and water in rural areas of Burundi. 12. Domestic hydro power supply: Most of the country's electricity supply is generated by REGIDESO through seven hydroelectric plants, which have a combined installed power capacity of 30.6 MW.4 Two of these hydro power plants deliver 85 percent of the domestic power supply: Rwegura (18 MW) and Mugere (8 MW). Burundi's energy supply therefore depends to about 95 4 In addition DGHER operates eight small and micro hydro plants in rural areas while non-governmental organizations (NGOs) and some non-profit organizations operate another twelve micro hydro plants. 4 percent on hydro power. This makes the country highly vulnerable to droughts which frequently decrease the electricity production by depleting the limited water storage capacity in the associated hydro power reservoirs. 13. Domestic thermal power supply: REGIDESO also owns a 5.5 MW thermal power plant in Bujumbura, which has been mostly idle since its acquisition in 1995. Low electricity tariff levels and high diesel prices did not allow REGIDESO to finance fuel payments, and the plant has therefore been kept as an emergency back-up in case of hydro power production failure. Considering the adverse effects of the widening supply deficit on Burundi's domestic economy, and especially small and medium enterprises (SMEs), funding for diesel fuel subsidies for the Bujumbura thermal plant was allocated under the IDA-financed MSWEIP in 2008. The Bujumbura thermal power plant started regular operations in September 2009, following a complete technical overhaul and operation and maintenance (O&M) training of REGIDESO staff. 14. Regional power supply: Burundi imports electricity from the regional hydro plants of Ruzizi I and II, which are operated by SINELAC (Société Internationale des Pays des Grands Lacs) and SNLE (Société Nationale d'Electricité), respectively. The operation of these power plants has been fluctuating, mainly due to complex ownership issues on maintenance and payments for power delivery. Plans for new regional power plants and regional power interconnections are still in the feasibility stage. 15. Energy access and demand growth: The average per capita consumption of electricity in Burundi is among the lowest in Africa at 23 kWh/year. During the years of civil conflict, the electricity access rate in connected areas halved as the urban population doubled, while the number of REGIDESO's customers remained barely unchanged. Less than two percent of the country's households currently have electricity service in their homes. Looking forward, national electricity demand is likely to increase between 8-12 percent per year.5 With no immediate relief from new power generation projects under construction, the power sector in Burundi needs to immediately reinforce its production capacity by increasing the thermal, diesel based generation, while waiting for the installation of new, less expensive hydro power plants to be implemented in the next 4-5 years. 16. Electricity tariffs: REGIDESO's electricity tariff was revised last time in 2008 and remains one of the region's lowest average electricity tariffs.6 REGIDESO's average tariff of US$ 0.08 per kWh does not reflect operating costs nor allows the utility to properly maintain its assets and honor multi-lateral agreements to pay for power imports from regional hydro power plants. REGIDESO will undertake a complete review and overhaul of both water and electricity tariff levels and structure during 2010, taking into account the increased reliance on fossil fuel based generation for the coming 3-4 years. In this regard a detailed tariff study is being finalized with support from the IDA financed MSWEIP. An official confirmation of the GOB's energy sector policy has been received in June 2010, committing the GoB to gradually introduce cost 5 REGIDESO's household electricity access program targets 3,000 new connections per year. Industrial electricity demand is also growing, for instance a newly constructed cement plant and a plant making steel re-bars for the construction sector have requested supply of 3 MW and 2.5 MW respectively by mid 2010. 6 Average electricity tariffs in the region are 2-3 times higher than in Burundi: 0.21 US$ per kWh in Rwanda (2010); and 0.15-0.18 US$ per kWh in Uganda and Kenya (2010). 5 reflective tariffs including a fuel cost pass-through component with a quarterly adjustment mechanism reflecting the variable cost of diesel based electricity production. 17. Growing power supply-demand gap: During the 2004-2006 regional droughts, REGIDESO's hydro power production decreased to 137 GWh per year, representing a 35 percent decline compared to the 2009 supply level. The total annual supply of electricity increased slightly from 188.8 GWh in 2007 to 208 GWh in 2009 due to rehabilitation of some smaller hydro plants and increased generation from the Bujumbura thermal power plant. Supply reliability is further hampered by a severely dilapidated electricity grid in urgent need of repair. The absence of key system protection and control functions make outages more frequent and difficult to monitor and address in time. The fast growing power supply deficit is due to a combination of several factors including: (i) lack of investments in the country's hydro power generation capacity during the last 13 years of civil war; (ii) rapidly increasing power demand in the Bujumbura capital area (further increased by the REGIDESO's electricity access program for new connections); (iii) over-reliance of hydro power, immediately affecting power supply during droughts; (iv) degradation of the catchment area upstream of main hydro power plants due to deforestation and increased land usage during the years of conflict; (v) high technical and commercial losses in the electricity distribution network and (vi) failure to operate the existing (yet limited) thermal capacity due to lack of funds for fuel purchase, poor maintenance and lack of available spare parts. Assuming that the economic growth continues at the current pace and the 5 MW extension of the Bujumbura thermal power plant is realized by 2011, the supply deficit may reach 21 MW and 36 MW respectively during the wet and dry seasons of 2014, at which point additional small scale hydro generation capacity could be added. Large scale hydro power developments, such as Kabu 16 in Burundi (20 MW) and the two regional plants Rusumo Falls (60-80 MW) and Ruzizi III (145 MW), can be expected to contribute to Burundi's power supply in 2017 (see Annex 1 for a detailed supply-demand analysis). 18. Service issues. Due to the lack of maintenance and the supply deficit described above, the quality of service and operations is currently insufficient, with an estimated 43 GWh in combined technical and non technical losses for 2009, representing 20.5 percent of total supply. Technical losses are deemed to make up a large portion of these losses given the poor condition of the network, of the high voltage (HV) and medium voltage (MV) stations, and of the low voltage (LV) distribution posts. The numbers of power interruptions are high both on the LV and on the HV/MV backbone network. The quality electricity supply suffers from poor frequency and significant voltage deviations estimated to be in excess of 10 percent below and above 220 Volts. 19. Electricity collection issues: Many municipalities and public customers, such as the military and universities, are not paying their electricity bills thus forcing REGIDESO to run up significant arrears only partially compensated by the Ministry of Finance in budget transfers. For billed electricity, the cash collection rate is estimated to be 76 percent. However this should be seen in the context of a relatively high collection rate (> 90 percent) among private households and small businesses, benefiting from the region's lowest tariffs, and reversely a very low collection rate among public customers such as municipalities (~ 50 percent). When long term outstanding arrears to the public sector are taken into account REGIDESO collects on average only 55 percent of the outstanding payments due. As a result, the utility does not generate 6 enough revenues to cover its increasing operating and maintenance costs. The financial situation is worsened by the increasing cost of regional hydro power supply from Ruzizi I and Ruzizi II. 20. Power supply crises in the dry seasons of 2009 and 2010: Burundi was affected by a severe electricity crisis in the summer of 2009, in which REGIDESO lost 40 percent of its generation and supply capacity in the Bujumbura capital area was curtailed for a period of four months. During that time, power shortages affected for instance the water supply, hospitals, and public services. The return of ample rainfall and additional electricity production spurred by the MSWEIP diesel subsidies improved the situation temporarily and helped avert a humanitarian crisis. However the severe load shedding and impact on basic services led the GoB to issue a call to the development partners to help restore reliable and sustainable electricity supply to the capital. The next power supply crisis affecting large areas of the Bujumbura capital area occurred during the summer of 2010. Scheduled general technical revision and O&M works at the 8 MW Mugere hydro power plant, requiring to shut down the power plant for a period of about one month starting in mid-August 2010, and unexpected technical problems in a key MV substation and distribution post in Bujumbura, mainly due to surcharges in the country's transmission system only two days after the start of Mugure revision works, both resulted in unexpected outages and heavy load shedding in large parts of Bujumbura capital area for several days, adversely affecting the water supply, hospitals, public services and households. 21. If no urgent measures are taken, the electricity crisis experienced in 2009 could recur in an even more severe form leading to high socioeconomic cost or even a humanitarian crisis. There is a substantial risk of major power supply breakdowns that, in the worst scenario, could result in nearly complete lack of electricity supply for a prolonged period. A possible scenario with a combination of drought conditions during the 2010 rainy season (to start in October 2010), immediately affecting the hydro power production, together with a major technical breakdown of key generation or transmission substations could bring public services and the (urban) economy to a standstill. Emerging from financial restructuring in 2008, hampered by low electricity tariffs, that are not reflecting operating costs, REGIDESO lacks funds to perform vital maintenance and rehabilitation of its dilapidated infrastructure. Adjustment of these sector imbalances will take time and in the meanwhile increased support from the donor community will be a vital component of a necessary turnaround. C. Government Strategy 22. Government power sector strategy for recovery: The GoB's power sector strategy in the short to medium term consists of (i) increasing thermal (petroleum based) electricity generation capacity to stem the immediate supply deficit; (ii) develop national hydro power resources as well as other renewable energy resources able to replace thermal base load power production in 3-4 years; (iii) complete the rehabilitation of the national power grid and distribution services so badly damaged during the conflict, creating a base for sustainable electricity access expansion; and (iv) strengthen REGIDESO's financial and operational performance by introducing cost reflective tariffs, debt restructuring, performance based management and technical assistance for commercial operations, including the introduction of pre-payment meters to reduce losses. 7 23. Government response to the 2009 and 2010 power supply crises: The GoB responded to the 2009 power supply crisis by ordering systematic load shedding, fast tracking the re- forestation of the main hydro power plant catchment areas and most importantly, using IDA funds under the MSWEIP to procure additional diesel fuel to operate the existing 5.5 MW Bujumbura thermal power plant. To avoid the next power supply crisis the GoB decided to install 10 MW of rental thermal power supply for a period of 6 months, in order to deliver additional power supply during the 4 peak hours each day from September 2010 onwards. These investments did not prevent another power supply crisis to occur in the Bujumbura capital area in the 2010 dry season, as acute supply shortages and outages negatively affected the country during its critical second presidential and parliamentary election period from May to August 2010. Due to lack of internal resources, GoB has appealed to the international community for assistance in reestablishing reliable and affordable power supply to the capital. REGIDESO's technicians are constantly repairing failing generation equipment; but this is not sustainable, as the electricity infrastructure needs major rehabilitation and due to the old age of the equipment, in many cases spares are no longer available. REGIDESO's revenues are not sufficient to cover all its operating cost, let alone rehabilitate its infrastructure. The GoB does not have the means to intervene financially in the electricity sector. The recently installed rental power generation will substantially increase the financial pressure on GoB and REGIDESO from September 2010 onwards, in the beginning of the post-election period. The country is therefore relying on external financing for the required emergency electricity infrastructure investments and short term operational subsidies to sustain the power sector while gradually developing cheaper domestic hydro power generation resources and adopting cost reflective tariffs to cover the operating and maintenance costs in the medium term. 24. Government commitment to strengthen implementation of urgent infrastructure investments: The focus on improved energy and water infrastructure project performance is anchored at the highest levels of government and utility management. The GoB's "Rapid Results Initiative (RRI)" launched on March 4, 2010, is aiming to accelerate the commitment rate of MSWEIP funds to reach 20 percent by end of June 2010. The MSWEIP disbursement rate increased to 25 percent by the end of August 2010, thus reaching the targets set forth in the RRI with a minor delay. The RRI includes a detailed action plan tied to an updated MSWEIP procurement and processing time table with clear individual responsibilities, tight deadlines and over-sight from both MWEM and the 2nd Vice Presidency.7 The efforts have been successful in fast-tracking the procurement activities of the MSWEIP and the proposed Emergency Energy Project (EEP) will benefit from the measures taken within the GoB's RRI to strengthen project management and procurement processes in REGIDESO to ensure rapid implementation of these urgent investments. D. Complimentarity with other Bank- and donor-financed Projects 25. The activities under the proposed EEP will be closely coordinated with development partners active in supporting Burundi's electricity and water sectors. In particular, the African Development Bank (AfDB) is implementing complementary programs in both the electricity and water sectors. The emergency electricity infrastructure components have also been discussed 7 The Burundi Ministry of Water, Energy and Mines reports to the 2nd Vice Presidency responsible for coordinating all the economic and social sector policy in Burundi. 8 with representatives of the Belgian cooperation and the Dutch Ministry of Foreign Affairs to explore possibilities of parallel co-financing in the areas of emergency diesel power generation and sustainable energy development with special emphasis on the development of small scale hydro power plants. It is expected that potential Belgian parallel co-financing financing of the proposed project could be confirmed prior to project effectiveness. 26. The proposed project is fully aligned with and complimentary to the IDA financed MSWEIP and the AfDB Energy Infrastructure Rehabilitation and Extension Project, currently under implementation, that finance investments in the electricity and water supply and distribution systems as well as a comprehensive capacity building program for REGIDESO and MWEM. Especially, the implementation of the EEP will build on the capacity of the already operational and experienced project implementation unit (PIU) within REGIDESO and the fiduciary and safeguard instruments that have been established under the MSWEIP. Over the past six months significant progress in MSWEIP implementation has been made by REGIDESO. All scheduled procurement activities have been launched and are nearing completion, which is reflected in a steadily increasing MSWEIP disbursement rate from about 16 percent in June 2010 to about 26 percent in September 2010. A summary of the scope, implementation arrangements and implementation progress of the MSWEIP are presented in Annex 10. III. PROJECT DESCRIPTION A. World Bank's Strategy of Emergency Support 27. The proposed Emergency Energy Project is aligned to the GoB's power sector strategy of financing high-impact activities that address urgent unmet electricity needs with quick return on investment for the utility REGIDESO. In the short-term, the proposed emergency electricity infrastructure program aims to improve the quality and reliability of electricity services. The project will also make substantial strides to rehabilitate the national power grid and underpin REGIDESO' corporate restructuring and reform program. 28. Bank experience to date with emergency response operations has underscored the need to approach the immediate challenge with realism and simplicity, and to work with organizations that have proven experience in the type of activities that are proposed. As such, the project's proposed implementation arrangements take into consideration the lessons learned during the implementation of the MSWEIP and build on the capacity of the existing PIU. 29. The medium- to long-term term objective of the World Bank engagement in Burundi's power sector is to enable Burundi to develop locally available sources of energy, especially hydro power that would be less costly and more environmentally sustainable. In the long term (a realistic target date is 2017), Burundi will be also able to benefit from regional electricity interconnections and jointly developed power generation from regional hydro power plants such as Ruzizi III and Rusumo falls, resulting in a reduced cost of electricity production. B. Project Development Objective 30. The project's development objective (PDO) is to improve the capacity and reliability of electricity generation, transmission, and distribution. 9 C. Summary of Project Components 31. An emergency electricity infrastructure investment program has been identified under the EEP to quickly address, over the next 12 months, the main risks of power system failure and lack of supply diversification. The project components are dictated by the nature of the emergency affecting the power system as well as by considerations of sustainability and equilibrium, i.e., bringing demand and available supply into closer balance. The project design and financing have been closely coordinated with the GoB and its development partners. The project design has been kept simple and proportionate with the local implementation capacity and includes further support to project management. 32. The proposed EEP will finance five emergency electricity infrastructure components that are summarized below. A detailed description of project activities is provided in Annex 1. 33. Component 1 - Extension of the Bujumbura Thermal Generation Plant (US$5 million): Increasing REGIDESO's thermal generation capacity and improving fuel management in the Project Implementing Entity's existing diesel-fueled 5.5 MW thermal generation plant in Bujumbura, through the supply and installation of diesel engines (representing additional 5 MW of thermal generating capacity) as well as associated electromechanical equipments and critical spare parts, and the installation of an accurate fuel metering system. 34. Component 2 - Rehabilitation of Hydro Power Plants (US$3 million): Supporting the upgrading, renovation, modernization and operation of the REGIDESO's hydropower plants in Rwegura and Nyemanga, through: (i) the replacement or refurbishment of mechanical equipment including, inter alia, cooling system, and associated equipments; (ii) the replacement or refurbishing of electrical equipments including, inter alia, alternators, control and regulation system, protection system, medium voltage equipments; and (iii) the availability of spare parts. 35. Component 3 - Rehabilitation of Electricity Transmission and Distribution Network (US$1.25 million): Improving the quality of supply, especially in the Bujumbura area, through the rehabilitation and expansion of REGIDESO's medium voltage transmission and distribution system including, inter alia, the upgrade of the distribution voltage level from 6 kV to 10 kV, and the replacement of the transformer and associated equipments to rehabilitate and expand sub-transmission substations, especially in the Bujumbura area. 36. Component 4 ­ Pre-payment Meters (US$ 1.55 million): Improving the management of billing, arrears and payments by REGIDESO and of electricity consumption by its customers, through the supply and installation of payment meters. 