Madagascar: Power/Water Sector Recovery and Restructuring (APL) Project (World Bank - 2006)

8/4/2019 Madagascar: Power/Water Sector Recovery and Restructuring (APL) Project (World Bank - 2006)

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Document o fThe World BankFOR OFFICIAL USE ONLY

Repor t No: 36474-MG

PROJECT APPRAISAL DOCUMENTON A

PROPOSED CREDITIN THE AMOUNT OF SDR6.8 MILLION(U S$ l O MILLION EQUIVALENT)

TO THEREPUBLIC OF MADAGASCAR

FORAPOWEWWATER SECTORS RECOVERY AND RESTRUCTURINGPROJECT

IN SUPPORT OF THE FIRST PHASE OFTHE POWEWWATER SECTORS RECOVERYAND RESTRUCTURING PROGRAM

June 14,2006

Energy TeamInfrastructure GroupAfr ic a RegionThis document has a restr icted distr ibution and m ay b e used by recipients onl y in he performance o f heirofficial duties. I t s contents may n ot otherwise be disclosed witho ut W o rl d Ba nk author ization.

PublicDisclosureAuthorized

Pub

licDisclosureAuthorized




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A C C TADERAFDAfDBAPLBADEAC A SC F A AC P A RC E L C ODEELDFBEBITDAEIBEIRRESMFE S I AEMPFDIFIDEFFMRsGDPG O MHFO

C U R R E N C Y EQUIVALENTS(Exchange Rate E ffec tive June 7,2006)

Currency Unit = Malagasy Ar iar y2169.00 = U S $ 1

F I S C A L YEARJanuary 1 - December 31

A B B R E V I A T I O N S AND A C R O N Y M S

Agence Com ptable Centrale du Tresor (Central Account ing Agency o f heTreasury)Agence de Developpement de 1Electr if ication Rurale (Agency fo r Ru ra lElectr if ication)Agence Franqaise de Dtve loppe ment (French Deve lopment Agency)Afr ican Development Ba nkAdaptable Program LoanBanque arabe pour le developpement tconom ique de 1Afr ique (Arab Bankfor Ec onomic Development in Afr ica)Cou ntry Assistance StrategyCoun try Financial Accounta bil i ty AssessmentCoun try Procurement Assessment R eportCellule de CoordinationDire ction de 1Equipement Electr icit6 (Department o f Electr ic i ty Equipmentand Installations)Directorate o f Finance and Budge tEarnin g Befo re Interests, Taxes, Depreciation and Amo rt izat ionEuropean Investment Ba nkEconomic Internal Rate o f ReturnEnvironmental and Social Impac t Management Fram eworkEnvironmental and Social Impact AssessmentEnvironment Management PlanForeign Direct InvestmentFCdCration Internationale des Exp erts Comp tables Francophones(International Federation o f Francoph one Accountants)Financial Monitoring ReportsGross Domes tic Produ ctGovernment o f MadagascarHeavy Fuel O i l


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I F CIG2PIH PI N T E C

Vic e President: Gobind NankaniCountry Director: James Bo ndS. Vij ay Iyerector Man ager:Task Team Leader: Stephan Gamier- Program Ass is tant : Lily Wong

IP PISRJ l R A M ALSDPMEMN C BOPOREP CBPOPP R GPRGFPRSPRAPROSCSOEsU G M PUNEP

International Finance CorporationIntegrated Gro wt h Poles ProjectIndependent Hydrop owe r ProjectsInst i tut National des Techniques Economiques et Comptables (NationalInst itu te o f Economy and Accounting)Independent Pow er ProducerImple men tation Status ReportJiro SyRan0 MalagasyLetter o f Sector Development PolicyMinistry o f Energy and M i n e sNation al Competit ive BiddingOperational Polic yEle ctric ity sector regulatorPolychlorinated BiphenylPersistent Organic PollutantsPart ial Risk GuaranteePart ial Risk Guarantee F aci lityPoverty Reduc tion Strategy PaperResettlement Acti on P lanReports o n the Observance o f Standards and CodesStatement of ExpensesUn i te de Gestion des Marches Publics (Unit for Pub lic Procurement)UnitedNations E nvironmen t Programme


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MADAGASCARM G Power/Water Sectors Recovery and Restructuring Project

CONTENTSPage

A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1Count ry and Sector Issues................................................................................................... 1Higher Le ve l Object ives to w hich the Project Contr ibutes ................................................ 7

12.3.

Rationale for Ban k Involvement ......................................................................................... 5. .................................................................................................PROJECT DESCRIPTION 7

Lending Instrument ............................................................................................................. 72 .3 Project Components 94 .5 .

Program Development O bjectives ...................................................................................... 7Lessons Learned and Reflected in he Project Desig n ...................................................... 11

. ............................................................................................................Altern atives Considered and Reasons for Re jec tion ........................................................ 12

C. IMPLEMENTATION ........................................................................................................ 1312 .3 .

Partnership Arrangements (if applicable) ......................................................................... 13Institution al and Implementation Arrangements .............................................................. 14Mon i tor ing and Evaluation o f OutcomesResults............................................................. 15

4 . Sustainabil i ty .................................................................................................................... 15Cri t ical Risks and Possible Co ntroversial Aspects ........................................................... 17Credit C onditio ns and Covenants ..................................................................................... 18

. . .5.6.

D. APPRAISAL SUMMARY ................................................................................................. 2012 . Technical ........................................................................................................................... 233 . Fiduciary ........................................................................................................................... 244 . Environmental and Social ................................................................................................. 255 . Safeguard Policies ............................................................................................................ 266.

Economic and Financial Analyses .................................................................................... 2 0

Poli cy Exceptions and Readiness...................................................................................... 27Annex 1: Electricity Sector and Program Background......................................................... 28Annex 2: Major Related Projects Financed by the Bank and/or other Agencies.................36


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Annex 3 : Resu l t s F rame work and Mon i to r i ng ........................................................................ 37Anne x 4: De ta i led Pro ject Descr ip t ion...................................................................................... 43An nex 5: Pr oje ct Costs .............................................................................................................. 56Anne x 6: Imp lemen tat ion Arrangements ................................................................................. 57A nnex 7: F inanc ia l Management and Disbursement Arrangements.................................... 59Anne x 8: Procurem ent Arrangements ...................................................................................... 66A nnex 9: Economic and F inancia l Analys is ............................................................................. 72An nex 10: Safeguard Pol icy Issues............................................................................................ 92A nnex 11: Le t te r o f E lect r i c i t y Sector Development Policy (Abst ract) ................................. 97Anne x 12: Pro ject Preparat ion a nd Superv is ion ..................................................................... 98Anne x 13: Do cumen ts in the Project F i l e .............................................................................. 100Anne x 14: Statement o f Loans and Credits............................................................................ 101Anne x 15: Co un t ry a t a Glance ............................................................................................... 102Annex 16 : M a p IBRD 34815 .................................................................................................... 104


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MADAGASCAR

ASSOCIAT IONTotal:

P O W E W A T E R SECTORS RECOVERY AND RESTRUCTURING PROJECT

0.84 9.16 10.00

PROJECT APPRAISAL DOCUMENTAFRICAAFTEG

Date: June 14,2006Cou ntry Dire ctor: James P. Bon dSector Manager: S. Vijay IyerProject ID: PO95240Lending Instrument: Adaptable ProgramLending[ ] Loan [X I Credit [ ] Grant [ ] Guarantee [ ] Other:

Team Leader: Stephan Claude Frederic GSectors: Power (100%)Themes: Infrastructure services fo r priva tesector development (P)Environm ental screening category: PartialAssessment

Project Financing Data

For Loans/Credits/Others:Tot al Bank financing (US$m.): 10.00

Borrower: Governmento f MadagascarResponsible Agency: Ministry o f Energy and Mining and JIF UMA

I

Cumulative1 4.0 I 9.0 I 10.0 I 10.0 IProject implementation period : Start: September 1, 2006 End: December 31,2008Expec ted effectiveness date: September 1, 2006Expected closing date: April 30, 2009Does the project depart from th e CAS in content or other significant respects? [ ]Yes [X I No


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Does the project require any exceptions f ro m Ba nk policies?Re$ P A D D. 7 1[ ]Yes [XINOHave these bee n appro ved by Ban k management?[s approval for an y pol icy except ion sought f rom the Board? [ ]Yes [ IN0[ ]Yes [ IN0

[X IYes [ ] N o[X IYes [ ] N o

Does the projec t inc lude any crit ical risks rated substantial or high?Re$ PAD C.5Does the project meet the Regio nal criteria fo r readiness fo r implemen tation?Re$ PAD D.7Project development objective Re$ PAD B.2, Technical Annex 3The a im o f he p rogram i s to restore an adequate pu bli c utility service f or ele ctr icity a nd water inurban areas o f Madagascar and to create the foundation for a sustainable expansion o f acomm ercially-oriented service in the mos t cost-efficient way.Project description [one-sentence summary of each component] Re$ P A D B.3.a, TechnicalAnnex 4Component A: Investments for: (Al) Pow er generation reinforcement (rehabilitation); (A2)Reduction o f ransmission and distribution ech nica l losses; and (A3) Revenue management andModernizat ion o f nformat ion Systems and IT equipment.Component B: Fundingand tech nica l assistance for: (Bl) close cooperation with the IF Ctransaction advisors team in he process o f selecting and contracting a n ew private operator andcommu nication; (B2) prolongation o f he current management contract; (B3) prepa ration o ffuture generation projects in coordination with IFC s (second) IPP mandate; (B4) strengtheningo f the M in is t r y o f Energy and Mining; (B5) fea sibi lity and environme ntal studies for APL-2investments; (B6) mon itoring and evaluation; and (B7) project implementation.W hi ch safeguard policies are triggered, i f any? Re$ PAD 0 .6 , Technical An nex 10OP 4.01 Env ironm ental AssessmentOP 4.3 7 Safety of damsSignificant, non-standard conditions, if any, for: Re$ PAD C.7Bo ard presentation: Ju ly 13, 2006Lo ad cre dit effectiveness:(a)ratif ied.(b)Manua l a l l in fo rm and substance satisfactory to the Ass ociation.(c)procedures and upgraded i t s accounting and f inancial management and mon ito rin g andevaluation system (capable o f producing FMRs) in a manner satisfactory to the Association; andhas appo inted an accountant spe cialist and a procurement off icer within th e MEM acceptable tothe Association.(d) Fo r the purpose of Part A o f he Project, JIRAMA (DEEL) has upgraded its a ccountingand f inancial management and mon itorin g and evaluation system (capable o f produc ing FMRs)in a manner satisfactory to the Association.(e)cond itions acceptable to th e Association.

