Version 2 final – October 23, 2020 Guinea Bissau: Power Sector Policy Note EXECUTIVE SUMMARY The electricity sector in Guinea Bissau is in the midst of a transformational reform towards a sustainable development characterized by reliable, greener and affordable service delivery. The electricity sector has been trapped in a downward spiral for decades due to political instability, poor management, lack of planning and vested interests, which resulted in poor service to a small part and no service to most of the population. Only 29% of the population (less than 10% outside the capital) has access to electricity, far below the 48% average in countries in Sub-Saharan Africa. The national grid is fragmented between the capital Bissau, which benefits from a distribution network recently upgraded to 10 kV and stable power supply, and several poorly performing and costly isolated systems in interior cities, e.g. Bafata and Gabu. The national water and electricity utility, Electricidade e Aguas da Guinee Bissau (EAGB), under the supervision of the Ministry of Natural Resources and Energy, has had an historical dismal performance which has constrained the provision of electricity and water services only to the capital, Bissau. The Bank’s investment in densifying the distribution grid around OMVG substation should increase access to electricity to 39 %. But the dynamics have started to change. Since February 2019, power supply has dramatically improved by a 30 MW heavy-fuel oil power ship (Karpower), wherein a private operator supplies electricity under a power purchase agreement (PPA) with EAGB (17 MW are supplied during the current 1st phase). Under this arrangement, the private operator is responsible for fuel purchases (and not EAGB as it was before 2019). This new source of generation has eliminated diesel theft, doubled the available generation capacity, reduced the unit generation cost from US$ 0.29/kWh to US$ 0.18/kWh and saved the national utility EAGB between US$ 8.4-12 million annually in fuel costs. The World Bank financed a transaction advisor to support the Government throughout the process to award the PPA. Prospects for further reduction in cost of supply are promising, with the operationalization of the OMVG interconnector currently under construction expected in 2022, and significant interest to develop domestic solar generation. A management contract between EAGB and the consortium Electricidade de Portugal (EDP)– Aguas de Portugal (ADP)–LBCS financed by the World Bank, has been effective since August 2019. As a result of the initial actions implemented by the “new� EAGB under a Management Improvement Plan, i.e. roll-out of pre-paid meters, cash shortfall has been reduced by half from US$ 1.3 million to US$ 600,000 monthly since 2018. However, all staff from the management contractor has left the country due to the COVID-19 pandemic and the contract has been suspended. Until the contract can be resumed, the Government has appointed a local management team to continue with the company’s operations and reform process. As a result of the Government’s efforts in reducing the cost of electricity generation and improving EAGB’s management and operational performance, the average cost of electricity service has been reduced from US$ 0.60/kWh to US$ 0.42/kWh. Despite this progress, the average electricity tariff at US$ 0.38/kWh does not recover costs yet. Thus, the Government and EAGB would need to deepen their engagement to the proposed reform path in order to achieve a financially sustainable sector. The reduction of electricity generation costs through the upcoming electricity imports and domestic solar production, as well as the improvement in EAGB’s operational performance, for 1 Version 2 final – October 23, 2020 instance by improving revenue collection and reducing losses to within Sub-Saharan averages, offers a great opportunity to turnaround the sector. The present Policy Note identifies the most pressing actions and reforms across three pillars to achieve a sustainable satisfactory performance of the power sector in Guinea Bissau (Table 1). The first pillar encompasses actions related to the systematic optimized least-cost planning and implementation of investments in all segments of the supply chain, including the expansion of electricity access. The implementation of these actions under this pillar are the responsibility of the Government. The second pillar includes actions related to the efficient operational performance of EAGB in all business areas. The third pillar identifies actions to improve the sector’s financial sustainability. Table 1. Key pillars and actions to achieve sustainable satisfactory performance of the power sector in Guinea Bissau Time frame Policy impact I. Systematic optimized least-cost planning and implementation of investments - Approve the 2020 Least Cost Generation Expansion Plan and procurement Short term procedures - Complete review of implementation status of donor-led projects in the power Short term sector (generation, transmission, distribution), update implementation timelines and identify challenges and solutions - Consolidate donor coordination group meetings led by the Ministry of Natural Short term Resources and Energy - Recruit a transaction advisor and complete grid integration and site assessment Short term studies for development of solar PV with battery storage - Complete and adopt a national electrification strategy to achieve universal Medium term access to