GPOBA Commitment Paper: Ethiopia Electricity Access Rural Expansion Project April 2008
GPOBA COMMITMENT DOCUMENT
Project Name: Ethiopia Electricity Access Rural Expansion Project (P105651)
Executive Summary:Ethiopia has a GDP of US$11 billion, corresponding to US$155/capita, significantly less than the Sub-Saharan Africa average. Although the country has abundant resources and good potential for development, poverty is pandemic. 44% of the population was below the poverty line in the last survey in 1999/00. In rural areas, 70% of the population was below the poverty line (with US$60 cents/day).
Ethiopia presents one of the lowest electrification rates in the region. Only 17% of the population lives in electrified areas, but overall national access is only 7% (2% in rural areas). Biomass still represents 90% of the country’s total energy needs. The pattern of energy consumption in the country has led to increasing deforestation, shortage of wood fuel and degradation of the rural ecosystems. As a consequence, the Government of Ethiopia (GoE) launched, two years ago, a 10.5 billion Birr (or US$1.3 billion) Universal Electricity Access Program (UEAP). Its objective is to triple overall national grid access from 17% to 50% in a 5-year timeframe. Under the UEAP, donors[1] provide funds to the GoE. The state-owned Ethiopian Electric Power Corporation (EEPCo) is responsible for the execution of the UEAP. Within the UEAP, there is the Second Electricity Access Rural Expansion Project (EAREP II), a US$130 million IDA loan. The Output-Based Aid (OBA) scheme discussed in this Commitment Document was originally envisioned to blend into the EAREP II project only; however, GPOBA funds will now also apply to other donor-funded projects under the UEAP.
The main objective of the GPOBA project is to increase access to electricity in rural towns and villages with grid-access, by assisting EEPCo in its connection fee[2]financing program, extending loan tenors of five years. In addition, the GPOBA grant will finance twoenergy efficient Compact Fluorescent Lamps (CFLs) for poor households (hhs) as part of the connection packageto both ensure an affordable tariff bill for hhs, and O&M cost recovery for EEPCo. The GPOBA funds, amounting to up to US$10 million, will provide 286,000 new and/or regularized rural connections and 572,000 CFLs, benefiting a population of 1,430,000. The increased access to electricity will improve the quality of life, enhance educational services, and provide income-generating opportunities.
GPOBA subsidy:
GPOBA will provide a subsidy of US$35 per hh. The subsidy level has been determined by: (1) the cost of financing (US$29) pertaining to the 5-year loansfor the connection fee; plus (ii) the cost of providing CFLs to target hhs (US$6). In comparison to other GPOBA projects in energy where connection subsidies vary from US$135-650, a connection subsidy of US$35 per hh represents excellent value for money. Given an average of 5 people per hh in rural Ethiopia, the subsidy is expected to be US$7/capita.
To encouraging accountability of and risk sharing by the provider, EEPCo will bear all construction and commercial risks as it will not receive the subsidy after certain conditions have been met. It should be noted that the hh is responsible for the internal wiring costs, estimated at US$20 per hh, although typically cheaper solutions are implemented by the hh. This could represent a reputational risk to GPOBA.
The proposed OBA scheme will create incentives to execute a large number of new connections to poor hhs. Subsequent connections should take place using the proceeds from the amortization of the loan. A kind of “revolving fund,” once established, can provide capital to finance new or to regularize connections even after the completion of the 3-year GPOBA intervention. Currently in Ethiopia there are 15,000,000 hhs, many of them poor and most without access to electricity; so, there is scale-up potential for the project. The project might also be replicated in similar situations in other countries where user contributions need to be subsidized.
In conclusion, the GPOBA project will accelerate by 20% the pace of regular connections to poor hhs in rural areas: Based on experience, it is expected that 40% of the customers will request connection in year 1, increasing to 80% in year 5. If no connection fee financing scheme is available, it is expected that in the first year only 20% of potential residential customers would be able to pay the fee and get connected. This percentage is assumed to gradually increase to 60% after 5 years. To ensure that those hhs that would have connected without a subsidy do not benefit from the GPOBA project, the loan program to the poor hhs will be delayed for one year in a newly electrified town. For already electrified towns, the connection financing scheme will be implemented immediately for both new and to be regularized connections[3].
