Document of The World Bank FOR OFFICIAL USE ONLY Report No: 68192-DJ PROJECT PAPER ON A PROPOSED ADDITIONAL GRANT IN THE AMOUNT OF SDR 3.4 MILLION (US$5.2 MILLION EQUIVALENT) FROM THE IDA CRISIS RESPONSE WINDOW (CRW) RESOURCES TO THE REPUBLIC OF DJIBOUTI FOR THE POWER ACCESS AND DIVERSIFICATION PROJECT ADDITIONAL FINANCING II May 23, 2012 Sustainable Development Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 68192-DJ
PROJECT PAPER
ON A
PROPOSED ADDITIONAL GRANT
IN THE AMOUNT OF SDR 3.4 MILLION (US$5.2 MILLION EQUIVALENT)
FROM THE IDA CRISIS RESPONSE WINDOW (CRW) RESOURCES
TO THE
REPUBLIC OF DJIBOUTI
FOR THE
POWER ACCESS AND DIVERSIFICATION PROJECT ADDITIONAL FINANCING II
May 23, 2012
Sustainable Development Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS (Exchange Rate Effective March 31, 2012)
Currency Unit = Djiboutian Franc (DJF)
DJF177.75 = US$1.00
SDR 1 = US$1.55US$1 = SDR 0.65
FISCAL YEAR
January – December 31
ABBREVIATIONS AND ACRONYMS
AF Additional Financing CNMP National Procurement Commission (Commission Nationale des Marchés
Publics) CRW Crisis Response Window EA Environmental Audit EDD Djibouti Electricity Utility (Electricité de Djibouti) EHS Environmental Health Safety GAC Governance and Anti-Corruption GFDRR Global Facility for Disaster Reduction Recovery HFO Heavy Fuel Oil IDA International Development Agency kWh Kilo Watt Hour INDS Initiative Nationale pour le Développement Social MW MegaWatt PDNA Post-Disaster Needs Assessment PDO Project Development Objectives PMU Project Management Unit OECD Organization for Economic Co-operation and Development ONEAD Djibouti National Bureau of Water Supply and Sanitation (Office National de
l’Eau et de l’Assainissement de Djibouti) WBG World Bank Group MEF Ministry of Economy and Finance, in charge of Industry and Planning
Vice President: Inger AndersenCountry Director: A. David Craig
Sector Director Junaid Kamal Ahmad Sector Manager: Patricia Veevers-Carter
Task Team Leader: Ilhem Salamon
REPUBLIC OF DJIBOUTI
POWER ACCESS AND DIVERSIFICATION ADDITIONAL FINANCING II
CONTENTS Project Paper Data Sheet ................................................................................................................. 1
I. Introduction ................................................................................................................................. 3
II. Background and Rationale for Additional Financing ................................................................ 3
III. Proposed Changes ..................................................................................................................... 7
IV. Implementation Arrangements ............................................................................................... 11
V. Risk and Design Considerations .............................................................................................. 12
VI. Appraisal Summary ................................................................................................................ 12
Annex 1: Revised Results Framework and Monitoring Indicators ................................... 15
AF Estimated Disbursements (Bank FY/US$ m) FY 2013 2014
Annual 4.9 0.3 Cumulative 4.9 5.2
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Project Development Objective and Description Current project development objective:
i) To increase access of underserved populations to electricity services; and ii) To improve Electricité de Djibouti’s (EDD) efficiency through execution of investment operations aimed
at reducing EDD’s electricity losses.
Revised project development objective: i) To increase access of underserved populations to electricity services;
ii) To improve EDD’s efficiency through execution of investment operations aimed at reducing EDD’s electricity losses, and;
iii) To reduce the negative effects of drought on water pumping in both rural and urban areas by strengthening the country’s power supply resilience to natural catastrophes, through the creation of High Fuel Oil (HFO) and diesel security stocks.
Project description: The proposed activities to be financed under the “Power Access and Diversification Additional Financing II” will consist of the following:
i) Component 1: Setting up petroleum security stocks through: The purchase of diesel and High Fuel Oil (HFO) The rental of long term storage capacity
ii) Component 2: Institutionalizing the management of petroleum security stocks by: Assisting the Government of Djibouti in purchasing petroleum products and negotiating the
maintenance and rental of storage capacity Designing a simple regulation of security stock management Strengthening the PMU capacity through the recruitment of a local financial management expert
Safeguards and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Yes No Natural Habitats (OP/BP 4.04) Yes No Forests (OP/BP 4.36) Yes No Pest Management (OP 4.09) Yes No Physical Cultural Resources (OP/BP 4.11) Yes No Indigenous Peoples (OP/BP 4.10) Yes No Involuntary Resettlement (OP/BP 4.12) Yes No Safety of Dams (OP/BP 4.37) Yes No Projects on International Waterways (OP/BP 7.50) Yes No Projects in Disputed Areas (OP/BP 7.60) Yes No Does the project require any waivers of Bank policies? Yes No Have these been endorsed or approved by Bank management? Yes No
Conditions and Legal Covenants Financing Agreement
Reference Description of Condition/Covenant Date Due
Article V. Para 5.01(a) The Manual of Operations for the projects has been revised and approved by the Recipient.
Effectiveness
Article V. Para 5.01(b) The International Adviser and the local FM specialist for the PMU have been recruited satisfactory to the Association.
Effectiveness
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I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide a second Additional Financing (AF II) in the amount of US$5.2 million equivalent, in the form of a grant, to the Republic of Djibouti for the Power Access and Diversification Project. The proposed project is being processed as an emergency operation under Operational Policy/Bank Policy (OP/BP) 8.00 – Rapid Response to Crises and Emergencies. 2. AF II introduces a scale-up of the activities and outreach of the amended scope of the Power Access and Diversification Project (Credit IDA 41200 and Grant IDA H5740-DJ) by providing a crisis response mechanism in the event of drought in Djibouti. All other ongoing activities remain unchanged. 3. AF II would finance the costs associated with activities aimed at expanding the project’s outreach to energy disaster risk management tools that will benefit both rural and urban areas. This scaling up of the project was validated through a multi-sectoral drought post-disaster needs assessment (PDNA) that was completed by the Government of Djibouti, in partnership with the international community, on October 25, 2011. The scope of AF II was also agreed to by a letter from the Minister of Economy and Finance, in charge of Industry and Planning, dated February 2, 2012. II. Background and Rationale for Additional Financing Background 4. This is an emergency operation and does not fall under the Country Assistance Strategy for Djibouti. The latest drought in the Horn of Africa, one of the worst on record over the last 60 years, has severely affected the region and caused severe water shortages and food crisis across Somalia, Kenya, Ethiopia and Djibouti, threatening the livelihood of more than 13.3 million people. In response to international appeals, and in close collaboration with the international partners, the World Bank Group (WBG) launched a comprehensive assistance program to support countries in the Horn of Africa to address immediate vulnerabilities and build longer-term natural hazard resilience. On September 15, 2011, the WBG approved US$250 million from the IDA Crisis Response Window (CRW) (Report: IDA/R2011) which seeks to maximize efficiency gains from existing World Bank operations and technical assistance, while promoting strategies that support sustainable, economically strong livelihoods, and potentially negate the need for routine emergency appeals. 5. As a result of the initial assessment, a number of priority activities were identified and a request for drought mitigation funding in the amount of US$13.2 million was presented to World Bank’s Board in August 2011. The proposed interventions (which are in line with the Government’s seven pillar drought mitigations priorities) were approved by the Board on September 15, 2011. Of this amount, US$5.2 million was approved to scale up the Power Access and Diversification project to reduce the negative effects of drought on water pumping in both rural and urban areas by creating Heavy Fuel Oil (HFO) and diesel security stocks that would provide a critical buffer supply of fuel to cover surges in power demand from pumping in urban
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and rural areas. The scaling up of the project has been validated through the completion of a multi-sectoral drought PNDA that was completed by the Government of Djibouti in partnership with the international community, on October 25, 2011. The scaling up of project activities will be carried out using the additional financing mechanism and will be built upon the existing US$7.0 million IDA Credit 41200-DJ and US$6 million Grant H5740-DJ. The envisaged AF II complements well the rural community driven development and water operation, also supported by IDA CRW financing. 6. In accordance with OP/BP 8.00, the constitution of HFO and diesel security stocks under AF II will address the following priorities: (a) assisting with the crucial initial stages of building capacity for longer-term disaster management and risk reduction; and (b) supporting measures to mitigate or avert the potential effects of imminent emergencies or future emergencies or crises in countries at high risk. Project Background 7. An IDA Credit of US$7 million was approved on November 1, 2005 for the Power Access and Diversification Project and became effective on March 29, 2006. The original Project Development Objectives (PDOs) were to: (i) increase access of underserved populations to electricity services, through priority investments in distribution and new electricity connections in Balbala; (ii) increase reliability of electricity services through the development of alternative sources of production and targeted technical assistance by introducing a pilot wind farm of an estimated capacity of 3.5 to 4.5 MW near Arta, West of Djibouti Ville, and; (iii) improve the efficiency of the electricity utility, through technical assistance, by carrying out three studies, including an electricity tariff study, an electricity loss reduction study, and a commercial management study for the electricity and water sectors jointly.
