Document of The World Bankdocuments.worldbank.org/...Third-Rwanda...Project.pdfThe World Bank Third Rwanda Energy Sector Development Policy Financing (P169040) Page 5 IDA PROGRAM DOCUMENT

The World Bank Third Rwanda Energy Sector Development Policy Financing (P169040)

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: PGD68

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A

PROPOSED DEVELOPMENT POLICY CREDIT

IN THE AMOUNT OF SDR 90 MILLION (US$125 MILLION EQUIVALENT) TO

THE REPUBLIC OF RWANDA

FOR A

THIRD RWANDA ENERGY SECTOR DEVELOPMENT POLICY FINANCING

August 2, 2019 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 REPUBLIC OF RWANDA

GOVERNMENT FISCAL YEAR

July 1 –June 30

CURRENCY EQUIVALENTS

Exchange Rate Effective as of June 30, 2019

Currency Unit = Rwanda franc (RWF)

US$1 = RWF 913.35615

US$1 = SDR 0.71931579

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank BNR National Bank of Rwanda (Banque Nationale du Rwanda) CAD Current Account Deficit CEO Chief Executive Officer CFO Chief Financial Officer CPI Consumer Price Index DPO Development Policy Operation DRM Domestic Revenue Mobilization 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 Economic Development and Poverty Reduction Strategy EICV Integrated Household Living Conditions Survey EnDev Energising Development EPC + F Engineering, Procurement, and Construction + Financing 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 GIZ Gesellschaft für Internationale Zusammenarbeit GoR Government of Rwanda GRS Grievance Redress Service HR Human Resources IBMS Integrated Business Management System

ICR IEC

Implementation Completion and Results Report International Electrotechnical Commission

IEG Independent Evaluation Group IFI International Finance Institution IFRS International Financial Reporting Standards IMF International Monetary Fund IPP Independent Power Producer IRMS Incident Recording and Management System IT Information Technology LCPDP Least-cost Power Development Plan MINECOFIN Ministry of Finance and Economic Planning MININFRA Ministry of Infrastructure NDC Nationally Determined Contribution NEP National Electrification Plan NISR National Institute of Statistics of Rwanda NST1 National Strategy for Transformation OAG Office of the Auditor General PCI Policy Coordination Instrument PDO Program Development Objective PFM Public Financial Management PPA Power Purchase Agreement PPP Public-Private Partnership PSI Policy Support Instrument PV Photovoltaic RBF Results-Based Financing 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 RURA Rwanda Utilities Regulatory Authority SACCO Savings and Credit Cooperative SAIDI System Average Interruption Duration Index SAIFI System Average Interruption Frequency Index SDG Sustainable Development Goal SHS Solar Home System SID Strategic Investment Department SOE State-Owned Enterprise SSA Sub-Saharan Africa STEM Science, Technology, Engineering, and Mathematics SUBSIM Subsidy Simulation SWAP Sector Wide Approach SWG Sector Working Group TA Technical Assistance TWG Technical Working Group VUP Vision 2020 Umurenge Program

.

Regional Vice President: Hafez Ghanem

Country Director: Carlos Felipe Jaramillo

Regional Director: Riccardo Puliti

Practice Manager: Sudeshna Ghosh Banerjee

Task Team Leader(s): Yadviga Semikolenova, Joern Huenteler


Page 1

REPUBLIC OF RWANDA

THIRD RWANDA ENERGY SECTOR DEVELOPMENT POLICY FINANCING

Table of Contents

SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3

1. INTRODUCTION AND COUNTRY CONTEXT .......................................................................................5

2. MACROECONOMIC POLICY FRAMEWORK ..................................................................................... 13

2.1. RECENT ECONOMIC DEVELOPMENTS ............................................................................................. 13

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY .......................................................... 16

2.3. IMF RELATIONS ................................................................................................................................ 18

3. GOVERNMENT PROGRAM ............................................................................................................ 19

4. PROPOSED OPERATION ................................................................................................................ 21

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ............................................ 21

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................... 23

4.3. LINK TO CPF, OTHER WORLD BANK OPERATIONS AND THE WBG STRATEGY .............................. 41

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ................................. 42

5. OTHER DESIGN AND APPRAISAL ISSUES ........................................................................................ 43

5.1. POVERTY AND SOCIAL IMPACT ....................................................................................................... 43

5.2. ENVIRONMENTAL ASPECTS ............................................................................................................ 47

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS ............................................................................ 50

5.4. MONITORING, EVALUATION, AND ACCOUNTABILITY ................................................................... 52

6. SUMMARY OF RISKS AND MITIGATION ......................................................................................... 53

ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 56

ANNEX 2: IMF RELATIONS ANNEX ..................................................................................................... 60

ANNEX 3: LETTER OF DEVELOPMENT POLICY ..................................................................................... 66

ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE ................................................... 74

ANNEX 5: LINK OF THE PROGRAMMATIC ENERGY SECTOR DEVELOPMENT POLICY OPERATION TO RWANDA’S NATIONALLY DETERMINED CONTRIBUTION UNDER THE PARIS AGREEMENT ................... 79

ANNEX 6: ECONOMIC AND FINANCIAL PROJECTIONS FOR THE ELECTRICITY SECTOR IN RWANDA ....... 83

ANNEX 7: POVERTY AND SOCIAL IMPACT ASSESSMENT FOR TARIFF REFORMS UNDER THE DPO SERIES........................................................................................................................................................ 92

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), Jiawei Song (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), Sofia De Abreu Ferreira (Senior Counsel), Marie Louise Feliciteq Soue (Program Assistant), and Sylvie Ingabire (Program Assistant). Sheoli Parga (Lead Energy Economist), Mikul Bhatia (Senior Energy Specialist), Husam Mohamed Beides (Lead Energy Specialist), and Dana Rysankova (Global Lead for Energy Access and 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 set up for this operation.


Page 3

SUMMARY OF PROPOSED FINANCING AND PROGRAM

BASIC INFORMATION

Project ID Programmatic If programmatic, position in series

P169040 Yes 3rd 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: MININFRA, MINECOFIN

PROJECT FINANCING DATA (US$, Millions) SUMMARY

Total Financing 125.00 DETAILS

International Development Association (IDA) 125.00

IDA Credit 125.00

INSTITUTIONAL DATA

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Overall Risk Rating

Substantial


Page 4

. Results

Indicator Name Baseline Target

Results Indicator A1:

Contain electricity subsidies a as percentage of GDP FY2016/17: 1.4% of GDP

FY2020/21: No more than 1.5% of GDP

Results Indicator A2:

Implement the quarterly 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


Expand electrification rate nationwide (percentage of

households)

September 2017: 40.7%

(29.7% on-grid and 11% off-grid)

2016: 21% among female-

headed households

December 2020: 61%

(38% on-grid and 23% off-grid)

2019: 42% among female-headed

households


Expand electrification rate among rural households

(percentage of households)

June 2017: 16% December 2020: 25%

Results Indicator B4: The independent audits of REG, EDCL, and EUCL are in compliance with IFRS, without qualifications and published within the first two quarters of the following year.

September 2017: No December 2020: Yes


Reduce total electricity sector losses as a percentage of

electricity supply

FY2017/18: 22% FY2020/21: 19%


Reduce average duration of interruptions (SAIDI) and

average frequency of interruptions (SAIFI)

2017: SAIDI: 44 hours;

SAIFI: 265

2020: SAIDI: 28 hours;

SAIFI: 183.4


Implement and publish annual customer satisfaction

survey

2017: No 2020: Yes

Note: 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. .


Page 5

IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE REPUBLIC OF RWANDA1

1. INTRODUCTION AND COUNTRY CONTEXT

1. The proposed Energy Sector Development Policy Operation (DPO) is the third and last in a programmatic series. The Government’s reform program aims at balancing the triple objectives of achieving ambitious targets for electricity generation and access, containing fiscal transfers to the sector, and enhancing the affordability and quality of electricity service for consumers. In line with the Government’s program, 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: (a) containing the fiscal impact of the electricity sector; and (b) improving operational efficiency, affordability, and accountability of electricity service. The credit amounts of SDR 88.5 million and SDR 89.6 million under the first and second operations were disbursed in December 2017 and December 2018, respectively. This is the first Energy Sector DPO series in Rwanda.

2. Rwanda is recognized as a leading reformer in Sub-Saharan Africa, with an impressive performance in poverty reduction. 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 2018, according to the latest Integrated Household Living Conditions Survey (the fifth Enquête Intégrale sur les Conditions de Vie, EICV5). Rwanda has also been the leading reformer among African economies in the Doing Business indicators: it moved from a global rank of 148 in 2008 to 29 in 2019,2 which is second in Africa after Mauritius. However, GDP per capita, which stood at US$787 in 2018, 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.

3. The country has a strong record of reform implementation under programmatic DPOs. 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 sector (a total of nine operations over 2009–2017). The Government delivered on the agreed program and implemented deep social protection reforms that established a good practice social protection program (the Vision 2020 Umurenge Program [VUP]), which covers about 300,000 households and institutionalized efficiency, accountability, and transparency throughout the social protection 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).3

4. 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

1 The financial and technical support by the Energy Sector Management Assistance Program (ESMAP) is gratefully acknowledged. ESMAP―a global knowledge and technical assistance (TA) program administered by the World Bank―assists low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Canada, ClimateWorks Foundation, Denmark, the European Commission, Finland, France, Germany, Iceland, Italy, Japan, Lithuania, Luxembourg, the Netherlands, Norway, the Rockefeller Foundation, Sweden, Switzerland, the United Kingdom, and the World Bank. 2 http://www.doingbusiness.org/content/dam/doingBusiness/country/r/rwanda/RWA.pdf. 3 http://ieg.worldbankgroup.org/data.


Page 6

countries, none made more progress than Rwanda during that period.4 Investments in grid extension have increased grid connections from 6 percent in 2009 to 37 percent at the end of February 2019. Off-grid access has more than doubled since 2016 and is estimated at 14 percent at the end of February 2019 (see annex 6). This places the nationwide electrification rate at 51 percent. The grid covers, as of March 2019, 100 percent of hospitals, 93 percent of health centers (compared to only a third on average in Sub-Saharan Africa), and 80 percent of primary and secondary schools (compared to a quarter for Sub-Saharan Africa on average). Rwanda has also taken a number of steps to improve the 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 accountability, grant operational independence, and create a financially viable offtaker for private sector contracts (see annex 6). They also separate asset development (the Energy Development Corporation Limited or EDCL) from utility business (Energy Utility Corporation Limited or EUCL). The generation capacity tripled from 76 MW in 2010 to 221.6 MW in June 2019 with 53.5 percent renewable energy installed capacity. 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.5

5. Achieving universal access to electricity is at the heart of Rwanda’s National Strategy for Transformation (NST1) (2017/18–2023/24), which aims to lay the foundations for achieving upper-middle-income country status by 2035 and high-income status by 2050. 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 of households by 2024. The strategy envisages expansion of the 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.

6. The GoR has adopted both grid and off-grid supply solutions in the drive toward universal electrification. Rwanda’s Energy Sector Strategic Plan (ESSP) 2017/18–2023/24, which was adopted in June 2018 and elaborates the electricity sector priorities of 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 power system 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 funding constraints. The Government is also committed to ensuring affordability of off-grid solutions by adopting incentive schemes for private sector companies and rural consumers.

4 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. 5 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/.


Page 7

7. This DPO series supports a Government reform program that proactively addresses the fiscal risks related to the NST1 target of achieving universal access to affordable, sustainable, and reliable electricity by 2024. The main rationale for the series is to avoid a ballooning of fiscal transfers, driven by (a) Rwanda’s already high cost of electricity service delivery, which is among the highest in the region (around US$0.28 per kWh in FY2017/18); (b) ambitions for rapid electrification and system expansion during NST1 (2017/18–2023/24), largely financed by public investments; (c) generation investment planning that is inconsistent with least-cost planning principles; (d) procurement processes for public-private partnerships (PPPs) that are inconsistent with competitive procedures; and (e) the limited scope for tariff increases in view of generally low income levels in the country. Figure 1 shows the underlying theory of change.

8. The PDO is supported by two main pillars. Pillar A 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 the Ministry of Infrastructure (MININFRA) and REG that improve the operational efficiency, affordability, and accountability of electricity service, divided into four themes: (a) transitioning Rwanda to a least-cost and low-carbon energy mix; (b) increasing access to affordable and reliable electricity—specifically, the adoption of least-cost principles in the expansion of electricity access; (c) 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 toward the listing of EUCL and improving transparency to REG’s balance sheet; and (d) improving the operational efficiency and quality of electricity services, which will lead to lower cost of service and higher revenues.

9. 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. Had the Government gone ahead with the original schedule of proposed power plants and electrification and not pursued other policy interventions on demand, tariff rationalization, and improved investment planning, estimates suggest that electricity sector subsidies6 could rapidly balloon from the current 1.9 percent to 4.5 percent in 2020/21 (Figure 2). These subsidies mostly consist of transfers for public investment, rather than consumption subsidies, but they nonetheless impose a major risk for the general medium- and long-term fiscal sustainability and macroeconomic stability in Rwanda. The reform program supported by the DPO addresses this fiscal risk through a policy and results matrix underpinned by the principles of least-cost planning, competition, accountability, and operational efficiency.

6 The subsidies include public investment in generation, transmission, and distribution assets, as well as transfers to REG to cover any operating deficits. Public investments constitute the bulk of the subsidies: in FY2018/19, of the total electricity subsidies that amounted to 1.9 percent of the GDP, public investments were 1.7 percent while operating subsidies were 0.2 percent.


Page 8

Figure 1. Theory of Change of the DPO Series

Note: HR = Human Resources; IFRS = International Financial Reporting Standards; IT = Information Technology.

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 2019.

Pillar B.3Pillar B.2Pillar B.1

Prior actions

Beneficiaries and PDO-level

indicators

PDO

Higher-level objectives

Tariff reforms

Enable fiscally sustainable expansion of electricity services in Rwanda

Contain electricity

subsidies as percentage

of GDP

Increase access to affordable and reliable

electricity services

Improve operational efficiency

and quality of

electricity services

Improve account-

ability and trans-

parency of REG

Transition to least-cost

and low-carbon

energy mix

Supporting the economic and industrial development objectives

of Rwanda

Freeing up fiscal resources for human capital development

Achieving Rwanda’s commitments to the Paris Climate Agreement

Multi-year fiscal

planning for the energy

sector

Least-cost generation planning &

regional trade

PPP Law and competitive

procurement of generation

PPPs

Least-cost electrification

planning

Lifeline tariff & affordable connections

Off-grid solar product

standards

Mini-grid specifications

and investment guidelines

Transition to IFRS

Pillar A

External audit and

publication of financial

statements

Pillar B.4

Commercial loss

reduction & quality of

service

Modernized HR,

operations & IT

infrastructure

A B.1 B.2 B.3 B.4

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 Actual Projected Projected Projected Projected Projected

FY2014/15 FY2015/16 FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 FY2021/22 FY2022/23 FY2023/24

Historical fiscal transfers to energy sector (% of GDP)

Business-as-usual projection (pre-DPO 1): Operating subsidies

Reduction through ▪ Electricity tariff reforms

(DPOs 1 and 2); ▪ Least-cost generation

expansion (DPOs 1–3); ▪ Least-cost electrification

(DPOs 1-3); ▪ Reforms for attracting

private-sector investment (DPOs 1–3);

▪ Utility reforms to improve accountability and efficiency (DPOs 1–3).


Page 9

10. The prior actions taken under DPO 1 and 2 enabled the Government to reduce fiscal transfers to the sector while doubling new connections per year and halving the tariffs for low-income households. The program of reforms supported by the DPO has already led to major progress on electrification, system losses, and quality of supply, and the DPO series is on track to achieve its results indicators (see Table 1). As a result of the newly adopted generation planning tools, the GoR recognized that the original pipeline of new power plants, if fully implemented, would lead to significant oversupply. Two major power plants that were in the pipeline (115 MW in total) were deprioritized and several smaller ones were shelved while several small hydropower purchasing contracts were renegotiated, significantly lowering the expected excess costs. 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 that allows for gradual repayment of connection fees without large lump-sum up-front payment, has drastically improved affordability of electricity for low-income consumers while largely maintaining REG’s revenue base. Rwanda’s pace of electrification has accelerated markedly since the DPO series started, from less than 3 percent per year during 2009-17 to over 9 percent per year during 2017-19 (access increased from 41 percent in late 2017 to 51 percent in February 2019). New connections completed per year doubled to around 150,000 per year in FY2017/18 and FY2018/19 from an average of 74,000 per year during 2012–2016. Rwanda’s target to achieve 48 percent of the universal electrification target through off-grid solar systems is also exemplary in expanding electricity access to low-income households in a way that is affordable for consumers and the Government. For businesses, REG has introduced a client charter ensuring that consumers are connected to the national grid in not more 20 days, down from 54 days, and allows customers to apply online for a connection.7 Quality of service is also improving, with blackouts falling from 34 in 2016 to 20 in July 2017/2018.8 These results were achieved while reducing transfers from 2.28 percent of GDP in FY2014/15 to 1.9 percent in FY2018/19.

Figure 3. Projected Impact of Prior Actions under DPO 1–2 and Scenario for Impact of DPO 3


7 See http://rdb.rw/rwanda-introduces-new-reforms-in-electricity-provision-construction-permits-and-export-facilitation-to-ease-doing-business/. 8 As a first step to improve the quality of supply, for the first time in Rwanda, the average duration of interruptions (as measured by the system average interruption duration index [SAIDI]) is now being regularly measured and monitored (see paragraph 78).

