Public Disclosure Authorized Aide-Memoire

MOZAMBIQUE

Energy Development and Access Project (EDAP)

IDACredit 4681-MOZ

AIDE MEMOIRE

Supervision mission, September 14 - 23, 2011

Introduction

  1. A World Bank (WB) team comprising Rob Mills (Economist, TTL), Sara Nso (Energy Analyst), Pedro Antmann (Power Utility Specialist), Marcelino Madrigal (Regulatory Specialist for EDAP), Ayse Cansiz (Power Engineer), Maria Hilda Rivera (Energy Specialist), and Salma Chande (Team Assistant) carried out a supervision mission for the Energy Development and Access Project (EDAP) from September 19 to September 23, 2011. Some team members participated from remote locations via video-conference.
  2. The mission held meetings with senior officials of the Ministry of Energy (ME), National Energy Regulatory Council(CNELEC), Electricidade de Mozambique (EdM), and the Energy Fund (FUNAE).
  3. A wrap-up meeting was held in Maputo on September 23 to discuss the mission findings and to invite comments, on the basis of a draft version of this aide-memoire.The mission wishes to thank Minister Namburete and staff from the Ministry of Energy (ME), EdM, FUNAE, and CNELEC for all the courtesies and hospitality extended to the mission. The mission recognizes the commitment demonstrated by the staff of ME, EdM, FUNAE, CNELEC and the other agencies in preparing for and participating in the mission’s meetings. This Aide Memoiresummarizes the mission’s findings and agreements reached, and has been cleared by World Bank management.
  4. On July 1, 2010, the World Bank Group introduced a new policy on information disclosure. Under this policy, following consultation with the Government, mission aide-memoires are generally made public, including on World Bank websites. The public disclosure of this Aide-Memoirehas been agreed by the project implementing agencies, coordinated by Laura Nhacale.

Contents

I. Key Points

II. Mission Findings & Recommendations

-Component 1: Reinforcement of the Primary Networks and Grid Extension

-Component 2: Investments in Rural and Renewable Energy

-Component 3: Energy Sector Planning, Policy and Institutional Development

-Financial Management Issues

Annex A:Summary of Follow-Up Actions

Distribution

H.E. Salvador Namburete, Minister of Energy

H.E. Aiuba Cuereneia, Minister of Planning and Development

H.E. Manuel Chang, Minister of Finance

Mr. Júlio Bernardino Mahumane, Permanent Secretary, Ministry of Energy

Ms. LauraNhacaleNational Director, Planning, Ministry of Energy

Mr. Pascoal Bacela, National Director, Electric Energy, Ministry of Energy

Ms. Telma Matavel, Head, Department of International Cooperation, ME

Mr. Ilidio Bambo, Legal Adviser, Ministry of Energy

Mr. Adriano Ubisse, National Director, Ministry of Planning and Development

Ms. Piedade Mataveia, Deputy National Director, Ministry of Finance

Mr. Manuel Cuambe, President, EdM

Mr. Marcelino Alberto, Board Member, EdM

Mr. Luis Amado, Director, EdM

Mr. Carlos Yum, Director, EdM

Mr. Moises Silombe, Project Manager, EdM

Mr. Vagner Languene, Deputy Project Manager, EdM

Ms. Miquelina Menezes, President, FUNAE

Mr. Mário Batsana, Head of Mini Hydro, Biomass and Gensets Division, FUNAE

Mr. Miguel Diogo, Head of Solar and Wind Division, FUNAE

Mr. Guilherme Mavila, President, CNELEC

Mr. Isaque Chande, Commissioner, CNELEC

Mr. Issufo Mussagy, Commissioner, CNELEC

KEY POINTS

EDAP disbursements

Despite being declared Effective in March 2011, disbursement on EDAP hashitherto been blocked by the failure to fully repay outstanding refunds from the ERAP project. The final payment, for approximately $9,000, wasdue from FUNAE, and was finally paid shortly following the conclusion of the mission. Disbursement under EDAP is now possible andit is a priority for existing commitments to be paid, particularly the individual consultants employed for the SIGEM activity in Component 1.

Project cost estimates

The cost estimates for the FUNAE solar PV activities in Component 2have changed significantly. It was discoveredduring the mission that the original project appraisal did not include the costs of (i) staff houses for the 500 schools and clinics, and (ii) atwo-year maintenance program. The cost estimate has hence increased by $4.75 million,taking it from $7.75 million to $12.1 million.The implementing agencies were informed that the EDAP procurement planwill need to be revisedin line with these revised costs (and procurement methods); a newNo Objection will then be issued.

Other cost estimates that have changed significantly since project appraisal include:

  • Costs in Component 1 (EdM) are now $3.5 million higher than originally appraised, due to the addition of the Automatic Meter Reading / Revenue Protection sub-activity under SIGEM (see below).
  • As the procurement process for the Consulting Engineer for Component 1 (EdM) nears conclusion, it is expected that the cost will be approximately $2.3 million less than estimated.

