The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD26 INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY CREDIT IN THE AMOUNT OF SDR 89.6 MILLION (EQUIVALENT TO US$125 MILLION) TO THE REPUBLIC OF RWANDA FOR A SECOND RWANDA ENERGY SECTOR DEVELOPMENT POLICY FINANCING October 19, 2018 Energy and Extractives Global Practice 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
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The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458)
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: PGD26
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A
PROPOSED DEVELOPMENT POLICY CREDIT
IN THE AMOUNT OF SDR 89.6 MILLION (EQUIVALENT TO US$125 MILLION) TO
THE REPUBLIC OF RWANDA
FOR A
SECOND RWANDA ENERGY SECTOR DEVELOPMENT POLICY FINANCING
October 19, 2018
Energy and Extractives Global Practice 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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The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458)
THE REPUBLIC OF RWANDA
GOVERNMENT FISCAL YEAR
July 1 – June 30
CURRENCY EQUIVALENTS
Exchange Rate Effective as of September 30, 2018
Currency Unit = Rwanda franc (RWF)
US$1 = RWF 884.7470000
US$1 = SDR 0.71671743
ABBREVIATIONS AND ACRONYMS
AfDB African Development Bank BNR National Bank of Rwanda CAD Current Account Deficit CEO Chie Executive Officer CFO Chief Financial Officer CMS Commercial Management System DPO Development Policy Operation DSA Debt Sustainability Analysis EAC East African Community EARP Electricity Access Rollout Program EASSDP Rwanda Electricity Access Scale‐up and Sector Wide Approach Development Project EDCL Energy Development Corporation Limited EDPRS‐II Second Economic Development and Poverty Reduction Strategy EICV Integrated Household Living Conditions Survey ERR Efficient Revenue Requirement ESMAP Energy Sector Management Assistance Program ESSP Energy Sector Strategic Plan EU European Union EUCL Energy Utility Corporation Limited EWSA Electricity, Water, and Sanitation Authority GDP Gross Domestic Product GHG Greenhouse Gas GIS Geographic Information System GoR Government of Rwanda GRS Grievance Redress Service HR Human Resources IBMS Integrated Business Management System IDA International Development Association IEG Independent Evaluation Group IFRS International Financial Reporting Standards IMF International Monetary Fund IPP Independent Power Producer
IRMS Incident Recording and Management System IT Information Technology kVA Kilovolt‐ampere kWh Kilowatt Hour LCPDP Least‐cost Power Development Plan MINECOFIN Ministry of Finance and Economic Planning MININFRA Ministry of Infrastructure MIS Management Information System MTF Multitier Framework MW Megawatt NDC Nationally Determined Contribution NEP National Electrification Plan NISR National Institute of Statistics of Rwanda NST1 National Strategy for Transformation PDO Program Development Objective PFM Public Financial Management PPP Public‐private Partnership PSI Policy Support Instrument PSIA Poverty and Social Impacts Assessment PV Photovoltaic RDB Rwanda Development Board REG Rwanda Energy Group REMA Rwanda Environment Management Authority RESSP Rwanda Electricity Sector Strengthening Project RISE Regulatory Indicators for Sustainable Energy RPP Revenue Protection Program RPPA Rwanda Public Procurement Authority ( RR Revenue Requirement RURA Rwanda Utilities Regulatory Authority RWF Rwandan France SAIDI System Average Interruption Duration Index SAIFI System Average Interruption Frequency Index SCF Standby Credit Facility SDG Sustainable Development Goal SDR Special Drawing Rights SID Strategic Investment Department SOE State‐owned Enterprise SP Social Protection STEM Science, Technology, Engineering, and Mathematics SUBSIM Subsidy Simulation SWAp Sector Wide Approach SWG Sector Working Group TA Technical Assistance TWG Technical Working Group ( US$ United States Dollar VAT Value‐added Tax VUP Vision 2020 Umurenge Program
.
Regional Vice President: Hafez Ghanem
Country Director: Felipe Jaramillo
Senior Practice Director: Riccardo Puliti
Practice Manager: Sudeshna Ghosh Banerjee
Task Team Leaders: Yadviga Semikolenova, Joern Huenteler
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REPUBLIC OF RWANDA
SECOND RWANDA ENERGY SECTOR DEVELOPMENT POLICY FINANCING
Table of Contents
SUMMARY OF PROPOSED FINANCING AND PROGRAM ........................................................................ 3
1. INTRODUCTION AND COUNTRY CONTEXT ........................................................................................ 5
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS ............................................................................ 45
5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................... 47
6. SUMMARY OF RISKS AND MITIGATION .......................................................................................... 48
ANNEX 1: POLICY AND RESULTS MATRIX ............................................................................................ 51
ANNEX 2: IMF RELATIONS ANNEX ...................................................................................................... 56
ANNEX 3: LETTER OF DEVELOPMENT POLICY ...................................................................................... 59
ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................... 66
ANNEX 5: LINK OF THE PROGRAMMATIC ENERGY SECTOR DEVELOPMENT POLICY OPERATION TO RWANDA’S NATIONALLY DETERMINED CONTRIBUTION UNDER THE PARIS AGREEMENT ................... 68
ANNEX 6: ECONOMIC AND FINANCIAL PROJECTIONS FOR THE ELECTRICITY SECTOR IN RWANDA ...... 72
ANNEX 7: POVERTY AND SOCIAL IMPACT ASSESSMENT FOR TARIFF REFORMS UNDER THE DPO SERIES .......................................................................................................................................................... 81
The development policy operation (DPO) was prepared by an International Development Association (IDA) team led by Yadviga Semikolenova (Senior Energy Economist and Task Team Leader) and Joern Huenteler (Energy Specialist and Co‐Task Team Leader), which included Norah Kipwola (Senior Energy Specialist), Pedro Antmann (Lead Energy Specialist), Aghassi Mkrtchyan (Senior Economist), Arun Singh (Energy Consultant), Isaura Espinosa De Los Monteros (Energy Consultant), Inka Schomer (Operations Officer), Vivien Foster (Lead Economist), Enagnon Ernest Eric Adda (Senior Financial Management Specialist), Jean Owino (Finance Officer), Nagaraju Duthaluri (Lead Procurement Specialist), Mulugeta Dinka (Senior Procurement Specialist). Mary Bitekerezo (Senior Social Development Specialist), Edward Dwumfour (Senior Environmental Specialist), Marjorie Mpundu (Senior Counsel), Marie Louise Feliciteq Soue (Program Assistant), and Sylvie Ingabire (Program Assistant). Sheoli Pargal (Lead Energy Specialist), Mikul Bhatia (Senior Energy Specialist), Franz Gerner (Lead Energy Specialist), and Dana Rysankova (Senior Energy Specialist) served as peer reviewers. The team is grateful for the support and guidance from Felipe Jaramillo (Country Director), Yasser El‐Gammal (Country Manager), Lucio Monari (Director), and Sudeshna Banerjee (Practice Manager). The team is also appreciative of the excellent collaboration with the Government of Rwanda throughout the preparation and acknowledges the leadership of the interagency working group setup for this operation.
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SUMMARY OF PROPOSED FINANCING AND PROGRAM
BASIC INFORMATION
Project ID Programmatic If programmatic, position in series
P166458 Yes 2nd in a series of 3
Proposed Development Objective(s)
The Program Development Objective (PDO) of the proposed operation is to enable fiscally sustainable expansion of electricity services in Rwanda. The proposed operation is built around two pillars: (i) containing the fiscal impact of the electricity sector; and (ii) improving the operational efficiency, affordability, and accountability of electricity service.
Organizations
Borrower: MINECOFIN
Implementing Agency: MINECOFIN, MININFRA
PROJECT FINANCING DATA (US$, Millions) SUMMARY
Total Financing 125.00 DETAILS
International Development Association (IDA) 125.00
IDA Credit 125.00
INSTITUTIONAL DATA
Change and Disaster Screening
This operation has been screened for short and long‐term climate change and disaster risks
Overall Risk Rating
Substantial
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. Results
Indicator Name Baseline Target
Result Indicator A1:
Contain electricity subsidies a as percentage of GDP FY2016/17: 1.4% of GDP.
FY2020/21: No more than 1.4% of GDP.
Results Indicator A2:
Implement the quarterly automatic tariff adjustment. FY2016/17: No. FY2020/21: Yes.
Results Indicator B1:
Ensure all generation and transmission projects initiated or
accepted by the Government over the past 24 months are
consistent with the LCPDP and comply with the PPP Law
and competitive procurement procedures
September 2017: No. December 2020: Yes.
Results Indicator B2:
Initiate competitive procurement processes to implement
investments identified in the LCPDP
September 2017: 0. December 2020: at least 1.
Results Indicator B3:
Expand electrification rate countrywide (percentage of
households)
September 2017: 40.7%
nationwide (29.7% on‐grid and
11% off‐grid)
2016: 21% among female‐
headed households.
December 2020: 61% nationwide
(38% on‐grid and 23% off‐grid); 50%
among female‐headed households.
Results Indicator B4:
Expand electrification rate among rural households
(percentage of households)
June 2017: 16%. December 2020: 25%
Results Indicator B5:
Ensure EUCL financial statements are in full compliance
with IFRS, the independent audit of REG's and EUCL’s
financial statements is without qualifications, and REG's
and EUCL’s financial statements are published within the
first two quarters of the following year and distributed to
key stakeholders
September 2017: No. December 2020: Yes.
Results Indicator B6:
Reduce total electricity sector losses as a percentage of
electricity supply
FY2017/18: 22%. FY2019/20: 19%.
Results Indicator B7:
Reduce average duration of interruptions (SAIDI) and
a Here, the Government subsidies are defined as budget transfers to the electricity sector as recorded in the official Government budget, including transfers for investment and operational expenditures. .
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IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE REPUBLIC OF RWANDA
1. INTRODUCTION AND COUNTRY CONTEXT
1. The proposed Energy Sector Development Policy Operation (DPO) is the second in a programmatic series of three DPOs. The Government’s reform program aims at balancing the triple objectives of achieving ambitious expansion targets for electricity generation and access while containing fiscal transfers to the sector and enhancing the affordability of electricity service for consumers. In line with the Government’s program, the PDO of the proposed operation is to enable fiscally sustainable expansion of electricity services in Rwanda. The proposed operation is built around two pillars: (a) containing fiscal impact of the electricity sector; and (b) improving operational efficiency, affordability, and accountability of electricity service. The credit amount (SDR 89.6 million) under the first operation of the series was disbursed at the end of December 2017.
2. Rwanda is recognized as a leading reformer in Sub‐Saharan Africa, with impressive performance in poverty reduction. The country has a strong record of reform implementation under programmatic DPOs. Annual gross domestic product (GDP) growth has averaged 7.5 percent in the last decade. Rwanda’s poverty levels have dropped from 57 percent in 2006 to 39 percent in 2014, according to the latest Integrated Household Living Conditions Survey (EICV4). Rwanda has also been the leading reformer among African economies in the Doing Business indicators: observing among the fastest improvement in rankings, it moved from a global rank of 148 in 2008 to 41 in 2018, which is second in Africa after Mauritius. However, GDP per capita, which stood at US$729 in 2016, remains substantially below the average for Sub‐Saharan Africa, and Rwanda remains one of the poorest countries in the world, with significant infrastructure investments needed for its socioeconomic development. The Government has demonstrated its strong commitment and ability to sustain programmatic reform efforts, including under three consecutive series of World Bank DPOs in the social protection (SP) sector (a total of nine operations over 2009–2017). The Government delivered on the agreed program and implemented deep SP reforms that established a good practice SP program (the Vision 2020 Umurenge Program [VUP], which covers about 300,000 households) and institutionalized efficiency, accountability, and transparency throughout the SP system. Moreover, 100 percent of Rwanda’s World Bank projects completed in 2011–2016 have been rated Moderately Satisfactory and above by the World Bank’s Independent Evaluation Group (IEG).1
3. Rwanda’s energy sector has emerged as a success story in Africa. Rwanda’s progress in electrification during 2010–2016 ranked 11th globally and 3rd in Africa. Among the 20 least‐electrified countries, none made more progress than Rwanda during that period.2 Investments in grid extension have increased grid connections from 6 percent in 2009 to 36 percent at the end of August 2018. Off‐grid access has more than doubled since 2016 and is estimated at 11.6 percent at the end of August 2018 (see Annex 6). This puts the nationwide electrification rate at 47.6 percent. The grid covers, as at August 2018, 100 percent of hospitals, 92.1 percent of health centers, 94.5 percent of administrative offices, and 77.2 percent of primary and secondary schools. Rwanda has also taken a number of steps to improve efficiency of its energy sector operations. In 2014, the Government of Rwanda (GoR) restructured the key energy sector institutions by creating a separate Rwanda Energy Group (REG), with the aim to strengthen
1 http://ieg.worldbankgroup.org/data. 2 The World Bank, Tracking SDG7: The Energy Progress Report; http://trackingsdg7.esmap.org/data/files/download‐documents/tracking_sdg7‐the_energy_progress_report_full_report.pdf
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accountability, grant operational independence, and create a financially viable off‐taker for private sector contracts (see Annex 6). The generation capacity tripled from 76 megawatt (MW) in 2010 to 218 MW in June 2018 (with hydro at 45.1 percent, oil [heavy fuel oil and diesel] at 26.7 percent, peat 6.9 percent, solar 5.6 percent, methane gas‐to‐power 13.2 percent, and imports 2.5 percent). A total of 17 independent power producers (IPPs) now supply power to REG, making Rwanda a pioneer in the Maximizing Financing for Development agenda in the energy sector in Africa (as of 2017, 52 percent of generation capacity was under private ownership). In the World Bank’s Regulatory Indicators for Sustainable Energy (RISE) framework, Rwanda is among the top performers in East Africa and has particularly high scores in indicators associated with renewable energy.3
4. Achieving universal access to electricity is at the heart of Rwanda’s National Strategy for Transformation (NST1) (2017–2024), which aims to lay the foundations for achieving upper‐middle‐income country status by 2035 and high‐income status by 2050. Rwanda’s development strategy is laid out in its latest seven‐year plan, NST1 for 2017–2024. NST1 is guided by the Sustainable Development Goals (SDGs), the Africa Union Agenda 2063 and its First 10‐Year Implementation Plan 2014–2023, and the East African Community (EAC) Vision 2050. NST1 identifies the importance of universal electricity access for achieving the envisioned social transformation and aims to expand electricity access to 100 percent households by 2024. The strategy envisages expansion of electricity sector based on least‐cost principles and competitive procurement to provide quality, reliable, and affordable electricity to consumers and aims at prioritizing energy‐intensive industries and productive uses of electricity as measures to reduce the cost of doing business in Rwanda.
5. The approach of the GoR to achieve universal electricity access in an affordable manner is exemplary in its innovativeness. Rwanda’s Energy Sector Strategic Plan 2017‐2024 (ESSP), which was adopted in June 2018 and elaborates the electricity sector priorities of the NST1, specifies the split of universal electricity access as 48 percent off‐grid and 52 percent grid connections. The remarkably high off‐grid target is almost unprecedented for a nationwide electrification plan pursued by any Government. It illustrates the Government’s recognition of off‐grid solutions as a viable electrification option for remote and low‐income households while the grid is expanded in a financially responsible manner. Rwanda’s use of cutting edge electrification planning models and modern geospatial tools to find cost‐efficient ways of expanding electricity access could set a noteworthy precedent in planning access expansion under constraints. The Government is also committed to ensuring affordability of off‐grid solutions.
6. This DPO series supports a Government reform program that proactively addresses the fiscal risks related to achieving universal access to affordable, sustainable, and reliable electricity by 2024. The main rationale for the series is to avoid a projected escalation of fiscal transfers, driven by (i) Rwanda’s already‐high cost of electricity service delivery, which are among the highest in the region (around US$0.28 per kilowatt hour (kWh) in FY2017/18); (ii) ambitions for rapid electrification and system expansion during NST1 (2017‐2024), largely financed by public investments; (iii) generation investment planning inconsistent with least‐cost planning principles; (iv) procurement processes for public‐private partnerships (PPP) inconsistent with competitive procedures; and (v) the limited scope for tariff increases as electricity is already barely affordable for much of the population. Figure 1 shows a schematic representation of the underlying theory of change. The PDO is supported by two main pillars. Pillar A
3 Developed by the World Bank Group, RISE is a tool for policy makers to compare national policy frameworks for sustainable energy and identify opportunities to attract investment. RISE assesses countries’ policy support for each of the three pillars of sustainable energy—access to modern energy, energy efficiency, and renewable energy. See http://rise.worldbank.org/.
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contains measures led by the Ministry of Finance and Economic Planning (MINECOFIN) and the Rwanda Utilities Regulatory Authority (RURA) that directly contain the fiscal impact of the power sector, including tariff reforms. Pillar B contains measures led by Ministry of Infrastructure (MININFRA) and REG that improve the operational efficiency, affordability and accountability of electricity service, divided into four themes: (i) Transitioning Rwanda to a least‐cost and low‐carbon energy mix; (ii) Increasing access to affordable and reliable electricity—specifically, the adoption of least‐cost principles in the expansion of electricity access; (iii) Improving the accountability and transparency of REG—specifically, the modernization of REG’s accounting and the publication of its financial statements, which is a critical step towards the listing of REG and improving transparency to REG’s balance sheet; and (iv) Improving the operational efficiency and quality of electricity services, which will lead to lower cost of service and higher revenues.
Figure 1. Link between DPO Pillars and Expected Outcomes (‘Theory of Change’)
7. The counterfactuals to this series are the possibility of fiscal transfers to the electricity sector rising to above 4 percent of the GDP by FY2020/21, crowding out funding to other priority sectors, or fiscal constraints keeping the Government from achieving its objectives in the power sector. Should the Government go ahead with current schedule of proposed power plants and electrification, and not pursue other policy interventions on demand, tariff, estimates suggest that electricity sector subsidies can rapidly balloon from the current 1.35 percent to 4.5 percent in 2020/21 (Figure 2). This would also impose a major risk for the general medium‐ and long‐term fiscal sustainability and macroeconomic stability in Rwanda. If fiscal space does not allow such large transfers, the Government would miss its electrification and sector expansion targets. The reform program supported by the DPO addresses these fiscal risks through a Policy and Results Matrix underpinned by the principles of least‐cost planning, competition, accountability, and operational efficiency.
Pillar B: Improve the operational efficiency, affordability, and accountability of electricity service
Pillar A: Contain fiscal impact of the electricity sector
PDO: Enable fiscally
sustainable expansion of electricity services in
Rwanda
B.1 Transition to least-cost and low-carbon energy mix
B.2 Increase access to affordable and
reliable electricity services
B.3 Improved accountability and
transparency of utility
B.4 Improved operational efficiency
and quality of electricity services
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Figure 2. Fiscal Objective of the DPO Series: Containing Fiscal Transfers to the Energy Sector while Achieving Electrification and Development Targets
Source: World Bank staff analysis (2018).
8. The DPO 1 prior actions are already showing tangible results, enabling the Government to reduce fiscal transfers to the sector while doubling new connections per year and halving the tariffs for low‐income households. As a result of Rwanda’s first Least‐cost Power Development Plan (LCPDP) prepared under DPO 1, consensus emerged among Government authorities that the pipeline of new power plants, if implemented as originally envisioned, would lead to significant oversupply of power generation compared to future demand which incorporates ambitious demand growth projections. NST1, approved in late 2017, rather than setting another ambitious generation capacity target, sets the objective of always balancing demand and supply. Implementation of the new tariff, including lifeline tariffs for electricity consumers below 15 kWh per month, and the new connection policy has drastically improved affordability of electricity for low‐income consumers, while largely maintaining REG’s revenue base (see paragraphs 83, 84 and Annex 7). New connections completed per year doubled to 154,000 in FY2017/18 from an average of 74,000 per year during 2012–2016.4 Rwanda’s groundbreaking decision to achieve 48 percent of the universal electrification target through off‐grid options (see paragraphs 34 and 59) is also exemplary in expanding affordable electricity access to low‐income households. For businesses, REG has introduced a client charter ensuring that investors are connected to the national grid in not more 20 days, down from 54 days, and allows customers to apply online for a connection.5 Quality of service is also improving, with blackouts falling from 34 in 2016 to 20 in the 12 months to July 2018.6 These results were achieved while reducing transfers from 2.28 percent of GDP in FY2014/15 to 1.35 percent in FY2017/18.
4 These reforms are also expected to improve Rwanda’s currently relatively poor ranking of 119 in “getting electricity” under the Doing Business indicators. 5 See http://rdb.rw/rwanda‐introduces‐new‐reforms‐in‐electricity‐provision‐construction‐permits‐and‐export‐facilitation‐to‐ease‐doing‐business/ 6 As a first step to improve quality of supply, for the first time in Rwanda average duration of interruptions (as measured by SAIDI) now being regularly measured and monitored (see paragraph 68).
Reduction through Electricity tariff reforms
(DPOs 1 and 2); Least‐cost generation
expansion (DPOs 1–3); Least‐cost electrification
(DPOs 1 and 2); Reforms for attracting
private‐sector investment (DPOs 1–3);
Utility reforms to improve accountability and efficiency (DPOs 1–3).
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Figure 3: Projected Impact of Prior Actions under DPO 1‐2 and Scenario for Impact of DPO 3
Source: World Bank staff analysis (2018).
9. The prior actions under DPO 2 build upon lessons learned from DPO 1, represent major advances on all reform areas of the Program, and put the series on track to achieve its objectives. Under Pillar A, RURA approved a tariff reform under DPO 2 that implements the conclusions from the utilities’ internal revenue requirement (RR) study under DPO 1; and MINECOFIN and MININFRA jointly submitted to the Economic Cluster policy options to contain fiscal transfers to the sector, building upon the assessments concluded under DPO 1. Under Pillar B.1, the PPP Law Guidelines approved by Rwanda Development Board (RDB) under DPO 2 provide the implementation framework for the law approved under DPO 1; and approved a revised LCPDP which—together with other measures implemented under DPO 1—lowers the projected fiscal deficit significantly (see Figure 3). Under Pillar B.2, the National Electrification Plan (NEP) and the related policies under DPO 2 translate the audit concluded under DPO 1 into a complete forward‐looking investment framework. Under Pillar B.3, REG completed the action plan approved under DPO 1 to modernize its accounting and reporting. Lastly, under Pillar B.4, the utility’s new management hired under DPO 1 put in place under DPO 2 a framework to fundamentally improve the quality of service and reduce system losses. Taken together, the prior actions under DPO 2 complete the sector’s investment planning framework and make critical progress towards containing the projected fiscal transfers. The measures already taken are expected to ensure fiscal sustainability in the short term (until 2020), while the measures introduced under DPO 2 that will be adopted/endorsed under DPO 3 during FY2018/19 are expected to set the power sector on a fiscally sustainable path in the long term (beyond 2020).