3.84%

4.52%

3.57%

2.88%

2.44%

3.26%3.67%

2.80%

2.21%1.83%

1.40% 1.40% 1.50% 1.45% 1.47%

Projected Projected Projected Projected Projected

FY2019/20 FY2020/21 FY2021/22 FY2022/23 FY2023/24

Business-as-usual projection (pre-DPO 1)

Revised projection (including all decisions that are final at the time of DPO 2)

Scenario under consideration (including all decisions that were approved by the Economic Cluster under DPO 3)


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Table 1. Progress on Selected DPO Result Indicators

Results Baseline Current DPO Target

Electricity subsidies as percentage of GDP

FY2016/17

1.4%

FY2018/19

1.9%

FY2020/21

No more than 1.5%

Quarterly automatic tariff adjustment FY2016/17

No

Expected from

September 2019

onwards

FY2020/21 Yes

Generation and transmission expansion to be consistent with LCPDP and in compliance with the PPP Law

September 2017 No

No new projects have been procured

so far

December 2020 Yes

Electrification rate September 2017

40.7 percent

February 2019

51 percent

December 2020

61 percent

Electrification rate among rural households

June 2017

16 percent

2019 data not yet

available

December 2020

25 percent

Compliance of the independent audits of REG, EDCL and EUCL with IFRS

September 2017

No

June 2019

Yes

December 2020

Yes

Electricity system losses FY2017/18

22 percent

March 2019

19.8 percent

FY2020/21

19 percent

Average duration of interruptions (SAIDI) and Average frequency of interruptions (SAIFI)

2017

SAIDI: 44 hours

SAIFI: 265

2018

SAIDI: 30.5 hours

SAIFI: 208

2020

SAIDI: 28 hours

SAIFI: 183.4

Annual customer satisfaction survey 2017

No

To be published in

2020

2020

Yes

11. The prior actions under DPO 3 consolidate the achievements of the series and establish a framework for containing fiscal transfers to the energy sector over the full NST1 period (2017/18–2023/24).

• Under Pillar A, the Economic Cluster9 has approved a fiscal trajectory that contains transfers to the power sector and a policy program to stay within the fiscal limits (see paragraph 58 for more details).

• Under Pillar B.1, the EDCL has institutionalized least-cost planning for generation and transmission and is updating the LCPDP every six months (rather than annually, as originally envisioned), and REG has adopted new standard Power Purchase Agreement (PPA) documents applicable to all future IPPs, to facilitate competitive procurement consistent with the PPP Law Guidelines adopted under DPO 2.

9 The Economic Cluster is a subgroup of 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.


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• Under Pillar B.2, the GoR has established a policy and regulatory framework for implementation of the National Electrification Plan (NEP), including guidelines and technical specifications for mini-grids and off-grid solar products, and REG has approved an incentive scheme to make these electrification options affordable.

• Under Pillar B.3, REG has completed the transition to IFRS, timely external audits without qualifications, and transparent publication of its financial statements (including its subsidiaries).

• Under Pillar B.4, REG has completed the implementation of operational and institutional reforms related to its new Integrated Business Management System (IBMS).

12. The tariff reforms underpinning the DPO series are deliberately designed to protect the poor. Electricity tariff reforms in 2017 and 2018, which raised average tariffs while lowering rates for most household consumers, and a proposed review in 2019 demonstrate the Government’s resolve to contain fiscal transfers while maintaining the 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 household consumption was exempt from tariff increases. In the latest reform in August 2018, among household consumers, tariffs were 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—were brought closer to cost recovery. General industrial tariffs were 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,10 while the higher average tariffs have helped the Government contain fiscal transfers to the sector.11

13. The DPO series supports the Government’s efforts to transition to a low-carbon energy trajectory. Faced with a power deficit situation between 2011 and 2013, the electric utility signed a number of contracts for the expansion of the electricity supply, which also included a PPA for an 80 MW peat power plant in the southeast of the country, which was already under construction during the program identification stage for the DPO series. Since then, through the support of the DPO series, the Government has taken a number of measures to limit the reliance on fossil fuels in the short term and transition toward low-carbon sources in the medium to long term. The latest LCPDP updated in June 2019 focused substantially on reducing fossil fuels, including no longer prioritizing a second peat power plant and discontinuation of oil-fired power by 2020. The focus has instead shifted to more hydro resources and other low-carbon resources (such as natural gas) in the longer term. In addition, pursuing off-grid electrification for 48 percent of the population under the NEP, largely through solar power, will lead to meeting a large part of household electricity demand through renewable sources.

10 About 93 percent of all households (including nearly 100 percent of households in the first quintile) 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. 11 RURA is currently preparing another tariff review, expected to be completed by Q1 FY 2020, which is expected to further disaggregate customer categories and implement cost-recovery tariffs for additional customer categories that do not require subsidies.


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14. The Government is also advancing the regional electricity trade integration agenda in East Africa. Although Rwanda emphasizes self-reliance as a policy and is unlikely to rely substantially on imports for extended periods of time, regional electricity trade will provide an option to Rwanda to import low-cost resources such as hydro and geothermal from the neighboring countries to meet its growing demand in the short-to-medium term. An 80 MW regional Rusumo Falls hydropower plant, to be shared equally 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 project12, to be shared equally by Rwanda, the Democratic Republic of Congo, and Burundi, is proposed. These efforts are expected to have substantial impact on greening the electricity sector in Rwanda. An interconnection to Kenya through Uganda is under construction and the Government is in preparations to enter into agreements with neighboring countries to utilize the interconnections for regional power trade once completed.

15. The prior actions of the series are designed to reflect the Government’s planning and decision-making process (see box 1) with DPO 3 expected to implement the plans and procedures adopted under DPOs 1 and 2. The DPO policy matrix combines measures (a) with immediate impacts (for example, electricity tariff reforms, the new connection policy, and institutional decisions in the utility) and (b) with medium and long-term impacts by putting in place a policy framework to ensure fiscal and financial sustainability of the sector (for example, the LCPDP, the NEP, and the associated policy measures). The timing of prior actions for these measures in the DPO series is aligned with the Government’s decision-making process and time horizon for such strategic sector policies, namely NST1 (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’s approval of a financing plan for the NEP.

16. The results of the series will depend on the Government’s continued commitment toward implementation of the reform program. On the generation side, the LCPDP needs to be revised periodically to include appropriate demand forecasts and energy resource information. Any new capacity addition should be informed by the LCPDP and should be procured through competitive bidding. On the electrification side, consistency of the NEP, specifically demarcation of off-grid and on-grid targets, should be ensured. Such certainty will help mobilize private sector investment as part of the access paradigm. Furthermore, REG needs to finalize and adequately implement both the investment prospectus for expanding on-grid electrification as well as a financing scheme to support off-grid electrification for low-income households.

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 (for example, 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 decisions,13 the line ministry will then seek validation by all relevant sector stakeholders (including development partners), first in the respective Technical Working Group (TWG) (for example, 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

12 An expansion of the Ruzizi III plant to 200 MW is under currently consideration. 13 Exceptions that are not subject to SWG endorsement include electricity tariffs and budget decisions.


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implications, recommend the decision to the Economic Cluster. This process takes time but ensures buy-in by all relevant stakeholders.

2. MACROECONOMIC POLICY FRAMEWORK

2.1. RECENT ECONOMIC DEVELOPMENTS

17. In 2018, the economy expanded at a brisk pace, achieving 8.6 percent growth, the highest on the continent and well above Rwanda’s average growth of the past 10 years of 7.2 percent. Growth in production was broad based. Recovering from the droughts, agriculture expanded by almost 6 percent, above the historical growth rate. Industry grew by more than 10 percent, the highest growth since 2012, supported by 14 percent growth in construction and 11 percent growth in manufacturing. Services expanded by almost 9 percent. On the demand side, investments were the main driver of growth expanding by 23.5 percent supported by strong public investments. After a stagnation in 2016 and 2017, private consumption grew by 6 percent. Contribution of net exports to the growth, however, turned negative in 2018 as Rwanda’s export sector was not able to maintain the strong momentum achieved in 2017. In real terms, exports of goods and services grew by less than 1 percent, well below the 9 percent increase in imports.

18. Despite the relatively weak performance of the export sector in 2018, the current account deficit (CAD) remained relatively unchanged. Unlike in the previous episodes of growth acceleration driven by public sector-led investments, Rwanda did not experience an increase in CAD, which remained relatively unchanged at 7.8 percent of GDP. Strong private transfers and lesser reliance on foreign savings helped sustain a relatively low CAD in 2018. Furthermore, helped by the flexible exchange rate regime adopted since 2015, the National Bank increased its foreign exchange reserves by around 13 percent, bringing them to US$1.3 billion—or 4.7 months—coverage of imports.

19. Monetary policy remains accommodative amidst low inflation and a favorable external environment. Headline inflation fell to 1.2 percent as of March 2019. Food price inflation has been very low due to favorable agriculture harvest. Pressures on the exchange rate were quite mild, resulting in only a 4 percent depreciation of the franc against the U.S. dollar in the year ended in March 2019. These have helped the National Bank of Rwanda (BNR) reduce the policy rate further to 5 percent. The accommodative policy stance, however, has not translated into a stronger credit growth given the recent large writing-off of nonperforming loans accumulated during the economic slowdown of 2016 and 2017. Credit to the economy grew by only 10.8 percent for the year ended in December 2018. Nonperforming loans have declined further to 6.4 percent as of December 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, and the risk-weighted assets ratio reached 25.5 percent in December compared to 19.5 percent as of June 2018, well above the levels required by Basel III.

20. Rwanda’s financial sector has made strides toward becoming a diversified and modern financial sector. Banks, microfinance institutions, savings and credit cooperatives (SACCOs),14 insurance companies, pension funds, and capital markets firms are providing an expanding range of products. The rapid growth of the financial sector has realized demonstrable results in expanding access but also

14 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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revealed vulnerabilities and risks. The Government and BNR have undertaken major reforms to the legal and regulatory framework for the financial sector.

Table 2. Selected Economic Indicators

2016 2017 2018 2019f 2020f 2021f 2022f

Real economy: annual percent change, unless indicated otherwise

Real GDP 6.1 6.1 8.6 7.8 8.1 8.2 8.0

GDP deflator 5.5 7.3 −0.8 4.2 5.0 5.0 5.0

Consumer price index (year average) 5.7 4.8 1.4 3.5 5.0 5.0 5.0 Fiscal accounts, percentage of GDP unless indicated otherwise

Revenues 22.7 22.9 24.1 23.1 22.2 21.6 22

Expenditures 27.3 27.5 28.8 29.2 28.6 27.8 27.1

General government balance -4.6 -4.6 -4.7 -6.1 -6.4 -6.2 -5.1

Primary balance -3.6 -3.5 -4.9 -5 -4.8 -3.6

General government debt, CY 44.2 48.9 53.1 55.8 57.3 58.2 57.2 Balance of payments, percentage of GDP unless indicated otherwise

Current account balance -15.8 -7.8 -7.9 -9.6 -9.4 -7.9 -8.1

Exports, goods, and services 18.4 21.7 21.4 21.2 21.4 22.3 22.3

Imports, goods, and services 36.9 32.5 32.7 33.6 32.8 32.0 32.2

Net income -3.5 -3.5 -3.5 -3.8 -3.7 -3.6 -3.5

Current transfers (net) 6.2 6.5 6.9 6.6 5.7 5.3 5.3

Net foreign direct investment 2.6 2.8 3.0 2.9 2.8 2.1 1.8

Source: IMF country reports (No. 19/2011 of July 2019 and No. 18/167 of June 2018); Notes: f= forecast

21. The Government has maintained a prudent fiscal stance in the first half of FY2018/19 (July–December 2018). The fiscal deficit was 3.1 percent of GDP in the first half of FY2018/19, lower than in the same periods of 2016 and 2017. Both government revenue and expenditure have increased as a share of GDP. The increase in budget outlays was mainly driven by capital spending. In nominal terms, budget outlays grew at 16.5 percent in July–December 2018 compared to the same period in 2017. Capital expenditure and transfers were the fastest growing categories. Capital spending rose by 25.1 percent, reaching 10.8 percent of GDP, compared to 9.3 percent in July–December of 2017. The energy sector was one of the main recipients of increased public investments with an increase of 15.5 percent, where investments were directed at increasing access to electricity, expanding electricity transmission as well as generation.

22. Rwanda is experiencing a strong revenue mobilization momentum with fiscal revenues growing at the fastest pace over the last three years. Total revenues, excluding grants, grew 16.7 percent in July–December 2018, compared to the same period in 2017. Revenues have increased for all the main categories, including, taxes, nontax revenues, and grants. Increases in total government expenditure were a result of higher capital spending and transfers to the local government. Tax revenues grew 12.3 percent, well above the growth of nominal GDP. Increased tax collection was mainly driven by direct taxes, primarily due to robust performance of the corporate profit tax, which grew by 23.8 percent. The income tax grew at 13.8 percent in the same period, reaching 3.7 percent of GDP. Taxes on goods and services and on international trade grew by 9.9 percent and 10.8 percent, respectively. Growing at 40.9 percent, nontax revenue was the highest growing revenue category and exceeded the target by about 20 percent, because of the larger-than-expected reimbursements from the United Nations Peacekeeping operations.


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There was a 27.2 percent growth in grants as a result of the larger-than-expected disbursement of the grants for the health and education sectors in the first half of the fiscal year.

23. Strong revenue momentum and renewed investment ambitions led to a revision of the 2018/19 budget in February 2019. The target for expenditures for FY2018/19 was increased by 5.8 percent, including a 2.5 percent increase in recurrent expenses and 11.1 percent increase in the development budget. In addition to the revenue overperformance, the Government has increased the budget deficit for FY2018/19 to fund its higher capital spending.

24. Rwanda’s public debt has continued to rise in 2018, reaching 53 percent of GDP. External public and publicly guaranteed debt, including commercial loans and eurobonds, contributed to more than 80 percent of Rwanda’s debt accumulation since 2013. In terms of the drivers of debt, high primary deficits —driven mainly by public investments—have contributed to high debt levels, in addition to the real exchange depreciation and government guarantees. Interest payments have been also increasing along with the accumulation of debt, currently staying at 1.2 percent of GDP. Although domestic debt is a small fraction of total public debt, 54 percent of total interest payments serve Rwanda’s domestic debt because of higher interest rates. The debt distress risk remains low.

25. Fiscal transfers to the energy sector had been on a downward trend as a percentage of GDP but spiked again in FY2018/19. Overall fiscal transfers declined from an estimated 2.3 percent of GDP in FY2014/15 to 1.26 percent in FY2016/17, which helped maintain the fiscal space for other priority spending programs amid the declining external grants. However, fiscal transfers then rose again to 1.9 percent in 2018/19, owing largely to increased public investments, which constituted 1.7 percent of GDP. The projections for energy sector fiscal transfers for FY2020 to FY2023 submitted by MINECOFIN under the latest Medium-Term Fiscal Framework of 2019 hover around 1.4–1.5 percent. While sector transfers are projected to increase across the years in absolute terms, the percentage increase is roughly equivalent to the 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 could be substantially higher if reform measures, including those underpinning the prior action on containing the trajectory of fiscal transfers are not fully implemented and followed through.

26. The Government needs to closely monitor and contain contingent liabilities that may arise from state-owned enterprises (SOEs). To boost Rwanda’s nascent enterprise sector and promote structural transformation, the Government has proactively 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.

Table 3. Fiscal Accounts (percentage of GDP, fiscal year)

FY2016/17 FY2017/18 FY2018/19f FY2019/20f FY2020/21f FY2021/22f

Key Fiscal Indicators, percent of GDP unless otherwise indicated

Overall Balance -4.9 -5.0 -5.8 -6.3 -5.8 -5.5

Primary Balance -3.9 -3.8 -4.7 -5.0 -4.4 -4.1

Total Revenues and Grants 22.7 23.1 23.9 22.5 22.5 22.1

Tax Revenues 15.5 15.9 16.1 16.0 16.2 16.4

Taxes on Goods and Services 7.6 7.8 7.9 7.8 7.9 8.0

Direct Taxes 6.6 6.8 7.0 7.0 7.1 7.2


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Taxes on International Trade 1.3 1.2 1.3 1.2 1.2 1.2

Non-Tax Revenues 2.5 2.6 2.8 2.3 2.2 1.9

Grants 4.6 4.5 4.9 4.2 4.1 3.8 Expenditures 27.3 27.7 29.3 28.5 28.0 27.3

Wages and Compensation 4.1 4.1 4.2 4.3 4.2 4.2

Goods and Services 2.7 2.7 2.7 2.4 2.7 2.6

Interest Payments 1.0 1.2 1.2 1.3 1.4 1.4

Transfers 4.9 4.6 4.6 4.2 4.1 3.7

Exceptional social expenditure

2.2 2.3 2.3 2.1 1.6 1.5

Capital Expenditures 10.7 10.8 12.0 11.7 11.8 12.0

Net lending 1.6 2.0 2.4 2.4 2.2 1.9

Change in arrears (net reduction-)

-0.3 -0.3 -0.3 -0.3 -0.3 -0.3

Memorandum item: GDP (billions of RWF, FY basis) 7,129.0 7,895.0 8,694.0 9,821.0 11,151.0 12,663.0

Transfers to the Electricity Sectora

1.3 1.4 1.9 1.4 1.4 1.5

Public investment 1.1 1.1 1.7 1.3 1.2 1.4

Operating subsidies 0.2 0.3 0.2 0.1 0.2 0.1

Source: IMF country report No. 19/2011 of July 2019; Notes: f= forecast

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

27. Rwanda’s economy is projected to grow between 7 percent and 8 percent over the medium term. Economic activity will be driven by improved agriculture, strong exports, and large infrastructure projects funded by the public sector, including by capital spending through a temporary fiscal expansion. The ongoing construction of the new airport and a number of other large infrastructure projects, including roads and dams, will continue to boost industrial activities. The Government's renewed commitments to scaling up investments in agriculture, especially irrigation, will further strengthen the sector’s medium-term outlook. The competitiveness of the exchange rate will continue to provide support to export growth. The mining sector will remain strong, supported by increased exploration and investment in the sector. With low inflation and a favorable external environment, monetary policy is expected to continue remaining accommodative.