8. The project went through five restructurings with the second restructuring having the most impact. Indeed, by end 2008, right in the middle of a severe global energy crisis, delays in the implementation of the Project’s wind component coincided with a severe cash crisis at the electricity utility EDD linked to high oil prices which were not translated into tariffs. The Bank’s Board of Executive Directors agreed to a request by the Government of Djibouti and reallocated the funds originally earmarked for the wind component of the project for the emergency procurement of fuel oil for EDD’s main power plant; some adjustments to the TA activities were also made. The PDOs were thus amended to read as follows: (i) to increase electricity access; (ii) to ensure the emergency reliability of power generation; and (iii) to provide some diagnostic tools to improve the efficiency of the power utility. 9. A first additional financing (AF I) grant in the amount of US$6 million was approved on July 27, 2010 bringing the total financial support of the project to US$13 million. That additional financing was provided to the Government of Djibouti to deepen the impact of the project and scale up its activities. The project closing-date was extended by three years, from June 30, 2010 to June 30, 2013. The current PDOs, further revised under AF I, are: (i) To increase access of underserved populations to electricity services; and (ii) To improve EDD’s efficiency through execution of investment operations aimed at reducing EDD’s electricity losses.
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10. A fifth restructuring took place in May 2012. This restructuring cancelled component 2 ‘support for project management and implementation’ of AF I, as no funds were initially allocated to implement it. The activities planned under this component were added to component 3 of the parent project. Indeed, the latter had remaining funds that were reallocated to execute the technical assistance activities. Lastly, in order to accommodate the 9-month delay in the effectiveness date of AF I and provide time to execute the new activities, the Closing Date was extended by 9 months, from June 30, 2013 to March 31, 2014. Status of Implementation 11. The parent project experienced delays in implementation, particularly in its early post-approval stages. Component 1 focusing on the electricity distribution expansion in Balbala was completed and rated highly satisfactory. The project’s wind power component (original Component 2) however faced major implementation delays and uncertainties, primarily as of a result of the unexpected wind power equipment supply constraints on world markets that led to price hikes and a steep decline in the interest of suppliers for small tenders. The project was subsequently restructured and this component was replaced by an emergency assistance to EDD for fuel purchase, a component that has received sustained attention from counterparts and has been rated satisfactory. The original project also included technical assistance (Component 3) that has been rated satisfactory, as it allowed EDD to better diagnose some of its challenges and enabled energy sector stakeholders to clarify the least-cost electricity expansion priorities for Djibouti. Lastly, component 4 of the original project focused on strengthened capacity for project implementation and has been rated satisfactory as its implementation led to the head of the PMU being well versed in Bank procurement guidelines and project management. Following the second project restructuring, close to 97 percent of the funds allocated have been disbursed as of January 31, 2012. Most of the remaining funds are committed and a marginal balance remains. 12. AF I included three components, all of which have been rated satisfactory. While the progress toward the PDOs has been consistently rated as satisfactory, the assessment of project implementation following the approval of the additional financing led to a moderately unsatisfactory rating in June 2011. Indeed, the project experienced a 9-month delay in its effectiveness that resulted mostly from coordination issues amongst the counterparts in Djibouti during the very demanding presidential campaign in 2010-2011. Consequently, delays in procurement were registered and a new procurement plan was established to accommodate them. Project implementation however went back on track with a moderately satisfactory Implementation Progress rating in December 2011. While no disbursements have taken place yet, all the consultants required by the implementation support component have been hired and the procurement documents for the electricity access expansion component and for the loss reduction investments component have received the World Bank’s no-objection and have been published on February 6, 2012. Finally, all legal covenants, and audit requirements are complied with, although the latest audit and financial management reporting were received after the deadline.
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Rationale and Eligibility for the Power Access and Diversification Project Additional Financing II 13. The drought in the Horn of Africa has caused a major food crisis, generated widespread water shortages and threatened the livelihood of millions of people. In Djibouti, the impact of the drought is felt in different ways, but the absence of mitigation measures specific to the energy sector worsens the crisis. Indeed, in urban areas, the Office Nationale de l’Eau et de l’Assainissement de Djibouti (ONEAD), the national water utility is unable to meet the increased water demand due to the additional electricity requirements for pumping not being satisfied by EDD. EDD’s difficulty to expand production therefore translates into water shortages that have dramatic consequences on the country’s urban areas. Similarly, small villages in rural areas find it extremely difficult to get the additional diesel oil required to fuel their generators to pump water, a daily task that is made even more crucial by the drought. 14. At its core, the problem stems from the fact that Djibouti doesn’t have any mechanisms to prevent energy risks associated with natural hazards, a situation that renders the country incapable of meeting its energy needs when disasters occur. Contrary to what is practiced in all developed nations and in an increasing number of developing countries, there are no security oil stocks1 in place in Djibouti. In the OECD, the common practice is to have security energy stocks equivalent to at least 90 to 120 days of consumption. Closer to Djibouti, an increasing number of Sub-Saharan nations have security stocks of petroleum products equivalent to 10 to 30 days of consumption that help them mitigate the impact of disasters when they take place. In Kenya, for instance, petroleum security stocks currently amount to 21 days of consumption and the country is planning a large expansion that will bring this number to 90 days in the long run. Ghana also has similar expansion plans and security stocks of petroleum products should rise from 14 consumption days-equivalent to a minimum of 60 days by 2015. 15. In the absence of such energy specific crisis mitigation mechanisms, the drought taking place in the Horn of Africa has had a significant impact on the social and economic well-being of the Djiboutian population. Given that Djibouti suffers from droughts on a regular basis, a disaster mitigation strategy centered on energy should thus be to set up petroleum security storages equivalent to several inter alia days of national consumption of the petroleum products that are critically important: HFO, used for electricity generation, and Diesel oil, used for powering water pumps in rural areas. Indeed the country went through severe power outages, which reportedly lasted up to 48 hours.
16. Currently, all of the country’s electricity generation facilities run on imported diesel and HFO. The electricity they produce is used to meet all of the demand throughout the year, except during summer when Djibouti can import cheap hydroelectricity from neighboring Ethiopia2. Indeed, since 2011, an interconnection between the two countries makes it possible to import
1 Security stocks are different from strategic stocks. While the former are meant to prevent energy shortages, the latter are intended to influence international market prices, and are used in Europe, Japan and the USA.
2 The cost of imported hydroelectricity is between 6 to 8 cents per kw/h. Conventional electricity produced by EDD is a lot more expensive as the cost for fuel only is around 13 cents per kw/h produced when the crude oil barrel is at around US$100. The low hydroelectricity price is explained partly by the fact that hydroelectricity is produced very competitively and partly by the fact that the Power Purchase Agreement (PPA) between Ethiopia and Djibouti is for surpluses only. Ethiopia has no firm selling commitment towards Djibouti.
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electricity during summer, a season when Ethiopia produces enough excess hydroelectricity to cover 65 percent of Djibouti’s needs. When a drought hits the East African region however, Ethiopia has lower surpluses and can lose its capacity to export hydroelectricity to its neighbor. EDD can therefore only rely on its own HFO and diesel powered thermal facilities to meet the electricity demand. This, however, is made difficult by the limited financial capacity of the electricity utility and by the absence of security HFO/diesel stocks in the country. Consequently, when ONEAD’s needs increase as a result of the drought, EDD is incapable of meeting them, and power and water shortages occur in most urban areas. In this context, ONEAD is also incapable of producing additional water, which could be distributed in rural areas using water tankers. This is all the more problematic since in rural areas, the pumping of water for consumption and agro-pastoral activities is made more difficult during droughts when water tables are low. In this case, pumping water requires additional diesel oil. However, no security stocks of diesel oil are available, water-pumping is thus limited and the negative impact of the drought on rural areas is more harshly felt, as stressed by the PDNA. 17. The need for HFO and diesel oil security stocks is apparent. The Government of Djibouti, aware of its vulnerability, has previously indicated an interest in obtaining the assistance of the World Bank to set up such security stocks and the regulation that is required for such an undertaking. Security stocks are energy risk management tools meant to address major catastrophes including severe natural disasters. They are therefore not supposed to be used for minor and recurrent climatic events. In a country like Djibouti, a regulation should be put in place to establish clear qualitative criteria to ensure that the use of security storage is only allowed in clearly defined emergency situations, and the modalities of such use should be clearly defined. The purpose of the regulation is to avoid using the security stocks in non-life threatening situations. In addition, regulation is also needed to ensure the sustainability of the security stocks by identifying feasible replenishment rules. Such rules generally include price mechanisms that allow for a marginal taxation of luxury oil products, such as gasoline, in order to finance stocks replenishment as well as the cost of storage and its maintenance. Lastly, these regulations also make it mandatory for the private operators of the downstream oil business to complement public security stocks, in line with international best practices. As knowledge on these regulations is widely available, setting them up is feasible. 18. In short, AF II can support the creation of emergency response mechanisms quickly and efficiently while helping increase the resilience of Djibouti to disasters by setting up risk prevention devices in the energy sector. III. Proposed Changes Project Development Objectives 19. In addition to the existing PDOs, AF II aims at reducing the negative effects of drought on water pumping in both rural and urban areas by strengthening the country’s power supply resilience to natural catastrophes, through the creation of HFO and diesel security stocks. The changes in PDOs are summarized below.
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Table 1: Revised PDOs
Current Revised i) To increase access of underserved
populations to electricity services; and ii) To improve EDD’s efficiency through
execution of investment operations aimed at reducing EDD’s electricity losses.
i) To increase access of underserved populations to electricity services; ii) To improve EDD’s efficiency through execution of investment
operations aimed at reducing EDD’s electricity losses; and, iii) To reduce the negative effects of drought on water pumping in both
rural and urban areas by strengthening the country’s power supply resilience to natural catastrophes, through the creation of HFO and diesel security stocks.