The Subsidiary Agreement between GOM and J IR AM A has been duly author ized o rMEM has adopted the Project Ma nua l and J IR A M A has adopted JI RA M A s ProjectFo r the purpose of Part B o f he Project, MEM has elaborated i t s account ing manual o f

T w o special accounts hav e been opened (for DEEL and MEM) in he Cent ra l Bank under


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(f)Component A an d Component B o f he ProjectCovenants applica ble to projec t implem entation:Credit Covenants are likely to be:Dated covenants regarding tarif fs(a) N o ater th an Novemb er 30,2006, GOM shall have adopted the Elec tr icity Tari ffIndexat ion Formula.(b) N o a te r than April 1,2007, GOM shall have pub licly disclosed the Electr ic i ty Tar i f fIndexa tion For mu la and adjusted electr icity tarif fs in accordance with said formula, and shallsubsequently adjust said tariffs in accordance with the Electr ic i ty Ta r i f f Indexat ion Formulaevery 6 months.Dat ed covenants (Milestones) regarding th e process o f ecrui t ing th e long-term priv ate partnerfor JIRAMA(c)used in he contracting of JIRAMAs private partner satisfactory to the A ssoc iation a nd havelaunched the preq uali fica tion process.(d)recruitment o f a ne w private operator fo r the management o f JI RA MA s operations.Financ ial covenants(a) Beginning with the first quarter o f C Y 2007, J IR A M A to produce a quarterlymanagement repo rt (including re levant technical, co mm ercial and finan cial parameters for themoni tor ing o f he company and to communicate this report ing to the Ba nk less than 60 days afterth e end o f he quarter.(b)onwards.(c)year during Project implementation amounts to be in jected as need be into J IR A M A during thefo llo wi ng calendar year so as to allow no rma l operations o f he company.

Au dit ors satisfactory to the Association have been recru ited fo r the purpose o f

N o ater than December 3 1,2006, GOM shall have established terms and con dit ions to be

N o a te r than April 1,2007, GOM shall have launc hed the biddingprocess for the

Accounts receivable not to exceed 3 months bil l in gs by the beginn ing o f FY 2008 andGOM shall define in agreement with the Association, n o later than September 30 o f each

Specific condition o disbursements would be:(a) Cre dit disbursement for Com pon ent B wou ld be permit ted onl y af ter recrui tment byMEM o f a technical advisor acceptable to the Ass ociation.(b) Credit disbursement for th e rehabil i ta t ion o f he c iv i l works o f he Vatomandryhydroelectric plant (to satisfy the requirements o f he safeguard policy OP 4.37 o n D a m Safety)w o u l d be permitted on ly after JIRAMA has submitteda report satisfactory t o the Association onthe condit ion o f he Vatomandry dam and the proposed sa fety measures to be implemented.


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A. STRATEGIC CONTEXT AND RATIONALE1. Country and Sector IssuesSector Issues1.1per capita inc om e i s about US$290 . In 2004, 72.1% o f he population was deemed to be at orbe low the pover ty l ine. The pr imary sector o f he economy accounts for a third o f GDPbut 80%o f employment. Despi te some macroeconomic insta bil i ty in 2003-2004, characterized by highinf lat ion and a rapidly depreciating currency, the real economy grew by over 5.3% in 2004 andby 4.6% in 2005. The overall macroeconomic situation has stabil ized and in he medium-term,rea l GDP gr ow th s expected to average 5%. This imp lies robust grow th in he demand forelectr icity. Unfortunately, powe r shortages have become a bott leneck to g ro wt h as the demandfor electr icity recovered strongly in 2003-2004, with out any accompan ying increase in supplycapacity. The ma jor i ty o f enterprises in the Export Processing Zones, w hi ch e mploy over100,000 worke rs (mainly in garment manufacturing) were n ot equipped with standby generators,so the adverse impact on output was acutely felt when po wer cuts began in mid-2005. Loadshedding i s estimated to have cut 0.5% o f f a st years econom ic grow th rate. These shortagesalso adversely affec t the overall investment cl imate and discourage Fo reig n Direct Investments(FDI). Power i s an essential input to the success o f he Government o f Madagascar (GOM)economic gro wt h agenda.

Madagascar has a population o f over 17 mi l l ion, a third o f wh ich is urbanized. Average

Electr icity Sector1.2 At present, with the exception o f a handfu l o f private pow er producers, electr icity supplyand distr ibut ion i s entirely in he hands o f J I R A M A , the state-owned p owe r and water utilitycompany. JIRAMA, with 6,500 staff, supplies about 400,000 ele ctric ity consumers in 112 urbancenters and 125,000 wa ter consumers across 65 urban centers. Access to ele ctric ity outside thecapital i s l o w (about 15% nationwide, but far less in ru ra l areas). There i s no interconnectednationa l electr icity grid and J IR A M A operates smal l grids in and around three m ajo r urbancenters, wh ile the rest o f he country i s served by stand-alone systems, mo st ly supplied by high-cost diese l generators. Madagascar has a ve ry larg e hydro electr ic resource potential, about 6,000MW, which has bare ly begun to b e tapped.1.3 The presently installed capacity o f he grid serving Antananarivo (140 MW) i s inadequateand load shedding o f at least 10 M W occurs at t imes o f peak demand. Th is grid supplies 70% o fMadagascars electricity consumption. An addit ional 40 MW o f uel-oi l f i red generat ioncapacity i s expected to enter service in mid-2007, which wil l ease the su ppl y constraints in th eAntananarivo grid.1.4 JTRAMA s total installed generating capacity is about 300 MW, over 35% o f w h i c h i shydroelectric. Elec tricit y sales in 2005 were 754 GWh. Sales have inc reased at an annualaverage rate o f almost 7% since 1996, some wha t above the average increase in GDP over thesame period. Hydro electr icity accounted fo r 65% o f product ion in 2005. To tal energy losses in2005 were about 24%.

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1.5JIRAMAs concess ion was set up in ate 2002, alon g with a national electr if ica tion fund. ADERbegan operating in mid 2004 and has as i t s mandate the objective o f electr ifyin g a ll 7,300vil lages with mo re than 400 inhabitants over the next 15 years. I t has an annual target o f 30,000ne w rur al connections over the next five years, but has yet to raise the necessary financi ng.

A new agency for rur al electr if ication (ADER) operating outside the areas covered by

1.6practica l purposes i t only began operating in mid 2004. I t s s t i l l in he early stages o festablishing itse lf as a ful l- f ledged institution capable o f exercising i t s legal mandate. M or edetails about the e lectricity sector are given in Annex 1.

Legis lation creating an electr icity sector regulator (ORE) was passed in 2001, but for

Water Sector1.7about 20% nationw ide. In 2005 J IR A M A produced about 95 million cubic meters o f reatedwater, over 50% o f whi ch was in the capital. Unacco unted for water represents a third o f o ta lproduction. J I R A M A has un ifo rm water charges nationwide. In 2006 the average revenue fromwater sales i s expected t o be about USc30 per cu.m. Legisla tion sett ing up a water and sewageregu latory agency has been passed, but no t yet implemented.

Access to pub lic water supply in those areas served by J I R A M A i s about 50%, but i s only

Financia l Issues.1.8frozen fr om 2001 to mid-2005, even though this was a period o f high inf lat ion, sharp devaluationof the local currency and risingwo rl d o i l prices. Furthermore, electr icity produ ction costs alsorose because all add itional dem and in he past few years has had t o b e m e t by using expensivediesel-powered plants. The ina ctio n on the part o f he GOM, due to pol i t ic al reluctance to raisetariffs, d irectly contr ibuted to the f inancial insolvency o f J IR AM A. The la tter was forced tobuild up large arrears to i t s fue l suppliers and was incapa ble o f servicin g its debts. Th e inab il i tyeven to pay for fuel to run i t s power plants and the result ing pow er cuts broug ht matters to a headin mid-2005. GOM was obl iged to intervene and bai l out JIRAMA with a cash inject ion to pa yfor fuel, to help ease the powe r shortages, w hi ch lasted fro m May-Se ptember 2005.

J I R A M A has been under severe finan cial stress for the past t w o years. Ta ri ff s rema ined

1.9garments, seafood proc essi ng etc. w hi c h were unprepared to deal with loa d shedding due to alac k o f standby generators. This crisis brought an end to the complacency and neglect o f hepow er sector o n the part of the authorities, as i t was a sharp warn ing o f he vu lnerab i l i ty o f heentire economic recovery and growt h program t o disruptions arising from a lack o f electr icity.