28. Public sector-led investments will remain central as the government plans higher public investment to achieve the objectives of NST1. A substantial part of new public sector investments will be financed through higher capital spending funded by the budget, while SOE investment will also contribute to the investment push. Combined with a smaller increase in recurrent expenses to accommodate restructuring in public administration and revision in teachers’ salaries, higher capital spending will increase the fiscal deficit to an average of around 6 percent of GDP in 2019–2021. It is projected that the fiscal deficit will return to a range of 4 to 5 percent after 2021. Public debt is expected to decline after peaking at around 57 percent of GDP in 2021. Revenue mobilization is expected to improve and partly contribute to the financing of public investments. However, the momentum observed in non-tax revenues over the past fiscal years is expected to ease slightly in the next three FYs, due to lower levels of reimbursements from the UN for the cost of peacekeeping operations.


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29. The CAD will widen over the medium term to accommodate higher public investments. However, the CAD is expected to remain below 10.5 percent of GDP compared to the peak of around 16 percent in 2016 (Table 4). Notwithstanding the projected increase in external debt amortization, the overall external financing requirements will remain between 10 percent and 11 percent of GDP. With a further decline in external grants expected over the long term, the role of private financing in meeting external financing requirements will increase.

30. The 2019 Debt Sustainability Analysis (DSA) maintained Rwanda’s status of low risk of debt distress. Under the baseline scenario that includes the fiscal expansion projected for 2019–2021, all debt burden indicators are projected to remain below the thresholds except for a small and one-off breach 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 focused on carefully choosing the highest return projects, financed under the most favorable terms.

31. Rwanda’s economic outlook is vulnerable to both domestic and external risks. Domestically, the main risks are weather related, such as droughts and floods that may depress agricultural production. Scaling up of public sector-led investments is a challenge as well as an opportunity; it could jeopardize debt sustainability if Rwanda’s investments-growth nexus does not improve. In addition, with the expected increase in fiscal pressures from the expansion of the power sector, maintaining fiscal sustainability will be of utmost importance. A weak private sector remains a major risk to Rwanda’s growth outlook, as reforms to promote the business environment have not yet translated into significant private sector activity in all sectors (power generation, a heavily regulated subsector in Rwanda, and off-grid electrification have been positive outliers with significant private investment over the past decade). The main external risks are related to a more severe slowdown in global economic growth than is currently projected that would affect prices for the commodities Rwanda exports.

32. A fiscally unaffordable expansion of the electricity sector is a major risk to fiscal sustainability, especially against the background of envisaged fiscal expansion and the resulting increase in public debt. 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 DPO series, including measures such as slowing down or postponing new thermal plants by institutionalizing the LCPDP, implementing competitive power procurement to lower supply cost, and adopting plans to incentivize demand from users with higher ability to pay.

33. Without the DPO series, the electricity sector would drain scarce public resources from spending in social sectors and other priorities. Budget transfers to electricity averaged 1.8 percent of GDP over FY2014/15–FY2017/18, crowding out spending on human development and other government priorities. By containing public spending in the electricity sector and freeing up the fiscal space for these expenditure priorities, the DPO is expected to free up funds for more spending to improve household welfare in the long run.

Table 4. External Financing Requirements and Sources (% of GDP)

2016 2017 2018f 2019f 2020f 2021f 2022f

Financing requirements (% of GDP) 13.8 8.0 8.6 9.6 9.4 7.9 8.1

Current account Deficit 15.8 7.8 7.9 9.6 9.4 7.9 8.1

Net Errors and Omissions -2.0 0.3 0.7 0.0 0.0 0.0 0.0


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Financing Sources (% of GDP) 13.8 8.0 8.6 9.6 9.4 7.9 8.1

Capital Account Balance 2.2 2.1 2.6 2.6 2.6 2.4 2.2

Net Foreign Direct Investment 2.6 2.8 3.0 2.9 2.8 2.1 1.8

Net Portfolio Investment 0.1 -0.8 -0.2 0.1 0.1 0.1 0.1

Net All Other Flows 9.8 5.8 4.8 5.1 5.2 3.9 4.8

Change in reserve assets (increase -) -0.9 -1.8 -1.6 -1.1 -1.3 -0.6 -0.7

Source: IMF, World Bank staff calculations and estimates; Notes: f= forecast

34. 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 2015/16. The authorities have since implemented an adjustment program to mitigate the risks of external imbalance by muting domestic absorption and easing the current account strains notwithstanding the temporary growth slowdown. The program has already helped reduce external imbalances drastically in 2017 and 2018, while growth has regained momentum, returning to 7 percent to 8 percent per year, and BNR has continued to accumulate foreign exchange reserves. Even with the fiscal expansion, Rwanda is expected to maintain its low risk of debt distress. The proposed DPO will support the authorities, among others, in containing the fiscal risks that may emerge from the energy sector over the medium term.

2.3. IMF RELATIONS

35. In November 2018, the International Monetary Fund (IMF) completed its 10th and final review of Rwanda’s economic performance under the program supported by the Policy Support Instrument (PSI). The PSI for Rwanda was approved on December 2, 2013, and extended from January 12, 2018, to December 1, 2018. Requests for an 18-month standby credit facility arrangement with access of about US$204 million (SDR 144.18 million) or 90 percent of Rwanda’s quota were approved by the Executive Board on June 8, 2016. The program 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 Rwanda franc); (b) cut/delay non-priority expenditures, especially ones with high import content; and (c) shift from an accommodative to a neutral monetary policy. Performance under the ongoing PSI-supported program was strong. All but one of the quantitative targets and structural reform benchmarks were met. Rwanda’s risk of debt distress remains low.

36. IA new three-year Policy Coordination Instrument was approved by the IMF Executive Board on June 28, 2019. The program consists of four main pillars: (a) a medium-term fiscal path that allows for more spending to reach NST goals while maintaining public debt at a sustainable level; (b) regaining momentum in mobilizing domestic resources to support development goals, including through broadening the tax base and strengthening tax compliance; (c) building on efforts to further enhance fiscal transparency; and (d) supporting implementation of the BNR’s new forward-looking monetary policy operational framework, including through development of financial markets and broader access within the economy to financial resources.

37. The World Bank and the IMF have been closely collaborating in Rwanda. The World Bank team participates in the IMF missions and the IMF’s internal meetings, as needed, and vice versa. The Joint Staff


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Advisory Note for the Second Economic Development and Poverty Reduction Strategy (EDPRS-II) was completed in December 2013 and the DSA is conducted jointly on an annual basis (the latest completed in May 2019). 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

38. The Government’s program was announced in NST1 (2017/18–2023/24) and the associated ESSP and the Nationally Determined Contribution (NDC) under the Paris Agreement.

39. NST1 identifies a number of priorities in the energy sector. NST1 identifies the importance of universal electricity access for achieving the envisioned social transformation and aims to achieve universal electrification 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 the improvement of quality and reliability of electricity supply and prioritizing electricity 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.

40. The targets established in the ESSP capture the spirit of NST1 for the energy sector (Table 5). 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 power interruptions (average number of power interruptions per year reduced to 91.7 and average number of hours without power to 14.2), 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).

Table 5. Rwanda’s Objectives for the Power Sector under EESP (2017/18–2023/24)

ESSP Objectives Baseline (2017) Target (2023/24)

Achieve universal electrification 40.7%: 29.7% on-grid, 11% off-grid

100%: 52% on-grid, 48% off-grid

Reserve margin n.a. 15%

Average number of interruptions per year 265 92

Average total duration of interruptions per year 44 hours 14 hours

Reduce transmission and distribution network losses 22% 15%

Expand electricity access to productive usersa 72.6% 2020/21: 100%

Source: MININFRA 2018. Note: a According to the ESSP, productive users use energy for activities that enhance income and welfare and include health and education facilities, public infrastructure, and industry.

41. Rwanda’s NDC 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


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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) mini-grids in rural communities, and (c) increasing energy efficiency through demand-side measures and supply-side loss reduction measures. By deprioritizing 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 3,712,658 tCO2e by 2030 compared to the emission under the business-as-usual commissioning schedule (see annex 5 for more details).

42. The Government envisions a strong role for the private sector as a strategic partner in generation and off-grid electrification. Rwanda will continue prioritizing private-sector financing in generation, pursuing all new generation investments as IPPs with the exception of multi-purpose dams. Off-grid solutions, envisioned in areas where extending the grid is not financially viable in the short term, is expected to be primarily driven by the private sector. According to the final NEP, about US$370 million of private finance is expected to be mobilized between now and 2024 to support the implementation of off-grid solutions. The NEP marks distinct areas for grid and off-grid electrification, underpinned by geospatial planning, to create a more robust enabling environment for the private sector. The Government is also in the process of deciding investment procedures for implementing the NEP, including to ensure the affordability of off-grid solutions. The Sector Working Group, comprising private sector representatives, government stakeholders, and development partners, is facilitating the consultation process on achieving off-grid targets and is putting renewed efforts into enhancing a transparent and predictable regulatory framework. Measures are being taken to introduce minimum quality standards for off-grid devices and offer incentive schemes that make off-grid solutions affordable for low-income households yet attractive for private solar companies to be active in Rwanda.

Figure 4. Expected Increase in Private Sector Involvement in Electrification and Generation during NST1

Source: World Bank analysis based on NST1 and LCPDP.

43. The Government is taking steps to tap into low-cost hydro and geothermal resources in the region to lower the cost of electricity. 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

0%

20%

40%

60%

80%

100%

2019 Addition between 2019and 2024

Per

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ity

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ss

Increase in privately financed electrification

Public (on-grid) Private (off-grid)

0%

20%

40%

60%

80%

100%

2019 Addition between 2019 and2024

Per

cen

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inst

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Increase in privately financed generation capacity

Public IPP

Total access = 52% Increase in access = 48%Installed capacity = 220 MW Increase in installed capacity =

236 MW


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expected to be operational by mid-2021, and a 147 MW Ruzizi Regional Hydropower Project (P148226), to be equally shared by Rwanda, the Democratic Republic of Congo, and Burundi, is proposed. The Government is also in discussions with Kenya, Uganda, and Ethiopia on power exchange frameworks.15

4. PROPOSED OPERATION

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

44. The proposed energy sector DPO in the amount of Special Drawing Rights (SDR) 90 million (equivalent to US$125 million) is the third and last in a programmatic series of three DPOs. The PDO of the proposed operation is to enable fiscally sustainable expansion of electricity services in Rwanda and is built around two pillars: (a) containing the fiscal impact of the electricity sector and (b) improving the operational efficiency, affordability, and accountability of electricity service.

45. The DPO series proactively addresses the fiscal risks related to the implementation of NST1 and ESSP and establishes a policy and institutional framework to achieve the sector targets in a fiscally sustainable manner. The DPO series supports a program that includes measures to respond proactively to fiscal risks emanating from the energy sector and lays the foundation for the provision of reliable and affordable energy services in a sustainable manner. This short- to medium-term reform program consists of the following main elements:

(a) Establishing a fiscal framework for the electricity sector that balances the Government’s sector expenditure priorities and fiscal sustainability objectives over the NST1 period (Pillar A, 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 IFRS-compliant accounting and commercial independence—to enable REG to become a transparent and accountable offtaker (Pillar B.3).

(f) Improving operational efficiency of REG—through strengthened resource management, systematic monitoring of quality of customers’ commercial service and quality of electricity supply, and independent performance evaluation (Pillar B.4).

15 An interconnection to Kenya through Uganda is under construction and a bilateral agreement for up to 30 MW of imports at US$0.14 per kWh was signed with Kenya in 2014.

http://operationsportal.worldbank.org/secure/P148226/home


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46. The DPO series boosts Rwanda’s priority mitigation actions under its NDC by (a) increasing the share of new grid-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 supply-side loss reduction measures. 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 52 percent by 2030, compared to 48 percent under the business-as-usual scenario and reduces cumulative emissions by about 3,712,658 tCO2eq by 2030 compared to the business-as-usual scenario. Further, measures to strengthen the off-grid solar market under this series will ease barriers to the adoption of off-grid solar solutions, thereby expanding access through renewable energy.

47. The DPO series is transformative on how the sector will deliver its mandate toward sustainable energy service delivery. 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 at 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 has been willing to take bold measures to rein in costs and improve efficiency, and this represents an important change from a business-as-usual scenario. 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, have 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 establishing an adequate framework for investment planning, procurement, and sector governance and 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.

48. The reforms envisaged in this DPO build 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 the reforms achieved to date as well as enhance the sector’s ability to scale up reliable, affordable, and sustainable service delivery.

49. 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 social protection 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 2017/18–2023/24.


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It builds on past achievements and lessons learned to support policy and administrative reforms, including under the World Bank’s three consecutive DPO series in the social protection sector (FY2008/09–FY2016/17) through which Rwanda (a) established a good practice social protection program (the VUP); (b) institutionalized efficiency, accountability, and transparency in the social protection 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 macrofiscal framework.

50. 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 (SWAP) Development Project (EASSDP) (P111567) and the ongoing Rwanda Electricity Sector Strengthening Project (RESSP) (P150634). Specifically, the DPO incorporates three lessons from the Implementation Completion and Results Report (ICR) of the EASSDP (Report No: ICR00004291).16 First, least-cost planning is crucial for sustainability of electrification outcomes because affordability is a barrier to electricity access (reflected in Pillar B.1); second, electrification programs designed based on a credible prospectus and geospatial mapping stand on a strong foundation for success and follow-through (reflected in Pillar B.2); and third, a well-coordinated and inclusive sector governance is important for successful electrification programs (reflected in the stakeholder engagement approach of the DPO).

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

Pillar A: Contain 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 toward 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

Prior Action 3.1: The Economic Cluster has approved a medium-term trajectory for fiscal transfers to REG and measures to stay within the budget envelope, including a financing plan for national electrification prioritizing private financing for off-grid solutions, a commitment to implementing the quarterly tariff adjustment, and a decision to pursue a partial listing of EUCL on a stock exchange.

51. Under business-as-usual circumstances, the sector expansion envisioned in the NST1 and ESSP targets implies significant fiscal transfers to the energy sector. Fiscal transfers needed to sustain sector

16 Available online at http://documents.worldbank.org/curated/en/790591539716903028/pdf/Implementation-Completion-and-Results-Report-ICR-Document-10102018.pdf.


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operations and investment, which are already at 1.9 percent of GDP, could have increased significantly to over 4 percent of GDP by FY2020/21 (see Figure 2). Most of the forecast increase in subsidies was due to tariffs not keeping up with expensive generation capacity additions and an extensive program of public investment in transmission, distribution, and streetlighting.

52. The Government is therefore implementing a program of subsidy rationalization (Pillar A of this series), accompanied by a sector reform program focusing both on cost and revenue side (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 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 implementing a fiscally, politically, and socially acceptable ‘glide path’ toward efficient cost-reflective tariffs.

53. Under DPO 1 and 2, RURA has wide-ranging changes in both tariff structure and levels. With the support of DPO 1 and 2, REG adopted the results of an ERR study that 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 allow maintaining the pace of the ambitious access program and meeting the expanding demand while containing budget transfers to the sector at no more than 1.5 percent of GDP, which is slightly higher than the originally envisioned 1.4 percent. Using the ERR study results as input, Rwanda’s regulator, RURA, implemented new electricity tariffs effective August 13, 2018, which raised the average cost recovery level, introduced new tariff categories, rationalized tariffs for selected consumers, and included quarterly ‘tariff adjustment’ (DPO 3 captures cabinet-level approval of a fiscal trajectory of transfers to the electricity sector and a policy program to keep transfer needs within the defined limits during the implementation of NST1 and ESSP (2017/18–2023/24). New electricity tariffs increased REG’s revenues by RWF 1 billion per month on average and RWF 6 billion in total in the first six months of FY2018/19. Under DPO 3, the Economic Cluster has committed to quarterly tariff adjustments, which will help maintain REG’s cost recovery amid fluctuations in the exchange rate, inflation, and fuel prices. Besides, RURA is currently preparing another tariff review expected to be implemented by Q1 FY2020.

54. Even then, tariff revenues collected by REG remain insufficient to recover the full costs of service provision, and the Government’s ability to further raise tariffs is limited by low incomes of consumers. With implementation of the tariff reviews of 2017 and 2018, along with the implementation of the new connection policy in 2017, REG has drastically improved affordability of electricity for low-income consumers and increased revenues. Nevertheless, tariff revenues collected by REG are still insufficient to recover the operating and investment 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 has fallen slightly from US$0.32 per kWh in FY2015/16 to about US$0.26 per kWh in FY2017/18. Tariffs—at an average of US$0.18 per kWh, among the highest in the region17—are below cost recovery because of the limited ability of consumers to pay for electricity services. The gap between tariffs and cost as well as REG’s investment needs are covered by budget transfers to REG (RWF 162.2 billion in total or 1.9 percent of GDP in FY2018/19, net of taxes).

17 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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Figure 5. Electricity Tariffs in Rwanda,18 2005–2018 (in Rwanda francs, nominal)

Source: World Bank analysis based on RURA 2018.