Project Activities 20. Within the allocated grant resources of US$5.2 million, the proposed project can provide Djibouti with 5 days of security stocks of HFO, 5.2 days of diesel, two years of storage and maintenance for the products and the TA needed to assist the government in procuring the goods and establishing the regulation needed to replenish and maintain the stocks. While AF II allows for a very limited number of days of security stocks, its impact shall however be significant. Indeed, the longest disruption to energy supply reported in the country was of two days. As such, the security stocks envisaged by AF II will be enough to prevent a similar situation from taking place again. Furthermore, security stocks are traditionally used to cover the consumption of a whole nation. In the case of the security stocks envisaged by AF II for Djibouti however, they will be set up so that they can only be used to pump water to villages (diesel) and urban areas (HFO) during drought peaks. Since water pumping is only one component of the energy demand in the country, diesel and HFO security stocks financed by the project (equivalent to five days of total national energy consumption) are in effect equivalent to at least 14 to 30 days of energy consumption3 from water pumping. Moreover, a regulation will be passed to match these publically funded stocks with contributions from the private operators of the downstream oil market in Djibouti, as is the case in most countries around the world. 21. AF II will thus finance the following two components that are described in detail in Annex 3. 22. Component 1: Setting up petroleum security stocks (US$4.87 million).This component will include (1) the purchase of diesel and HFO for security stocks (US$4,246,297 i.e. 87% of component cost) and (2) the rental of long-term storage capacities for both petroleum products in Horizon Djibouti Terminals Limited storage facility (US$619,629 i.e. 13% of component cost). According to the assessment developed in Annex 3, the Government of Djibouti should be able to afford around 5 days of consumption of HFO and 5.2 days of diesel within the allocated budget, as well as a 2 year rental and maintenance contract for the storage tanks, though the precise figures will depend on the outcome of the procurement procedure. 23. Component 2: Institutionalizing the management of petroleum security stocks (US$330,000). This component will include: (1) the recruitment of an international individual consultant to advice the Government of Djibouti in purchasing petroleum products and in negotiating the maintenance and rental of storage capacity (contract estimated at US$100,000 i.e.
3 There aren’t any national statistics available on the breakdown of energy consumption in Djibouti. The figures presented in this document come from various counterparts’ estimates.
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30% of component cost); (2) the hiring of a consulting firm to design a simple regulation required for security stocks management, including guidelines for releasing and rebuilding security stocks (contract estimated at US$185,000 i.e. 56% of component cost); and (3) the recruitment of a local financial management expert to strengthen the PMU’s capacity and ensure the timely execution of the activities of the project (contract estimated at US$45,000 i.e. 14% of component cost). 24. Several new activities are added to the original project description to these ends, while all existing activities will continue to be implemented.
Table 2: Original and Revised Activities
Original Revised Extension of access and rehabilitation in
Arta and Balbala* HFO procurement** Smart metering*** Technical Assistance****
Extension of access and rehabilitation Arta and Balbala HFO procurement Smart metering Technical Assistance Setting up petroleum security stocks Institutionalizing the management of petroleum security stocks.
* Activity financed under Component 1 of the initial project (Credit 41200-DJ) and expanded under AF I (Grant H5740-DJ) ** Activity financed under Component 2 of the initial project (Credit 41200-DJ) *** Activity financed under Component 2 of AF I (Grant H5740-DJ) **** Activity financed under Component 3 of the initial project (Credit 41200-DJ)
Changes in the Closing Date 25. No changes in Closing Date are envisaged. The Closing Date for the AF II is proposed to be fully aligned with the current Closing Date of the Djibouti Power Access and Diversification Project (Credit No. 41200-DJ (P086379) and AF I (Grant H5740), namely March 31, 2014. Changes in the Result Framework 26. The result framework has primarily been updated to enable the monitoring of the new activities financed by the proposed AF II. As shown in Annex 1. A few minor adjustments were also made to the wording of a couple of intermediate indicators, a more realistic target value for a few intermediate indicators was set, and a few missing baselines were added. The main changes are summarized in Table 3 below.
Table 3: Changes in Project Outcome Indicators
Current Revised Increased number of newly connected houses and increase
in street lightening Deployment of smart meters and consequent loss
reduction
Increased number of newly connected houses and increase in street lightening
Deployment of smart meters and consequent loss reduction
Days of HFO security stocks (purchased, stored and maintained)
Days of Diesel security stocks (purchased, stored and maintained)
Design and Implementation of a regulation of the security stocks
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Revised Costing 27. The Power Access and Diversification Project was launched under Credit 41200-DJI in 2005 (US$7 million) and benefited from a first additional financing through Grant H5740-DJ (US$6 million) in July 2010. The proposed AF II (US$5.2 million) will bring total project financing to US$18.2 million. Changes in project cost are summarized in Table 4 below.
Table 4: Changes in Project Cost
Cost Status Credit 41200-DJI / Parent Project: Extension of Access and Rehabilitation US$3.0 million Completed HFO Procurement US$ 4.9 million Completed Technical Assistance and Implementation Support US$1.1 million Ongoing
Sub-total US$7 million Grant H5740-DJ / Additional Financing I Extension of Access and Rehabilitation US$4.0 million OngoingSmart metering US$2.0 million Ongoing
Sub-total US$6 million Proposed Grant / Additional Financing II Setting up Petroleum Security Stocks US$4.87 million Not yet startedInstitutionalizing the management of petroleum security stocks US$0.33 million Not yet started
Sub-total US$5.2 million TOTAL PROJECT COST US$18.2 million
Changes in Environmental and Social Safeguards 28. AF II does not entail any changes in the environmental project category, which remains classified as “B”. 29. Environmental safeguards. OP4.01 is triggered by Component 1 of AF II and the proposed classification of AF II is thus “B”. The second component of the AF II does not trigger any environmental operational policy. The diesel and HFO security stocks developed under this second additional financing will represent a very small fraction (around 1 percent) of the existing capacity of the privately-owned Horizon Djibouti Terminals Limited storage facility, which is proposed to be used to store the hydrocarbons purchased under AF II. Therefore, the proposed operation does not increase the environmental impacts of the existing storage facility. Since the HFO and the Diesel will be stored in an existing facility, the PMU prepared an Environmental Audit (EA) to assess the hazards of the existing terminals and define the corresponding prevention measures and emergency plan. The Environmental Audit concludes that Horizon Djibouti Terminals Limited storage facility has an Environment Health Safety (EHS) policy in place and is maintaining a risk-based emergency response system to control and mitigate the effects of any incident that might occur. The Environmental Audit has been reviewed by the World Bank and disclosed in French in Djibouti on March 18, 2012 and at the Infoshop on March 26, 2012. 30. Social safeguards. OP 4.12 is not triggered by AF II. The rental of existing storage facilities is the current and only option envisaged for the storage of the security stocks to be purchased. These tanks, owned and managed by Horizon Djibouti Terminals Ltd, are located on
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privately owned facilities. As such, the implementation of the project would not necessitate any construction, acquisition of land or displacement of population. Changes in Fiduciary Management
31. Procurement. While the PMU has extensive experience in contracting consultant services, AF II involves a challenging procurement process and an international consultant will be hired to strengthen the procurement capacity as needed. The purchase of fuel should fall under World Bank documents on “Procurement of Crude Oil/Petroleum Products”. 32. Financial Management. Given the limited capacities of the existing PMU, a local financial management specialist will be added to the team to ensure the timely execution of the activities of the project. This will be a condition of effectiveness. IV. Implementation Arrangements 33. AF II would be implemented using the existing PMU under the same procurement and disbursement arrangements. However, the oversight of the activities planned under AF II will be directly performed by the Ministry of Finance rather than EDD, as they pertain to national risk prevention and not electricity. Moreover the implementation framework will be updated according to the latest Bank’s Procedures/Guidelines, inter alia Procurement and Consultants Guideline, dated January 2011 and the PMU staff will be trained on these new Bank's guidelines, which are expected to be used in project implementation. The PMU has performed relatively well under the current project and has acquired capacity in fiduciary, procurement, and safeguard policies and procedures applicable to Bank projects. The continuation of implementation arrangements would also prevent a gap in knowledge, engagement and commitment of staff, which has often proven costly in other projects in Djibouti. 34. It is proposed that the cost sharing arrangements between IDA and the Recipient with regard to the functioning of the PMU remain in place. All activities undertaken by the PMU under AFII will be overseen and coordinated by the Ministry of Economy, Finance and Planning in charge of Privatization. The Ministry of Economy, Finance and Planning in charge of Privatization would be the authority in charge of enforcing security stocks regulations by authorizing the release of HFO and diesel security stocks. 35. All project components should be completed within 12 to 15 months. Component 2 could be implemented under the rule of advanced procurement in order to jump-start the technical assistance when the project becomes effective. It is assessed that activities funded under this AF II can be completed by the original project’s Closing Date.
36. Consistent with OP/BP 8.00 procedures, the task team will provide close implementation support, particularly with respect to financial management, procurement, safeguards and project management.
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V. Risk and Design Considerations 37. The risks of the proposed AF II are expected to be moderate since the scope largely focuses on setting up HFO and diesel security stocks, using spare storage capacities. Likewise, the technical assistance component is not anticipated to be problematic as it will mainly involve recruiting consultants to work on topics that are commonly tackled worldwide. 38. The major risk is on procurement as petroleum procurement capacity is limited in Djibouti. Lessons learnt from past experience in this field show that petroleum product purchase should be made with specialized support provided to counterparts. Therefore, in addition to using Bank procurement guidelines, an experienced international consultant specialized in procurement of petroleum products is being hired under the project. 39. Another risk is to inefficiently deplete security stocks if the Government of Djibouti authorizes their release during the dry season rather than in the event of drought peaks. This risk is important and should not be overlooked as it would defeat the whole purpose of developing security stocks. The design of a sound regulation of the downstream oil sector and security stocks management however will mitigate this risk. The design and implementation of such a regulation should be straightforward as it is widely applied internationally and the operators of the downstream oil business in Djibouti are familiar with the rules that will be set up and used to abide by them. 40. Finally, the short project life might threaten the completion of the new activities. Any derailing in the timeline of the procurement and implementation of the new activities would cause some challenges to project achievements. Close support by the Bank team, in particular with matters related to procurement, will be required.