Project Data Sheet
Project Name: Ethiopia Electricity Access Rural Expansion Project
Scope:To increase access to electricity for poor hhs in rural towns and villages with grid-access.
Total Project Costs: US$203 million (US$10 millionGPOBA subsidy[4]and US$US$193 million funding from other sources).
Total GPOBA Contribution Requested: US$10,200,000
- Subsidy funding (W3) = US$10,000,000 (5% of total cost)
- Monitoring & Evaluation/Auditing (W3) = US$150,000
- Supervision = US$50,000
Funding Leveraged from Other Sources:
- GoE/EEPCo: US$171,600,000.00 (approximately 84% of total cost) to cover the cost of extending access to the grid to rural towns and villages.
- User Fees: US$21,450,000.00 (11% of total cost) for connection fees
GPOBA W3 Funding: SIDA (US$1,800,000), DFID (US$3,200,000) and other donors (as available)
Outputs:a286,000 operative electricity connections; and
b) 572,000 energy efficient CFLs (2 per hh).
Expected beneficiaries: 286,000 rural hhs (1,430,000 people)
Targeting: Geographic targeting in those rural areas where the UAEP is being rolled out, with the EEPCo connection fee financing program to the poor hhs being delayed for one year in a newly electrified town to ensure that hhs who can afford the connection fee do not benefit from the GPOBA subsidy, as typically they connect within the first year of electricity being made available. For those towns already electrified for a year or more, the GPOBA funded project will be implemented immediately for the benefit of hhs not yet connected and those hhs with irregular connections.
Economic Rationale: The EIRR of the GPOBA support is expected to be approximately 23%(without CFLs) and 28% (with CFLs). The FIRR is 22% (with GPOBA subsidy) and-6% (without GPOBA subsidy).
GPOBA subsidy “efficiency”: The average subsidy is US$35 per hh (including US$6 for the CFLs), or US$7 per person.
Sustainability:In Ethiopia, poorhhs are financially constrained to pay for the connection fee and this is a significant barrier in a country with limited micro-credit and where the average GNI per capita is only twice as much. Empirical evidence whereby EEPCo in the past has been providing loans, have shown the important role that hhs financing can play to accelerate the pace of direct connection significantly. With this GPOBA Project, poor hhs would be able to obtain financing for the connection fees and once connected, EEPCo will continue to supply electricity and provide services (assuming that the tariff payment is made on time). The current tariff is not cost-covering but it would be with: a) the 20% tariff increase approved in 2006 and deferred for poor hhs, which should enter into effect in the next 2-3 years; and b) the reduction of consumption via energy efficiency with the introduction by EEPCo of the CFLs to the poor hhs. CFLs (which will reduce the hh consumption by 55%) should help make the bill more affordable to the poor, increasing the affordability and chances of prompt payment in the long run.
Grant recipient: EEPCo.
Financial Management: Same as the IDA-financed EAREP I and II projects.
Procurement: The GPOBA project will be implemented by EEPCo. A Procurement Assessment was carried out for EEPCo as part of EAREP I and II, and the utility was found to have adequate capacity to extend the distribution network and proceed with the installation of thousands of customers, as it has been doing in the last few years.
Disbursement: GPOBA will reimburse US$35 to EEPCo upon independent verification as follows:
(i)50% after the customer has received a 5-year loan and EEPCo has provided an operative connection and 2 CFLs; and,
(ii)50% after three billing cycles (i.e., bills being sent out to the customer).
Environmental clearance: The ISDS for EAREP II, describing the GPOBA component, has been submitted and reports have been posted on Infoshop.
Government endorsement: A letter of confirmation is in the process of submitted by GoE to GPOBA. EAREP II was approved by the WB Board in July 2007, ratified by the Ethiopian Parliament in March 2008, and became effective on March 31, 2008.
Exchange Rate: 8.89 Birr = 1US$
Summary Responses to the Comments Raised by the Panel of Experts at Eligibility Stage
1.Merits of structuring the GPOBA subsidy in a way that it does not cause the impression of being interest-free to the customers. To achieve this, the subsidy could be used to lower the loan amount, which then would have to be repaid including nominal interest payments.
The team incorporated this request into the project design and will request EEPCo to redraft its current loan agreement with the customers to incorporate a nominal interest rate. The GPOBA subsidy will help EEPCo to “buy down” the loan to the hhs.