In summary, estimated costs are now nearly $6 million higher than appraisal, or 7.5% of the total IDA financing available for the project:

Component / Agency / Activity / Change in cost estimate
(US$ mn)
(1) EdM / AMR / Revenue Protection / +$3.5 million
(2 ) FUNAE / Solar PV systems for Staff houses for schools & clinics + 2- year maintenance / +$4.75 million
(2) EdM / Cost of consulting / -$2.3 million
+ $5.95 million

To ‘recover’ some of these additional costs within Component 2, it is proposed and supported by FUNAE to reduce the scope or number of activities in the biomass activities in Component 2.2, with the aim of lowering the cost estimate from $6.3 million to $5 million or below.This will need to be fully agreed between Ministry of Energy and FUNAE as the two implementing agencies for Component 2.2.

This would still leave a financing shortfall against current cost estimates of approximately $4.7 million, or 5.8% of total project financing. At this early stage of project implementation, where bids have not been received for the large procurements, this shortfall can be ‘carried’. However, it is underlined that the implementing agencies track need to monitor this shortfall carefully as project implementation continues.

Project Covenants

The project’s Dated Covenants were reviewed and it was concluded that some cannot be met at this time:

  • “Annual submission to IDA of EdM annual self-assessment and of CNELEC annual report on EdM Performance Contract no later than September 30 of each year.”As noted below, the new Performance Contract between the Government and EdM has not yet been published. Accordingly, it has not been possible to fulfill this project covenant at this point. It is emphasized that the Performance Contract must be finalised as soon as possible in order that CNELEC’s assignment can be undertaken. EdM is also urged to submit its self-assessment to the WB as soon as possible.
  • By June 30, 2011 an electricity tariff setting mechanism will be put in place for EdM which sets and thereafter maintains throughout the project implementation period average tariffs in a manner that reflect full cost recovery principles. It is well understood and accepted by the Bank that the political environment in Mozambique is currently not one in which significant tariff increases can occur, particularly for the first tariff blocks for household connections (i.e. the tariffs that apply to the first couple of hundred KWh used per month). Nonetheless, the Ministry of Energy is encouraged to use the recently-completed tariff analysis commissioned by CNELEC to assess whether a higher degree of cross-subsidy is feasible, via tariff increases for the higher-consumption tariff blocks and/or the commercial & industrial customer categories. The financial impact on EdM of relatively low average tariffs remains a concern, and the WB team will continue to monitor this situation.
  • Hiring external auditors within 3 months of credit effectiveness. Given the transition to the ‘e-SISTAFE’ Financial Management system foreseen in project appraisal, the ‘Tribunal Administrativo’ of the Republic of Mozambique will perform the external auditing function for EDAP. This covenant is hence considered as having been met. Further information is provided in the FM section below.

In addition, the project includes ongoing Financial Covenants. These include maintaining: (i) a current ratio of 1.1, and (ii) a debt service coverage ratio of 1.1. EdM’s financial team is requested to provide information so that it can be ascertained if the project’s Financial Covenants are being met.

MISSION FINDINGS & RECOMMENDATIONS

Component 1: Reinforcement of the Primary Networks and Grid Extension Component

Sub-component 1.1: Engineering Consulting Services for Preliminary Engineering Design, Scoping and Packaging, Tender Documents and Procurement of Contractors

Activities have continued to procure the consulting engineer that will assist EdM with sub-components 1.2, 1.3 and 1.4 of the EDAP program (respectively, the MV network transmission efficiency improvement pilot,the rehabilitation and reinforcement of the primary network and theextension of the distribution networks customer connections).The No Objection to the Technical Evaluation Report was given in August 2011. Since then, the Combined Evaluation Report (CER) has been received and was reviewed during the mission. Shortly after the mission, EdM submitted the revised CER to the Bank, which is currently under review.

As the consulting engineer will assist EdM with the preparation and supervision of contracts under the EDAP program financed by the other financiers (AFD and EIB), discussions will be held to ensure that the interests of AFD and EIB are fully met, although the contract is 100% financed by IDA.

Sub-component 1.2 – 1.4: Reconfiguration, Rehabilitation and Extension of the Primary Network

These sub-components will only be launched once the Consulting Engineer is in place and assisting EdM with the design work. They were not discussed during the mission.

Sub-component 1.5: Institutional Strengthening and Capacity Building

The primary activity under this sub-component to date is ‘SIGEM’. This is an Integrated Business Management System (IBMS), to support the improvement of the EdM’soperations and management and enhance corporate governance. This system, called SIGEM, will be comprised of 3 main management information systems (MIS), namely:

  • Commercial Management System (CMS) to support execution of all commercial operations (consumption metering, reading, billing, collection, customer service in EdM offices or call centers, disconnection and reconnection related to commercial debts, new contracts, etc.)
  • Incidents Recording and Management System (IRMS) to attend and resolve customers' claims for interruptions and bad quality in electricity supply
  • Enterprise Resource Planning (ERP) to support management of all corporate resources, such as accounting and finances, human resources, procurement and logistics (stocks, fleet, etc), plant and equipment maintenance, etc.
  • In addition, an internal communication system module (ICS) serves as a platform to support the operation of the three MIS systems.