These shortages bad ly hu rt the manufacturing and expo rt-oriented industr ies such as

1.10while demand has increased substantial ly as the econ omy recovered fr om the po lit ica l cr isis o f2002. Most o f JIRAMAs pow er plants are now inadequate to meet demand in hei r serviceareas. Ov er 6,000 requests for n ew connections in he capital (backed by do wn payments) arecurre ntly frozen, due to the lac k o f materials to connect them and the capacity to supply them.Add it ion al generation capacity has been added o n an ad hoc basis in th e past few years throug hexpensive quasi-IPP/leasing contracts awarded o n a non-competit ive basis. JI RA M A soperational performanc e i s unsatisfactory, with high losses and po or maintenance. Therm al

Very limited new investment has taken place in recent years to increase po we r supply,

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plants are gene rally in a very poo r condit ion. Billing, mete ring and revenue c ollection practicesare weak. U np ai d arrears o f arge consumers, bo th pub lic ( l ik e universities) and pr ivate(numerous ma nuf act urin g enterprises), exceeded three mon ths bil lin gs at end-2005.Recent Reforms1.11government decide d against privatization o f JIRAMAs assets. A diagnostic study andmanagement audi t o f JIRAMA carried out at that time revealed the severity o f he problemsfacing JIRAMA. This study le d to GO Ms decision to op t fo r a two-year management contractas a f irst step towards rais ing JIRAMAs performance to a leve l where i t can carry out i t smandate of pr ov idi ng satisfactory service to e lectr icity and wate r consumers. Given he changedinternational investment cl imate in he early years o f h is decade and the lessons fro mpr ivatizat ions o f other developing country utilities, the Bank concurred with this approach. As aresult, J I R A M A has been under private management since April 2005 (paras. 1 .16- 1.17) andGOM has dec ide d that the present short-term mana gement con tract wil l be succeeded by alonger-term solution based on a public-private partnership.

After an extended stalemate on nstitutional reforms o f he sector in 2003, the ne w

1.12cumulative r ise o f 75%. A further 10% r i se in tar i f fs took place in April 2006, consistent withth e GOM sector re fo rm program. Average revenue this year should therefore be aboutUSc l3 /k Wh . Average water t a r i f f s were also raised by a third in 2005 and by 20% in April2006. JIRAMA does not have a po l icy o f pan-terr itorial pr ic ing fo r electr icity, and tarif fscharged in areas supplie d entirely by therm al energy are substantially m ore than in hose withaccess to hydroelectr icity. Ti me o f day pr ic ing i s applied to me dium and high voltagecustomers.

Tw o be la ted but large electr icity tar if f ncreases were introduce d in 2005, am ountin g to a

Government Objectives, Policies,andCommitmentLinkages to Macroeconomic Pol ic ies1.13 The GOMs Poverty Redu ction Strategy Paper (PRSP) states the overall objective o f hegovernment as the reduction o f poverty by h a l f in e n years. Th e three k e y priorities set out bythe PRSP are: (i)mp rov ing governance; (ii)romot ing broad based growth; and(iii)rovidinghuman and material securi ty. Achiev ing rap id economic grow th requires improvedinfrastructure, part icula rly improved transport l i nks an d the availa bil i ty o f a rel iable electr icitysupply. The absence o f he latter i s bo th an addit ional cost to existing businesses as we ll as animpediment to attracting inflows o f new foreign investment. The provision o f potable water i salso a ke y element in achieving the goal o f prov id ing hum an and ma teria l security.1.14geographical poles, Nosy B e (for tourism) in the north, Antsirabe-Antananarivo (for exportprocessing) in he center and Taolagnaro, formerly For t Dauphin, (f or minerals) in he south. I ti s ndispensable f or the success o f he grow th poles strategy that the recent electr icity supplyproblems do not recur.

GOM has decided to stimulate private sector l e d economic grow th in hree distinct

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Sectoral Policies1.15 Restoring and improving electr icity supply to acceptable levels necessa rily requires bothsubstantial ne w investment and ma jor reforms to the pow er sector. The f i r s t ma jor step inreform ing the pow er sector took place in 1999, with the passage o f a law abol ish ing J IRAM Asmo no po ly and creating a regulatory body. This opened the door to private investment ingeneration for sale to JIR AM A, as wel l as to the creation o f new generation an d dis tr ibutionenterprises outsid e JIR AM A s current operating areas. New legisla tion was also passed for thewater sector.1.16 JI RA M A s top management was replaced in early 2005 and the utility i s cur rent ly be ingrun under a two-year, IDA -fund ed management contract, wh ic h has already bro ugh t posit iveresults. Bet ter generation plant dispatching, o ptim iza tion o f pl an t operations, enhanced revenuecol lect ion and cost control measures, have all co ntr ibuted to improv ed cash f lo w and reducedfinancial losses. Financial recovery fro m a situation o f near-bankruptcy i s no w under way.JI RA M A s balance sheet has also been restructured through a mix o f write-offs and debt-equityconversions (Anne x 9).1.17alrea dy taken, and by high- level commitments pub l ic ly made to the donor com mun i ty at a roundtable conference on the sector hel d in January 2006. A task force with wi de representat ion f romoutside GOM was set up in 2005 to study and advise o n the best long-term structure fo r thepower and water sectors. I t s w o r k i s close to completio n and GOM has indicated that i t wi l lfol low th e Task Forces proposal that JIRAMA be retained as a combined power and waterutility under state ownership but with operations delegated t o a private firm. JIRAMA wil l beoffered to the private sector to manage o n a lon g-term basis under affermage- type contractualterm s that are in the process o f being def ined. I t s expected that recruitment o f he long-termpartner wou ld b e f inal ized in mid 2007. IFC has already b een retained by GOM to act as itstransaction adviser to gu ide and manage the selection and contractual process. Fig ure 1i l lustrates the on going sector refo rm process.

JI RA M A s recovery process is fully supported by GOM, as shown by the measures

GOM wou ld remain the owner o f he assets and be f inan cial ly responsible for a l l major asset renewals or systemexpansion. The operator wo uld have a long -term operat ing contract and pay an annual rental fee to GOM fo r th euse of the assets. I t s remuneration wou ld no t be guaranteed, but w ou ld have to be generated f ro m the cashf low o fJIRAMA.

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Figure I: IRAMA's ReformProgram

1.18refo rm agenda and the future r o le o f he energy and water sector as engines o f growth. Thegovernm ent's strategy articulates inter a l ia , the ma in goals o f he re fo rm program, GOM'scommitment to the publ ic-pr ivate par tnership model and the implementat ion o f cost-reflectivetar if fs .

The Government's letter o f sector po l ic y (Annex 11) ref lects the progress made in he

2. Rationale for Ban k Involvement2.1 The B an k has been engaged in the powe r sector in Madagascar for several decades, withm ix ed results. Howev er, after years o f esistance to fundamental sector reforms, the Ba nk wasable to convince the government to consider far-reaching reforms, goin g bey ond the in ter im stepo f a managem ent contract, a nd vie we d as the on ly wa y to resolve the ut i l i ty 's poor and decl in ingperformance. Th e Ban k has established a constant dialogue with the Government o f Madagascarover the last three years, and i s therefore considered as the lea d don or in he sector.2.2even when JIRAMA i s under p r ivate management. In eal ity , g iven prev ai l in g condi t ions in heinternational utility business, combined with Madagascar's handicaps o f sm all ma rket size,remote location, p ol i t ic al history, lack o f a convertible currency, etc., a firm and expl ic i t donorcommitment to participate in f inancing long-term investments appears to b e a p recondi t ion fo rattracting any p rivate sector interest in operating JIRAMA.

Do no r assistance w o ul d continue to be needed to finan ce lo ng-t erm sector investments,

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2.3 Th e Ban ks close involvement with GO Ms rescue o f J I R A M A in 2005 a nd the designo f t s f inancial andoperational recovery program over the past year is show ing signs o f success.In order to maint a in the momentum o f sector reforms, i t s essential that the B an k remains fullyengaged. Ba nk support of the recovery program was clearly a n important signal t o other donorsat the recent roundtable conference to back GO Ms refo rm efforts. They n o w expect the Ban k tocontin ue to lead ex terna l assistance to the sector reforms.2.4to promote growt h and i t s an essential input for the success o f other Bank-supported projects.Wh i le the IDA supported Integrated GrowthPoles Project (IG2P) wil l address th e mostimmediate barriers to accelerated grow th in hree key regions, the allocation in the IG2 P projectfor electricity i s necessari ly limited. The importance o f a reliable powe r sup ply cannot beunderstated, particularly at a t ime when Malgache garment exports to the U S A and EU are facin gsevere compe tit ion fro m Chinese suppliers. IG 2P does not have the means to tackle the ve rylarge needs o f upgrad ing J IRAMA s ma in grid.

As c lea rl y identified in the Wo rld Banks Afr i ca Ac t ion Plan, better power supply i s v i ta l

2.5 The proposed operation i s a logical fol low-o n to the Energy Sector Development Project(ESDP) that close d on Decemb er 3 1,2005, but which l e f t a large agenda o f unfin ished businessthat s t i l l needs to be tackled, particu larly the short-term recov ery progra m for JIRAMA an d th etransit ion to a sustainable long-term arrangement fo r ma nagin g the utility. With the GOMdecision to put JIRAMA under an operations & maintenance (0& M) contract (uffeermage), i t sclear that there wil l continue to be a need for public funds for investment in system rehabilitationand expansion. N o nternational private operator ready to run JIRAMA will, however, be willingto com mit substantial r isk ca pital on a long-term basis to the utility. GOM will thereforenecessarily turn to the donor community to help f inance JIR AM A s capi tal investment program.Furth er external support i s also needed to reduce the degree o f isk faced by foreign privateinvestors con siderin g generation IPPs in Madagascar and/or taking over JIRAMAs operations.Inst rument o f cre dit enhancements such as IDA PRG, I F C A & B loans or MIGA guaranteescould be employed as necessary.2.6 The pr im ary object ive of providing IDA guarantee support wo ul d be to help makeJ I R A M A s O & M contract appealing to pro spective operators by mit igat ing those cr i t icalsovereign and pol i t ical r isks whic h have kept private operators and investors away f ro m thepow er sector in Madagascar.2.7 The attractiveness of JI RA MA s O &M contract and o f smal l pr ivate hydropowergeneration investm ent program wil l be grea tly enhanced by th e PRGbackingo f governmentcommitments under th e project. A f ract ion o f he PRGF amount wo ul d be used to issue a part ia lrisk guarantee c ove ring selected GOM obligations towards th e O&M contractor. Tentatively, them a i n r isks that coul d be covered by an IDA guarantee wo ul d be: (i)he regulatory r isk i.e., theris k that the G O M and/or JIRAMA do not abide by the countrys regula tory framework; (ii)her isk that GOM and/or J IR A M A breach their contractual obligations under agreements signedwith the priv ate operator; an d (iii)hange in aw, po lit ica l force majeure, or currencyconvert ib i l i ty r isks.