37. Component 5 - Fuel Procurement and support to Project Management (US$3.75 million): Support: (i) the Project Implementing Entity's gradual adaptation to increased production costs and its implementation of tariff adjustments over two years; and (ii) the Project Implementing Entity's and the Recipient's institutional strengthening, including in management, procurement and execution of contracts. 10 D. Eligibility for Processing under OP/BP 8.00 38. The 13-year civil war left Burundi facing formidable challenges to rebuild its economy, reestablish security and reconstruct the country's damaged infrastructure. Burundi was affected by a severe electricity crisis in the summer of 2009, again repeated in 2010, in which REGIDESO lost 40 percent of its generation and supply capacity in the Bujumbura capital area as supply was curtailed for a period of four months. Power shortages affected adversely basic services, including drinking water supply, hospitals, and public services. There is a substantial risk of major power supply breakdowns that, in the worst scenario, could result in nearly complete lack of electricity supply for a prolonged period, thus resulting in a deterioration of the fragile security situation and adversely affecting water supply and health services in Bujumbura. 39. The proposed project will reduce the risk of such a crisis reoccurring by addressing some of the main risks of power system failure and lack of supply diversification. Lack of electricity would affect the GoB's ability to provide key services such as the supply of potable water in the Bujumbura capital area (pumping and water treatment plants are all depending on electricity supply) as well as quality health services. The breakdown of electricity supply would also risk post-conflict recovery in a wider sense by limiting provision of public lighting and access to information, important for the population's perception of security and personal safety. Similarly, the heavy reliance on hydro power generation (95 percent of current output) leaves the country severely exposed to fluctuations in seasonal rainfall, even for shorter periods. 40. The World Bank's response is adapted in form and scope to the particular circumstances of the emergency experienced by the power sector in Burundi. It is mainly limited to restoring reliable power supply to the capital Bujumbura and preventing the future recurrence of the crisis. The proposed project will provide visible benefits in terms of reduced load shedding, increased supply reliability and improved service quality to the population of Bujumbura after 12 months of implementation. Processing the proposed project as an Emergency Recovery Loan (ERL) under Operational Policy/Bank Policy (OP/BP) 8.00 rapid response procedures will ensure continuation of emergency power supply in the Bujumbura capital area with minimal operational disruption, thus mitigating the potential effects of future energy crises and supporting the Government of Burundi's fragile post-conflict economic recovery. Specifically, the proposed project responds to three key objectives of OP/BP 8.00, namely: (i) rebuilding and restoring physical assets with regards to electricity generation, transmission and distribution infrastructure; (ii) restoring the means of production and economic activities by ensuring continuation of emergency power supply; and (iii) restoring essential services, particularly electricity services for basic services, including drinking water supply, hospitals, and public services. E. Consistency with Country Assistance Strategy 41. The World Bank Group's Country Assistance Strategy (CAS), discussed by the Board of Directors in August 2008, presents a medium-term vision of sustainable development by assisting Burundi's transition from a post-conflict economy to a developing country. The CAS provides a framework for World Bank Group support from FY 2009 through FY 2012 and focuses on two strategic objectives: (i) promote sustainable and broad-based economic growth; and (ii) improve access to social services and consolidate social stability. Governance is a cross- cutting CAS objective. Electricity services will play a crucial role in accelerating industrial and 11 commercial activity and hence contribute to the country's economic growth. The proposed EEP contributes to both CAS objectives by improving access to and reliability of electricity services, which have been identified as core requirements to achieve sustained higher growth performance and to restore essential basic services, such as water supply, health and public services. These goals are aligned with those of the Burundi's Poverty Reduction Strategy Paper (PRSP) of September 2006, which aims to promote sustainable economic growth and to develop human capital. Provision of an adequate electricity supply at competitive prices is also considered as one of the core pillars of increased and participatory growth identified in the 2009 Country Economic Memorandum (CEM). F. Consistency with Crisis Response Window Objectives 42. The IDA Crisis Response Window (CRW), approved by the Board of Directors on December 10, 2009, is aiming to assist countries in developing, implementing and monitoring programs to manage the poverty, social, and economic impact of the global economic crisis and to provide financial assistance to protect core spending on health, education, social safety nets, infrastructure, and agriculture. As discussed above, the proposed EEP will scale up the Bank's assistance to the energy sector in Burundi to alleviate some of the immediate effects of the global financial crisis on the country's fragile economic growth and reduce risks of severe supply interruptions due to heavily dilapidated electricity equipment and infrastructure. The emergency electricity infrastructure investment program has been designed to quickly address, over the next 12 months, some of the main risks of power system failure and lack of supply diversification. G. Expected Outcomes 43. The proposed Emergency Energy Project (EEP) will achieve the following main outcomes: (i) increased electricity generation capacity; (ii) improved transmission and distribution reliability; and (iii) improved revenue recovery of REGIDESO. 44. The expected main outputs under the proposed EEP include: (i) 5 MW of thermal generation capacity constructed; (ii) 20 MW of hydro power capacity and 1 key MV substation rehabilitated; (iii) Reduced average number of unplanned power interruptions and reduced electricity losses; and (iv) 15,000 additional pre-payment meters installed. 45. The results framework, outcome indicators and target values of the proposed project are provided in Annex 2, taking into account the recently established IDA core indicators for energy sector operations. 12 IV. APPRAISAL OF PROJECT ACTIVITIES A. Technical 46. Technologies considered for the emergency electricity infrastructure investment program under the EEP, are proven globally and pose no major technical concerns. With exception for the 5 MW extension of the Bujumbura thermal power plant, all activities proposed are identical or very similar to the activities already included under the complementary MSWEIP, i.e., procurement of diesel fuel, refurbishment of electrical and electromechanical installations in the national electricity grid and installation of pre-payment meters. Considering the emergency supply deficit situation, while waiting for the commissioning of new hydro power investments for the medium and long term planning, REGIDESO will invest in high speed diesel generators (1,500 rpm) that offer several advantages (e.g., higher flexibility in operations because of scalable capacity, lower initial purchase price, easily manageable fuel supply logistics, shorter manufacturing time and quicker installation) compared to medium speed diesel and Heavy Fuel Oil (HFO) based engines. The design would allow the utility to operate the Bujumbura thermal power plant as follows: (i) during the initial 3-4 years as base load power supply to support business demand, (ii) in the medium term to supplement hydro power plants during the dry season, and (iii) eventually as a standby facility when large scale, lower cost generation resources come on-line in 2017 at the earliest. A financial analysis of various technology options, including rental power supply, can be found in Annex 9. B. Economic Analysis 47. The proposed project is economically justified. The economic analysis has been based on a 5-year REGIDESO investment program. The results show that the project's economic returns would be positive and remain robust even under less favorable scenarios. The projected base economic internal rate of return (EIRR) for the proposed project is 18 percent. C. Financial Analysis 48. The proposed project is financially justified. Under the MSWEIP REGIDESO improved its accounting and financial management and an integrated accounting system was introduced. The MSWEIP also included measures for helping REGIDESO improve its operating efficiency, in particular, the installation of prepaid meters with a focus on government buildings, as well as reaching agreement between the Government of Burundi and REGIDESO on a financial restructuring plan and anchoring both parties' obligations in a performance contract between them. REGIDESO's tariff was last revised in FY 2008, at about US$ 0.08 per kWh, which does not reflect operating costs nor allows the utility to properly maintain its assets and honor multi-lateral agreements to pay for power produced by the regional hydro power plants. Using the existing MSWEIP proceeds, REGIDESO will undertake a complete review and overhaul of both water and electricity tariff levels and structure during 2010. In this regard a detailed tariff study is being finalized with support from the IDA financed MSWEIP. A letter to clarify the Energy Sector Policy, committing the Government of Burundi to cost reflective tariffs and the introduction of a fuel cost pass through mechanism, reflecting the variable cost of diesel based electricity production, was signed in June 2010. 13 D. Environmental and Social Safeguards 49. The safeguard category of the EEP was determined as B after review by Bank safeguard specialists since there are no significant and/or irreversible adverse environmental and social issues expected from electricity infrastructure components financed under the proposed project. With exception for the extension of the existing diesel power plant, all activities proposed are identical or very similar to the activities already covered under the existing MSWEIP safeguards framework, i.e., procurement of diesel fuel, refurbishment of electrical and electromechanical installations in the national electricity grid and installation of pre-payment meters. The safeguards implications of the 5 MW extension of the existing power plant is expected to be minor and will be fully reflected in updated and re-disclosed safeguards documents. The expansion of the existing power plant, by addition of four new diesel engines to the existing 4 diesel engines installed in 1996, can be done inside the existing engine hall of the power plant or at another location within the confines of the current REGIDESO industrial plot perimeter. Therefore only minor environmental impacts could be expected from the installation activities and site works, similar to the impact of the subcomponent for substation rehabilitation covered within the existing MSWEIP safeguard framework. As the new engines are likely to be less noisy and cleaner than the existing ones currently under operation no significant noise or air pollution is expected. As the rehabilitation works proposed for the two hydro power plants does not concern the existing dam structure (only replacement and repair of power and relay equipment in the generating station, no civil works) hydro power related safeguard policies such as safety of dams and international waterways are not deemed to be triggered by the investments proposed under the EEP. While no adverse affects on dam safety is expected, the task team will pay special attention to dam safety aspects during supervision. 50. REGIDESO will continue to be responsible for the implementation of the ESMF and RPF. An environmental and social specialist is already in place in the MSWEIP PIU with satisfactory performance and would be supervising implementation of the EEP components. The two safeguards policies triggered under the MSWEIP will be applied under the EEP: Environmental Assessment (OP/BP 4.01) and Involuntary Resettlement (OP/BP 4.12). No long term adverse impacts were identified in the prepared safeguards instruments during the implementation of the MSWEIP: Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF). All Environmental Assessments and Resettlement Plans for electricity infrastructure components under the EEP will continue to be handled according to the provisions made in the ESMF and RPF. These safeguard documents were completed in December 2007 during MSWEIP preparations and were satisfactory to the Bank. The "in-country" disclosure took place on February 6, 2008, and the documents were submitted to the World Bank's Infoshop on February 21, 2008. Both safeguard frameworks were re- disclosed under the proposed project. The "in-country" re-disclosure of the safeguard frameworks will take place on September 15, 2010, after these documents were re-submitted to the World Bank's Infoshop on August 30, 2010. MSWEIP supervision confirms that all safeguard aspects of energy infrastructure components are overall implemented in a satisfactory manner. Further details are provided in Annex 8. 14 V. IMPLEMENTATION ARRANGEMENTS AND FINANCING PLAN A. Institutional and Implementation Arrangements 51. The EEP will strengthen existing institutional and implementation arrangements within REGIDESO. REGIDESO will continue to be responsible for the implementation and supervision of the project. The project implementation unit (PIU) established within REGIDESO under the MSWEIP will conduct the daily tasks of project implementation and periodic assessments of its progress. The unit is reporting to REGIDESO management and to the Director of Energy and Water in MWEM. The PIU will continue to work closely with all of the relevant departments within REGIDESO to ensure the timely allocation of additional resources and execution of both investment and technical assistance (TA) activities. The PIU will also continue to be responsible for the financial management of the project and for the preparation of financial reports regarding the project. The PIU will continue to rely primarily on in-house staff in order to build and maintain capacity and institutional memory, but additional funds have been allocated to ensure that consultants can be hired for critical tasks such as procurement management and contract supervision. B. Project Costs and Financing Plan 52. The proposed Emergency Energy Project (EEP) will result in the following allocation of project costs: (i) US$14.55 million will be allocated to five emergency electricity infrastructure components; and (ii) US$0.85 million will be allocated for contingencies. 53. A description of financing allocation by component is provided in Annex 3. C. Procurement Arrangements 54. Procurement for the proposed project will be carried out in accordance with the World Bank's « Guidelines : Procurement under IBRD Loans and IDA Credit », dated May 2004, revised October 2006 and May 2010, and « Guidelines : Selection and Employment of Consultants by World Bank Borrowers, » dated May 2004, revised October 2006 and May 2010 ; Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants, dated October 15, 2006 and the Board approved modifications as stipulated in the Financing Agreement. REGIDESO has concluded its initial identification and feasibility of the proposed EEP components and is now preparing a revised Project Implementation Plan including a detailed Procurement Plan. As most of the proposed project components are either a direct scale-up of ongoing MSWEIP activities with already prepared bidding documents or activities that were initially prepared for other donor funded projects, the procurement documents are ready in draft and have been discussed in detail with the World Bank technical and procurement experts. It is expected that the large majority of bidding documents for the proposed project would be ready by September 30, 2010, for IDA no objection. 15 55. The Bank's Procurement Specialist evaluated REGIDESO's ability to implement the project's procurement plan and found it to be satisfactory. The PIU is adequately staffed to deal with the workload associated with the project, as they expect other projects to be phased out as this project begins. To allow for fast implementation of the new emergency operation, the project would finance for a period as needed (i) an international consultant to supervise the extension of the Bujumbura thermal generation plant; (ii) an international consultant to supervise the rehabilitation works of hydropower plants; and (iii) an additional procurement consultant with experience in the World Bank's procurement guidelines and procedures (for a period of 6-9 months or as needed) to accelerate the processing of large scale contracts under international competitive bidding procedures, and advice on negotiations and tender evaluation. Detailed procurement arrangements of the proposed project are presented in Annex 5. D. Financial Management, Reporting and Auditing 56. Fiduciary management of REGIDESO is satisfactory and no new fiduciary risks are expected under the project. REGIDESO has been submitting its FMRs and project audits on time. There are currently no overdue audit reports or unresolved ineligible expenditures under projects being implemented by the Project Implementing Agency (REGIDESO). The financial management (FM) system of REGIDESO has been determined to be satisfactory by the Bank's Financial Management Specialist (FMS) and meet the Bank guidelines as stated in OP 10.02. REGIDESO is adequately staffed to deal with the workload associated with the project, as they expect other projects to be phased out as this project begins. An appropriate and adequate number and mix of skilled and experienced staff are working in the Financial Management (FM) unit of the PIU. In addition, an integrated information system was installed and is operational at the PIU and it is expected that the same information system will be used for the Emergency Energy Project (EEP). REGIDESO will be required to submit quarterly Interim Unaudited Financial Reports (IFR) within 45 days following the first day of each calendar quarter after effectiveness. The formats and the content of the IFR and of the Annual Financial Statements have been discussed and agreed upon. Independent auditors acceptable to IDA will audit the use of all funds available under the project grant, including the Designated Account and the statements of expenditures. Audit reports will be submitted to IDA no later than six months after the end of the fiscal year. The format and the frequency of periodic reporting will be maintained as defined in the Project Manual. Detailed financial management arrangements are presented in Annex 4. E. Disbursement Arrangements 57. The project will finance 100 percent of all expenditures, excluding taxes. This is consistent with the Country Financing Parameters for Burundi. The proposed disbursement arrangements include the establishment of one Designated Account managed by REGIDESO. Detailed disbursement arrangements are presented in Annex 4. F. Supervision, monitoring and evaluation 58. Three supervision missions per year will be conducted by the World Bank task team in the first two years of project implementation, followed by supervision missions conducted twice a year for the remainder of the project implementation period. The supervision team will 16 continue the sector dialogue with the GOB and incorporate the right mix of expertise in order to cover all project components. Implementation support and supervision, through missions as well as direct involvement by the Burundi Country Office will focus, in particular, on the implementation of the fuel cost pass-through mechanism, performance of REGIDESO in managing contracts, procurement and financial management, as well as in completing the agreed implementation plans. G. Implementation Schedule 59. As the proposed EEP mainly targets a scale-up of already ongoing activities under the MSWEIP and new activities initially prepared for donor co-financing, there is high readiness for implementation. As mentioned under the procurement section above, it is expected that the large majority of bidding documents for the proposed project would be ready by September 30, 2010, for IDA no objection. Commitment of funds and initial disbursements can be expected shortly after Board approval and effectiveness. Key milestones for the implementation of contracts are provided in Annex 5. 