10. The Government overachieved on several DPO 2 triggers and remains strongly committed to the DPO objectives of containing the fiscal impact of the electricity sector without slowing down its access program or compromising on consumer affordability. Under DPO 2, the Government implemented a tariff reform that was not envisioned until DPO 3. Two other triggers of DPO 2 were already achieved by the time of Board approval of DPO 1 and therefore removed from the matrix. The Government is also revising its generation expansion plan, that includes considering options to postpone two power plants and delay selected IPPs by several years, as indicated in the revised LCPDP. This demonstrates the Government’s resolve to implement the Program and achieve the results indicators. The DPO series’ target of containing electricity subsidies at 1.4 percent of GDP—while maintaining the
Projected fiscal transfers to the power sector (% of GDP)
Business‐as‐usual projection (pre‐DPO 1)
Revised projection (including all decisions that are final at the time of DPO 2)
Scenario under consideration (identified under Prior Action 2.2, to be approved by the Economic Cluster under DPO 3)
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pace of the Government’s access program and meet expanding demand—was included in the Government’s medium‐term fiscal framework as agreed with the International Monetary Fund (IMF).
11. The tariff reforms in 2017 and 2018, which raised average tariffs while lowering rates for small household consumers, demonstrate the Government’s resolve to contain fiscal transfers while maintaining affordability of tariffs for low‐income households. The tariff reviews of 2017 and 2018 have raised average tariffs without significant poverty impact, because almost all households’ consumption was exempt from tariff increases. In the latest reform in August 2018, among household consumers, tariffs have been increased by 11 percent for larger consumers (>50 kWh per month) and kept unchanged for those consuming less than 50 kWh. Tariffs for selected non‐household consumers that are not exposed to international competition—commercial customers, broadcasters, telecom towers and health facilities—have been brought closer to cost recovery. General industrial tariffs have been refined to promote competitiveness while flattening the demand profile during the day by keeping maximum demand charges for non‐peak hours substantially lower than that for peak hours (see Annex 6 for details). As described in Section 5.1 and Annex 7, the direct welfare impact of the tariff reforms on households has been generally very small and slightly positive for households in the two lowest consumption quintiles.7 The higher average tariffs have helped the Government keep fiscal subsidies in check in the short term.
12. The prior actions and triggers of the series are designed to reflect the Government’s planning and decision‐making process (see Box 1). The DPO policy matrix combines (i) policies with immediate impacts (e.g., electricity tariff reforms, the new connection policy, and institutional decisions in the utility) and (ii) measures that will put in place a policy framework to ensure fiscal and financial sustainability of the sector in the medium‐ to long‐term (e.g., the LCPDP and the NEP and the associated policy measures; see Annex 6 for details of the different plans). The time horizon of the second set of measures is aligned with the Government’s seven‐year planning cycles (i.e., the NST1 and the associated seven‐year ESSP). The timing of prior actions and triggers for these measures in the DPO series is aligned with the Government’s decision‐making process for such strategic sector policies (see Box 1): For example, in the case of the NEP, DPO 1 included (part of) the technical foundations; DPO 2 included the approval of the NEP by MININFRA; and DPO 3 includes the Economic Cluster’s8 approval of a financing plan for the NEP.
Box 1: The Decision‐Making Process for Strategic Sector Policies in Rwanda
The DPO series is structured along Rwanda’s decision‐making process for strategic sector policies, which is consultative and consensus‐oriented. Policy decisions follow a defined procedure: First, the technically responsible implementing agency (e.g., the utility or the regulator) gathers information and prepares the analytical foundations of the policy decision and submits them in the form of a report to the line ministry (in this case, MININFRA). Second, for most important decisions9, the line ministry will then seek validation by all relevant sector stakeholders (including Development Partners), first in the respective Technical Working Group (TWG) (e.g., the TWG on electricity access) and then in the wider Energy Sector Working Group (Energy SWG), which also includes civil society and political constituencies. Third, after validation from the SWG, the line ministry will either approve the decision or, in the case of decisions that affect multiple sectors or have budget implications, recommend the decision to the Economic Cluster of the Cabinet of Ministers. This process takes time but ensures buy‐in by all relevant stakeholders.
7 Ninety‐three percent of all households (including nearly 100 percent of Q1 households) are within the first two tariff blocks that either paid less or stayed the same under the tariff reform of 2017 and stayed the same during the tariff reform of 2018. 8 The Economic Cluster is a subgroup of the Cabinet of Ministers formed for the effective implementation and monitoring of NST priorities. It includes the Ministers of Natural Resources; Agriculture and Animal Resources; Trade, Industry, and EAC Affairs; Finance and Economic Planning; Infrastructure; and Employment Promotion. 9 Exceptions that are not subject to SWG endorsement include electricity tariffs and budget decisions.
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2. MACROECONOMIC POLICY FRAMEWORK
2.1. RECENT ECONOMIC DEVELOPMENTS
13. Real GDP growth is on a rebound, with a broad‐based pick‐up. After declining to less than 3 percent in the first half of 2017, growth has since rebounded mostly supported by exports and agriculture. In 2017, the growth reached 6.1, while it accelerated further to 8.9 percent in 12 months ending in June 2018, proving that the slowdown of 2016/2017 was temporary. Annual growth for 2018 is projected at 7.2 percent (table 1). On the supply‐side, supported by improved weather conditions, agriculture grew by 6.6 percent in 2017, and further to 8.1 percent as of June 2018. Fueled by commerce and transport sub‐sectors, services grew 7.9 percent in 2017, while accelerating to 10 percent as of June 2018. Industry has recovered thanks to the revival in construction activities (including ongoing construction of the new airport) and solid performance of the food‐processing sector, expanding from 4.2 percent in 2017 to 8.4 percent as of June 2018. On the demand side, robust expansion in investment and exports drove GDP growth, while consumption growth remained at low single digits. Driven by capital goods and industrial raw materials imports picked up in first half of 2018 after declining in 2017.
14. The current account deficit (CAD) more than halved in 2017 to less than 7 percent of GDP, driven by strong export growth (32 percent). Strong export growth momentum continued in first half of 2018. In US$ terms, goods’ exports grew 23.3 percent, outpacing import growth of 7 percent. Exports of non‐traditional and other newly discovered minerals (sapphires, rubies, and tourmaline, among others) that made up almost 31 percent of goods exports grew 19 percent while coffee and tea, accounting for 16 percent of exports of goods, grew 14 percent.
15. Monetary policy remains accommodative amidst low inflation and a favorable external environment. Headline inflation fell to 2.9 percent in June 2018. Food price inflation has been very low due to favorable agriculture harvest. Reflecting the sizable external adjustment of 2017, pressures on the exchange rate were quite mild resulting in only a 3.5 percent depreciation of the franc against US dollar in the year ended June 2018. These have helped the National Bank of Rwanda (BNR) to keep the policy rate at 5.5 percent.
16. The accommodative policy stance has not translated into a stronger credit growth given the recent large writing‐off of non‐performing loans accumulated during the economic slowdown of 2016 and 2017. Credit to the economy grew by only 7.3 percent for the year ended June 2018. Non‐performing loans have declined to 6.9 percent in June 2018, compared to the peak at 8.2 percent in June 2017. This was mainly helped by the new regulation on credit classification and provisioning that became effective in January 2018. The banking sector remained well capitalized, with the risk‐weighted assets ratio standing at 19.7 percent in June 2018 well above the levels required by Basel III.
17. Rwanda’s financial sector has made strides towards becoming a diversified and modern financial sector. Banks, microfinance institutions, SACCOs10, insurance companies, pension funds, and capital markets firms are providing an expanding range of products. According to the latest survey from 2016, 89 percent of adults in Rwanda had an account at a financial institution, compared to 72 percent in 2012. The rapid growth of the financial sector has realized demonstrable results in expanding access, but also revealed vulnerabilities and risks. The government and BNR have undertaken major reforms to the legal and regulatory framework for the financial sector. Continuing these reforms and eliminating all
10 Umurenge SACCOs are savings credit and co‐operatives whose objective is to pool savings for the members and in turn provide them with credit facilities.
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potential barriers to efficient investment allocations will help Rwanda be an attractive destination for local, regional, and international investments in the future.
Table 1: Selected Economic Indicators
18. The Government has maintained a prudent fiscal stance. The fiscal deficit on cash basis is estimated to have reached 5 percent of GDP in the fiscal year ending in June 2018, slightly higher than the 4.9 percent of the previous fiscal year. Domestic revenues increased by 0.4 percentage points of GDP because of ongoing administrative measures in value‐added tax (VAT). Non‐tax revenues increased by 0.1 percentage point of GDP mainly due to increased reimbursements from the UN for peace‐keeping operations. Grants were at 4.5 percent of GDP, slightly lower than 4.6 percent in FY 2016/17. The stock of public external debt rose to 48.3 percent of GDP in December 2017 and it is expected to remain relatively stable in 2018‐19.
19. While total public expenditures were maintained at around 27.5 percent as a share of GDP over the last three fiscal years, there have been variations across spending categories. The most noticeable change was a decline in capital expenditures, from 11.4 percent in FY2015/16 to about 10.8 percent in FY2017/18. This was offset by increases in both recurrent expenditure and let lending increased, by 0.2 percentage points of GDP and 0.6 percentage points of GDP respectively. Combined public expenditures on health, education, and SP remained relatively stable (an estimated 8 percent of GDP in FY2016/17 versus 8.6 percent in FY2014/15). Public expenditures on education increased by 0.4 percentage points in GDP in that period, while health expenditures declined by 0.8 percentage points of GDP, mostly driven by the decline in the capital expenditures. SP expenditures remained relatively stable as a percentage of GDP.
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20. Fiscal transfers to the energy sector have declined as a percentage of GDP. Overall fiscal transfers declined from an estimated 2.3 percent of GDP in FY2014/15 to 1.26 percent in FY2016/17 and 1.35 percent in 2017/18, which helped maintain the fiscal space for other priority spending programs amid the declining fiscal envelope. The projections for energy sector fiscal transfers for 2018 to 2021 submitted by MINECOFIN under the 2017/18 budget hover between 1.3 and 1.5 percent. While sector transfers are projected to increase across the years, the percentage increase is roughly equivalent to projected GDP growth rate, thus containing transfers as a percentage of GDP. However, the actual transfers to the power sector in the coming years as a percentage of the GDP can be substantially higher if immediate measures are not taken.
21. Containing contingent liabilities that may arise from state‐owned enterprises (SOE) will be important for mitigating fiscal risks. To boost Rwanda’s nascent enterprise sector and promote structural transformation, the government has pro‐actively invested in production sectors through establishing new publicly owned enterprises and forming joint ventures with private investors. The authorities have already initiated a comprehensive fiscal risks assessment and have announced their plans to privatize some of the enterprises.
22. Public and publicly guaranteed debt has increased substantially since 2013 due to an investment push. At end‐2017, the public and publicly guaranteed debt stood at 48 percent of GDP, reflecting a sustained public investment expansion in Rwandair and the Kigali Convention Center (KCC). Rwanda’s debt portfolio has been further affected by a shift in the composition of official development assistance away from grants toward concessional borrowing. The debt distress risk remains low. The DSA of June 2018 showed, however, that the debt service‐to‐exports and debt service‐to‐revenue ratios breach the thresholds in 2023 with projected repayments of Eurobonds. Although the breach appears to be temporary and manageable, it illustrates risks that might confront Rwanda in refinancing its commercial debt if conditions in international markets are not favorable.
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Table 2: Fiscal Accounts (percentage of GDP)
23. Rwanda experienced a major external adjustment in 2017. A mix of factors, such as prudent demand management, more competitive exchange rate, strong export commodity prices and continued expansion of non‐traditional exports, contributed to a substantial reduction in CAD from 16 percent in 2016 to less than 7 percent in 2017, a level in line with historic data before increased external imbalances caused by the investment push of 2014‐2016. This helped the BNR to accumulate official foreign exchange reserves in 2017.
2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
24. Rwanda’s economy is projected to grow between 7 and 8 percent over the medium term. Economic activity will be driven by improved agriculture, strong exports, especially minerals, and large infrastructure projects. Government's renewed commitments to scaling up investments in agriculture, especially irrigation, will further strengthen the sectors' medium‐term outlook. The ongoing construction of the new airport will continue to boost industrial activities. The competitiveness of the exchange rate will continue to provide support to export growth. Mining sector activity will continue to remain strong, supported by higher global prices and increased exploration and investment in the sector. With low inflation and a favorable external environment, monetary policy is expected to continue remaining accommodative. With respect to the CAD, strong investments will push it up slightly from the very low level achieved in 2017, but it is expected to remain at or below 9 percent of GDP in 2018‐2020.
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25. Key risks to the growth outlook are associated with weather‐related events, such as droughts and floods, external volatility (especially commodity prices), and weak private sector credit growth. A reversal in the recovery in global prices of minerals, coffee and tea may subdue production and exports. Continued weak private sector response to the improved investment climate remains a key risk. The pace of growth and economic transformation will largely depend on the extent to which private sector will scale up its investment activities.
26. Before converging towards the EAC target of 3 percent of GDP by 2021, the fiscal deficit is projected to temporarily rise in FY2018/19. This reflects spending needs for public investments and ongoing restructuring in public administration. With an elevated public debt, the medium‐term fiscal policy framework prioritizes revenue mobilization. The Government initiated several revenue policy and administration measures to strengthen revenue mobilization. The main reform areas include property tax, a new risk management plan to improve tax compliance, and the expansion of the use of electronic billing machines. Notwithstanding the improvements in those reforms areas, tax revenues remain below 16 percent of GDP due to the tax expenditures arising from generous tax incentives that the authorities continue to extend to the private sector for attracting investments to Rwanda.
27. With the decline in the CAD, external financial requirements are expected to stabilize over the medium term. The CAD is projected to stabilize at or below 9 percent of GDP by 2020 compared to the peak of around 16 percent in 2016 (Table 3). Notwithstanding the projected increase in external debt amortization, the overall external financing requirements will remain between 10 and 11 percent of GDP. With the decline in external grants, the role of private financing in meeting external financing requirements is expected to increase.
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Table 3: External Financing Requirements and Sources (in US$ and % of GDP)
28. A fiscally unaffordable expansion of the electricity sector is a major risk to fiscal sustainability. Against the background of continued decline in grant financing and a low tax‐to‐GDP ratio, mitigating the fiscal risks emanating from possible excess generation capacity in the electricity sector is a critical policy priority. These risks will, in part, be mitigated through the Government’s actions supported by this operation.
29. The 2018 Debt Sustainability Analysis (DSA) maintained Rwanda’s status of low risk of debt distress. Under the baseline scenario, all debt burden indicators are projected to remain below the policy‐dependent thresholds except for a small and temporary breach in the baseline of the debt service‐to‐revenue ratio and the stress test for debt service‐to‐exports in 2023, when the Eurobond issued in 2013 matures. Rwanda’s overall external vulnerability, however, remains high. Recognizing Rwanda’s investment needs on the one hand and its narrow export base and import‐dependent growth on the other, the authorities are closely focused on carefully choosing the highest return projects, financed under the most favorable terms. In the context of the Compact with Africa, the authorities hope to encourage more private investment, leveraging guarantee schemes from multilateral and bilateral development partners and minimizing the Government’s exposure to additional liabilities.
30. Overall, while risks remain, Rwanda’s macroeconomic policy framework is considered adequate for the DPO. Rwanda’s prudent macroeconomic policy has enabled the country to achieve high economic growth and macroeconomic stability in the past decade. Both monetary and fiscal policies have been implemented in a prudent manner. A difficult external environment and the surge in the public investments compounded pressure on foreign reserves in 2015–2016. The authorities have since put an adjustment program in place to mitigate the risks of external imbalance by muting domestic absorption
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and easing the current account strains notwithstanding the temporary growth slowdown. The program has already helped reduce external imbalances drastically in 2017, while the growth has regained the momentum returning to 7 to 8 percent per annum. The proposed DPO will support the authorities, among others, in containing the fiscal risks that are likely to emerge from the energy sector over the medium term.
2.3. IMF RELATIONS
31. In June 2018, the IMF completed its ninth review of Rwanda’s economic performance under the program supported by the Policy Support Instrument (PSI). This review followed the third and final review under the Standby Credit Facility (SCF) in January 2018 which enabled disbursement of US$25.8 million, bringing total disbursements under the arrangement to about US$206.6 million. The PSI for Rwanda was approved on December 2, 2013, and extended on January 12, 2018, to December 1, 2018. Requests for an 18‐month SCF arrangement with access of about US$204 million (SDR 144.18 million equivalent) or 90 percent of Rwanda’s quota were approved by the Executive Board on June 8, 2016.
32. The SCF was aimed at complementing the authorities’ efforts to address growing external imbalances, by boosting reserves. The Government has committed to implementing the following policy measures: (a) exchange rate flexibility (that is, allow more depreciation of the RWF); (b) cut/delay in non‐priority expenditures, especially ones with high import content; and (c) shift from accommodative to neutral monetary policy. Performance under the ongoing PSI‐supported program remains strong. All but one quantitative targets and structural reform benchmarks were met. Rwanda’s risk of debt distress remains low.
33. The World Bank and the IMF have been closely collaborating in Rwanda. The World Bank team participates in the IMF missions (including the latest in March 2018) and the IMF’s internal meetings, as needed, and vice versa. The Joint Staff Advisory Note for the Second Economic Development and Poverty Reduction Strategy (EDPRS‐II) was completed in December 2013, and the DSA is jointly conducted on an annual basis (the latest completed in May 2017). In formulating the Program‐for‐Results on Public Sector Governance, the World Bank and the IMF collaborated on public financial management (PFM) reforms.
3. GOVERNMENT PROGRAM
34. NST1 (2017–2024) and the ESSP11 lay out the Government program for the energy sector. NST1 identifies the importance of universal electricity access for achieving the envisioned social transformation and aims to expand electricity access to 100 percent of households by 2024. Generation planning is expected to be informed by medium‐ and long‐term supply and demand projections, as well as by the identification of least‐cost sources of energy generation. The strategy aims to increase demand by creating enabling conditions for energy‐intensive industries such as mining, manufacturing, information and communication technologies, and commercial premises. Further, by emphasizing on the improvement of quality and reliability of electricity supply and prioritizing connection for productive uses of electricity (such as, by industrial zones, market centers, schools, and health centers), NST1 recognizes the enabling role of electricity for economic development in Rwanda. The targets laid out in the ESSP capture the spirit of NST1 for the energy sector. Specifically, the ESSP aims to increase generation capacity in accordance with demand (where demand projections incorporate increase in productive use) and maintain reserve capacity of 15 percent, improve reliability of electricity supply by reducing frequency and duration of
11 See Annex 6 for details of the different plans in the sector and their respective focus and objectives.
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power interruptions (average number of power interruptions per year to be reduced to 16 and average number of hours without power to be reduced to 9), achieve universal electrification by expanding access through both on‐grid (52 percent of households) and off‐grid (48 percent of households) measures, provide universal access for productive uses of electricity, and reduce transmission and distribution losses to 15 percent (from 22 percent as of FY2017/18).
35. With NST1, the Government is shifting its focus from investment to policy and institutional reforms aimed at fiscal sustainability of the electricity sector, embracing least‐cost planning and competitive procurement, enhancing transparency and accountability, and improving utility operations. Measures to contain the revenue shortfall aim to ensure the fiscal sustainability of the electricity sector in the medium term. Reforms to sector planning, including a new NEP, aim to improve expansion planning and target setting and institutionalize least‐cost principles to electricity access. Enhanced transparency and financial management aim to allow the utility to maximize financing, including private finance, for sector expansion. Improved regulations and utility operational policies aim to ensure system efficiency and improved quality of service for consumers. Together, these complementary measures underpin the aim of having a sustainable sector operating on commercial principles and being able to deliver services in an affordable and reliable manner.
36. Rwanda’s Nationally Determined Contribution (NDC) under the Paris Agreement lays out a vision of greening the power sector through mitigation actions on renewable energy and energy efficiency. Specifically, the NDC defines Rwanda’s contribution as emission reductions compared to a counterfactual, business‐as‐usual scenario, based on policies and actions conditional on availability of international support for finance, technology, and capacity building. In the power sector, the NDC prioritizes (a) increasing the share of new grid‐connected renewable capacity compared to fossil fuels; (b) installing solar photovoltaic (PV) in rural communities; and (c) increasing energy efficiency through demand‐side measures and supply‐side grid‐loss reduction. By suggesting postponing/cancellation of selected thermal power plants in the pipeline, the revised LCPDP under consideration by the Government is expected to reduce greenhouse gas (GHG) emissions by about 800,000 tCO2e by 2030 compared to the emission under the Business as Usual commissioning schedule (see Annex 5 for more details).
37. The private sector is envisioned as a strategic partner for investment in off‐grid electrification in the access agenda. The Government’s NEP incorporates both grid and off‐grid solutions. Off‐grid solutions, envisioned in areas where extending the grid is not financially viable in the short term, are expected to be primarily driven by the private sector. The NEP marks distinct areas for grid and off‐grid electrification to give the private sector certainty about their investments. The Government is also in the process of deciding investment procedures for implementing the NEP, including the procedures to ensure the affordability of off‐grid solutions while increasing private sector involvement. The Government has created an off‐grid advisory group, including private sector representatives, to facilitate the consultation process on achieving off‐grid targets, and is putting renewed efforts into enhancing a transparent and predictable regulatory framework.
38. In its attempts to reduce the cost of electricity generation for the country, the Government is also taking steps to tap into low‐cost hydro and geothermal resources in the region. The Government is committed to developing regional hydropower projects—an 80 MW regional Rusumo Falls hydropower plant (P075941), to be equally shared by Rwanda, Tanzania, and Burundi, is currently under construction (with the support of World Bank financing) and is expected to be operational at the end of 2020; and a 147 MW regional Ruzizi III hydropower plant project (P148226), to be equally shared by Rwanda, the
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Democratic Republic of Congo, and Burundi, is proposed. The Government is also in discussions with Kenya, Uganda, and Ethiopia on power exchange frameworks.
4. PROPOSED OPERATION
4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION
39. The proposed energy sector DPO in the amount of SDR 89.6 million (equivalent to US$125 million) is the second in a programmatic series of three DPOs. The PDO of the proposed operation is to enable fiscally sustainable expansion of electricity services in Rwanda. The proposed operation is built around two pillars: (a) containing fiscal impact of the electricity sector and (b) improving the operational efficiency, affordability, and accountability of electricity service.