The loan to be given to the hhs would be based on the real connection costs (US$75) to be charged to the customer. The customer will make a US$15 down payment and obtain a US$36.69 loan at 19%. This loan will be repaid during five years with principal payments and interest payments totaling US$12/year according to the schedule of payments in Table 1 below:
Table 1
2.A clearly understandable assessment of economic benefits of the scheme. In particular, energy savings due to the scheme should be considered and clearly set out as part of the benefits.
The team’s economic analysis is provided in detail in Annex 2 of this document
3. Relationship between this project and its dependency on a wider Bank project.
This issue has been address in detail in the Executive Summary above.
ABBREVIATIONS AND ACRONYMS
AfDB / African Development BankBADEA / Arab Bank for Economic Development in Africa
CFL / Compact Fluorescent Lamp
EAREP / Electricity Access Rural Expansion Project
EEPCo / Ethiopian Electric Power Corporation
EIRR / Economic Internal Rate of Return
ERR / Economic Rate of Return
FM / Financial Management
GNI / Gross National Income
GoE / Government of Ethiopia
GPOBA / Global Partnership on Output-Based Aid
ISDS / Integrated Safeguards Datasheet Stage
kWh / Kilowatt hour
kV / Kilovolt
IDA / International Development Association
M&V / Monitoring and Verification
MW(h) / Megawatt (hour)
NPV / Net Present Value
OBA / Output-Based Aid
O&M / Operations and Maintenance
SDPRP / Sustainable Development and Poverty Reduction Program
SIDA / Swedish International Development Cooperation Agency
TWh / Terawatt hour
UEAP / Universal Electricity Access Program
WB / World Bank
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GPOBA Commitment Paper: Ethiopia Electricity Access Rural Expansion Project April 2008
TABLE OF CONTENTS
A. STRATEGIC CONTEXT AND RATIONALE….……………………………………..2
1. Country and sector context...... 2
2. Rationale for GPOBA involvement...... 5
3. Higher level objectives to which the project contributes...... 6
B. PROJECT DESCRIPTION………….………………………………………………………..6
1. Project development objective and key indicators....... ……..….6
2. Description of the project:...... 6
3. Economic and financial analysis...... 9
4. Lessons learned and reflected in the project design...... 10
C. IMPLEMENTATION………………………………………………………………......... 10
1. Milestones for project implementa………………….…………………………………………….10
2.Institutional and implementation arrangements...... 10
3Reporting ...... 11
4. Sustainability...... 11
5. Critical risks ...... 12
D. TECHNICAL ANNEXES……………………………………………………………………13
Annex 1. Project Costs...... 13
Annex 2. Economic and Financial Analysis...... 14
Annex 3. Financial management and Disbursement (OP/BP 10.02 and 12.00)...... 15
Annex 4. Procurement....... 16
Annex 5. Safeguards...... 17
Annex 6. Results and monitoring...... 18
Annex 7. Project Preparation and Supervision...... 20
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GPOBA Commitment Paper: Ethiopia Electricity Access Rural Expansion Project April 2008
- STRATEGIC CONTEXT AND RATIONALE
A.1Country and Sector Context
Ethiopia is the third most populous country in Africa, with 71 million inhabitants. With a fertility rate of 5.3 births per woman, it will soon become the second most populous country after Nigeria. Although the country has abundant resources and good potential for development, poverty is pandemic and often linked to environmental and natural resource degradation. Ethiopia has a GDP of US$11 billion, corresponding to a US$155 per capita significantly less than the Sub-Saharan Africa average. Approximately 44% of people fell below the basic needs poverty line in the last comprehensive national survey done in 1999/00. External aid contributes with US$1.8 billion. In the last few years, the country has experienced a high and sustainable economic growth. In 2005, the growth rate was 8.7%. Agriculture, which is still very dependent on rainfall, is the main source of value added in the economy, representing about half of GDP. The country does not produce oil or natural gas, but has a yet to be exploited hydro potential of about 30,000 MW.