55. DPO 3 captures cabinet-level approval of a fiscal trajectory of transfers to the electricity sector and a policy program to keep transfer needs within the defined limits during the implementation of NST1 and ESSP (2017/18–2023/24). Specifically, under Prior Action 3.1, the Economic Cluster approved a multiyear trajectory for transitioning to fiscal sustainability that aims at containing budget transfers to the sector to a sustainable level. The budget projection is consistent with the implementation of Rwanda’s electrification target, which considers the financing plan of the NEP (both on-grid and off-grid access), off-grid incentive scheme, and public investment plans in energy infrastructure while also being realistic to allow REG to maintain its financial viability. In the short-to-medium-term, budget transfers to the sector are likely to rise and peak around 2023/24 (the end of NST1), as significant public investment is required for implementing the NEP, and also there is increased need for operational subsidies transferred to EUCL to cover the high costs of electricity supply. Looking beyond 2024, public investment is expected to reduce substantially while operational subsidies stabilize at a certain level, leading to a declining trend of budget transfers. This is due to the slowing pace of the electrification program and the convergence of revenue and the cost of services due to tariff adjustment.

56. The inclusion of the financing plan for the NEP in Prior Action 3.1 ensures that the planned budget transfers to the power sector adequately reflect the public investments required to achieve the electrification targets through both on-grid and off-grid measures. To translate the Government’s targets for on-grid and off-grid access expansion into practice, REG has prepared the NEP with related investment plans under DPO 2, which defined and established institutional arrangements, least-cost technical options, and financing schemes for the implementation of the ambitious targets set on access to electricity services. Under DPO 3, REG revised and produced the final NEP, indicating that the universal access target by 2024 will be achieved through 52 percent on-grid access and 48 percent off-grid access, and submitted

18 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 RWF 10,514 per kVA per month depending upon the time of consumption (see annex 6). This means that, per kilowatt hour, most industrial consumers pay higher rates than most households do. Additionally, because industrial consumers are connected to medium and high voltage lines and have a smoother demand profile, the cost of service per kilowatt hour is significantly lower than for low-voltage consumers such as households.

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a financing plan for the NEP implementation to the Economic Cluster for approval. The final NEP defines a combination of extension and densification of the national grid and deployment of off-grid solutions throughout the country to expand electricity access while optimizing the costs of access expansion. Prioritizing private sector investments in off-grid electrification is key to achieving the Government’s access objectives while not stressing limited public investments. To mobilize private financing for off-grid solutions, the NEP clearly demarcates on-grid and off-grid electricity expansion regions, which gives the private sector certainty about their operations in off-grid areas.

57. The policy program for NST1 approved by the Economic Cluster under Prior Action 3.1 includes several measures that are already under implementation, including a number of measures that go above the prior actions of DPO 1 and DPO 2:

(a) MINECOFIN’s decisions (i) that liabilities, worth about RWF 170 billion, of REG’s predecessor Electricity, Water, and Sanitation Authority (EWSA) will not be transferred to REG; (ii) to work with international financial institutions (IFIs) to mobilize financing to lower the power purchasing cost from new IPPs; and (iii) to facilitate access to commercial borrowing for REG for all transmission projects without external financing secured (for example, engineering, procurement, and construction + financing [EPC+F]).

(b) MININFRA’s decisions to (i) pursue power exports to the region to mitigate oversupply from 2021 onward, (ii) work with IFIs to mobilize financing to lower the cost of existing IPPs (micro-hydro plants), and (iii) pursue 48 percent electrification target by 2024 through off-grid and focusing public investment to on-grid electrification according to the NEP study results from 2019 onward.

(c) REG’s decisions to (i) commit to reducing total system losses from 22 percent in 2017 to 15 percent in 2024, (ii) commit to using public financing only for multipurpose dams from 2019 onward and pursue all other generation plants as IPPs, and (iii) renegotiate PPAs for new small hydro plants and adopt standard clauses and risk allocation for new PPAs.

(d) RURA’s decision to implement the approved quarterly tariff adjustments to account for movements in exchange rate and fuel prices.

58. Beyond the measures already under implementation, the Economic Cluster approved a set of additional measures to further improve the financial sustainability of the electricity sector. The set of measures is under review by the Economic Cluster and reflects the full needs for public investment and subsidies arising from, among others, (a) all public investment projects in generation, transmission, and distribution (including streetlighting); (b) the implementation of the NEP, including any public finance support for off-grid solar and mini-grids; and (c) the projected cash flow needs of REG to cover any gaps between tariff revenues and the cost of service. Based on the analytical assessments conducted under DPO 1 and DPO 2 to assess possible financial sustainability trajectories, the measures proposed by the two ministries are as follows:

(a) Recurrent budget transfers

(i) MININFRA and MINECOFIN to postpone concessions fees for generation assets

(b) Generation


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(i) Strategically use public financing to dilute average generation costs from 2019 onward

(ii) REG to sign new PPAs only for plants in the lowest-cost scenario of the least-cost plan from 2019 onward

(c) Transmission

(i) MINECOFIN/MININFRA to pursue partial listing of EUCL on the domestic stock market to attract commercial financing

(d) Distribution and Access

(i) MININFRA/MINECOFIN to take a policy decision on streetlighting consumption costs to reduce the burden on REG from FY2020/21 onward

59. 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 1.5 percent of GDP through FY2020/21 and beyond, compared to a business-as-usual scenario above 4 percent of GDP and down from 1.9 percent in FY2018/19. This target indicator is consistent with the measures adopted under DPO 1 and 2, the updated Government’s Medium-Term Fiscal Framework (from June 2019) and the IMF program review from July 2018. As an intermediate outcome indicator, RURA has made progress on implementing the quarterly tariff adjustment mechanism that will help maintain REG’s cost recovery amid fluctuations in the exchange rate, inflation, and fuel prices, and the first tariff review and adjustment are expected in by Q1 FY2020.

60. 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 3.1 will build on what has been achieved under Prior Action 2.1 to further improve efficient pricing of electricity and is expected to contribute to the reduction of carbon emissions against a business-as-usual scenario by supporting cost-reflective electricity tariffs. Continued tariff increases to achieve cost recovery will provide electricity users effective signals to promote efficiency in their consumption (Priority Mitigation Action 3.1 in Rwanda’s NDC).

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


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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.19

DPO 3

Prior Action 3.2: MININFRA has approved an updated LCPDP methodology that, inter alia, incorporates the government’s GHG emission reduction commitments.

Prior Action 3.3: REG has approved new standard PPA clauses and a standardized risk allocation matrix applicable to all future IPPs to ensure adequate risk sharing between REG and the private investors.

Prior Action 3.4: RURA has completed a review of its regulatory framework for cross-border electricity trade, which concluded that its grid code and licensing regulations are compatible with electricity trade in the East Africa Power Pool.

61. 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, the Government is working to improve sector planning and commits to making procurement of new privately-owned generation capacity solely based on the results of the least-cost generation plan and by following transparent and competitive procedures specified under the PPP Law of 2016. In the past 12 months, no new bilateral Memoranda of Understanding and/or other forms of agreements were undertaken.

62. Prior Action 3.2 creates the platform for systematic adherence to least-cost planning that intrinsically considers the Government’s NDCs. The EDCL has institutionalized least-cost planning for generation and transmission and is updating the LCPDP every six months (rather than annually, as originally envisioned). The revisions will be based on revised demand projections, progress on ongoing projects, and variations in technology costs, among other factors. Since the only peat plant Hakan I in the LCPDP was already under construction during program identification stage of DPO 1, the time when the first LCPDP exercise began, Hakan I was placed as an input to the modeling of LCPDP. Considering the environmental risks of peat plants, the revised LCPDP under consideration optimizes the commissioning schedule of planned power projects, which reduced the size of the already planned peat power plant Hakan I to 72 MW and led to another peat plant Hakan II (40 MW) and one lake methane plant KivuWatt (75 MW) no longer being prioritized. Within all developed scenarios under the LCPDP, compliance with the Government’s Paris commitments toward increasing its contribution of renewable energy to the national electricity production to 60 percent by 2030 and reducing GHG emissions from the power sector was considered throughout the planning horizon (e.g. CO2 emission caps were added as constraints of modelling). To update the LCPDP, the EDCL is now using a new planning model that offers more flexibility on specifying supply and demand scenarios as well as more refined optimization timelines. The updated LCPDP will be part of a larger master plan covering generation, transmission, distribution, and access in

19 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 the GoR’s vision of power sector reforms and link with the DPO objective.


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which the principle of least-cost planning is applied to all segments of the electricity supply chain. By including least-cost planning as the guiding principle in future power sector planning, the Government brings a fundamental shift in its approach to electricity sector planning and aims at improving the financial sustainability of the electricity sector in the long term. Figure 6 illustrates that while the cost of service of electricity will rise in the short-term, largely due to potential oversupply from power plants already under construction, it will subsequently decline as the impact of the LCPCP materializes in the medium- to long-term. Even so, with expected cost of supply ranging between US$c 35 per kWh and US$c 20 per kWh, electricity will remain an expensive commodity in Rwanda.

Figure 6. Projected Gap between Electricity Revenues and Cost of Service, Assuming that Average Tariffs Remain Constant in US$c per kWh

Source: World Bank staff analysis. Note: Actuals: 2015-18; Projection: 2019-2030. Projected costs are estimated based on the latest version of the LCPDP. Projected specific revenues are kept constant in US$ terms to estimated specific revenues in 2019.

63. Prior Action 3.3 builds a more systematic institutional framework to manage IPPs. REG has approved a new standard PPA document package, including a standardized risk allocation matrix, which is applicable to all future IPPs and aims at adequate risk sharing between REG and the private investors. In terms of institutional arrangements, REG has established a new institutional structure to more systematically manage IPPs. The IPP Unit has been fully staffed and has support from an IPP committee, which provides advice to the IPP Unit with expertise sourced from across REG.

64. Prior Action 3.4 ensures that the regulatory framework required for regional electricity trade is in place, allowing Rwanda to trade electricity in the East Africa Power Pool. Although Rwanda emphasizes self-reliance as a policy and is unlikely to rely substantially on imports for extended periods of time, regional electricity trade will provide an option to Rwanda to import low-cost resources such as hydro and geothermal from the neighboring countries to meet its growing demand in the short-to-medium term. In 2015, the EUCL obtained a license for power imports and exports that allows it to trade power with neighboring countries. Further, in 2018, a review of RURA’s regulatory framework for cross-

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border electricity trade concluded that there is no barrier to trade and that RURA’s grid code and licensing regulations allow it to trade electricity in the East Africa Power Pool. This will provide Rwanda with the option to tap into relatively cheaper sources of power from neighboring countries. Under the latest LCPDP developed in May 2019, REG has modelled the cost benefits stemmed from power trade possibilities in the short term (2019–2025), which can result in additional income, the maximum annual value of which is forecasted to be US$1.86 million by 2025 (at an assumed tariff of US$0.12 per kWh), and total potential savings of US$28.6 million by 2025.

65. Expected results. DPO 1 (Prior Actions 1.2 and 1.3) ensured that the Government took decisions to identify optimal short-term, least-cost options for sector expansion. In Rwanda, transitioning to least-cost energy mix is also synonymous with shifting toward a low-carbon energy mix, given the abundant low-cost indigenous hydro resources the country has. 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 (see more details in Annex 5). Prior Action 3.2 is an important planning measure that connects the policy measures under Pillar B.1 with the results indicators. The expected result20 is that from 2020, all new generation and transmission projects initiated or accepted by the Government over the past 24 months are consistent with the outcomes of the LCPDP and comply with the PPP Law and competitive procurement procedures (Results Indicator B1). As of June 2019, no new projects have been procured. 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. As the last tranche of the DPO series, DPO 3 aims at strengthening planning capacity for least-cost expansion in all segments of the electricity supply chain and access to service to new consumers, which is critical for the financial sustainability of the electricity sector.

66. Climate change mitigation and adaptation co-benefits. The adoption and update of the LCPDP is expected to improve generation investment planning in Rwanda’s power sector, thus enabling Rwanda to transition to a least-cost, low-carbon energy mix for the country. Competitive procurement of new generation capacity according to the outcomes of the updated LCPDP is expected to yield significant climate mitigation and adaptation co-benefits. Shifting from high carbon-intensity peat to low-carbon resources including hydropower, solar power, and lake methane represents Rwanda’s goal toward decarbonization of the energy sector by exploiting least-cost and lowest-emission options for expanding electricity supply in the medium to long term (see annex 5). Therefore, Rwanda’s NDC aims to increase the share of these three primary energy resources 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 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 3,712,658 tCO2eq by 2030 compared to the business-as-usual scenario.

20 The second expected result for this pillar under DPO 1 and 2 Results Indicator B2 ‘Initiate competitive procurement processes to implement investments identified in the LCPDP’) was dropped because under the revised LCPDP, no new generation or transmission projects are envisioned in the short to medium term.


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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 closes 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

Prior Action 3.5: MININFRA has approved 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.

Prior Action 3.6: REG has approved an incentive scheme to make off-grid solutions affordable for low-income households.

Prior Action 3.7: (a) RURA has updated the simplified licensing framework for mini-grids that do not require an offtaker agreement with the public sector; (b) RURA has issued and published the technical specifications for mini-grids; and (c) MININFRA has approved the investment guidelines for mini-grids.

67. 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. The ESSP aims to achieve universal access 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 has prepared the NEP and is deciding the implementation arrangements of the NEP, by reforming the pricing of electricity and new connections and streamlining procedures for simplified procurement of small mini-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 on-grid and off-grid electrification in parallel. Complementing on-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. 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


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be considered on a case-by-case basis. Besides, under the RESSP, the Government already has a strong program to connect non-household consumers.

68. Prior Action 3.5 captures the Government’s sustained efforts to ensure the sustainability of the off-grid market. Rwanda’s off‐grid solar market has emerged as one of the most active in Sub‐Saharan Africa in the last decade. Because customers need to be confident about the quality and reliability of stand‐alone solar power systems, the establishment and enforcement of minimum quality standards are essential to support the sustainable growth of the off‐grid market. Poor‐quality systems can threaten customer trust of the technology and, hence, jeopardize the sustainability of the market. Under DPO 1, the Rwanda Standards Board issued an order adopting standards for the design and installation of stand‐alone solar PV power systems and MININFRA developed Ministerial Guidelines on Minimum Standards Requirements for Solar Home Systems (SHSs) to support the enforcement of standards. As a healthy off-grid solar market is critical to achieve the Government’s universal access through off-grid solutions, MININFRA adopted a revised Guidelines of Minimum Requirements for Off-grid Solutions under Prior Action 3.5 to ensure that the guidelines are updated to align with the international best practice while off-grid solutions remain affordable in Rwanda. Extensive consultations have been undertaken with the Lighting Global Program, private sector developers, development partners, and other stakeholders during the process. Going forward, it will be important that the increase in the minimum service requirements is complemented by a fully funded subsidy program to align with global best practices, as approved under Prior Action 3.6.

69. Prior Action 3.6 encapsulates a framework for Results-Based Financing (RBF) for off-grid solar electrification and an incentive scheme to make off-grid solutions affordable for low-income households. To reach 48 percent of the population through off-grid, the Government needs to address the affordability issue, because SHSs remain beyond the paying capacity of many Rwandans, particularly in Ubudehe 1 households, which are among the poorest households and require additional support. In the past, the Government has held tenders at the national and district levels to distribute SHSs for free. Due to a lack of ownership by the beneficiaries, the systems that were sold have not been used or maintained properly. As a result, a number of the systems distributed no longer function. Additionally, these tenders resulted in significant market distortion, thereby threatening the long-term sustainability of off-grid electrification. To resolve some of the above challenges, an RBF scheme for off-grid electrification has been approved. The scheme will offer financial incentives to off-grid companies through the use of targeted subsidies covered by Government funding to enable private companies to lower the prices of SHSs for end-consumers. Through this market-oriented approach, the Government can improve the affordability for households while also offering the private sector a sustainable business model to provide off-grid access more efficiently and faster, thereby achieving the rural electrification target. The RBF pilot will be jointly implemented jointly by the EDCL and Energising Development (EnDev), will support households in the Ubudehe 1 and 2 categories, and will be financed by PowerAfrica. The Memorandum of Understanding for the pro-poor RBF pilot was signed at the end of April 2019. To scale up this pilot later on with resources for a wider range of financing sources, MININFRA has prepared a concept note that will set framework conditions for any RBF in the off-grid solar sector in Rwanda, whether financed and managed by MININFRA or by other sector stakeholders.

70. Prior Action 3.7 captures reforms on the procurement of mini‐grids. Substantial progress has been made to create favorable environment for deployment mini-grids in Rwanda to support the overall electrification efforts. While mini-grids with a public sector offtaker will be procured under the PPP Law, the licensing procedure for other mini-grids, which will typically serve private enterprises and households,


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has been simplified to support the market development (Prior Action 3.7 (a)). Further RURA has published technical specifications to ensure that mini-grid installations comply with best practices (Prior Action 3.7 (b)). Finally, to create a supportive investment environment, MININFRA has approved the investment guidelines for mini-grids (Prior Action 3.7 (c)).

71. 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 expand the overall electrification rate nationwide (as a percentage of households) from the current 51 percent to at least 61 percent by December 2020 (38 percent on-grid and at least 23 percent off-grid) (Results Indicator B2). 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 annex 7. By keeping tariffs constant for low-consumption households in the tariff review of August 2018 and adopting an incentive scheme for off-grid solutions, the Government has reaffirmed its commitment to ensuring the affordability of electricity. As a result, the electrification rate among rural households is expected to increase to 25 percent by December 2020 compared to 16 percent in June 2017 (Results Indicator B3). On the supply side, by optimizing the provision of on-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.