40. To proactively address the fiscal risks from the electricity sector, this DPO series supports a program that includes measures to respond to the urgency of the situation but also lay the foundation for a sustainable sector capable of providing reliable and affordable energy services. This short‐ to medium‐term reform program is underpinned by the principles of least‐cost planning, competition, accountability, and operational efficiency and consists of the following main elements:
(a) Putting in place a fiscal policy for the electricity sector that balances the Government’s sector expenditure priorities and fiscal sustainability objectives (supported under Pillar A of this DPO series, see Figure 1);
(b) Institutionalizing least‐cost principles in the scheduling and procurement of new power plants, including in the short term, by moving from ad hoc, bilaterally negotiated investments to adoption of least‐cost sector planning and competitive procurement, as well as including strengthened regional electricity trade in least‐cost planning (Pillar B.1);
(c) Promoting the transition to low‐carbon energy by reforming the legal framework for renewable energy generation and developing grid‐connected hydropower and solar power (Pillar B.1) and by removing barriers for off‐grid solar energy (Pillar B.2);
(d) Reforming its electrification program to make electricity access more affordable, including by leveraging the private sector for mini‐grids and off‐grid solar (Pillar B.2);
(e) Taking measures—including the transition to International Financial Reporting Standards (IFRS)‐compliant accounting and commercial independence—to improve transparency of fiscal impacts and enable REG, which is in charge of electricity utility services provision to tap commercial financing for sector expansion and become a financially viable off‐taker (Pillar B.3); and
(f) Improving operational efficiency of REG, through strengthened resource management in the utility, systematic monitoring of quality of customers’ commercial service and quality of electricity supply, and independent performance evaluation of REG (Pillar B.4).
41. The proposed programmatic DPO series boosts Rwanda’s priority mitigation actions under its NDC to the Paris Agreement (see Annex 5 for details). The DPO series supports all three climate change mitigation actions in the power sector prioritized in Rwanda’s NDC: (a) increasing the share of new grid
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connected renewable capacity compared to fossil fuels; (b) installing solar PV mini‐grids in rural communities; and (c) increasing energy efficiency through demand‐side measures and grid‐loss reduction. The adoption and effective implementation of the LCPDP will reduce GHG emissions from the power sector by increasing the share of low‐cost renewable energy sources compared to fossil fuels. As detailed in Annex 5, the optimal LCPDP scenario is expected to increase the share of renewables in Rwanda’s energy mix to 57 percent by 2030, compared to 48 percent under the counterfactual, business‐as‐usual scenario and reduces cumulative emissions by about 800,000 tCO2eq by 2030 compared to the business‐as‐usual scenario (an 8 percent reduction). Further, measures to strengthen the off‐grid solar market under this operation will reduce barriers to the adoption of off‐grid solar solutions, thereby expanding access through renewable energy rather than grid‐based electricity.
42. By shifting the Government’s focus to sustainable service delivery, the proposed programmatic DPO series is transformative on how the sector will deliver its mandate. The DPO series represents the World Bank’s first lending engagement solely focusing on electricity sector reforms in Rwanda and marks an important shift in the Government’s approach to the sector. The preparation of the DPO series has been instrumental in facilitating dialogue and coordination on a policy level between MINECOFIN and MININFRA on sector policy, which was previously mainly the domain of the line ministry. After years of prioritizing investment and expansion, the Government is willing to take bold measures to rein in costs and improve efficiency, and this represents an important change from business‐as‐usual. The programmed reforms, including competitive procurement of investments, strict adherence to least‐cost sector expansion planning, geospatially optimized access planning, and fully digitalized performance monitoring and optimization, has the potential to turn REG into one of the most advanced utilities in Sub‐Saharan Africa. The reform program supported by this operation will further strengthen the role of the private sector in the power sector, which already owns and manages over half of the generation capacity and, through its dominant role in the off‐grid market, is now also emerging as a strategic partner in the access agenda. By putting in place an adequate framework for investment planning, procurement, and sector governance and by improving the financial viability and accountability of the offtaker of private generation (REG), the proposed operation is maximizing the symbiotic relationship of private and public investment for the development of the sector.
43. The reforms envisaged in this DPO builds on Rwanda’s past successes. In 2014, with the support of the World Bank and other development partners, the Government restructured the key energy sector institutions, aiming at achieving regulatory independence, financial sustainability, and increased private sector engagement. REG was created to take over the electricity utility functions as well as carry out power sector planning and development. While the Government retains ownership of REG, its affiliated companies are governed under company law as opposed to the Public Service Law. Subsequent support focused on enhancing REG’s operational efficiency and governance. The scope of this DPO series is broader in nature and aims to consolidate reforms’ achievements to date as well as enhance the sector’s ability to scale up reliable, affordable, and sustainable service delivery.
44. The choice of a programmatic DPO as a lending instrument is in line with the nature of the proposed reforms and the experience from the previous SP DPO series. The programmatic nature of the DPO matches the multiyear time horizon of the reforms supported, many of which require sustained Government attention and follow‐up to achieve the desired objectives. The proposed plan is based on a consistent set of reforms encompassed in a three‐year program that will help Rwanda lay the groundwork for successful sector development during the implementation of NST1 for the period 2017–2024. It builds on past achievements and lessons learned to support policy and administrative reforms, including under
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the World Bank’s three consecutive DPO series in the SP sector (FY2008/09–FY2016/17) through which Rwanda (a) established a good practice SP program (the VUP); (b) institutionalized efficiency, accountability, and transparency in the SP system; and (c) extended VUP coverage from 30 to about 360 out of 416 geographical sectors and from 25 to about 300,000 households. Finally, this instrument responds to client preference for support and is consistent with Rwanda’s adequate macro‐fiscal framework.
45. The DPO incorporates lessons learned from the World Bank’s past and current engagement in the energy sector in Rwanda. Most notably, the DPO draws on lessons from the recently closed Rwanda Electricity Access Scale‐up and Sector Wide Approach Development Project (EASSDP) and the ongoing Rwanda Electricity Sector Strengthening Project (RESSP). Specifically, the DPO
(a) Strengthens planning capacity for least‐cost expansion in all segments of the electricity supply chain, and access to service of new consumers;
(b) Improves accountability and transparency in implementation of electrification programs;
(c) Strengthens the systematic use of tools to improve operational performance of REG’s affiliates and service delivery of electricity, especially the recently introduced management information system (MIS), to reduce losses in electricity supply, improve quality of service, and enhance financial performance; and
(d) Contributes to the long‐term financial sustainability of the sector.
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS
Pillar A: Containing the fiscal impact of the electricity sector
DPO 1
Prior Action 1.1: The REG Board of Directors approved the assessment of current revenue requirement of REG and its affiliate companies contained in the REG Strategic Plan 2017–2026 and started an independent review of said assessment.
DPO 2
Prior Action 2.1: (a) REG has approved the results of an efficient revenue requirement (ERR) study, piloting the use of efficiency benchmarks in the determination of the revenue requirement trajectory towards cost‐recovery; and (b) RURA has implemented new electricity tariffs effective August 13, 2018 introducing new tariff categories and rationalized tariffs for selected consumers.
Prior Action 2.2: MININFRA and MINECOFIN have jointly (a) adopted options to achieve electricity sector fiscal sustainability and contain budget transfers to the electricity sector in the medium term; and (b) submitted the results to the Economic Cluster.
DPO 3
Trigger 3.1: The Economic Cluster approves a medium‐term trajectory for fiscal transfers to REG, with the aim to gradually reduce Government subsidies to the sector.
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46. At present, tariff revenues collected by REG are insufficient to recover the operating costs of service provision to its customers. Rwanda’s cost of electricity supply is high due to limited domestic energy resources and noncompetitively procured generation capacity. The cost of supply averaged US$0.32 per kWh in FY2015/16 and about US$0.28 per kWh in FY2017/18). Tariffs—at an average of [US$0.22] per kWh, among the highest in the region12—are below cost recovery because low incomes limit consumers’ ability to pay for electricity services. The gap of US$0.12 per kWh is covered by budget transfers to REG (US$57 million in total in FY2015/16, net of taxes).
47. Under business‐as‐usual circumstances, the envisioned sector expansion implies significant fiscal risks for the Government. If the Government implements its plans to expand electricity supply and access under business‐as‐usual circumstances, the fiscal transfers needed to sustain operations in the sector, which are already at 1.3 percent of GDP, could increase significantly to over 4 percent of GDP by FY2020/21 (Figure 2). Most of the potential increase in subsidies comes from a series of capital‐intensive base load power plants under development (totaling 205 MW, about the same as the total current installed capacity) that are scheduled to come online in 2019–2024. The revised LCPDP of Rwanda notes that if commissioned according to the original schedule, these power plants add about US$218 million to total system costs (discounted to 2018), or more than twice the current annual revenues, compared to an optimal scenario of system expansion that follows expected demand growth with 15 percent reserve margin. These additional costs derive from repayment of expensive investments in base load power plants (through capacity payments in power purchase agreements) that are expected to run with very low load factors, because demand is not keeping up with the added generation capacity. Recognizing the potential fiscal impact of the business‐as‐usual capacity expansion plan, the Government is revising the commissioning schedule of selected IPPs as reflected in the revised LCPDP.
48. To contain the fiscal impact of sector expansion, the Government is implementing a program of subsidy rationalization (Pillar A of this series), accompanied by a sector reform program to ensure a multipronged approach to reducing cost and boosting revenues of electricity service delivery (Pillar B of this series). Achieving financial sustainability of the power sector will require that REG’s tariff revenues allow it to recover the full cost of service. To ensure that consumers do not pay for wasteful spending or overinvestment by the utility, the cost of service must reflect efficiency in operations in all areas. The Government has committed to approve and put in place a trajectory of budget transfers for the electricity sector to ensure that sector expansion remains fiscally affordable (that is, in line with projections in the Medium‐Term Fiscal Framework), while at the same time allows to implement a fiscally, politically, and socially acceptable ‘glide path’ toward efficient cost‐reflective tariffs.
49. Prior Action 2.1 (a) establishes the ERR of REG, which provides the basis for RURA’s tariff decisions. REG’s initial assessment of its RR, pursued under Prior Action 1.1, provided the basis for the Government’s strategy to restore REG’s financial independence from Government support in the medium term. For Prior Action 2.1, the ERR was independently reviewed, and the outcome was approved by REG’s management. The ERR study provides an estimate of the baseline cost and effectively determines how drastic the Government’s policy measures have to be (on both cost and tariffs) to contain budget transfers to the sector within 1.4 percent. The underlying analytical work has been carried out under the World
12 The median tariff among the 39 countries in Sub‐Saharan Africa surveyed by the World Bank in 2016 was US$0.15 per kWh. Rwanda’s tariff was the highest in East Africa and the 12th highest overall.
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Bank‐funded EASSDP and RESSP, as well as through technical assistance (TA) to REG funded by Enabel (Belgium Development Agency).
50. Prior Action 2.1 (b) reforms Rwanda’s electricity tariffs, which represents a key component of the policy framework to ensure fiscal sustainability of the electricity sector in Rwanda in the short to medium term. Using the ERR study’s results as input, Rwanda’s regulator, RURA, implemented new electricity tariffs effective August 13, 2018, which raise the average cost recovery level, introduce new tariff categories, rationalize tariffs for selected consumers, and include quarterly “automatic tariff adjustment”. Tariffs for households consuming less than 50 kWh per month have been kept constant to ensure affordability of electricity (Figure 4). Tariffs have also been kept constant for water treatment plants, water pumping stations, and hotels. Tariffs have been increased for households consuming more than 50 kWh per month as well as for selected non‐household consumers—commercial customers, broadcasters, telecom towers, and health facilities—that are not exposed to international competition. General industrial tariffs have been reduced by between 4 percent for large industries and about 15 percent for small industries. Further, to flatten the demand profile during the day, maximum demand charges for industries have been revised to keep maximum demand charges for off‐peak hours substantially lower than those for peak hours (see Annex 6 for more details). The tariff review is expected to raise REG’s revenues and narrow the gap between required revenues and revenues generated from tariffs. The remaining gap will continue to be provided as operating subsidy by MINECOFIN.
Figure 4. Electricity Tariffs in Rwanda13, 2005‐2018 (in RWF, nominal)
Source: World Bank analysis based on RURA (2018).
51. Prior Action 2.2 and Trigger 3.1 capture the Government’s actions to develop a road map toward meeting REG’s RR in the medium to long term, containing budget transfers and, in the long term, eliminating fiscal support to the electricity sector. So far, fiscal transfers to the sector have been ad hoc,
13 It is noteworthy that while the tariffs for medium and large industries are lower than the tariffs for households, they are accompanied by substantially high demand charges, ranging from RWF 886 to 10,514 per kVA per month depending upon the time of consumption (see Annex 6). This means that, per kWh, most industrial consumers pay higher rates than most households do. Additionally, since industrial consumers are connected to medium and high voltage lines and have a smoother demand profile, the cost of service per kWh is significantly lower than for low‐voltage consumers like households.
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without an articulated vision of the ways the sector would reach fiscal sustainability in a medium term. Under DPO 2, MININFRA approved a selection of alternative trajectories for transitioning to fiscal sustainability (Prior Action 2.2), understood as containing budget transfers to the sector in the short term, reducing budget transfers in the medium term, and eliminating budget transfers in the medium to long term. Building upon the ERR study, and the revised LCPDP, the Government has completed a robust analytical analysis to understand the impact of available options to reduce budget transfers. Under DPO 3, the Government is expected to adopt one of these alternative trajectories and the corresponding targets for cost recovery and fiscal transfers (Trigger 3.1). The required analytical work is supported by a grant from the World Bank‐managed Energy Sector Management Assistance Program (ESMAP).
52. Under Prior Action 2.2., MININFRA and MINECOFIN have proposed to the Economic Cluster of the Cabinet of Ministers a suite of options aimed at containing the remaining fiscal deficit of the power sector. Informed from the analytical assessments conducted under DPO 1 and DPO 2 to assess possible financial sustainability trajectories, the options proposed by the two ministries include:
(a) Raising revenues by increasing average tariffs through targeted reforms to tariff structure and tariff levels to get closer to cost recovery, while ensuring affordability for low‐income consumers and ensuring competitiveness of industries. Also measures to promote industrial demand when it can be served cost‐effectively.
(b) Reducing the cost of service by revising the generation expansion plan; waiving concession fees for government‐owned assets; assuming the servicing of debt taken on by REG’s predecessor Electricity, Water, and Sanitation Authority (EWSA); providing credit enhancement to reduce financing cost for the private sector; and pursuing an aggressive loss reduction program through REG.
(c) Promoting private‐sector participation in the power sector to lower the need for public investment by implementing all future generation projects as PPPs (with the exception of certain mixed‐use and cross‐border hydropower plants); private sector‐owned transmission projects; and EPC‐plus‐finance contracts in the implementation of publicly‐owned transmission and distribution investments.
(d) Rationalizing public investment plans by reengineering the investment program of Energy Development Corporation Limited (EDCL to reduce and smoothen out the required fiscal transfers during 2018‐2024; and revising development plans for street lighting.
53. Expected results. In view of the risks that under a no‐reform (counterfactual) scenario the fiscal burden could reach 4 percent of GDP in the medium term (see Figure 2), the program aims at containing fiscal transfers, rather than reducing them significantly from the current level. As such, the Government subsidies to REG as a percentage of GDP are expected to be contained at a level of 1.4 percent of GDP through FY2020/21 and beyond (the same value as in FY2016/17). This target indicator is consistent with the updated Government’s Medium‐Term Fiscal Framework (from June 2018) and the IMF program review from July 2018. As an intermediate outcome indicator, RURA is expected to implement the quarterly tariff adjustment mechanism that will help maintain REG’s cost recovery amid fluctuations in the exchange rate, inflation and fuel prices.
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54. Climate change mitigation co‐benefits. Consistent with the World Bank’s 2016 Climate Change Action Plan and Rwanda’s contributions to the Paris Agreement, Prior Action 2.1, which relates to efficient pricing of electricity, is expected to contribute to the reduction of carbon emissions because cost‐reflective prices will provide electricity users effective signals to promote efficiency in their consumption (Priority Mitigation Action 3.1 in Rwanda’s NDC). The options proposed under Prior Action 2.2 include several measures with climate co‐benefits. First, continued tariff increases to achieve cost‐recovery will encourage further efficiency gains in electricity use by consumers. Second, revising the generation expansion plan as per the revised LCPDP would delay the commissioning of selected thermal power plants and increase the share of hydropower in the capacity mix (Prior Mitigation Action 1.1 in Rwanda’s NDC; see also annex 5 for details). Third, rationalizing the development plan for street lighting would increase the associated energy efficiency. And finally, an aggressive loss reduction program would result in system‐wide energy efficiency improvements.
Pillar B: Improve the operational efficiency, affordability, and accountability of electricity service
B.1 Transition to least‐cost and low‐carbon energy mix
DPO 1
Prior Action 1.2: The REG Board of Directors approved the outline of the Sector Development Investment Plan, which is based on the LCPDP.
Prior Action 1.3: MININFRA adopted a resolution requiring the LCPDP to be updated on an annual basis by REG.
Prior Action 1.4: The Rwanda Development Board (RDB) strengthened the capacity of its Strategic Investment Department (SID) through: (i) organizational restructuring of said department; (ii) the appointment of at least one PPP analyst; and (iii) the certification on PPP matters of at least two staff of the SID.
DPO 2
Prior Action 2.3: The RDB has approved guidelines for implementation of the PPP Law of 2016, which mandates competitive procurement of private sector‐owned electricity infrastructure, with the exception of mini‐grids that do not require offtake agreements with the public sector.
Prior Action 2.4: MININFRA has adopted an updated ESSP, covering the period 2017/18‐2023/24, which is consistent with the LCPDP and the NEP.14
DPO 3
Trigger 3.2: REG approves an updated LCPDP.
Trigger 3.3: MININFRA approves a new standard PPA document package applicable to all future IPPs to ensure adequate risk sharing between REG and the private investors.
Trigger 3.4: RURA approves the regulatory framework for cross‐border electricity trade.
14 A clarifying note on the interlinked plans and strategy documents pertaining to the power sector in Rwanda: the ESSP is the energy‐sector specific implementation plan under NST1 and applies to the whole energy sector. The electricity sector components of the ESSP need to be consistent with the LCPDP and the NEP. While the LCPDP will be revised annually, the high‐level targets in the ESSP will not be updated in the short term. There is a process for midterm review of the NST, and this review will be informed by the updated LCPDP and the NEP. The midterm review of the NST will inform the future review of the ESSP. See Annex 6, Table 6.1 for more information about the plans, how they reflect GoR’s vision of power sector reforms and link with the DPO objective.
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55. The Government is moving from bilaterally negotiated agreements based on unsolicited proposals to competitive procurement of new generation capacity, informed by an LCPDP. In view of the challenges resulting from supply‐driven planning that did not incorporate appropriate demand assumptions and was inconsistent with least‐cost planning (see paragraphs 6 and 42), the Government is working to improve sector planning and make procurement of new generation capacity more competitive. Prior actions and triggers in Pillar B.1 are expected to fundamentally transform the development of the electricity sector in Rwanda by introducing and ring‐fencing systematic least‐cost planning, in all segments of the electricity supply chain. The Government’s commitment to bring a fundamental shift in its approach to electricity sector planning is visible from the inclusion of least‐cost planning as the guiding principle in both the NST and ESSP.
56. The prior actions under DPO 2 and triggers under DPO 3 will put in place legislative and regulatory building blocks for implementation and systematic update of the LCPDP. Two of these reforms are prior actions for DPO 2. First, the RDB has approved guidelines for implementation of the PPP Law of 2016, which mandates competitive procurement of private sector‐owned electricity infrastructure for public service delivery (Prior Action 2.3; the guidelines exclude mini‐grids that will not require offtaker agreements. Such mini‐grids will follow the simplified licensing procedure: see Trigger 3.8). Second, MININFRA has adopted an updated ESSP, covering the period 2017/18–2023/24, which is consistent with the LCPDP and the NEP (Prior Action 2.4). Under DPO 3, RURA is expected to put in place the regulatory framework for cross‐border electricity trade, enabling imports of lower‐cost supply and export of excess capacity, thereby optimizing the cost of the power mix through exchanges with other countries in the region contributing to stronger regional economic integration of Rwanda (Trigger 3.4).
57. Expected results. DPO 1 (Prior Action 1.2 and Prior Action 1.3) ensured that the Government takes decisions to identify optimal short‐term, least‐cost options for the sector expansion. In Rwanda, transitioning to least‐cost energy mix is also synonymous with shifting toward a low‐carbon energy mix, given the resource base. The revised LCPDP outlines a path that is therefore both least cost and low carbon for Rwanda, compared to the business‐as‐usual scenario, and is built on realistic demand estimate projections. Prior Action 2.3 and Prior Action 2.4 are important legal and planning measures that connect the policy measures under Pillar B.1 with the result indicators. Two results are expected: first, from 2019 onward, all new generation and transmission projects are expected to reflect the outcomes of the LCPDP and be implemented complying with the PPP Law and competitive procurement procedures (Results Indicator B1). Second, the Government aims to initiate at least one competitive procurement process to implement investments identified in the LCPDP (Results Indicator B2). The most important levers for cost improvements, and consequently for reducing subsidy requirements, lie in the optimization of the pipeline of projects already under development and consideration.
58. Climate change mitigation and adaptation co‐benefits. The adoption of the LCPDP is expected to improve generation investment planning in Rwanda’s power sector (Prior Actions 1.2 and 1.3), thus enabling Rwanda to transition to least‐cost, low‐carbon energy mix for the country, in full consistency with the Government’s policies. Under DPO 2, the approved guidelines pursuant to the PPP Law are critical for the effective implementation of the outcomes of the LCPDP, especially for large‐scale PPP investments in solar power as envisioned under the plan (see Annex 5) (Prior Actions 2.3). Competitive procurement of new generation capacity according to the outcomes of the LCPDP is expected to yield significant climate mitigation and adaptation co‐benefits. Hydropower, solar power, and lake methane represent Rwanda’s least‐cost and lowest‐emission options for expanding electricity supply in the medium to long term. Therefore, Rwanda’s NDC aims to increase the share of these three primary energy resources in its
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electricity generation mix (Priority Mitigation Action 1.1 in Rwanda’s NDC). However, the effective utilization of hydropower and solar power requires adequate planning of the supply‐demand balance and the grid. This is demonstrated by the LCPDP, which shows that higher hydro and solar utilization reduces system costs compared to the business‐as‐usual case (the current project pipeline). Expanding the sector according to the LCPDP outcomes and reflecting these in the ESSP targets will, therefore, increase the share of renewables in Rwanda energy mix and reduce cumulative GHG emissions from the power sector by about 800,000 tCO2eq by 2030 compared to the business‐as‐usual scenario (Prior Action 2.4; see Annex 5 for more details).
B.2 Increase access to affordable and reliable electricity services
DPO 1
Prior Action 1.5: The REG Board of Directors (i) approved the technical audit of the Government’s approach to electrification; and (ii) submitted it to MININFRA for its approval.
Prior Action 1.6: RURA adopted a new electricity tariff schedule, which includes, inter‐alia, time‐of‐use incentives, demand charges for large consumers, lifeline tariffs for low‐volume electricity consumers below 15 kWh.
Prior Action 1.7: MININFRA approved a new connection policy that eliminates up‐front payment of the full connection fee and allows said connection fee to be paid over time.
Prior Action 1.8: The Rwanda Standards Board issued and published in the Official Gazette the national standards consistent with the standards developed by the International Electrotechnical Commission (IEC) for solar systems and the MININFRA approved the Guidelines on Minimum Standard Requirements for Solar Home Systems to Support Off‐Grid Standards Enforcement.
DPO 2
Prior Action 2.5: REG has approved the NEP, which identifies principles for investments to achieve universal access by 2024 and close the gender access gap and submitted it to MININFRA for approval.