Ethiopia presents one of the lowest electrification rates in Sub-Saharan Africa. Only 17% of the population lives in electrified areas, but overall national access is only 7%. Biomass still represents 90% of the country’s total energy needs. This pattern of energy consumption has led to increasing deforestation, shortage of wood fuel and degradation of the rural ecosystems. As a consequence of that, Ethiopia launched the 10.5 billion Birr UEAP to achieve universal access in 10 years. Donors provide funds to the GoE, which in turn, on-lends to EEPCo to execute the UEAP. So far, those institutions have co-funded specific projects encompassing about US$4.13 billion Birr to serve 780 towns and villages. This amount represents about 40% of the overall UEAP requirements and 13% of the total number towns and villages to be electrified. Ongoing dialogue with a number of donors regarding financing the investment program has to date resulted in continued and/or new commitments from BADEA, Kuwait Fund, AfDB, the Indian Government and IDA. Other donors have expressed interest, such as the Islamic Development Bank and the Government of China, and may formalize commitments for various portions of the investment program shortly.
The majority of people in Ethiopia are supplied by the state-owned EEPCo, a vertically integrated power utility. EEPCo serves about 1,130,000 customers, including 360,000 in Addis Ababa, where the connection rate is 33 per cent. In other urban areas, the rate is about 20-30%. However, 85% of the population lives in rural areas, where the access rate is less than 2%. EEPCo, as per table below, has been able to almost double the number of electrified towns and customers served in the last 5 years thanks to the support of the Bank and other donors.
Table 2: Number of Customers & Electrified Towns in Ethiopia
Fiscal Year / 2002 / 2003 / 2004 / 2005 / 2006Total # of customers directly connected / 654,885 / 698,360 / 797697 / 947697 / 1,126,464
# of customers directly connected per year / 29,389 / 43,475 / 99,337 / 150,000 / 178,767
Electrified towns per year / 23 / 66 / 74 / 32 / 227
Number of electrified towns / 492 / 558 / 632 / 664 / 891
EEPCo has an installed capacity of almost 900 MW, which should double in the next 2 years, with the ongoing construction of three new hydro electricity plants, namely Beles, Tekeze and Gilgel Gibe II. Those plants have been funded by EEPCo, the GoE, the Italian Government and the Chinese Government. Hydro expansion to serve the domestic market and for exports has represented a significant financial commitment both for EEPCo and for the GoE. Demand in 2005/06 reached 2.9 TWh. In the last 5 years, it has grown at a high yearly rate of 9.6%. EEPCo has a strong technical and stable management team, and is operating profitably with an internal cash generation of about US$50 million per year. Its operating costs are low since generation is predominantly hydro, which also reduces exposure to oil price volatility. EEPCo has satisfactorily responded to the GoE commitment to provide universal access in a ten year period and has technically responded to the challenge of developing the country’s hydro generation potential. The ambitious investment program (two thirds in generation) has been well beyond EEPCo’s financial capacity to invest. The GoE has supported the company via loans and equity, to keep it operationally sound. EEPCo invests US$600 per hh for the sub-transmission and distribution cost.
Tariff Structure:
In Ethiopia, hhs in the lowest consumption bracket[5] have to pay a two-part tariff consisting of: a) a fixed monthly payment (service charge) of US$16 cents; and,b) a variable payment on a per kWh basis (lifeline tariff) of US$3 cents/kWh up to a consumption of 50 kWh. A typical, poor hh in rural areas falls under this lowest bracket consuming approximately 15 kWh/month. This results in a monthly payment of about US$61 cents or US4 cents/kWh, which is slightly lower than EEPCo’s cost to serve that poor hh (US$4.6 cents/kWh). Therefore, this structure is currently not cost-covering for the lowest strata of the population, and the deficit is financed by cross subsidies from higher consumption customers. Furthermore, in 2006, a tariff increase of 20% was deferred for poor customers, but is expected to be implemented in the next 2-3 years. Taking this tariff trajectory into account, as well as the assumption of a 10% cost increase during that period, EEPCo would be able to cover costs for the poor hhs in the lowest consumption bracket (please refer to Table 3 below).
However, in addition to this monthly two-part tariff, the hh needs to pay: a) a one-time connection fee of U$50-100 (on average US$75); and b) wiring costs of the house, which may represent about US$20, if a “Ready Board” panel is to be installed. In most cases, a much simpler wiring solution is envisioned. Wiring is an additional cost to be borne by the customer upon connection. As is customarily the case, the utility is not responsible for providing the wiring inside the customer’s house, which is considered private property. It is envisaged that for this project, the consumers will continue to bear the cost of wiring their houses. In future interventions, the pros and cons of financing Ready Boards may be considered.