72. Climate change mitigation co-benefits. Prior Actions 3.5, 3.6, and 3.7 are key steps toward implementation of the Government’s new policy to place a stronger emphasis on off-grid solar and solar mini-grids for electricity access. By supporting solar-based off-grid electrification, this policy will reduce carbon emissions through off-grid 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). Also see annex 5 for details.

73. 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 (from 2016) suggest that only 21 percent of female-headed households have access to electricity. This is expected to increase to 42 percent by 2019. 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 toward 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.


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DPO 3

Prior Action 3.8: (a) REG has completed its transition to IFRS, as evidenced by the unqualified opinion of the independent auditor on the financial statements of both REG and EUCL; (b) The REG Board of Directors has mandated the external audit and publication of the financial statements of REG, EDCL and EUCL within the first quarter of the following financial year.

74. 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 improve 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, installation of new IBMS/ IT software and hardware, hiring of an experienced professional as the director of finance, completion of asset revaluation, and hiring of international auditing firms to confirm compliance. The DPO is supporting the final stretch of transition to IFRS.

75. Prior Action 3.8 enables REG and the EUCL to transition to IFRS and publish its financial statements. Since FY2015/16, the financial statements for the EUCL have been 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 and published on REG’s website. REG has now completed the transition to IFRS for both the EUCL as well as at a consolidated level for REG (Prior Action 3.8 (a)). From FY2018/19 onward, the financial statements of REG, EUCL, and EDCL are expected to be independently audited and published within the first two quarters of the subsequent fiscal year (Prior Action 3.8 (b)). The substantial efforts underlying the move to IFRS is being supported with extensive capacity building and IT infrastructure by a parallel Investment Project Financing (the RESSP, which provides direct support to REG’s financial department though ongoing hands-on training as well as remote support). Further, the Belgian Development Agency, Enabel, also supported a project to provide on-the-job training and support for the transition to IFRS.

76. Expected results. Because of Pillar B.3 of the DPO series, the financial statements of REG, EUCL, and EDCL are now in full compliance with the IFRS and are independently audited (without qualifications) and published within the first two quarters of the following year (Results Indicator B4). 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 PPAs 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.


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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.

DPO 3

Prior Action 3.9: REG has fully transitioned to automated customer and bill management using its new Integrated Business Management System (IBMS).

77. There is significant scope for improvement in operational performance of REG and its two fully owned affiliate entities, the EUCL and EDCL. The quality of electricity services provided by the 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 the 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 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.

78. The DPO series promotes 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.’21 Power blackouts in the transmission system are on a downward trend (Figure 7). The outage frequency in power distribution has also been reduced from about 450 per week in January 2017 to about 150 per week in July 2018 (Figure 8). The incorporation of the Incident Recording and Management System (IRMS) will allow the 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), 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 implementation of representative benchmarking against values achieved in other comparable countries. These operational reforms are partly supported under Pillar B.4 of the DPO series.

79. Pillar B.4 captures the EUCL’s efforts to reduce system losses and improve the quality of service provided to its customers. Prior actions under DPO 1 and 2 have established procedures and introduced technological advancements that have enabled REG to chart a path of improvement with regard to the quality of electricity service. REG has made substantial progress in monitoring system losses and failures, which is enabling it to take measures to better address them (Prior Actions 1.10 and 2.8). The operationalizing of the geographic information system (GIS) unit, geo-tagging of new customers, and use of geospatial data for fault monitoring and resolution has further strengthened REG’s ability to improve the quality of service (Prior Action 2.9). Besides, competitive hiring of staff and adoption of procedures

21 See http://www.newtimes.co.rw/news/featured-reg-moves-implement-new-doing-business-reforms.


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for efficient corporate planning and HR are important internal reforms with expected long-term impact on the functioning of the utility (Prior Actions 1.11 and 2.10).

Figure 7. REG - Number of Blackouts in Transmission and System Operations

Source: REG 2019.

Figure 8. REG - Weekly Average Outages in the Distribution System

Source: REG 2019.

80. Prior Action 3.9 concludes the utility’s ongoing measures of operational improvements by instituting an independent performance audit and by ensuring full launch of the IBMS. The launch of the IBMS has been successful and, with the customer management system, the last major module was launched on April 25, 2019 (Prior Action 3.9). The last two submodules of the HR module (e-Recruitment and Capacity Development) are expected to be launched within a few months. The impact of the reform measures and the possibility of any future reforms will be evaluated in an independent performance audit of REG which will be reported directly to MININFRA (Prior Action 3.9). The audit will be initiated once the IBMS is fully functional and will therefore not be completed in time for DPO 3.

81. Expected results. 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 B5), from 22


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percent in FY2017/18 to 19 percent in FY2020/21; (b) reduced average duration of interruptions (as measured by SAIDI) from 44 in 2017 to 28 in 2020 and reduced average frequency of interruptions (as measured by SAIFI) from 265 in 2017 to 183.4 in 2020 (Results Indicator B6); and (c) the successful implementation and publication of the annual customer satisfaction survey by 2020 (Results Indicator B7). As of March 2019, the sector losses stood at 19.8 percent. Further 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 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. Notably, Rwanda has a high collection rate (96 percent in 2017/18) and low receivable days (36 in 2017/18). Non-payment of bills has thus not been identified as a policy issue to be addressed in the DPO.

82. 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 diminish the need for fossil-fueled generation supply to meet demand, thereby reducing carbon emissions. Also see annex 5 for details.

Table 6. Revised Prior Actions for DPO 3 Against Corresponding Triggers Envisioned under DPO 2

Trigger for DPO 3 as Envisioned during DPO 2

Revised Prior Action for DPO 3 Explanation

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.


Significantly strengthened. Originally, the measure focused only on the fiscal trajectory, but it was augmented by the action plan to stay within the budget envelope.

Trigger 3.2: REG approves an updated LCPDP.

Prior Action 3.2: MININFRA has approved an updated LCPDP methodology that, inter alia, incorporates the government’s GHG emission reduction commitments.

Editorial changes to better reflect the Government’s decision making. MININFRA was included in the approval process to reflect higher-level endorsement on the updated LCPDP as well as the Government’s firm commitment to implement the 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.


Editorial changes to better reflect the Government’s decision making


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Trigger 3.4: RURA approves the regulatory framework for cross‐border electricity trade.


Significantly strengthened and achieved ahead of time. The new prior action elaborates the description of the trigger. Furthermore, the trigger was already achieved in 2018.

Trigger 3.5: The Economic Cluster approves a financing plan for the implementation of the NEP.

n.a. The trigger has been subsumed in Prior Action 3.1.

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.

Prior Action 3.5: MININFRA has approved 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.

Unchanged

Trigger 3.7: The Government approves an incentive scheme to make off‐grid solutions affordable for low‐income households.

Prior Action 3.6: REG has approved an incentive scheme to make off‐grid solutions affordable for low‐income households.

Unchanged

Trigger 3.8: RURA updates the simplified licensing framework for mini-grids that do not require an offtaker agreement with the public sector.


Significantly strengthened. Inclusion of publication of technical specifications on mini-grids by RURA and approval of investment guidelines for mini-grids by MININFRA have enlarged the scope of the prior action and have strengthened the overall objective.

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.

Prior Action 3.8: (a) REG has completed its transition to IFRS, as evidenced by the unqualified opinion of the independent auditor on the financial statements of both REG and EUCL; (b) the REG Board of Directors has mandated the external audit and publication of the financial statements of REG, EDCL, and EUCL financial statements within the first quarter of the following financial year.

Significantly strengthened and achieved ahead of time. The revised prior action applies to the financial statements of not only the EUCL but also REG at a consolidated level. Furthermore, the prior action was achieved ahead of time.

Trigger 3.10: REG institutionalizes the external audit and publication of REG’s and EUCL’s financial statements within the first

Merged with Prior Action 3.8.


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two quarters of the following year and distribution to key stakeholders.

Trigger 3.11: REG approves and publishes an independent evaluation of EUCL’s performance.

Dropped as a comprehensive assessment of the recent sector restructuring (e.g. performance of REG, EDCL and EUCL from October 2014 to date as compared with the intended results of the reform) will be conducted under RESSP program instead of the DPO series. The performance evaluation will be started in September 2019, after a full quarter of operations with the new customer management system has been completed. Any earlier evaluation would have been incomplete.

Trigger 3.12: REG adopts revised operational procedures for efficient procurement and logistics.


Significantly strengthened, as this prior action will further improve operational efficiency and service quality of REG through adopting the IBMS. The previous prior action was achieved by REG ahead of time.

Table 7. DPO Prior Actions and Analytical Underpinnings

Prior Actions Analytical Underpinnings



• Mercados. 2018. REG ERR Study. Kigali, Rwanda: Mercados.

• World Bank. 2016. Making Power Affordable for Africa and Viable for Its Utilities. Washington, DC: World Bank.

• IHS Energy. 2017. Powering Development: Strategic Audit of Rwanda’s Electricity Sector. Kigali, Rwanda: IHS Energy.

• 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: IMF.

• MINECOFIN. 2017. Budget Framework Paper 2017/2018–2019/2020. Kigali, Rwanda: MINECOFIN.

• MINECOFIN budget data (2014–2017).

• NISR (National Institute of Statistics of Rwanda). 2017. GDP National Accounts 2016. Kigali, Rwanda: NISR.

• 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.


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• EWSA Financial Assessment 2011–2020.



Prior Action 3.2: MININFRA has approved an updated LCPDP methodology that, inter alia, incorporates the government’s GHG emission reduction commitments. Prior Action 3.3: REG has approved new standard PPA clauses and a standardized risk allocation matrix applicable to all future IPPs to ensure adequate risk sharing between REG and the private investors. Prior Action 3.4: RURA has completed a review of its regulatory framework for cross-border electricity trade, which concluded that its grid code and licensing regulations are compatible with electricity trade in the East Africa Power Pool.

• Draft LCPDP prepared in May 2019 by REG.

• Review of Grid Codes and East Africa Power Pool (EAPP) Interconnection Code by Energy Regulators Association of East Africa.

• Draft Master Plan including generation, transmission, and distribution, access prepared by REG.

• Draft LCPDP prepared in December 2018 by REG.

• 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. Kigali, Rwanda: MININFRA.

• MININFRA. 2017. ESSP. Kigali, Rwanda: MININFRA.

• Electricity Network Planning and Design Report (SOFRECO, 2013).

• AfDB (African Development Bank). 2013. Rwanda Energy Sector Review and Action Plan. Report. Tunis, Tunisia: AfDB.

• World Bank. 2017. Rwanda: Country Public-Private-Partnerships Diagnostic. An Assessment of Rwanda’s PPP Readiness. Washington, DC: World Bank.


Prior Action 3.5: MININFRA has approved 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. Prior Action 3.6: REG has approved an incentive scheme to make off‐grid solutions affordable for low‐income households. Prior Action 3.7: (a) RURA has updated the simplified licensing framework for mini-grids that do not require an offtaker agreement with the public sector; (b) RURA has issued and published the technical specifications for mini-grids; and (c) MININFRA has approved the investment guidelines for mini-grids.

• Investment/financing plan of the NEP prepared by REG, 2019.

• World Bank. 2016. Who Uses Electricity in Sub-Saharan Africa? Washington, DC: World Bank.

• EDCL (Energy Development Company Limited). 2016. Impact Evaluation of the Rwanda Electricity Access Rollout Program (EARP) and Sector Wide Approach (SWAP) Development Project. Kigali, Rwanda: EDCL.

• World Bank/IEG. 2014. World Bank Group Support to Electricity Access, FY2000–2014. World Bank/IEG, Washington, DC: World Bank.

• 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.

• World Bank. 2014. Scaling Up Access to Electricity: The Case of Rwanda. Washington, DC: World Bank.

• World Bank. 2012. Institutional Approaches to Electrification: The Experience of Rural Energy Agencies/Rural Energy Funds in Sub-Saharan Africa. Washington, DC: World Bank.

• ESMAP. 2012. Rwanda - Extending Access to Energy: Lessons from a SWAP. ESMAP, Washington, DC: World Bank.

• Castalia. 2009. “Rwanda Electricity Sector Access Programme - Volume I: Investment Prospectus.” Washington, DC: World Bank.

• World Bank/IEG. 2008. The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits. World


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Bank/IEG, Washington, DC: World Bank.


Prior Action 3.8: (a) REG has completed its transition to IFRS, as evidenced by the unqualified opinion of the independent auditor on the financial statements of both REG and EUCL; (b) The REG Board of Directors has mandated the external audit and publication of the financial statements of REG, EDCL and EUCL financial statements within the first quarter of the following financial year

• World Bank. 2017. Regulatory Indicators for Sustainable Energy. Washington, DC: World Bank.

• Audited financial statements of the EUCL for FY2014/15 through 2017/18.



• IHS Energy. 2017. Powering Development: Strategic Audit of Rwanda’s Electricity Sector. Kigali, Rwanda: IHS Energy.

• 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 FY2017/18. Kigali, Rwanda: MINECOFIN.

• MININFRA. 2016. Energy Performance Report/Backward Looking JSR For FY2015/16. Kigali, Rwanda: MININFRA.

• MININFRA. 2015. Energy Performance Report/Backward Looking JSR For FY2014/15. Kigali, Rwanda: MININFRA.

• 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).

4.3. LINK TO CPF, OTHER WORLD BANK OPERATIONS AND THE WBG STRATEGY

83. The focus on energy by this program is directly aligned with the most recent Rwanda Country Partnership Strategy FY2014–2018 (Report No. 87025-RW).22 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.

84. The series is also aligned with the World Bank’s twin goals, the IDA18 special themes, and the World Bank’s Energy Directions Paper. 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

22 The Country Partnership Strategy has been extended to 2020 according to the Performance and Learning Review of the Country Partnership Strategy that was presented to the Board on March 20, 2017 (Report No 106731-RW).


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promotes helping client countries secure affordable, reliable, and sustainable energy supply needed to meet the twin goals.

85. The World Bank has long been a strategic partner of the Government in the energy sector. Through several operations, the World Bank has supported the Government with expanding access23 and generation capacity,24 restructuring Rwanda’s electric utility and improving its efficiency,25 asset and liability evaluation, sector capacity needs assessments, energy sector agencies’ capacity strengthening, and comprehensive assessment of financial viability of the energy sector. The World Bank has also served as co-chair of the SWG designed as a platform to discuss challenges and opportunities as well as promote a coordinated approach of donor partners toward a coherent sector agenda. The proposed programmatic operation harnesses this trusted relationship to build an incremental yet transformative reform program.

86. A number of reform measures in the DPO series are complemented by existing investment operations. First, the RESSP (P150634), approved in 2015, supported the implementation of a new IBMS at REG and strengthened the capacity of the utility for using the system effectively. The measures under Pillar B.4 ensure that the management information system is indeed used effectively and deepens REG’s work in improving efficiency, transparency, and accountability. Second, the Rwanda Renewable Energy Fund Project (P160691), approved in 2017 and financed by the Scaling-up Renewable Energy Program, facilitates private sector participation in off-grid electrification through a financial intermediary. The measures taken under Pillar B.2 directly facilitate implementation of the facility, especially the measures relating to off-grid solar products and mini-grids.

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS

87. Rwanda assigns high priority to policy consultations with stakeholders and development partners. Regular meetings to coordinate support are held under the umbrella of the Energy SWG—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 upon extensively in the SWG. 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. The EUCL has also widely discussed the new tariff structure with their industrial and commercial consumers. MININFRA conducted extensive consultation on Guidelines of Minimum Requirements for Off-grid Solutions with private sector developers, development partners, and other stakeholders.

88. 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. In addition, the EU is funding a bulk metering project within the EUCL, which helps the utility determine the location of network losses and complements the World Bank-funded Revenue Protection Program (RPP) under the

23 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). 24 AFR RI-Regional Rusumo Falls Hydroelectric Project (P075941, 2013; US$340 million). 25 RESSP (P150634, 2015; US$50 million for utility reforms).


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RESSP (P150643). Energising Development (EnDev26—implemented by Deutsche Gesellschaft für Internationale Zusammenarbeit [GIZ]) is complementing the World Bank effort in dialogue on off-grid electrification. The AfDB, Enabel, and Arab funds are co-funding the EARP electrification projects and are part of the policy dialogue on sustainable electrification, and Power Africa is aligned with the World Bank’s dialogue on expanding generation capacity along 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 revenue requirements and in implementing the modifications to financial reporting.

5. OTHER DESIGN AND APPRAISAL ISSUES

5.1. POVERTY AND SOCIAL IMPACT

89. Enhanced electricity access is associated with a measurable impact on household welfare in Rwanda. Findings from a recent impact evaluation (of EASSDP) show significant differences 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. The effect of electricity on most of the household welfare indicators is positive and significant—through increased income and consumption spending, quality and value of houses, and asset creation. 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. Finally, access to electricity has an impact on the education of children (number of hours studied at home per day after sunset for schooling children) and time used for tutoring children.27

90. The DPO series supports both fiscal affordability and consumer affordability. First, promotion of off-grid energy solutions for electrification lowers the cost of electrification in rural and remote 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 3.5, 3.6, and 3.7 under DPO 3, aim to reduce barriers to the adoption of off-grid solar solutions. Second, freeing up of scarce public resources for spending in social sectors and other priorities will contribute to the Government’s overarching human capital development agenda. Budget transfers to electricity averaged 1.8 percent of GDP over FY2014/15–FY2017/18, crowding out spending on human development. By containing public spending on the

26 The programme Energising Development (EnDev) is funded and directed by the Directorate-General for International

Cooperation of the Dutch Ministry of Foreign Affairs (MFA NL), the German Federal Ministry for Economic Cooperation and Development (BMZ), the Norwegian Agency for Development Cooperation (NORAD), the U.K. Department for International Development (DFID) , the Swiss Agency for Development and Cooperation (SDC), and the Swedish International Development Cooperation Agency (SIDA). Further financial contributions to country projects have been given by Irish Aid, the EU, U.S. Agency for International Development (USAID), and the Australian Government Department of Foreign Affairs and Trade (DFAT), supporting individual bilateral projects. 27 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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electricity sector, the DPO is therefore expected to free up funds for more spending to improve household welfare in the long run. (Figure 9).