60. Considering the high readiness for implementation the closing date of the proposed project is set to three years from expected effectiveness and will be January 31, 2014. A mid- term review is planned in 2012. VI. PROJECT RISKS AND MITIGATING MEASURES 61. The proposed EEP would enhance the economic impact of the MSWEIP in a number of ways. First, the majority of the Emergency Recovery Grant would be dedicated to increasing electricity supply during business hours allowing businesses to stay open and consume electricity at a considerably lower cost and higher quality than the alternative, self generation or complete lack of electricity supply. Secondly, part of the proposed financing would be dedicated to refurbishment of the country's key electricity infrastructure installations. Following 13 years of conflict and lack of maintenance, the poor state of the installed electricity infrastructure constitutes a substantial risk of prolonged technical outages if the installed base is not urgently rehabilitated. Complete or partial lack of power supply for prolonged periods would immediately cripple the Burundian economy and its attractiveness for investment. 62. Key project risks and mitigating measures are presented in Table 1 below. The overall risk after mitigation measures for the proposed EEP is rated Moderate as (i) its outcome is contingent on improvement of the sectors' governance and on GoB's commitment to restore the financial viability of REGIDESO (including the implementation of adequate cost recovery policies and the budgeting and timely payment of public bills); and (ii) it will be implemented in a fluid international environment with regard to energy prices. The risk exposure to fluctuating world petroleum prices will increase with the extension of the diesel power plant and will be mitigated by putting in place the fuel pass through mechanism allowing for quarterly tariff adjustments reflecting the cost of fuel purchases. IDA's experience in helping Sub-Saharan African (SSA) countries to overcome energy crises and developing efficient investment programs will be a critical mitigation factor, as well as the lessons drawn from the electricity and water supply portfolio regarding capacity building and performance improvement for national utilities. 17 Table 1: Key risks and risk mitigation measures Risks Risk Mitigation Measures Risk Rating Lack of financial Financial restructuring of REGIDESO completed in 2009, including Substantial viability of REGIDESO settlement of arrears from public institutions. could hamper the Prepaid electricity meters have been installed for public institutions and will ability to provide gradually be introduced for all private households. services and properly Tariff regime will be restructured to promote cost recovery while assuring maintain the assets. affordability of basic services to low income people. Budgetary management Generalization of prepayment. High failures of the Commitment of the government through executed performance contract and government and the public dissemination of its compliance with performance contract municipality leading to obligations. non-payment of water Awareness campaigns targeting public consumers. and energy bills. Checking the installations to limit losses and waste. Improved budget allocations to reflect real consumption. Accounting - REGIDESO hired a qualified accountant FM Specialist to strengthen the FM Moderate REGIDESO has glaring unit of the PIU and submitted a FM manual satisfactory to IDA. REGIDESO weaknesses in financial has been submitting its FMRs and project audits on time. There are currently management as no overdue audit reports and the Bank supervision rating of project level outlined in the past fiduciary management, during the January 2010 mission, was set to audit reports. satisfactory with a moderate risk rating. Lack of implementation REGIDESO has the technical experience on the type of works to be Moderate capacity. implemented by the project. A majority of the procurement documents has already been prepared prior to appraisal and could be launched without major additional work by REGIDESO. REGIDESO's procurement and FM capacity has been strengthened with training, technical assistance for the preparation of large documents, and recruitment of consulting firms to control quality in the execution of works. Required electricity Tariff regime will be restructured to promote cost recovery while assuring Substantial tariff increases, not affordability of basic services to low income users. implemented by Tariff increases will be implemented gradually using the projects provision government or beyond of fuel subsidies to adapt the revenues to the increasing cost of operations. A the capacity or public information campaign will increase awareness of customers regarding willingness of users to costs of services. pay. Letter of clarification of Energy Sector Policy received from the Government of Burundi in time for negotiations confirming the government's commitment to cost reflective tariffs and the introduction of a fuel cost pass- through mechanism. Uncertainties on the Short-term: fuel procurement to be funded on a declining basis. Cost of fuel Moderate prices of oil/petroleum gradually introduced as a fuel cost pass-through component of tariffs products. adjusted regularly to reflect changing market prices. Long-term: development of hydropower and other sources of energy to reduce the dependence on oil/petroleum fuel products. Possibility of drought Short-term: use of thermal capacity and energy saving to reduce the gap Moderate recurrence resulting in between demand and supply and enable REGIDESO to better manage their reduced hydroelectric hydro reservoirs. capacity. Long-term: diversification of the sources of production to provide an alternative to hydroelectricity using regional interconnections and improving water resource management. Overall risk rating Moderate 18 VII. TERMS AND CONDITIONS FOR PROJECT FINANCING 63. The Emergency Recovery Loan (ERL) to the Republic of Burundi will be provided as a grant from the IDA-Crisis Response Window (CRW) to cover 100 percent of expenditure excluding taxes as per OP 8.00 and the Country Financing Parameters. 64. In line with OP 8.00, conditions are limited to a minimum and only to those directly related to the emergency recovery activities: Board presentation: None Effectiveness: (a) Receipt by IDA of a Legal Opinion (b) The Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity. 65. The effectiveness deadline date is ninety (90) days after the date of the signing of the Financing Agreement. Other Covenants: (a) REGIDESO shall earn, for each of its fiscal years after its fiscal year ending on December 31, 2011 or a later date if the Recipient has modified the length of its fiscal year, an annual return of not less than zero percent (0%) of the average current net value of the its fixed assets in operation; i. Before June 30 in each of its fiscal years, the Project Implementing Entity shall, on the basis of forecasts prepared by the Project Implementing Entity and satisfactory to the Association, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Association the results of such review upon its completion. ii. If any such review shows that the Project Implementing Entity would not meet the requirements set forth in paragraph (a) for the Project Implementing Entity's fiscal years covered by such review, the Project Implementing Entity shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its tariffs) in order to meet such requirements. (b) No later than six (6) months after the Effective Date, the Project Implementing Entity shall establish and enforce a mechanism acceptable to the Association to enable the Project Implementing Entity to pass on to its customers the cost of purchasing the fuel used to generate energy and the cost of purchasing energy provided by other producers including, without limitation, through adjustments in 19 the structure or levels of the Project Implementing Entity's tariffs, if necessary (the "Fuel Cost Pass-Though Mechanism"). i. Each year starting from the date of establishment of the Fuel Cost Pass- Though Mechanism and thereafter, the Recipient shall (with inputs from the Project Implementing Entity), for each calendar quarter, prepare on the basis of a methodology acceptable to the Association, and furnish to the Association no later than two weeks before the beginning of said calendar quarter, (a) a reasonable forecast of total operating revenues and of total operating expenses (as defined in the Project Agreement) of the Project Implementing Entity during said quarter, including in respect of any changes in fuel and purchased power costs, and (b) details of any necessary tariff revision in order to enable the Project Implementing Entity to meet the targets set out in the Performance Contract, taking into account the views of the Association in the matter. ii. No later than the beginning of each calendar quarter, the Project Implementing Entity shall implement such revision as the Recipient has determined, in accordance with Section V.B of Schedule 2 to the Financing Agreement, is necessary to enable the Project Implementing Entity to meet the targets set out in the Performance Contract for such quarter. 20 Annex 1: Detailed Description of Project Components BURUNDI: EMERGENCY ENERGY PROJECT Burundi Background and Outlook 1. Burundi is a small, landlocked country that straddles Central and East Africa, with a total land area of 27,834 km2, and approximately 8.5 million inhabitants, about 10.6 percent of whom live in urban areas. Burundi's frontiers are formed by natural borders, particularly Lake Tanganyika, the Rusizi River in the west, and the Kagera and Kanyayru Rivers in the north. 2. Burundi has emerged from a cycle of political-ethnic conflicts that lasted more than 13 years and claimed the lives of about 300,000 people while displacing about 1,200,000 people, or about 16 percent of the population. The years of recurring conflict has had a devastating effect on Burundi's economy. Burundi's per capita income fell by about 40 percent, from US$180 in 1993 to US$110 in 2007. In 2009 GDP per capita stands at US$111, making Burundi one of the poorest countries in the world. A simple estimate of the cost of the war indicates that without the conflict Burundi's GDP per capita would be about double its current level.8 Burundi is not likely to meet many of the Millennium Development Goals by 2015. Nearly all social indicators have sharply deteriorated as a result of the civil war. By most measures of health and human capital, Burundi lags behind the world and other countries in the region. Among children less than five years old, undernourishment reached 57 percent in 2000, but has improved in recent years. An estimated 67 percent of the population lives below the national poverty line and the country ranked towards the bottom of the Human Development Index in 2009. 3. After about 25 years of protracted decline in GDP per capita, Burundi's economy is beginning to experience positive growth with the gradual return of stability. Burundi's per capita income in 2008 was at about one-ninth of the Sub-Saharan Africa average, roughly on par with its 1975 income per capita level. Consolidation of the peace process has helped start reconstruction and created positive prospects, but the country has not experienced the typical post-conflict bounce in GDP growth, in large part due to periodic internal instability and a generally poor investment climate linked to heavily dilapidated infrastructure.9 The agriculture sector currently dominates Burundi's economy, representing 46 percent of GDP and providing 90 percent of the population with income and employment. Recent growth in the service sector, which accounts for 37 percent of GDP is largely due to a rise in public services. Burundi's industrial sector contributes to only 17 percent of GDP, however the construction industry has shown considerable dynamism since 2001. The rate of growth of Burundi's Gross Domestic Product (GDP) is projected to increase from an estimated 3.5 percent in 2009 to 4.8 percent in 2012. A strategy for the commercial and industrial development of Burundi suggests that Burundi should focus on five main export subsectors in the short term, namely coffee, tea, tourism, horticulture and mining. 8 Burundi Country Economic Memorandum, World Bank, December 2009. 9 The lack of post-conflict rebound for Burundi is explained by the continued instability in the country, even after the beginning of relative peace in 2001. This has had adverse consequences on the level of private investment which, unlike that of neighbors like Rwanda, remains low. The difference in growth performance between Burundi and Rwanda five years after the end of conflict can be almost completely attributed to differences in private investment. 21 4. The Government of Burundi has requested CRW financing to fight the adverse economic and social impacts of the global financial crisis on the country's fragile post-conflict economy. Compared to similar post-conflict economies, Burundi has not been able to attract private sector investment capital and spur non-farm growth to the extent needed to fuel a strong economic recovery. The impact of the global financial crisis should be seen in the context of a prolonged set of sustained economic shocks during 2008-2009 affecting the country's growth prospects and recovery, starting with the effect from the Kenya post election violence on the country's cost of imports, the large oil price fluctuations and the rapid increase in agricultural commodity prices. Looking forward, the continued global economic slowdown is likely to affect Burundi further through declining international aid, as donor countries are likely to cut back assistance to developing countries due to budgetary constraints; delayed private sector investments; and reduction in migrant remittances. To reduce the dependence on increasingly volatile commodity prices and external aid, Burundi would need to rapidly improve the conditions for private sector investment, starting in the Bujumbura capital area. Provision of an adequate electricity supply at competitive prices can be considered as one of the core pillars of this strategy as identified in the December 2009 Country Economic Memorandum (CEM). In a recent survey of Burundian businesses 72 percent of the respondents rated poor access and reliability of electricity supply as the primary constraint to new investment and growth. Sector Background 5. During the years of civil conflict, the electricity access rate in connected areas halved as the urban population doubled, while the number of REGIDESO's customers remained barely unchanged. Less than two percent of the country's households currently have access to electricity services. The average annual electricity consumption in Burundi is among the lowest in Africa, with only 23 kWh per capita. 6. With the prevailing supply constraints, highly limited electricity access, dilapidated power infrastructure and expected electricity demand growth, the GoB's power sector strategy in the short to medium terms consists in (i) increasing thermal (petroleum based) electricity generation capacity to stem the immediate supply deficit; (ii) develop national hydro power resources as well as other renewable energy resources able to replace thermal base load power production in 3-4 years; (iii) complete the rehabilitation of the national power grid and distribution services so badly damaged during the conflict to establish a base for sustainable electricity access expansion; and (iv) strengthen REGIDESO's financial and operational performance by introducing cost reflective tariffs, debt restructuring, performance based management and technical assistance for commercial operations, including the introduction of pre-payment meters to reduce losses. 7. The main organizations involved in the supply of electricity and water for Burundi are: · REGIDESO, a public water and power utility with autonomous judicial and financial status that operates under the supervision of MWEM; · DGHER (Direction Générale de l'Hydraulique et des Energies Rurales), also an autonomous entity operating under MWEM's tutelage and responsible for the provision of electricity and water in rural areas. 22 · SINELAC, the Société Internationale des Pays des Grands Lacs, was established by Burundi, Rwanda and the Democratic Republic of Congo to operate the Ruzizi II regional hydro power plant. Status of Burundi's Power Generation, Distribution and Transmission Facilities 8. Hydro Power Plants: Electricity in Burundi is almost exclusively generated through seven main hydroelectric power plants with a domestic installed capacity of 32.2 MW. These domestic hydro power plants are mainly managed by REGIDESO, only 1.6 MW of smaller hydro plants are managed by DGHER. As shown in Table 2 below, the large majority of Burundi's power production stems from two main hydro power plants: (i) the Rwegura hydro power plant with an installed capacity of 18 MW and (ii) the Mugere with an installed capacity of 8 MW respectively. Burundi's electricity production includes electricity imports of about 85 GWh per year from two regional hydro power plants: (i) Ruzizi I operated by SNEL and (ii) Ruzizi II operated by SINELAC. Burundi's power generation currently depends to about 95 percent on hydro power generation, thus making the country highly vulnerable to droughts. During the 2004-2006 regional droughts REGIDESO's hydro power production plummeted to 137 GWh per year, representing a 35 percent decrease compared to the 2009 supply level. The total annual supply of electricity increased slightly from 188.8 GWh in 2007 to 208 GWh in 2009 due to rehabilitation of some of the smaller hydro plants as well as increased thermal generation from the Bujumbura diesel power plant. The reliability of Burundi's power system is furthermore adversely affected by the persistent lack of funds for the maintenance of both national and regional power plants, thus risking extended outages of hydro power plants and the connecting networks. Table 2: Burundi National and Regional Power Production in 2009 National and Regional Type Installed Firm Capacity Firm Capacity Maximum Year Power Plants Capacity (MW) -Dry Season -Wet Season available (MW) (MW) capacity (MW) MUGERE Hydro 8.00 2.20 6.00 6.00 1982 RWEGURA Hydro 18.00 4.07 10.00 17.00 1986 RUVYIRONZA Hydro 1.50 0.40 1.00 1.20 1980 GIKONGE Hydro 1.00 0.24 0.60 0.70 1982 NYEMANGA Hydro 2.00 1.40 1.80 1.80 1987 KAYENZI Hydro 0.80 0.15 0.30 0.60 1984 MARANGARA Hydro 0.24 0.22 0.25 0.25 1986 BUJUMBURA Diesel 5.50 3.50 3.50 5.00 1996 THERMAL POWER PLANT RUZIZI II (Import.) Hydro 13.30 5.37 8.00 10.00 1989 RUZIZI I (Import.) Hydro 1.71 1.71 3.00 3.00 1958 TOTAL 52.05 19.26 34.45 45.55 9. Thermal Power Plant in Bujumbura: REGIDESO also owns a 5.5 MW diesel power plant acquired in 1995, which up to 2009 had been mostly idle (only 1,000 hours of use) due to 23 the lack of funds to pay for the fuel. The average cost of thermal (diesel) electricity is approximately US$ 0.35/kWh, while the average sale price was FBu 88.5 per kWh (about US$ 0.075 per kWh) in 2009. The Bujumbura thermal power plant has been used as back-up in case of hydro power production failure. More recently, and in the face of the increasing supply deficit, the Government of Burundi has requested funds from the IDA MSWEIP to finance fuel subsidies adequate for eight hours of operations during five days per week to support the business sector while longer term supply options are being developed. The Bujumbura plant started regular operations in September 2009 following a complete technical overhaul and O&M training of REGIDESO staff and is scheduled to produce 11 GWh during the first year of operation. 10. Transmission and Distribution System: During the years of conflict much of the transmission system (especially 110 and 70 kV switchgear equipment) was damaged by technical malfunction and in some cases direct hostilities. Spare parts are not available for a majority of the installed equipment, as much of the switchgear equipment has long since been phased out from manufacturing. Repairs of key switchgear have instead been made by stripping parts from stand-by equipment for needed seals, gaskets, etc. This move has enabled REGIDESO to re- establish the needed functionality of the transmission system but will not sustain the system for more than a short period of time. 11. The distribution system is in equally poor condition, with much of the essential switchgear beyond repair due to limited availability of spare parts and lack of resources for maintenance. Key load centers such as Bujumbura are already heavily saturated, resulting in increased technical losses and poor quality of supply. Some of the outages are due to the lack of spinning reserve and the high dependence on regional generation resources that offer little flexibility to bridge sudden supply interruptions. 12. The control, protection and communication equipment are also severely dilapidated and does not permit the utility to operate even the simplest maneuvers without manual intervention. Lack of adequate earthing systems and protection functions are causing occasional high voltage surges (up to 1.73 times nominal voltage) with destroyed consumer equipment and appliances as a result. The limited functionality of key relays result in more frequent and longer lasting outages and damage to transformers and other equipment. 13. The quality of electricity services is thus insufficient, with an estimated 43 GWh in combined technical and non technical losses for 2009, representing 20.5 percent of total supply. Technical losses make up a large portion of these losses given the poor condition of the electricity network, high voltage and medium voltage stations, and low voltage distribution posts. The number of power interruptions is high both on low voltage and on high/medium voltage backbone networks. The quality of the electricity that is delivered also suffers from poor frequency and significant voltage deviations, estimated to be greater than network voltage standards require (larger than 10 percent below and above the nominal value of 220 Volts). 