Prior Action 2.6: MININFRA has (a) adopted procedures for implementing investments in on‐grid and off‐grid electrification; and (b) approved a grid extension plan in accordance with the least‐cost options.
DPO 3
Trigger 3.5: The Economic Cluster approves a financing plan for the implementation of the NEP.
Trigger 3.6: MININFRA approves guidelines setting minimum requirements for off‐grid solutions that are consistent with international best practice to ensure that off‐grid solutions remain affordable in Rwanda.
Trigger 3.7: The Government approves an incentive scheme to make off‐grid solutions affordable for low‐income households.
Trigger 3.8: RURA updates the simplified licensing framework for mini‐grids that do not require an offtaker agreement with the public sector.
59. Drawing on lessons learned over the past five years, the Government is implementing policy and institutional reforms to achieve electricity access in a more cost‐efficient manner, and to support productive uses of electricity, during the implementation of the NST1 for the period 2017–2024. The ESSP aims that universal access will be achieved by 2024 with the split between on‐grid and off‐grid consumers being 52 percent and 48 percent, respectively. To implement the new targets, the Government is preparing the NEP and is deciding implementation arrangements of the NEP, by reforming the pricing of electricity and new connections and streamlining procedures for simplified procurement of small mini‐
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grids. These efforts are captured by the prior actions and triggers in Pillar B.2, which introduce a more systematic approach to electrification that is expected to further streamline Rwanda’s ambitious access agenda. The electrification planning in Rwanda also exhibits a recent trend where countries with ambitious electrification targets are pursuing grid and off‐grid electrification in parallel. Complementing grid expansion with off‐grid electrification leads to rapid expansion in areas where the grid may not reach soon and/or where the consumers will not be able to afford a grid connection. Off‐grid electrification in areas where the tariffs cannot be cost‐reflective due to affordability constraints also takes away some pressure from financially strained utilities. In order to realize the downstream economic benefits of electrification, the Government is making distinct efforts to connect productive users of electricity. For instance, large productive users of electricity will not be subject to the on‐grid/off‐grid demarcation of the NEP, and will be considered on a case‐by‐case basis. Besides, under the RESSP, the Government already has a strong program to connect non‐household consumers.
60. Prior Actions 2.5 and 2.6 and associated triggers capture reforms to electrification planning procedures. To translate the Government’s targets for on‐grid and off‐grid access expansion into practice, REG has prepared the NEP and is finalizing the related investment plans, aimed at defining and putting in place institutional arrangements, least‐cost technical options, and financing schemes for the implementation of investments needed to achieve the ambitious targets set on access to electricity services. The NEP has been adopted by MININFRA under Prior Action 2.5. Considering the 52 percent on‐grid and 48 percent off‐grid split established in the ESSP as an input, the NEP defines a combination of extension of the national grid and deployment of off‐grid solutions throughout the country that represents the least‐cost option to supply forecasted demand for the 2018‐2024 period. To give the private sector certainty about their operations in off‐grid areas, the NEP clearly demarcates on‐grid and off‐grid electricity expansion regions. To ensure timely implementation of the NEP, MININFRA has decided on procedures for on‐grid and off‐grid electrification including approval of a grid extension plan prepared in full accordance with the least‐cost options, as defined in the NEP (Prior Action 2.6). The procedures incorporate policy decisions to ensure affordability of electricity for low‐income consumers in both grid (building upon measures already taken under DPO‐1) and off‐grid areas. The Government is in the process of designing investment procedures for off‐grid electrification aiming to achieve the triple objectives of expanding off‐grid electricity access in an affordable manner with private sector involvement. Under DPO 3, the Government is expected to approve a financing plan for the investments needed for the implementation of the NEP (Trigger 3.5) as well as adequate incentives, technical guidelines, and standards for off‐grid solutions (Trigger 3.6/3.7). Procedures for establishing mini‐grids that do not require an offtaker agreement shall be defined by RURA in the updated simplified licensing framework under Trigger 3.8.
61. Expected results. The reforms implemented under the DPO series are expected to make charges for electricity connections and consumption more affordable for households, and thus help increase the overall electrification rate (as a percentage of households) from 40.7 percent to at least 61 percent by December 2020 (38 percent on‐grid and at least 23 percent off‐grid) (Results Indicator B3). Under DPO 1, the Government has taken measures to make on‐grid electricity affordable for a large section of low‐income households, especially female‐headed households given the access and income dynamics highlighted in paragraph 87. By keeping tariffs constant for low consumption households in the tariff review of August 2018, the Government has reaffirmed its commitment to ensuring affordability of electricity. Furthermore, rural households that may have difficulties paying for grid connections at current prices are set to benefit disproportionally from a shift in the Government’s priority toward (much more affordable) off‐grid solar solutions. The electrification rate among rural households is expected to increase
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to 25 percent as a result (Results Indicator B4). On the supply side, by optimizing the provision of grid versus off‐grid technologies based on village characteristics, and by using the most cost‐efficient technologies for grid expansion, the NEP is designed to expand electrification in a least‐cost manner. This will ease the investment needs of REG and the expected cost savings to the power sector are captured by Results Indicator A1.
62. Climate change mitigation co‐benefits. Prior Actions 2.5 and 2.6 are key steps toward implementation of the Government’s new policy to put a stronger emphasis on off‐grid solar and solar mini‐grids for electricity access. By supporting solar based off‐grid electrification rather than grid‐based electricity (which had an average emission factor of 240 gCO2eq per kWh in 2016), this policy will reduce emissions from access expansion significantly (also see Annex 5). Pillar B.2 is thus closely aligned with Rwanda’s NDC, specifically NDC Priority Mitigation Action 2.1 (installing of solar PV mini‐grids in rural communities). See also Annex 5 for details.
63. Gender benefits. Adopting least‐cost planning principles in electrification, especially the targeted deployment of off‐grid technologies, is expected to make electricity significantly more affordable for households. Because limited affordability is a key driver behind the gender gap in electricity access, affordability improvements are expected to reduce the gender gap by increasing the ability of female‐headed households to obtain an electricity connection. The latest available data available (from 2016) suggests that only 21 percent of female‐headed households have access to electricity. This is expected to increase to 50 percent by December 2020. The target indicators will be defined to ensure a reduction in the gap between electricity access for female and male headed households observed in the baseline.
B.3 Improve accountability and transparency of REG
DPO 1
Prior Acton 1.9: The REG Board of Directors (i) endorsed the shift to consolidate financial reporting of REG and its affiliates and the revision of the chart of accounts, compliant with IFRS requirements; and (ii) approved the roadmap towards compliance with IFRS.
DPO 2
Prior Action 2.7: The financial statements of EUCL for the year ended June 30, 2018 have been prepared according to IFRS and audited by an independent auditor.
DPO 3
Trigger 3.9: REG approves further revisions to its financial procedures to address any qualifications by the independent auditor and ensure that EUCL’s annual financial statements are prepared in full compliance with IFRS.
Trigger 3.10: REG institutionalizes the external audit and publication of REG’s and EUCL’s financial statements within the first two quarters of the following year and distribution to key stakeholders.
64. Modernizing REG’s financial accounting and reporting is essential to improve transparency and accountability of REG. International experience suggests that countries that reform electricity subsidies without having in place solid financial management and accounting systems often risk racking up off‐balance‐sheet losses and cross‐debt between public sector entities. Transparent accounting and reporting
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improves financial accountability to a utility’s stakeholders. It also makes the sector more attractive for private finance. Recognizing these benefits, the Government had initiated planning for the transition to IFRS when the utilities were separated in 2014. This included: preparation of an action plan in 2016, installation of new Integrated Business Management System (IBMS)/information technology (IT) software and hardware in 2016, hiring of an experienced professional as the director of finance, completion of asset revaluation in 2017, and hiring of international auditing firms to confirm compliance. The DPO is supporting the final stretch of transition to IFRS.
65. Under the DPO series, REG is modernizing its financial accounting and reporting procedures to adopt the internationally harmonized IFRS and publish its financial statements (Prior Actions 1.9, 2.7 and related triggers). Since FY2015/16, the financial statements for Energy Utility Corporation Limited (EUCL) are being prepared in accordance with IFRS (completed in March 2018) and the statements for FY2016/17 and FY2017/18 were audited without qualifications by an independent auditor (completed in June 2018; Prior Action 2.7). From FY2018/19 onward, EUCL financial statements are expected to continue being IFRS compliant, and REG’s and EUCL’s financial statements are expected to be independently audited and published within the first two quarters of the subsequent fiscal year (Trigger 3.9 and Trigger 3.10 for DPO 3). The substantial efforts underlying the move to IFRS is being supported with extensive capacity building and IT infrastructure by a parallel Investment Project Financing (RESSP, which provides direct support to REG’s financial department though ongoing hands‐on trainings as well as remote support). Further, the Belgian Development Agency, Enabel, also has an ongoing project to provide on‐the‐job training and support for the transition to IFRS.
66. Expected results. Because of Prior Actions 1.9 and 2.7 and related triggers, EUCL’s financial statements will be in full compliance with the IFRS, and both REG and EUCL statements will be independently audited (without qualifications) and published. This output is expected to contribute to REG’s ability to attract private and commercial finance by improving financial transparency, both as an offtaker in power purchase agreements with privately financed IPPs or as a borrower from commercial banks. This, in turn, is expected to reduce the sector’s reliance on public finance and sovereign guarantees, consequently reducing the subsidy transfers to REG.
B.4 Improve operational efficiency and quality of electricity services
DPO 1
Prior Action 1.10: REG (i) initiated piloting the use of bulk metering to accurately measure systems losses; and (ii) approved the plan for commercial losses reduction of EUCL.
Prior Action 1.11: MININFRA piloted the use of competitive international hiring of key staff in REG by (i) completing the competitive hiring of the new REG chief executive officer (CEO); and (ii) initiating a competitive hiring process for the appointment of a new REG CFO.
DPO 2
Prior Action 2.8: REG has approved a strategy and the related operational procedures for improving commercial customers’ quality of service and the general quality of electricity supply.
Prior Action 2.9: (a) REG has fully staffed the GIS unit; (b) REG has revised the operational procedures for new connections to include GIS data collection for all new connections; (c) REG has approved the piloting of GIS data in the identification of grid faults and complaint resolution.
Prior Action 2.10: REG has adopted operational procedures for efficient corporate planning and HR.
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DPO 3
Trigger 3.11: REG approves and publishes an independent evaluation of EUCL’s performance.
Trigger 3.12: REG adopts revised operational procedures for efficient procurement and logistics.
67. There is significant scope for improvement in current operational performance of REG and its two fully owned affiliate entities, the EUCL and EDCL. The quality of electricity services provided by EUCL to its customers is substandard and total losses in electricity supply are high, which has significant negative financial impacts, exacerbated by the very high generation cost. Improving EUCL’s operational performance in a sustainable manner is crucial for the development of the power sector of Rwanda. Optimization of losses will result in a reduction of the cost of electricity supply, as part of the currently unmetered consumption will be accounted for. Good quality of electricity services enables applying cost recovery tariff rates to all users who are able to pay them. This will pave the way toward financial viability of the utility and the sector as a whole.
68. The reforms under the DPO series promote a transition to electricity as a ‘social contract’ with consumers and a direct link with tariffs charged to them. REG is undertaking a suite of reforms, including the “strengthening of transmission and distribution networks’ stability, introduction of an automated computation system to monitor power outages, and establishment of an online portal to facilitate investors to easily access energy related services.”15 Power blackouts in the transmission system are on a downward trend (Figure 5). The outage frequency in power distribution has also been reduced from about 400 per week in January 2017 to about 150 per week in July 2018 (Figure 6). The incorporation of the Incident Recording and Management System (IRMS) will allow EUCL to resolve power outages occurring at all voltage levels more efficiently. REG has already started regular measurement of frequency and duration of system interruptions through SAIDI and System Average Interruption Frequency Index (SAIFI) indices, making it possible to identify network assets requiring maintenance and upgrade actions to improve their serviceability. Systematic recording of indicators characterizing quality of electricity supply in Rwanda will allow to implement representative benchmarking against values achieved in other comparable countries. These operational reforms are partly supported under Pillar B.4 of the DPO series.
15 See http://www.newtimes.co.rw/news/featured‐reg‐moves‐implement‐new‐doing‐business‐reforms.
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Figure 5. REG ‐ Number of Blackouts in Transmission and System Operations
Source: REG (2018).
Figure 6. REG – Weekly Average Outages in the Distribution System
Source: REG (2018).
69. Prior Actions 2.8 and 2.9 and Trigger 3.11 capture EUCL’s efforts to leverage IT and geospatial planning to reduce system losses and improve the quality of service provided to its customers. The measures taken by REG under DPO 2 include adopting procedures for improvements in the quality of service of commercial consumers (Prior Action 2.8) and using geospatial planning to identify consumers as well as locations of network faults for quick resolution (Prior Action 2.9). To ensure that the right priorities are being addressed, REG is planning an independent evaluation of the EUCL’s performance (Trigger 3.11).
70. Prior Action 2.10 and Trigger 3.12 capture REG’s efforts to overhaul its corporate resource management. REG is implementing a comprehensive IBMS to improve efficiency, transparency, and accountability in operations in all business areas. The first information system in the scope of the IBMS to be implemented (in June 2017) was the Enterprise Resource Planning System, supporting management of corporate resources. Phase II, which is currently underway, covers the Commercial Management System
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(CMS) and the IRMS. The IBMS will be gradually extended to the larger scope of REG’s operations. In that process, REG’s operational procedures will be reengineered to maximize effectiveness in the use of the functionalities of the information systems incorporated. Prior Action 2.10 and Trigger 3.12 capture the overhaul of its operational procedures for corporate planning and HR and efficient procurement and logistics, respectively.
71. Expected results. REG’s reforms are expected to enable more efficient utility operations and improved quality of service to electricity consumers. Specifically, the measures under the DPO series are expected to result in (a) reduced total electricity sector losses as a percentage of electricity supply (Results Indicator B6), from 22 percent in FY2017/18 to 19 percent in FY2019/20; (b) reduced average duration of interruptions (as measured by SAIDI) and reduced average frequency of interruptions (as measured by SAIFI) (Results Indicator B7); and (c) the successful completion and publication of the annual customer satisfaction survey by 2020 (Results Indicator B8). Decrease in sector losses will directly improve REG’s revenue base as the quantity of unbilled electricity goes down. Improvement in the quality of service is expected to stimulate demand, which will also contribute positively to REG’s revenues, while also narrowing the supply‐demand gap. Improved operational cash flows resulting from these measures are thus expected to reduce REG’s subsidy requirements for operational purposes and ease overall fiscal transfers.
72. Climate change mitigation co‐benefits. By promoting operational efficiency, geospatial planning, and system management, the prior actions under Pillar B.4 are expected to lower system losses, which would reduce the need for fossil‐fueled generation to meet demand, thereby reducing carbon emissions. See also Annex 5 for details.
Table 4. Revised Prior Actions for DPO 2 Against Corresponding Triggers Envisioned under DPO 1
Trigger for DPO 2 and DPO 3 as Envisioned during DPO 1 (P162671)
Revised Prior Action for DPO 2 Explanation
Trigger 2.1: The REG Board approves the results of an ERR study, piloting the use of efficiency benchmarks in the calculation of the revenue requirement trajectory, and submits the results to MININFRA for presentation to the Economic Cluster.
Prior Action 2.1: (a) REG has approved the results of an ERR study, piloting the use of efficiency benchmarks in the determination of the revenue requirement trajectory towards cost‐recovery; and (b) RURA has implemented new electricity tariffs effective August 13, 2018 introducing new tariff categories and rationalized tariffs for selected consumers.
Significantly strengthened. The Government significantly exceeded the agreed‐upon milestones by completing the tariff reform in addition to the RR study. RURA’s tariff reform in August 2018 brings forward the implementation of new tariff categories and tariff rationalization for selected consumers, thereby, enhancing REG’s revenue base.
Trigger 2.2: MININFRA adopts options to achieve energy sector fiscal sustainability and reduce explicit and implicit Government subsidies in the medium term and submits the results to the Economic Cluster.
Prior Action 2.2: MININFRA and MINECOFIN have jointly (a) adopted options to achieve electricity sector fiscal sustainability and contain budget transfers to the electricity sector in the medium term; and (b)
Editorial changes to better reflect the Government decision making. MINECOFIN was included in the approval of options to reflect the joint responsibility of ministries. Additional editorial change of replacing ‘energy’ with ‘electricity’
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Trigger for DPO 2 and DPO 3 as Envisioned during DPO 1 (P162671)
Revised Prior Action for DPO 2 Explanation
submitted the results to the Economic Cluster.
accurately reflects the focus of the DPO series on the electricity sector.
Trigger 2.3: The Economic Cluster approves new generation capacity targets for the electricity sector in the NST1 for the period 2017–2024 that are consistent with the LCPDP.
n.a. The Government achieved this target ahead of time (just before Board approval of DPO 1). The trigger was therefore removed from the matrix.
Trigger 2.4: The RDB develops, approves, and publishes new procedures for competitive procurement of private sector‐owned energy infrastructure, in pursuance of the PPP Law of 2016.
Prior Action 2.3: The RDB has approved guidelines for implementation of the PPP Law of 2016, which mandates competitive procurement of private sector‐owned electricity infrastructure, with the exception of mini‐grids that do not require offtaker agreements with the public sector.
Editorial change to reflect the RDB’s implementation of guidelines pursuant to the PPP Law of 2016.
Trigger 2.5: MININFRA endorses new draft legislation for renewable energy and submits it to the Economic Cluster for approval.
n.a. Merged with Trigger 2.4 (Prior Action 2.3) to reflect changes in Government program. The PPP Law, the guidelines to its implementation, and the simplified licensing framework are considered sufficient to address on‐grid and off‐grid renewables. The Government no longer pursues separate legislation for renewables. The trigger was therefore removed from the matrix.
Prior Action 2.4: MININFRA has adopted an updated ESSP, covering the period 2017/18–2023/24, which is consistent with the LCPDP and the NEP.
Included to appropriately reflect Government reforms that align with the DPO objectives of integrated electrification planning based on least‐cost principles.
Trigger 2.6: The Economic Cluster approves separate, revised targets for on‐grid and off‐grid electrification under the NST1 for the period 2017–2024.
n.a. The Government achieved this target ahead of time (just before Board approval of DPO 1). The trigger was therefore removed from matrix.
Trigger 2.7: The REG Board approves the NEP, which identifies principles for investments to achieve the Government’s access targets in a more efficient manner and submits it to MININFRA for approval.
Prior Action 2.5: REG has approved the NEP, which identifies principles for investments to achieve universal access by 2024 and close the gender access gap and submitted it to MININFRA for approval.
Slightly edited without change in substance.
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Trigger for DPO 2 and DPO 3 as Envisioned during DPO 1 (P162671)
Revised Prior Action for DPO 2 Explanation
Trigger 2.8: MININFRA adopts procedures for implementing investments in on‐grid and off‐grid electrification, as defined in the NEP, and approves a grid extension plan prepared in full accordance with the least‐cost options, as defined in the NEP.
Prior Action 2.6. MININFRA has (a) adopted procedures for implementing investments in on‐grid and off‐grid electrification; and (b) has approved a grid extension plan in accordance with the least‐cost options.
Unchanged.
Trigger 2.9: The Government takes further policy and institutional actions to ensure electricity access remains affordable for poor households (to be identified during preparation of DPO 2).
n.a. Placeholder was removed from matrix. The reforms implemented under Prior Action 1.6 and Prior Action 1.7 of DPO 1 have been very effective and are considered sufficient to address affordability concerns. The trigger was therefore removed from the matrix.
Trigger 2.10: MININFRA approves the procedure for simplified procurement of mini‐grids under 50 kW and 100 kW, consistent with the new PPP Law and the simplified licensing framework.
n.a. Subsumed under Prior Action 2.3. The RDB’s approval of PPP guidelines, captured in Prior Action 2.3, which include the procedure for simplified procurement of mini‐grids.
Trigger 2.11: REG’s annual financial statements are prepared according to IFRS, audited by an independent auditor, and published.
Prior Action 2.7: The financial statements of EUCL for the year ended June 30, 2018 have been prepared according to IFRS and audited by an independent auditor.
Revised without impact on the DPO’s objective. The Prior Action now only refers to the utility arm EUCL of the holding company REG because the Government has decided to maintain its requirement that EDCL (the investment arm) report on cash basis (this requirement applies to all SOEs that receive allocations from the budget for public investment). This change does not affect the objectives of the DPO as the utility EUCL is the one receiving subsidies and for which accountability to the public is critical.
Trigger 2.12: The REG Board approves a strategy and the related operational procedures for improving commercial customers’ quality of service and the general quality of electricity supply.
Prior Action 2.8: REG has approved a strategy and the related operational procedures for improving commercial customers’ quality of service and the general quality of electricity supply.
Substance unchanged. The editorial change from “Board” to “Management” aligns with REG’s decision‐making process.
Trigger 2.13: (i) The REG Board approves a corporate budget that increases staffing and resources for the
Prior Action 2.9: (a) REG has fully staffed the GIS unit; (b) REG has revised the
Only editorial changes to (a) and (c). Substance remains unchanged.
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Trigger for DPO 2 and DPO 3 as Envisioned during DPO 1 (P162671)
Revised Prior Action for DPO 2 Explanation
GIS unit. (ii) REG management revises the operational procedures for new connections to include GIS data collection for all new connections. (iii) REG management pilots the use of GIS data in the identification of grid failures and complaint resolution.
operational procedures for new connections to include GIS data collection for all new connections; (c) REG has approved the piloting of GIS data in the identification of grid faults and complaint resolution.
Trigger 2.14: The REG Board adopts operational procedures for efficient corporate planning and HR.
Unchanged. Now Prior Action 2.10.
n.a.
Table 5. DPO Prior Actions and Analytical Underpinnings
Prior Actions Analytical Underpinnings
Pillar A: Contain the fiscal impact of the electricity sector
Prior Action 2.1: (a) REG has approved the results of an ERR study, piloting the use of efficiency benchmarks in the determination of the revenue requirement trajectory towards cost‐recovery; and (b) RURA has implemented new electricity tariffs effective August 13, 2018 introducing new tariff categories and rationalized tariffs for selected consumers. Prior Action 2.2: MININFRA and MINECOFIN have jointly (a) adopted options to achieve electricity sector fiscal sustainability and contain budget transfers to the electricity sector in the medium term; and (b) submitted the results to the Economic Cluster.
Mercados. 2018. REG ERR Study. Kigali, Rwanda.
World Bank. 2016. Making Power Affordable for Africa and Viable for Its Utilities. Washington, DC.
Indra/Minsait. 2017. REG’s Strategic Plan 2017–2026 and EDCL and EUCL Business Plans 2017–2019. Minsait by Indra, Kigali, Rwanda.
IMF. 2017. Rwanda: Staff Report for the 2017 Article IV Consultation, Seventh Review under the PSI, and Second Review under the Standby Credit Facility. Washington, DC.