electricity - Monitor implementation progress to reach construction completion of OMVG Medium term and ECOWAS-Regional Electricity Access projects - Complete training by senior staff of Ministry of Natural Resources and Energy Medium term and EAGB on Power Purchase Agreements (PPA) with IPPs - Complete technical study for the construction of a least cost HFO supply chain Medium term and storage system for the 15 MW Bor power plant (financed by BOAD). II. Efficient operational performance of EAGB in all business areas - Reinstate EAGB management contract Short term - Reduce labor costs by facilitating the retirement of eligible staff with Government support Short term - Ensure that a performance contract is signed between EAGB and the Short term Government - Prepare feasibility study on management options for EAGB following Medium term completion of management contract in 2022 III. Financial sustainability - Publish audited financial statements and annual report Short term - Complete a cost of service study and adopt methodology for EAGB’s Annual Short term Revenue Requirement - Complete construction and energize the 30 kV transmission ring around Bissau Short term financed by AfDB. - Prepare a debt restructuring plan with world-class technical assistance Medium term - Renegotiate contract with Karpower before starting Phase II (30 MW) Medium term 2 Version 2 final – October 23, 2020 I. INTRODUCTION and SECTOR CONTEXT 1. This policy note builds upon the results of the Least Cost Generation Expansion Plan and the Sector Financial model prepared with World Bank support during the last two years and aims to prioritize short and medium-term reforms along the electricity supply chain to improve service delivery, ensure sector sustainability, and reduce the sector’s impact on the government budget. The policy note proposes actionable measures that could help improve the sector’s outcomes, provided that the Government takes a strong leadership to implement key actions. 2. The Ministry of Natural Resources and Energy (MNRE) and Electricidade e Aguas da Guine-Bissau (EAGB), are the two main actors in the power sector. The MNRE is responsible for government policy, regulation and oversight of the sector. EAGB is a state-owned company responsible for the production, distribution and commercialization of water and electricity. Its concession area covers the entire territory of Guinea-Bissau but at present its activity is in fact limited to the capital city of Bissau. On January 17, 2019 the Council of Ministers approved the revised statutes of EAGB to bring them into alignment with OHADA’s Uniform Acts1. The new statutes transformed the publicly owned company in a limited company whose only shareholder is the State of Guinea Bissau. The World Bank provided technical assistance support throughout the process. 3. Historically, EAGB has not been able to operate electricity generation assets and manage a fuel supply chain. In 2014, the World Bank financed two HFO generators for EAGB with a total capacity of 5 MW, but both broke down shortly after commissioning. The original plan was to install the 5 MW generators at the site of the 15 MW HFO plant planned to be constructed in the city of Bor near the capital. However, the 15 MW HFO plant financed by the BOAD has not yet been constructed after a six-year delay. In view of the sudden lack of sufficient installed generation capacity, the government was forced to sign a costly emergency rental contract with Aggreko in 2014 consisting of containerized diesel units with a total capacity of 15 MW. The contractual obligation for EAGB to purchase the diesel has not been a successful experience due to the high cost of the fuel and the thefts along the diesel supply chain. EAGB’s inability to afford costly diesel purchases led to recurrent supply crises, such as a 5-day blackout in May 2018, and frequent blackouts of 4-12 hours a day in the capital. 4. Guinea-Bissau has one of the lowest electrification rates in Sub-Saharan Africa with only 29 percent2 of the population -around 53 percent in urban areas- having access to electricity (Figure 1). Several isolated grids provide electricity throughout the country, while a low and medium voltage grid serves around 60 percent of the capital’s population. Guinea-Bissau is part of the OMVG interconnection project which will develop a 225 kV high-voltage transmission interconnection3. The country is also part of the ECOWAS-Regional Electricity Access Project4 which will increase electrification rate in the impoverished regions from the OVMG substations and allow low-cost electricity imports. According to the West Africa Power 1 OHADA Uniform Acts: https://www.ohada.org/index.php/en/45-l-organisation/textes-de-reference/505-actes-uniformes-de-l- ohada-en 2 Global Tracking Framework, 2018: https://trackingsdg7.esmap.org/country/guinea-bissau 3 OMVG interconnection project (P146830) approved by the Bank Board on April 29, 2015. 4 ECOWAS regional electricity access project (P164044) approved by the Bank Board on December 13, 2018. 