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3. Higher L e v e l Objectives to which the Project Contributes3.1A c t i o n P l an (MAP) that sets out th e roadmap aim ing to produce a quantum leap in hecountrys development process. The Bank i s currently preparing t s new C A S in paral le l whichwil l support the implem entation o f he MAP. The C A S will reflect the GOMs focus o ninfrastructure provision to underpin growth and private sector development. The proposedproject i s thus a core element in the Banks support to the MAP because i t addresses a crit ica lgap in nfrastructure and a key constraint fo r private sector dev elopmen t in the Madagascareconomy. Gr ow th and ob creat ion in the m od e m sectors are vulnerable to inadequacies in hepublic electr ic i ty supply system.

The GOM s currently preparing i t s second-generation PRSP cal led the Madagascar

B. PROJECT DESCRIPTION1. Lending Instrument1.1 The proposed lending nstrument for this operation wo ul d be a two-phase, six year APL(mid-C Y 2006 - mi d- CY 2012). On ly Phase 1 (mid-CY 2006 to mid C Y 2008) o f he proposedAPL i s presented here. IDA funding o f U S $1 0 m i l l i o n vi a A P L - 1 i s described in depth in thisreport. An adjustable program loan provides the GOM with the necessary f lexib i l i ty o f contentand timing i t needs to r e fo rm the sector and facilita te an order ly commercial t ransi tion o fJ I R A M A . The GOM ntends to com mercialize JIRAMA through private operations. The searchand recruitment o f a new private operator to run J I R A M A has yet to commence, and th e terms o fth e PPP under w h ic h G O M a nd i t s donors wo ul d fund long-term investments for the newJIRAMA, have yet to be defined. These actions are expected to be undertaken with APL 1.1.2operations and private participation. The content o f APL -2 has ye t to be def ined in detail, butcomponents wil l b e selected from a well-de fined Government investment program to b epresented at the nex t donors rou nd table, planned fo r September 2006. The two phases APLprovides the Ban k the possib il i ty to introduce appropriate triggers t ha t wou ld b e l i nked withsatisfactory progress on the agreed recovery o f JIRAMA and i t s future sustainable ope ration.

This operation (APL-1 ) aims to assist the Government to prepare Jl R A M A for enhanced

2. Program Development Objectives2.1 The a im o f he program i s to restore an adequate public utility service fo r electr ic ity andwater in urban areas o f Madagascar and to create the foundatio n for a sustainable expansion o f acomme rcially-oriented service in he most cost-eff icient way.2.2solvent J I RA MA to be in he hands o f private managers on a lon g-te rm basis. (See figu re 2).This outc ome appears to of fer the best prospects fo r eff icien cy and sustainabil i ty and i s anecessary preco ndition fo r addressing the hug e u n m e t needs for electr icity and water outside th emainurban centres of Madagascar. I t s also the considered and agreed choice o f he Task Forceappointed to advise GOM on i t s options for the long-term future o f J I R A M A .

A successful outcome for the in i t ia l phase o f he program would be for a f inanc ia l ly

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Figure 2: JlRAMKs Financial Restructuring

2.3efficient, profit-making and cre ditw orth y enterprise, pr ov id in g goo d-q ua lity services, to anexpanded custome r base, and be able to f inance a reasonable po rtio n o f ne w sector investments.At the conclusion o f APL-2, the expectation i s that J IR AM A wou ld have become an

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3. Pro jec t C o m p o n en ts3.1short-term investment p lan estimated to cost approximately U S$ 100 mi l l i on for electr ic ity andU S $ 100 million fo r water, to lower th e cost and improve the performance o f t s generationplants, cut tech nical losses and improve com mercial performance. The Bank, in coordinationwith other donors, w ou ld finance some o f he most pressing and high-pr ior i ty investments o f hisrecovery plan. This i s the centerpiece o f APL-1. Specif ically, the progra m wo ul d assist with:

T o address immed iate technical shortcomings in he utility, JIRAMA has iden tif ied a

(a) reduction ofgeneration costs: rehabi li tation o f existing hydroe lectr ic and thermal units,as we ll as conversion o f some diesel generators to heav y fu el o il;(b) reduction o technical losses in transmission and distribution: upgrad ing o f k e y sectionso f MV ines, replacement o f overloaded transformers and undersized dist ribu tion lines a ndcables;(c) improvements to metering, bil ling and revenue collection: meter verif ication andreplacement, high-value customer management, updating o f customer records, introductiono f prepayment meters and spot mete ring techniques in selected clusters;(d) modernization o JIRAMA s information systems and IT equipment: installat ion o f acom pany -wide computer ne two rk and associated hardw are and software.

3.2is ent i rely focused o n restoring JlRAMA to a minimum acceptable l ev el o f operational andfinancial performance, an essential pre con diti on to attrac ting a pr iva te firm. The specif icinvestments to b e f inanced have been selected on the basis o f heir short payback periods andhigh impact o n JIRAMAs earnings.

Only the m ost pres sing needs o f he electr icity sector w ou ld be covered by APL-1, w h i c h

3.3 AP L- 1 wo ul d also support the long-term object ives o f mp rov ing the electr ic i ty and watersectors performan ce by assisting Madagascar in pr ov id ing funds: (a) for complem entary actionsand comm unication activit ies needed to accompany the transaction advisor (IFC) in he processof selecting and contracting a new p rivate operator t o take over JTRAMA; (b) for prolongat ion o fthe current management contract to avoid any hiatus before the takeover by the selected strategicpartner; (c) TA for preparation o f uture generation project s in coordinat ion with IFCs IPPmandate; (d) TA t o the M in is t r y o f Energy (MEM) to steer the ab ove process to a successfuloutcome and for capacity buildingwithin MEM inclu ding environmental and social safeguardsissues; and (e) the techn ical a nd safeguard studies requ ired f o r APL-2 as w e l l as the duediligen ce requirements for pr iva te hydro generation investments.

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Table 1: Project Costs by Component (in U S $ 000s)

Sehcoinpotienr A1.w Puwe i yeiieial ioii rei i i foiceii i i il lel ial~ii i tal ioii lSulvxwipo iieiit A1.b Retlailctive tinaiiciiigSiihcoiiipoiieiir A2: Reduclioii of lraiisiiiissloiialld dinrltiiilioii tecliiiicai lanesSulicoiiipoiieiit PJ : Reveiirie i~i.iildgeliIeil1 lld iiiodeiiiIzd11oii of Iiiloiiiiatioii Systeiii aiid IT eqiiiliinentU ~u f f o cared

Total Component A

IDA AFD JIRAYA2 000 4 155 17001 000 5001,300 tbd tbd2,300 4004007.000 tbd tbd

~

nand PrOlBctlmDlement;ltlOnSubcampoiieiit B1: Tecliiilcdl OsdStaiiCe 8nil colliliillliicatioii - Coiilianiiig irrlvale npeiarnrs to lake over JIRAMASirhcoiripoiieiit 82: Prnioiigar loii oftli e ciiireiit inaiiageineiit CoiitracISubcoinpoiicnt 83: Prepar stloii Of hilllie gelierallnii projects hi coordiiiatioii with IFC IPP iiimihleSiilicoiiipoiient B I: Stieiigtlieiiiiig oftlie lvlinisliy of Energy aiid IrlliiliiySribcoiiipoiieiit 05: Piepararloii of APL2 and eiiviioiiiiieiifd stridles for APL2 i l ivestii iei inSiihcoinpoiieiil BG: Moi~ iro i i l i l j i111 valllaliuiiSulicoiiipoiieiit 87: Pioject i i i ipleti iei itat ioiiUmfloc.?recl

Total Coimonent BTotal APL.11 10.000 1 tb d I tbd I

IDA I AFD JIRAMA250 tbd900 tbd600400150150150400

3 000 tbd tbd

______ I

Phase I1 or APL-2) o f the Program3.4US$30 mi ll i on , covering investments in generation, trans mission and dis trib uti on systemexpansion, as we l l as capacity building and consult ing services for implementat ion o f heinstitutiona l refo rm of the sector. A signi ficant part o f A P L - 2 funding could b e a l located to acredit enhancement facility (such as partial risk guarantee facility) to attract f ore ign investors.Th e second phase would be condit ioned on satisfactory progress towards f inanc ial reco very o fJIRAMA and a signed PPP agreement for the long-term management o f he utility by a privatefirm.

The funding needs for APL-2 (FY 2009 - FY 2012) from IDA wo ul d tentatively be about

3.5from a well-defin ed Government investment program to be presented at the next donors ro un dtable, planned fo r September 2006. Ad dit ion al funding i s expected to be secured f ro m AfDB,bila tera l donors an d the private sector.

The content o f AP L-2 has yet to be defined in detail, but components will be selected

3.6 Further details o n APL-2 can be found in he table in Attachment 4.2 o f Annex 4.Financing Requirements and Financing Plan3.7 The GOMs energy/water sector recovery pla n estimates a need for US $lOO m il l i o n o fshort-term investme nt financing for the years 2006-2009 for the Elec tr icity and Water sectorsrespectively. These estimates do n ot includ e the developments o f Hy dr o Generat ion facil i tiesthat, although offered fo r private sector financing as PPs, are likely to requ i re signif icant publicsector support.

