PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB5241

Project Name / Rep. of Congo – Water, Electricity and Urban Development SIL
Region / AFRICA
Sector / Sub-national government administration (50%); Water supply (47%); Electricity (3%)
Project ID / P106975
Borrower(s) / REPUBLIC OF CONGO
Implementing Agency / Ministry of Equipment and Public Works
Environment Category / [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / March 3, 2010
Date of Appraisal Authorization / February 2, 2010
Date of Board Approval / March 25, 2010

Country and Sector Background

1.  The Republic of Congo (RoC) has a relatively small population of 3.8 million (of which over half lives in urban areas), a significant endowment of oil, natural forests, arable land, a biodiversity of global importance, minerals, and a strategic location in Central Africa with a deep-sea port at Pointe Noire. It has the potential for building a strong and robust economy as a gateway to the sub-region, and attaining a high standard of living for its people. However, economic growth was severely hampered by heavy state intervention in the economy in the 1970s and 1980s and recurrent conflicts in the 1990s, which ravaged the infrastructure and destroyed public institutions.

2.  Since the ceasefire in 2000 and adoption of the new Constitution in 2002, the country has been largely at peace. Although the political environment remains fragile, substantial progress in rebuilding and consolidating peace has been made. Prospects for full restoration of peace offer Congo a unique opportunity to focus its full attention on strengthening its still fledgling institutions, and stimulating robust economic growth in order to combat poverty and inequality.

3.  According to the most recent assessment[1], most social indicators have been improving since the return to peace, although meeting the Millennium Development Goals (MDGs) remains a challenge. The 2008 Human Development Index (which used 2006 statistics) ranked Congo as 130 out of 179 countries, putting it in the top 15th percentile among Sub-Saharan Africa (SSA) countries. Given its high level of resources and a small population, Congo should be able to attain high economic and social outcomes, provided that it puts appropriate policies and programs in place. However, the likelihood of attaining most of the MDG by 2015 is currently rated as low.

4.  Congo reached the Highly Indebted Poor Countries (HIPC) completion point in January 2010 as a result of significant efforts to implement measures related to the national poverty reduction strategy, macroeconomic stability, public financial management, oil sector management, governance, as well as implementing reforms in the health and education sectors. Achieving the HIPC completion point will free up resources to invest in basic infrastructure (water, energy in particular) and in rebuilding service delivery systems in health and education, areas in which the RoC had a strong record before the outbreak of conflict in the 1990s. The Government has shown strong commitment in the post-HIPC period to improve the economic and social situation in the country, and implement the economic diversification strategy.

5.  Over the past years, the government has lived up to its commitment to increasing budget allocations for expanding service delivery in basic infrastructure (water and energy in particular) as well as in social sectors. To illustrate this: the share of energy and water in the total budget (at payment order stage) increased from 1.6 to 4 percent from 2004 to 2007. The medium-term expenditure framework (MTEF) for 2010-2012, which was approved together with the 2010 budget, commits the government to continue expanding spending in these areas designated as key priorities by the Poverty Reduction Strategy Paper (PRSP). Allocations for water and energy are expected to reach 5.5 percent of total spending in 2012, according to the MTEF. The Government has also made a strong commitment to continue reform efforts in the post-HIPC period, as demonstrated by the continuation of its close dialogue and collaboration with the Bank and other partners in key reform areas like procurement reform and public investment reforms (supported by the Bank) and on macroeconomic and fiscal stability.

6.  The key policy challenge for Congo is to use its oil wealth to build a more diversified and competitive economy and, thereby, reduce poverty and improve social policy outcomes. In order to take advantage of this opportunity, the difficult economic and governance challenges that come with the economy’s strong dependence on oil will have to be addressed, including strengthening its capacity in budget and public financial management, in particular by completing public investment management and public procurement reforms. Finally, there will be a need to improve basic service delivery and strengthen public institutions, not just as a pre-requisite for sustained growth, but also to make sure that the growth outcomes are well distributed among the Congolese people in order to help reduce poverty and inequality.