3 Version 2 final – October 23, 2020 Pool (WAPP) Master Plan, Guinea Bissau has an estimated unconstrained electricity peak demand of 63 MW countrywide, which is more than double the installed generation capacity (~30 MW). In the last decade and until February 2019, the demand-supply gap was even larger since the only generation capacity was 15 MW of rented containerized diesel generators. Figure 1. Access to electricity in Guinea Bissau and Sub-Saharan Africa 80 70 67 60 60 51 48 50 % 40 29 30 20 10 0 Mali Senegal The Gambia Sub-Saharan Guinea Bissau Africa Source: Global Tracking Framework, 2018 5. The electricity sector has been trapped in a downward spiral for years due to political instability, lack of planning, vested interests, fragmented donor assistance and poor EAGB management, but the dynamics have started to change. These factors have undermined EAGB’s capacity to supply affordable and good quality power to most of the population and has forced a minority of affluent individual and private sector consumers to rely on expensive back- up generators. Political interference has constantly affected EAGB’s management due to the absence of a strong and technically qualified Board of Directors. The shortage of qualified staff in key management positions, the absence of well-defined corporate internal processes, and the lack of adequate information technologies for regular business operations, have led to EAGB’s weak performance, with only 68 percent bill collection rate and 30 percent total network losses (Table 2). However, the Government emerging from the November 2018 elections took a reformist stance to get the sector out of its permanent crisis. Indeed, the government adopted vigorous measures to eliminate vested interests in the diesel supply chain for power generation, and to strengthen EAGB’s governance. Thus, the 15 MW diesel-based Aggreko generators were replaced by a 30 MW HFO Karpower barge with the support of a transaction advisor financed by the World Bank. This fuel switch eliminated the existing theft of diesel and reduced fuel costs, which were hindering any attempt to improve EAGB’s financial and operational recovery. 6. The 5-year Power Purchase Agreement (PPA) signed between Karpower and EAGB was structured in two phases: an initial one-year phase of 17 MW and a second 5-year phase of 30 MW. The PPA stipulated that the second phase would start with the commissioning of the 30 kV ring around Bissau, financed by the African Development Bank. Due to continuous delays in this piece of infrastructure, the transition from 17 MW to 30 MW has not yet occurred. In absence of the transmission infrastructure, the distribution grid concentrated in Bissau is not able to support modern economic activity due to decades of lack of investment. The distribution network is composed of 344 km of 0,4 kV low voltage lines, 46 km of 6 kV lines (currently being replaced by 10 kV lines) and 68 km of 10 kV lines. Cities in the interior of the country (Bafata, Canchungo or Gabu) rely on private diesel generators for electricity supply. Bambadinca has a 312 kWp solar PV-hybrid mini-grid, which is the only one in operation in the country. 4 Version 2 final – October 23, 2020 7. The electricity supply cost (from generation to final consumer) has decreased from US$ 0.60/kWh to US$ 0.42/kWh due to the replacement of the diesel generation by more affordable HFO based production. The key drivers of electricity service cost are the following: (i) contract with Karpower (62%); (ii) debt service (14%); (iii) EAGB staff costs (10%); (iv) operation and maintenance (10%); and (iv) other costs (5%)5. Despite an average tariff of US$ 0.38/kWh, which is high compared to regional peers, EAGB has been incurring annual deficits of around US$17 million (CFAF 9.5 billion)6 covered with loans from local commercial banks, which has saddled EAGB with a US$42 million debt7 (23.5 billion FCFA). EAGB’s delicate financial position puts additional pressure on the quality of electricity supply due to insufficient investments in assets, equipment and staff. 8. In addition, a management contract between EAGB and the consortium Electricidade de Portugal (EDP)–Aguas de Portugal (ADP)–LBCS financed by the World Bank, has been effective from August 2019 until June 2020. Due to the COVID-19 pandemic, the management contractor’s team left the country, the contract was suspended, and an interim local management team appointed by the Government. The management contractor had started the implementation of a Management Improvement Plan8, which led to the reduction of EAGB’s cash shortfall by half from US$ 1.3 million in 2018 to US$ 600,000 monthly in 2020 due to the reduction in costs and the increase in revenues, i.e. roll-out of pre-paid meters. The Government and the management contractor are expected to agree on the contract resumption date as soon as the effects of the pandemic recede in the country. Table 2. Power sector basic facts Value Electricity Access rate 29%: 53% in urban and 10% rural areas Number of electricity customers 72,230 (2019) Installed capacity 30 MW: 17 MW current PPA (2020) Energy mix 100% HFO (2020) Share of private sector in generation 100 % (2020) Average cost of service $0.42 / kWh (2019)9 Average tariff $0.38 / kWh (2019) Average T&D losses 30%10 Electricity bill collection rate 68%11 5 These include fixed costs, e.g. EAGB’s main building rent, and third party services. 6 Annual average deficit 2017-2019. As the last information provided by the interim management team in June 2020, institutional clients, through the Ministry of Finance, pay a fixed monthly fee of 500 million FCFA since 2017 (not accounted as subsidy). However, this amount accounts for less than their actual consumption. This situation has led to public arrears of about 2 million FCFA from 2017 to June 2020. 