In addition, as the scope of SIGEM has been clarified, a new sub-activity has become necessary – a ‘Revenue Protection’ project based on Automatic Meter Reading (AMR). This has three elements:

  • Creation of a Large Consumers Unit (LCU) in EdM’sCommercial Department, responsible for the integral management of the large consumers(involving both commercial aspects and quality of electricity supply).
  • Implementation of “smart metering” for all 4,238 existing large consumers(estimated cost US$2.7 million)
  • Creation of 3 regional “Metering Control Centers (MCCs), to respectively attend tolarge consumerslocated in the Maputo-Sul, Centro and Norte regions. Operations of each MCC will be supported by specific “Meter Data Management’ (MDM) software, designed to make possible the systematic monitoring of consumption of these consumers, and the timely detection of any irregular situations. Staff of each MCC will be formed by experts in charge of operating the MDM, and crews reporting to them responsible for execution of field inspections in potentially irregular situations detected with the support of the software. All other activities external to the MCC but needed to sustain its operation could be outsourced (this includes maintenance of the metering communication facilities, and the MDM and other software). (Estimated cost US$ 0.8 million)

The total additional cost of this new sub-activity is hence $3.5 million.

Over the course of 2011, a team of individual consultants – one for each of the five activities under SIGEM -- has been working closely with the EdM SIGEM team to advance the work on each activity. The consultants have submitted to EDM final versions of their reports on organizational structure, incorporating the comments from internal consultations within EdM. In addition, the consultants then prepared and submitted to EDM by end of July the technical specifications of the threeMISsystems that form the core of SIGEM.

During this mission, a review was undertaken with the project team of the technical specifications prepared by the consultants forthe threeMIS systems. A single call for bids for the supply, installation, commissioning and maintenance of the MIS systems by the same contractor will be developed. The final version of the technical specifications was agreed with the project team.

It was underlined that the contractual payments due to the individual consultants developing SIGEM are long overdue, to the constraints on disbursement from the EDAP credit. Now that disbursements can start (as noted in the Key Issues section above), payment of these invoices must be a priority.

In addition, discussions were held with the President of the Board of EdM and EdM’s Director of Projects responsible for SIGEM on:

  • Adjustments in EDM's organizational structure proposed by the Consultants to maximize effectiveness in SIGEM's implementation. The President took decisions on those proposals, in particular on the approach to be followed for the implementation of the Distribution Operations Centers that will respond tocustomers' claims with the support of the new MIS.
  • Next steps in project development: the President decided to move without delays to the call for bids stage, and instructed the SIGEM Director to prepare the whole package of bidding documents to be submitted to the Bank for "No Objection". The ‘coordinator consultant’ will assist the team in this task. Documents for a similar project in Honduras, which was recently approved by the Bank, were informally provided as reference. The SIGEM team expects to have the draft package ready by mid-October and will consult the Bank procurement specialists in Maputo before formal submission.
  • New approaches to design and carry out the field campaigns required to update and improve quality of information of EDM's customers and network assets databases.

Component 2: Investments on Rural and Renewable Energy Component

Sub-component 2.1: Solar Systems and Technologies

Cost estimates.During the mission, it was found that the total costs set out in thePAD for the procurement of PV systems for schools, clinics, and villages substantially under-estimate the actualexpected costs. It appears that thecost estimates for the PAD were done on the basis of contract values for schools and clinics from ERAP – but overlooking the costs of (i) staff houses for the 500 schools and clinics, and (ii) the two-year post-guarantee maintenance program.

To ensure delivery of targets as outlinedin the project’s Results Framework while attempting to cut costs where possible, the WB and FUNAE team took various steps:

  • Reviewed again the cost estimates, based on average $/Wp unit cost for systems of similar sizesprocured in previous WB and Mozambique projects. The analysis factored in the trend of decreasing PV system costs, allowing where aslightly lower average $/Wp unit cost to be used in the revised estimates.
  • Removal of fridges from staff houses, effectively allowing for only one staff house system type, (system type #13) and eliminating all type #12systems. Fridges for staff are assessed as not being a critical aspect of the systems and allow significant cost savings.
  • Review of system quantities.

Even after incorporating these adjustments, the cost estimate for this sub-component has increased by $4.75 million, taking it from $7.75 million to $12.1 million. FUNAE has adjusted the Procurement Plan accordingly.

Maintenance. It had been originally foreseen that the contractor would provide maintenance for the installed facilities for one year, after which time maintenance responsibilityfor the schools and clinics systems would transfer to the respective line Ministries (MinEd and MISAU), and village systems maintenance would pass to FUNAE. Based on recommendations from the WB team on best-practice, and in line with other donor funded activities executed by FUNAE, the bid will now include atwo-year maintenance contract, following the expiration of the guarantee period. The expectation is that having these longer maintenance contracts will result in a more attractive bidding opportunity for suppliers, as well as facilitate the transition of maintenance responsibilities to the line Ministries.

Solar Lanterns. During previous ERAP supervision missions, FUNAE expressed dissatisfaction with the performance of solar lanterns for the village electrification kits. Based on the discussions, and following the supply to FUNAE by the WB of various samples of high-quality solar lantern samples for testing, it was agreed to include solar lanterns under the village electrification scheme (as system type #1).