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3.8investments during the period 2006 - 20 11. US$125 mi l l io n o f donor support ( includin g thecombined US$ 40 million f r om IDA) are already committed. Further f inancing fo r long-terminvestmen ts are expected to b e pledged at a second donors conference to b e he ld in September2006.

APL 1& AP L- 2 wo uld together cover approximately 25% o f J I R A M A s p r i o r i ty

4. Lessons Learned and Reflected in the Project Design4.1between 1996 - 2005, was over-ambitious, too comp lex and too broad in ts scope. Within asingle project i t simultaneou sly attempted to imp rov e service to existin g consumers, exten daccess to elec trici ty in rur al and urban areas, undertake fundamen tal sector ref orm s to fac ilitateprivate sector entry, promote energy eff iciency and conservation and impro ve management o fwood fuel supp ly and usage. The lesson learnt from E SDP and applied here is that the proposedproject i s m u ch mo re narro wly focused and does no t attempt to address broader issues in heenergy sector.

The recently-closed Energy Sector Development Project (ESDP, Cr. 2844), implemented

4.2transparent and non -com petitive contracting, abuse o f privi leges by staff, l a x management andpo or customer service. These problems have now been suff icien tly exposed to public scrutinyand the transfer o f J l R A M A to a private operator wil l serve to ke ep a check o n costs, im proverevenue collec tion and inculcate higher standards o f service. Transpare ncy and acco untab ilityare also expected to be enhanced.

ESDP did not adequately address we ak corporate governance in JIRAMA, including non-

4.3 The early years o f ESD P (pre-2003) were also characterized by an excessively dogmaticapproach to institutional r efo rm by the Bank, whi ch led to stalemate. Th e propo sed proje ct hasavoided repeating this error by i t s consultative and participatory approach t o reforms, asil lustrated by the importance attached to the role and recommendations o f he Task F orce onreforms. M u c h mor e attention has been given to keepin g the labour unions fully abreast o f a l lmatters affecting JI R A M A staff, and regular press briefings have also been given to in for mpubl ic opinion.4.4 The experience under ESDP also shows that there i s a need to b e more v ig i lant withrespect to tari ffs during inf lat iona ry t imes. The fai lure by GOM to address the erosion o f ar i f fscaused by devaluation an d rising wo rld o i l prices, contr ibuted to the f inancial insolvency o fJIR AM A. The condit ional i ty o f he proposed project ref lects this lesson by front-loading actionsexpected o f Go M .4.5 Experience and the lessons learned fr o m similar projec ts elsewhere s hows that attractingprivate operators to run Af r i can u t i l i t i es i s fraught with diffic ultie s. Rece nt cases also illustratethat even in nstances where long -term contracts were entered int o private firm s are ready torevoke them i f he operating environment turns unfavourable. Th e proposed project wil ltherefore seek to minimize such r isks by ensuring that the ground rules and contractualarrangements are dr aw n up as cle ar ly as possible, by prov id ing GOM with suitab ly experiencedinternational f inancial and legal advisers.

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5. Alternatives Considered and Reasons for Rejection5.1 A number o f strong arguments favor an APL rather than a SIL . In he current context o fa utility em ergi ng f ro m near-bankruptcy, in a per iod o f ransi tion inv olv ing changes to i tscorporate culture and business practices, some fle xib i l i ty o f actions a nd their timing are felt t o beneeded and these are more easily accommodated in an APL structure than in a SIL.5.2 I t wo u ld have been possible to continue with the existing JIRAMA management contracto n an open end ed basis period, ho wever this wou ld have no t incent iv ized the operator to improveperformance. I t wou ld a lso be expensive, and require dono r or GOM financing, sinceJIR AM As o w n nternal resources wou ld be insuff ic ient to cover i t s cost.5.3consultants h ir ed to assist GOM in deciding on JIR AM A s lon g-t ern structure. The consultantrecommended that a separation was inappropriate fo r a compa ny o f elatively modest size.Vert ical and hor izontal unbundlingo f JI RA MA s electr icity operations was also studied by th esame consultants and advis ed against for the same reason.

T h e o p t i o n o f separating o f water fr om electr icity activit ies was examined in detail by the

5.4management contract to lapse and then leave J R A M A to s t rugg le on as best as i t could. Thiswo ul d have been a recipe for ra pid collapse, widespread damage to the m od em export-orientedsector o f he economy and a repeat o f he expensive 2005 G O M bai lout for the sector.

The mo st extreme option could be called the do-nothing scenario, i.e. all ow the current

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C. IMPLEMENTATION1. Partnership Arrangements (if applicable)1.1m a xi m um effectiveness. Thi s has been clearly expressed in he jo in t a ide memoire o f heJanuary 2006 Pa ris donors' rou nd table. The aide mCmoire set for th a co mm on set o fcondit ionalit ies requested by the donors to comm it f inancing to support G O M' s recovery pl anfo r JIR AM A, as w e l l as for the sector 's medium-termexpa nsio n requirements. (See figure 3).

All donors involved in the sector are closely coord inatin g their interventions fo r

Figure 3: Medium Term Power Generation & Investment Plan....................... ........................................ ..................... I

1.2 The European Investment Ban k (EIB) i s very active in wa te r supply an d ..as alreac .yapproved a project o f 47 m i l l i o n in mid-2006. The Du tch government is contr ibut ing grantfunds towards the construction o f a 40 MW uel-oil powe r plant (expected in service in mid-2007) that will help relieve the current supply shortages as w e l l as substitute for higher-costdiesel generation. Age nce Franqaise de DCveloppemen t (AFD) has indicated that i t will supportimplementation of th e JIRAMA recovery program with a contr ibution in 2 00 6 o f about US $l O -12 mi l l ion . A third 3 0 MW generator at the exist ing Andekaleka h ydro plant i s about to begin,with f inancing fro m the Banque Arabe pou r le DCveloppement Economique de 1'Afr ique(BADEA). The Afr ican Development Ban k (AfDB) has indicated its pote ntial sector f inancialsupport in 2008. Since the f inancing plan for APL- 2 i s s t i l l to be completed, the involvement o fother donors wil l be needed and firm pledges obtained early enough to be in cluded in heinform ation a nd guidance to potentia l private partners for JIRAMA.1.3been hired by GOM to act as a transaction adviser f or a series o f hydro generation projects thatare to be offered to private investors to develop as P P s . In esponse to the di f f ic ul t c l imate for

Within the WBG, there i s close cooperation between I F C and the Bank. IF C has already

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attracting FDI o t h e pow er sector in Madagascar, an IDA-supported PRG is also beingpreparedto complement IFCs efforts to attract po ten tial investors and to at tempt to l ow er the r is kpre mi um (and hen ce the cost) in a bulk supply contract to JIRAMA.1.4a pr ivate partner to manage JIRA MA . In order for I F C to successfully carry ou t i ts tw omandates i t requires the close collaboration o f he Bank and other donors to provide f inancingfor the pr epa rato ry wo rk such as feasibility and environme ntal impact studies fo r the generationIPPS.

In addit ion, IF C will also be the GOMs investme nt adviser and lead the process o f hiring

2. Institutionaland Implementation Arrangements2.1part o f J I R A M A s DEEL (Direction de 1Equipement Electricitk), and w ou ld deal with hardware,procurement and p hysical implementat ionby J IR A M A o f ts rehabi l itat ion sub-proj ects. Theother wo ul d be a sma ll coordination and advisory group responsible fo r the pol ic y andinstitution al re fo rm components as well as fo r monito ring and evaluat ion o f he project in tsentirety that wo ul d be attached to the o f fi ce o f he M in iste r o f Energy and Mining.

The project wo uld have two distinct implementation enti ties. One wou ld be an integral

2.2JIR AM A, and the implementat ion cel l woul d predominant ly deal with procurement-relatedmatters. Adequate expertise for this exists within JIR AM A, backed up by lo ca l consultants o n ashor t-term basis as required.

The phys ical rehabi li tation works do no t present any signi ficant technical di f f ic ul ty for

2.3selecting a ne w private operator and carry thro ugh sector reforms. Desp ite GOMs decision torecruit I F C as its investm ent adviser to manage the selection process fr om start to finish, theMEM interface with IF C will need to be strengthened, and fo r this purpose i t s envisaged thatthe project wil l finance the services o f a resident expatriate adviser in MEM fo r about tw o years.The adviser wo ul d also be responsible fo r man aging the sma ll coordination and advisory group(Cellule de coordination-CELCO ) attached to the off ic e o f he MEM (see above).

MEM, however, has a ser ious problem o f ack o f adequate capacity to lead the process o f

2.4related to each component for w hic h they have overall impleme ntation responsibil i ty and willproduce their ind ivi du al annual financial statements in accordance with internationally acceptedaccounting principles. The consolidation o f pro ject accounts i f necessary, the prod uction o fquarterly Financial Mon itor ing Reports (FMRs) in compliance with international accountingstandards and IDA requirements and the mo nitor ing o f he pro ject progress wil l be assured byMEM.

MEM and the DEEL (JIRAMA) wil l ma inta in separate accounts fo r a ll transactions

2.5M E M K E L C O o deal with f inancial and acc ounting matters will need to b e strengthened by: (i)improving the f iduciary system in place to ensure t imely d el ivery o f data o n project activities;and(ii)ecruit ing a qualified and experienced accountant to assist the MEM acco untin g staff in

While the capacity of JIRAMADEEL s deemed adequate, the capac ity o f

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pe rfo rm ing fina nc ial management tasks incl udin g budgeting, accounting, fina nci al reporting, anddisbursement opera tions.

3. Monitoring and Evaluationo f Outcomes/Results3.1that the Project coordinators (bo th at JIRAMA andMEM) wil l prepare and subm it to IDA. Thiswill provide a way o f racking actual project execution against impleme ntation milestonesestablished at th e time o f he projec t launch. These are the key performance indicators andproject outcomes that are detailed in Annex 3.