7 Source: EAGB interim management team report, June 2020. The debt is reported to be 32.3% short term and 67.7%medium and long term. However, financial statements are not public nor audited yet. In 2020, EAGB’s revenues are around US$2 million per month. 8 A new corporate image and website has been created: https://eagb-gb.com/ 9 Cost of service per electricity billed. 10 Total losses includes T&D (~24%) and unbilled consumption of the water sector (~5%) losses. 11 Average 2015-2018 5 Version 2 final – October 23, 2020 II. KEY ISSUES and SECTOR CHALLENGES 1. The 2020 least cost generation expansion plan recommends moving away from diesel for power generation towards low-cost electricity imports, domestic solar photovoltaic with batteries and hydropower, together with HFO generators for improving security of supply and grid stability (Figure 3). The commissioning of the 30 MW Karpower HFO power barge has put an end to the problems of availability and reliability of electricity supply to the capital Bissau but has kept the risky dependency from one generation source. The main reason is the lack of timely implementation of other least-cost donor-financed power generation projects. Figure 2. Projected electricity demand in Guinea- Figure 3. Guinea-Bissau’s optimal least-cost energy Bissau (MW) mix 2020-203512 100% 286 273 90% 260 247 234 80% 221 208 70% 195 182 60% 169 157 142 145 50% 130 134 140 123 129 118 107 112 118 40% 103 96 101 90 85 90 30% 74 79 63 68 20% 10% 0% 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Scénario Bas Scénario Haut Solaire PV Thermique Fioul Hydro Imports ENS Source: WAPP Master Plan. Source: Least Cost Generation Expansion Plan, 2020. Figure 4. The West African Power Pool 12 Note: “ENS� means suppressed demand and “Thermique Fioul� means heavy-fuel oil. 6 Version 2 final – October 23, 2020 2. The Government is developing a 15 MW HFO power plant in Bor financed by the West African Development Bank (BOAD), but its construction has been significantly delayed The Bor power plant is expected to have three “dual-fuel� engines, i.e. HFO/diesel, and is expected to operate primarily on HFO. The construction contract for this plant was awarded to the French company JA Delmas for an amount of 15.85 billion FCFA, and the duration of the work was expected to be 17 months. However, the project design has not included an assessment of the HFO supply chain and storage system and, thus, there is a risk of regressing backwards to the use of costly and unsustainable diesel generation. The works and dates of commissioning have been announced and postponed several times. The kick-off of the construction works was on November 15, 2017, but, to this date, they have barely started on-site. 3. Big delays in the implementation of generation projects and their divergence from the least-cost generation expansion plan had a negative impact on the quality of electricity service and the country’s debt management13. However, the Government had taken corrective measures two years ago. Previous administrations had signed a loan agreement with the BADEA to build a 22.4 MW diesel power plant. However, the preliminary draft of the least cost generation expansion plan presented at the energy experts’ consultation of July 16, 2018, showed that this project was not part of the least-cost generation mix. Thus, the Government decided to reconsider the implementation of this project given its high costs and reallocate the funding to rehabilitate the distribution grid. 4. In the short term, EAGB needs to ensure close monitoring and sound management of Karpower’s contract and honor its payment obligations in a timely manner. Since February 2019, the commissioning of a 30 MW HFO power ship from Karpower has reduced electricity generation costs by 34 percent reaching US$ 0.18/kWh14, bringing up to US$12 million in annual savings to EAGB and eliminating financial losses created by diesel theft. This is the only power generation source providing electricity to Bissau, so extreme care should be devoted by EAGB to this contract, while the Government might provide support as needed. Despite the 5-year duration of contract with Karpower, this project should be conceived as a temporary solution to bridge a supply-demand gap and allow effective implementation of strategic projects, such as importing low-cost electricity and more affordable local generation. EAGB’s financial position could experience a turnaround point by 2022 (as shown in Figure 6) if new low-cost sources of generation are commissioned in time, such as HFO, electricity imports and solar photovoltaics with batteries. Under this scenario, the conditions could be met to explore potential electricity tariff reductions by end 2022. 5. The transition to cleaner energy sources such as hydro-based electricity imports from Guinea and solar energy will further decrease average generation costs to US$ 0.12/kWh15 by 2035 at the latest. As part of the OMVG interconnection project, Guinea Bissau will benefit from the electricity production of hydroelectric projects under development in Guinea. These include the Kaléta (240MW) hydropower plant in operation since 2015, and Soaupiti (480MW) on the Konkouré River. The capacity allocated to Guinea Bissau has been set at 27.5 MW and the share of energy at 167 GWh per year. The Power Purchase Agreement signed in December 2019 13 IMF Staff Visit to Guinea-Bissau on January 14-18, 2019 drew the authorities’ attention on the misalignment between the pipeline of investment projects and the public investment plan and 2019 draft budget. Among others, IMF mentioned that there “is no room to continue with the BOAD-financed power project in Bor on the current timetable for completing construction by end-2019, implying disbursements of about CFAF 16.4 billion in 2019 against CFAF 1.6 billion in the draft budget�. 