Figure 9. Fiscal Expenditure on Energy (including Public Investment) and Human Development Sectors in Comparison (FY2015–2018; % of GDP)

Source: MINECOFIN 2019. Note: Spending on human development sectors excludes donor-funded capital expenditure and thus slightly underestimates the budget figures for these sectors.

91. 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.28 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.

92. The poverty and social impact of tariff reforms under the DPO series, which affect the already connected consumers, is estimated to be highly progressive. The Poverty and Social Impacts Assessment, presented in the following paragraphs, focuses on the direct impacts of the tariff reforms. As can be seen from annex 4, the tariff reforms are the only measures under the DPO series that carry significant poverty and social risks.

93. The 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. The World Bank staff estimates suggest that electricity has become more affordable between 2013/14 and 2016/17, and the affordability ratio has lowered for everyone and in 2016/17 was on average 1 percent. The poor spent 1.5 percent (2.89 percent) of their income in grid electricity while for the richest quintiles,

28 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.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

FY2014/15 FY2015/16 FY2016/17 FY2017/18

Health % Education %

Social protection % Energy sector % of GDP


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it was less than 1 percent (1.37 percent) for 2016/17. 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, announced in mid-2017, made new connections more 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.

94. The direct welfare impact of 2017 and 2018 tariff reviews on residential consumers was very small for the households in the first two quintiles (Table 8). In the case of the 2017 tariff change, the effect is positive for all households. The projected effect that the 2018 tariff will have on consumption quintiles is small but negative for all; nevertheless, the net impact of both tariff increases is positive for all except the richest quintile. When analyzed by rural and urban, Table 9 shows that the direct impact on well-being has been stronger for urban households than rural households, which is not surprising given that less than 20 percent of rural households are connected to the grid.

Table 8. 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) 0.07 −0.02 0.05

Quintile 2 0.10 −0.04 0.06

Quintile 3 0.14 −0.04 0.10

Quintile 4 0.20 −0.10 0.10

Quintile 5 (richest) 0.19 −0.26 −0.07


Table 9. 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 0.21 –0.31 –0.10

Rural 0.16 –0.03 0.13


95. If tariffs were to increase more, the direct effect would still be small for the poorest quintiles. Using the subsidy simulation (SUBSIM) model and the household survey from 2016/17, the effect of increasing the 2018 tariff by 1 percent, 5 percent, 15 percent, 30 percent, and 50 percent and projected direct effect of the tariff increase is provided in Error! Reference source not found.Table 10.

Table 10. Direct Welfare Impact of Potential 2019 Tariff Increase by Different Percentages Using 2016/17 Data

Direct Impacts % of Pre-increase Welfare Change

Increment (%) 1 5 10 15 30 50

Quintile 1 (poorest) −0.00 −0.02 −0.04 −0.06 −0.09 −0.22

Quintile 2 −0.01 −0.03 −0.06 −0.09 −0.13 −0.31

Quintile 3 −0.01 −0.05 −0.10 −0.15 −0.20 −0.49

Quintile 4 −0.01 −0.07 −0.14 −0.21 −0.27 −0.68


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Direct Impacts % of Pre-increase Welfare Change

Quintile 5 (richest) −0.03 −0.17 −0.33 −0.50 −0.66 −1.65

96. The DPO series is expected to contribute to closing the gender gap in electricity access. Providing households, social institutions, and enterprises with 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.

97. The Government is addressing measures to close the gender gap in access to electricity. The Multi-tier Framework Survey29 reveals a gender gap in access to electricity. 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 on-grid and off-grid electricity. Demographic and Health Survey data from 2014 indicate similar gender gaps, with 23 percent of households having access to electricity: 73 percent in urban areas and 12 percent in rural areas. 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 female-headed households comprise 18 percent of households connected, 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.

98. 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 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 gender segregation is often due to explicit and implicit gender biases, negative 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, among others, (a) gender stereotypes and norms,

29 Koo, Bonsuk, Dana Rysankova, Elisa Portale, Niki Angelou, Sandra Keller, and Gouthami Padam. 2018. Rwanda - Beyond Connections: Energy Access Diagnostic Report Based on the Multi-Tier Framework (English). Washington, DC: World Bank. http://documents.worldbank.org/curated/en/406341533065364544/Rwanda-Beyond-connections-energy-access-diagnostic-report-based-on-the-multi-tier-framework.

http://documents.worldbank.org/curated/en/406341533065364544/Rwanda-Beyond-connections-energy-access-diagnostic-report-based-on-the-multi-tier-framework

http://documents.worldbank.org/curated/en/406341533065364544/Rwanda-Beyond-connections-energy-access-diagnostic-report-based-on-the-multi-tier-framework


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(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. REG has conducted 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

99. 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). REMA is providing support to the line ministries, including MININFRA and the Rwanda Development Board (RDB), in incorporating environmental guidelines, especially environmental and social impact assessments (ESIAs), strategic environmental and social assessments (ESSAs), etc. in the operational manuals for its programs. With effective regulation and environmental management systems in place, these risks can be effectively monitored and managed.

100. The REMA is responsible for environmental management issues in Rwanda, including relating to energy projects. It has established units that include climate change and international obligations, environmental regulation and pollution control environmental education and mainstreaming, research, environmental planning and development. Operating in a country with a strong commitment to promoting sound stewardship of the biophysical and socio-economic environment, both REMA and RDB have sufficient capacity financially, technically and materially at both national and sub-national levels to oversee, coordinate, enforce and implement environmental and social sustainability matters in the country. In 2018, the RDB established a safeguards coordinating unit staffed with full-time safeguards specialists. REMA, in particular, has in the past benefited from investments in institutional capacity and strengthening from both bilateral and multilateral financial institutions such as the World Bank, UNDP, etc. Also, the World Bank is supporting REMA with TA to consider climate risks and opportunities and with land policy TA to review sustainable land management practices. On June 7, 2019, the Government of Rwanda approved the new Environment and Climate Change Policy, which contains a number of new provisions to better align the 2003 version with Rwanda’s overarching medium-term National Strategy for Transformation, long-term Vision 2050 as well as multilateral commitments including the EAC Vision 2050, African Union Agenda 2063 and the Sustainable Development Goals as well as The Paris Agreement on Climate Change and the Kigali Amendment to the Montreal Protocol. Rwanda is well positioned to able to deal with residual risks likely to emanate from implementing the WB supported policy and institutional actions, given the strong commitment by the Government but also the solid institutional and organizational capabilities.

101. Rwanda has a peat power plant under construction and is expanding hydropower generation, two technologies that are associated with environmental risks that need to be monitored and managed on a project-specific basis. Potential negative environmental risks related to these specific technologies have been identified. Specifically, burning peat could lead to loss of carbon sink and have negative impacts on biodiversity and ecological services. Development of hydropower may result in negative cumulative environmental effects, such as reduction of the base flow of the river if multiple plants are developed within a single river basin, large environmental footprints from construction of reservoir and associated


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infrastructure, changes in local precipitation and biodiversity, and disruption of the habitats of local wildlife. Rwanda’s country systems are equipped to manage these risks.

102. As Rwanda’s power mix has shifted away from oil, owing to investments in hydropower and lake methane-based power, the GHG emissions intensity of the power sector has dropped significantly. The share of oil-fueled power in Rwanda’s power generation mix has declined from about 45 percent in 2013 to less than 20 percent in 2018 as it has been replaced by cleaner lake methane-based power and to a smaller extent by solar power and peat-fueled power (Figure 10). As a result, the GHG intensity of power generation, which is largely driven by the share of oil in the fuel mix in Rwanda, has declined from about 328 gCO2 per kWh 2013 to 137 gCO2 per kWh in 2018.30

Figure 10. Power Generation Mix and GHG Intensity of Power Generation in Rwanda (2013–2018)

Source: RURA, World Bank estimates.

103. 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

30 Due to differences in methodology, the GHG emission intensity figures cited here differ from those disclosed by the GoR.

0%

10%

20%

30%

40%

50%

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Hydro kWh Solar kWh Lake methane kWh Non-hydro imports kWh Peat kWh Oil kWh

-

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gCO

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(supported by the LCPDP under Prior Actions 1.2, 1.3, 1.4, 2.4, and 3.2); (b) installation of solar PV mini-grids in rural communities (supported by Prior Actions 1.5, 1.8, 2.3, 2.5, 2.6, and 3.7); and (c) increases in energy efficiency through demand-side measures and supply-side loss reduction measures (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.

104. Net positive environmental effects are expected from improved sector planning (Prior Actions 2.3, 2.4, 2.5, 2.6, 3.1, and 3.2); the new tariff structure (Prior Action 1.6); promotion of the off-grid solar market (Prior Actions 2.3, 2.5, 2.6, 3.5, 3.6, and 3.7); and improved operational efficiencies (Prior Actions 2.8, 2.9, and 3.9). Sector 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 and moderate 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 easing the demand for power generation.

105. The Government has set a target to further reduce the GHG intensity of power generation by 25 percent against the 2013 baseline by 2025, 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. Since the only peat plant Hakan I in the LCPDP was already under construction during program identification stage and preparation of DPO 1, the time when the first LCPDP exercise began, Hakan I was placed as an input to the modeling of LCPDP. Considering the environmental risks of the peat plant, the revised LCPDP under consideration optimizes the commissioning schedule of planned power projects by aligning supply with demand with a 15 percent reserve margin, which reduced the size of the already planned peat power plant Hakan I to 72 MW and led to another peat plant Hakan II (40 MW) and one lake methane plant KivuWatt (75 MW) no longer being prioritized. As detailed in annex 5, the optimal LCPDP scenario is expected to increase the share of renewables in Rwanda’s energy mix to 55 percent by 2030, compared to 50 percent under the counterfactual, business-as-usual scenario and reduces cumulative emissions by about 3,712,658 tCO2eq by 2030 compared to the business-as-usual scenario. 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.

106. 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; P160699), 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 the Ministries of Trade and Industry to develop a specific environmental code of practice as 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.


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5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS

107. 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. PFM systems and processes of the Government have both strengths and challenges as demonstrated in recent PFM diagnostic reports.31 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, several 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 underdeveloped internal audit function, (c) internal control weaknesses, and (d) weaknesses in expenditure management. The World Bank-financed Rwanda Public Sector Governance Program-for-Results (P149095) supports the strengthening of PFM.32 The GoR developed a new PFM reform strategy for 2018–2023 supported by the World Bank-financed PFM Reform Project (P164807) and other development partners to further improve the GoR PFM system.

108. An assessment of the systems and processes for dealing with fraud and corruption issues shows that Rwanda has adequate institutional, organizational, and legal frameworks for controlling fraud and corruption. In 2018, Rwanda was ranked third in Africa on the Corruption Perception Index. 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. Rwanda also passed the Whistle Blowers Protection Act, 2013.

109. Procurement. The GoR has an acceptable and robust public procurement legal framework based on the United Nations Commission on International Trade Law model, which covers all aspects of public procurement at all levels of government and provides for competition as a mandatory procurement method. The GoR is moving toward modernizing its procurement function to improve compliance, efficiency, transparency, fair competition, value for money, and controls in public procurement. As part of its procurement modernization initiative, the GoR has developed a full-fledged e-procurement system and rolled it out to all budget agencies at national and subnational levels. The system is expected to enhance transparency, minimize fraud and corruption, and ensure efficiency of the procurement process. The system is accessible online to all government entities, the business community, and the public. The Rwanda Public Procurement Authority (RPPA) has organized training programs to familiarize procurement practitioners and internal tender committees with the requirements of the law and the procedures to be followed. The revised Rwanda Public Procurement Law (No.62/2018 of August 25, 2018 law governing public procurement) was passed to consolidate all amendments into one and enshrine the e-procurement system. Rwanda has developed standard bidding documents to simplify and standardize the bidding process. The RPPA has organized training programs to familiarize procurement practitioners and internal tender committees with the requirements of the law and the procedures to be followed. Procurement

31 Such as the Public Expenditure and Financial Accountability 2007 and 2010 assessments, sector public expenditure review reports, public expenditure tracking survey reports, and independent midterm and end-term evaluations of the PFM Reform Strategy (2008–2012). 32 http://www.worldbank.org/projects/P149095?lang=en.

http://operationsportal.worldbank.org/secure/P149095/home

http://www.worldbank.org/projects/P149095?lang=en


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compliance is actively enforced by the RPPA through a program 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, as Rwanda is still developing professional capacity in all sectors including in procurement, there are areas where the level of compliance can improve. In addition, a procurement audit is carried out annually by the OAG as part of its finance management audit.

110. 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 of fraud and corruption are expected to improve significantly. 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. 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.

111. 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.

112. Fiscal transparency. Fiscal transparency has progressed but is still limited. The Central Government budget and all budget agencies’ budgets as approved by the Parliament are made public on MINECOFIN’s website. The OAG annual audit report is published usually within nine months after the end of the fiscal year. However, even though the quarterly and annual budget execution reports are published on time, the in-year monthly budget execution reports are prepared but not yet published, and the state annual audit report is not yet fully comprehensive as it is not yet covering 100 percent of public expenditures.

113. Disbursement. The recipient of DPO 3 is the Republic of Rwanda, represented by MINECOFIN. A single-tranche DPO in the amount of SDR 90 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 of DPO 3 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 Rwanda franc 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 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.


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114. Internal control at the BNR. The last audit report of FY2017/18 published by the BNR indicated that the independent private audit firm opinion on financial statements is unqualified (clean). Furthermore, there is no evidence of significant internal controls issues in BNR and in the management of the World Bank-financed projects Designated Accounts held in foreign exchange.

115. 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 Rwanda franc 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 Rwanda franc equivalent of the financing proceeds was recorded as financing for the Government budget; and (c) ensure that the Rwanda franc equivalent of the financing proceeds is subject to controls to ensure its use for eligible budgeted public expenditures only. Since the fiduciary risk is moderate and BNR internal controls and the overall country PFM system are adequate, there is no requirement for an external audit.

5.4. MONITORING, EVALUATION, AND ACCOUNTABILITY

116. The DPO policy and Results Matrix (see annex 1) includes selected results indicators of the proposed program. All prior actions and results indicators have been defined and agreed upon.

117. A working group has been formed to monitor progress toward the prior actions 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 3 and address any challenges in real time. MININFRA has a long and established history of monitoring outcomes of donor-supported programs, specifically the SWAP toward access expansion. In fact, Rwanda is the first country in Sub-Saharan Africa to embrace such an approach that pooled the resources from various donors (including the World Bank’s EASSDP - P111567).

118. 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 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.

http://www.worldbank.org/GRS

http://www.inspectionpanel.org/


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6. SUMMARY OF RISKS AND MITIGATION

119. The overall risk rating for the project is Substantial. The key risks and proposed mitigation measures are outlined in the following paragraphs.

120. Macroeconomic (Moderate). While the macroeconomic outlook is generally positive, any unexpectedly poor growth or substantial currency depreciation 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. As outlined in section 2, key risks to growth are associated with a weak external environment, regional tensions, and persisting external imbalances. The pace of structural transformation and sustainability of high growth will largely depend on the extent of materialization of the authorities expectations behind the large-scale investment program in tourism and connectivity. Continued inadequate private sector response to the improved investment climate remains a risk as well.

121. Sector strategies and policies (Substantial). 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. While a policy framework put in place under the DPO series is to address the fiscal and financial risk in the sector beyond the end of the series, the program’s sustainability is largely dependent on continued government ownership and commitment to the overall objectives of the DPO, leading to an increasing sustainability risk for the operation. The main risks relate to (a) suboptimal implementation of the LCPDP and competitive procurement of new generation capacity, leading to increased cost of service; (b) suboptimal implementation of the NEP, leading to lower than targeted access rates; (c) misalignment between subsidies for off-grid products and implementation of the Guidelines of Minimum Requirements for Off-grid Solutions; and (d) poor progress on utility performance. While the GoR has a strong track record of reform implementation, continued monitoring of the results indicators will be important to ensure sustainability of the results of the DPO series. The framework for this follow-up engagement is provided by the active role of the World Bank in the energy sector in Rwanda (including through the Bank’s role as co-chair of the SWG) and the existing investment projects, as well as complementary engagements by the IMF and other development partners.

122. Institutional capacity for implementation (Substantial). 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 implementation of the prior actions of the DPO series. Remaining risks are being mitigated through using well-established dialogue avenues with the counterparts as well as extensive TA support provided through ongoing World Bank investment projects and ESMAP grants, including the financing of experts to coach and mentor new utility staff in the aspects of utility operations and management. 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.

123. Stakeholder risks (Substantial). The program outcomes depend on the Government’s continued ability to find an agreement on adequate responses to the fiscal and financial trade-offs in the sector with all relevant stakeholders, including development partners and the private sector. To mitigate stakeholder risk, the Government is using the existing system of public consultations in Rwanda: public discussions on


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the important policy documents through TWGs and the Energy SWG. The existing practice of public consultations has been critical in reaching consensus on sector reforms in Rwanda, including the LCPDP, development of the NEP, off-grid guidelines, the incentive scheme for off-grid, and other prior actions under this operation.