The implementation o f he pro ject will be monitored through quarterly progress reports

3.2 Further, in orde r to assess imp acts that the pro ject i s expected to h ave o n the quantity andqua l it y o f electr icity and wate r supplied, i t s envisaged that several survey s wil l be carried out atdifferent points on J I R A M A s network. Mo nit ori ng o f evenue enhancement measures wil l befacilitated by the ring-fe ncing of clusters where these are to be introduced. Baseline data will becollected in hese clusters pri or to introduc tion o f he ne w customer management techniques.3.3been agreed during negotiations. These indic ators are giv en in Annex 3.Other indicators of JIR AM A s overall performance, their baseline values a nd targets have

4. SustainabilityThe ollowing topics are relevant to long-term sustainability:4.1to be revised to reflect Governments decision regarding JI RA MA s institutiona l reform. Sometop ics also need to b e defned with greater cla rity and precision and these wi l l be addressedunder IFCs mandate as transaction adviser, w hi ch includes the provisio n o f egal support. Theelectric ity sector regulator (ORE) i s operational and has established some in it ia l credib il i ty in therecent roun d o f arif f increases. The Letter o f Sector Development Po lic y (LSDP) clearly spellsout GOMs vis ion o f the sector for the next 5 - 10 years and presents a g oo d basis fo r bo thprivate and donor participation in sector developm ent.

Policy ramework: The 1999 sector legislation is basically sound but will probab ly need

4.2 Technical: I t s expected that the future priva te operator o f J I R A M A wil l ensure thatmaintenance i s carr ied out according to good operational practice. The remuneration o f hefuture operator wil l depend on maxim izing revenue and plant avai labil i ty, w hi ch in turn creates astrong incentive for sound 0 & M practices. I t s also expected that JIRAMA under a privatemanagement woul d better assist the government in ma ki ng strategic fu ture electr icity generationchoices by providing a more rel iable long-term p lanning and data on expected load growth.4.3 Financial: The 1999 law makes a prov is ion for indexation o f ar if fs , but this wasignored. No cast-iron assurance can be obtained that history wil l not repeat i tsel f in uture, butthe lessons appear to have been learnt fro m the economic damage to the country and the f inancialcost to the budget of ba i l ing out J W A n 2005. The GOM has agreed to introduce a Credit

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covenant under t h e proposed project that wi ll permit J IR AM A to apply tar i f fs that ensure fullcost recove ry (para. 6 - Cre di t co ndi t ions and covenants). In addit ion, the introdu ction ofpr ivate management in JIRAMA wil l provide the necessary stimulus to im prove revenuecollectio n partic ularly fro m large industr ial users, cut d o w n on electr icity and fuel theft andinje ct greater all -ro un d cost consciousness within J I R A M A .4.4 F i s c a l : T h e GOMs budgetary support to J IR A M A in 2006 i s expected to exceed AR 70bi l l io n ( roughly US$30 mill ion), in order for i t o continue operating and to help i t meet paymentobligations, p redo min antly to fuel suppliers (over AR 180 bil l ion). Depending upon theevolu tion o f wo r l d o i l p rices, further budgetary support wil l be needed f rom G o M n 2007,although on a grea tly reduced scale. The project seeks to ensure that fr om 2008, J I R A M A wil lno longer need to rely on budgetary support for i t s operating expenditures. How ever, i t must berecognized that t h i s turnaround i s vulnerable t o fu rther rises in wo r ld o i l p r ices an dor unforeseenmaj or delays in commiss ion ing o f he 40 MW uel o i l power p lant in mid-2007. I t s thusproposed as a trig ge r for the second phase o f he APL that JIRAMA should break even in ermsof EBITDA (Ea rnin g Before Interests, Taxes, Deprecia tion and Amortiza tion) in 2007. Such atarget might no t seem very demanding for a power and water utility with a major i ty o f tsgeneration deriv ed fro m hydroelectr ic units. However, i t wo ul d represent a majo r improvementcompared to the situation that prevailed in 2004 and 2005. Al so given, the projected eff icienc yimprovements that wil l begin to have a full year effect onl y in 2008, and pro vid ed an adequatetariff indexing formula i s effect ively applied, J IR AM As prof i tabi l i ty should signi f icant lyimprove in 2008 and 2009. By the end o f he decade, J I R A M A should be expected to generateenough cash -flow from interna l sources to fund the investments required to adequately mainta init s assets. In hese respects, the pro jec t wil l have a pos itive fisc al impact. Nevertheless, i t has tobe recognized that p ublic funds through international loans or grants will st i l l b e required to fundthe bulk of J IR AM A s long-term-investments required to increase signif icantly the rates o faccess to ele ctric ity and water in Madagascar, but these wil l no t have any budgetary impact.

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5. Cr i t i c a l R i s k s an d Possible Controve rsial Aspects

Proposed Guarantee facili ty will protect priv ate operatoragainst tari ff erosion and ensure currency co nve rtibility .Bank and IMF macro-economic programs with G O M ;but some risk will remain, especially i f o il prices remainhigh.prov ide some assurance o f coverage o f polit ica l andregulatory risks.APL-2 will proceed onl y after selection o f privateoperator (post-elections).indexation (FA covenant), bu t some element o f risk wil lremain.J I RA M A . Will be kept informed in selection process fo r

Da ted covenants, APL-2 triggers and Guarantee faci lity

AP L-1 investments to becommitted p rio r to elections.

G O M will commit to preserving real level o f ari f fs by

Unio ns participate in Task Force on long-term future o f

M a i n R i s k sS

M

M

S

M

Macro-economicproblems: high inf lat ion,currency devaluation,rising oi l pr ices.

priva te operator.TA to assist Ministry o f Energy to implement sector

Uncertain w hether GOMi s able to stay the courseon refo rm process.Reforms stalled due toforthcoming elections.

M

Polit ica l opposition tohigher tariffs.