14 Generation cost per unit of electricity injected to the network. 15 2020 Least Cost Generation Expansion Plan estimates that the average electricity generation cost will be reduced to US$ 0.12/kWh by 2035. 7 Version 2 final – October 23, 2020 between both Governments established an average purchase price of US$ 0.11/kWh for Guinea Bissau. The West Africa Power Pool (WAPP) (Figure 3) will provide additional opportunities to reduce the costs of electricity and to increase access to reliable energy. 6. Scaling-up the country’s solar potential through private sector participation will be transformational for the local economy. In October 2017, the Government signed a US$ 45 million loan with the BOAD for the construction, operation and maintenance of a 20 MW solar PV plant in Bissau and a 1MW plant in Gabu and Cachungo respectively. The EPC contract was awarded in March 2020 and construction has not yet started. An additional 30 MW of solar PV in Bissau, 36 MW in countryside cities and two solar PV mini-grids in the Bijagos islands could be developed according to a feasibility study completed in April 2020 with the support of the World Bank and ESMAP. In Bissau, solar photovoltaic (PV) plants will help reduce the average cost of electricity in the country and diversify the energy mix, while battery storage will help integrate this variable energy source into the grid. In Bafata, Gabu and Cacheu, the PV plants will provide cheaper and cleaner local power generation than current diesel production. In the Bijagos islands (Bolama, Rubane and Bubaque), hybrid mini-grids will increase access to electricity among the local population, as well as improve the quality and reduce cost of electricity supply, which will contribute to unleash the islands’ tourist potential. 7. The construction of key transmission infrastructure under the OMVG project is experiencing delays due to safeguards-related issues and the impact of the COVID-19 pandemic but should be completed during the first half of 2022. The associated ECOWAS regional access project will boost electricity access in Guinea-Bissau to 39 percent16. The OMVG will have around 300 km of a 225 kV transmission line in Guinea Bissau, and four high- voltage 225/30 kV substations (Mansoa, Bissau, Bambadinca and Saltinho). The ECOWAS regional access project will extend and strengthen the distribution network in Guinea-Bissau from the planned four high-voltage substations, and supply electricity to 198,000 additional people (33,000 households) by 2022. A low-hanging fruit opportunity to bring electricity to additional 31,443 households exists.17 8. Around US$ 263 million of public and private funding will be needed to achieve universal electricity access in Guinea Bissau by 2030. To achieve this goal, a combination of grid (70%) and off-grid (30%) solutions will be required to bring 400,000 additional new connections18. These estimates would need to be confirmed by a country-wide least-cost geospatial planning analysis that would underpin a National Electrification Strategy. The analysis will assess the potential options that comprehensively address nationwide electrification (via grid expansion, isolated networks and/or standalone systems) and provide details on the investment financing requirements. 9. Next section highlights suggested key actions and recommended reform priorities for the Government across three strategic pillars: (I) Systematic optimized least-cost planning and implementation of investments in all segments of the supply chain; (II) Efficient operational performance of EAGB in all business areas; and (III) Financial sustainability 16 ECOWAS regional electricity access project (P164044). 17 The Government and donor partners should use the available technical studies, including the feasibility study conducted by IRAF (August 2018) which identified 68,443 households (684,430 people) with potential to be electrified by low-cost grid extension technologies. 18 World Bank, Africa Energy Access Initiative, 2020. 8 Version 2 final – October 23, 2020 Figure 5 – EAGB’s financial turnaround with improved operational performance (Cash shortfall FCFA million) Network losses: 25% Share of pre-paid sales: 95% Collection rate (post-paid): 80% 10000 7847 6402 5000 3557 2022 2023 2024 2025 2017 2018 2019 2020 2021 473 0 -5000 -4138 -4444 -4220 -4813 -4770 -5320 -5395 -6088 -5736 -6532 Current levels of Network losses, Share of pre- -10000 paid sales and Collection rate (post-paid) Source: World Bank, 2020 Figure 6 – EAGB’s financial turnaround with improved operational performance and energy mixed (Cash shortfall FCFA million) Source: World Bank, 2020 9 Version 2 final – October 23, 2020 III. KEY ACTIONS and REFORMS Pillar I - Systematic optimized least-cost planning and implementation of investments in all segments of the supply chain: 10. The Ministry of Natural Resources and Energy (MNRE) and EAGB management need to carry out high-quality studies, in addition to training and capacity-building, to improve their planning capacity and achieve a financially sustainable sector. The World Bank provided technical assistance for the drafting of a least-cost generation expansion plan and a sector financial model, but those tools