VI. Appraisal Summary Financial Management 41. An evaluation of the financial management capacities of the PMU, responsible for delivering the proposed AF II was conducted as part of project preparation. AF II would be implemented using the existing PMU under the same procurement and disbursement arrangements. AF II will be overseen by the Ministry of Economy, Finance and Planning in charge of Privatization. The PMU has performed well under the original project and has acquired solid capacity in fiduciary procedures applicable to World Bank projects. The assessment identified the following weaknesses: (i) the PMU’s Administrative and Financial Procedure Manuel dates from March 2006 and needs to be updated with regard to the new World Bank guidelines and to the local news regulation; and (ii) the PMU software is not fully used and needs to be updated through a maintenance contract. The last project rating of the Financial Management team was Moderately Satisfactory and the overdue audit was received. In this context, the overall financial management risk is deemed to be low at this stage. From now on, the PMU should ensure it meets the recommendations listed above.
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42. No exceptions to World Bank policies are envisaged for AF II. The involvement of government counterparts and the implementing agency in project preparation and appraisal has been significant. There are no conditions for negotiations or disbursement. The effectiveness conditions are the following: (a) The Manual of Operations for the projects has been revised and approved by the Recipient. (b) The International Adviser and the local FM specialist for the PMU have been recruited satisfactory to the Association. Procurement 43. The PMU of the original project will be in charge of the implementation of AF II and will administrate all procurement-related transactions to be financed under this project. The PMU is usually subject to the rules and regulations falling under the Public Procurement Code of the Government of Djibouti. Above 5,000,000 DJF (US$ 28,500 equivalent), all procurement decisions (bid opening, evaluation report, contract award, etc.) are subject to the prior review of the National Procurement Committee (Commission Nationale des Marchés Publics - CNMP). Overall, the new Djiboutian procurement Manual of Procedures for goods, works and employment of consultants remains in line with the World Bank's procedures and the country has, since May 2010, adequate standard bidding documents and request for proposals similar to those of the Bank’s. 44. The PMU is familiar with World Bank procurement guidelines and procedures through its management of two earlier projects. However, given that the procurement under AF II will be very specialized (petroleum products), the PMU’s coordinator and staff members involved in procurement will require full support from an experienced international consultant specialized in procurement of petroleum products. The consultant will assist the PMU throughout the procurement process, thus allowing the PMU to develop all bidding documents and contracts in line with international best practices and World Bank procurement guidelines. Through this process, the PMU will see its capacity strengthened. The World Bank supervision team will be working very closely with the PMU (and the consultant) to ensure full compliance of the procurement procedure with World Bank Procurement guidelines. 45. Taking into account Djibouti’s context and the limited capacity of the PMU to deal with the procurement process for the purchase of petroleum products, the overall assessment of procurement risk is high. Social and Environmental Safeguards 46. The implementation of the proposed activities does not trigger any social safeguards policies. There are no exceptions to or waivers of Bank policies necessary and applicable. The proposed additional financing does not raise the environmental category of the project ("B") nor trigger any new safeguard policy. The proposed changes also do not involve any exceptions to Bank safeguards policies. The Environmental Audit prepared by the PMU is satisfactory to the World Bank and has been disclosed in Country on March 18, 2012 and at the Infoshop on March 26, 2012.
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Economic and Financial Analysis 47. The quantity of petroleum stocks and the potential for electricity generation. The petroleum products purchased can be used to generate extra electricity, thus avoiding a certain amount of blackout for grid supplies, and unavailability of diesel supplies to rural households. The quantities purchased can be converted into kilowatt-hours of electricity using standard conversion factors. The maximum quantities of electricity generation made possible by the utilization of all the security stocks are shown in the table below.
Table 5: Purchase of petroleum products and extra electricity production made possible
HFO Diesel Quantity purchased (tons) 1644 2876 Days of national consumption 5 5 Volume conversion 276 gallons/ton 1176 liters/ton Generation conversion (kWh per unit) 12.3 2.5 Total hours generation (million kWh) 5.58 8.46
48. The economic value of the extra generation. Blackouts and shortages of diesel impose costs on users well above the tariffs for normal supply. This cost of unserved energy is widely used in power system planning, and for the economy as a whole has been estimated at US$6 per kilowatt-hour in Djibouti. For agriculture the value may be lower and, based on an international survey for developing countries, a conservative value of US$1/kWh was used in this study. Furthermore, in Djibouti, some rural water supply will go to household use instead of agriculture - providing access to drinking water during a drought can have a positive effect on mortality and morbidity. Bearing all the points in mind a value of US$1/kWh for the costs of unserved energy to supply water provides a conservative economic value for the project of US$14.0 million (details are available in Annex 6).
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Annex 1: Revised Results Framework and Monitoring Indicators
Revised Results Framework and Monitoring
PDO Project Outcome Indicators Use of Project Outcome Information Current Proposed Current Proposed Current Proposed
To increase access of underserved populations to electricity services; and,
No change
Number of additional connections, improved connections, reconnections established in Balbala project site Number of new street lighting units
No change
Use to measure the expansion of access, and consequent further expansion planning needs.
No change
To improve EDD’s efficiency through execution of investment operations aimed at reducing EDD’s electricity losses.
No change
Reduction in electricity losses as a % of total billed in selected 20KV feeder due to the deployment of smart meters
No change
Use in estimating loss rates after introduction of smart meters, and thus decide on further use of smart meters; and on other loss reduction measures.
No change
-- To reduce the negative effects of drought on water pumping in both rural and urban areas by strengthening the country’s power supply resilience to natural catastrophes, through the creation of HFO and diesel security stocks.
-- Days of HFO security stocks (purchased, stored and maintained)
-- Future planning of HFO security
stocks
-- -- Days of Diesel security stocks (purchased, stored and maintained)
-- Future planning of Diesel security
stocks
-- -- Design and implementation of a regulation of the security stocks
-- Future authorization to deplete
security stocks and their replenishment
Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring
Current Proposed Current Proposed Current Proposed Completion of (i) 1.85 km of 20 kV primary lines; (ii) completion of 12.35 km of 400/200 V secondary lines; installation of 3x400kVA and 3x800kVA transformers (20kV/400/200 V) and installation of 243 street lighting units.
No change
Number of new connections and re-connections Rate of progress on primary and secondary lines, on transformers and installation of lighting units.
No change Future planning of power sector investment and Monitoring and Evaluation Reports
No change
Completion of pilot smart metering project including 5,000 smart meters and associated equipment
Completion of pilot smart metering project including 3,341 smart meters and associated equipment
Engineering, Procurement and Construction Contract for Smart Meters signed
No change Monitoring and Evaluation Report; next stage of smart metering installation program.
No change Rate of progress on installation of smart meters
No change
Completion of 36 km of overhead 20 kV primary lines.
Completion of 33.64 km line of overhead 20 kV primary lines.
Rate of progress on installation of emergency line, and its contribution to providing better performance.
No change Measurement of reliability of line; Monitoring and Evaluation Report.
No change
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Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring Current Proposed Current Proposed Current Proposed
Contract signed for the project management services and for the financial auditing services respectively
No change Contracts signed and services performed.
No change Sector Improvement Planning, Monitoring and Evaluation Report.
No change
--
Recruitment of a consultant for the purchase of HFO and Diesel and the negotiation of their storage and maintenance
-- Consultant Recruited -- Instrumental support to petroleum procurement and negotiation of long term storage facilities
-- Recruitment of a consultant for the draft of a security stocks regulation
-- Consultant Recruited -- Design of a regulation
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Arrangements for results monitoring
Project Outcome Indicators Baselines Target Values (cumulative) Data Collection and Reporting
Original At AF II
Appraisal YR1
04/2011-04/2012YR2
04/2012-04/2013YR3
04/2013-04/2014Frequency
and Reports Data Collection
Instruments Responsibility for Data Collection
Current Proposed Number of additional connections, improved connections, reconnections established in Balbala project site
No change 0 0 0 0 3,800
Semi-annual reports and end
of project report
EDD Register for new connections
PMU/EDD
Number of new street lighting units
No change 199 199 199 349 442
Semi-annual reports and end
of project report
Monthly Progress Reports
PMU/EDD
Reduction in electricity losses as a % of total billed in selected 20KV feeder due to the deployment of smart meters
Reduction in electricity losses as a % of total billed in selected 20KV feeder due to the deployment of smart meters
Not applicable 12% 12% 3% 3%
Semi-annual reports and end
of project report
Financial reports EDD
PMU/EDD
-- Days of HFO purchased, stored and maintained
-- 0 0
5 days of HFO domestic
consumption-equivalent are
purchased
5 days of HFO purchased, stored and maintained
Semi-annual reports and end
of project report
Monthly Progress Reports
PMU/MEF4
-- Days of Diesel purchased, stored and maintained
-- 0 0
5.2 days of Diesel domestic
consumption-equivalent are
purchased
5.2 days of Diesel purchased, stored and maintained
Semi-annual reports and end
of project report
Monthly Progress Reports
PMU/MEF
-- New security stocks regulation designed and implemented
-- None None Contract is signed is work and under
way
Regulation is designed and implemented
Semi-annual reports and end
of project report
Monthly Progress Reports
PMU/MEF
4 Ministry of Economy and Finance, in charge of Industry and Planning
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Intermediate Outcome Indicators
Baselines Target Values (cumulative) Data Collection and Reporting
Original At AF II Appraisal
YR1 YR2 YR3 Frequency and
Reports
Data Collection
Instruments
Responsibility for Data
Collection
Current Proposed
Completion of 1.85 km of 20 kV primary lines; completion of 12.35 km of 400/200 V secondary lines; installation of 3x400kVA and 3x800kVA transformers (20kV/400/200 V)
No change
0 new primary lines, 0 new secondary lines, 0 new transformers
No change
0 new primary lines, 0 new secondary lines, 0 new transformers
1 .0 km of new primary lines, 8 km of new secondary lines, 0 new transformers
1.85 km primary lines; 12.35 km secondary lines; 3x400kVA and 3x800kVA transformers
Semi-annual reports and end of project report
Monthly Progress Reports
PMU/EDD
Engineering, procurement and construction contract for Smart Meters signed
No change No contract signed
No contract signed
Bid launched on February 1, 2012
Contract signed – June 15, 2012
End of contract – December 31, 2013
Semi-annual reports and end of project report
Verification of contract and of installed smart meters
PMU/EDD
N/A
Engineering, procurement, and construction contract for extension of Balbala distribution network and extension of the 20 kV line to Arta.