MINECOFIN. 2017. Budget Framework Paper 2017/2018–2019/2020. Kigali, Rwanda.
MINECOFIN budget data (2014–2017).
National Institute of Statistics of Rwanda (NISR). 2017. GDP National Accounts 2016. NISR, Kigali, Rwanda.
Audited financial statements of the EUCL for FY2014/15 and FY2015/16.
MININFRA. 2015. “Medium‐term Generation and Financial Sustainability Plan for Rwanda’s Power Sector.”
EWSA Financial Assessment 2011–2020.
Pillar B: Improve the operational efficiency, affordability, and accountability of electricity service
B.1 Transition to least‐cost and low‐carbon energy mix
Prior Action 2.3: The RDB has approved guidelines for implementation of the PPP Law of 2016, which mandates competitive procurement of private sector‐owned electricity infrastructure, with the exception of mini‐grids that do not require offtaker agreements with the public sector. Prior Action 2.4: MININFRA has adopted an updated ESSP, covering the period
Draft LCPDP prepared in August 2017 by REG with technical support from Israeli Electricity Corporation (2017).
Draft LCPDP prepared in 2014 with support from Japan International Cooperation Agency (2014).
MININFRA. 2015. ESSP. MININFRA, Kigali, Rwanda.
MININFRA. 2017. ESSP. MININFRA, Kigali, Rwanda.
Electricity Network Planning and Design Report (SOFRECO, 2013).
AfDB (African Development Bank). 2013. Rwanda Energy Sector Review and Action Plan, Report. AfDB, Tunis, Tunisia.
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Prior Actions Analytical Underpinnings
2017/18–2023/24, which is consistent with the LCPDP and the NEP.
World Bank. 2017. “Rwanda: Country Public‐Private‐Partnerships Diagnostic. An Assessment of Rwanda’s PPP Readiness.” Washington, DC.
B.2 Increase access to affordable and reliable electricity services
Prior Action 2.5: REG has approved the NEP, which identifies principles for investments to achieve universal access by 2024 and close the gender access gap and submitted it to MININFRA for approval. Prior Action 2.6: MININFRA has (a) adopted procedures for implementing investments in on‐grid and off‐grid electrification; and (b) has approved a grid extension plan prepared in full accordance with the least‐cost options.
World Bank. 2016. Who Uses Electricity in Sub‐Saharan Africa? Washington, DC.
EDCL (Energy Development Company Limited). 2016. Impact Evaluation of the Rwanda Electricity Access Scale‐up (EARP) and Sector Wide Approach (SWAp) Development Project. Kigali, Rwanda.
World Bank/IEG. 2014. World Bank Group Support to Electricity Access, FY2000–2014. World Bank/IEG, Washington, DC.
World Bank. 2014. From the Bottom Up: How Small Power Producers and Mini‐Grids Can Deliver Electrification and Renewable Energy in Africa. Washington, DC.
World Bank. 2014. Scaling Up Access to Electricity: The Case of Rwanda. Washington, DC.
World Bank. 2012. Institutional Approaches to Electrification: The Experience of Rural Energy Agencies/Rural Energy Funds in Sub‐Saharan Africa. Washington, DC.
ESMAP. 2012. Rwanda ‐ Extending Access to Energy: Lessons from a SWAp. ESMAP, Washington, DC.
World Bank/IEG. 2008. The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits. World Bank/IEG, Washington, DC.
B.3 Improve accountability and transparency of REG
Prior Action 2.7: The financial statements of EUCL for the year ended June 30, 2018 have been prepared according to IFRS and audited by an independent auditor.
World Bank. 2017. Regulatory Indicators for Sustainable Energy. Washington, DC.
Audited financial statements of the EUCL for FY2014/15 and FY2015/16.
B.4 Improve operational efficiency and quality of electricity services
Prior Action 2.8: REG has approved a strategy and the related operational procedures for improving commercial customers’ quality of service and the general quality of electricity supply. Prior Action 2.9: (a) REG has fully staffed the GIS unit; (b) REG has revised the operational procedures for new connections to include GIS data collection for all new connections; (c) REG has approved the piloting of GIS data in the identification of grid faults and complaint resolution. Prior Action 2.10: REG has adopted
Indra/Minsait. 2017. REG’s Strategic Plan 2017–2027 and EDCL and EUCL Business Plans 2017–2020. Minsait by Indra, Kigali, Rwanda.
MINECOFIN. 2017. Energy Sector: Forward Looking JSR for FY 2017/18. Kigali, Rwanda.
MININFRA. 2016. Energy Performance Report/Backward Looking JSR For FY2015/16. Kigali, Rwanda.
MININFRA. 2015. Energy Performance Report / Backward Looking JSR For FY2014/15. Kigali, Rwanda.
Energy Sector Functional and Organizational Design Report (2014).
“Electricity and water and sanitation sectors in Rwanda: a proposed reform to achieve sustainable development” ‐ PowerPoint Presentation (2013).
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Prior Actions Analytical Underpinnings
operational procedures for efficient corporate planning and HR.
4.3. LINK TO CPF, OTHER WORLD BANK OPERATIONS AND THE WBG STRATEGY
73. The focus on energy by this program is directly aligned with the most recent Rwanda Country Partnership Strategy FY2014–2018 (Report No. 87025‐RW)16. The series contributes directly to Theme 1: “Accelerating economic growth that is private sector driven and job‐creating.” Under this theme, energy is highlighted as the key sector for World Bank support because increased access to electricity/energy services is core to both increased private sector investment and improved social welfare.
74. The series is also aligned with the World Bank’s twin goals, the IDA18 special themes and the World Bank’s energy sector strategy. Increased access to reliable and affordable electricity supply lowers the cost of doing business, promotes job creation, improves citizens’ connectivity and access to opportunity, and strengthens resilience to climate change. Through these effects, the DPO is aligned with the World Bank Group’s twin goals of reducing poverty and promoting shared prosperity and supports two of the IDA18 themes and priorities (job creation, economic transformation, and climate change). The proposed program follows the strategy laid out in the World Bank’s Energy Directions Paper (2012), which presents the World Bank’s sector strategy for helping client countries secure affordable, reliable, and sustainable energy supply needed to meet the twin goals.
75. The World Bank is a strategic partner of the Government in the energy sector, including as co‐chair of the joint Government/development partner Sector Working Group and is actively involved in the formulation and in reviews of the sector reform program as well as continuously supporting the Government’s investments in sector expansion. Through several operations, the World Bank has supported the Government with expanding access17 and generation capacity,18 restructuring Rwanda’s electric utility and improving its efficiency,19 asset and liability evaluation, sector capacity needs assessments, energy sector agencies’ capacity strengthening, and comprehensive assessment of financial viability of the energy sector. The proposed programmatic operation supports the Government in taking many of these reform measures, initiated in previous World Bank operations, forward in a structured, pragmatic, yet transformative manner.
76. The policy and regulatory reform program supported under this DPO is complemented by existing investment operations. The RESSP, approved in 2015, supported the implementation of a comprehensive MIS at REG and strengthened the capacity of the utility for using the MIS effectively. Actions taken by the Government under the proposed program include ensuring that the MIS is used effectively and deepens REG’s work in improving efficiency, transparency, and accountability. The Rwanda Renewable Energy Fund (P160691), approved by the Board in June 2017 and financed by the Scaling‐up Renewable Energy Program, will facilitate private sector participation in off‐grid electrification through a
16 The Country Partnership Strategy has been extended till 2020 as per the Performance and Learning Review of the Country Partnership Strategy that was presented to the Board on March 20, 2017 (Report No 106731‐RW) 17 Rwanda EASSDP (P111567, 2009, and 2013; US$130 million); RESSP (P150634, 2015; US$45 million for access); and Scaling‐up Renewable Energy Program‐financed Rwanda Renewable Energy Fund (P160691, 2017; US$50 million for off‐grid access). 18 Regional Rusumo Falls Hydroelectric Project (P075941, 2013; US$340 million). 19 RESSP (P150634, 2015; US$50 million for utility reforms).
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financial intermediary facility. The proposed DPO program directly facilitates implementation of the facility, especially the development of small mini‐grids.
4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS
77. Rwanda assigns high priority to policy consultations with stakeholders and development partners, including on the energy policy actions proposed under the DPO. The Government places high priority on aid coordination and effectiveness and there is a particularly high level of donor coordination and engagement in the energy sector. Regular meetings to coordinate support are held under the umbrella of the Energy Sector Working Group—the main coordination body among key sector stakeholders that includes the Government, donors, civil society organizations, and the private sector—which is currently co‐chaired by the World Bank. The policy actions taken under the DPO program have been consulted extensively in the Sector Working Group and other forums. Progress on the utility reforms has been consistently discussed between the development partners and REG. The Government program supported by the DPO series was presented and discussed with the development partners on September 14, 2017 and again on September 13, 2018, and the development partners endorsed the proposed program. RURA held extensive stakeholder awareness meetings with electricity consumers. EUCL has also widely discussed the new tariff structure with their industrial and commercial consumers.
78. The World Bank is collaborating closely with development partners in the energy sector. The European Union (EU) is currently implementing a US$156 million budget support operation (grant) that promotes, among others, off‐grid sector policy actions and energy sector transparency. Lessons from the budget support are included in the proposed operation. In addition, the EU is funding a bulk metering project within the EUCL, which will help the utility determine where the losses on the network take place and, complementing the World Bank‐funded Revenue Protection Program (RPP) under the RESSP (P150643), will go a long way in reducing commercial losses. Energizing development is complementing the World Bank effort in dialogue on off‐grid electrification. The AfDB, Enabel, and Arab funds are cofunding the EARP electrification projects and are complementing the World Bank dialogue on sustainable electrification, while Power Africa is also complementing the World Bank’s dialogue on expanding generation in line with the LCPDP principles. The National Association of Regulatory Utility Commissions of the United States is complementing the World Bank’s engagement with REG and RURA in understanding the RR and in implementing the modifications to financial reporting.
5. OTHER DESIGN AND APPRAISAL ISSUES
5.1. POVERTY AND SOCIAL IMPACT
79. Recent improvements in energy sector outcomes, especially enhanced electricity access, are associated with a measurable impact on household welfare. As part of the broader commitment by the World Bank to enhance the development impact of the resources provided to recipient countries, the recently closed EASSDP was one of four energy projects selected in the World Bank’s Africa Region for impact evaluation. Findings from a survey‐based analysis show significant difference between treatment and control villages on several socioeconomic indicators of the population, for instance, the percentage of people who moved from agriculture to non‐agriculture, the percentage of permanent material for house walls, the percentage of people offering or benefiting from trainings on income‐generating activities, opinions on women and children’s rights, and the percentage of women who indicated that they can make their own decisions, which significantly increased from 44 percent in the control villages
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to 51 percent in treatment villages. A difference‐in‐differences analysis intended to distill the sole effect of electrification from other factors showed that the effect of electricity on most of the household welfare indicators is positive and significant. The impact is found to have come through increased income and consumption spending, quality and value of houses, and asset creation, which could be interpreted as an improvement in well‐being. Also, the impact of electricity has decreased the household monthly energy expenditure (excluding electricity), biomass collection costs and time and non‐biomass energy costs—this would mean that households used electricity as a substitute to biomass and non‐biomass energy needs, especially for lighting. Access to electricity also has a positive impact on increasing the number of hours worked per day. It has an impact, as well, on the education of children (number of hours studied at home per day after sunset for schooling children) and time used for tutoring children.20
80. The promotion of off‐grid solutions for rural households under the DPO series will make it more affordable to reach the lower tiers of the access ladder. Rwanda is a small, densely populated country that could be fully electrified through the national grid. However, grid connections are still relatively expensive for many households. Mini‐grids and solar home systems as a precursor to the national grid have the potential to accelerate and lower the cost of electrification in certain areas in Rwanda. RURA’s simplified licensing framework for mini‐grids will ensure that project implementation conforms to national standards and that consumers are protected. The Government’s measures to strengthen the off‐grid solar market, Prior Actions 2.5 and 2.6 under DPO 2, aim to reduce barriers to the adoption of off‐grid solar solutions.
81. By freeing up scarce public resources for spending in social sectors and other priorities, this DPO series is expected to contribute to the Government’s overarching human capital development agenda. Budget transfers to electricity averaged 1.8 percent of GDP over FY2015–FY2018, crowding out spending on human development. By containing public spending on the electricity sector, the DPO is therefore freeing up funds for spending to improve household welfare in the long run.
20 The ‘Impact Evaluation of the Rwanda Electricity Access Rollout Program (EARP) and SWAp Development Project’ was conducted by REG with the support of the World Bank. The baseline survey was completed in 2014 and the follow‐up survey was conducted in 2016. The report provides unprecedented information on the use of energy and its impact on socioeconomic welfare.
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Figure 7. Budget Spending on Electricity in Comparison to Education, Health, and SP (FY2016/17)
Source: MINECOFIN (2017).
82. The impact of the tariff reforms under the DPO, which affect the already connected consumers, is estimated to be highly progressive, that is, to affect richer households much more than the poor even in relative terms. The quantitative assessment under this poverty and social impacts assessment (PSIA), presented in the following paragraphs, focuses on the direct impacts of the tariff reforms. As can be seen from the table in Annex 4, the tariff reforms are the only measures under the DPO series that carry significant poverty and social risks.
83. The reforms’ impacts are estimated to be generally small and to benefit the poor and the bottom 40 percent on a net basis, while slightly reducing household welfare in the top three quintiles. The tariff revision in January 2017 (Prior Action 1.6) and the new connection policy in June 2017 (Prior Action 1.7) have made on‐grid electricity significantly more affordable for the poor and the bottom 40 percent and have accelerated Rwanda’s electrification program. The World Bank staff estimates suggest that, at the tariff prevailing until January 2017, the affordability threshold was near the 70th income percentile (that is, electricity is affordable for the top 30 percent and unaffordable for the lowest 70 percent).21 Electricity becomes even less affordable for households that only recently gained access to the grid and must pay off their contribution to the connection fee. Two measures taken by the Government were aimed at addressing this situation and making electricity more affordable for lower‐income households. First, the tariff revision in January 2017 reduced the cost of electricity by 51 percent for households with monthly consumption of up to 15 kWh (the average monthly consumption of households in Rwanda was an estimated 35 kWh per month in 2016/17). Second, the new connection policy attempted making connections affordable for all consumer categories and introduced new payment options for the connection fee, including one with zero down payment targeted at low‐income households. Both measures are expected to have significant, positive poverty and distributional effects. As a result of the new connection policy, REG was able to double the new connections made per year from an average of 74,000 per year in 2012–2016 to 154,000 in FY2017/18.
21 This estimate is based on household consumption expenditure from the EICV4 (2013/14) and applies the definition used by the World Bank’s MTF for Measuring Energy Access (https://www.esmap.org/node/55526). The MTF defines affordability as the ability of households to buy 365 kWh per year for no more than 5 percent of annual household income. At the 2016 tariff, 365 kWh per year cost RWF 66,430 per household per year, meaning that electricity would be considered ‘affordable’ for any household with income above a threshold of RWF 1.329 million, which is near the average for the fourth quintile.
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84. The tariff reform in August 2018 (Prior Action 2.1) have helped move tariffs closer to cost‐reflective levels without significant poverty impact because almost all households’ consumption was exempt from tariff increases. Since 2015, Rwanda has implemented a series of changes in electricity tariffs to gradually recover the price of electricity. In 2017, the tariff scheme changed from a flat rate of RWF 182 per kWh to a block structure.22 For residential users consuming less than 15 kWh, the price was set at RWF 89 per kWh; for residential usage between 15 kWh and 50 kWh, the price was set at RWF 182 per kWh; and for residential consumers with a per month usage higher than 50 kWh, the price was RWF 189 per kWh. In August 2018, tariffs were adjusted again, blocks 1 and 2 stayed the same and block 3 increased by RWF 21 per kWh to RWF 210 per kWh. The effect of these two tariff increases on households is calculated using the subsidy simulation (SUBSIM) model.23 The results show that the direct welfare impact on residential consumers was very small or in the case of the households in the first two quintiles, the change in welfare is even positive (Table 6). This is because 93 percent of all households (including 100 percent of households in the poorest quintile) are within the first two blocks that either paid less or stayed the same because of the tariff reform of 2017 and stayed the same during the last tariff reform of 2018 (see Annex 7 for more details). When analyzed by rural and urban, Table 7 shows that the direct impact on well‐being has been stronger for urban households than rural households, which is not a surprise given that less than 10 percent24 of rural households are connected to the grid.
Table 6. Direct Welfare Impact of Tariff Reviews of 2017 and 2018 across Different Consumption Quintiles
Direct Impacts % of Pre‐reform Welfare Change 2017 Tariff Reform 2018 Tariff Reform Total
Quintile 1 (poorest) 0.27 −0.08 0.19
Quintile 2 0.13 −0.08 0.05
Quintile 3 0.07 −0.08 −0.01
Quintile 4 0.02 −0.08 −0.06
Quintile 5 (richest) −0.01 −0.07 −0.08
Source: World Bank staff analysis (2018).
Table 7. Direct Welfare Impact of Tariff Reviews of 2017 and 2018 on Urban and Rural Households
Direct Impacts % of Pre‐reform Welfare Change 2017 Tariff Reform 2018 Tariff Reform Total
Urban 0.02 −0.07 −0.05
Rural 0.01 −0.02 −0.01
Source: World Bank staff analysis (2018).
85. A sensitivity analysis of the elasticity of electricity consumption in response to prices suggest that REG can expect to maintain its overall revenue base even if households respond to price increases with slightly lower consumption.25 While the analysis above uses a zero own‐price elasticity of demand,
22 A previous tariff reform in 2015 changed the price of electricity from RWF 134 to RWF 182 per kWh for all residential and nonresidential customers. This change is unambiguously negative in welfare effect for all households and was not simulated. 23 Household consumptions are approximated by household expenditures of electricity. The calculations are made based on data from the EICV4, the most recent household survey conducted in 2013/14. Expenditure is estimated as monthly expenditure in 2014, updated by inflation using the World Bank CPI. The own‐price elasticity of electricity is taken to be zero, and the quantities of electricity consumed in kilowatt‐hour per month by household are modeled as constant (with respect to those observed in 2014) irrespective of time. 24 As per EICV4. 25 SUBSIM does not allow evaluating changes in welfare impacts resulting from changes in elasticities. Welfare changes in SUBSIM are calculated using behavioral responses from “households including changes in quantities consumed of the
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changing the elasticities doesn’t have a substantial impact on electricity consumption. Under the 2017 tariff review, as expected, elasticity values of higher than zero increase lead to minor increases in electricity consumption across all quintiles except for the richest one (Table 7.6). However, under the tariff review of 2018, the change in electricity consumption is almost negligible when analyzed using a small elasticity values of 5‐10 percent, and very low (a maximum of about 3 percent decline in electricity consumption) when using a larger elasticity values of 20 percent or 30 percent (Table 7.7).
86. The operation is expected to contribute to closing the gender gap in electricity access. Providing households, social institutions, and enterprises with new energy access and improved energy services has the potential to promote gender equality, create employment and business opportunities for women, and improve development outcomes with regard to income generation and maternal health. For example, electrification can significantly reduce women’s drudgery and save them time, particularly in female‐dominated labor‐intensive agricultural and food processing activities through uptake of electrical appliances, such as water pumps, grinders, mills, and refrigeration. The provision of electric light further amplifies time savings through increased efficiency and added flexibility in the scheduling of household tasks and increases the sense of safety and security. Further positive impacts include improved quality of lighting and indoor air quality, which are expected to lead to better education, health outcomes, and public security, especially for women and children, as well as in improving women’s access to IT and communications for the household which has the potential to shift norms and increase women’s agency.
87. The Multitier Framework (MTF) survey reveals a gender gap in access to electricity, which the Government is addressing through measures to improve affordability (including Prior Action 2.5). Female‐headed households are less likely to have electricity access than male‐headed households. As of 2016, only 21 percent of female‐headed households have access to any source of electricity, against 31 percent for male‐headed households. Nationwide, female‐headed households show lower access rates for both grid and off‐grid electricity. In urban areas, female‐headed households have significantly poorer access to the grid than their male counterparts but are more likely to have off‐grid solutions, mainly solar lanterns or solar lighting systems. In rural areas, female‐headed households have poorer access to both grid and off‐grid electricity. Demographic and Health Survey (DHS) data from 2014 indicates similar gender gaps with 23 percent of households having access to electricity: 73 percent in urban areas and 12 percent in rural areas and, of which, male‐headed households comprise 25 percent of households connected, of which 76 percent are in urban areas and 14 percent are in rural areas; and 18 percent female‐headed households, of which 64 percent are in urban areas and 10 percent are in urban areas. These findings point to differences in income and therefore affordability constraints regarding the connection cost. The Government’s measures to improve affordability of electricity, including a focus on off‐grid electrification to areas with higher shares of low‐income households, are expected to reduce this gender gap.
88. In terms of public sector employment in energy, gender equity has become a priority for MININFRA. MININFRA’s Infrastructure Gender Mainstreaming Policy outlines how the sector will strive to mainstream gender in its policies, plans, processes, programs, and projects for the period 2017 to 2022. Key priorities include for example, strengthening institutional and HR capacity for gender equality promotion in the infrastructure sector, enhancing the gender responsiveness in infrastructure subsectors and improving access to job opportunities and earnings for women from different infrastructure investments. Occupational sex segregation is often due to explicit and implicit gender biases, negative
subsidized products or substitution of the subsidized product with consumption of other products. This means that the use of elasticities in SUBSIM does not affect the estimation of the impact of subsidies reforms on household welfare.”
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stereotypes, limited exposure, and social norms at school and home, circumventing opportunities for enrollment and retention in for example, Science, Technology, Engineering, and Mathematics (STEM) subjects. For women who do enter STEM professions, they are likely to face a host of challenges, including (a) gender stereotypes and norms; (b) explicit or implicit biases in the workplace; (c) lack of mentors; (d) limited networks due to small numbers of women working in the sector; (e) issues maintaining work‐life balance and the care burden; (f) gender wage gaps; and (g) sexual harassment and safety concerns, among others. REG has done a baseline assessment of institutional gender gaps (out of 1,153 REG staff, 208 are female) and the formalization of gender focal points at REG. Based on a workshop in March 2018, REG management adopted an action plan that will reduce the gender gap and ensure a harassment‐free environment.
5.2. ENVIRONMENTAL ASPECTS
89. The specific policies supported by the DPO series are not expected to have significant negative effects on Rwanda’s environment, forests, water resources, habitats, or other natural resources. The risk of unanticipated adverse effects to the environment is modest (see Annex 4). Rwanda has in place adequate environmental controls and legislations under the mandate of the Rwanda Environment Management Authority (REMA), providing support to the line ministries, including MININFRA, in incorporating environmental guidelines in the operational manual for its programs. Also, the World Bank is supporting REMA with TA to take into account climate risks and opportunities and with land policy TA to review sustainable land management practices.