have not yet been adopted. Both documents underpinned the emergence of a shared vision among key stakeholders of the optimal least-cost energy mix to meet electricity demand in Guinea-Bissau, as well as the critical factors that could help turnaround EAGB’s financial position (Figure 5 and 6). In the short-term, therefore, the recommendations are the following: 11. Approve the 2020 Least Cost Generation Expansion Plan (LCGEP): A LCGEP was prepared with World Bank support by a Steering Committee composed of representatives from the MNRE, EAGB and the PUASEE project Coordination Unit. The formal approval of the LCGEP by the Government is recommended to provide a sound diagnostic and roadmap to the MNRE and key stakeholders on the least cost energy sources and investment requirements to meet projected demand until 2035. In addition, the LCGEP approval is a disbursement condition under the Bank- financed PUASEE project yet to be met. 12. Review implementation status of donor-led projects in the power sector (generation, transmission, distribution): In Guinea Bissau, power sector projects are approved but seldom completed within a reasonable time frame. This situation creates significant challenges for the development of the sector and imposes a heavy fiscal burden. It is recommended that MNRE takes stock of the implementation status of different projects, updates their completion timelines and defines an action plan to improve implementation of projects without reasonable progress. 13. Consolidate donor coordination group meetings to be led by the Ministry of Natural Resources and Energy: The World Bank, in cooperation with the African Development Bank, has chaired the power sector donor coordination group in the last two years, which has included the BADEA, BOAD and the EU. The regular virtual meetings have been proven helpful to exchange valuable information on project implementation and improve coordination to maximize development outcomes. It is recommended that MNRE takes the lead in organizing and chairing the donor coordination group to improve its effectiveness and coordination. 14. Recruit a transaction advisor and complete grid integration and site assessment studies for development of solar PV with battery storage: As part of the 2020 Least Cost Generation Expansion Plan and as a result of the ESMAP-financed feasibility study for scaling-up solar PV (April 2020), the Government might consider increasing private sector participation in the sector by tendering 30 MW of solar PV in Bissau, 36 MW in interior cities under IPP scheme. The improvement of EAGB’s operational performance and financial position is a pre-condition for this approach. It is recommended that a transaction advisor is recruited to assist EAGB and the Government in structuring the proposed solar projects with a sound risk allocation and coordinate technical studies, e.g. grid integration and site assessment. The Solar Resource Management 10 Version 2 final – October 23, 2020 Initiative (SRMI) is a technical assistance program managed by ESMAP that could support Guinea Bissau in this regard. 15. The completion and adoption of a National Electrification Strategy is recommended to have a shared vision on how to achieve universal electricity access in Guinea Bissau optimally. The recently approved World Bank-financed ECOWAS regional access project is expected to significantly increase the access to electricity in the next three years, but more needs to be done. The National Electrification Strategy would provide clear and transparent criteria and procedures to: (i) define the responsibilities of key stakeholders, including EAGB and MEIRN; (ii) prioritize electrification projects; (iii) identify the level of service to be provided; (iv) select technical solutions in accordance with the identified level of service; and (v) define investment financing modalities, i.e. government subsidies, donor support. 16. The Government’s close monitoring of the implementation progress of the OMVG and ECOWAS-Regional Electricity Access projects would support their timely completion. Both projects have well-staffed Project Coordination Units that would benefit from enhanced monitoring by the Ministry of Natural Resources and Energy (MNRE) that could provide implementation support whenever needed. The regular monitoring by the MNRE would facilitate coordination and contribute to accelerate implementation of these strategic projects. The information on project status and key challenges would be reported to the donor’s coordination group chaired by the MNRE mentioned above. 17. Complete training by senior staff of Ministry of Natural Resources and Energy and EAGB on Power Purchase Agreements (PPA) with IPPs: In Guinea Bissau, the power purchaser EAGB has signed two PPAs so far: the first with the Karpowership company for a 30 MW HFO power barge, and the second with Electricité de Guinée (EDG), the national public electric utility of Guinea, for importing power through the OMVG transmission line by 2022. In both cases, EAGB had external technical and legal advisors and the Government was deeply involved. At this critical juncture for the development of the sector, it is recommended to strengthen the capacities of key stakeholders on PPAs for IPPs through tailor-made trainings that are currently being provided by the World Bank in other countries of the region. 