No contract signed
No contract signed
Bid launched on February 1, 2012
Contract signed – June 15, 2012
End of contract – December 31, 2013
Semi-annual reports and end of project report
Verification of contract
PMU/EDD
Rate of progress on installation of 5000 smart meters
Rate of progress on installation of 3,341 smart meters
0 0 0 45% 100% Semi-annual reports and end of project report
Verification of contracts and of installed smart meters
PMU/EDD
Primary lines, secondary lines, transformers and street lighting installed
No change
0 new primary lines, 0 new secondary lines, 0 new transformers, 199 street lights
0 new primary lines, 0 new secondary lines, 0 new transformers, 199 street lights
0 new primary lines, 0 new secondary lines, 0 new transformers, 199 street lights
1.0 km of new primary lines, 8 km of new secondary lines, 0 new transformers, 349 street lights
1.85 km primary lines; 12.35 km secondary lines; 3x400kVA and 3x800kVA transformers, 442 street lights
Semi-annual reports and end of project report
Verification of lines, transformers and street lights installed
PMU/EDD
Contract signed for the project management services and for the financial auditing services respectively
No change No contract
signed No contract signed Contracts signed
Semi-annual reports and end of project
report
Verification of contracts and of installed smart
meters
PMU/EDD
--
Recruitment of a consultant for the purchase of HFO and Diesel and the negotiation of their storage
-- No contract signedNo contract
signed
Contract signed and petroleum products are purchased
Petroleum security stocks
stored and maintained
Semi-annual reports and end of project
report
Verification of contract
PMU/MEF
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Intermediate Outcome Indicators
Baselines Target Values (cumulative) Data Collection and Reporting
Original At AF II Appraisal
YR1 YR2 YR3 Frequency and
Reports
Data Collection
Instruments
Responsibility for Data
Collection
Current Proposed
and maintenance.
-- Recruitment of a consultant for the draft of a security stocks regulation
The Project Development Objectives are (i) to increase access of underserved populations to electricity services; (ii) to improve EDD’s efficiency through execution of investment operations aimed at reducing EDD’s electricity losses; and (iii) to reduce the negative effects of drought on water pumping in both rural and urban areas by strengthening the country’s power supply resilience to natural catastrophes through the creation of HFO and diesel security stocks.
PDO Level Results Indicators: 1. Number of additional connections, improved connections, reconnections established in Balbala project site
2. Number of new street lighting units
3. Reduction in electricity losses as a % of total billed in selected 20KV feeder due to the deployment of smart meters
4. Days of HFO security stocks (purchased, stored and maintained)
5. Days of Diesel security stocks (purchased, stored and maintained)
6. Design and implementation of a regulation of the security stocks
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1. Project Stakeholder Risks Rating M Description: The project will finance an energy risk prevention mechanism meant at increasing the resilience of Djibouti to droughts. There is however a risk that the stocks that will be constituted are not enough to prevent large disruptions to power supply during droughts.
Risk Management: This risk will be mitigated though the setting of a security stocks regulation that allows for stock release only during drought peaks. Furthermore, this regulation will make it mandatory for private operators of the downstream oil market to match the public security stocks with a private endowment. This is an international best practice that all operators worldwide, including those present in Djibouti, are used to.
Resp: WB/PMU Stage: Implementation Due Date: By Closing Date Status: Not due yet
Resp: WB/PMU Stage: Prep. / Impl. Due Date: By Closing Date Status: Ongoing
2. Implementing Agency Risks (including fiduciary) 2.1. Capacity Rating: M Description: The assessment of existing staffing and qualifications of the PMU shows it has the capacity needed for project implementation.
Risk Management: The project implementation capacity is moderately satisfactory and will be further strengthened through the recruitment of a financial management expert who will ensure that all contracts are implemented in due time. Moreover, the project design includes the technical assistance needed to undertake procurement of petroleum products and the negotiation of a long-term storage and maintenance contract. As all technical aspects of the procurement of these two activities will be outsourced, implementing agency risks are considered moderate.
A segregated designated account will be opened in the commercial bank in terms acceptable to the Bank, to track the project expenditures. External auditor with qualification and experience satisfactory to the World Bank will conduct annual audit of the project’s financial statements.
Resp: WB/PMU Stage: Implementation Due Date: By Closing Date Status: Ongoing
2.2. Governance Rating: M Description: Given the lack of capacity in the country, any disruption of the PMU would have a negative impact on the implementation of the project. The severity of the impact would depend on the nature and length of the disruption.
Risk Management: The PMU is already financed by the existing activities developed under both the parent project and its first additional financing. It has the resources necessary to function properly until its Closing Date and protect it from the vagaries of the government budget. Accountability and reporting lines within the PMU and with respect to its oversight are very clear. PMU staff and oversight shall not be replaced without prior consultation with the WB. Resp: WB/Ministry of Economy and Finance
Stage: Implementation Due Date: By Closing Date Status: Ongoing
The project is subject to annual external audits, acceptable to IDA, and benefits from regular Bank supervision missions that include FM staff. Current project has good governance track records. Procurement of petroleum products will be done in compliance with World Bank Procurement Guidelines and PMU will receive the support of an international consultant that will ensure transparency and effectiveness of diesel and HFO purchase.
Resp: WB/PMU Stage: Implementation Due Date: Before year one of AF II
Status: Not yet due
3. Project Risks 3.1. Design Rating: L Description: Project design is fairly simple and straightforward and therefore not risky. It focuses on a limited number of activities doable in 12 to 15 months.
Risk Management: The scope of the project is limited to procurement of diesel oil and HFO, a contract ensuring their storage and maintenance, and a TA meant at enabling sustainability over time. It is a relatively simple workable framework.
Resp: WB/PMU Stage: Prep. / Impl. Due Date: By Closing Date Status: Ongoing
3.2. Social & Environmental Rating: M Description: Potential social and environmental impact of the project are limited given that the diesel and HFO security stocks developed under AF II will represent a fraction (around 1 percent) of the existing Horizon Djibouti Terminals Limited storage facility.
Risk Management: An Environmental Audit of the Horizon Djibouti Terminals Limited storage facility has been prepared and has been disclosed in Djibouti and at the Infoshop. Based on the satisfactory Environmental Audit prepared, the risk is deemed moderate provided that the implementation of the Environmental, Health and Safety standards currently in place remains the same. From a social safeguards perspective, there will not be any constructions, or any acquisition of land or any displacement of population in the context of the project implementation. Existing facilities will be used. OP 4.12 will not be triggered.
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Resp: WB/PMU Stage: Prep. / Impl. Due Date: Before appraisal Status: Ongoing
3.3. Program & Donor Rating: NA Description: There is no involvement of other donors. Risk Management: Activities planned under this AF II will be entirely funded, implemented and supervised by the World
Bank.
Resp: NA Stage: NA Due Date: NA Status: NA
3.4. Delivery quality Rating: H Description: The delivery quality risk for this AF II is moderate, The constitution, storage, and maintenance of security stocks will be supported by substantial technical assistance to ensure the quality of the results and their sustainability over time. However, any derailing in the timeline of the procurement and implementation of the new activities would cause some challenges to project achievements.
Risk Management: Delivery quality of the development, storage and maintenance of security stocks will be ensured through the recruitment of internationally renowned consulting companies, which will be in charge of all technical aspects involved in the procurement of these activities. A TA will also be undertaken by an internationally renowned consulting company recruited according to WB guidelines to develop the security stocks regulation, which will notably ensure the sustainability of the security stocks. Successful implementation of the project will require close supervision from the WB team in particular with matters related to procurement.
Resp: WB/PMU Stage: Impl. Due Date: By Closing Date Status: Ongoing
3.5. Other – Risk of depleting security stocks inefficiently Rating: M Description: There is a risk of depleting security stocks inefficiently if the criteria distinguishing between dry season and drought peaks is not properly defined or overlooked by the authorities.
Risk Management: This risk will be mitigated through the design of a downstream oil regulation, which will be put in place to avoid using the security stocks in non-life threatening situations. The design of these regulations should also define how private sector operators should contribute to petroleum security storage in line with international best practice. Finally, it should identify a pricing mechanism that will enable the replenishment of stocks.
Resp: WB/PMU Stage: Impl. Due Date: By Closing Date Status: Not yet due
3.6. Other – Petroleum procurement capacity Rating: H Description: Petroleum procurement capacity is limited in Djibouti. Risk Management: This risk will be mitigated through the recruitment of an international consultant specialized in
petroleum procurement. All the technicalities of petroleum procurement will be outsourced to this consultant.
Resp: WB/PMU Stage: Prep. / Impl. Due Date: By Closing Date Status: Ongoing
4. Overall Risk Following Review 4.1. Implementation Risk Rating: M Comments: Implementation risk rating is moderate. While it involves procuring highly specialized goods, key procurement activities will be outsourced to an international consultant specialized in this field.