90. Greening the energy sector is a core element of Rwanda’s NDC under the Paris Agreement and the program supports all three NDC priority mitigation actions in the power sector. Rwanda’s NDC prioritizes (a) increase in the share of new grid‐connected renewable capacity compared to fossil fuels (supported by the LCPDP under Prior Actions 1.2, 1.3, 1.4, and 2.4); (b) the installing of solar PV in rural communities (supported by Prior Actions 1.5, 1.8, 2.3, 2.5, 2.6, and Trigger 3.8); and (c) increases in energy efficiency through demand‐side measures and grid‐loss reduction (supported by Prior Actions 1.1, 1.6, 1.10, and 2.9). The fourth NDC Priority Mitigation Action in energy relates to biofuels and is, therefore, outside the scope of this DPO series.
91. Net positive environmental effects are expected from improved sector planning (Prior Actions 2.3, 2.4, 2.5, and 2.6); the new tariff structure (Prior Action 1.6); promotion of the off‐grid solar market (Prior Actions 2.3, 2.5, and 2.6); and improved operational efficiencies (Prior Actions 2.8 and 2.9). Improved planning is expected to improve the utilization of low‐cost hydropower and regional electricity exchanges in the energy mix and reduce the need for expensive and polluting fossil fuel capacity. The time‐of‐use incentives and demand charges for large consumers are expected to smoothen their demand profile. This is expected to reduce the need for diesel and fuel oil‐operated peaking plants and increase utilization of baseload hydropower plants. Off‐grid solar market development will reduce emissions from kerosene and other liquid and solid fuels currently in use by households. Improved operational efficiencies will mitigate GHG and pollutant emissions by reducing the demand for power generation.
92. Effective implementation of the LCPDP will reduce GHG emissions from the power sector by increasing the share of low‐cost renewable energy sources compared to fossil fuels. As detailed in Annex 5, the optimal LCPDP scenario is expected to increase the share of renewables in Rwanda’s energy mix to 57 percent by 2030, compared to 48 percent under the counterfactual, business‐as‐usual scenario and reduces cumulative emissions by about 800,000 tCO2eq by 2030 compared to the business‐as‐usual
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scenario (an 8 percent reduction). Further, measures to strengthen the off‐grid solar market under this operation will reduce barriers to the adoption of off‐grid solar solutions, thereby expanding access through renewable energy rather than grid‐based electricity.
93. The expansion of the off‐grid solar market, which entails certain environmental risks relating to the disposal of batteries and solar panels, is supported through a separate Investment Project Financing (the Renewable Energy Fund), under which a number of measures are taken to ensure the environmental soundness of the off‐grid access program. Under the recently approved project, MININFRA is working with REMA to develop a specific environmental code of practice as a guidance on the approach for the collection, transport, storage, and disposal of spent batteries, with the aim of ensuring that risks to the environment and human health are prevented or mitigated.
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS
94. The main objective of the PFM is ‘to ensure efficient, effective, and accountable use of public resources as a basis for economic development and poverty eradication through improved service delivery’. The Government embarked on comprehensive PFM reforms years ago, with the comprehensive PFM Reform Strategy 2013–2018 to advance reforms. PFM systems and processes of the Government have both strengths and challenges as demonstrated in recent PFM diagnostic reports.26 The strengths of the PFM system include (a) the simplified public financial guidelines for chief budget managers, which provide clear descriptions for the various PFM processes; (b) the orderly, participatory, and transparent planning and budget preparation process; (c) a strong financial management and procurement legal framework; and (d) the rollout of an e‐procurement system to all ministries, departments, and agencies. On the other hand, a number of challenges remain, including (a) a small number of suitably qualified PFM specialists to handle PFM functions coupled with the turnover of the few trained staff; (b) a relatively recent and undeveloped internal audit; (c) internal control weaknesses; and (d) weaknesses in expenditure management. The World Bank‐financed Public‐Sector Governance Program for Results (P149095) supports the strengthening of PFM.27 The GoR is developing a new PFM reform strategy for 2018–2023 that will be supported by a new World Bank‐financed PFM operation and other development partners to further improve the GoR PFM system.
95. An assessment of the systems and processes for dealing with fraud and corruption issues also shows that Rwanda has adequate institutional, organization, and legal frameworks for controlling fraud and corruption. Rwanda further strengthened the legal frameworks in 2013 with the amendment of the law to allow the Office of the Ombudsman to prosecute cases of corruption, though there is a transition to enable the Office of the Ombudsman to be properly prepared to take over prosecution of corruption cases from the National Public Prosecution Authority. Rwanda also passed the Whistle Blowers Protection Act, 2013.
96. Procurement. The GoR has an acceptable public procurement legal framework that is based on the United Nations Commission on International Trade Law model, and it is quite robust and covers all aspects of public procurement at all levels of Government. The GoR is moving toward modernizing its procurement function to improve compliance, efficiency, transparency, fair competition, value for money,
26 Such as the Public Expenditure and Financial Accountability 2007 and 2010 assessments, sector public expenditure review reports, public expenditure tracking survey reports, and independent mid‐term and end‐term evaluations of the PFM Reform Strategy (2008–2012). 27 http://www.worldbank.org/projects/P149095?lang=en.
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and controls in public procurement. The Rwanda Public Procurement Law (Law No. 12 of 2007) was passed in March 2007 and revised in 2013 (Law No. 5 of 2013) and currently undergoing amendment so as to enshrine the e‐procurement system and to consolidate all amendments made so far in one. The law is supported by implementing regulations and a user guide to facilitate understanding of the requirements and good practices. There are Standard Bidding Documents to simplify and standardize the bidding process. The Rwanda Public Procurement Authority (RPPA) has organized training programmes to familiarise procurement practitioners and internal tender committees with the requirements of the law and with the procedures to be followed. Procurement compliance is actively enforced by the RPPA through a programme of procurement audits, carried out in accordance with an internal control and audit manual. The audits cover all phases of public procurement proceedings and execution of contracts, from preparation of procurement plans to completion of contracts. The audit reports show that there are improvements from time to time—in all procurement indicators. Despite this there are areas where the level of compliance is below the target set by the RPPA and need improvement. In addition, procurement audit is carried out on an annual basis by the Office of Auditor General as part of its finance management audit. The GoR has developed a full‐fledged e‐procurement system as part of its procurement modernization and rolled it out for use by all agencies at the national and subnational levels. With implementation of the system, transparency, efficiency, and countering fraud and corruption are expected to improve significantly. The e‐procurement system is accessible over the Internet by all Government entities, the public, and the business community, enhancing transparency in utilization of the public resource.
97. In addition to the procurement audits, procurement‐related complaints are reviewed by a National Independent Review Panel. Thus, the business community is taking advantage of its right to challenge the decisions of procuring entities and the procuring entities are aware that any departure from the law or bias and unfairness in evaluation and contract award may be subject to challenge.
98. The Government has also implemented a full‐fledged e‐procurement system for use by its central and local government entities as part of its procurement modernization. The system is accessible over the Internet by all the Government entities and the business community. It provides ready access for buyers and sellers to create and approve purchasing requisitions, placing purchase orders and receiving goods and services, and online invoicing and payment.
99. Fiscal transparency. The Central Government budget and all budget agencies’ budgets as approved by the Parliament are made public on MINECOFIN’s website.
100. Disbursement. The Recipient of DPO 2 is the Republic of Rwanda, represented by MINECOFIN. A single‐tranche DPO in the amount of SDR 89.6 million (US$125 million equivalent) will follow the World Bank’s disbursement procedures for DPOs. The financing proceeds will be disbursed against satisfactory implementation of the development policy program and the maintenance of a satisfactory macroeconomic framework. Upon notification by IDA DPO 2 effectiveness, and with the submission by the Recipient of a withdrawal application, the proceeds of the operation will be deposited into a foreign currency account designated by the Recipient that forms a part of the country’s foreign exchange reserves at the BNR. Within two business days, the BNR will credit the RWF equivalent of the proceeds to the consolidated account maintained on behalf of the Government, which finances budgeted expenditures. Disbursements will not be linked to specific purchases, and no procurement requirements will be necessary. However, the proceeds of the IDA financing cannot be used for ineligible expenditures (that is, to finance goods and services from the IDA’s standard negative list as reflected in the Financing
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Agreement). If IDA determines, at any time, that an amount of the financing was used to make a payment for an excluded expenditure, the Recipient shall, promptly upon notice from IDA, refund an amount equal to the amount of such payment to the Association. Amounts refunded to IDA upon such request shall be cancelled.
101. Internal control at the BNR. The last audit report of FY2016/17 published by the BNR indicated that the independent private audit firm opinion on financial statements is unqualified (clean). Furthermore, no significant issues are noticed in the management of the World Bank‐financed projects. Designated Accounts at the BNR are held in U.S. dollars.
102. Reporting and audit. The Recipient will report to IDA on the amounts deposited in the foreign currency account and credited in local currency to the budget management system with an indication of the exchange rate applied. The Deputy Accountant General in charge of Treasury will be notified accordingly. The BNR will not impose any charges or commissions on the Government for these transactions. The conversion from U.S. dollar to RWF will be based on the prevailing exchange rate on the date that the funds are credited to the consolidated account. The Government, through MINECOFIN, will (a) provide written confirmation within 30 days to the World Bank that an amount equivalent to the financing proceeds from the World Bank has been credited to the consolidated account, with an indication of the exchange rate applied; (b) provide evidence that the RWF equivalent of the financing proceeds was recorded as financing for the Government budget; and (c) ensure that the RWF equivalent of the financing proceeds is subject to controls to ensure its use for eligible budgeted public expenditures only. IDA reserves the right to request the Recipient to audit the foreign currency deposit account through agreed terms of reference by independent external audit to be agreed upon. The audit report shall be submitted to the World Bank no later than six months after agreement on the terms of references and the external auditor.
5.4. MONITORING, EVALUATION AND ACCOUNTABILITY
103. The DPO policy and results matrix (see Annex 1) includes selected results indicators of the proposed program. Most triggers for DPO 3 and results indicators have been defined and agreed upon. Exceptions include triggers where the exact nature of the policy or institutional action is dependent on the outcomes or prior actions of DPO 1 and DPO 2. The exact language for these triggers will be defined during the preparation of DPO 3.
104. A working group has been formed to monitor progress toward the prior actions, triggers, and results indicators. Monitoring the progress toward the achievement of the program’s objectives is the responsibility of the line ministry, MININFRA, with support from REG and its subsidiaries. To facilitate the process, MININFRA has established a working group with representatives from MINECOFIN, MININFRA, REG, and its subsidiaries. In addition, a high‐level Steering Committee has been set up to coordinate DPO 2 and DPO 3 and address any challenges in real time.
105. Grievance redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank DPO may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines
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whether harm occurred, or could occur, as a result of WB non‐compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate GRS, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.
6. SUMMARY OF RISKS AND MITIGATION
106. The overall risk rating for the project is Substantial. The key risks and proposed mitigation measures are outlined in the following paragraphs.
107. Political and governance. The governance of Rwanda’s power sector has historically been highly concentrated in the Government, with relatively little independent decision making, for example, in the functioning of state utilities. This benefits reform coordination and can speed up program implementation. However, with limited separation of commercial, regulatory, and political objectives in decision making, it carries risks of inefficiencies and nonadherence to business plans or regulatory mandates. To mitigate such risks, the Government has taken steps to promote institutional independence, including by piloting competitive recruitment of key staff and senior managers of the sector institutions. Moreover, the Government is engaging RURA, an independent sector regulator28 with a track record of independent tariffs decisions and utility performance reviews, in the program development and implementation.
108. Macroeconomic. Weak growth, a currency devaluation, or increases in global energy prices, particularly oil, during the Program period may make it more difficult for the Government to contain electricity subsidies as a percentage of GDP while maintaining public spending on access. Key risks to the growth are associated with weak external environment, regional tensions, and persisting external imbalances. The pace of structural transformation will largely depend on the extent of materialization of authorities’ expectations behind the large‐scale investment program in tourism and connectivity. Continued weak private sector response to the improved investment climate remains a key risk.
109. Sector strategies and policies and technical design of program. This DPO series is unusual in that it does not address an existing fiscal or financial deficit but supports the Government in taking difficult, preventive measures to avoid one. The associated risk is that the DPO series’ results will be put in jeopardy if the Government cannot find consensus on adequate responses to the challenges of the sector, including through (a) suboptimal implementation of the LCPDP, leading to increased cost of service; (b) suboptimal implementation of the NEP, leading to lower than the targeted access rates; and (c) poor progress on utility performance. To mitigate these risks, the results indicators of this operation are outcome oriented, and MININFRA is committed to continuously monitoring progress of the LCPDP, electrification targets, access policies and regulations, and implementation of utility reforms. The Government’s overall reform track record is widely recognized and gives confidence in the Government’s ability to sustain implementation of programmatic reform efforts. Strong continuity of reforms was demonstrated, for
28 RURA was established in 2001 by Law No. 39/2001; its independence was strengthened further in 2013 by Law No. 09/2013 of 01/03/2013. RURA reports to the Office of the Prime Minister and coordinates with the line ministries responsible for each regulated sector in executing its functions.
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instance, under three consecutive series of World Bank‐supported DPOs in the SP sector (a total of nine operations over 2009–2017).
110. Institutional capacity for implementation and sustainability. While institutional capacity to implement the program is reasonably high in Rwanda, the scope and ambition of the program are stretching this capacity, thus increasing implementation and sustainability risks of the operation. To identify challenges in real time, a high‐level Steering Committee has been set up to coordinate DPO 2 and DPO 3 implementation. Remaining risks are being mitigated through using well‐established dialogue avenues with the counterparts as well as extensive TA support provided through ongoing investment projects. To further strengthen implementation capacity, the World Bank is providing additional World Bank‐executed TA, including the financing of experts to coach and mentor new utility staff in the aspects of utility operations and management; additional technical advisers will be provided to MININFRA and REG, if the need arises. The experts and the local counterparts (a) actively get involved in the implementation of the new systems; (b) set up systems to follow up on the information received through these systems, including performance benchmarking; and (c) prepare and implement a corporate strategic plan, including key business performance indicators aimed at promoting a performance‐driven culture.
111. Stakeholder risks. The program outcomes critically depend on the Government’s ability to find an agreement on adequate responses to the issues facing the sector with all relevant stakeholders. The core elements of the proposed program rest upon not just putting in place an adequate planning and decision‐making framework but also on finding consensus among stakeholders, including development partners and private sector, on how to address fiscal risks. To mitigate stakeholder risk, the Government is using the existing system of public consultations in Rwanda: public discussions of the important policy documents through technical working groups and the Energy Sector Working Group. The existing practice of public consultations have been proven critical in reaching consensus on sector reforms in Rwanda. It has been used for discussing outcomes of the LCPDP, enforcement of off‐grid standards, and other prior actions under this operation.
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Table 8: Summary Risk Ratings
Risk Categories Rating
1. Political and Governance High
2. Macroeconomic Moderate
3. Sector Strategies and Policies Substantial
4. Technical Design of Project or Program Substantial
5. Institutional Capacity for Implementation and Sustainability Substantial
6. Fiduciary Moderate
7. Environment and Social Moderate
8. Stakeholders Substantial
9. Other Moderate
Overall Substantial
.
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ANNEX 1: POLICY AND RESULTS MATRIX
Prior Actions and Triggers Results
Prior Actions under DPO 1 Prior Actions for DPO 2 Triggers for DPO 3
Pillar A: Contain the fiscal impact of the electricity sector
Prior Action 1.1: The REG Board of Directors approved the assessment of the current revenue requirement of REG and its affiliate companies contained in the REG Strategic Plan 2017–2026 and started an independent review of said assessment.
Prior Action 2.1: (a) REG has approved the results of an ERR study, piloting the use of efficiency benchmarks in the determination of the revenue requirement trajectory towards cost‐recovery; and (b) RURA has implemented new electricity tariffs effective August 13, 2018 introducing new tariff categories and rationalized tariffs for selected consumers. Prior Action 2.2: MININFRA and MINECOFIN have jointly (a) adopted options to achieve electricity sector fiscal sustainability and contain budget transfers to the electricity sector in the medium term; and (b) submitted the results to the Economic Cluster.a
Trigger 3.1: The Economic Cluster approves a medium‐term trajectory for fiscal transfers to REG, with the aim to gradually reduce Government subsidies to the sector.
Results Indicator A1: Contain electricity subsidiesb as percentage of GDP:
Baseline (FY2016/17): 1.4% of GDP.
Target (FY2020/21): No more than 1.4% of GDP.
Results Indicator A2: Implement the quarterly automatic tariff adjustment:
Baseline (FY2016/17): No.
Target (FY2020/21): Yes.
Note: a. The Economic Cluster is a subgroup of the Cabinet formed for the effective implementation and monitoring of NST priorities. It includes the Ministers of Natural Resources; Agriculture and Animal Resources; Trade, Industry, and EAC Affairs; Finance and Economic Planning; Infrastructure; and Employment Promotion. b. Here, the Government subsidies are defined as budget transfers to the electricity sector as recorded in the official Government budget, including transfers for investment and operational expenditures. c. The SID is the former PPP Unit in the RDB.
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Prior Actions and Triggers Results
Prior Actions under DPO 1 Prior Actions for DPO 2 Triggers for DPO 3
Pillar B: Improve the operational efficiency, affordability, and accountability of electricity service
B.1 Transition to least‐cost and low‐carbon energy mix
Prior Action 1.2: The REG Board of Directors approved the outline of the Sector Development Investment Plan, which is based on the LCPDP.
Prior Action 1.3: MININFRA adopted a resolution requiring the LCPDP to be updated on an annual basis by REG.
Prior Action 1.4: The Rwanda Development Board (RDB) strengthened the capacity of its Strategic Investment Department (SID)c through (i) organizational restructuring of said department; (ii) the appointment of at least one PPP analyst; and (iii) the certification on PPP matters of at least two staff of the SID.
Prior Action 2.3: The RDB has approved guidelines for implementation of the PPP Law of 2016, which mandates competitive procurement of private sector‐owned electricity infrastructure, with the exception of mini‐grids that do not require offtaker agreements with the public sector.
Prior Action 2.4: MININFRA has adopted an updated ESSP, covering the period 2017/18‐2023/24, which is consistent with the LCPDP and the NEP.
Trigger 3.2: REG approves an updated LCPDP.
Trigger 3.3: MININFRA approves a new standard PPA document package applicable to all future IPPs to ensure adequate risk sharing between REG and the private investors.
Trigger 3.4: RURA approves the regulatory framework for cross‐border electricity trade.
Results Indicator B1:
Ensure all generation and transmission projects initiated or accepted by the Government over the past 24 months are consistent with the LCPDP and comply with the PPP Law and competitive procurement procedures:
Baseline (September 2017): No.
Target (December 2020): Yes.
Results Indicator B2:
Initiate competitive procurement processes to implement investments identified in the LCPDP:
Baseline (September 2017): 0.
Target (December 2020): at least 1.
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Prior Actions and Triggers Results
Prior Actions under DPO 1 Prior Actions for DPO 2 Triggers for DPO 3
B.2 Increase access to affordable and reliable electricity services
Prior Action 1.5: The REG Board of Directors (i) approved the technical audit of the Government’s approach to electrification; and (ii) submitted it to MININFRA for its approval.
Prior Action 1.6: RURA adopted a new electricity tariff schedule, which includes, inter‐alia, time‐of‐use incentives, demand charges for large consumers, lifeline tariffs for low‐volume electricity consumers below 15 kWh.
Prior Action 1.7: MININFRA approved a new connection policy that eliminates up‐front payment of the full connection fee and allows said connections fee to be paid over time.
Prior Action 1.8: The Rwanda Standards Board issued and published in the Official Gazette the national standards consistent with the standards developed by the International Electrotechnical Commission (IEC) for solar systems and the MININFRA approved the Guidelines on Minimum Standards Requirements for Solar Home Systems to Support Off‐Grid Standards Enforcement.
Prior Action 2.5: REG has approved the NEP, which identifies principles for investments to achieve universal access by 2024 and close the gender access gap and submitted it to MININFRA for approval.
Prior Action 2.6: MININFRA has (a) adopted procedures for implementing investments in on‐grid and off‐grid electrification; and (b) approved a grid extension plan prepared in full accordance with the least‐cost options.
Trigger 3.5: The Economic Cluster approves a financing plan for the implementation of the NEP.
Trigger 3.6: MININFRA approves guidelines setting minimum requirements for off‐grid solutions that are consistent with international best practice to ensure that off‐grid solutions remain affordable in Rwanda.
Trigger 3.7: The Government approves an incentive scheme to make off‐grid solutions affordable for low‐income households.
Trigger 3.8: RURA updates the simplified licensing framework for mini‐grids that do not require an offtaker agreement with the public sector.
Results Indicator B3:
Expand electrification rate nationwide (percentage of households):
Baseline (2016): 21 percent among female‐headed households (2016).
Target (December 2020): 61 percent (38 percent on‐grid and 23 percent off‐grid); 50 percent among female‐headed households.
Results Indicator B4:
Expand electrification rate among rural households (percentage of households):
Baseline (June 2017): 16 percent.
Target (December 2020): 25 percent.
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Prior Actions and Triggers Results
Prior Actions under DPO 1 Prior Actions for DPO 2 Triggers for DPO 3
B.3 Improve accountability and transparency of REG
Prior Acton 1.9: The REG Board of Directors (i) endorsed the shift to consolidated financial reporting of REG and its affiliates and the revision of the chart of accounts, compliant with IFRS requirements; and (ii) approved the roadmap towards compliance with IFRS.
Prior Action 2.7: The financial statements of EUCL for the year ended June 30, 2018 have been prepared according to IFRS and audited by an independent auditor.
Trigger 3.9: REG approves further revisions to its financial procedures to address any qualifications by the independent auditor and ensure that EUCL’s annual financial statements are prepared in full compliance with IFRS.
Trigger 3.10: REG institutionalizes the external audit and publication of REG’s and EUCL’s financial statements within the first two quarters of the following year and distribution to key stakeholders.
Results Indicator B5:
Ensure EUCL’s financial statements are in full compliance with IFRS, the independent audit of REG's and EUCL’s financial statements is without qualifications, and REG's and EUCL’s financial statements are published within the first two quarters of the following year and distributed to key stakeholders:
Baseline (September 2017): No.
Target (December 2020): Yes.
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Prior Actions and Triggers Results
Prior Actions under DPO 1 Prior Actions for DPO 2 Triggers for DPO 3
B.4 Improve operational efficiency and quality of electricity services
Prior Action 1.10: The REG (i) initiated piloting the use of bulk metering to accurately measure systems losses; and (ii) approved the plan for commercial losses reduction of EUCL.
Prior Action 1.11: MININFRA piloted the use of competitive international hiring of key staff in REG by (i) completing the competitive hiring of the new REG CEO; and (ii) initiating the competitive hiring process for the appointment of a new REG CFO.
Prior Action 2.8: REG has approved a strategy and the related operational procedures for improving commercial customers’ quality of service and the general quality of electricity supply.
Prior Action 2.9: (a) REG has fully staffed the GIS unit; (b) REG has revised the operational procedures for new connections to include GIS data collection for all new connections; (c) REG has approved the piloting of GIS data in the identification of grid faults and complaint resolution.