18. Complete technical study for the construction of a least cost HFO supply chain and storage system for the 15 MW Bor power plant (financed by BOAD). The 2020 Least Cost Generation Expansion Plan presents a base scenario where electricity imports could increase from 0% in 2020 to 65% in 2025, whereas domestic generation through HFO would decrease from 100% at present to 15% in 2035. The planned 15 MW HFO power plant in Bor financed by the BOAD is expected to cover this part when the 5-year Karpower contract is completed. At this stage, however, the Bor project has experienced significant technical challenges and implementation delays. More importantly, it is recommended that the Government strengthens the project’s technical design by ensuring an optimum HFO supply chain for the power plant. Thus, the completion of a technical study for the construction of a viable HFO supply chain and storage system is required. 11 Version 2 final – October 23, 2020 Pillar II - Efficient operational performance of EAGB in all business areas: 19. The management contract between EAGB and the consortium Electricidade de Portugal (EDP)–Aguas de Portugal (ADP) effective since August 2019 needs to be reinstated and implementation of the Management Improvement Plan accelerated. It is recommended to resume the contract with a focus on accelerating implementation of the Management Improvement Plan19 to improve the commercial and operational performance of the utility. The completion of the on-going transformational changes in the country’s power generation mix and the improvement in EAGB’s key indicators, i.e. bill collection and total network losses, could restore the company’s financial health by 2022 (Figure 5). 20. EAGB needs to reduce its labor costs by facilitating the retirement of eligible staff with Government support. As of June 30, 202020, EAGB had 599 workers on its payroll, out of which 90 were temporary. Among the total number of workers, 95 of them are beyond their retirement age. However, they are still on EAGB’s payroll due to the company’s debts towards the National Institute of Social Security (INSS) which do not allow them to benefit from a pension. It is recommended that EAGB seeks Government support to pay off the INSS debt in order to reduce EAGB’s wage bill and the pressure on the company’s cashflow. 21. Ensure that a performance contract is signed between EAGB and the Government. The objective of the performance contract between EAGB and the State of Guinea Bissau, represented by the Government, is to clarify the responsibilities of both parties in order to ensure the improvement of the quality of EAGB’s services in order to fulfill the expectations of the population. The performance contract establishes the mutual obligations between the Government and EAGB, in order to guarantee a framework of continuous improvement of the company's management. The monitoring of compliance with these obligations will be subject to periodic reviews. The 5-year performance contract is divided in two phases. The initial one includes measures to monitor the implementation of the Action Plan (also known as Management Improvement Plan) by the Management Contractor. A draft performance contract has already been prepared. It is therefore recommended that EAGB and the new Government review it in order to reach an agreement and proceed to sign the contract. 22. Complete a feasibility study on management options for EAGB following completion of management contract in 2022. The power sector in Guinea Bissau is expected to experience significant changes during the second half of 2022. First, the management contract between EAGB and EDP/ADP, if resumed, will come to an end; second, the hydro-based electricity from Guinea will effectively be imported through the OMVG transmission infrastructure; and third EAGB electricity customers will increase by 45% with the additional 33,000 household connections through the ECOWAS-Regional Electricity Access Project (P164044). Thus, it is recommended to assess EAGB’s capacity to provide quality service to a larger number of customers and provide adequate operations and maintenance to a significant amount of additional transmission and 19 On June 2018, the PUASEE project financed an individual expert to complete a 6-volume report including a diagnostic assessment of EAGB and a Management Improvement Plan. Based on this assessment, EAGB’s management contractor EDP/ADP prepared an Action Plan (“also referred as Management Improvement Plan�) on October 2019, which was approved by EAGB’s Board. The Management Improvement Plan included a comprehensive action plan, including the implementation of: actions to rehabilitate the distribution network, commercial management software, smart meters for large customers, revenue protection and anti-fraud processes, leadership programs for senior executives, program to rehabilitee EAGB’s agencies. 20 EAGB Report of Activities, June 2020. 