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Annex 3: Detailed Description of Modified or New Project Activities 49. The new activities financed through AF II are focused on essential interventions that are achievable within 12 to 15 months. Advanced procurement5 could shorten the time needed for project execution. Within this context, the proposed AF II activities consist of two main components: (1) purchase of Diesel and HFO for security stocks as well as a 2-year rental and maintenance contract for their storage; (2) the design and enforcement of a regulation guided by international best practices and adapted to local realities in order to enable a sound procurement process and ensure the sustainability management of security stocks. 50. The constitution of security stocks requires data on the daily consumption of oil products. According to the Ministry of Industry, annual fuel consumption is as follow: 3,500 ton/year of gasoline, 120,000 ton/year of kerosene, 140,000 ton/year of diesel oil and 80,000 ton/year of HFO. Since the project is specifically designed to help mitigate the impact of the drought on Djibouti, it will focus solely on HFO and diesel oil. HFO is only used by EDD for electricity generation, while diesel consumption stems from power generation, transport sector and water-pumping needs in rural areas. National statistics however do not provide the split between these last two uses of diesel, and no monthly or daily data is available. Based on discussions with counterparts from the Ministry of Energy and Water in charge of Natural Resources and the Ministry of Economy, Finance and Planning in charge of Privatization, it has been estimated that HFO and diesel demand during drought periods is 150% higher than the yearly average. An adjustment factor of 1.5 has thus been used for the calculation of petroleum production consumption during droughts. In addition, based on the discussions with above-mentioned ministries, it is assumed that rural consumption of diesel is equal to a third of the overall consumption of diesel in Djibouti.
51. Beyond data collection, constituting stocks in HFO and diesel requires the budget needed to buy the oil products that will be stored for security purpose, and the construction or rental of oil products’ tanks. Within an allocated budget of US$5.2 million, it is estimated that this project could provide Djibouti with 5 days of security stocks of HFO, 5.2 days of diesel, 2 years of storage and maintenance for each product and the TA needed to assist the Government in procuring the goods and establishing the regulation needed to replenish and maintain the stocks. While AF II allows for a very limited number of days of security stocks, its impact shall however be significant. Indeed, the longest disruption to energy supply witnessed in the country was of two days. As such, the security stocks envisaged by AF II will be enough to prevent a similar situation from taking place again. Furthermore, security stocks are traditionally used to cover the consumption of a whole nation. In the case of the security stocks envisaged by AF II for Djibouti however, they will be set up so that they can only be used to pump water to villages (diesel) and urban areas (HFO) during drought peaks. Since water pumping is only one component of the energy demand in the country, diesel and HFO security stocks financed by the project
5The Borrower may wish to proceed with the initial steps of procurement before signing the related Bank loan. In such cases, the procurement procedures, including advertising, shall be in accordance with the World Bank Guidelines in order for the eventual contracts to be eligible for Bank financing, and the Bank shall review the process used by the Borrower. A Borrower undertakes such advance contracting at its own risk, and any concurrence by the Bank with the procedures, documentation, or proposal for award does not commit the Bank to make a loan for the project in question. If the contract is signed, reimbursement by the Bank of any payments made by the Borrower under the contract prior to loan signing is referred to as retroactive financing and is only permitted within the limits specified in the Loan Agreement.
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(equivalent to 5 days of total national energy consumption) are in effect equivalent to at least 14 to 30 days of energy consumption6 from water pumping. 7. 52. The cost assessment for AF II is an estimation of actual costs based on January 17, 2012 (FOB Barge Rotterdam) Platts quotations of petroleum prices and AFRA/Petroleum tanker proxies for transportation and insurance costs. As a matter of fact, both FOB petroleum prices and transport costs vary on a daily basis.
Table 6: Cost Assessment for AF II
HFO Diesel Annual Consumption (tons) 80,000 140,000 Average Daily Consumption (tons) 219.18 383.56 Adjusted Average Daily Consumption (tons) 328.77 575.34 Days of Consumption Envisaged for Security Stocks 5 5.2 Security Stocks Envisaged (tons) 1,644 2,992
Cost Platts - Rotterdam (US$ / ton) 680 960.75
Cost of Petroleum Products 1,117,818 2,874,341
Transport & Insurance (US$ / ton) 100 30 Cost of Transport (US$) 164,385 89,753
Total Cost of Petroleum Products (US$) 1,282,203 2,964,094
Storage and Maintenance Cost for 2 years (US$ / ton) 120 120
Cost of Storage and Maintenance (US$) 197,262
(1 ton of HFO per m3) 422,367
(0.85 ton of Diesel per m3)
Cost of Security Stocks per Product (US$) 1,479,465 3,386,461 Total Cost of Security Stocks (US$) 4,865,926
Total Cost of Petroleum Products ( US$) 4,246,297 Total Cost of Storage and Maintenance (US$) 619,629
Cost of Technical Assistance (US$) 330,000
TOTAL COST (US$) 5,195,926
53. The Power Access and Diversification Additional Financing II will support the following two activities: Component 1: Setting up petroleum security stocks - US$4.87 million. 54. This component will include (1) the purchase of diesel and HFO for security stock and (2) the rental of long-term storage capacities for both petroleum products. As shown in the table above, the Government of Djibouti should be able to afford around 5 days of consumption of HFO and 5.2 days of diesel within the allocated budget, as well as a 2-year rental and maintenance contract for the storage tanks, though the precise figures will depend on the outcome of the procurement procedure.
6 There aren’t any national statistics available on the breakdown of energy consumption in Djibouti. The figures presented in this document come from various counterparts’ estimates. 7 There aren’t any national statistics available on the breakdown of energy consumption in Djibouti. The figures presented in this document come from various counterparts’ estimates.
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55. Almost all of this component’s funds will be used to buy oil products (US$4,246,297 i.e. 87% of component cost), the remaining will go toward the rental of available storage capacities. While building storage tanks is an option, it is not doable within this project. Building an 11,000 to 15,000 cubic meters tank of petroleum products costs between US$1.8 and 3.5 million. As petroleum products of different qualities cannot be stored in the same tank, constructing dedicated tanks for HFO and diesel would cost US$3.6 to 7 million for the envisaged project. This is unreasonably expensive given the budget of AF II. Moreover, that would be extremely inefficient as 5 days of security stocks per product are but a fraction of a tank (between 10 and 20%). It is also important to factor in the fact that storage has a maintenance cost that includes the inventory turnover cost. In a country like Djibouti where there isn’t any public entity with the capacity to properly maintain stocks8, this option is not appropriate. In addition, in the context of an emergency financing that has to be executed before March 31, 2014, there is no time to construct the tanks and develop local public capacity to properly manage them. The rental option therefore is the most appropriate for this project. 56. There are large HFO and diesel storage capacities available in Horizon Djibouti Terminals Limited storage facility9, where all the operators store their products. Petroleum product storage costs US$5 per cubic meter per month, including maintenance. Storing 5 days of HFO and 5.2 days of diesel amounts to US$619,629 over 2 years (i.e. 13% of component cost). The number of petroleum days-equivalent covered under the allocated budget is small, however this public investment could be used as a basis to legally mandate private sector operators to contribute to the constitution of larger security stocks, as is the case in most countries around the world. This obligation would be defined through the technical assistance planned in component 2. Component 2: Institutionalizing the management of petroleum security stocks - US$330,000. 57. This component will include:
a) The recruitment of an international individual consultant to assist the Government of Djibouti in purchasing petroleum products and negotiating the maintenance and rental of storage capacity (contract estimated at US$100,000). The recruitment of an international individual consultant to purchase petroleum products and negotiate the maintenance and rental of storage capacity is essential as a recent assessment showed that Djibouti’s capacity to procure petroleum is very limited. It should not cost more than US$100,000 as the petroleum purchase and storage negotiation is a one shot operation. Moreover, the only capacities available in the country are those in the Horizon Djibouti Terminals Limited storage facility. All private operators rent their storage from Horizon Djibouti Terminals Limited and the options that can be considered for the project can either be to rent capacity directly from Horizon Djibouti Terminals Limited or from private operators
8Djibouti International Hydrocarbon Company was established 10 years ago with the objective to import, distribute and store petroleum products. Since then, it did not have the opportunity to develop any experience in petroleum procurement, import, distribution or storage. The company’s sole experience was as a recipient of a single Japanese grant executed by the donor.
9 Horizon Djibouti Terminals Limited storage facility has 27 storage tanks for liquid petroleum and petrochemical products, including 17 tanks of 15,000 cubic meters and 3 tanks of 35,000 cubic meters used for petroleum products. HFO and Diesel security stocks developed under this project will require a fraction of a single 15,000 cubic meter tank each.
26
which have spare capacity in the Horizon Djibouti Terminals Limited storage facility. Renting diesel storage capacity and maintenance from private operators might be considered because they have the logistical organization and experience to supply villages. While from a financial perspective, renting second-hand storage capacity might not be optimal, the operators are international companies who maintain a risk-based emergency response systems and facilities as necessary to control and mitigate the effects of any incident that may occur.
b) The hiring of a consulting service company to design a simple regulation of security stocks management, including guidelines for releasing and rebuilding security stocks (contract estimated at US$185,000); The largest share of this component’s budget will be allocated to the design of security stock regulation. Such a regulation should include very clear rules on how and when to use the security stocks. Given the recurrent nature of dry seasons in Djibouti, a clear distinction should be made between drought and dry season, and the use of security storage should only be allowed in clearly defined emergency situations. The purpose of the regulations to be put in place is to avoid using the security stocks in non-life threatening situations. The design of these regulations should also define how private sector operators should contribute to petroleum security storage in line with international best practice. Finally, it should identify a pricing mechanism that will enable the replenishment of stocks
c) The recruitment of a local financial management expert to strengthen the PMU’s capacity and ensure the timely execution of the activities of the project (contract estimated at US$45,000).