reforms, b ut some slippage risk will remain.IFCs appointed as transaction adviser to GOM o guide

~~~ ~Labo r un ion resistance tointernal JI R A M A reforms.

MWeak institutional andimplemen tation capacityInsuffic ient interest byforeign util it ies in akingover JIRAMA.

Project transactions ma ynot beproperly accountedby MEM, and financialreports not t imelyproduced.

Mitiga tion Measures I RiskRating

be in place end-2006 to mitig ate r isks.Recruitment o f a q ualif ied accountant in conformity withBa nk procedures, to assist th e MEMaccounting s ta f f inperforming FM tasks.Elaboration and implementation o f an accounting manu alo f procedures.Adjustment o f he accounting softw are acquired withinthe context o f he Energy Sector Development Projectand users training.Recruitment o f an international auditing firm acceptableto IDA to carry o ut the annual audit o f he projectfinancial statements o f he Project.

The quali ty o f the auditmay not beacceptable andth e report not delivered ntime due to wea k capacityo f he accountingprofession.

M

M

Th e o ve ra l l risk of the pr og ram has bee n assessed as moderate.

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6. Credit Conditions and Covenants6.1 Effectiveness conditions would be:

The Subsidiary Agreement between GO M and JIRA M A has been duly authorizedor ratif ied.MEM has adopted the Project Manualand JIR AM A has adopted JIRA M AsProject Manua l a l l in or m and substance satisfactory to th e Association.For the purpose o f Part B o f he Project, MEM has elaborated i t s accountingman ual o f procedures and upgraded i t s accounting and financial management andmo nito ring and evaluation system (capable o f producing FMRs) in a mannersatisfactory to the Association; and has appointed an accountant specialist and aprocurementoff icer with in the MEM acceptable to the Association.F o r th e purpose o f Part A o f he Project, JI R AM A (DEEL) has upgraded i t saccounting and financial management and mo nito ring and evaluation system(capable o f producing FMRs) in a manner satisfactory to the Association.Two special accounts have been opened (fo r DEEL and MEM) in he CentralBank under conditions acceptable to the Association.Auditors satisfactory to the Association have been recruited fo r the purpose o fComponent A and Component B o f he Project.

6.2 The main Credi t Covenants a re l ike ly to be:Dated covenants regarding tari f fs(a)Indexation Formula.N o ater than November 30,2006, G O M shall have adopted th e Electr ic ity Ta r i f f

(b)Ta riff Indexation Formula and adjusted electricity t a r i f f s in accordance w it h said formula,and shall subsequently adjust said tarif fs in accordance with the Electr ic ity Ta r i f fIndexation Formula every 6 m onths.

N o later than April 1,2007, G O M shall have pu blic ly disclosed th e Electr icity

Da ted covenants (Milestones) regarding he process o f ecruit ing the long-term privatepartner for JIRAMA(c) N o ater than December 3 1,2006, G O M shall have established t e rms andconditions to be used in he contracting o f JIR AM As private partner satisfactory to theAssociation and have launched th e prequalification process.

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(d)recrui tment o f a new private operator fo r the management o f JIR AM As operat ions.No later than April 1,2007, G O M shal l have launched th e biddingprocess for the

Finan cial covenants(b)manag ement report (including relevant technical, com merc ial and financia l parametersfor the mon i tor ing o f he company and to communicate this report ing to the Bank lessthan 60 days after the end o f he quarter.

Beg inn ing with the f i rs t quarter o f C Y 2007, J IR AM A to produce a quarterly

(c)and onwards.Accou nts receivable not to exceed 3 months billings by the beginning o f FY 2008

(d)of each year during Project impleme ntation amounts to be injected as need be int oJIRAMA during the f ol l ow ing calendar year so as to a ll ow no rma l operations o f hecompany.

GOM shall define in agreement with the Association, n o later than September 30

Other covenants (Financial management an d audits)(a)acco untin g practices.

DEEL/MEM shall ma inta in records and accounts in accordance with sound

(b)after the end o f each calenda r semester, interim un-audited f inanc ial reports for theProje ct cov erin g the semester, in fo rm and substance satisfactory to the Association.DEEL/MEM shal l prepare and f i n i s h o the Association not later than 45 days

(c)provisions of Section 4.09 (b) o f he General Condit ions. Each audit o f he FinancialStatements shall cover the period o f one f iscal year o f he Recipient. The auditedFinancial Statements fo r each such period sha ll be furnished t o the Association no t laterthan six mon ths after the end o f such period.

DEEL/MEM shall have its Finan cia l Statements a udited in accordance with th e

6.3 Specific condition o disbursements would be:(a)by MEM o f a technical advisor acceptable to the Association.Credit disbursement for Component B w o u l d b e permit ted only after recruitment

(b)hydroelectr ic plan t (to satisfy the requireme nts o f h e safeguard policy OP 4.37 o n DamSafety) would be permit ted on ly after JIRAMA has subm itted a report satisfactory t o theAssociat ion o n the condit ion o f he Vatomand ry d am and the proposed safety measures tobe implemented.

Credit disbursement fo r the rehabil ita tion o f he c iv i l works o f he Vatomandry

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6.4 Tr iggers or In i t ia t ing APL-2I n order to proceed with APL-2, GOM would need to demonstrate:(a) Satisfactory imp lementation o f APL-1 nvestments;(b)financial coven ants o f he FA for APL-1;Sufficie nt progress o n the J M A inancial restructuring as per th e agreed

(c)and implemented tarif fs indexation formulas; andReg ula tory agencies (water and electricity) fully operationalwith clearly defined

(d)contract signature.Complet ion o f the recruitment o f he long-term private partner for JIRAMA up to

D. APPRAISAL SUMMARY1. Economic and Financial AnalysesEconomic Analysis1.1 System expansion plan: The recent oi l pr ice hikes have turned JI RA M A s stop-gap andsubopt imal choice o f diesel generators in to a severe fina ncial bu rden fo r its consumers a nd alsofor GOM. The success o f he proposed recovery program for JIRAMA is predicated upon arap id move away f rom diesel generation, in it i al ly to Heav y Fue l O i l (HFO) and then in hemed ium - to long-term to hydroelectr icity. Unfortunately, in he short- to medium-term , despiteMadagascars evident hydroele ctric resource poten tial, the scope for rapi dly dev elopin g ne whyd ro pow er sources i s rather l imited. W ork o n he addit ion o f a third 30 M W generator at theexisting Andekaleka hydr o plant i s about to begin, with f inancing fro m BADEA. Under no rma lhydrological conditions i t will produce 200 GWhpe r year, represen ting a massive cost savin g toJIRAMA.T w o mi no r sites (Sahanivotry and Lily) are at a suff icien tly advanced stage o fpreparation by private developers to contribute a further 80 GWho f hydro power by 2009 -2010. Du e to a lack o f preparatory studies, other smal l to medium term hyd ro prospects areunl ike ly to be commissioned before 2010 - 2011.1.2 In he near term, major fuel savings can therefore o nl y be achieved through substitutionof heavy f u e l o i l burningplants in p lace o f diesel generators (finance d unde r APL-1).Implementation o f a 40 MW HFO plant (with f inancing fr om D utc h Government) to be si ted inthe cap ital has begun and i t s expected to b e in service in mid-2007. This plant will permi tJ I R A M A to greatly reduce i t s use o f diesel, s ince the plant i s capable o f producing 200-250GWh annually. All of the above new generation projects have been delayed by several years andshould already have been in service. They pro duc e substantial e conom ic benefits and delays incompleting them would be very cost ly to JIRAMA.

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1.3envisaged under t he recovery program and i t s nature as a two-part APL , t he econ omic analysis i sbased o n a 5-year t ime-slice (2006-2010) o f he electr icity sectors total investment program,wh ic h has been reviewed and found to be least-cost in nature. Deta ils are conta ined in Annex 9.Assig ning specif ic benefits to part icular project components wo uld have been both arbitrary andnear ly impossible. The base case estimate o f he EIRR i s 14.4%.

Economic Rate o f Return: Given the diverse nature o f he phys ical investments

1.4 The physic al benefits fr om these investments that have been quantif ie d here are twof old:first, (and most impo rtant) the increme ntal electricity supplied to consumers; second, thereduct ion in high-cost diesel fuel consumption arising fro m the replacement o f dies el generatorsby mo re economical ones usingheavy f ue l o i l (HFO).1.5program is based on the variant o f he loa d forecast prepared by JIRAMAs consultants, HQI.F o r the purposes o f the econom ic analysis, on ly fi ve years (2007 - 2011) o f cumulat ive loa dgro wth ha ve been considered as benefits dire ctly attributable to the 2006 - 2010 investmentprogram. Tota l electr icity demand i s projected to increase at an annual average rate o f 7.6%.However, demand growth in 2006-2007 is severely constrained to on ly 2% - 4%, due to adeliberate attemp t by J IR AM A to restra in consumption pr ior to the ent ry in service o f a large,n ew HFO plant.

The incremental demand that can be met as a result o f nvestments made possible by th e

1.6 The minimum value o f he incremental sales has been taken to b e the average tariffacross a ll custo me r categories charged by JIRAMA in 2006, i.e. USc l3 /k Wh. Th is does no trepresent the full value o f benefits to users f r om this electricity, but in he absence o f an estimateof the consumer surplus i t s a minimummeasure o f benefits that has be en used as a proxy. I ti s we l l be low the JIRAMA ta ri f f charged to LV consumers in Zone 3 (isola ted centers servedentirely by diesel), o f U S c19-20/kWh. Fuel savings to J IR A M A have been est imated at thedifference between the cost o f generation usin g HFO in the new HFO p o w e r plant and diesel fuelthat i t wo uld otherwise have to use in t s existing generators, about US cl O /k W h at current o i lprices.1.7Annex 9. T he EIRR i s particula rly sensit ive to variations in o il prices, the size and timing o f heinvestmen t program, delays in comp leting more eff icient plants, and to assumptions aboutdemand growth. As can be seen in Anne x 9, depending on the comb ination o f negative factorsassumed, the EIRR varies from 10.3% to 13.7%.

Full details of the analysis a nd the parameters used in estimating the ERR are given in

FinancialFina ncial Analysis of J I R A M A1.8 The fo l lowing conclusions can be drawn fro m the fina nci al forecasts presented in Annex 9:

(a)the ongoing conversion o f debt into com pany equity, and the successive ta ri ff increasesfor electricity and water, JIRAMA remains in a precarious f inan cial situation.In spite o f he large funds injected in he company by th e government and donors,

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(b) With most o f t s debts canc elled or rescheduled, JIRAMA has been given a freshstart f inancially; however its most immediate problem remains an insuff icie nt generationof funds fr o m internal sources: cash-flow f ro m current operations i s l i ke ly to remainnegative in 2006 and 2007. This i s the resul t o f JIR AM As unfavorable generat ion mix,with too m u c h diesel f ired capacity, and the ever-r is ing wo r ld pr ice o f oil.(c)expected average revenue this year to US cl 3 per kilowatt-hour, a level that i s similar toi t s value in 2002 and 2003. However, o i l prices are m uc h higher today than they werethen, and the current lev el o f ariff remains below what wo ul d be adequate to achievecost-recovery. Further hikes during the next 12 months are po l i t ic al ly and social lyd i f f i cu l t to envisage. A s a result, JIRAMA cash pos it ion is bou nd to deteriorate againover the pe rio d to 2008, especially i f he compa ny reduces its paym ent arrears to i tssuppliers, as envisioned in the January 200 6 plan de redressement. Therefore, a n ewinject ion o f iquidity f r om GOMwill probably be needed in mid-2007.

Elec tr icity tarif fs have been raised by nearly 100% over the past year, bringing he