24 Supply Demand Gap and 2009/2010 Electricity Crises 14. Burundi has experienced a deepening electricity supply crisis in 2009 resulting in large scale and systematic load-shedding with severe effects on the country's post-conflict economic recovery. The fast growing power supply deficit is due to a combination of several factors including: (i) lack of investments in the country's hydro power generation capacity during the last 15 years; (ii) rapidly increasing power demand in the Bujumbura capital area (further increased by the REGIDESO's electricity access program for new connections); (iii) less than expected rainfall during the September 2008 to May 2009 rainy season; (iv) degradation of the catchment area upstream of main hydro power plants due to deforestation and increased land usage during the years of conflict; (v) high technical and commercial losses in the electricity distribution network and (vi) failure to operate the existing (yet limited) thermal capacity due to lack of funds for fuel purchase, poor maintenance and lack of available spare parts. The supply deficit and load-shedding was further reinforced during the June to September 2009 dry season with the shortfall reaching approximately 40-50 percent of existing demand during peak hours. The Government of Burundi responded to the crisis by ordering systematic load shedding, fast tracking the re-forestation of the main hydro power plant catchment areas and most importantly, using IDA funds to procure additional diesel fuel to operate the existing 5.5 MW Bujumbura thermal power plant. 15. During the rainy season in October 2009 to May 2010, the electricity supply has improved, due to higher than normal levels of rainfall further reinforced by the start of daytime power generation at the Bujumbura thermal power plant. It is however likely that the improvement will only be temporary as the demand continues to increase and would soon outstrip even theoretical generation capacity levels (see Figures 1, 2 and 3). The newly constructed cement plant and the plant making steel re-bars for the construction sector have requested supply of an additional 3 MW and 2.5 MW respectively by mid 2011, representing more than 10 percent of national supply capacity. 16. The next power supply crisis affecting large areas of the Bujumbura capital area occurred during the summer of 2010. Scheduled general technical revision and O&M works at the 8 MW Mugere hydro power plant, requiring to shut down the power plant for a period of about one month starting in mid-August 2010, and unexpected technical problems in a key MV substation in Bujumbura, mainly due to surcharges in the country's transmission system only 2 days after the start of Mugure revision works, both resulted in unexpected outages and load shedding in large parts of Bujumbura capital area for several days, adversely affecting the water supply, hospitals, public services and households. To avoid another power supply crisis the GoB decided to install 10 MW of rented thermal power supply for a period of 6 months, planned to deliver 4 additional hours of electricity supply per day for the Bujumbura capital area from September 2010 onwards. 25 Figure 1: Energy Supply/Demand Balance 2009-2014 (including proposed investments) Annual Energy Supply versus Demand 350,000 MWh 350,000 MWh 300,000 MWh 300,000 MWh Proj. Energy Demand 250,000 MWh 250,000 MWh 200,000 MWh 200,000 MWh 150,000 MWh 150,000 MWh 100,000 MWh 100,000 MWh Proj. Energy 50,000 MWh 50,000 MWh Supply 0 MWh 0 MWh 2009 2010 2011 2012 2013 2014 17. As the economy improves, returning refugees re-establish themselves, and standards of living increase, national electricity demand is likely to continue to increase between 8-12 percent per year without accounting for any impact from a future access expansion program. With no immediate relief from new power generation projects under construction, the power sector in Burundi has little choice but to turn to thermal, diesel based generation for added power generation and supply diversification, while waiting for the installation of new, less expensive renewable energy sources such as small hydro power plants possible to be developed in the next 4-5 years. The supply deficit varies between approximately 11 MW during the wet season and app. 26 MW during the dry season (See figure 2 and 3). This deficit may reach 21 MW and 36 MW respectively during the wet and dry seasons by 2014 (with the proposed 5 MW power plant extension), at which point additional small scale hydro can be brought online. Large Hydro power developments such as Kabu 16 (20 MW) and Rusumo Falls/Ruzizi III (regional) hydro power plants can be expected to contribute to Burundi's power supply in 2017. 26 Figure 2: Burundi's supply demand deficit during the wet season Power Supply versus Demand Wet Season 70 MW 70.00 65.00 60 MW 60.00 Estimated Demand 55.00 (suppressed/unserved demand not included) 50 MW 50.00 Diesel Rental (10MW with a 45.00 private company) 40 MW 40.00 35.00 Demand Side Management 30 MW 30.00 25.00 Hydro Capacity (Non Firm) 20 MW 20.00 15.00 Diesel Power Plant (Extension to 10 MW 10.00 10.50 MW) 5.00 0 MW 0.00 2009 2010 2011 2012 2013 2014 27 Figure 3: Burundi's supply demand deficit during the dry season Power Supply versus Demand Dry Season 70 MW 70.00 65.00 60 MW 60.00 Estimated Demand 55.00 (suppressed/unserved demand 50 MW 50.00 not included) 45.00 Diesel Rental (10MW with a private company) 40 MW 40.00 35.00 Demand Side Management 30 MW 30.00 25.00 Diesel Power Plant (Extension 20 MW 20.00 to 10.50 MW) 15.00 Total Hydro Firm Capacity 10 MW 10.00 available before new large 5.00 investments 0 MW 0.00 2009 2010 2011 2012 2013 2014 Regional Context 18. In the long-term, Burundi will rely on regional power generation to supply its domestic market. A number of regional hydroelectric projects are being considered by the Government of Burundi. However, the technical and especially the financial feasibility and the sources of financing of these projects have yet to be confirmed. 19. Rusumo Falls Hydroelectric Development will be located on the border between Rwanda and Tanzania, close to Burundi, on the Kagera River, at a highway crossing between Rwanda and Tanzania. The project is strategically placed in the region to: (i) strengthen the backbone electricity transmission system, which is necessary for an equitable distribution of benefits from regional power planning; and (ii) meet the new loads from the mines in the Kagera District, Tanzania, that are being implemented. The power plant is estimated to have an installed capacity of 60-80 MW with an estimated levelised tariff of US$0.10-0.14 per kWh. The project would increase downstream flows in dry periods, and potentially improve the viability of the Kakono hydro-project and the Kyaka irrigation project. The design would include a dam (around 15 m in height, 472 million m3 in reservoir capacity, and 313 km2 in reservoir area). Current estimates indicate that the full reservoir option would affect a large number of households through loss of farmland or, to a smaller number, resettlement. The associated costs include the environmental and social mitigation as well as local area development works. A power sharing agreement between Burundi, Rwanda and Tanzania will have to be negotiated. 28 20. Ruzizi III Hydroelectric Development will be located on the Ruzizi River, which forms the border between Rwanda and the Democratic Republic of Congo, 25 km downstream (south) of the outlet of Lake Kivu. The project would be located downstream of the Ruzizi I and II existing plants, and flows would be nearly completely regulated by Ruzizi I operation of Lake Kivu as a reservoir. The power plant is estimated to have an installed capacity of 145 MW with an estimated levelised tariff of US$0.10 per kWh. 21. Kabu 16 Hydroelectric Development will be located on the Kaburantwa River 16 km above confluence with Ruzizi, 50 km north of Bujumbura. The Kabu 16 hydro power station has been identified in the Nile Basin Strategic Social and Environmental Assessment (SSEA) study of regional power generation options to be among the most suitable sites to meet the region's medium-term energy needs. The site has been designed for run-of-the-river operation. The feasibility study done by Sogreah (1995) needs updating, including technical specifications and bidding documents, as well as a thorough review of safeguard aspects such as an environmental impact analysis and resettlement plan. The project would comprise a small conventional gravity dam in the main river channel with live storage equal to two hours of plant output. Power facilities would include intake above the dam, a 3,400 m of power tunnel and penstock, and a two unit powerhouse with an installed capacity of 20 MW under a head of 191 m. 22. To support the development of larger regional energy resources, the Nile Basin Equatorial Lakes Subsidiary has recently commissioned a study to strengthen the supply from DRC and EAC through the following projects: · Voltage upgrade from 70 kV to 220 kV for the Burundi­DRC­Rwanda transmission line: This project would enable Burundi to benefit from power trading and regional transmission integration with the neighboring countries (including Uganda and Kenya when the planned transmission link is completed). The area around Kivu Lake represents a potential regional source of power generation both through the hydro potential on the Ruzizi River and the significant methane gas deposits in the Kivu Lake, currently being developed for power generation by Rwanda through a first 100 MW Independent Power Producer (IPP) with an American developer. · Rusumo Falls Transmission links: The transmission line from the proposed Rusumo Falls Hydro Power station would, in addition to delivering Burundi's share of the generated capacity (estimated to 20+ MW), interconnect it with the national networks of Rwanda and Tanzania to enable further resource sharing and optimization. Detailed Description of Project Components 23. The project will scale up the World Bank's assistance to the energy sector in Burundi to alleviate some of the immediate effects of the global financial crisis on the country's fragile economic growth and reduce risks of severe supply interruptions due to heavily dilapidated electricity equipment and infrastructure. The proposed project will mainly scale-up the electricity component of the MSWEIP and to address part of the financing shortfall stemming from cost overruns in projects funded by other sector development partners. 29 Component 1 - Extension of the Bujumbura Thermal Generation Plant (US$5 million) 24. To stem the short term supply deficit while lower cost hydro power resources are being developed, the GoB has requested assistance to increase the country's thermal generation capacity. The proposed project would finance the procurement and installation of an additional 5 MW of thermal generating capacity to the existing diesel-fueled 5.5 MW Bujumbura thermal power plant, thus leading to a total power plant capacity of 10.5 MW. The relatively long period of the projected power supply deficit in Burundi (see above, Figures 1-3) and the continuous need for thermal power generation during the dry season for at least the next 6-8 years makes diesel-fueled rental power production prohibitively expensive (see Annex 9). As REGIDESO has proven operational and maintenance capability in running the existing 5.5 MW Bujumbura thermal power plant, an extension of the utility owned and operated power plant with strong manufacturer maintenance support is the preferred option. 25. Considering the country's emergency situation, it is proposed to invest in high speed diesel engines with 1,500 rotations per minute (rpm) that offer the advantage of lower initial purchase price and quicker installation compared to medium speed and heavy fuel oil (HFO) based engines, but in return have a slightly shorter lifetime during continuous operation 24 hours per day. The proposed engine technology would allow REGIDESO (i) to operate the extended Bujumbura thermal generation plant during the next 3-4 years as day-load capacity to support electricity demand during business and evening hours, and (ii) to be scaled down in the medium term to dry season use and back-up functionality as lower cost hydro generation resources will come on-line. A financial analysis of various technology options for the extension of the Bujumbura power plant as well as rental production can be found in Annex 9. The team is in discussion with bilateral development partners to explore possibilities of parallel co-financing of this component. 26. The proposed investment in high speed (1,500 rpm) diesel engines which offer the advantages of: Suitability to the Burundi power supply emergency need due to the fact that the power plant will be commissioned significantly quicker than other alternatives; Lower initial purchase price compared to medium speed diesel and HFO based engines; Facility of operation and ease of maintenance. These advantages outweigh the slightly shorter life time at continuous operation and less robustness compared to low/medium speed engines. 27. In addition to the procurement of high speed diesel engines, associated electromechanical equipments and critical spare parts, the installation of an accurate fuel metering system will be included in the tender to ensure a good management of fuel as the fuel consumption represents more than 85 percent of the electricity generation cost. 30 Component 2 - Rehabilitation of Hydro Power Plants (US$ 3 million) 28. As Burundi emerges from conflict most of the country's electricity generation assets are in urgent need of rehabilitation to ensure continued operation and power supply. It is evident, with the country's current energy crisis, that any break-down in the power production of the hydro plants would result in additional limitations to the country's already severely constrained electricity supply with resulting negative effects on the economy and growth prospects. Most of these main hydro power plants are equipped with more than 20 years old electrical and electronic equipment for which there are today no available spare parts. Equally the mechanical and electromechanical equipment (turbines, generators, etc.) are in dire need of technical overhaul and refurbishment. The project therefore proposes to provide financing to replace outdated electrical and mechanical equipment to ensure a continuous operation of the main hydro power plants. These investments have been identified in a detailed study completed by REGIDESO consultants10 and would modernize the operation of existing hydro power plants and significantly reduce the risk of breakdowns due to dilapidated equipment. 29. This component would focus on the replacement of critical electro-mechanical equipments of the 18 MW Rwegura and the 2 MW Nyemanga hydro power plants to increase their reliability. It would include (i) the replacement or refurbishment of mechanical equipments, among others, cooling system, and associated equipments (ii) the replacement or refurbishment of electrical equipments such as alternators, control and regulation system, protection system, medium voltage equipments and (iii) the procurement of spare parts. The implementation of the activities under this component would guarantee the technical availability of the existing hydro power plant outputs at their original performance and would prevent the country to further increase investments in costly thermal generation. Component 3 - Rehabilitation of Electricity Transmission and Distribution Network (US$1.25 million) 30. The project proposes to finance of priority rehabilitation works on the Bujumbura medium voltage (MV) distribution system in an amount of US$1.25 million. These investments were initially foreseen to be funded under the African Development Bank's Energy Infrastructure Rehabilitation and Extension Project. Due to cost overruns in this AfDB project a financing gap emerged for REGIDESO, risking not completing the envisaged urgent rehabilitation works of the electricity transmission and distribution network. The proposed investments under the IDA Emergency Energy Project will therefore include required rehabilitation works of key transmission and distribution substations in the Bujumbura area (such as the main Bujumbura substation: the RN1 substation). These investments will contribute to establish an upgraded distribution voltage level (from the current 6 kV to 10 kV) to improve the quality of supply to five recently connected neighborhoods in the Bujumbura capital area. 31. The proposed activities will include the replacement of an old 10 MVA 30/6,6 kV transformer of the RN1 substation by a new 30/10 kV transformer with the same capacity. The replacement of associated equipments such as MV cubicles, cables and auxiliaries would also be included to allow REGIDESO to increase the quality of service. 10 Sogreah, France, 2008 31 Component 4 ­ Pre-payment Meters (US$1.55 million) 32. As the cost of electricity production will increase with the extension of thermal generation, REGIDESO will be under pressure to improve its revenue stream and reduce commercial losses. To assist REGIDESO to better manage its billing and revenue flow, the ongoing MSWEIP is financing the replacement of 15,000 meters scheduled to be installed during 2010. The remaining 15,000 meters were initially supposed to be funded by AfDB but had to be put on hold due to lack of funds. It is therefore proposed to include financing for the second phase of REGIDESO's pre-payment metering program under the proposed emergency electricity infrastructure investment program. This investment would enable REGIDESO to improve its cash flow and reduce the amount of billing arrears from public, commercial and household customers. Pre-paid metering would also enable improved management of electricity consumption for REGIDESO's customers and, especially for poorer households with limited and uncertain cash income, reduced risk of power cuts. Component 5 ­ Fuel Procurement and support to Project Management (US$3.75 million) 33. The project proposes to increase the diesel generating capacity at the Bujumbura thermal power plant (from 5.5 to 10.5 MW) to scale up power production in Bujumbura during business hours. The additional diesel production would increase Burundi's limited supply diversity, to ensure a minimum of electricity services to power vital public services such as water supply and hospitals, in the case of drought affecting the country's hydro power production representing 95 percent of supply. 34. The increase in thermal generation based on diesel fuel would, while stemming the power supply deficit, dramatically increase the utility's electricity production costs. REGIDESO will therefore need to mobilize significant additional revenues to make the operation of thermal power plants economically and financially sustainable. The annual fuel cost required to operate the Bujumbura thermal power plant with an extended capacity of 10.5 MW is estimated at US$16 million per year. This would require a 140 percent surcharge to the current average electricity tariff to allow REGIDESO to pay for fuel and maintenance costs to sustain the power plant operation at a level equivalent to 12 hours per day. To reduce the immediate price impact of increasing tariffs on already vulnerable small and medium size enterprises (SMEs) and the general population, the project would accompany the financing of the extension of the generating plant with a gradually declining subsidy of the operating cost. 35. During the 2009 dry season, the electricity crisis forced small and large businesses in Burundi to prioritize the purchase of back-up generators and diesel fuel to keep their businesses operating instead of investing in the long term growth of their enterprise. It is estimated that the running cost of small diesel generators is approximately US$ 50 cents/kWh compared with the current average grid tariff of US$ 8 cents/ kWh. With the proposed fuel procurement for thermal electricity generation (additional to the remaining amount of US$3.5 million from the MSWEIP) the average electricity tariff could be increased in steps over two year (reaching a total fuel surcharge of approximately FBu 125 per kWh in 2012). The precise electricity tariff adjustment levels, structure and timing will be determined in the recently launched electricity and water tariff study, funded by the MSWEIP. 32 36. The proposed component 5 also includes additional support to provide technical assistance and strengthen the implementation capacity of REGIDESO, especially with regards to procurement and contract supervision. The project would finance for a period as needed (i) an international consultant to supervise the extension of the Bujumbura thermal generation plant; (ii) an international consultant to supervise the rehabilitation works of hydro power plants; and (iii) an additional procurement consultant with experience in the World Bank's procurement guidelines and procedures (for a period of 6-9 months or as needed) to accelerate the processing of large scale contracts under international competitive bidding procedures, and advice on negotiations and tender evaluation. 