Public Disclosure Authorized - World Bankdocuments.worldbank.org/curated/en/482781468211481560/pdf/39645.pdfSouthern African Power Pool, comprised of the following Operating and Non-Operating

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 39645 - ZR

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 196.1 MILLION (US$296.7 MILLION EQUIVALENT)

TO THE

DEMOCRATIC REPUBLIC OF CONGO

FOR A

REGIONAL AND DOMESTIC POWER MARKETS DEVELOPMENT PROJECT

IN SUPPORT OF THE

SOUTHERN AFRICAN POWER MARKET PROGRAM (PHASE AF'L-lb)

May 2,2007

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

AAFM AfDB APL BCECO CAPP

CATE

C F A A

D R C ED3 EIRR E M W

CQS

ESR Plan

ESIA

ESMF

ESMP

E S M U FIRR FM FMR GoDRC GWh HV H V D C IDA IFC Inga 1 and 2 Inga 3 IEM

Currency Unit = Franc Congolais (FC) US$1 = 555 F C (as o f April 30,2007)

US$1.513 = SDR 1

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS Administrative, Accounting and Financial Manual Afncan Development Bank Adaptable Program Loan Bureau Central de Coordination (Central Coordination Office) Central African Power Pool comprising DRC, Republic o f Congo, Angola, Chad, Cameroon, Sao Tome and Principe, Gabon, Equatorial Guinea, and Central African Republic Cellule d 'appui technique a I 'tlectricit&, the unit within M o E responsible for providing guidance on sectoral strategies and M o E support on SNEL related activities Country Financial Accountability Assessment Selection based on Consultant Qualifications Democratic Republic o f Congo European Investment Bank Economic Internal Rate o f Return The Emergency Multisector Reconstruction and Rehabilitation Project, approved by the Association's Board Environmental, Social and Resettlement Plan: the seven documents, dated December 2006, relating to environmental, social and resettlements aspects o f the Project, namely: (i) the ESIA, (ii) ESMP, (iii) the ESMF, (iv) the RPF, (v) the MCHF, (vi) the ESIA Executive Summary (French), and (vii) the ESIA Executive Summary (English), as supplemented by (viii) the PMP. Etude d 'Impact Environnemental et Social (the Environmental and Social Impact Assessment), dated December 2006, prepared for the Project Cadre de Gestion Environnementale et Sociale (the Environmental and Social Management Framework), dated December 2006, prepared for the Project. Plan de Gestion Environnementale et Sociale (Environmental and Social Management Plan), dated December 2006, prepared for the Project. SNEL's Environmental and Social Management Unit Financial Internal Rate o f Return Financial Management Financial Management Reports Government o f D R C Gigawatt hours (of energy) High Voltage High voltage, direct current transmission line International Development Association International Finance Corporation The two existing power plants located at the Inga site The proposed new hydroelectric plant at the Inga site Inga Entomological Mission

FOR OFFICIAL USE ONLY

IRR LV M C H F

MIGA M o E M o E Project Components MV MW NEPAD N-PV PCB PCG PCT-SNEL PCU P F M Agent

PMP

QBS RPF

SADC SAPMP SAPP

SBD SNEL SNEL Project Components SOE sss Westcor

WHO WTP

Internal Rate o f Return L o w Voltage Cadre de Gestion du Patrimoine Culture1 (the Management o f Cultural Heritage Framework), dated December 2006, prepared for the Project. Multilateral Investment Guarantee Agency Ministry o f Energy o f D R C Component o f the Project to be carried out by MoE, namely Component 4(b) o f the Project

Medium Voltage Megawatt New Partnership for Africa's Development Net Present Value Polychlorinated Biphenyl Project Coordination Unit, which includes the PCT SNEL's Project Coordination Team Project Coordination Unit The procurement and financial management agent to be employed by M o E to assist with procurement and financial management actions under the Project Plan de Gestion des Nuisances et Pesticides (Pest Management Plan), dated March 2007, related to the control o f black flies in the Inga area Quality Based Selection Cadre de Reinstallation Involontaire (Resettlement Policy Framework), dated December 2006, prepared for the Project Southern Afncan Development Community The Southern Afncan Power Market Program, approved by the Association's Board Southern African Power Pool, comprised o f the following Operating and Non-Operating members: DRC, Botswana, South Ahca , Namibia, Mozambique, Malawi, Lesotho, Swaziland, Angola, Zambia, Zimbabwe and Tanzania Standard Bidding Documents Socie'te! Nationale d 'Electricite!, DRC's national power utility The Components of the Project to be carried out by SNEL, namely al l the Components of the Project other than Component 4(b), which relates to M o E activities Statement o f Expenditures Single Source Selection A joint-venture among the uti l i t ies o f DRC, Botswana, Angola, Namibia and South Afnca for the construction o f a transmission line in southwestern Africa emanating from Inga 3 World Health Organization Willingness to pay

Vice President: Obiageli K. Ezekwesili Country Managermirector: Mark Tomlinson, Pedro Alba

Sector Manager: S. Vi jay Iyer Task Team Leader: Phi l ime Benoit

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.