Transformational feature of the proposed operation

7.  The proposed operation is an example of the Bank’s new partnership program in the RoC which is based on the following principles: acting as a catalyst for change, complementarities with other partners, and flexibility. The Bank’s role is therefore no longer that of a “financier” but rather that of a "catalyst" for change, assisting the country to improve selectivity and efficiency in its own programs. Consequently, the Bank’s strategic approach under the proposed operation is to leverage a relatively small IDA amount (US$25.5 million) with US$100 million from the Government for moving the reform agenda in the urban, water and electricity sectors, three infrastructure sectors where large investments are underway and for which the Government is seeking guidance from the Bank to ensure an optimization of resources under clear sectoral strategies. This operation will thus be essential in supporting the Government to better define and implement its sectoral strategies, as well as managing its budget in those sectors better.

Water Sector

6. Overview of the Water Sector. Although water resources are abundant in the RoC, access to potable water remains insufficient. Only 26 percent[2] of the urban population and 11 percent of the rural population have access to reliable and potable water. The unavailability of safe drinking water poses a major public health threat, with the poor bearing the full brunt of inefficient service delivery. The SNDE, the public enterprise under the tutelage of the Ministry of Energy and Hydraulics (MEH) responsible for the supply of water in urban areas, is currently facing a number of serious problems, the main ones being:

7. Deficient operational management. The rate of inactive connections is 44 percent in the RoC, compared to 10 percent in Senegal and 15 percent in Burkina Faso. The overall network efficiency of SNDE is estimated at 55 percent, compared to 80 percent in Senegal, 84 percent in Cote d’Ivoire and 83 percent in Burkina Faso. The water network lacks appropriate metering (metering rates of only 2.3 percent in Brazzaville and 27 percent in Pointe Noire) and meters in place, they are either too old or not operational. The volume of water consumed by users is unknown given the lack of meters on the network. The billing rate is inadequate, partly because of the very low metering rate. Due to a shortage of functioning meters, bills are paid on a flat-rate basis. SNDE accounts show that only 53 percent of bills are paid. Water used by the State, which accounts for close to 30 percent of the SNDE’s turnover, is also paid only on a flat-rate basis[3]. Despite difficulties in supplying water to users, the SNDE continues to expand its fleet by approximately 3,000 users per year and installation of meters is clearly necessary. This will lead to better management of users, better knowledge of the network and the gradual identification of technical losses as well as purely commercial losses.

8. Reforming tariffs and understanding consumption. The current water tariff, unchanged since 1994, does not allow SNDE to be financially viable. Low tariffs[4], the currently low collection and billing rates, a relatively high wage bill, and a low business turnover have led to a structural operating deficit. As a result, the current cost recovery rate (estimated at 52 percent) is insufficient to cover investment or even operating costs. Besides, the high cost of connection is an obstacle that hinders an increase in connections. Tariff reform, associated with a development of a billing system based on actual consumption, should therefore be pursued to achieve financial viability and social objectives (coverage extension and service affordability). A better understanding of consumer needs and practices is a prerequisite to the definition of a sound reform.

9. Chronic lack of investments In Brazzaville, it is estimated that only 35 percent[5] of the population have direct access to a water point (through a functional connection). The current total production capacity represents 81,000 m3 per day while the current demand for water in the capital city is estimated at 140,000 m3 per day. In Pointe-Noire, the access rate to SNDE water is estimated at 25 percent. Water production is only 49,000 m3 per day compared to the demand of 135,000 m3 a day. The water distribution network also remains insufficient to address the rapid influx of the urban population. The network density of the two cities represented in 2008 was 0.9 meters per inhabitant compared to 1.8 meters per inhabitant in Dakar (Senegal) and 2.29 meters per inhabitant in Abidjan (Cote d’Ivoire).