33 Annex 2: Results Framework and Monitoring BURUNDI: EMERGENCY ENERGY PROJECT Table 3: Results Framework PDO Project Outcome Indicators Use of Project Outcome Information The project's development Average unplanned interruptions To monitor the security and objective (PDO) is to frequency in Bujumbura reliability of electricity improve the capacity and (number/year) ­ CORE supply and plan future reliability of electricity Increased electricity generation from investments generation, transmission and the Bujumbura thermal power plant distribution. (GWh/year) Direct project beneficiaries (number), To monitor access of of which female (%) ­ CORE project beneficiaries to electricity services Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring Component 1: Extension of the Bujumbura Thermal Generation Plant Increased electricity Generation capacity of conventional Assess supply-demand gap generation capacity to reduce generation constructed (MW) ­ CORE and level of supply security the existing power supply deficit Component 2: Rehabilitation of Hydro Power Plants More reliable electricity Generation capacity of renewable Assess contribution of generation from rehabilitated energy rehabilitated (MW) ­ CORE rehabilitated hydro power hydro power plants plants to improved reliability of electricity services Component 3: Rehabilitation of Electricity Transmission and Distribution Network Improved transmission and MV and HV-substations rehabilitated Assess the actual distribution reliability (number) implementation of the rehabilitation works Component 4: Pre-payment Meters Improved revenue recovery Pre-payment electricity meters installed Assess improvement in of REGIDESO by REGIDESO (number) REGIDESO's operational Electricity collection rate (calculated as performance billing revenues/amount billed) (%) ­ CORE AFRICA 34 Component 4: Fuel Procurement and support to Project Management Increased availability and Increased availability of power supply Assess supply-demand gap reliability of electricity from the extended Bujumbura thermal and level of supply security services from Bujumbura power plant (hours/week) thermal plant Monitoring arrangements 1. The REGIDESO PIU will be responsible for monitoring and will provide quarterly progress reports on the project to REGIDESO's management and to the Bank. The REGIDESO PIU has been established under the Bank-financed MSWEIP and has sufficient capacity to compile a number of simple results indicators necessary to monitor progress, and each quarterly report will provide a detailed update on these indicators. For ease of reporting, the format of the report is simple and streamlined and builds on existing operational manuals. The indicators for the proposed project are harmonized with the ongoing MSWEIP project, thus avoiding the duplication of already existing indicators for energy sector activities. Both IDA financed projects will therefore facilitate a comprehensive monitoring and evaluation of REGIDESO's performance. 2. Based on the audit report of the performance management contract between REGIDESO and GoB, most of the baseline data reflect REGIDESO's actual performance as of December 2009. Given the country's fragile, post-conflict environment, REGIDESO's data collection capacity and quality has been assessed as weak in the last audit. Indicators that require very accurate utility data, currently not available, and complex monitoring methodologies, currently not established, have therefore been excluded for the ease of monitoring and reporting under the proposed emergency operations. In the context of regular independent audits of the performance management contract, World Bank supervision missions will ensure a close dialogue with REGIDESO on strategies to improve the data collection and monitoring methodologies, and the accuracy of performance indicators and target values. 3. The proposed EEP will achieve the following main outcomes: increased electricity generation capacity; improved transmission and distribution reliability; and improved revenue recovery of REGIDESO 35 Table 4: Arrangements for results monitoring Target values (cumulated) calendar year Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 Frequency and Data Collection Responsibility Dec 2009 Dec 2010 Dec Dec 2012 Dec 2013 Reports Instruments for Data 2011 Collection Average unplanned interruptions frequency 51 56 45 30 30 Annual REGIDESO's reports REGIDESO in Bujumbura (number/year)11 Increased electricity generation from the 6 11 11 25 25 Annual Audit performance Independent Bujumbura thermal power plant (GWh/year) management contract, Auditor, REGIDESO's reports REGIDESO Direct project beneficiaries (number), of 270,000 282,000 294,000 306,000 318,000 Annual Audit performance Independent which female (%)12 50% 50% 50% 50% 50% management contract, Auditor, REGIDESO's reports REGIDESO Intermediate Outcome Indicators Component 1: Extension of the Bujumbura Thermal Generation Plant Generation capacity of conventional 5.5 5.5 10.5 10.5 10.5 Annual REGIDESO's REGIDESO generation constructed (MW) Reports Component 2: Rehabilitation of Hydro Power Plants Generation capacity of renewable energy 0 0 20 20 20 Annual REGIDESO's REGIDESO rehabilitated (MW)13 Reports Component 3: Rehabilitation of Electricity Transmission and Distribution Network MV and HV-substations rehabilitated 0 0 0 1 1 Annual REGIDESO's REGIDESO (number) Reports Component 4: Pre-payment Meters Pre-payment electricity meters installed by 10,000 13,000 23,000 33,000 43,000 Annual Audit performance Independent REGIDESO (number)14 management contract, Auditor, 11 The average unplanned interruption frequency in Bujumbura is measured at the main Bujumbura substation, called "Poste de dispatching RN1" 12 Direct project beneficiaries are estimated as follows: number of private clients (mainly households, but also including religious organisations, NGOs, small businesses) multiplied by an average householdsize of 6 people. In the end of 2009 REGIDESO served 45,000 private clients. It is projected that at least 2,000 new private client connections will be achieved each year. Female project beneficiaries are estimated as 50% of total direct project beneficiaries. 13 The proposed project will contribute to rehabilitate two hydro power plants in Burundi, which have a total installed capacity of 20 MW (Rwegura 18 MW and Nyemanga 2 MW). 36 REGIDESO's reports REGIDESO Electricity collection rate (%) 6415 70 75 80 85 Annual Audit performance Independent management contract, Auditor, REGIDESO's reports REGIDESO Component 5: Fuel Procurement and support to Project Management Increased availability of power supply from 0 0 0 56 56 Annual REGIDESO's REGIDESO the extended Bujumbura thermal power plant Reports (hours/week) 14 This indicator will measure the total number of pre-payment meters installed by REGIDESO. It is estimated that about 13,000 meters will be financed by REGIDESO itself, about 15,000 meters by the ongoing MSWEIP and about 15,000 meters by the proposed project. All pre-payment meters initially supposed to be funded under by AfDB are excluded from projections, as due to lack of AfDB funds these meters will now be financed by the proposed project. 15 Un-audited number as part of the audit of the performance management contract, data quality needs to be verified during supervision (indicator calculated as billing revenues divided by amount billed). 37 Annex 3: Project Costs BURUNDI: EMERGENCY ENERGY PROJECT Table 5: Proposed IDA allocation IDA Component Description allocation US$ million Emergency electricity infrastructure rehabilitation Component 1: Extension of the Bujumbura Thermal Generation Plant 5.00 Component 2: Rehabilitation of Hydro Power Plants 3.00 Component 3: Rehabilitation of Electricity Transmission and Distribution Network 1.25 Component 4: Pre-payment Meters 1.55 Component 5: Fuel Procurement and support to Project Management 3.75 Contingency 0.85 Total 15.40 38 Annex 4: Financial Management and Disbursement Arrangements BURUNDI: EMERGENCY ENERGY PROJECT Executive Summary 1. This Annex is a record of the results of the assessment of the existing financial management arrangements at the project implementation unit (PIU) in preparation of the Burundi Emergency Energy Project (EEP). The objective of the assessment is to determine whether: (i) REGIDESO has maintained adequate financial management arrangements to ensure additional funds will be used for purposes intended in an efficient and economical way; (ii) REGIDESO's financial reports have been and will be prepared in an accurate, reliable and timely manner; (iii) arrangements exist for an independent audit of the sources and uses of funds; and (iv) the entities' assets are being safeguarded. 2. The financial management (FM) assessment for this project was carried out in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board on January 2010. 3. The supervision mission carried in January 2010 revealed that the risk assessment of the existing financial management arrangements put in place by the PIU was rated as moderate. Budgeting Arrangements 4. The budgeting arrangements are well documented in the updated/new procedures manual. REGIDESO's budgeting arrangements are undertaken by the inspection (control) department and will guide the PIU in the budgeting process. Budget analysis will be conducted to ensure budget variances are addressed on an adequate and timely manner. Accounting Arrangements Books of Accounts 5. For the purpose of this project, adequate books of accounts which shall include ledgers, journals and the various registers will be maintained by the PIU's FM unit. The accounting system already developed in the Financial Management Manual will be used to track, record, analyze and summarize its financial transactions and adequately capture those of the implementing agencies. The PIU's accounts will be prepared on a cash basis in accordance with the finance agreement, the laws and regulations in Burundi and best accounting practice. The accounting system will allow for the proper recording of project's financial transactions, including the allocation of expenditures in accordance with its components, disbursement categories, and sources of funds. Appropriate controls over the preparation and approval of transactions should be put in place to ensure that all transactions are correctly made, recorded, and reported upon. 39 Staffing arrangements 6. REGIDESO has hired a qualified accountant/FMS to strengthen the FM unit of the PIU. However the overall responsibility for finance will remain of the Director of Finance. 7. The Director of Finance will be responsible for approving payments to contracted service providers, suppliers of equipment and goods, and implementing agencies and for submitting consolidated financial monitoring and audited financial statements to IDA. Information systems 8. REGIDESO currently uses TOMPRO accounting software under the Bank-financed MSWEIP which will allow the PIU to manage more than one financing agreement. The PIU will use the same software to maintain the books of the EEP. Financial Reporting and Monitoring 9. The PIU has been submitting the Interim Financial Reports on a quarterly basis for review to ensure that they provide quality and timely information to the PIU and various stakeholders monitoring the project's performance. A single IFR will be submitted and will comprise: Sources and uses of funds statement; and Uses of funds by project activity. 10. The accounting policies and procedures adopted and notes to the financial statements will be disclosed in the report. Audit Arrangements 11. The recruitment process of an independent external auditor for the MSWEIP has been finalized and the auditing work is being done. The initial audit report was submitted to the World Bank on June 23, 2010. The EEP audit arrangements will follow the same arrangements as set for the MSWEIP. Internal Control and Internal Audit Internal Controls 12. The project internal controls have been documented in a newly developed Project Implementation Manual (PIM) complemented with a Financial Management Manual (FMM). The accounting systems, policies and procedures employed by the PIU to account for and to manage project funds have thus been documented in the PIU's updated PIM and FMM. The accounting policies specify the accounting treatment for the PIU financial transactions and constitute basic principles designed to ensure that the accounting records are complete, relevant and reliable and that accounting practices are followed consistently. 40 13. The EEP internal controls will be based on the existing PIM and FMM developed by the PIU for the activities of the MSWEIP. Internal Auditor 14. The Internal Auditor will review the financial monitoring reports and will carry out regular internal audit controls. These controls will include ex post verification of expenditure eligibility, as well as physical inspection of works and goods acquired during the implementation of the project. The findings and recommendations of the Internal Auditor will be used by REGIDESO to improve PIU's implementation in areas related to financial management and procurement. The internal audit capacity will however need to be strengthened under the project's capacity strengthening component to enable it achieve efficient quality work and reporting. Disbursements arrangements and methods Bank Account 15. A separate Designated Account (DA) dominated in US dollars will be opened in commercial bank acceptable to IDA for the purposes of implementing the Emergency Recovery Grant. 16. Monthly bank reconciliation will be carried out by the appropriate designated personnel. 17. Account signatories as documented in the Financial Management Manual (FMM) by defining the positions of those authorized as signatories will remain the same for this Emergency Recovery Grant. Funds Flow: IDA and Counterpart Funds Initial Advance and Other Disbursement Methods 18. Upon grant effectiveness, IDA will make an initial advance (Advance method) from the proceeds of the grant by depositing it into the borrower's designated account (DA) opened in a commercial bank under terms and conditions acceptable to IDA. The DA ceiling is US$1.2 million which has been calculated to represent four months of eligible local project expenditures. Actual expenditure of goods and services will be reimbursed (reimbursement method) through submission of withdrawal applications and against statements of expenditures(SOEs) which will be prepared and approved in accordance with the Financial Management Manual. The direct payment method, whereby the IDA may send payments directly to a third party for eligible expenditures at the Recipient's request supported with records evidencing eligible expenditures (e.g., copies of receipts, supplier invoices) is also offered as a disbursement option. Another acceptable method of withdrawing proceeds from the IDA grant proceeds is the special commitment method whereby IDA may pay amounts to a third party for eligible expenditures under special commitments entered into, in writing, at the Recipient's request and on terms agreed between the Bank and the Recipient. 41 Disbursement by category 19. The project will finance 100 percent of all expenditures, excluding taxes. This is consistent with the Country Financing Parameters for Burundi. Funds will be bundled in one single disbursement category as specified below: Category Amount of Financing Percentage of Allocated Expenditures to be (expressed in USD) Financed (exclusive of taxes) Works, goods and services, Training USD 15,400,000 100% and Operating Costs under the project Total USD 15,400,000 Use of Statement of Expenditures 20. Disbursements for all expenditures under components of the project would be made against full documentation, except for the following items of expenditures: (i) contracts for goods in an amount inferior to US$150,000; (ii) contracts for works in an amount inferior to US$200,000; (iii) contracts for consulting firms in an amount inferior to US$100,000 equivalent per contract; and contracts for individual consultants in an amount below US$50,000 equivalent per contract, as well as all operating costs, which would be claimed on the basis of Statement of Expenditures (SOEs). All supporting documentation for SOEs would be retained at the PIU within REGIDESO to be readily available for review by periodic IDA supervision missions and internal and external auditors. 21. IDA will have the right to suspend disbursements should the Recipient fails to comply with reporting requirements specified in the Financing Agreement. 42 Funds Flow chart Figure 4: Funds Flow Chart for the Proposed Project IDA Direct Payment to Designated Account third party (DA) in an acceptable (alt. through special commercial bank commitment) denominated in US$ Goods & Services in US$ Supervision plan 22. Given the Moderate risk rating associated with existing FM arrangements, two on-site supervision visits will be conducted each year to commensurate with the risk levels. The objective of the supervision missions will be to ensure that strong financial management systems are maintained for the grant throughout the life of the project. Reviews will be carried out regularly to ensure that expenditures incurred by PIU remain eligible for IDA funding. The Implementation Status and Result Report will include a Financial Management rating for the FM component and will be arrived at by the Financial Management Specialist after an appropriate review. 43 Annex 5: Procurement Arrangements BURUNDI: EMERGENCY ENERGY PROJECT 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 Credit », dated May 2004, revised October 2006 and May 2010, and « Guidelines : Selection and Employment of Consultants by World Bank Borrowers, » dated May 2004, revised October 2006 and May 2010 ; Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants, dated October 15, 2006 and the Board approved modifications as stipulated in the Financing Agreement. The general description of various items under different expenditure categories are described below. For each contract to be financed by the Emergency Recovery Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works: Works procured under this project will include the rehabilitation of power plants and networks. Works estimated to cost the equivalent of US$3,000,000 or more would be procured through International Competitive Bidding (ICB). Works estimated to cost more than US$100,000 up to the equivalent of US$3,000,000 will be procured through National Competitive bidding (NCB) in accordance with the provisions of paragraphs 3.3 and 3.4 of the Guidelines for procurement under IBRD Loans and IDA Credits above mentioned. Small works estimated to cost less than US$100,000 equivalent per contract up shall be procured on the basis of quotations obtained from at least three qualified contractors in response to a written invitation. The written invitation will include a description of the works, basic technical specifications, completion date and if necessary the plan of the works. The Project Implementation Manual (PIM) will furnish the standard bidding document to be used for NCB and shopping. 3. Procurement of Goods: Goods to be procured under this grant will include fuel, lubricants and essential parts for existing plants, and networks. Goods to be procured would also include high speed diesels generators and pre-payment meters. The above mentioned goods will be procured through a combination of the following procurement methods: (a) international competitive bidding for contracts estimated to cost more than US$500,000 equivalent; (b) national competitive bidding for contracts of valued at more than US$50,000 equivalent but less than US$500,000 equivalent; and (c) shopping for contracts estimated to cost less than US$50,000 equivalent. In situations and circumstances that are in compliance with the provisions of paragraph 3.6 of the Guidelines for procurement, direct contracting may be used with Bank prior review. In circumstances where previous procurement experience in the sector and a list of eligible suppliers exists from open advertisements exists, limited international bidding (LIB) may be used with Bank prior review. 4. Procurement of non-consulting services: No non-consulting services are expected to be financed under the proposed project. 44 5. Selection of Consultants: Consultant services to be procured under this grant would include technical assistance, and monitoring and evaluation activities performed by firms and individual consultants. Table 6: Procurement Overview Category Procurement Method International National Other Total Competitive Competitive Methods Bidding Bidding Goods, Works, Consultants' services, US$ US$ US$ US$ operating costs, and training Fuel procurement for 3,500,000 3,500,000 thermal generation of electricity Rehabilitation of 1,250,000 1,250,000 transmission and distribution system 1,550,000 1,550,000 Pre-payment meters Extension of Bujumbura 5,000,000 5,000,000 Thermal generation Plant Rehabilitation of Hydro 3,000,000 3,000,000 Power Plants Support to Project 250,000 250,000 Management Total 14,300,000 250,000 14,550,000 B. Assessment of the Agency's Capacity to implement Procurement 6. Procurement under this project will maintain existing procurement arrangements for Bank-financed MSWEIP. REGIDESO will continue to be responsible for the implementation and supervision of the project. REGIDESO established a project implementation unit (PIU) under the MSWEIP, which is fully operational and conducts the daily tasks of project implementation including procurement activities. The PIU operates under the oversight of the General Manager of REGIDESO and includes the following key staff: (i) a project coordinator; (ii) an electrical or hydraulic engineer; (ii) a second engineer (electrical/hydraulic); (iii) a financial management specialist and certified accountant; (iv) a procurement specialist and (v) a social and environmental specialist. The PIU will use consultants when needed to accomplish certain specific tasks, such as technical execution studies, preparation of bidding documents, the receipt of goods and equipments and the supervision and receipt of works. 