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Table 11. Summary Risk Ratings

Risk Categories Rating

1. Political and Governance ⚫ Moderate

2. Macroeconomic ⚫ Moderate

3. Sector Strategies and Policies ⚫ Substantial

4. Technical Design of Project or Program ⚫ Moderate

5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial

6. Fiduciary ⚫ Moderate

7. Environment and Social ⚫ Moderate

8. Stakeholders ⚫ Substantial

9. Other

Overall ⚫ Substantial

.


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ANNEX 1: POLICY AND RESULTS MATRIX

Prior Actions and Triggers Results

Prior Actions for DPO 1 Prior Actions for DPO 2 Prior Actions for DPO 3


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 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.


Results Indicator A1: Contain electricity subsidies as percentage of GDP:

• Baseline (FY2016/17): 1.4% of GDP.

• Target (FY2020/21): No more than 1.5% of GDP.

• Current: 1.9% for FY2018/19.

Results Indicator A2: Implement the quarterly tariff adjustment:

• Baseline (FY2016/17): No.

• Target (FY2020/21): Yes.

• Current: Expected from September 2019 onward.


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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.

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.

Prior Action 3.2: MININFRA has approved an updated LCPDP methodology that, inter alia, incorporates, the government’s GHG emission reduction commitments. Prior Action 3.3: REG has approved new standard PPA clauses and a standardized risk allocation matrix applicable to all future IPPs to ensure adequate risk sharing between REG and the private investors. Prior Action 3.4: RURA has completed a review of its regulatory framework for cross-border electricity trade, which concluded that its grid code and licensing regulations are compatible with electricity trade in the East Africa Power Pool.

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.

• Current: No new projects have been procured so far.


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

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

Prior Action 3.5: MININFRA has approved 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. Prior Action 3.6: REG has approved an incentive scheme to make off-grid

Results Indicator B2: Expand electrification rate nationwide (percentage of households):

• Baseline (September 2017): 40.7 percent nationwide (29.7 percent on-grid and 11 percent off-grid).

• Baseline (2016): 21 percent among female-headed households.


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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.

electrification; and (b) approved a grid extension plan prepared in full accordance with the least-cost options.

solutions affordable for low-income households. Prior Action 3.7: (a) RURA has updated the simplified licensing framework for mini-grids that do not require an offtaker agreement with the public sector; (b) RURA has issued and published the technical specifications for mini-grids; and (c) MININFRA has approved the investment guidelines for mini-grids.

• Target (December 2020): 61 percent (38 percent on-grid and 23 percent off-grid).

• Target (2019): 42 percent among female-headed households.

• Current (February 2019): 51 percent nationwide (37 percent on-grid and 14 percent off-grid). 2019 data for female-headed households not yet available.

Results Indicator B3: Expand electrification rate among rural households (percentage of households):

• Baseline (June 2017): 16 percent.

• Target (December 2020): 25 percent.

• Current: 2019 data not yet available.


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.

Prior Action 3.8: (a) REG has completed its transition to IFRS, as evidenced by the unqualified opinion of the independent auditor on the financial statements of both REG and EUCL; (b) The REG Board of Directors has mandated the external audit and publication of the financial statements of REG, EDCL and EUCL financial statements within the first quarter of the following financial year.

Results Indicator B4: The independent audits of REG, EDCL, and EUCL are in compliance with IFRS, without qualifications and published within the first two quarters of the following year:

• Baseline (September 2017): No.

• Target (December 2020): Yes.

• Current: The financial statements of REG, EDCL, and EUCL were externally audited and are now IFRS compliant without qualification.


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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.


Results Indicator B5: Reduce total electricity sector losses as a percentage of electricity supply:

• Baseline (FY2017/18): 22 percent.

• Target (FY2019/20): 19 percent.

• Current (March 2019): 19.8 percent.

Results Indicator B6: 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.

• Current: SAIDI (2018): 30.5 hours; SAIFI (2018): 208.

Results Indicator B7: Implement and publish annual customer satisfaction survey.

• Baseline (2017): No.

• Target (2020): Yes.

• Current: No.


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ANNEX 2: IMF RELATIONS ANNEX

IMF Press release dated June 28, 2019

IMF Executive Board Concludes the 2019 Article IV Consultation and Request for a Three-Year Policy Coordination Instrument with Rwanda

On June 28, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and approved a new Three-Year Policy Coordination Instrument (PCI) with Rwanda.33

Rwanda continues to make notable progress in sustaining high and inclusive growth. Rwanda’s National Strategy for Transformation (NST) aims to make progress toward the SDGs, but its financing will be challenging.

The newly-approved PCI-supported program will build on the successes of Rwanda’s previous programs with the IMF. The program aims to support NST implementation, including through an eased fiscal policy stance and additional domestic resource mobilization, while also maintaining external and debt sustainability. Program reviews will take place on a semi-annual fixed schedule. While the PCI involves no use of IMF financial resources, successful completion of program reviews will help signal Rwanda’s commitment to continued strong macroeconomic policies and structural reforms.

Following the Executive Board’s discussion on Rwanda, Tao Zhang, Deputy Managing Director and Acting Chair, issued the following statement:

“Rwanda has made notable progress in reaching its development objectives. Rapid and inclusive growth has been based on a combination of strategic goal‐setting, public accountability, and broad ownership of policies. This was supported by strong macroeconomic performance and rapid responses to shocks, for example, the recent exchange rate adjustment that helped align the external position with fundamentals.

“Growth in 2018 was stronger than expected, at 8.6 percent, led by construction and services. Growth should remain around 8 percent in 2019, supported by public investment spending, private investment, and interventions aimed at promoting diversified and higher value‐added economic activity. Inflation has been below the authorities’ targeted band for several months, prompting the central bank to lower its policy rate in May.

“The new PCI‐supported program supports Rwanda’s National Strategy for Transformation (NST), while safeguarding external and debt sustainability. An eased medium‐term fiscal stance will provide more room for priority investments, while keeping debt risks low. NST implementation will also be supported by measures to mobilize domestic revenues and to further strengthen public financial management.

“The central bank has made good progress in implementing its new forward‐looking, interest rate‐based operational framework. Short‐term interest rates convergence and the nascent monetary transmission to

33 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.


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longer‐term interest rates should be further reinforced through continued active liquidity management, deeper money markets, and enhanced communications of policy intentions.

“Going forward, the NST aims to make progress toward the Sustainable Development Goals and help crowd in the private sector as an engine for growth. However, financing the strategy will be challenging. Initiatives such as the African Continental Free Trade Area and the Compact with Africa should help leverage additional private financing.”

Recent Economic Developments

Rwanda has achieved notable success in reaching its development objectives. A combination of strategic goal-setting, public accountability, and broad ownership of policies has helped the country emerge from fragility as one of the fastest-growing economies in SSA and the world. Moreover, growth has been inclusive, and extensive investment in social safety nets has reduced poverty significantly.

The economic outlook remains positive. Real GDP growth reached 8.6 percent year-on-year in 2018 supported by activity in construction and services. Composite indicators suggest a continued trend in early 2019. Projections over the next five years have been revised up, to around 8.0 percent, based on first round effects of higher public investment spending agreed under the macroeconomic framework. Inflation is expected to rise in the second half of 2019 and remain thereafter within the target band also supported by policy easing by the National Bank of Rwanda. The current account deficit is expected to increase in 2019–20, due to airport construction, and decline thereafter.

Rwanda’s economic outlook is subject to balanced risks. Acceleration of several large public and private ongoing investment projects (including peat power plant, tin smelting factory, new energy distribution substations and construction of new Special Economic Zones) and their potential impact on productivity, as well as enhanced regional trade ties, pose upside risks to growth. Potential downside risks include lower than expected ODA, variable weather/climate change, commodity price movements, and regional security issues.

Program Summary

The program is designed to support implementation of the National Strategy for Transformation, while maintaining macroeconomic stability. The program consists of four main pillars: (1) recalibrating fiscal objectives and the medium-term fiscal stance; (2) bolstering domestic revenues over the medium term; (3) improving public financial management, notably fiscal risk management and transparency; and (4) supporting the new monetary policy framework, including through financial sector development.

The National Bank of Rwanda (BNR) continues its efforts to ensure successful implementation of the new interest rate-based monetary policy operational framework. These include commitments to strengthen communication and further deepen money markets, including by strengthening the repo market, to strengthen monetary policy transmission and enhance credibility of the new framework.

Structural reforms focus on supporting the National strategy and Transformation policies including by bolstering long-term savings, upgrading the national payments system and introducing new platforms for broader participation in the government securities market and more interaction across types of financial


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services providers. Rwanda’s ambitions for Vision 2050 and SDG achievement will also be supported by a renewed focus on the quality of education and private sector-led growth.

Executive Board Assessment34

Directors commended the authorities’ effective use of strategic goal-setting, public accountability, and broad ownership of policies to bring about rapid and inclusive growth, and significant progress toward their development objectives. Directors agreed that a PCI will appropriately support the authorities’ efforts to build on their progress. They highlighted the importance of continued strong ownership of the reform agenda, as well as strong donor support and capacity building.

Directors welcomed the new program’s focus on supporting Rwanda’s National Strategy for Transformation (NST), aimed at accelerating the achievement of the country’s development goals. They supported recalibrating the medium-term fiscal stance to provide more room for priority capital investment and social spending while maintaining a low risk of debt distress, with some Directors stressing the importance of consistency with the EAC fiscal deficit convergence. Directors emphasized the importance of domestic resource mobilization, including streamlining tax exemptions, strengthening tax policy capacity, and developing a medium-term revenue strategy. They welcomed the authorities’ commitment to further strengthen public financial management by identifying and mitigating potential fiscal risks and further enhancing fiscal transparency.

Directors agreed that Rwanda’s new monetary policy operational framework is appropriate and welcomed the recent easing aimed at bringing inflation back within the target range. They took positive note of the central bank’s active policy operations that have led to a convergence of money market and policy rates, and welcomed the nascent transmission of policy to longer-term rates. Directors emphasized that the authorities’ commitment to a more flexible exchange rate regime, combined with improved liquidity management, forecasting, and communication, would further strengthen monetary policy transmission.

Directors welcomed the NST’s focus to increase reliance on the private sector as an engine of growth and job creation, and highlighted the supportive measures to bolster financial development and mobilize national savings and improve education. Noting Rwanda’s inherent challenges in attracting private investment, they welcomed the African Continental Free Trade Area as a means for creating larger markets. They saw initiatives such as the G-20 Compact with Africa, together with aid directed toward blended finance, as vehicles to leverage additional private financing.

34 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.


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Table 2.1. Rwanda: Selected Economic Indicators, 2017-2023

2017 2018 2019 2020 2021 2022 2023

Act. Prel. Proj. Proj. Proj. Proj. Proj.

(Annual percentage change, unless otherwise indicated)

Output and prices

Real GDP 6.1 8.6 7.8 8.1 8.2 8.0 7.5

GDP deflator 7.3 -0.8 4.2 5.0 5.0 5.0 5.0

CPI (period average) 4.8 1.4 3.5 5.0 5.0 5.0 5.0

CPI (end period) 0.7 1.1 5.0 5.0 5.0 5.0 5.0

Terms of trade (deterioration, -) 1.8 -0.7 0.7 0.1 0.2 0.4 0.9

Money and credit

Broad money (M3) 12.4 15.6 19.8 20.0 17.7 16.9 15.9

Reserve money 8.8 16.1 17.2 17.9 15.7 14.9 14.2

Credit to non-government sector 13.9 10.8 12.8 14.3 13.9 13.3 13.4

M3/GDP (percent) 23.6 25.3 27.0 28.5 29.5 30.5 31.3

NPLs (percent of total gross loans) 7.6 6.4 … … … … …

Budgetary central government

(Percent of GDP, unless otherwise indicated)

Total revenue and grants 22.9 24.1 23.1 22.2 21.6 22.0 22.2

of which : tax revenue 15.5 16.2 16.1 16.3 16.1 16.5 16.8

of which : grants 4.7 4.9 4.8 3.9 3.4 3.6 3.7

Expenditure 27.5 28.8 29.2 28.6 27.8 27.1 27.0

Current 14.7 15.3 14.7 13.9 13.7 13.6 13.4

Capital 10.7 11.5 12.0 12.3 12.1 11.5 11.8

Primary balance -3.6 -3.5 -4.9 -5.0 -4.8 -3.6 -3.6

Overall balance -4.7 -4.7 -6.1 -6.4 -6.2 -5.1 -4.8


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excluding grants -9.4 -9.6 -10.9 -10.4 -9.6 -8.7 -8.5

Net domestic borrowing 0.2 0.0 2.0 0.8 1.1 -0.3 -0.6

Public debt

Total public debt incl. guarantees 48.9 53.1 55.8 57.3 58.2 57.2 56.7

of which : external public debt 37.9 41.6 43.4 44.6 45.5 45.6 45.8

PV of total public debt incl. guarantees … 41.1 42.5 42.9 42.7 41.6 41.2

Investment and savings

Investment 23.8 24.4 27.7 28.4 28.2 27.6 27.8

Government 10.7 11.5 12.0 12.3 12.1 11.5 11.8

Nongovernment 13.1 12.9 15.7 16.1 16.1 16.1 16.1

Savings 11.9 12.9 14.6 16.4 18.0 17.0 18.4

Government 3.4 4.0 3.6 4.3 4.5 4.8 5.2

Nongovernment 8.5 8.9 11.1 12.1 13.5 12.3 13.2

External sector

Exports (goods and services) 21.7 21.4 21.2 21.4 22.1 22.1 22.7

Imports (goods and services) 32.5 32.7 33.6 32.8 31.8 32.0 31.7

Current account balance (incl grants) -7.8 -7.9 -9.6 -9.4 -7.9 -8.1 -7.4

Current account balance (excl grants) -11.9 -11.5 -13.1 -12.0 -10.2 -10.6 -9.4

Current account balance (excl. large projects) -7.4 -7.4 -9.0 -8.3

-7.4 … …

Gross international reserves

In millions of US$ 1,163 1,319 1,428 1,566 1,637 1,726 1,867

In months of next year's imports 4.5 4.6 4.7 4.9 4.7 4.5 4.5

Memorandum items:

GDP at current market prices

Rwanda francs (billion) 7,600 8,189 9,199 10,442 11,866 13,460 15,197


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US$ (million) 9,140 9,510 … … … … …

GDP per capita (US$) 774 787 … … … … …

Population (million) 11.8 12.1 12.4 12.7 13.0 13.3 13.6

Sources: Rwandan authorities and IMF staff estimates.


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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



Net positive environmental effects are expected, because by supporting cost-reflective electricity tariffs (efficient pricing of electricity), this prior action will provide electricity users effective signals to promote efficiency in their consumption and thereby most likely lead to reduced consumption of electricity (less GHG emissions against a business-as-usual scenario). Further, the NEP is expected to facilitate substantial expansion of renewable sources based off-grid electrification.

Social effects are discussed in detail in the Poverty and Social Impact Analysis (annex 7). 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. Further, net positive poverty, social, or distributional effects are expected from the implementation of the NEP as it leads to electricity access to all households.




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Environment Effects


Effects

Prior Action 3.2: MININFRA has approved an updated LCPDP methodology that, inter alia, incorporates, the government’s GHG emission reduction commitments.

Overall, 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. Potential negative environmental effects associated with specific technologies have been identified. Burning peat will lead to loss of carbon sink and have negative impacts on biodiversity and ecological services. Development of hydropower may result in negative cumulative environmental effects, such as reduction of the base flow of the river if multiple plants developed within a single river basin, large environmental footprints from construction of reservoir and associated infrastructure, changes in local precipitation and biodiversity, and disrupting habitats of local wildlife. These risks are fully captured and will be properly addressed with effective regulations and environmental management system in place.

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. Development of hydropower may lead to some social impacts (e.g. land acquisition), and affect land use, homes, and natural habitats in the dam area.


No significant positive or negative environmental effects are expected.

Net positive poverty, social, or distributional effects are expected as the updated ESSP is expected to expand electricity access to all households.


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Environment Effects


Effects


No significant positive or negative environmental effects are expected

Net positive poverty, social, or distributional effects are expected as being able to tap into cheaper sources of power from neighboring countries might help reduce the cost of power for Rwanda.


Prior Action 3.5: MININFRA has approved 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.

Net positive environmental effects are expected, because the guidelines are expected to improve the quality of solar products by reducing the share of premature failures and improper recycling of solar products, which will enable substantial expansion of renewable sources-based, off-grid electrification.

Net positive poverty, social, or distributional effects are expected as the prior action will promote an effective off-grid market to facilitate the expansion of electricity access through off-grid electrification, especially for rural households.

Prior Action 3.6: REG has approved an incentive scheme to make off-grid solutions affordable for low-income households.

Net positive environmental effects are expected, because the incentive scheme is expected to improve the sustainability and effectiveness of the off-grid market and thereby facilitate substantial expansion of renewable sources-based, off-grid electrification.

Net positive poverty, social, or distributional effects are expected as the incentive scheme is expected to largely increase the affordability of off-grid solar products and thereby expand electricity access to rural households.


Net positive environmental effects are expected, because the updated framework is expected to encourage new players in the mini-grid market and thereby facilitate substantial expansion of renewable sources-based, mini-grids electrification.

No significant positive or negative poverty, social, or distributional effects are expected.

B.3: Improve accountability and transparency of REG


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Environment Effects


Effects

Prior Action 3.8: (a) REG has completed its transition to IFRS, as evidenced by the unqualified opinion of the independent auditor on the financial statements of both REG and EUCL. (b) The REG Board of Directors has mandated the external audit and publication of the financial statements of REG, EDCL, and EUCL financial statements within the first quarter of the following financial year.


No significant positive or negative poverty, social, or distributional effects are expected.


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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.