Prior Action 2.10: REG has adopted operational procedures for efficient corporate planning and HR.
Trigger 3.11: REG approves and publishes an independent evaluation of EUCL’s performance.
Trigger 3.12: REG adopts revised operational procedures for efficient procurement and logistics.
Results Indicator B6:
Reduce total electricity sector losses as a percentage of electricity supply:
Baseline (FY2017/18): 22 percent.
Target (FY2019/20): 19 percent.
Results Indicator B7:
Reduce average duration of interruptions (SAIDI) and average frequency of interruptions (SAIFI):
SAIDI Baseline (2017): 44 hours.
SAIDI Target (2020): 28 hours.
SAIFI Baseline (2017): 265.
SAIFI Target (2020): 183.4.
Results Indicator B8:
Implement and publish annual customer satisfaction survey.
Baseline (2017): No.
Target (2020): Yes.
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ANNEX 2: IMF RELATIONS ANNEX
IMF Press release dated June 11, 2018
IMF Executive Board Completes Ninth PSI Review for Rwanda
The Executive Board of the International Monetary Fund (IMF) today completed the ninth review of Rwanda’s performance under the Policy Support Instrument (PSI).29
The PSI for Rwanda was approved on December 2, 2013 (see Press Release No.13/483) and extended on January 12, 2018, to December 1, 2018 (see Press Release No.18/02).
Rwanda’s strong implementation of its macroeconomic program has helped it weather external shocks and maintain macroeconomic stability. With deliberate adjustment policies underpinned by exchange rate flexibility, combined with structural reforms to bolster domestic production, Rwanda’s external position has improved markedly while maintaining comfortable rates of growth. Budget execution remains in line with expectations, while monetary policy continues to focus on low and stable prices. Performance under the PSI‐supported program remains very satisfactory.
Growth rebound in 2017 was stronger than expected while inflation was contained. Growth was robust in most areas, except construction, with pronounced pick‐ups in non‐traditional exports and services. Consumer price inflation remained very low, with ample food supplies and as the exchange rate has reached equilibrium values. Over the medium term, investment in public infrastructure and interventions to promote structural transformation and diversified exports, underpinned by strong domestic revenue mobilization efforts and PFM reforms, should sustain growth in line with or above historical averages over the medium term. Inflation is expected to remain around the authorities’ targeted 5 percent over the medium‐term.
Looking forward, the authorities’ “Vision 2050” to reach middle income status by 2035 will require continued reform efforts to create higher value added economic activity, with the private sector serving as the main engine of growth. In addition, renewed momentum in domestic revenue mobilization will be necessary to support development spending. The Vision will be effected through a series of seven‐year NST, underpinned by detailed sectoral strategies that are aimed toward achievement of the SDGs.”
Recent economic developments
At 6.1 percent, growth in 2017 was high relative to the region, supported by agriculture, industry and services. A growth recovery that began in Q2 2017 strengthened through Q4. The CAD was more than halved, from 14.9 percent of GDP in 2016 to 6.8 percent in 2016, largely driven by a narrowed trade deficit, reflecting the impact of exchange rate adjustment and structural policies on exports and imports. As a result, the central bank accumulated foreign exchange reserves faster than anticipated, with reserves in their optimal range of over 4 months of imports at end‐2017.
29 The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the fund's endorsement of a member's policies (see http://www.imf.org/external/np/exr/facts/psi.htm). Details on Rwanda’s current PSI are available at www.imf.org/rwanda)
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Consumer price inflation declined in 2017 through early 2018, with year‐on‐year inflation at 1.7 percent in April 2018, reflecting improving food supply conditions and exchange rate stabilization. Inflation is expected to remain below the central bank’s medium‐term target of 5 percent in 2018, but should pick up toward the target over the medium‐term. Despite lower inflation expectations and tapering off of exchange rate pressures, the central bank has maintained a relatively neutral monetary policy stance over the near term, since the pace of recovery of domestic demand is still uncertain, with still low private sector credit growth. The fiscal stance policy for the remainder of FY2017/18 and for FY2018/19 remain unchanged, thus maintaining the path toward medium term objectives.
Performance under the PSI‐supported program remains strong. All but one quantitative targets and structural reform benchmarks were met. An indicative target on contracting new external debt by public enterprises was breached due to accelerated signing of a lease by Rwandair. Rwanda’s risk of debt distress remains low.
Program summary
The existing PSI arrangement has supported Rwanda’s efforts to address external imbalances, thereby supporting sustained growth and poverty reduction. The program aims to promote private‐sector led growth through safeguarding macroeconomic stability, including through external sustainability, fiscal sustainability based on continued improvements in domestic resource collection, low and stable inflation, and enhancing access to credit and deepening the financial sector.
Terms of trade (deterioration, ‐) 1.8 −1.1 0.3 0.9
Money and credit Broad money (M3) 12.3 16.5 18.8 —
Reserve money 8.8 12.3 14.1 —
Credit to non‐government sector 13.9 15.1 15.2 —
M3/GDP (percent) 23.6 24.9 26.1 —
NPLs (percent of total gross loans)1 7.6 — — —
General government budget Total revenue and grants 22.9 23.4 22 22.1
of which: tax revenue 15.5 15.8 15.8 16
of which: grants 4.7 4.9 4 3.9
Expenditure 27.6 27.5 26.2 25.6
Current 14.7 14.9 14.1 13.8
Capital 10.7 10.5 10 9.8
Primary balance −3.6 −3.0 −3.2 −2.5
Overall balance −4.7 −4.1 −4.2 −3.4
excluding grants −9.4 −9.0 −8.2 −7.3
Net domestic borrowing 0.2 0.8 0.6 0
Public debt
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2017 2018 2019 2020
Total public debt incl. guarantees 48.3 49 49 47.3
Of which: external public debt 37.5 39.2 39.7 38.6
Investment and savings Investment 23.4 25 25.9 25.9
Government 10.7 10.5 10 9.8
Nongovernment 12.7 14.6 16 16.1
Savings 12.5 12.4 13.8 14.6
Government 3.4 3.6 3.9 4.5
Nongovernment 9.3 8.8 10 10.1
External sector Exports (goods and services) 22.4 23 24.1 24.2
Imports (goods and services) 2 32.3 34.4 34.9 34.2
Current account balance (incl. grants) −6.8 −8.8 −9.0 −8.3
Current account balance (excl. grants) −10.9 −12.6 −12.1 −11.4
Current account balance (excl. large projects) −6.4 −8.6 −7.8 −7.2
Gross international reserves in millions of US$ 1,163 1,240 1,332 1,460
in months of next year’s imports 4.2 4 4 4.1
Memorandum items: GDP at current market prices RWFs (billions) 7,597 8,388 9,486 10,839
US$ (millions) 9,137 — — —
GDP per capita (US$) 772 — — —
Population (million) 11.8 12.1 12.4 12.7
Sources: Rwandan authorities and IMF staff estimates. Notes: 1 NPLs to total gross loans for 2017 is at June 2017. 2 imports for 2016 reflect purchases of two aircrafts.
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ANNEX 3: LETTER OF DEVELOPMENT POLICY
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ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE
Prior Actions Significant Positive or Negative Environment
Effects
Significant Positive or Negative Poverty, Social, or Distributional
Effects
Pillar A: Contain the fiscal impact of the electricity sector
Prior Action 2.1: (a) REG has approved the results of an ERR study, piloting the use of efficiency benchmarks in the determination of the revenue requirement trajectory towards cost‐recovery; and (b) RURA has implemented new electricity tariffs effective August 13, 2018 introducing new tariff categories and rationalized tariffs for selected consumers.
No significant positive or negative environmental effects are expected.
Social effects are discussed in detail in the Poverty and Social Impact Analysis (Annex 7) and Section 5.1. No significant negative effects on the poor and bottom 40 percent are expected, and the prior action is considered critical to the financially sustainable development of the sector, which is expected to have significantly positive social effects.
Prior Action 2.2: MININFRA and MINECOFIN have jointly (a) adopted options to achieve electricity sector fiscal sustainability and contain budget transfers to the electricity sector in the medium term; and (b) submitted the results to the Economic Cluster.
No significant positive or negative environmental effects are expected.
Please see response to Prior Action 2.1.
Pillar B: Improve the operational efficiency, affordability, and accountability of electricity service
B.1 Transition to least‐cost and low‐carbon energy mix
Prior Action 2.3: The RDB has approved guidelines for implementation of the PPP Law of 2016, which mandates competitive procurement of private sector‐owned electricity infrastructure, with the exception of mini‐grids that do not require offtaker agreements with the public sector.
Net positive environmental effects are expected, because competitive procurement is expected to improve the utilization of low‐cost hydropower in the electricity mix and reduce the need for expensive and polluting fossil fuel capacity.
Net positive poverty, social, or distributional effects are expected, because competitive procurement of private sector‐owned electricity infrastructure is expected to bring down the cost of service, thereby (a) contributing to reduction in electricity tariffs and (b) freeing up Government subsidies to the power sector for use in other priority sectors.
Prior Action 2.4: MININFRA has adopted an updated ESSP, covering the period 2017/18–2023/24, which is consistent with the LCPDP and the NEP.
Net positive environmental effects are expected, because improved planning is expected to improve the utilization of low‐cost hydropower and regional electricity exchanges in the electricity mix and reduce the need for expensive and polluting fossil fuel capacity.
Net positive poverty, social, or distributional effects are expected as the updated ESSP is expected to expand electricity access to all households.
B.2 Increase access to affordable and reliable electricity services
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Prior Actions Significant Positive or Negative Environment
Effects
Significant Positive or Negative Poverty, Social, or Distributional
Effects
Prior Action 2.5: REG has approved the NEP, which identifies principles for investments to achieve universal access by 2024 and close the gender access gap and submitted it to MININFRA for approval.
Net positive environmental effects are expected, because the NEP is expected to facilitate substantial expansion of renewable sources based off‐grid electrification.
Net positive poverty, social, or distributional effects are expected as the NEP is expected to expand electricity access to all households.
Prior Action 2.6: MININFRA has (a) adopted procedures for implementing investments in on‐grid and off‐grid electrification; (b) and approved a grid extension plan prepared in full accordance with the least‐cost options.
Net positive environmental effects are expected, because the NEP is expected to facilitate substantial expansion of renewable sources based off‐grid electrification.
Net positive poverty, social, or distributional effects are expected as the NEP is expected to expand electricity access to all households.
B.3: Improve accountability and transparency of REG
Prior Action 2.7: The financial statements of EUCL for the year ended June 30, 2018 have been prepared according to IFRS and audited by an independent auditor.
No significant positive or negative environmental effects are expected.
No significant positive or negative poverty, social, or distributional effects are expected.
B.4 Improve operational efficiency and quality of electricity services
Prior Action 2.8: REG has approved a strategy and the related operational procedures for improving commercial customers’ quality of service and the general quality of electricity supply.
No significant positive or negative environmental effects are expected.
Net positive poverty, social, or distributional effects are expected as improved quality of electricity supply to commercial customers is expected to boost economic activity and improve overall business environment
Prior Action 2.9: (a) REG has fully staffed the GIS unit; (b) REG has revised the operational procedures for new connections to include GIS data collection for all new connections; and (c) REG has approved the piloting of GIS data in the identification of grid faults and complaint resolution.
No significant positive or negative environmental effects are expected.
No significant positive or negative poverty, social, or distributional effects are expected.
Prior Action 2.10: REG has adopted operational procedures for efficient corporate planning and HR.
No significant positive or negative environmental effects are expected.
No significant positive or negative poverty, social, or distributional effects are expected.
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ANNEX 5: LINK OF THE PROGRAMMATIC ENERGY SECTOR DEVELOPMENT POLICY OPERATION TO RWANDA’S NATIONALLY DETERMINED CONTRIBUTION UNDER THE PARIS AGREEMENT
1. Rwanda’s NDC defines Rwanda’s contribution to climate change mitigation as “emission reductions compared to a business‐as‐usual scenario, based on policies and actions conditional on availability of international support for finance, technology and capacity building.” The mitigation vision
of the NDC is to “put Rwanda on the road to a low carbon economy”, and to achieve “energy security and a low‐carbon energy supply that support the development of green industry and services and avoids deforestation.”
2. The program supports all three NDC priority mitigation actions in the power sector and promotes a renewable energy transition in both on‐grid and off‐grid space. Rwanda’s NDC prioritizes (a) increase in the share of new grid‐connected renewable capacity compared to fossil fuels (supported by the LCPDP under Prior Actions 1.2, 1.3, 1.4, 2.4, and Trigger 3.2); (b) the installing of solar PV in rural communities (supported by Prior Actions 1.5 and 1.8, 2.5 and 2.6, and Triggers 3.5, 3.6, 3.7 and 3.8); and (c) increases in energy efficiency through demand‐side measures and grid‐loss reduction (supported by Prior Actions 1.1, 1.6, 1.10, 2.8, and 2.9). The fourth NDC Priority Mitigation Action in energy relates to biofuels and is, therefore, outside of the scope of this DPO series.
3. The program will support a deliberate evolution toward a lower carbon energy mix with larger role for hydro, solar, and lake methane (NDC Priority Mitigation Action 1.1). Improved generation investment planning and effective implementation of the LCPDP, as supported under the program’s Pillar B.1, are expected to yield significant climate mitigation and adaptation co‐benefits. Hydropower, solar power, and lake methane represent Rwanda’s lowest‐cost and lowest‐emission options for expanding electricity supply in the medium to long term. Therefore, Rwanda’s NDC aims to increase the share of these three fuels in its electricity generation mix (Priority Mitigation Action 1.1 in Rwanda’s NDC). However, the effective utilization of hydropower and solar power requires adequate planning of the supply‐demand balance and the grid. This is to be achieved through the preparation, regular update, and effective implementation of the LCPDP (Prior Actions 1.2, 1.3, 2.1, 2.2 and associated triggers).
4. The LCPDP and its implementation represent a significant deviation from current practice, which mostly relied on direct proposals from project developers to identify new generation investment options. Rwanda’s approach to power sector expansion planning before this program was ad hoc. No Least‐Cost Power Sector Development Plan had been approved by the Government and effectively implemented. A draft LCPDP was prepared in FY2014/15 with donor funds and presented to the Energy Sector Working Group on February 9, 2015. However, the plan was never adopted by the Government. In the absence of an LCPDP, most new capacity has been procured based on unsolicited proposals without competitive processes and without adequate consideration of the relative costs and benefits of different options resulting from properly conducted least‐cost planning. This imposes undue financial burden on the sector, putting at risk achievement of the Government’s affordability and expansion targets. Aiming to improve sector expansion planning and align planning and operational functions, a revision to the LCPDP was financed and implemented by REG under leadership of MININFRA, with technical support from a partner utility in an Organization for Economic co‐operation and Development country.
5. The Business as Usual scenario included the construction of four major thermal power plants that would have added 230 MW capacity between 2018 and 2024, more than doubling current generation capacity. These plants, which are at various stages of development, include an 80 MW peat
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power plant in Gisagara, and 150 MW of lake methane power plants, half of which will be developed by Symbion in two phases (50 MW and 25 MW) and half under the next phase of KivuWatt (75 MW).
6. The optimal scenario under the LCPDP shows that improved sector planning, especially better utilization of the hydro resources, can reduce generation cost and GHG emissions compared to the business as usual. The revised LCPDP under consideration optimizes the commissioning schedule of planned power projects by aligning supply with demand with a 15 percent reserve margin. The resulting capacity mix (Figure 5.1) sees a higher share of hydropower throughout the projection period along with a reduced share of peat based thermal power (which has the highest GHG emissions intensity among the available options) from 2025 onwards as the proposed peat capacity addition in 2025 is postponed indefinitely. Compared to Business as Usual, the LCPDP Optimal scenario is expected to reduce cumulative GHG emissions by about 65,000 tCO2eq by 2025 and about 800,000 tCO2eq by 2030 (Figure 5.2).
Figure 5.1. Rwanda’s Electricity Capacity Mix in 2020 and Future Projections under Business as Usual Scenario and LCPDP Optimal Scenario
Source: World Bank staff estimates based on information from LCPDP/REG (2018).
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Figure 5.2. Cumulative GHG Emissions Reduction in Rwanda under LCPDP Optimal Scenario compared to Business as Usual Scenario
Source: World Bank staff estimates based on information from LCPDP/REG (2018).
7. The program will also support the Government’s push for off‐grid solar to play a larger role in access expansion, moving households to transition from kerosene and dry cell battery use for lighting purposes. In view of the high cost of new connections to the grid, households’ limited ability to afford electricity, and recent rapid progress in off‐grid solutions (especially solar), the Government has reconsidered its strategy for access expansion. It is now placing more emphasis on off‐grid solar as a means to provide access to households that have relatively basic electricity needs and would have difficulties affording even a subsidized connection fee for a grid connection. The ESSP sets a target of providing electricity to 61 percent households by 2020, of which 38 percent will be grid‐connected and 23 percent off‐grid, and providing universal access to electricity by 2024, of which 52 percent will be grid‐connected and 48 percent off‐grid (Figure 5.3). Prior Actions 1.5, 1.8, 2.5, 2.6 and Triggers 3.6, 3.7, and 3.8 are key steps toward implementation of these new targets. By relying on solar rather than on grid‐based electricity (which had an average emission factor of 240 gCO2eq per kWh in 2016), this policy will reduce emissions from access expansion significantly. The Program is thus closely aligned with Rwanda’s NDC, specifically NDC Priority Mitigation Action 2.1 (installing of solar PV in rural communities).
Figure 5.3. Consumers Served through Different Forms of Access in 2018 and Government Targets for 2020 and 2024
Source: MINECOFIN (2018).
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8. Implementation of the program will provide electricity users effective signals to promote efficiency in their consumption (Priority Mitigation Action 3.1 in Rwanda’s NDC). Prior Action 2.1 (a) and has helped determine the utility’s ERR, which forms the basis for cost‐reflective pricing and associated climate change mitigation co‐benefits. Under the tariff review of 2018 (Prior Action 2.1 (b)), the continuation of time‐of‐use incentives and demand charges for large consumers provides industrial electricity users effective signals to promote efficiency in their consumption and shift consumption away from demand spikes. Because all peaking power plants in Rwanda are oil‐fired, this smoothening of the demand profile will have climate change mitigation co‐benefits.
9. Pillar B.4 will promote system‐loss reduction (Priority Mitigation Action 3.1 in Rwanda’s NDC). By promoting operational efficiency and system management, the prior actions and associated triggers under Pillar B.4 are expected to lower system losses, which would reduce the need for fossil‐fueled generation to meet demand, thereby reducing carbon emissions.
10. Climate adaptation co‐benefits. Adequate sector planning and effective implementation of the LCPDP will also allow the Government to better plan for hydrology risks and mitigate their impact on the security of supply by developing alternative energy sources (especially solar), thus strengthening the adaptation framework for the sector.
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ANNEX 6: ECONOMIC AND FINANCIAL PROJECTIONS FOR THE ELECTRICITY SECTOR IN RWANDA
1. REG is a Government‐owned holding company comprising two independent subsidiaries, EDCL and EUCL (Figure 6.1). The EUCL provides traditional electricity utility services wherein it owns certain generation assets while also buys electricity from IPPs and maintains the transmission and distribution network to provide electricity to consumers. The EDCL is responsible for building assets (generation as well as transmission/distribution) which are transferred to the EUCL upon completion. MININFRA oversees the investment as well as operations of REG as the governing ministry. RURA, an independent regulator, evaluates RRs of REG and proposes electricity tariffs that also account for affordability. The cash deficit of REG for both investment and operational purposes is provided through electricity sector subsidies by MINECOFIN. Macroeconomic sector‐level decisions require the approval of the Economic Cluster, which is a subgroup of the Cabinet formed for the effective implementation and monitoring of EDPRS priorities.
Figure 6.1. Key Players in Rwanda’s Energy Sector
Source: World Bank staff (2018).
2. The expansion of the electricity sector in Rwanda is underpinned by several interlinked strategies and plans. Table 6.1 lays out the key strategies and plans that are being pursued to expand electricity sector in Rwanda in a financially sustainable manner.
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Table 6.1. Key Power Sector Plans of the GoR
Plan Description Link with the DPO objective of containing fiscal subsidies
National Strategy for Transformation (NST1; 2017‐2024
NST1, approved in 2017, aims to lay the foundations for Rwanda to achieve upper‐middle‐income country status by 2035 and high‐income status by 2050. NST1 is guided by the SDGs, the Africa Union Agenda 2063 and its First 10‐Year Implementation Plan 2014–2023, and the EAC Vision 2050.
NST1 identifies the importance of universal electricity access for achieving the envisioned social transformation and aims to expand electricity access to 100 percent households by 2024. The strategy envisages expansion of electricity sector based on least‐cost principles and competitive procurement to provide quality, reliable, and affordable electricity to consumers and aims at prioritizing energy‐intensive industries and productive uses of electricity.
Energy Sector Strategic Plan (ESSP)
The ESSP, approved in July 2018 under DPO 2, elaborates the energy sector objectives for 2018/19‐2023/24 pursuant to the NST1. It “presents the current status of, and plans for, the energy sector, covering its three subsectors: electricity, biomass and petroleum.” Under the electricity sector, the plan lays out electrification targets and proposed measures to increase demand and to rationalize the supply‐demand balance. The ESSP is expected to be revised during the mid‐term review of the NST1.
The ESSP lays out a fundamental shift in GoR’s policy for electricity sector expansion by moving away from capacity expansion targets and establishing that future capacity expansion will be aligned with demand growth (keeping 15 percent reserve margin) and will be pursued through least‐cost principles. The ESSP also lays out the access expansion target of 100 percent by 2024 (52 percent on‐grid and 48 percent off‐grid). The ESSP, thus, ensures that the electricity sector expansion targets are consistent with the power sector reforms aimed at containing fiscal transfers.
Least Cost Power Development Plan (LCPDP)
The LCPDP, completed in October 2017 under DPO 1 and updated in October 2018, optimizes the expansion of electricity generation in Rwanda by prioritizing least‐cost generation options and aligning increase in generation capacity with demand. The LCPDP is expected to be revised annually.
Expansion of electricity generation under least‐cost principles is expected to reduce the cost of supply of electricity, thereby reducing revenue requirement, and consequently reducing fiscal transfers to the sector.
National Electrification Plan (NEP)
Considering the 52 percent on‐grid and 48 percent off‐grid split established in the ESSP as an input, the plan defines a combination of extension of the national grid and deployment of off‐grid solution throughout the country that represents the least‐cost option to supply forecasted demand for the 2018‐2024 period. The NEP, approved in October 2018 under DPO 2, is expected to be revised every two years.
Significant investments of about US$620 million are needed to achieve Rwanda’s electrification targets. So far access expansion in Rwanda was done without proper planning and based on the grid extension prospectus that was prepared in 2009 and not updated since. The NEP recommends the least‐cost options to expand electricity access throughout the country, thus enabling significant cost‐savings as compared to pursuing electrification uninformed by any plan. Pursuing access expansion through efficient planning is expected to ease investments by REG in electrification, thereby reducing REG’s revenue requirement and helping contain fiscal transfers.