7. An assessment of the capacity of the PIU to implement procurement actions for the project has been carried out in February 2008. The assessment reviewed the organizational structure of REGIDESO, and the interaction between staff responsible for procurement in the implementing unit, the Ministry of Water, Energy and Mines (MWEM) and the Ministry of Finance. The assessment revealed that procurement capacity of REGIDESO was limited mainly because this institution did not get the opportunity to procure works or goods using Bank 45 procedures or similar procedures over the last ten years. The number and the value of contracts managed by REGIDESO using its own procedures over the last ten years are also modest due to the lack of resources. 8. The major issues concerning procurement activities for project implementation have been identified and it was also agreed to undertake other measures aimed at minimizing procurement risks, including: (i) the PIM would include the standard bidding document for NCB, Shopping and model of evaluation report; (ii) the creation of filing and monitoring systems for procurement activities to be followed by REGIDESO and its PIU; and (iii) conducting a yearly technical audit. 9. Although it was agreed to use REGIDESO staff as much as possible to better ensure sustainability, based on the findings of the procurement capacity assessment it was deemed necessary to hire consultant services on time-basis contracts for specific tasks in order to strengthen the capacity of REGIDESO and reduce the risk. The objective of the consultant assignment would be two-fold: (i) to produce and review the bidding documents considered complex or critical; and (ii) to train REGIDESO staff and PIU staff in procurement planning and the whole procurement process. Technical assistance and training for procurement aspects would be established based on the findings of the technical audit that will be conducted and the finding of prior and post review to be conducted by IDA. C. Details of Contract Packages to be procured under the Project 10. The following two tables (Table 7 and Table 8) show details of the procurement arrangements involving international competition, including goods, works and consulting services. Table 7: List of Contract Packages for Goods and Works 1 2 3 4 5 6 7 8 Ref. Contract Estimated Procurement P-Q Domestic Review Expected No. (Description) Cost Method Preferenc by Bank Bid- (US$) e (Prior / Opening (yes/no) Post) Date 1 Diesel fuel 3,500,000 LIB NO NO Prior July 2011 2 Rehabilitation of 1,250,000 ICB NO NO Prior December transmission and 2010 distribution network, including special equipment 3 Pre-paid meters 1,550,000 ICB NO NO Prior December 2010 4 Rehabilitation of 3,000,000 ICB NO NO Prior January 2011 Hydro Power Plants 5 Extension of 5,000,000 ICB NO NO Prior January 2011 Bujumbura Thermal generation Plant 46 Table 8: List of Consulting Assignments 1 2 3 4 5 6 Ref. No. Description of Estimated Selection Review Expected Assignment Cost (US$) Method by Bank Proposals (Prior / Submission Post) Date 1 Supervision of 100,000 IC Prior December Bujumbura 2010 thermal plant extension 2 Supervision of 100,000 IC Prior January hydro power 2011 rehabilitation 3 Procurement 50,000 IC Prior February consultant 2011 11. Assuming the proposed emergency recovery grant becomes effective in December 2010, the key milestones for implementation are estimated to be as specified in Table 9 below: Table 9: Estimate of key milestones for implementation of contracts Bidding Contract Work Ref. Contract documents awarded completed No. (Description) finalized 1 Diesel fuel Sept. 2010 Jan. 2012 Not applicable 2 Rehabilitation of transmission and Sept. 2010 Feb. 2011 March 2012 distribution network, including special equipment 3 Pre-paid meters Sept. 2010 Dec. 2010 Dec. 2011 4 Rehabilitation of Hydro Power Sept. 2010 Feb. 2011 March 2012 Plants 5 Extension of Bujumbura Thermal Sept. 2010 Feb. 2011 Jan. 2012 generation Plant 47 Annex 6: Implementation Arrangements BURUNDI: EMERGENCY ENERGY PROJECT 1. REGIDESO will be responsible for the implementation and supervision of the project. An implementation supervision committee has been established under the original project, comprising the General Manager of REGIDESO, its directors, and a representative of the Ministry of Water, Energy and Mines (MWEM). This committee will be charged with providing overall guidance to the project to ascertain the project results, ensure coordination of the project with the country's overall electrification and water service improvement programs (including the MSWEIP), and ensure that the main beneficiaries' expectations are met. 2. REGIDESO established a project implementation unit (PIU), which conducts the daily tasks of project implementation and periodic assessment of its progress. The PIU operates under the direction of the General Manager of REGIDESO and includes the following professional profiles: A project coordinator who is also an electrical or hydraulic engineer A hydraulic engineer An electrical engineer A financial management specialist and certified accountant A procurement specialist A social and environmental safeguards specialist An administrative assistant 3. The REGIDESO PIU is receiving collaborative support from existing REGIDESO focal staff, such as electrical engineers and hydraulic engineers and a billing and collections manager, to monitor the corresponding project sub-components. The PIU is using consultants when necessary to accomplish certain specific tasks such as technical execution studies, preparation of bidding documents, the receipt of goods and equipments, and the control and receipt of works. 4. The PIU will oversee the execution of the project components and corresponding contracts for works and services. It will prepare quarterly progress reports for IDA and the Monitoring Committee, including detailed comments on the execution of the project. These will highlight project achievements but also provide detailed description of any difficulties encountered and how these are being addressed. The PIU will facilitate the coordination between the contractors, consultants and any public entity or service related to the project. 5. The PIU is also responsible for the project financial management and for the preparation of project financial reports. It will ensure that all project activities are performed, and quarterly progress reports and annual financial audits submitted, in a timely manner. The PIU is maintaining a separate accounting of assets generated by the project, which will only be merged with REGIDESO's assets at the end of the project. 48 6. REGIDESO's PIU will be responsible for the implementation of the project's safeguard frameworks (ESMF and RPF). The PIU builds on experienced staff, including an experienced environmental and social specialist who will be responsible for managing safeguards issues as and when they arise during project implementation. Consultants will be engaged to prepare Resettlement Action Plans (RAPs) and Environmental Management Plans (EMPs) or Environmental Impact Assessments (EIAs) as and when necessary. Capacity building sessions will be provided by the team or consultants to insure smooth implementation and safeguards compliance. As for the complimentary MSWEIP, all safeguard aspects in the context of the proposed emergency electricity infrastructure investment program will continue to be part of REGIDESO's project progress reports. 49 Annex 7: Project Preparation and Appraisal Team Members BURUNDI: EMERGENCY ENERGY PROJECT Name Title Unit Erik M. Fernstrom TTL, Senior Energy Specialist AFTEG Mathewos Woldu Senior Economist (TTL MSWEIP) AFTUW Deo-Marcel Niyungeko Senior Municipal Engineer AFTU2 Peggy Mischke Power Engineer (JPO) AFTEG Vonjy Rakotondramanana Energy Specialist AFTEG Astrid Manroth Senior Energy Specialist AFTEG Satoru Ueda Lead Water Resources Specialist AFTUW Helene Bertaud Sr. Counsel LEGAF Jean Paul Feno Environmental Specialist AFTEN Abdoul-Wahab Seyni Social Development Specialist ASPEN Sylvain Rambeloson Senior Procurement Specialist AFTPR Melance Ndikumasabo Procurement Specialist AFTPR Emmanuel Sinzohagera Financial Management Specialist AFTFM Bella Lelouma Diallo Financial Management Specialist AFTFM Wolfgang Chadab Senior Finance Officer CTRFC Aissatou Diallo Finance Officer CTRFC Anta Loum Lo Language Program Assistant AFTEG Clarette Rwagatore Program Assistant AFMBI 50 Annex 8: Environmental and Social Safeguards Framework BURUNDI: EMERGENCY ENERGY PROJECT Project location and salient physical characteristics relevant to the safeguard analysis 1. The project will be implemented in the Bujumbura capital area, especially in the northern area of the city. Safeguard policies triggered Safeguard Policies Yes No Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Physical Cultural Resources (OP/BP 4.11) X Indigenous Peoples (OP/BP 4.10) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X Potential indirect and/or long-term impacts 2. The proposed project falls into environmental category B as no adverse long term impacts are anticipated. The project is expected to positively impact the beneficiary communities and individuals in a number of ways. The rehabilitation of electricity infrastructure will not only improve the way of life of the people in terms of having improved access to electricity, but will also serve as the basis for their social and economic empowerment and reduction in poverty levels. More importantly, the project is determined to avoid as much as possible, relocation issues. 3. The proposed project is fully aligned with and complimentary to the IDA financed Multi- Sectoral Water and Electricity Infrastructure Project (MSWEIP), under implementation since 2008 that finances investments in the electricity and water supply and distribution systems as well as a comprehensive capacity building program for REGIDESO and the Ministry of Water, Energy and Mines (MWEM). 4. All emergency electricity infrastructure activities proposed under the project are very similar to activities currently implemented under the electricity component of the complimentary, IDA- financed MSWEIP, focusing mainly on the rehabilitation of existing electricity infrastructure. No long term adverse impacts of electricity infrastructure activities were identified in the Environmental and Social Assessment Instruments prepared, approved and disclosed under the MSWEIP in 2008. Both safeguard frameworks were re-disclosed under the proposed project. The "in-country" re-disclosure of the safeguard frameworks will take place on September 15, 51 2010, after these documents were re-submitted to the World Bank's Infoshop on August 30, 2010. The proposed project will build on these two safeguard instruments currently being implemented by REGIDESO's PIU: the Environment and Social Management Framework (ESMF), and the Resettlement Policy Framework (RPF). Provisions under these frameworks will guide the implementation of emergency electricity infrastructure activities under the proposed project. 5. The proposed project will not fund activities that would cause an adverse effect on the environment or any form of land acquisition or restriction of access to sources of livelihoods. The potential environmental and social impacts of the proposed project activities are expected to be small-scale and site-specific; and thus easily remediable typical of category B projects. The 5 MW expansion of the existing thermal power plant can be done inside the existing engine hall of the power plant and easily kept within the confines of the current REGIDESO industrial plot perimeter. The new engines are likely to be less noisy than the existing ones currently under operation and no additional noise pollution is expected. Therefore only minor environmental impacts could be expected from the installation activities and site works, similar to the impact of the subcomponent for substation rehabilitation covered within the existing safeguard framework. The rehabilitation works proposed for the two hydro power plants does not concern the existing dam structure (no civil works) additional hydro power related safeguard policies such as safety of dams and international waterways are not triggered by the investments proposed under the additional financing. During supervision the task team will pay special attention to dam safety aspects. 6. Where project activities will potentially impact negatively on people living and/or working on or near the project areas, the procedures as described in the existing RPF will become applicable. Accordingly, people will be compensated and/or resettled for any loss that they may incur due to project activities. Likewise, no project activities will be implemented until a resettlement action plan (RAP) has been prepared, approved of (by the GoB as well as by the World Bank) and disclosed. Measures taken by the Borrower to address safeguard issues and borrower's implementation capacity 7. Prior to appraisal of the complimentary MSWEIP, the borrower prepared an Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) for the purpose of identifying and mitigating potential negative environmental and social impacts at the sub-project planning and implementation stage. The two safeguard instruments are currently implemented, after review and approval by World Bank safeguard specialists and disclosure in- country on February 6, 2008, and at the Bank's on February 21, 2008. 8. The ESMF outlines the environmental and social screening process for sub-projects and proposes capacity building measures, including cost estimates. The ESMF includes (i) an Environmental Management Plan (EMP); (ii) environmental guidelines for contractors; and (iii) environmental and social checklists for sub-projects screening. 9. The RPF provides the overarching framework by which potential resettlement issues will be addressed. The RPF outlines the policies and procedures to be followed in the event that sub- 52 projects require land acquisition. In cases where resettlement is unavoidable, the project will rely on the RFP and RAPs mechanisms for ensuring that the relocation and resettlement is done in accordance with the Burundi and the Bank safeguards policies in consultation with key stakeholders. 10. REGIDESO's project implementation unit (PIU) will be responsible for the implementation of the ESMF and RPF. The PIU is already operational and builds on experienced staff, including an experienced environmental and social specialist who will be responsible for managing safeguards issues as and when they arise during project implementation. Consultants will be engaged to prepare Resettlement Action Plans (RAPs) and Environmental Management Plans (EMPs) or Environmental Impact Assessments (EIAs) as and when necessary. Capacity building sessions will be provided by the team or consultants to insure smooth implementation and safeguards compliance. 11. A supervision mission of World Bank safeguard specialists in May 2009 evaluated REGIDESO's safeguard implementation capacity under the MSWEIP and proposed the following main measures to strengthen future safeguard implementation: (i) conduct a campaign to disseminate ESMF and RPF in the local language; (ii) establish a work program for PIU's safeguard specialist; (iii) promote partnerships with project partners, including the Ministry of Environment and a HIV/AIDS program; and (iv) establish a safeguard capacity building and training plan. All measures proposed during the safeguard supervision mission were satisfactory implemented by REGIDESO's PIU by June 2010, except a delay in the safeguard capacity building and training plan. This plan is currently being prepared with the help of a consultant. Due to delays in the procurement processes for infrastructure investment components under the MSWEIP, no sub-project related safeguard instruments were prepared to date. 53 Annex 9: Economic and Financial Analysis BURUNDI: EMERGENCY ENERGY PROJECT Economic analysis of the proposed project: Economic rate of return 1. The proposed project offers the prospect of high economic returns to the economy of Burundi, which is suffering from inadequate electricity supply. Lack of power has severely affected the commercial and industrial sector, with adverse consequences on employment, exports and prospects for growth. The services rendered by REGIDESO have been inadequate and declining during the years of crisis due to insufficient investment and neglected maintenance. Resource constraints meant that REGIDESO was not in a position to either extend service or to increase its generating capacity in a timely, least-cost manner despite the country's ample hydroelectric potential. These issues are all being addressed under the five-year investment program for the electricity sector. 2. Given the diverse nature of the physical investments envisaged as part of the program, the economic analysis is based on a five-year period (2009-2013) within the electricity sector's total investment program, which has been reviewed and found to be least-cost in nature (see Table 10). Assigning specific benefits to particular project components in such a rehabilitation program would have been both arbitrary and nearly impossible. 3. The physical benefits from these investments that have been quantified stem from the incremental electricity supplied to consumers following increased generation and expected reduction of technical losses from rehabilitation of the severely dilapidated network (Table 11). Benefits from improved reliability and quality of service have not been quantified in the economic analysis and represents added benefits brought by the project. The base case estimate of the EIRR is 17.7 percent. 4. Burundi is expected to face continuing capacity constraints during the period of the investment program. The analysis is therefore based on the assumption that the limited additional supply made available will be fully consumed, as it will essentially reduce the active load- shedding16 done by REGIDESO. Total electricity supply is projected to increase from about 189 GWh in 2008 to 298 GWh in 2012, equivalent to an annual average increase of 6 percent. 5. The minimum economic benefit of the incremental sales has been estimated by assuming recipients in two categories: (i) the productive sector that is currently using captive diesel generators (the alternative cost is an estimated US$ 0.35 per kWh; the average cost of running the Bujumbura thermal power plant); and (ii) connected households that increase their consumption due to reduced load-shedding, the benefits have been valued at the average tariff across all customer categories charged by REGIDESO in 2009, i.e., US$ 0.08 per kWh. The added supply is assumed to be distributed evenly between the two groups. 16 Term used in utility operations for the shutting down of certain pre-arranged electric loads or devices if a certain upper threshold of electric usage is approached. 54 6. Details of the analysis and the parameters used in estimating the EIRR are given in the tables below. The EIRR is particularly sensitive to variations in investment cost, delays in completing generation investments, and to assumptions regarding reductions in technical losses. As can be seen from Table 10, the EIRR varies from 15 percent to 19 percent, depending on the combination of negative factors assumed. Table 10: Results of EIRR Sensitivity Analysis Parameter EIRR (in %) Base case 18.0 Investment costs 20% higher (entire 5 15.0 year Regideso Program) Continued Diesel Production (and 19.1 maintained Fuel Cost pass-through) Continued Diesel Production, Hydro 15.6 program delayed 2 years 55 Table 11: EIRR Analysis ­ Base Case 56 Table 12: Electricity Sector Investment Program Table 13: REGIDESO's Sales and Production Forecast Comparative analysis of additional thermal generation for Bujumbura plant 7. Increased thermal (petroleum based) generation for continuous operation can essentially be made in three main categories, (i) low speed engines using Heavy Fuel Oil (HFO); (ii) medium speed (1,000 rpm) diesel engines; and (iii) high speed (1,500 rpm) diesel engines. The installation of high speed diesel engines has been assessed as the most appropriate option to address Burundi's short term emergency power supply needs. The factors considered in the assessment of options are as follows: Investment cost: The fuel investment cost of a high speed engine is about 50 percent less expensive compared to medium speed engines. In turn the medium speed engine is slightly more fuel efficient. 