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Annex 4: Revised Estimate of Project Costs 58. The project was launched through credit 41200-DJI in 2005 (US$7 million) and benefited from a first additional financing (grant H5740-DJ – US$6 million) in 2010. The Power Access and Diversification Additional Financing II of US$5.2 million will bring total project costs to US$18.2 million. 59. The initial project (credit 41200-DJI) contains three components, two of which are completed (components 1 & 2). The third component “Technical Assistance and Implementation Support” contains four sub-components, two of which are still not completed: sub-component 3(iii) and sub-component 3(g)10. The detail of credit 41200-DJI components costs is presented in Table 7 below.
Table 7: Credit 41200-DJI, Components costs.
CREDIT 41200-DJI Components
Component cost (2008 restructuring)
Status
1: Extension of Access / Rehabilitation US$3.0 million Completed 2: HFO Procurement US$4.9 million Completed 3: Technical Assistance and Implementation Support US$1.1 million Ongoing
TOTAL US$7 million
60. The first additional financing of 2010, AF I, was done on financial terms that are different from those of the parent project as latter was a credit while the former was a grant (grant H5740-DJ). It contains two components that are now both in their tendering phase. The envisaged AF II will also be a grant and will add two components for a total of US$5.2 million. The total additional financing for this project will thus reach US$11.2 million and the detail of components costs is presented in Table 8 below.
Table 8: Grant H5740-DJ and AF II, Components costs.
GRANT H5740-DJ Components
Component cost Additional Financing I
(2010)
Component cost Additional Financing II – (2012)
Total Cost Status
1: Extension of Access / Rehabilitation Balbala and Arta
US$4.0 million - US$4.0 million Ongoing
2: Smart metering US$2.0 million - US$2.0 million Ongoing
3: Setting up Petroleum Security Stocks - US$4.87 million US$4.87 million Not yet started
4: Advisory Assistance for setting up security storage
- US$0.33 million US$0.33 million Not yet started
TOTAL US$11.2 million
10Sub-component 3(iii) -“Acquisition of consultants’ services for Project’s engineering, procurement and supervision activities, including monitoring and implementation of the Environmental Management Plan and the Project’s audit” - is changed by the 5th restructuring of the project while sub-component 3(g) -“Preparation of an environmental and social impact assessment for a proposed geothermal exploratory drilling operation”- is added to Credit 41200-DJI.
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Annex 5: Revised Implementation Arrangements and Support 5.1 Revised procurement plan 61. The PMU has developed a procurement plan for the implementation of AFII. The procurement of the goods and services planned under this project will be carried out in accordance with the World Bank’s guidelines in effect11.
11Currently the “Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants, January 2011” and “Guidelines: Selection and Employment of Consultants under IBRD Loans & IDA Credits & Grants by World Bank Borrowers, January 2011”
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Table 9. Procurement Plan– Goods and Non-Consulting Services financed by AFII
Description Category Method Estimated Amount
(US$)
Prior/Post Review
Plan vs. Actual
Bidding Doc Bid Evaluation Report Contract Amount
(US$)
Contract Signature
Contract Completion Launching of
Bidding Process
Submission deadline and Bid Opening
Evaluation Rpt to the
Bank
Bank No-Objection
Procurement of oil products
(HFO) GOODS ICB 1,282,203 Prior
Plan 10/15/2012 11/30/2012 12/15/2012 12/30/2012
01/30/2013 04/30/2013
Actual
Procurement of oil products
(Diesel) GOODS ICB 2,964,094 Prior
Plan 10/15/2012 11/30/2012 12/15/2012 12/30/2012
01/30/2013 04/30/2013
Actual
Fuel Storage
Rental NON
CONSULTING D.C 619,629 Prior
Plan 10/15/2012 11/30/2012 12/15/2012 12/30/2012
01/30/2013 03/31/2014
Actual
Table 10. Procurement Plan – Consulting Services financed by AF II
Package
identification Description Selection
Method Cost
Estimate (US$)
Contract Type
Prior/Post Review by
Bank
Plan vs. Actual
Launching of Selection Process
Submission Deadline and
Public Technical Proposals Opening
Contract Amount
US$
Contract Signature
Comments
Recruitment of an
International Advisor IC 100,000 LUMP-SUM Prior
Plan 06/15/2012 07/30/2012
09/15/2012Advanced procurement foreseen, contract will be signed when project
is effective Actual
Recruitment of an
FM consultant IC 45,000 LUMP-SUM Prior
Plan 06/15/2012 07/30/2012
09/15/2012Same as above
Actual
Hiring of a consulting service
company to design a simple regulation of
security stocks management
QCBS 185,000 LUMP-SUM Prior
Plan 06/15/2012 07/30/2012
09/15/2012
Same as above Actual
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5.2 Assessment of PMU capacity to undertake the new activities planned under the AF II 5.2.1 Financial Management and Disbursement Arrangements 62. The proposed additional financing would be implemented using the existing PMU under the same procurement and disbursement arrangements. It will be overseen by the Ministry of Economy, Finance and Planning in charge of Privatization. The PMU has performed well under the original project and has acquired solid capacity in fiduciary procedures applicable to Bank projects. The PMU is considered as an autonomous unit in charge of planning, executing, monitoring and evaluating project activities. It is responsible for project financial management and accounting and for preparing periodic reports on project implementation progress and on both physical and financial achievements. The continuation of implementation arrangements would prevent a hiatus in knowledge, engagement and commitment of staff, which has often proven costly in other projects. 63. The proceeds of the IDA Grant would be disbursed in accordance with the traditional disbursement procedures of the Bank and will be used to finance project activities through the disbursement procedures currently used as stated in the Disbursement Letter dated July 27, 2010 for the first Additional Financing under IDA Grant No. H5740. 64. Designated Account. The PMU will open a segregated Designated Account in a Commercial Bank in Djibouti acceptable to the World Bank in US Dollars to cover Grant's shares of eligible project expenditures. The Ceiling of the Designated Account would be 10% of the Grant's amount. The PMU will be responsible for submitting monthly replenishment applications with appropriate supporting documentation. 65. Statement of Expenditures (SOEs). Necessary supporting documents will be sent to the Bank in connection with contract that are above the prior review threshold, except for expenditures under contracts with an estimated value of (a) US$ 50,000 or less for goods; (c) US$ 100,000 or less for consulting firms; (d) US$ 50,000 or less for individual consultants, as well as all operating costs, training, workshops, study tours and Audit Fees, which will be claimed on the basis of SOEs. The documentation supporting expenditures will be retained at the PMU and will be readily accessible for review by the external auditors and periods Bank supervision missions. All disbursements will be subject to the conditions of the Grant Agreement and disbursement procedures as defined in the Disbursement Letter.
Table 11. Goods and Consulting Services to be financed by AFII
Category Description Cost Estimate (US$)
Method or Contract Type
Goods Procurement of oil products (HFO) 1,282,203 ICB Procurement of oil products (Diesel) 2,964,094 ICB
Subtotal: Goods 4,246,297 Consulting Services
Recruitment of an International Advisor 100,000 Lump-sum Recruitment of an FM consultant 45,000 Lump-sum Hiring of a consulting service company to design a simple regulation of security stocks management
185,000 Lump-sum
Subtotal: Consultant’s Services 330,000 TOTAL 4,576,297
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66. The staffing of the PMU with regard to the transaction volume level is satisfactory. It is managed using an administrative, financial and accounting procedures manual set up in March 2006. This Manual defines the role, function and responsibilities of the project coordinator and the project accountant, the flows of fund and information and the chart of accounts. This manual will be updated according to the Bank’s new guidelines and procedures and submitted to the Bank for approval. The PMU is equipped with financial, accounting and assets management software that is not fully used. The PMU should get an update and maintenance contract with the software supplier for all the project period. 67. Project commitments are subject to local procurement procedures through the National Procurement Committee, for amount exceeding the threshold fixed by local regulations. This Committee will therefore be involved in the control of all procurements steps. Payments of eligible expenses will be done based on instructions signed by both the project coordinator and the director of external financing of the Ministry of Finance. The department of external financing will be in charge of ensuring the eligibility of all expenses. The project will be subject to an annual external audit which covers all aspects, uses of fund and committed expenditures of the project. The audit will also cover the financial operations, internal control and financial management systems as well as a comprehensive review of statements of expenses (SOEs).The last Financial Management rating of the project was Moderately Satisfactory. No audit report is overdue and the overall fiduciary risk rating is assessed as low. 5.2.2 Procurement 68. General. Procurement for the proposed project will be carried out in accordance with the World Bank "Guidelines: Procurement of goods, works, and non-consulting services under IBRD loans and IDA credits & grants by World Bank borrowers” dated January 2011 (“Procurement Guidelines”), and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011 (“Consultant Guidelines”), and the provisions stipulated in the Credit Agreement. National Competitive Bidding (NCB) will be carried out with procedures acceptable to IDA/IBRD. Overall, the new Djiboutian Procurement Manual of Procedures for goods, works and employment of consultants remains in line with the Bank's procedures and the country has, since May 2010, adequate standard bidding documents and request for proposals similar to that of the Bank’s. 69. Project Management. The PMU of the parent project will be responsible for the overall supervision and coordination of the project. The PMU will be supported by an International Advisor and by the relevant technical services inside the Ministry of Energy for bidding documents preparation. The PMU will be the interlocutor of the World Bank during the supervision and appraisal missions. 70. Procurement of Works. No works are currently foreseen under this project. 71. Procurement of Goods. The main goods contracts to be financed by the project will be the purchase of oil products (HFO) (US$1,282,192) and the purchase of Diesel (US$2,280,082).