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3. The installed electricity capacity in Rwanda has increased rapidly in recent years (Figure 6.2). From a small electricity base of 69 MW in 2008, the capacity has increased rapidly to 218 MW in 2018. Electricity supply in Rwanda has also diversified from only hydropower and diesel‐thermal power until 2011 to a mix comprising electricity from lake methane, solar, and peat in 2018. However, the increase in demand has not kept up with the supply growth, leading to substantial unutilized capacity. The difference between supply and demand will further increase if the power plants in the pipeline are commissioned on their originally proposed dates. However, commissioning dates of selected power plants may change according to the revised LCPDP.
Figure 6.2. Rwanda’s Progress in Installed Electricity Capacity (MW) and Peak Demand
Source: MININFRA/REG (2018).
4. Electricity access in Rwanda has also increased rapidly in the recent years and off‐grid electricity is playing an increasingly important role (Figure 6.3). The percentage of electrified households increased from 6 percent in 2008 to 47.6 percent in 2018 (corresponding to August 2018) of which 11.6 percent households are provided with off‐grid solutions. NST1 targets electrification of all households by 2024 of which 52 percent of households shall be connected to the grid and 48 percent will have off‐grid solutions.
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Figure 6.3 Rwanda Electricity Access Rate in % (2008–2017) and Target for 2024
Source: MININFRA 2018.
5. The tariff review of 2017 was an important reform as it disaggregated residential and commercial consumers into multiple tariff categories, enabling REG to collect revenues according to the consumers’ ability to pay, while keeping tariffs substantially low for the least‐consumption households. Until 2017, as Figure 6.4 indicates, residential and commercial consumers were charged a flat tariff, whereas industries were charged tariffs based on the time of consumption—the highest tariffs for consumption in the evening, followed by lower tariffs for the day, and the lowest for the night. The 2017 tariff review disaggregated household and commercial consumers across multiple categories based on their consumption. It also disaggregated industries as small, medium, and large, based on their demand. The per unit tariff of medium and large industries was decreased to stimulate demand, but separate peak demand charges were introduced to also flatten the demand profile. The tariff review of 2018 has continued many of these trends as discussed in the following paragraph.
6. The latest tariff review implemented in August 2018 is aimed at further rationalizing average tariffs to cost‐reflective levels as well as stimulating industrial demand. Tariffs for households consuming less than 50 kWh per month have been kept constant to ensure affordability of electricity (Figure 6.4). Tariffs have also been kept constant for water treatment plants, water pumping stations, and hotels. Tariffs have been increased for households consuming more than 50 kWh per month as well as for selected non‐household consumers—commercial customers, broadcasters, telecom towers, and health facilities—that are not exposed to international competition. General industrial tariffs have been reduced by between 4 percent for large industries and about 15 percent for small industries. Further, to flatten the demand profile during the day, maximum demand charges for industries have been revised to keep maximum demand charges for off‐peak hours substantially lower than those for peak hours (Figure 6.5).
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Figure 6.4. Electricity Tariffs in Rwanda 2005–2018 (in RWF, nominal)
Source: RURA 2018.
Figure 6.5. Maximum Demand Charge for Industrial Consumers (in RWF per kilovolt‐ampere (kVA) per month)
Source: RURA 2018.
7. With increasing access levels and rising demand, REG’s revenue base has seen a tremendous growth, rising by about 470 percent between FY2009/10 and FY2016/17. Gross profits have usually been positive, as the relatively high tariffs have been able to cover for the cost of sales that include costs of own generation and of purchased electricity. However, REG has consistently incurred operating losses (defined here as income after depreciation and distribution charges but before interest and taxes) even after accounting for Government subsidies, indicating that the tariffs fall substantially short of recovering all associated costs.
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Figure 6.6. REG’s Revenue, Cost of Sales, and Profits (in million RWF ‐ nominal)
Source: World Bank staff analysis (2018).
8. The shortage of cash flow from operations and insufficient cash being raised from financing has made REG dependent upon cash subsidies both to cover the deficit in operations and to finance its investments (Figure 6.7). The dependence on cash subsidies especially increased in the recent years as the power sector expanded: rising to as high as RWF 74 billion in FY2014/15. The subsidy requirements have dropped in 2015/16 and 2016/17, but are expected to rise again as the plans to expand the power sector are implemented.
Figure 6.7. REG: Cash Flows, Including Subsidy Transfers (in million RWF ‐ nominal)
Source: World Bank staff analysis (2018).
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9. While fiscal transfers to the power sector as a percentage of the GDP have fallen to between 1 percent and 2 percent of the GDP in recent years, if the power sector expansion plans are pursued as originally envisioned (business‐as‐usual), the subsidy transfers may balloon rapidly to about 4.1 percent of the GDP in FY2020/21. Among other factors, the most important contributors to high subsidy needs under business‐as‐usual include (a) commissioning of several power plants with expensive take‐or‐pay clauses in the coming years; (b) substantial investment needs to achieve universal electricity access by 2024; and (c) high cost of electricity and underpriced tariffs (in spite of recent tariff reforms). In the absence of measures to address the different factors contributing to high subsidy needs, the next few years will see a rapid increase in subsidy requirements of the power sector, rising as high as about 4.1 percent of the GDP and generally hovering above about 2 percent of the GDP until 2024. This corresponds to the annual cash deficit of about RWF 400 billion in 2020/21 and accumulated cash deficit of about RWF 2 trillion by 2023/24 (Figures 6.8 and 6.9).
Figure 6.8. Fiscal Transfers to the Power Sector as a Percentage of the GDP; Actual: FY2014/15–FY2017/18 and Business‐as‐usual case for FY2018/19–FY2023/24
Source: World Bank staff analysis (2018).
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Actual Actual Actual Actual Projected Projected Projected Projected Projected Projected
Historical fiscal transfers to energy sector (% of GDP) Business‐as‐usual projection (pre‐DPO 1): Operating subsidies
Business‐as‐usual projection (pre‐DPO 1): Public investment Fiscal target
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Figure 6.9. Cash Deficit of REG – Annual (left) and Cumulative (right)
Source: World Bank staff estimates (2018).
10. Several initiatives, many of which constitute prior actions of the DPO series, are already being taken by the concerned authorities to meet the objective of the DPO series. These contribute to containing fiscal subsidies to the power sector to 1.4 percent of the GDP by 2020/21, the overarching objective of this DPO series (see Table 6.2).
Table 6.2. Policy Measures being Undertaken by the Government Authorities and REG
MININFRA Providing a conducive policy framework for private sector investment in generation and off‐grid electrification
Considering implementation of the revised LCPDP: delay commissioning of selected power plants to better manage supply‐demand balance
RURA Tariffs revised in 2017 and again in 2018 to take them closer to cost‐reflective levels along with stimulating industrial demand and flattening the demand profile
Simplify mini‐grid licensing procedure to increase private sector involvement in off‐grid electrification
RDB Provide new legislative framework for PPPs in the power sector
REG Commitment to least‐cost planning and competitive procurement: revised LCPDP approved by REG
Taking measures to reduce total losses from 22 percent in 2017 to 15 percent in 2024
Regular monitoring of quality of electricity through SAIDI and SAIFI indices and taking measures to enhance reliability
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11. However, further measures will be needed to achieve the objective of the DPO series. Additional key policy options have been proposed by MININFRA and MINECOFIN to the Economic Cluster of the Cabinet of Ministers and are currently being discussed.
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ANNEX 7: POVERTY AND SOCIAL IMPACT ASSESSMENT FOR TARIFF REFORMS UNDER THE DPO SERIES
1. The quantitative assessment under this PSIA, presented in the following paragraphs, focuses on the direct impacts of the tariff reforms. As can be seen from the table in Annex 4, the tariff reforms are the only measures under the DPO series that carry significant poverty and social risks (see Box 7.2 for external analyses related to electrification in Rwanda). In the analysis presented in this section, the welfare impacts of the tariff reforms are estimated to benefit the poor and the bottom 40 percent on a net basis, while slightly reducing household welfare in the top three quintiles. That means that the impact of the tariff reforms under the DPO, which affect the already connected consumers, is estimated to be highly progressive, that is, to affect richer households much more than the poor even in relative terms.
2. The most recent household survey data to assess the poverty and social impact of tariff reforms is from EICV430 (2013/14). The percentage of households using electricity as their main source of lighting almost doubled from 2010/2011 to 2013/2014 and has again doubled since then. The total percentage in 2014 was still at a very low level of 19.8 percent (Table 7.1). There was (and remains) considerable disparity between urban and rural households, with about 71.8 percent of urban households using electricity as a lighting source against only 9.1 percent of rural households in the EICV4 data.
3. With the appropriate caveats, this PSIA relies on EICV4 data as the latest reliable household survey data available in Rwanda. While electricity connectivity has gradually expanded to include less well‐off households in recent years and has now reached around 47.6 percent of the population, the qualitative conclusions of this PSIA appear robust enough to still hold for today’s electricity consumption and expenditure patterns in Rwanda. The PSIA will be updated for DPO3 once EICV5 data becomes available.
Table 7.1. Energy Indicators EICV4 and Asset Ownership (Mobile Phone) EICV4 (2013/14 data)
Percentage of Households Using Electricity as Main
Source of Lighting
Percentage of Households Using Oil Lamps as Main
Source of Lighting
Percentage of Households Using Candles as Main Source of Lighting
Rwanda 19.8 5 7.4
Urban/Rural
Urban 71.8 3.6 9
Rural 9.1 5.3 7
Quintile
Q1 1.7 2.9 6
Q2 5 4.3 6.3
Q3 7.1 6.4 7.4
Q4 16.8 6.7 8.7
Q5 57.2 4.5 8
Source: NISR EICV4 2014.
4. The tariff revisions of 2017 and 2018 and the new connection policy of 2017 have made on‐grid electricity more affordable for the poor and the bottom 40 percent. World Bank staff estimates suggest that, at the tariff prevailing until January 2017, the affordability threshold was near the 70th income
30 EICV4 stands for the Rwandan Integrated Household Living Conditions Survey 2014 by the National Institute of Statistics Rwanda (NISR).
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percentile (that is, electricity is affordable for the top 30 percent and unaffordable for the lowest 70 percent).31 Electricity becomes even less affordable for households that only recently gained access to the grid and must pay off their contribution to the connection fee. Two measures taken by the Government were aimed at addressing this situation and making electricity more affordable for lower‐income households. First, the tariff revision in January 2017 reduced the cost of electricity by 51 percent for households with monthly consumption of up to 15 kWh (the average monthly consumption of households in Rwanda was an estimated 35 kWh per month in 2016/17). Second, the new connection policy attempted making connections affordable for all consumer categories and introduced new payment options for the connection fee, including one with zero down payment targeted at low‐income households. Both measures are expected to have significant, positive poverty and distributional effects.
5. Electricity usage in Rwanda has increased across all consumption levels, however it is still a very small percentage of poorer households that consume electricity. Figure 7.1 and Figure 7.2 show the changes in electricity consumption by quintile in 2010/2011 and in 2013/2014. Despite an increase in all quintiles, expenditure on electricity is still concentrated in the richer segments of the population. The richer quintiles also had the biggest increase of electricity consumption between periods, in 2014 more than 50 percent of households in the top 20 consumed electricity.
Figure 7.1. Electricity Usage by Month per Consumption Quintile in 2011
Source: NISR EICV4 (2014).
31 This estimate is based on household consumption expenditure from the EICV4 (2013/14) and applies the definition used by the World Bank’s MTF for Measuring Energy Access (https://www.esmap.org/node/55526). The MTF defines affordability as the ability of households to buy 365 kWh per year for no more than 5 percent of annual household income. At the 2016 tariff, 365 kWh per year cost RWF 66,430 per household per year, meaning that electricity would be considered ‘affordable’ for any household with income above a threshold of RWF 1.329 million, which is near the average for the fourth quintile.
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Figure 7.2. Electricity Usage by Month per Consumption Quintile in 2014
Source: NISR EICV4 (2014).
6. Expenditure on electricity is concentrated in the richer, urban households, but the expenses on electricity as a percentage of overall consumption is higher among the poorer households. Figure 7.3 shows that expenditure on electricity by urban households greatly surpasses that by rural ones, with the greatest difference in average expenditure between urban and rural households being in the richest quintile. Nevertheless, as seen in Table 7.2, the poorest quintile is the one that spends the most on electricity as percentage of its whole consumption. The tendency is the same if expenditure on electricity is analyzed by Ubudehe. Table 7.3 shows that Ubudehe 1 spends more than 1.5 percent of total consumption on electricity and Ubudehe 6 less than 0.5 percent (see Table 7.1).
Figure 7.3. Mean Monthly Expenditure on Energy for Rural and Urban Households by Ubudehe Category (in RWF)
Source: NISR EICV4 (2014).
280 489 889 1,462 2,374
3,906 2,410
1,096 2,442
4,447
12,346
21,939
0
5,000
10,000
15,000
20,000
25,000
1 2 3 4 5 6
Rural Urban
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Table 7.2. Electricity Expenditure as Percentage of Household Consumption
Source: WBG calculations using EICV4 2014.
Table 7.3. Electricity Expenditure as Percentage of Consumption by Ubudehe
Source: WBG calculations using EICV4 (2014).
7. The tariff reviews have helped move tariffs closer to cost‐reflective levels without significant poverty impact because almost all households’ consumption was exempt from tariff increases. Since 2015, Rwanda has implemented a series of changes in electricity tariffs to gradually recover the price of electricity. In 2017, the tariff scheme changed from a flat rate of RWF 182 per kWh to a block structure.32 For residential users consuming less than 15 kWh, the price was set at RWF 89 per kWh; for residential usage between 15 kWh and 50 kWh, the price was set at RWF 182 per kWh; and for residential consumers with a per month usage higher than 50 kWh, the price was RWF 189 per kWh. In August 2018, tariffs were adjusted again, blocks 1 and 2 stayed the same and block 3 increased by RWF 21 per kWh to RWF 210 per kWh. We simulated the effect of these two tariff increases on households using the SUBSIM model.33 The results show that the direct welfare impact on residential consumers was very small or in the case of the households in the first two quintiles, the change in welfare is even positive (Table 7.4). This is because 93 percent of all households (including 100 percent of households in the poorest quintile) are within the first two blocks that either paid less or stayed the same because of the tariff reform of 2017 and stayed the same during the last tariff reform of 2018 (Figure 7.1 and Figure 7.2). When analyzed by rural and urban areas, Table 7.5 shows that the direct impact on well‐being has been stronger for urban households than rural households, which is not a surprise given that less than 10 percent of rural households are connected to the grid.
32 A previous tariff reform in 2015 changed the price of electricity from RWF 134 per kWh to RWF 182 per kWh for all residential and non‐residential customers. This change is unambiguously negative in the welfare effect for all households and was not simulated. 33 Household consumptions are approximated by household expenditures of electricity. The calculations are made based on data from the EICV 2014 household survey. Expenditure is estimated as monthly expenditure in 2014, updated by inflation using the World Bank CPI. The own‐price elasticity of electricity is taken to be zero, and the quantities of electricity consumed in kilowatt‐hour per month by household are modeled as constant (with respect to those observed in 2014) irrespective of time.
Quintile Average Monthly
Consumption in RWF Average Monthly Electricity
Expenditure in RWF Percentage
1 108250.90 1262.26 1.17%
2 176197.50 1463.59 0.83%
3 243053.50 1930.89 0.79%
4 353578.50 2012.95 0.57%
5 1017928.00 4066.40 0.40%
Ubudehe Average Monthly
Consumption in RWF Average Monthly Electricity
Expediture in RWF Percentage
1 212440.80 3267.27 1.54%
2 220877.80 1922.26 0.87%
3 334838.00 2576.09 0.77%
4 601833.10 3912.69 0.65%
5 1775512.00 9901.61 0.56%
6 4041717.00 19387.56 0.48%
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Table 7.4. Direct Welfare Impact of Tariff Reviews of 2017 and 2018 across Different Consumption Quintiles
Direct impacts % of Pre‐reform Welfare Change 2017 Tariff Reform 2018 Tariff Reform Total
Quintile 1 (poorest) 0.27 −0.08 0.19
Quintile 2 0.13 −0.08 0.05
Quintile 3 0.07 −0.08 −0.01
Quintile 4 0.02 −0.08 −0.06
Quintile 5 (richest) −0.01 −0.07 −0.08
Table 7.5. Direct Welfare Impact of Tariff Reviews of 2017 and 2018 on Urban and Rural Households
Direct Impacts % of Pre‐reform Welfare Change 2017 Reform 2018 Reform Total
Urban 0.02 −0.07 −0.05
Rural 0.01 −0.02 −0.01
8. A sensitivity analysis of the elasticity of electricity consumption in response to prices suggest that REG can expect to maintain its overall revenue base even if households respond to price increases with slightly lower consumption.34 While the analysis above uses a zero own‐price elasticity of demand, changing the elasticities doesn’t have a substantial impact on electricity consumption. Under the 2017 tariff review, as expected, elasticity values of higher than zero increase lead to minor increases in electricity consumption across all quintiles except for the richest one (Table 7.6). However, under the tariff review of 2018, the change in electricity consumption is almost negligible when analyzed using a small elasticity values of 5‐10 percent, and very low (a maximum of about 3 percent decline in electricity consumption) when using a larger elasticity values of 20 percent or 30 percent (Table 7.7). Table 7.6. Impact of Tariff Review of 2017 on Quantity of Electricity Consumed Across Different Consumption
Quintiles (Sensitivity to Different Elasticities)
Direct impacts % of pre‐reform quantity change 0% elasticity 5% elasticity 10% elasticity 20% elasticity 30% elasticity
Quintile 1 (poorest)
0 0.68% 1.36% 2.71% 4.07%
Quintile 2 0 0.43% 0.86% 1.72% 2.58%
Quintile 3 0 0.28% 0.56% 1.13% 1.69%
Quintile 4 0 0.12% 0.24% 0.47% 0.71%
Quintile 5 (richest)
0 −0.06% −0.11% −0.22% −0.33%
34 SUBSIM does not allow evaluating changes in welfare impacts resulting from changes in elasticities. Welfare changes in SUBSIM are calculated using behavioral responses from “households including changes in quantities consumed of the subsidized products or substitution of the subsidized product with consumption of other products. This means that the use of elasticities in SUBSIM does not affect the estimation of the impact of subsidies reforms on household welfare.”
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Table 7.7: Impact of Tariff Review of 2018 on Quantity of Electricity Consumed Across Different Consumption Quintiles (Sensitivity to Different Elasticities)
Direct impacts % of pre‐reform quantity change 0% elasticity 5% elasticity 10% elasticity 20% elasticity 30% elasticity
Quintile 1 (poorest)
0 ‐0.18% ‐0.36% ‐0.71% ‐1.07%
Quintile 2 0 ‐0.24% ‐0.49% ‐0.98% ‐1.47%
Quintile 3 0 ‐0.30% ‐0.61% ‐1.22% ‐1.82%
Quintile 4 0 ‐0.38% ‐0.76% ‐1.52% ‐2.29%
Quintile 5 (richest)
0 ‐0.48% ‐0.95% ‐1.90% ‐2.85%
Box 7.1: Ubudehe
Rwanda’s tradition of community and team work is reflected in the Government’s categorization of Ubudehe. The categories reflect the level of support each household receives from the GoR in form of the SP program. In 2001, the categorization of six Ubudehe was introduced to involve communities in their development. The categories separate population by vulnerability and went from abject poor, that had no land or livestock, to money rich, group with land and livestock and often salaried jobs. The assessment of households is done by the community and not explicitly by consumption or income. Thus, the categories are useful to delineate household poverty but are not completely equivalent to other welfare assessments. The next table shows average monthly household consumption by Ubudehe using EICV4. The EICVsurvey pairs each household with an Ubudehe category using information from the sector office. There are observations in each survey that were not pair to a specific Ubudehe category.
Table 7.8 Mean Average Consumption by Ubudehe in RWF
Ubudehe Mean Household Consumption
1 212,440.80
2 220,877.80
3 334,838.00
4 601,833.10
5 1,775,512.00
6 4,041,717.00
Source: WBG calculations using EICV4 Data (2013/14). In 2014, the GOR created new Ubudehe categories, changing them from six to four. The assessment of households is still made by the community and in reference of social and economic status. The Local Administrative Entities Development Agency created new Ubudehe categories.
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Box 7.2: Impact of Electrification in Rwanda and Demand for Off‐Grid Electrification
Electricity access in Rwanda has been found to have several positive socio‐economic impacts. An evaluation of the Electricity Access Roll‐Out Programme (EARP) in Rwanda35 found an increase in home‐business activities by households, and in non‐home business activities (such as micro‐enterprises) in connected communities. The impacts were found to be disproportionate for well‐connected communities with existing dynamic business centers. Mills, hairdressers, copy shops, and welding shops were found to be most positively affected by electrification. Among households, the evaluation found changes in daily routines, with members of households with electricity staying awake longer than those of households without electricity. The use of television as the main source of information was found to be significantly higher in electrified households. This was expected to contribute positively to gender aspects – women in electrified households with better access to information were less likely to think that it is justified that a husband beats a woman in different situations. Electricity access was also found to have a positive impact on school enrolment rates. Expanding off‐grid electricity access in Rwanda may require substantial financial support for uptake in the poorest households. A study of 324 randomly selected households in 16 remote and low‐income off‐grid communities spread across rural Rwanda found that few households are able and willing to pay amounts that come close to the market prices of different types of off‐grid solar home systems36. The findings illustrate that purely market‐based approaches may fall short of achieving the target off‐grid electrification rates, and government intervention in the form of upfront subsidies may be necessary. The study notes that if mass electrification is a political goal, the relative cost‐advantages of off‐grid solar make it a preferable technology over grid‐expansion for electrifying poorer areas. The GoR’s target of achieving almost half of universal access through off‐grid systems and the policy options under consideration to ensure affordability of off‐grid systems for the poorest households align with these findings.
35 See: Peters, Jörg; Sievert, Maximiliane; Lenz, Luciane; Munyehirwe, Anicet (2015): Impact evaluation of Netherlands supported programmes in the area of energy and development cooperation in Rwanda: The provision of grid electricity to households through the Electricity Access Roll‐out Programme. Electricity Access Roll‐out Programme (EARP) supported by the Netherlands through a multi‐donor fund, RWI Materialien, No. 96, ISBN 978‐3‐86788‐677‐2, Rheinisch‐Westfälisches Institut für Wirtschaftsforschung (RWI), Essen, http://nbn‐resolving.de/urn:nbn:de:hbz:061:3‐49784. 36 See: Grimm, Michael & Lenz, Luciane & Peters, Jörg & Sievert, Maximiliane, 2018. "Demand for off‐grid solar electricity: Experimental evidence from Rwanda," Ruhr Economic Papers 745, RWI ‐ Leibniz‐Institut für Wirtschaftsforschung, Ruhr‐University Bochum, TU Dortmund University, University of Duisburg‐Essen.