57 Manufacturing and Installation time: A high speed generator with a standard specification is in many cases available in stock from leading manufacturers and if it is not the case, it can be manufactured within six months. Transport and on-site installation is significantly faster and less costly compared to medium speed diesel engines. Fuel logistics: HFO engines require to be run with Light Fuel Oil (LFO) during the start up and before shutting down the engines. In this case, fuel supply and storage capacity for two fuels (HFO and LFO) needs to be considered. Given that Burundi has no existing HFO plants, the price difference between the HFO and the LFO delivered in the country would not be significant. Therefore HFO is not considered as the best fuel option. Capacity and flexibility of operations: Containerized HFO generator sets available on the market have an average output power starting from about 4 MW. Medium and high speed engines offer more flexibility in terms of operation, as smaller capacities below 1 MW are available, allowing to operate several engines in parallel. Life time: Depending on the running hours, the average lifetime of a high speed prime power generator is approximately ten years. This is suitable for four to five years of interim operation envisaged in Burundi while waiting for the realization of longer term and lower cost generation projects. Then, for the second five years, the power plant can be used as a standby application especially during the dry season and during the maintenance period of hydro power plants. 8. Three scenarios can be considered for the extension of the Bujumbura thermal power plant. These scenarios are summarized in Table 14 below and discussed in detail in the next paragraphs. Table 14: Scenarios for the extension of the Bujumbura thermal power plant Additiona Running Production Total Equivalent % in l Capacity hours per (GWh) per operating cost in tariff (MW) week year (US$) per year FBu/kWh increase Scenario 1 0 112 30.8 10.3 million 90 101 (existing 5.5 MW) Scenario 2 5 84 45 15.3 Million 125 140 Scenario 3 10 84 67 22.5 million 167 200 Scenario 1: Maximizing the energy production of the existing Bujumbura thermal power plant of 5.5 MW: This option aims to increasing the running hours of the existing plant from 8 h/5days to 16 h/7days during three years (2010 to 2012). The energy production per year of the thermal generation would increase from 11 GWh to 30.8 GWh. The equivalent in tariff increase (fuel pass trough cost) is about FBu 90.0 per kWh that represents 101.2 percent increase of the current electricity tariff. This scenario would enable Burundi to nearly triple the energy produced but it would not add to the power capacity and would thus not be able to reduce the supply demand capacity gap during peak hours with continued load shedding as a result. 58 Scenario 2: Adding new 5 MW diesel power plant ­ Increase in Energy production and available capacity while keeping investment cost and impact on tariffs lower. This scenario consists in installing new generator sets and operating both the existing and new plants 12h/7 days. The new plant will be operational starting 2011. The total energy production per year from 2011 onwards will increase from 11 GWh to 45 GWh, thus a fourfold increase in production from current levels. To recover the cost of fuel, the government would need to increase the tariff to FBu 125.00 per kWh, the equivalent of 140 percent increase of the current tariff. This can be seen as a compromise solution where energy production is significantly higher and the capacity gap is reduced while the impacts on tariffs are lower than the 10 MW option. With a good production plan, the country can avoid power outages during the peak demand hours for most of the year and make well managed load shedding during the dry season. Scenario 3: Adding new 10 MW diesel power plant ­ Maximal energy production and capacity increase with high impact on tariff levels. The scenario aims to install new thermal generation and to operate both the existing and new plants 12 h/7 days. The new plant will start producing from 2011. The production will increase from 11 GWh to 67 GWh. The option represents a tariff increase of about FBu 167.0 per kWh to be reached in 2012 (equivalent of 200 percent increase of the current electricity tariff.) The power peak demand will be satisfied during the wet season but the impact on the tariffs or demand for government subsidies would be very high. In summary, it will be difficult for the Burundian economy to afford this option in the short term. Financial analysis of additional thermal generation for the Bujumbura thermal power plant: NPV comparison 9. When comparing the net present value of the proposed investment for the extension of the Bujumbura thermal power plant (5 MW with high speed engines) with equivalent investment in rental diesel engines, the net savings are estimated to US$8.4 million over five years. The same comparison based on the expansion of existing thermal capacity with medium speed engines show lower savings over a five year period (US$2.6 million) due to a longer installation time (24 months compared to 12 months for high speed engines). An additional third scenario was added to compare the investment with an extension of the contract for the existing 10 MW rental plant currently under installation for six months 4h/day service. The savings of the proposed extension compared to this scenario has been estimated to US$ 4.0 million. A main cost factor is the price of rental diesel capacity and the associated fuel consumption required under all discussed scenarios. Detailed calculations and key assumptions are discussed below. 59 10. Electricity imports from the surrounding region have not been considered to be an alternative to domestic least-cost generation expansion as the transmission capacity for imports to Burundi remain very limited. Even as the transmission links are built as part of the East Africa Power Pool initiative, the ongoing energy crisis in the surrounding countries will likely limit their ability to export significant amounts of low-cost power to Burundi during the next five year period. Pricing and quantities of electricity available for regional trade remain therefore uncertain. 11. The following tables will summarize the NPV comparison for the different scenarios for the Bujumbura thermal power plant. The results of NPV comparision show that the proposed investment in high speed engines to allow for a 5 MW extension of the Bujumbura thermal power plant is the best option. 60 Table 15: NPV comparison of extension of Bujumbura power plant (Scenario 1) Table 16: NPV comparison of the extension of Bujumbura power plant (Scenario 2) 61 Table 17: NPV comparison of extension of Bujumbura power plant compared (Scenario 3) Financial analysis of REGIDESO Summary of historical financials 12. A detailed financial analysis of REGIDESO has been carried out under the MSWEIP in 2008, based on REGIDESO's annual reports 2003-2006 and the annual operations report of the Commercial Department for 2007. Under the MSWEIP REGIDESO improved its accounting and financial management and an integrated accounting system was introduced. The MSWEIP also included measures for helping REGIDESO improve its operating efficiency, in particular, the installation of prepaid meters with a focus on government buildings, as well as reaching agreement between government and REGIDESO on a financial restructuring plan and anchoring both parties' obligations in a performance contract between them. 13. REGIDESO was technically bankrupt and a financial restructuring plan was developed to: (i) in the short-term, restructure REGIDESO's balance sheet to provide an adequate capitalization of the company's operations; and (ii) in the-medium-term, ensure the financial sustainability of REGIDESO through cost-reflective tariffs, combined with efforts to improve its operating efficiency. While REGIDESO's revenues have continuously increased since 2002, the utility recorded deteriorating Earning Before Interest, Tax, Depreciation and Amortization margins and negative operating income from 2005 to 2008. Factors behind this development include increasing equipment prices and increased personnel costs, among other issues. The government is REGIDESO's largest debtor, as it pays its bills with a significant delay. Government accumulated a total of FBu 11,914 million in arrears to REGIDESO by December 31, 2006, including the arrears of government and government-related organizations. Significant arrears in government entities to REGIDESO were causing significant arrears, in turn, by the utility to its 62 own suppliers and preventing it from carrying out necessary network rehabilitation and maintenance to reduce technical and non-technical losses. Financial Restructuring of REGIDESO by December 31, 2008 14. To restore REGIDESO's financial viability, the Burundian government agreed to restructure REGIDESO by December 31, 2008, in a memorandum signed by the Minister of Economy, Finance and Development Cooperation on April 7, 2008. The 2008 restructuring plan was based on the following principles: (i) compensation of debts and accruals between the State and REGIDESO; (ii) tripartite compensation between the state, SINELAC and REGIDESO to deal with the arrears of the latter; (iii) an increase in capital by means of cancelling debts related to the equipment financed by external donors; and (iv) forfeiting of accumulated losses. Since the majority of these measures were accounting measures, the overall fiscal impact on the government budget was limited (see Table 18 below). Table 18: Financial compensation between REGIDESO and GoB Measures Million Fiscal impact FBu Compensation of debts and arrears of the public sector Yes No Government 5,249 Autonomous agencies 1,979 Communities and municipalities 1,782 State-owned enterprises (SOEs) 1,441 Other accounts receivable ­ government Compensation 727 Advances on fiscal debt 736 Total 11,914 To be compensated by : 1) Capitalization of KFW loan 7,179 2) Equipment subsidies 4,506 3) Fiscal and other debts 229 Total 11,914 63 15. In order to recapitalize REGIDESO as part of restoring the equilibrium of its balance sheet, a capital increase of FBu 39,116 million was achieved through the cancellation of the following debts or their conversion into equity (see Table 19 below): Table 19: Financial compensation between REGIDESO and GoB Measure Million FBu Fiscal impact Capital increase through : Yes No Debt forgiveness 2,685 Other debt from donors 244 Equipment subsidies 5,026 Transfer of the net debt due from REGIDESO to SINELAC to government17 31,161 Total 39,116 16. Following the recapitalization, REGIDESO's capital was sufficient to forfeit its cumulative losses of FBu 22,621 million as of December 31, 2006, through a reduction of its capital. To enhance the ongoing financial sustainability of REGIDESO going forward, GoB undertook to allow for additional fiscal measures, in particular (i) allowing for tax deductibility of provisions on accounts receivable, stocks, fixed assets and other assets which have recorded a loss in value and (ii) allowing for the deduction of realized or unrealized exchange rate losses on conversion of assets or liabilities. A summary of a pro-forma balance sheet of the situation as of December 31, 2006, and the restructured balance sheet as of January 1, 2007, is presented in Table 20 below. 17 On the other hand, SINELAC owes Burundi in concept of reimbursement for debt service an amount of SDR 42.3 million, equivalent to about FBu 64 billion. 64 Table 20: Pro-forma balance sheet after financial restructuring of REGIDESO Restructured Unaudited 2006 on January 1, 2007 REGIDESO Balance Sheet (in thousands FBu) (in thousands FBu) Assets Long term assets Net fixed assets 31,398,903 31,398,903 Investments 286,356 286,356 TOTAL LONG TERM ASSETS 31,685,259 31,685,259 Short term assets Cash 1,422,695 1,422,695 Accounts receivable ­ private clients 2,751,854 1,310,505 Accounts receivable - clients- government & associated 9,010,454 a) Government 5,249,110 - b) Municipalities 1,781,889 - c) Other administration 1,979,455 - Advances 41,423 41,423 Other accounts receivable 135,053 135,054 Stocks 6,750,281 6,750,281 TOTAL SHORT TERM ASSETS 21,574,402 9,659,957 TOTAL ASSETS 53,259,661 41,345,216 Liabilities Capital and Reserves Social capital 12,488,942 28,984,281 To be capitalized 2,929,028 - Cum. deficit (22,620,819) - Profit or loss of the period (5,746,209) - Subsidies 15,354,606 5,822,989 TOTAL CAPITAL AND RESERVES 8,151,756 34,807,270 Long-term debt Government 5,059,352 3,148,973 Subscriber deposits 386,701 386,701 TOTAL LONG-TERM DEBT 5,446,053 3,535,674 SHORT-TERM LIABILITIES Suppliers 31,336,001 174,715 Foreign suppliers 31,059,059 (102,227) SINELAC 31,161,285 0 SNEL (130,127) (130,127) Other suppliers 27,900 27,900 Local suppliers 276,942 276,942 Other accounts payable 2,641,419 2,641,419 Debt toward government 1,415,161 - Short-term portion of long-term debt 4,269,271 186,137 65 TOTAL SHORT-TERM LIABILITIES 39,661,851 3,002,271 TOTAL LIABILITIES 53,259,661 41,345,215 Performance Management Contract (2008 ­ 2012) 17. Following the financial restructuring of REGIDESO, a five year performance management contract, valid from 2008 ­ 2012, was signed between GoB and REGIDESO on September 29, 2008. The performance management contract includes detailed obligations of both parties to ensure the financial sustainability of REGIDESO. An independent audit of the performance management contract was carried out in April 2010, analyzing through more than 35 indicators the technical and financial status of REGIDESO. 18. With regard to the financial restructuring and recapitalization of REGIDESO the audit analyzed the real financial situation as of December 31, 2007, based on the 2007 financial statements, updated the pro-forma balance sheet and made recommendation how to adjust differences. REGIDESO's financial performance indicators showed first progress toward achieving the annual performance contract targets. In addition the following main recommendations were made in order to ensure REGIDESO's financial equilibrium: (i) establish an accounting system separated by activity and service; (ii) update internal controls; (iii) establish 5-year investment plans; (iv) conduct a tariff study based on long-term marginal costs; and (v) improve the management of material stocks. Current financial situation (2007-2009) 19. On the operating side, REGIDESO made improvements in reducing technical and non- technical losses in electricity from 28% in 2005, 24% in 2007 and 20% in 2009. Revenue collection rates (excluding public arrears) improved markedly from 80% in 2008 to 99% in 2009. 20. REGIDESO's balance sheet situation improved significantly following the implementation of the restructuring plan, the ensuing capital increase and debt forgiveness. As a result, REGIDESO's leverage (debt/(debt + equity)) dropped from 64% in 2007 to 12% in 2009. Government arrears to REGIDESO were cut in half between 2007-2009 and total accounts receivable dropped from 28% of total assets in 2008 to 15% in 2009. 21. REGIDESO's profitability suffered in 2009 as a result of a strong increase in the cost of fuel from 3.4% of operating expenses in 2007 to 12.1% in 2009. As a result, REGIDESO recorded an operating loss in 2009. REGIDESO's future profitability will depend on the application of the agreed tariff increases in combination with the gradual phasing out of the fuel subsidies. 22. A summary of REGIDESO's financial performance from 2007-2009 is provided in Table 21 and Table 22. 66 Table 21: Summary REGIDESO's 2007-2009 financial statements (part 1) (in thousands of FBu) 2007 2008 2009 INCOME STATEMENT Revenues 20,417,036 24,726,352 25,466,025 Operating expenses 11,281,913 16,775,330 21,737,041 Energy purchase 1,368,464 3,487,022 4,304,152 Fuel & lubricant 381,988 471,389 2,622,432 Personnel 5,089,261 7,003,211 7,972,345 Other operating expenses 4,442,200 5,813,708 6,838,112 EBITDA 9,135,124 7,951,021 3,728,985 Depreciation & amortization 5,978,012 4,612,564 4,975,231 Operating income (loss) 3,157,112 3,338,457 (1,246,247) Net interest 1,986,433 8,512 220,272 Income Taxes 1,629,959 1,594,985 219,272 Net (loss) income (459,280) 1,734,959 (1,685,792) BALANCE SHEET Long term assets Net fixed assets 29,794,138 33,344,909 38,346,561 Work in progress 6,407,287 4,375,912 7,081,490 Other long term assets 354,502 177,845 891,218 Current assets Accounts receivable government 11,007,586 4,171,191 5,652,439 Other accounts receivable 8,810,903 5,447,133 5,688,167 Cash & cash equivalents 4,535,428 9,471,933 7,059,551 Other current assets 11,966,930 14,934,566 15,763,174 Total assets 72,876,774 71,923,489 80,482,601 Current liabilities 41,032,808 7,507,967 9,141,340 Suppliers 33,933,857 3,023,991 4,538,772 Accounts payable government 1,185,839 - - Other accounts payable 1,566,616 5,002,110 5,025,544 Short term debt 4,329,180 0 0 Long-term debt 5,421,893 483,858 531,007 Equity 26,042,383 63,079,226 69,931,340 Total liabilities and equity 72,876,774 71,923,489 80,482,601 67 Table 22: Summary REGIDESO's 2007-2009 financial statements (part 2) (in thousands of FBu) 2007 2008 2009 CASH FLOW STATEMENT Cash flow from operations 3,296,184 (17,970,393) (488,941) Net income (459,280) 1,734,959 (1,685,792) Adjustments 12,174,885 0 0 Depreciation & amortization 1,657,019 2,419,685 2,424,038 Losses (gain) on disposals (7,837) (52,122) 21,986 Changes in working capital (9,942,973) (21,573,945) (728,945) Other (125,629) (498,970) (520,229) Cash flow from investment (7,112,787) (3,610,918) (10,844,526) Cash flow from financing 6,929,337 26,517,815 8,921,083 Increase (decrease) in capital 0 21,199,074 (1,389,304) Increase in long-term debt 0 0 0 Grants from Gov. and donors 6,893,590 5,257,333 10,263,238 Debt service 0 0 0 Other 35,748 61,409 47,149 Increase (decrease) in net cash position 3,112,733 4,936,505 (2,412,384) Net cash position at the end of the year 4,535,428 9,471,933 7,059,551 Key financial ratios 2007 2008 2009 Income statement Operating income % of revenues 15% 14% -5% Net income % revenues -2.3% 7.2% -6.7% Working ratio 56.0% 69.4% 86.3% Fuel & lubricant cost % operating expenses 3.4% 2.8% 12.1% Balance sheet Current ratio 0.89 4.24 3.57 Debt/(Debt+Equity) 64% 11% 12% Return on assets (%) -0.63% 2.41% -2.09% Accounts receivable % total assets 28% 14% 15% Cash flow statement Debt service coverage 2.72 (2,051.60) 1.14 Working capital ratio (%) 0.89 4.24 3.57 Self-financing ratio (of investments) 3.1% -45.6% 5.4% Electricity tariff adjustment 23. The GoB is committed to maintain REGIDESO financial viability throughout this process by adjusting, in regular intervals, the tariffs applicable to electricity sales in Burundi to reflect the increased cost of fuel purchases. The financing of fuel requirements for power generation would follow the following principles (see Energy Sector Policy Letter): (i) The GoB has agreed on the principle of setting the tariff to allow REGIDESO to recover its total operating cost, including fuel for power generation, and achieve a positive return 68 on its assets. The long term tariff structure will be adjusted based on the recommendations made in the ongoing tariff restructuring study, funded by proceeds from the MSWEIP. (ii) To reflect the temporary increase in fossil fuel based power generation and the ever fluctuating price of petroleum products, the government will require REGIDESO to apply a fuel cost pass-through mechanism to directly reflect the increasing cost of diesel fuel on the electricity tariff. The provision of fuel subsidies from the IDA financed MSWEIP and the proposed project will allow a gradual adaptation of this principle during 2010-2011. (iii)The request for tariff adjustment based on fuel cost pass-through and available subsidies will be made by REGIDESO on a quarterly basis. The results of the government review of the request, including underlying cost structure and rationale for the adjustments, will be shared with participating development partners in the sector working group. 69 Annex 10: Summary of the complimentary IDA-financed MSWEIP BURUNDI: EMERGENCY ENERGY PROJECT Introduction 1. The IDA-financed Multi-Sectoral Water and Electricity Infrastructure Program (MSWEIP) is the first IDA investment project focusing on investments in the energy and water sector since the end of Burundi's long civil war and conflict. The MSWEIP is helping REGIDESO to restore its financial and commercial viability and the quality and continuity of services in the face of the increasing demand from individual consumers and economic agents. At the same time, the project supports strategic planning activities and studies, as well as strengthening the operational capacity of the main sector institutions in order to avoid or effectively reduce future gaps. The MSWEIP was approved on May 13, 2008, with an original IDA Grant of SDR 30.4 million (US$50 million equivalent). The closing date of the MSWEIP is scheduled for June 30, 2013. MSWEIP Project Development Objective and Components 2. The project development objective (PDO) of the MSWEIP is to: (i) increase access to water supply services in peri-urban areas of Bujumbura; (ii) increase reliability and quality of electricity services; (iii) increase water supply quality and reliability in Bujumbura; and (iv) strengthen REGIDESO's financial sustainability. 