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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 is defined 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 DPO series contributes to 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 3.2); (b) installation of solar PV mini-grids in rural communities (supported by Prior Actions 1.5, 1.8, 2.3, 2.5, 2.6, and 3.6); and (c) increase 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 of the scope of this DPO series.

3. The DPO series supports 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. 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 3.2).

4. The adherence to the LCPDP in generation expansion represents a significant deviation from the current practice. Rwanda’s approach to power sector expansion planning before this program was ad hoc. No LCPDP 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 SWG 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 adequate consideration of the relative costs and benefits of different options resulting from properly conducted least-cost planning. This imposes an 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 the leadership of MININFRA, with technical support from a partner utility in an Organisation 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. These plants, which are at various stages of development, include a 120 MW peat power plant (80 MW and 40 MW) 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).


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6. The optimal scenario under the LCPDP shows that improved sector planning, especially better utilization of the hydro resources and postponing the construction of peat plants, will reduce generation cost and GHG emissions compared to the business-as-usual scenario. Since the only peat plant Hakan I in the LCPDP was already under construction during the Program identification stage and preparation of DPO 1, the time when the first LCPDP exercise began, Hakan I was placed as an input to the modeling of LCPDP. Considering the environmental risks of a peat plant, the revised LCPDP under consideration optimizes the commissioning schedule of planned power projects by aligning supply with demand with a 15 percent reserve margin, which reduced the size of the already planned peat power plant Hakan I to 72 MW and led to the deprioritization of another peat plant Hakan II (40 MW) and one lake methane plant KivuWatt (75 MW). Therefore, the resulting capacity mix (figure 5.1) sees a higher share of hydropower generation capacity throughout the projection period and a reduction of peat power generation capacity in the medium and long term against the baseline. Compared to the business-as-usual scenario, the LCPDP optimal scenario is expected to reduce cumulative GHG emissions by about 1,670,781 tCO2eq by 2025 and about 3,712,658 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 2019.


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Figure 5.2. Cumulative GHG Emissions Reduction in Rwanda under LCPDP Optimal Scenario Compared to Business-as-Usual Scenario (tCO2eq)

Source: World Bank staff estimates based on information from LCPDP/REG 2019.

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 of 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, 3.4, 3.5, and 3.6 are key steps toward implementation of these new targets. By relying on solar rather than on grid-based electricity, 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).

-4,000,000

-3,000,000

-2,000,000

-1,000,000

0

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030


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Figure 5.3. Consumers Served through Different Forms of Access in 2018 and Government Targets for 2020 and 2024

Source: MINECOFIN 2019.

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 3.1 will support a set of measures to improve cost-reflective pricing that can lead to 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 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.

37%

14%

49%

Off-gridGrid electricity No Access

38%

23%

39%

2020

52%48%

20242019


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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, the EDCL and EUCL (figure 6.1). The EUCL provides traditional electricity utility services wherein it owns certain generation assets while it 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 the revenue requirements 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 the 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; 2017/18–2023/24)

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 of households by 2024. The strategy envisages expansion of the 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 2017/18–2023/24 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 midterm review of NST1.

The ESSP lays out a fundamental shift in the 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, updated in October 2018 and May 2019, 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 every six months.

Expansion of electricity generation under least-cost principles is expected to reduce the cost of supply of electricity, thereby reducing revenue requirements, 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 and densification of the national grid and deployment of off-grid solution throughout the country that represents the least-cost option to supply forecasted demand for 2018–2024. The NEP was approved in October 2018 under DPO 2 and revised in May 2019

Significant public investments of about US$706 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 68 MW in 2008, the capacity has increased rapidly to 221.6 MW in June 2019. 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 unused 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, the 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 2019.

4. Electricity access in Rwanda has also increased rapidly in 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 51 percent in February 2019, of which 14 percent of 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 % (2008–2019) and Target for 2024

Source: MININFRA 2019. Note: 2019 data is as of February 2019.

5. The tariff review of 2017 made far-reaching changes in tariff structure and raised the level. 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.

6. The tariff review of 2018 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 (RWF per kVA per month)

Source: RURA 2018.

7. REG’s revenue base has seen a tremendous growth, rising by more than six times between FY2009/10 and FY2017/18. Gross profits have usually been positive, as the relatively high tariffs have been able to cover the cost of sales that include costs of own generation and 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 (RWF, millions - nominal)


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 subsequently 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 (RWF, millions - nominal)

Source: World Bank staff analysis 2018).

9. In a counterfactual scenario, the subsidy transfers may balloon rapidly to about 3.7 percent of the GDP in FY2020/21. Among other factors, the most important contributors to high subsidy needs under the business-as-usual scenario include (a) commissioning of several power plants with expensive take-or-


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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 4.5 percent of the GDP and generally hovering above about 2.5 percent of the GDP until 2024 (Figure 6.8).

10. With all prior actions supported by the DPO series implemented, the budget transfers would be contained and stabilized around 1.5 percent of GDP during the medium-to-long term. In the short-to-medium-term, budget transfers to the sector are likely to rise and peak around 2023/24 (the end of NST1), as significant public investment is required for implementing the NEP, and also there is increased need for operational subsidies transferred to EUCL to cover high costs of electricity supply. Looking beyond 2024, public investment is expected to reduce substantially while operational subsidies stabilize at a certain level, leading to a declining trend of budget transfers. This is due to the slowing pace of electrification program and the convergence of revenue and cost of services due to tariff adjustment.

Figure 6.8. Fiscal Transfers to the Power Sector as a Percentage of the GDP; Actual: FY2014/15–FY2018/19 and Business-as-Usual Case for FY2019/20–FY2023/24


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 Actual Projected Projected Projected Projected Projected

FY2014/15 FY2015/16 FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 FY2021/22 FY2022/23 FY2023/24

Historical fiscal transfers to energy sector (% of GDP)

Business-as-usual projection (pre-DPO 1): Operating subsidies


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11. 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 1.5 percent of the GDP by 2020/21 and throughout the NST1 period, the overarching objective of this DPO series.

(a) MINECOFIN

(i) Decided that the liabilities, worth about RWF 170 billion, of REG’s predecessor EWSA will not be transferred to REG

(ii) Decided to work with IFIs to mobilize financing to lower the power purchasing cost from new IPPs

(iii) Decided to facilitate access to commercial borrowing for REG for all transmission projects without external financing secured (for example, EPC+F)

(b) MININFRA

(i) Approved revised LCPDP and committed to least-cost planning and competitive procurement of new generation investments

(ii) Pursuing power exports to the region to mitigate oversupply from 2021 onward

(iii) Working with IFIs to mobilize financing to lower the cost of existing IPPs (micro-hydro power plants)

(iv) Pursuing 48 percent of electrification target by 2024 through off-grid and focusing public investment on-grid electrification according to NEP study results from 2019 onward

(c) REG

(i) Committed to reducing total system losses from 22 percent in 2017 to 15 percent in 2024

(ii) Developed least-cost plans for investments in generation and transmission, as well as distribution

(iii) Committed to use public financing only for multipurpose dams from 2019 onward and pursue all other generation plants as IPPs

(iv) Renegotiated PPAs for new small hydro plants and adopted standard clauses and risk allocation for new PPAs

(d) RURA

(i) Revised tariff in August 2018 to improve cost recovery, stimulate industrial demand, and flatten demand profile; further tariff reviews under consideration


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(ii) Approved quarterly tariff adjustments to account for movements in exchange rate and fuel prices

(iii) Prepared simplified mini-grid licensing procedure to increase private sector involvement in off-grid electrification

(e) RDB

(i) Approved new framework and implementation guidelines for PPPs in the power sector

12. Additional measures are being considered across the board for approval from the Economic Cluster. Several key policy options proposed by MININFRA and MINECOFIN to the Economic Cluster include the following:

(a) Recurrent budget transfers

(i) MININFRA and MINECOFIN to postpone concessions fees for generation assets

(b) Generation

(i) Use public financing for strategic generation plants to dilute average generation costs from 2019 onward

(ii) REG to sign new PPAs only for plants in the lowest-cost scenario of the least-cost plan from 2019 onward

(c) Transmission

(i) MINECOFIN/MININFRA to pursue partial listing of EUCL on the domestic stock market to attract commercial financing

(d) Distribution and Access

(i) MININFRA/MINECOFIN to take a policy decision on streetlighting consumption costs to reduce the burden on REG from FY2020/21 onward


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ANNEX 7: POVERTY AND SOCIAL IMPACT ASSESSMENT FOR TARIFF REFORMS UNDER THE DPO SERIES

1. Electricity access has increased significantly since 2014, but it still remains limited among the rural and poor areas. Nationwide, the percentage of households used electricity from the EUCL as the main source of lighting for their households has increased dramatically from 17.7 percent in 2013/14 to 26.0 percent in 2016/17. Between 2013 and 2017, connections almost doubled for rural households (from 9 percent to 15 percent) and for the bottom 40 percent (from 3 percent to 5 percent for Q1 and from 7 percent to 10 percent in Q2). Although connectivity35 remains higher in urban and rich areas, the grid connection rate is relatively low for Ubudehe36 1 and 2, resulting in a large variation in connectivity by Ubudehe. In 2016/17, up to 76 percent of urban households had access to the grid, and 71 percent in 2013/14. Within quintiles, ranked by total household expenditure per capita, variation has remained large.

Figure 7.1. Electricity Access 2013/14 and 2016/17

By Ubudehe By Quintiles

Source: EICV4 andEICV5. Note: *Houses that use electricity as their main source of lighting.

2. There have been three tariff increases since 2014.37 As a result, the average kWh consumption per month has decreased between 2013/14 and 2016/17. Only in the rich quintiles, a higher percentage of households are consuming more kWh in 2016/17 than in 2013/14. In 2016/17, the electricity use was 16.7 kWh on average per month, while in 2013/14 it was 21.72 kWh. Among the few households in the poorest quintile who consumed electricity, 97 percent consumed 15 kWh or less a month in 2016/17 (in 2013/14 the number was 91 percent), and the rest, for both periods, consumed between 15 kWh and 50 kWh a month in 2016/17. Among the top quintile with an electricity connection, there has been an

35 Treating households that use the EUCL electricity as a main source of lighting as households with a grid connection. 36 Not all households in the EICV5 Survey are assigned an Ubudehe. 37 In 2014, there was a flat tariff of RWF 134 that was increased to RWF 150 in 2015 and to RWF 182 in 2016. In 2017, a three-tier tariff was implemented: for households consuming from 0 to 15 kWh the tariff decreased to RWF 82, for households consuming between 15 to 50 kWh the tariff remained at RWF 182, and for households consuming more than 50 kWh the tariff increased to RWF 189.


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increase in the percentage of households consuming more than 15 kWh. In 2013/14, 46 percent consumed more than 15 kWh; the number increased to 53 percent in 2016/17 (figure 7.2). Regardless of the period, there are differences in consumption according to location (urban/rural) and income groups.38 An average rural household used 12 kWh monthly average in 2016/17 (15 kWh monthly average in 2013/14). In parallel, urban households consumed slightly more, about 20 kWh monthly average (25 kWh monthly average in 2013/14). When quintiles are divided by urban/rural, consumption according to location (urban/rural) does not differ much within each quintile, except for the top 20, in both periods. In the richest quintile, urban population consumed on average 10 kWh more per month in 2016/17. This used to be 20 kWh more per month on average during 2013/14 with the 134 SDG tariff. Thus, given the variation in electricity connection and use by income, the distribution of universal electricity subsidy is regressive.

Figure 7.2. Average Monthly Electricity Usage, 2013/14 and 2016/17

Mean kWh Used per Month by Urban and Rural Quintiles

Source: EICV4 and EICV5.

38 The household survey does not report the amount of electricity consumed, only the amount of money spent (RWF). The survey was conducted from October 2016 to October 2017. For households surveyed in 2016 the usage amount was calculated using the flat rate of RWF 182 per kWh in effect in 2016. For the households surveyed in 2017, the usage amount is calculated based on the tariff approved by the RURA board in 2016 that entered into force in 2017. The tariff classifies residential customers into three classes with different tariff levels based on consumption.


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Figure 7.3. Recent trends in electricity usage by quintiles

kWh Usage by Quintiles 2012/13 kWh Usage by Quintiles 2016/17


3. Electricity reliability is still a problem for two out of five households with connection to the grid. Among the connected households, 42 percent claimed that they have experienced at least one outage of electricity a day. The outages of electricity affected all income groups similarly but seem to be more serious in rural areas where half of the households suffered at least one outage per day. In addition, electricity is less reliable for poor households than non-poor households as they experienced more outages a day. As for electricity intermittency, on average, the connected households had 113 hours of electricity per week.

4. Electricity was still not the main source of lighting. On average for all households, the main alternative for lighting was a phone or torch (43 percent) followed by electricity from the EUCL (27 percent). For 2013/14, the main alternative for lighting was batteries (45 percent), probably for charging phones and torches,39 followed by electricity (18 percent). Even though only a small share of households, representing 7 percent, reported relying on solar panels as the main source of electricity, the share has notably increased from 1.78 percent in 2013/14. The use of torches (batteries) as the main source of lighting differs greatly by income and location (urban/rural). The use of torches was more common among the rural than the urban households and was as important as electricity for the non-poor than the poor households for both periods (figure 7.3).

39 The options for the question what is your main source of lighting? Is it different between EICV4 and EICV5? EICV4 does not include the option of torches/phones as EICV5.


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Figure 7.4. Main Source of Lighting

Main Source of Lighting for All Households 2012/13 Main Source of Lighting for All Households 2016/17

Main Source of Lighting by Groups 2013/14 Main Source of Lighting by Groups 2016/17


5. Electricity has become more affordable between 2013/14 and 2016/17. The affordability ratio40 has lowered for everyone and in 2016/17 was, on average, 1 percent. On average, electricity consumers (those who reported positive spending on electricity for the last four weeks) spent 1 percent of their budget on electricity in 2016/17, an improvement from the 1.59 percent for 2013/14. The share of electricity expenditure increases as household income decreases, even though consumption increases with income, as seen in figure 7.5. The poor spent 1.5 percent (2.89 percent) of their income on grid electricity while for the richest quintiles, the percentage was less than 1 percent (1.37 percent) for

40 The percentage of per capita expenditure required to pay for electricity.


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2016/17 (for 2013/14) (figure 7.5).

Figure 7.5. Affordability and Total Expenditure

Affordability 2013/14

Affordability 2016/17


Note: ‘Not found in list’ refers to households whose Ubudehe categorization is not listed in the EICV data.

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

Q1 Q2 Q3 Q4 Q5 U1 U2 U3 U4 Notfoundin list

Urban Rural

Consumption Quintiles Ubudehe Location


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6. The tariff reviews have helped move tariffs closer to cost-reflective levels without significant poverty impact. Since 2015, Rwanda has implemented a series of changes in electricity tariffs to gradually recover the price of electricity.41 Using the SUBSIM model42 and the household survey from 2013/14 the projected effect that the 2015 and 2016 tariff increases had on household welfare was simulated (table 7.1), and using the 2016/17 survey, the effect of the 201743 tariff increase and the projected direct effect of the 2018 tariff increase was simulated (table 7.2).

7. Overall, the direct effects are small and net positive for all, except for the richest quintile. Because electricity accounts for a small share of household expenditure (less than 5 percent on average), the direct impact is not large. In the case of the 2017 tariff change, the effect is positive for all households. The projected effect that the 2018 tariff will have on consumption quintiles is small but negative for all; nevertheless, the net impact of both tariff increases is positive for all except the richest quintile (table 7.2). When analyzed by rural and urban, table 7.3 shows that the direct impact on well-being has been stronger for urban households than rural households, which is not surprising given that less than 20 percent of rural households are connected to the grid.

Table 7.1. Direct Welfare Impact of Pre-DPO Tariff Reviews of 2015 and 2016 Across Different Consumption Quintiles Using 2013/14 Data

Direct Impacts % of Pre-reform Welfare Change 2015 Tariff Reform 2015-16 Tariff Reforms (cumulative)

Quintile 1 (poorest) –0.03 –0.09

Quintile 2 –0.06 –0.19

Quintile 3 –0.07 –0.22

Quintile 4 –0.17 –0.52

Quintile 5 (richest) –0.38 –1.15

Table 7.2. Direct Welfare Impact of Tariff Reviews of 2017 and 2018 Across Different Consumption Quintiles Using 2016/17 Data

Direct Impacts % of Pre-reform Welfare Change 2017 Tariff Reform 2018 Tariff Reform Total

Quintile 1 (poorest) 0.07 –0.02 0.05

Quintile 2 0.10 –0.04 0.06

Quintile 3 0.14 –0.04 0.10

Quintile 4 0.20 –0.10 0.10

Quintile 5 (richest) 0.19 –0.26 –0.07

41 A previous tariff reform in 2015 changed the price of electricity from RWF 134 to RWF 150 per kWh and one in 2016 increased the flat rate to RWF 182 per kWh for all residential and nonresidential customers. In 2017, the tariff scheme changed from a flat rate of RWF 182 per kWh to a block structure. 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. 42 Consumption is approximated by expenditures of electricity. The calculations are made based on data from the EICV4 and EICV5 household survey. The own-price elasticity of electricity is taken to be zero. 43 The survey took place between November 2016 and November 2017, thus the tariff increase took place during the survey implying that the direct effect calculated with SUBSIM may vary from the direct effect of the tariff change.


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Table 7.3. Direct Welfare Impact of Tariff Reviews of 2017 and 2018 on Urban and Rural Households Using 2016/17 Data

Direct Impacts % of Pre-reform Welfare Change 2017 Reform 2018 Reform Total

Urban 0.21 –0.31 –0.10

Rural 0.16 –0.03 0.13

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