10. Poor management of facilities and infrastructure deterioration due to the combined effect of obsolete and poorly maintained facilities. The SNDE is currently operating in an emergency mode where decisions are taken in the absence of a clear rehabilitation and maintenance policy. The distribution networks are very old and subject to frequent leaks and breakdowns. In the absence of meters for production and distribution, the technical network performance can only be estimated at around 55 percent. The distribution networks are often non-existent in the outlying areas where the majority of the people live. In commercial operations, working meters are virtually non-existent and customer conduct is worsening. Because inadequate amounts of supplies and spare parts are purchased, poor quality materials are used, a factor that ends up compounding technical losses. Lastly, based on assessments done, modern management tools are hardly used and agents in key areas of the enterprise lack training.

11. The SNDE is in financial difficulty: Since 2000, the company has been operating with a deficit of at least CFAF 1.3 billion a year as a result of a high level of non-revenue water and low tariff level. With 54 percent of the company’s turnover directed towards salary payments, there is no room for financing operation and maintenance let alone new investments to keep up with growing demand. Water quality has suffered as well from a lack of funding. In addition, numerous disruptions of the company’s operations at the production plants due to the unstable supply of electricity have further complicated water supply operations and the availability of services to the urban populations.

12. Absence of both a contractual framework between the State and the SNDE and performance indicators needed for the monitoring and evaluation of the company. At the moment, SNDE investment responsibilities are limited to a small number of small-scale works involving connections and network extension. The State serves as the works supervisor for larger sector investments (water production and supply). This division of responsibilities has proven inefficient and has been abandoned in most other countries in the sub-region. The reform envisioned, which entails the total transfer of works supervision to the SNDE, along with capacity building, is therefore essential. It should be based on the conclusion of a performance contract with the State, to be renewed each year.

13. Significant and unmanageable company debt. An audit of public and semipublic SNDE debt in December 2008 revealed that as of December 31, 2007, the total debt owed by the SNDE to the State and parastatal companies amounted to CFAF 69.4 billion.[6] Clearly, it will be very difficult for the company to wipe out this debt, regardless of its performance. The company’s debt situation can be addressed only in the wider context of the State’s corporate and commercial debt.

14. SNDE staff productivity is average. However, staff costs per activity are very high in the SNDE, mainly due to the low revenues generated. Staff costs represented 54 percent of turnover generated in 2008 while the standard is around 20 percent. Improvement of SNDE’s performance is currently constrained by a general lack of competencies of its personnel, particularly in operations, as well as by an insufficient use of modern, computerized management tools. Lastly, managing the SNDE personnel has become delicate because of the existence of significant unpaid salaries, estimated at nearly one year of the utility’s turnover.

Electricity sector issues

15. Organization of the Sector. Between its creation in 1967 and 2002, the Société Nationale d’Electricité (SNE) had a monopoly over the generation, transmission, distribution and sales of electricity throughout the RoC. The SNE is a State-owned enterprise operating under the general direction of the MEH. In 2002, the Government established the Société Congolaise de Production d’Electricité (SCPE), another State-owned enterprise, to manage large thermal power stations belonging to the SNE through a delegated contract. Furthermore in April 2003, the Government enacted a law enabling the provision of electricity services by one or several operators, public or private, in a manner which would encourage private initiative and competition. However, there has been no significant involvement of private operators in the electricity sector up to now. As a result, with the SNE continuing to be the sole provider of electricity services to the population, the sector faces numerous problems which are enumerated below.

16. Despite the country’s substantial energy resources, electricity consumption and access to electricity is low. The country has sizable deposits of oil and gas; its rivers can potentially supply 14,000 MW of power; its position on the equator enables it to receive 12 hours of sunshine per day; and the amount of biomass resources in the tropical forests is among the highest in the World. However, these resources have been barely harnessed. As a result, electricity consumption per capita is 114 kWhr compared with 200 kWhr in Senegal and 270 kWhr in Cote d’Ivoire.