REGIONAL AND DOMESTIC POWER MARKETS DEVELOPMENT PROJECT (SOUTHERN AFRICAN POWER MARKET PROGRAM, APL-lb)

PROJECT APPRAISAL DOCUMENT

AFRICA

AFTEG

Date: May 2,2007 Country Director: Mark Tomlinson, Pedro Alba Sector Managermirector: S. Vijay Iyer

Project ID: PO97201

Lending Instrument: Adaptable Program Lending -

Team Leader: Philippe Charles Benoit Sectors: Power (100%) Themes: Infrastructure services for private sector development (P) Environmental screening category: B - Partial Assessment

[ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$ million): 296.7

Retroactive Financing: In accordance with OP12.10, the Project wi l l be able to charge up to US$20 million of the grant amount for expenditures occurring on or after April 1,2007. Borrower: DEMOCRATIC REPUBLIC OF CONGO

Responsible Agencies: SociCtC Nationale d’ElectricitC 283 1 Avenue de la Justice, L a Gombe, Kinshasa, BP 500 KinshasdGombe, Tel: + 243 81 607 6254 Fax: +243 81 301 0382 E-mail: [email protected]

Ministry o f Energy - Cellule d’Appui Technique Energie (CATE) Immeuble Regideso, 15 Ctage, 5963 Bd du 30 Juin, L a Gombe, Kinshasa Tel: + 243 81 810 2300

FY Annual

Cumulative

Project development objective Re$ PAD B.3, Technical Annex 3 The development objectives o f the Project are to improve operational efficiency in the electricity sector and expand generation, transmission and distribution capacity in order to better serve domestic power demand and to support

2008 2009 2010 2011 2012 2013 5.0 40.0 80.0 80.0 70.0 21.7 5 .O 45.0 125.0 205 .O 275.0 296.7

regional power market integration. Project description Re$ PAD B.2 and B.4, Technical Annex 4 The Project would have five components: (a) rehabilitation o f generation capacities at the Inga 1 and 2 power plants to provide power to DRC, as wel l as to the Southern Afhcan Power Pool and to Central Afhca, (b) construction o f a transmission line from Inga to Kinshasa (also serving the Republic o f Congo), (c) expansion and rehabilitation o f the distribution network in Kinshasa, including powering o f un-electrified areas and 50,000 new connections, (d) strengthening the capacities o f SNEL (notably via a program to enhance governance, including the reduction o f losses in commercial operations) and o f the Ministry o f Energy, and (e) support to execution o f the Project, including on engineering and environmental/social aspects. The project wil l support the Southern African Power Marke t Program APL series, and notably complements Phase 1 w h i c h involves the rehabil itation o f the transmission l ine from Inga to the border o f the Republ ic o f Zambia. Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 The Environmental Assessment (OP/BP/GP 4.0 l), Involuntary Resettlement (OP/BP 4.12), Pest Management (OP 4.09), Dam Safety (OP/BP 4-37), International Waterways (OP/BP 7.50), and Cultural Properties (OP 4.1 1) safeguard policies are triggered under the Project.

Significant, non-standard conditions, if any, for: Re$ PAD C.6

The main conditions o f effectiveness are:

Execution o f a GoDRC/SNEL subsidiary loan agreement, in form and substance satisfactory to the Association.

0 Establishment o f the PCU and a financial management system for the Project, acceptable to the Association, including: (a) recruitment o f a PFM Agent (including adoption o f an accounting software); (b) adoption by the PCU o f a manual o f accounting and financial procedures; (c) recruitment o f an internal auditor; (d) recruitment o f an external auditor; and (e) adoption o f an anti-corruption action plan for the Project.

0 Establishment within SNEL o f an Environmental and Social Management Unit (ESMU), under terms o f reference and with staffing acceptable to the Association.

The main Grant covenants are:

0 The ESR Plan will be implemented in a manner satisfactory to the Association.

GoDRC shall employ the PFM Agent (the procurement and financial management agent) throughout Project implementation.