3. The MSWEIP consists of three components: (i) the electricity component (US$29.5 million), which supports urgent investments to rehabilitate the electricity supply system and reduce the supply/demand gap; (ii) the water component (US$14.1 million), which supports short-term investments to increase access to water supply, reduce losses and reinforce the capacity of the supply and distribution system; and (iii) the institutional component (US$3.3 million), which will support the strengthening of the capacities of both REGIDESO and MWEM. 4. The MSWEIP electricity component will focus on restoring a quality electricity supply by financing major rehabilitation of the backbone transmission and distribution grid and increasing generation capacity, while financing demand side activities to increase efficiency and reduce consumption at peak hours. In addition, the component will address medium to long-term energy needs by supporting technical studies on alternative energy sources, particularly for small run of the river type hydro power plants. Specifically, the following activities are planned under the MSWEIP electricity component: 1(a) Operational subsidy for thermal generation of electricity. The MSWEIPsupports the operation of the existing thermal generation plant, which will add 5.5 MW capacity to the system during peak hours, by providing funding to procure diesel fuel lubricants and critical parts for an average 8 hours per week-day operation over three years. The three year period will allow REGIDESO to address part of the existing energy deficit, especially during the dry seasons, while it develops additional hydropower capacity in the short-to-medium-term through micro-hydro power plants. The funding is in the form of a declining yearly subsidy (100 percent in the first year, 75 percent in the second year, and 50 percent in the third year). 70 1(b) Rehabilitation of transmission and distribution network. The MSWEIP finances urgent investments in the transmission and distribution system as identified by REGIDESO and consultants in a recent review of rehabilitation needs. When completed, the rehabilitation will improve security, reduce outage times and increase quality of supply in the national grid. These investments will re-establish the back-bone grid supply function paving the way for future access expansion. 1(c) Pre-feasibility and feasibility studies of small sized hydro power plants. To minimize the need for expansion of costly thermal generation capacity to supply the short and medium-term demand growth, the MSWEIP finances a study in three phases: (i) an initial scoping of the most promising six to eight sites identified in a 1983 study18 of hydro generation options; (ii) pre-feasibility studies of the most promising sites; and (iii) detailed feasibility and bidding documentation of the two best evaluated candidates from the previous phase. The plants would be of run-of-the-river type, thus not requiring any major dam works and could therefore be realized with limited environmental impacts in approximately two years. Small sized hydro power generation offers a credible low-cost alternative to bridge some of the expected medium-term supply deficit before larger hydro developments such as Kabu 16, Rusizi III and Rusumo Falls can be made operational. 1(d) Improved revenue collection. This MSWEIP subcomponent is financing the acquisition and installation of pre-payment electricity meters for household consumers and public institutions, adapted metering for large consumers/industries, and renewal of obsolete electricity meters. The component will also finance updated billing and client management systems to improve REGIDESO's ability to manage its client base and fight fraudulent practices. 1(e) Demand side management program. This MSWEIP subcomponent is focusing on energy savings by households, public institutions, industrial and large commercial customers. A key component of the efforts to bridge the supply/demand gap will be geared towards reducing consumption by consumers through promotion of energy efficient technologies and policies. This subcomponent includes the following activities: (i) Distribution and promotion of Compact Fluorescent Lights (CFL), (ii) Utility Energy Audit and (iii) Promotion of Energy Efficiency Investments to Large Consumers. 5. The MSWEIP water supply component is focusing on reducing Non-Revenue Water , expanding production facilities and networks, and extending the service to underserved northern and eastern peri-urban areas of Bujumbura. This component is coordinated with the African Development Bank with regards to the rehabilitation of the existing system and the extension of the southern primary network of Bujumbura. An update of Bujumbura's water master plan was prepared by international consultants as part of project preparation, and is guiding the implementation of the MSWEIP water component. Specifically, the following investments and studies are planned under the MSWEIP water component: 2(a) Reduction of Non-Revenue Water program. This MSWEIP sub-component is comprising (i) technical assistance to REGIDESO for the development of a 18 The study identifies 14 sites suitable for run-of-the-river operation with an installed capacity between 1 and 7.5 MW. "Etude du Développement des Ressources Hydro-Electriques du Burundi" Lahmeyer International, February, 1983. 71 comprehensive action plan for the reduction of technical and commercial losses in the system; and (ii) purchase of specific equipment (leak detection equipment, water flow meters, regulator pressure/pressure reducing valves), and equipment for the standardization of the connections, to allow for the implementation of the action plan. 2(b) Expansion of water treatment capacity. The MSWEIP funds the addition of a fourth slow sand filter to the existing water filtration plant (Usine du Lac), a reservoir (2,000 m3), and a pumping station equipped with one pump. The construction of this additional capacity will allow REGIDESO to increase its daily water production by 33,000 m3. 2(c) The expansion of the northern primary distribution network. The MSWEIP funds the construction of 15 km of transmission mains, three additional storage reservoirs (3,000 m3; 1,600 m3; and 1,600 m3 respectively), the construction of a new pumping station (three pumps installed) and the replacement of three existing pumps to serve the northern and eastern peri-urban areas of Bujumbura. 2(d) Extension of secondary distribution networks and expansion of standposts. This sub-component funds investments to (i) extend secondary distribution networks in those areas to reach a large number of additional standposts as a priority; (ii) rehabilitate and upgrade approximately 45 existing public standposts to convert them into more functional standpost kiosks, and (iii) to install approximately 85 additional standpost kiosks to improve supply to these areas. This MSWEIP sup-components focuses on the five peri-urban zones located north and east of Bujumbura that are characterized by deep poverty and a high proportion of displaced and resettled residents: Buterere, Kamenge, Kinama, Gihosha, and Musaga. These neighborhoods will benefit directly from the above-described extension of the primary network. 2(e) Engineering services for the detailed technical designs and the supervision of works. The MSWEIP funds consultant services to support the preparation of technical designs and specifications for the required bidding documents and conducts for REGIDESO supervision of works associated with the expansion of production capacity and the expansion of the primary and secondary networks in the project area, as detailed in components 2(b), 2(c) and 2(d) above. 6. The objective of the MSWEIP institutional strengthening component is to enhance sector capacity, efficiency and effectiveness enabling REGIDESO and MWEM to deliver improved electricity and water services. Specifically, this MSWEIP component is helping REGIDESO to: (i) meet specific performance indicators to improve operational and financial performance, through the execution of a performance contract with the state; (ii) provide institutional strengthening of REGIDESO including capacity building, technical assistance and investments in modern information systems to provide real time reporting and aggregated data to REGIDESO general management and finance functions; (iii) improve the planning and monitoring capacities of MWEM and its ability to provide support guidance to REGIDESO and other service providers; (iv) assist REGIDESO in launching a delegated standpost kiosk management program in the periphery of Bujumbura to improve service delivery at existing and new standposts; and (v) finance the operational costs and capacity building needed to establish the PIU in REGIDESO. A key objective of this component is to strengthen the contractual relationship between REGIDESO and the government (MWEM, Ministry of Finance and Ministry of Planning). The following activities are carried out: 72 3(a) Technical assistance to monitor the REGIDESO performance contract. This MSWEIP sub-component provides funds necessary to monitor and enforce the performance contract. In addition to a monitoring unit composed of government and REGIDESO representatives, a periodic external evaluation of the performance contract would be prepared. This will help to provide independent oversight and ensure accountability and transparency to the public in the execution of the performance contract. This regulatory mechanism is conceived as a first step toward the establishment of a permanent regulatory entity, as envisaged in the Law 1/014 of 2000. 3(b) Institutional strengthening, REGIDESO. This MSWEIP sub-component provides financing for technical assistance, capacity building and investment to facilitate corporate management and improve financial performance. The subcomponent includes financing to establish reliable information systems including interconnecting the four main offices of REGIDESO and main production and customer centers, an update of systems for enterprise resource planning and management information; and training and technical assistance to increase capacity of REGIDESO's financial and commercial functions. This MSWEIP sub-component also finances capacity building and training according to an agreed annual training plan for key personnel responsible for general management, technical, administrative and commercial functions. 3(c) Institutional strengthening, Ministry of Water, Energy and Mines. This MSWEIP sub-component funds capacity building activities within MWEM to enhance its ability to formulate policies and sectoral strategies. Among others, it is providing technical assistance for: (i) drafting the regulations for Law No. 1/014 (of 11/08/2000) that defines the principles, forms and conditions for private sector intervention; (ii) establishment of annual sector budget and execution reporting delivered in a timely and efficient manner; (iii) comprehensive tariff study to recommend a revised tariff structure that reflects the cost of service while providing necessary protection for the poor through the provision of an appropriate lifeline tariff block and adopted tariff scheme for public standposts; and (iv) monitoring sector operations, and the use of the financial model that has been developed during project preparation to evaluate and forecast REGIDESO's performance under different scenarios. This MSWEIP sub-component is also financing capacity building and training according to an agreed annual training plan for key personnel responsible for monitoring of utilities, and sectoral strategy and policy formulation. 3(d) Establishing within REGIDESO a program to delegate and oversee the services of standpost operators. This MSWEIP sub-component is supporting improved service and cost-recovery at new and rehabilitated standpost service points, and to build the capacity of standpost operators themselves through appropriate training and technical assistance. 3(e) Public information and consultations. A key objective of this MSWEIP sub- component is to disseminate information on the compliance of REGIDESO and the Government of Burundi with the obligations established in the performance contract in order to create social accountability. This MSWEIP sub-component funds the following activities: (i) Public consultation and information campaign and (ii) collection of monitoring data through recurrent surveys. 73 3(f) Support to the Project Implementation Unit (PIU) within REGIDESO. This MSWEIP sub-component finances the consultant services and operational costs of the PIU within REGIDESO. MSWEIP Implementation Arrangements 7. REGIDESO is responsible for the implementation and supervision of the project. A project implementation unit (PIU) was established within REGIDESO, which conducts the daily tasks of project implementation and periodic assessments of its progress. The unit is reporting to REGIDESO management and to the Director of Energy and Water in MWEM. It is coordinating closely with all of the relevant departments within REGIDESO to ensure the timely allocation of resources and execution of both investment and TA activities. The PIU has the ability to contract consultants but relies primarily on in-house staff in order to build and maintain capacity and institutional memory. The PIU is also responsible for the financial management of the project and for the preparation of financial reports regarding the project. The PIU is receiving financial support through the project, thus ensuring that it has the technical and management resources necessary to oversee the technical studies as well as the technical and financial aspects of implementation. REGIDESO's PIU is responsible for safeguards implementation. Two safeguards instruments were prepared during the implementation of the MSWEIP: Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF). All Environmental Assessments and Resettlement Plans for electricity and water infrastructure components are handled according to the provisions made in the ESMF and RPF. An environmental and social specialist is already in place in the MSWEIP PIU with satisfactory performance. MSWEIP Progress to date 8. The MSWEIP faced difficulties in the initial stages of implementation to launch the procurement process. The disbursement of the MSWEIP as of June 2010 was at US$7.8 million (representing approximately 16 percent of the original IDA grant). The delay is largely attributed to the utilities' lack of experience in implementing large scale investment projects and completing international competitive procurement processes. 9. Over the past six months, significant progress has been made by REGIDESO to improve procurement processes. The joint IDA water and energy sector task team has provided intensive implementation support and the construction and rehabilitation of main electricity and water infrastructure is expected to start in the third quarter of 2010. Currently, all scheduled procurement actions have been launched and are nearing completion (see Annex 5). With this recent progress and REGIDESO's updated action plan for finalizing the procurement process it is reasonable to estimate that 70-80 percent of the project funds allocated to the electricity component would be committed by end-July 2010. Similarly at least 70-80 percent of the project proceeds allocated under the water component are expected to be committed by December 2010. The construction of additional capacity to allow REGIDESO to increase its daily production by 30,000 m3 (30 percent of the installed capacity) has been contracted out since April 2010. The package for the expansion of the northern primary distribution network and extension of secondary distribution networks and expansion of standposts has been elaborated and contracting 74 is expected to be completed by the second quarter of 2010. Disbursement projections for 2010 point towards a marked improvement (from about 11 percent in June 2010 to about 26 percent in September 2010) and are likely to reach 30 percent by December 2010 The ongoing improvement in the procurement and disbursement performance would put the implementation back on track for completion of the project activities by the original project closing date of June 30, 2013, and would upgrade the performance ratings to "moderately satisfactory" by December 2010. 10. The focus on improved MSWEIP performance is anchored at the highest levels of government and utility management. The "Rapid Results Initiative" (RRI) launched March 4, 2010 is aiming to accelerate the disbursement rate of the MSWEIP to reach 20 percent in the following three months.19 The RRI includes a detailed action plan tied to an updated MSWEIP procurement and processing time table with clear individual responsibilities, tight deadlines and over-sight from the Ministry of Water, Energy and Mines and the 2nd Vice Presidency.20 11. The joint IDA water and energy sector task team are providing intensive implementation support to REGIDESO to address the limitations in implementation capacity. This includes increased field presence with extended implementation support missions and monthly meetings and bi-monthly video conference sessions with the utility management and the PIU. 19 The MSWEIP disbursement rate increased to 25 percent by the end of August 2010, thus reaching the targets set forth in the RRI with a two months delay. 20 The Burundi Ministry of Water, Energy, and Mines reports to the 2nd Vice Presidency. The World Bank team has reviewed the arrangements in place for high level supervision of the MSWEIP RRI and is satisfied with these. 75 Annex 11: Documents in Project Files BURUNDI: EMERGENCY ENERGY PROJECT Economic and Financial Burundi Country Economic Memorandum (CEM), December 2009 Burundi Quarterly Economic Report, April 2010 Economic Analysis of the Project, Excel File, June 2010 Technical Réhabilitation des centrales hydroélectriques de RWEGURA, NYEMENGA, KAYENZI ET MARANGARA, SOGREAH, Janvier 2009 Etude du Développement des Ressources Hydro-Electriques du Burundi, February 1983 Establishing a 7-10 MW Thermal Power Station at Bujumbura, Burundi, December 2007 Revue de l'étude de réhabilitation des postes haute tension, modernisation et extension des systèmes de protection, de télécommunication et de teléconduite, Janvier 2008 Expertise des barrages pour centrales hydroelectriques et leurs equipements de vantelleries, Rapport de l'expertise genie civil et electromecanique du barrage de Rwegura, SOGREAH, 2006 Etude de préparation détaillée des activités la Gestion de la Demande Energétique au Burundi « DSM » et Dossier d'appel d'offres pour l'acquisition du matériel Etude sur les compteurs prépaiement ­électricité (évaluation, proposition scaling up, préparation DAO achat matériel) au Burundi Etudes techniques relatives à la réhabilitation du réseau HT, y compris l'intégration d'un système de dispatching, SOGREAH Safeguard-related Cadre de Gestion Environmental et Sociale (CGES ­ CPRP) Strategic/Sectoral, Social and Environmental Assessment of Power Development Options in the Nile Equatorial Lakes Region ­ March 2007 Laws, Contracts, Audits Audit Technique du Contrat-Plan intervenue entre la REGIDESO et le Gouvernment Burundais, April 2010 Contrat Plan entre le Gouvernement du Burundi et la REGIDESO, Septembre 2008 Réforme des secteurs eau et électricité, restructuration de la REGIDESO et mise en place de l'Autorité de Contrôle et de Régulation, 2003 REGIDESO Documents Annual Reports 2007 ­ 2008 Etude Diagnostic du système d'information, Janvier 2008 Evaluation et Modélisation financière intégrée et Managériale de la Regideso (eau et électricité), 2008 Manuel d'Exécution du Projet multisectoriel d'infrastructures (Eau-Electricité) Rapport final sur la restructuration financière de la REGIDESO, 2003 Audit financier de la REGIDESO, exercice 2003-2004-2005 76 Annex 12: Statement of Loans and Credits BURUNDI: EMERGENCY ENERGY PROJECT Burundi Committed and Disbursed Outstanding Investment Portfolio As of 07/31/2010 (In USD Millions) Committed Disbursed Outstanding **Quasi Partici **Quasi Partici FY Approval Company Loan Equity Equity *GT/RM pant Loan Equity Equity *GT/RM pant 2009 Dtb burundi 0 0.85 0 0 0 0 0.85 0 0 0 Total Portfolio: 0 0.85 0 0 0 0 0.85 0 0 0 77 Annex 13: Country at a Glance BURUNDI: EMERGENCY ENERGY PROJECT 78 79 Annex 14: Map IBRD 33380 BURUNDI: EMERGENCY ENERGY PROJECT 80 IBRD 33380 BURUNDI SELECTED CITIES AND TOWNS MAIN ROADS PROVINCE CAPITALS PROVINCE BOUNDARIES NATIONAL CAPITAL INTERNATIONAL BOUNDARIES RIVERS 29°E 30°E 31°E Lake This map was produced by the Map Design Unit of The World Bank. To Kigali Kivu The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any To endorsement or acceptance of such boundaries. Gitarama Kagera Lake Lake Rweru Cohoha R WANDA KIRUNDO To Cyangugu Kirundo To Butare To Rulenge u ar y u an uv uv K R CIBITOKE MUYINGA NGOZI Muyinga To Cibitoke Nyakanura Ngozi Kayanza Rusiba 3°S Musada Ruvuvu 3°S Buhiga To Bubanza AYA AY K AYA N Z A Karuzi si Kakonko M w eru BUBANZA izi KARUZI CANKUZO Rus vu Cankuzo vu Muramvya V YA Ru R AM MU To Uvira BUJUMBURA L uvironza Gitega WA M WA R O RA Ruyiga DEM. REP. Mwaro RUYIGI BU OF CONGO GITEGA To Kibondo M gu JU p un Mt. Heha U Rum (2,670 m) Bukirasazi B Matana TA NZA NIA BURURI Mutangaro R U TA N A Bururi Most distant Rutana Rumonge headwater of the Nile River 4°S 4°S Makamba BURUNDI MAKAMBA z i ara Mabanda r ag Mu Lake Nyanza-Lac Tanganyika To Kasulu 0 10 20 30 40 Kilometers 0 10 20 30 Miles 29°E 30°E 31°E SEPTEMBER 2004