12 Version 2 final – October 23, 2020 distribution infrastructure in interior regions of the country. This assessment, or feasibility study, should provide the decision-maker with an overview of the different management options for EAGB to ensure the sustainability of its performance improvements, e.g. extension of management contract, affermage contract, etc. It is recommended to use the available technical assistance funding under the ECOWAS-Regional Electricity Access Project to complete this assessment. Pillar III – Financial sustainability: 23. EAGB needs to prioritize financial transparency to build trust, and, therefore, the publication of audited financial statements and an annual report need to be fast-tracked in the Management Improvement Plan. For many years, EAGB has not issued audited financial statements nor an annual report, which would allow the Government, commercial banks, suppliers and donors to have a reliable view on the company’s financial and operational performance. EAGB’s reform requires to bring financial transparency in the company as a priority. Several actions are required to prepare adequate financial statements. Thus, EAGB’s Management Improvement Plan includes the realization of an external audit to have a picture of EAGB’s financial situation of EAGB, including the identification of all the contingencies and obligations hampering the company, as well as a survey of the company’s assets and liabilities. The installation of the planned Enterprise Resource Planning (ERP) software at EAGB financed by the World Bank’s PUASEE project, is required to complete the audit of the financial statements. 24. A Cost of service study (CoSS) needs to be launched to update sector costs and pave the way for a revision of the tariff structure. The CoSS study would define the methodology for calculating EAGB’s annual revenue requirement to cover investment and operating costs to ensure optimum service in the electricity and water sectors. The agreed methodology will form the basis for tariff adjustments overtime. Building on the results of the CoSS study, EAGB, with specialized technical support, should implement a debt restructuring plan to start afresh on a solid ground. 25. Prepare a debt restructuring plan with world-class technical assistance. In the medium term, it is recommended that a world-class financial expert is recruited to assist EAGB in preparing a debt restructuring plan. This plan is critical to ensure the success of the ongoing EAGB reform. However, the following preconditions need to be met to ensure donor support for the debt restructuring plan: (i) Government’s adoption of Least Cost Generation Expansion Plan; (ii) Publication of EAGB’s audited financial statements; (iii) Completion of cost of service study (CoSS); and (iv) Government’s adoption of methodology for determining EAGB’s Annual Revenue Requirement (as established in the CoSS). A debt restructuring plan has been successfully prepared with World Bank’s support in the neighboring The Gambia (NAWEC). 26. Complete construction and energize 30 kV transmission ring around Bissau financed by the African Development Bank (AfDB). The AfDB finances a 30 kV transmission line around Bissau and three substations through its PASEB project21. This infrastructure is critical to improve power supply in the capital and be able to evacuate additional power from the only existing electricity generation source, the Karpower HFO barge. However, the completion of this infrastructure has accumulated significant delays due to financial issues of the selected contractor 21The PASEB project is financing: (i) the construction of 26.5 km of 30 kV underground ring around Bissau; and (ii) the construction of three 30/10 kV substations located at the existing EAGB power station, Bra and Antula respectively. 13 Version 2 final – October 23, 2020 and the impact of the COVID-19 pandemic. It is recommended that the Government engages constructively and proactively in solving this situation so that construction is completed soon. 27. Renegotiate contract with Karpower before starting Phase II (30 MW). EAGB’s daily monitoring of its only power generation contract with an independent power producer, Karpower, is critical to ensure adequate service and billing according to the signed Power Purchase Agreement (PPA). Thus, Karpower needs to provide EAGB with fully functional tools to permanently measure and monitor power generated by the barge and supplied to EAGB’s delivery point. 28. The 2-phase PPA between Karpower and EAGB is structured in three components: (i) a capacity fee or fixed charge, (ii) a spot capacity fee; and (iii) an electricity fee or variable charge. The first phase of the PPA is for an available capacity of 17 MW and the second for 30 MW. Karpower can only transition to the second phase when the 30 kV transmission ring (financed by AfDB) around Bissau is completed. The capacity fee is around US$ 774,000 monthly in the first phase22, and is paid by EAGB irrespective of consumption. The spot capacity fee is a premium in case a demand over 17 MW (not occurred yet) requires Karpower to use the barge’s second engine. The electricity fee is variable by nature, i.e. consumption and fuel cost, and has been US$ 785,000 on average from September 2019 to March 2020. The average monthly bill from Karpower to EAGB has therefore been around US$ 1.5 million. EAGB had average monthly revenues of US$ 2.26 million from April to June 202023 and are expected to keep gradually increasing with the implementation of the Management Improvement Plan, including the roll-out of pre-paid meters and revenue protection program. 29. However, a sudden transition to the Karpower’s PPA Phase II could threaten progress in EAGB’s reform process due to the increase of the fixed capacity fee by 76% to US$ 1,367,280, unless high capacity fee is reduced. It is therefore recommended that EAGB renegotiates the PPA contract with Karpower with the assistance of a reputable transaction advisor. 22 The capacity fee index established in the PPA is 0.0633. Thus 24x30x17,000 kW x 0.0633 = US$ 734,000/monthly. 23 Monthly average of 1.26 billion FCFA. 14