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These two contracts will be procured through a modified international competitive bidding (ICB) for procurement of commodities and a revised/updated Bank’s Standard Bidding Document for the procurement of petroleum products.
Procurement of non-consulting Services
72. The main non-consulting services to be financed by the Project will cover the rental of petroleum storage capacities with Horizon Djibouti Terminals. The rental cost is estimated at US$619,629 and the World Bank procurement rules would allow direct contracting as Horizon Djibouti Terminals is the only company in the country that can provide this service. 73. Consultants’ services. Consultancy services financed under this project will mainly include: (1) the recruitment of an international individual consultant to assist the Government of Djibouti in purchasing petroleum products and negotiating the maintenance and rental of storage capacity (contract estimated at US$100,000) (2) the hiring of a consulting service company to design a simple regulation of security stocks management, including guidelines for releasing and rebuilding security stocks (contract estimated at US$185,000) and (3) the recruitment of a local financial management expert to strengthen the PMU’s capacity and ensure the timely execution of the activities of the project (contract estimated at US$45,000). 74. Assessment of PMU’s capacity to execute the project procurement activities. The assessment of the PMU’s capacity to execute procurement activities within the framework of this project has been updated and the report will be filed in the Procurement Risk Assessment Management System (P-RAMS). Given the very limited capacity of Djibouti, in general and the PMU in particular, especially in procuring petroleum, the PMU’s capacity to oversee the procurement management has been judged weak. However, this capacity could be improved provided that the recommended actions are taken before project’s effectiveness. This does not apply to the Procurement Plan that should be provided before the approval of the financing. The risk has been rated as high. The frequency of procurement supervision including Post Procurement/Audit will be every 6 months. 75. The Action Plan is summarized below:
a) Train PMU Staff involved in procurement before the project starts on the Bank’s procurement procedures and documentation expected to be used in the project implementation; and
b) Make sure that the International Advisor is hired before the project starts, in order to provide the PMU with the required technical assistance for the preparation of the procurement documents and bid evaluation needed during project implementation.
76. The methods to be used for the procurement under this project, and the estimated amounts for each method, as well as the prior review thresholds are set in Table 11 below.
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Table 12. Prior review and Procurement Method Thresholds
Prior Review Thresholds (in US$) Procurement Type High Risk Implementing Agency Prior Review Thresholds
Goods 0.05 million and all direct contractsNon-consulting Services 0.05 million and all direct contracts
Consulting Firms 0.05 million Individual Consultants 0.025 million
Procurement Method Thresholds (in US$) Djibouti Goods/Non-consulting Services Works
ICB NCB Shopping ICB NCB Shopping > 150,000 ≤ 150,000 ≤ 25,000 > 1 million ≤ 1 million ≤ 200,000
77. Procurement Planning. A Project Operation Manual will be prepared for AF II and will include the description of applicable procurement procedures, as well as the detailed procurement plan for the first 18 months of activity that should have been approved during the negotiations. 78. Works/Goods/Non-consulting services. One ICB contract is expected for the purchase of petroleum products. A revised/updated Bank’s Standard Bidding Document for the procurement of petroleum shall be used. 79. Consultants’ Services. The consulting services are detailed in the procurement plan. Consulting assignments with short-list of international firms are set in Table 12 below.
Table 13. List of consulting assignments with short-list of international firms
Ref. No.
Description of the Assignment Cost Est.
(‘000 US$)
Selection Method
Bank review (prior/
post)
Date Submission of Proposals
Date Contract Signing
Advisory Assistance for setting up security storage
100,000 IC Prior 07/30/2012 09/15/2012
The hiring of a consulting service company to design a simple regulation of security stocks management
185,000 IC QCBS 07/30/2012 09/15/2012
5.2.3 Social Safeguards 80. There are no social safeguards policies triggered. 5.2.4 Environmental Safeguards 81. The Horizon Djibouti Terminals Limited company will be required, through a clause in the rental of petroleum storage capacities contract, to maintain the current health, safety and environment arrangements as described in the Environmental Audit (EA) and, more specifically (1) to have an Environment Health Safety (EHS) policy in place; (2) to provide the management structure, personnel resources and guidelines necessary to minimize adverse affects of its operations on the environment or human health and safety; (3) to prevent pollution by implementing proven technology, promoting safe working practices and maintaining property and equipment within acceptable international oil and gas industry standards; and (4) to maintain a risk-based emergency response systems and facilities as necessary to control and mitigate the effects of any incident that may occur.
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Annex 6: Economic Analysis
82. Direct purpose of project. The project is designed to purchase a limited amount of HFO and diesel on the government’s behalf, and to provide finance for renting storage for up to two years. The benefits of the project accrue from what can be done with these supplies to mitigate shortages of electricity and diesel used for pumped water for household use and irrigation at times when drought has created abnormally large demand for these products. 83. Reason for holding security stocks. It is assumed that commercial (working) stocks of these products are adequate to deal with normal fluctuations in demand or supply. Extreme events, such as a drought or physical supply disruption, happen infrequently and the fuel required would not be available from normal stockholding in Djibouti. As a result, the electric utility would have to ration the supply to urban pumping stations, and diesel fuel would become unavailable to supply all rural demand to fuel private generators that are primarily used for water pumping. In particular, it would either not be possible to rapidly acquire extra supplies from imports, or else these would be too expensive for the utility to purchase, especially when the existence of drought is correlated with high oil prices. 84. The quantity of HFO fuel purchased for stock and its impact on electricity supply. The project is planned to purchase the equivalent of 5 days average national consumption of HFO during a drought period (2876 metric tons). To quantify the impact on electricity production if all these supplies were released onto the market, at a time when otherwise there would be rationing, it is necessary to consider the efficiency of the generation units used. For heavy fuel oil, it has been calculated that 1 gallon would generate 12.3 kWh of electricity from the utility owned plant currently operating in Djibouti. At a conversion rate of 276 gallons per metric ton, the proposed stock purchase of HFO could generate 8,456,175 kWh of electricity. 85. The quantity of diesel fuel purchased for stock and its impact on electricity supply. The project is planned to purchase the equivalent of 4 days average national consumption of diesel fuel during a drought period (2301 metric tons). These supplies will be released during periods of shortage solely to rural households where the fuel is used in small-scale generators. The conversion factor to electricity generated depends on the size and efficiency of the generator used. Conversion coefficients for diesel fall in the range from 0.28 to 0.4 liters per kWh. Assuming conservatively a conversion factor of 0.4 liters per kWh and noting that 1 ton of diesel is equivalent to 1176 liters, the supply purchased could generate 6,764,940 kWh. 86. The costs of not having electricity available. The severity of the drought has at times increased electricity demand so much that there has been insufficient fuel to provide sufficient generation to meet the demand, resulting in blackouts. Similarly, rural demand for diesel to fuel small generators that can be used for irrigation pumping has created shortages of this fuel. Without diesel these generators cannot function and irrigation has had to stop. The cost of such energy shortages is measured by “the cost of unserved energy” (the “value of lost load”). Surveys and studies of the losses in production and the inconvenience incurred by having to cope with such shortages are widely used in power system planning. The simplest approach is the assumption that every hour lost costs a fixed amount. More elaborate studies allow the marginal cost of extra hours lost to vary. Losses also vary by category of user. Businesses may be
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expected to suffer larger losses per hour than households, and the losses will depend on the type of business. A universal finding is that the cost of unserved energy is much higher than the tariff charged for power when it is available, in part because households and businesses will have invested in plant and equipment on the assumption that power will be available. Being unable to use these imposes costs that would not have been incurred in their absence. 87. Valuing the benefits of extra fuel stocks. The extra fuel stocks to be purchased in this project, if released at a time when there was power rationing, or diesel shortage, will allow some mitigation of these effects. Hence there would be a reduction in the costs of unserved energy. By placing a value per hour on these costs, a maximum economic benefit can be calculated from the release of all the stocks at such times. The Parsons Brinkerhoff Least Cost Electricity Master Plan for Djibouti of 2009 estimated for the economy as a whole the cost of unserved energy was around US$6 / kWh. A survey by van der Welle and van der Zwaan (2007) suggested that in developing countries the cost of unserved energy falls between $1 and $10 per kWh, depending on the sector and country12. In Djibouti, some rural water supply will go to household use instead of agriculture – providing access to drinking water during a drought can have effects on improving mortality and morbidity. Bearing all the points in mind, a value of US$1/kWh for the costs of unserved energy to supply water provides a conservative economic value for the project of $12.3 million as shown in the table below.
Table 14. Economic benefits of increased petroleum stocks for mitigating electricity shortages
Petroleum product Economic value of full stock release (million US$)
HFO for urban power supply 5.58 Diesel for rural self generation 8.46
88. Sensitivity analysis. A lower rate of power sector blackout caused by fuel shortages could mean that, during the two year period in which the storage of these products is financed by the project, not all security stocks were used so that the economic benefits from reducing the costs of unserved power were correspondingly lower. However, the stocks would still be available to meet shortages further into the future, although the benefits from these would have to be discounted to reflect the value of time. The government would also have to pay storage fees on those stocks that had yet to be released. The expected extra costs of unreleased stocks during the two year period are likely to be small in comparison with the expected benefits accruing from those stocks that would be released during the two year period when the project will finance storage costs—recent experience suggests that most, if not all. stocks will be needed to deal with shortages during a two year period, and the costs of storage that would have to be borne by the government would be for a small amount of stock and that would likely be used with only a short delay A lower value for unserved energy would also reduce the project benefit, but the value chosen is conservative and still leaves a substantial economic benefit to the project.
12An Overview of Selected Studies on the Value of Lost Load (VOLL). Section 2 in WP5 report on National and EU level estimates of energy securities, CASES project, D5.1.