(d) Th e finan cial forecast presented in Anne x 9 assumes several interna l effic ienc yimprovements, but the biggest source o f poten tial savings is the reduction o f generationcosts, which wil l occur f ro m mid-2007 onwards.(e)sustainable basis. An updated tar i f f indexat ion formu la needs to be def ined andscrupulously fol lowed . A FA covenant that wou ld impos e the consistent application o f atar i f f ndexing procedure f r om April 2007 onwards is thus proposed. In addit ion to thisprocedural aspect, the lev el o f he t a r i f f should b e set adequately (it i s thus proposed toretain i t as a trigger fo r the second phase o f he APL that JIRAMA should break even interms o f EBITDA in 2007).

Ta r i f f d iscipl ine i s essential i f J I R A M A i s to become f inancial ly v iable on a

Situation of JIRAMA at the Begin ning of the Man agem ent Contract1.09the problems th e com pany had to face. The management contract, which has been in place sinceApril 2005, shed further light o n the t rue extent o f J IR AM As f inanc ia l d if f icu l t ies . In summary,the situation in mid-2005 can be described as follows:

A diagnostic study o f JIRAMAs operations carried ou t in 2003 revea led the severity o f

1.10 Extreme financial unsustainabil i tv o f current operations: during th e f i r s t semester o f2005, the varia ble costs associated with thermal generation alone ( f ue l expenses and energypurchase costs) were superior t o the tota l revenues o f he company leaving no source o f funds topay for other current expenses (maintenance, pers onn el etc), le t alone ne w inves tme nts or debtrepayment.1.11current expenses and revenues, J IR A M A c ould no t cont inue to operate w itho ut increasing i t sl eve l o f debt and arrears to suppliers. Th is practice mere ly postpone d the liquidity crisis facingJIRAMA until after the management contract too k effect.

Rapidly accum ulating arrears to suppliers: given the structural disconnect between

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1.12these deficie ncies are the absence o f el iable and audited annual accounts, the l ack o f moni tor ingo f he cash pos i t i on o f the company, incomplete and late report ing o f inancial informat ion f romthe m any remote outlying J I R A M A centers. The management contractor i s already addressingmost o f hese issues.

L a ck o f effective and reliable f inancial reDorting and internal controls: I l lustrations o f

Th e Fina nc ial Recovety Process Supported by A PL- 11.13accumulated. Th e financia l restructuring entails substantial debt cancellation by the GOM, aswe l l as an i n jec t ion o f cash. Overall, the plan entails sig nifican t budgetary costs in excess o f AFt75 b i l l i o n for GOM in 2006. I t s l ike l y that an addit ional in ject ion o f iquidity in J I R A M A willbe necessary ag ain in mid-2007, depending up on the trend o f wor ld o i l p rices.

Financia l restructuring o JIRAMA: JIRAMA cannot realistic ally service the debt i t has

1.14future, i f o i l prices do no t decrease, the bulk o f he adjustment ef for t in h is respect has alrea dybeen done, especially taking int o account expected red ucti on in generation costs thanks toplanned investments. I t s, however, vi tal that the current leve l o f arif fs be at least preserved inrea l terms. The def ini t ion o f an indexing formula fo r electr ic ity and water tar i ffs and astreamlined decision-making process to app ly the fo rmula and implemen t the necessary tar if fadjustment will provide protect ion against the vol at i l i ty o f he currency and o f o i l prices.1.15 Additional Support rom GOM: Under the assumption la id out in Table 9 o f Annex 9,J I R A M A wo ul d start to generate a posit ive cash-flow in 2008, due to a comb ination o f moderatetariff increases, a better generation mix , and improve d operat ional performance. J IR A M A wil lnevertheless remain in a diff icult situation with insuff ic ient liquidity up to the end o f 2008(current ra tio be lo w 1 and increase o f short-term financial debt) withou t fresh injections o f cashfrom GOM in 2007. Provisio n for continuing cash injections to JIRAMA needs to be made inthe GOM budget fo r 2007.

Tariff increases: Wh ile further increases o f arif fs in rea l terms might be necessary in he

2. Technical2.1electr icity sector objectives and to enable a swift f inancial turnaround o f JIRAMA, v iz . :The investments under the AP L- 1 have been designed to meet Madagascar's near term

'

.'''Convert costly diesel generation to HFO, resul t ing in savings o f U S c l O k W h o n e ve ryunit o f electric ity produced;Assure a minimum e v e l o f maintenance o f key power plants to maintain exist ingcapacity and reduce the number o f power cuts;Reduce technical and non-technical losses;Im pro ve revenue management and collections; andEncourage development o f cost effective generation sources, e.g. smal l hydr o plants.

2.2ident i f ied by J I R A M A as necessary for the success o f ts f inancia l restructuring planpresented toThe investments were chosen among a l is t o f candidates total ing about US$lOO m il l i o n

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the donors ro un d table meeting in January 2006. The f i r s t phase o f he APL focuses onimm ediate cr it i ca l generation needs and investments with high returns to urgen t ly mit igate thesevere f inancial problems o f JI RA M A. For these investments the bidding docum ents are alreadyw e ll advanced. For some, advance procurem ent is already ongo ing and J I R A M A p la ns t oquickly ut i l ize the IDA fundingby means o f etroactive f inancing right after C red it effectiveness.

3. FiduciaryFinancia l Management3.1strengthened to address some deficiencies and build their capacity to produce quarterly Finan cialMon i tor ing Repor ts (FMRs). The main measures to be taken are the fo l low ing:

The fin anc ial management systems bo th at the DEEL in J I R A M A and MEM need to be

0 F o r MEM:(i)ecruitment, under t e rms and condition s acceptable to IDA, o f aqu ali fie d and experienced accountant to assist the MEM accounting staff in place inper forming FM tasks; (ii)laboration o f a chart o f accounts to ensure the av aila bilit yo f al l re levant informat ion fo r financ ial reporting; (iii)laboration andimplementat ion o f writte n operating instructions to ensure proper rec ord keeping andadequate safeguarding o f assets; (iv) design and implementat ion o f an accountingsystem to ensure timely product ion o f f inancial informa t ion required for managingand monitor in g act iv i ties to be implemented by th e MEM.0 . For DEEL: (i)eview o f the DEEL chart o f accounts to reflect components andactivit ies outl ined in he P A D to satisfy reportin g requirements; (ii)pdate o f hecurrent accounting manuals o f procedures in order to include al l necessary changes

requiredby this ne w project, facilitate adequate record keep ing a nd the maintenanceof prope r contro l ove r assets; (iii)eview and adjustment o f he accounting softwareacquired within the context o f he Energy Sector Development Project in order tosatisfy DEEL requirements and ensure t i me ly prod uction of financial statements andFMRs required by IDA. All these recommenda tions shou ld be implemented pr io r tocredit effectiveness. The content and formats o f inancia l statements and FM R s havebeen determined during appraisal mis sio n and agreed at negotiations.

3.2 Theproject f inancial statements (C EL CO and DEEL) wil l be audited annual ly byindependent and quali f ied audi tors acceptable to IDA in accordance with Inte rna tion al Standardsof Auditing. The auditors shouldbe recruited prior to credit effectiveness. Th e audit report wil lb e submitted to IDA not later than 6 months after the end o f each fiscal year.Procurement3.3their application have recently been approved but i t wil l take some time before entering ineffectiveness and thus the existin g Procurement Code o f 1998 wil l cont inue to beuse d at leastuntil early 2007. The Ba nk has ascertained that deficiencies id entif ied in he 1995 CPA R have

A new Malagasy procurement code was enacted in July 2004 but, since then, the texts for

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been pro pe rly addressed. IDA standard biddingdocuments (SBDs) are wi de ly used inMadagascar. How eve r, an area o f concern i s the cumbersome and overly bureaucratic approvalprocess for contract signingby G O M , wh ich causes unnecessary delays. In addit ion, insuff icie ntprogra mmin g an d procurement planning contr ibute to delays in project implementat ion whic hresult in slow disbursement. T o mit igate r isks o f delays for the proposed project, p roperprerequisites fo r th e use of Ba nk SBDs, including evaluation reports for Nation al Com petit iveBiddingprocedures (NCB) have been agreed upo n with Government during negotiations. Theprocedures ma nua l will be updated as a part o f he Project Implemen tation Plan.3.4 A Procurem ent Capacity Assessment o f J I RA M A was not conducted during appraisalbecause i t was agreed with JIRAMAs management that the same team wil l b e maintained inplace as the one wh ic h dealt with the recently-close d ESDP. On he basis o f he experienceacquired by the JIRAMA procurem ent team, an actio n plan was drafte d to address areas wherecapacity needs to be strengthened. The action pla n ncludes(i)specif ic section o n procurementin he Project Implementat ion Ma nua l o be f inalized or updated before C redit effectiveness;(ii)mprovement o f ecord keeping o f procurement-related documents; and (iii)efresherprocurem ent train ing sessions for proje ct staff.3.5Unit during appraisal. Th e assessment reviewed the organizational structure fo r the unit. Thek e y issues and risks concerning procurement by MEM have been identif ied. Correctivemeasures which have been agreed are: (i)ecruitment, under terms and cond itions acceptable toIDA, o f a qual ifie d and experienced procuremen t expert; and (ii)he close fol low-up o f heagreed procurement pl an and activity scheduling. A procurement act ion pla n wil l be fine-tunedquarterly and the ma in procurement plan wil l be updated accordingly.

A separate Procurement Capac ity Assessment was con ducted f or the MEM procurement

4. Environmental and Social4.1rehabi li tation o f he exist ing t ransmission l i nes and substations in various towns in Madagascar.The investments are entirely a imed at upgrading existing nstal lat ions. N o ne w greenfield siteswil l be developed o r hu ma n resettlement undertaken.

APL-1wil l finance generation rehabilitation, disti-ibution reinfo rcem ent and

4.2for phase 1o f he proposed APL. Phase 2 o f he APL will be the subject o f a complete study(ESIA) during the execut ion o f phase 1. The JIRAMA subprojects envisag ed in APL Phase 1comprise 3 distinct groups:

J IR A M A has undertaken an Environmental and Social Impa ct Management Framework

- Group 1 Rehabilitationo f hermal power stations.- Group 2: Rehabi li ta tion o f hydroelectr ic power stations.- Group 3 : Rehabi l i tat ion o f ransmission and distr ibution networks.4.3 The rehab ilitation o f hermal po wer stations in Ambohim anambo la, Mahajanga,Toamasina, Toliary, Antsiranana includes the rehab il i tat ion o f he ex isting Pow er Plants. Theenvironmental examinat ion o f he projects related to the rehabi l i tat ion o f he power stations

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showed that the environmental impacts are generally neutral. However, the impacts of theinvestments alone cannot be considered independently fro m the totality o f he installat ions andthe current environm ental situation in he site in wh ic h they are located. The ma in mpacts arenoise, the atmosphe ric emissions, po llu tio n o f ground and water due to no n eff icientmanagement o f effluents, and po or risk management inc lud ing absence o f an emergency plan.The m ai n m it ig at i on measures to address these issues alon g with the action plans are available inthe Environm ental and Social impact Management Framework for phase 1.4.4Tsiazompaniry, Vatomandry, A ndekaleka and Volobe, consist o f eplacement o f used turbineand alternator parts, turbine cooling equipment, general revision o f plant, and rehabi l i tat ion ofthe c iv i l engineering works. The investments wil l not alter the current design o f he dam,existing water levels n or surpass the original capacity o f he turbines. The ma in env ironmentalimpact iden t i f ied concern the safety o f he sites (e.g. the transformer Switchyards are not lock edand the f i r e fighting equipment is outdated) and th

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Madagascar: Power/Water Sector Recovery and Restructuring (APL) Project (World Bank - 2006)

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