0 The E S M U within SNEL will be operated under terms o f reference and with staffing acceptable to the Bank.

0 SNEL shall: (i) not later than October 3 1 o f each year, adopt a maintenance program for the facilities under the Project and a related budget for the succeeding fiscal year, acceptable to the Association, (ii) thereafter implement such program, modified as necessary to properly maintain the facilities, and (iii) not later than October 3 1 o f each year, report on the implementation o f the such year’s maintenance program.

SNEL (i) shall only enter into agreements relating to the financing o f rehabilitation or other works, or any concessioning or other similar arrangements, regarding the Project facilities under terms that protect the development interests o f D R C in a financially and technically sound and equitable manner, and (ii) shall consult with the Association prior to entering into any such agreement.

0 SNEL shall ensure that all financiers o f activities or operators at the Project facilities will co-ordinate their activities with those financed by the Association in a manner acceptable to the Association, and shall require such activities to be carried out in conformity with the ESR Plan.

SNEL shall employ a supervisory engineer during Project implementation, under terms o f reference satisfactory to the Association.

0 SNEL shall adopt a dam emergency preparedness plan by December 3 1,2007 that reflects the comments o f the Association.

0 GoDRC and S N E L shall implement their undertalungs to enhance governance in the electricity sector, including with respect to the publication o f audits and contracts.

AFRICA REGIONAL AND DOMESTIC POWER MARKETS DEVELOPMENT PROJECT

(SOUTHERN AFRICAN POWER MARKET PROGRAM. APL-lb)

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 Regional. Country and Sector Context ............................................................................... 1

Rationale for Bank involvement ......................................................................................... 7

Higher level objectives to which the Project contributes .................................................... 8

PROJECT DESCRIPTION ................................................................................................. 9 Lending instrument ............................................................................................................. 9

Program objective and Phases ............................................................................................ 9

1 . 2 . 3 .

B . 1 . 2 . 3 . 4 . 5 . 6 .

Project development objective and key indicators ............................................................ 10 Project components ........................................................................................................... 10

Alternatives considered and reasons for rejection ............................................................ 12

Lessons learned and reflected in the Project design ......................................................... 11

C . IMPLEMENTATION ........................................................................................................ 14 Partnership arrangements .................................................................................................. 14

Institutional and implementation arrangements ................................................................ 14 1 . 2 . 3 . Monitoring and evaluation o f outcomeshesults ................................................................ 15 4 . Sustainability ..................................................................................................................... 15

Critical r isks and possible controversial aspects ............................................................... 16

Loadgrant conditions and covenants ................................................................................ 17

. . .

5 . 6 . . .

D . APPRAISAL SUMMARY ................................................................................................. 19 1 . 2 . 3 . 4 . 5 . 6 . 7 .

Economic and Financial Analyses .................................................................................... 19

Technical ........................................................................................................................... 22

Fiduciary ........................................................................................................................... 22

Social ................................................................................................................................. 23 Environment ...................................................................................................................... 23

Safeguard policies ............................................................................................................. 23

Policy Exceptions and Readiness ...................................................................................... 24

Annex 1: Regional. Country and Sector Background ............................................................. 26

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 41

Annex 3: Results Framework and Monitoring ........................................................................ 42

Annex 4: Detailed Project Description ...................................................................................... 44

Annex 5: Project Costs ............................................................................................................... 58

Annex 6: Implementation Arrangements ................................................................................. 60

Annex 7: Financial Management and Disbursement Arrangements ..................................... 66

Annex 8: Procurement Arrangements ...................................................................................... 77

Annex 9: Economic and Financial Analysis ............................................................................. 83

Annex 10: Safeguard Policy Issues ............................................................................................ 98

Annex 11: Project Preparation and Supervision ................................................................... 103

Annex 12: Documents in the Project File ............................................................................... 104

Annex 13: Statement of Loans and Credits ............................................................................ 105

Annex 14: Country at a Glance ............................................................................................... 106

Annex 15: IBRD 35198, 35356 ................................................................................................. 108

A. STRATEGIC CONTEXT AND RATIONALE

1. Regional, Country and Sector Context

A. Regional Context

Southern African Power Pool

1.1. Southern Afhca exhibits substantial variations in energy resource endowments, degrees o f industrial development, levels and patterns o f power consumption and power costs. These differences present opportunities for coordinated development o f the regional power sector to: (i) generate savings through aggregation o f loads with different load profiles, (ii) achieve efficient use o f energy resources by exploiting large scale power generation schemes that are viable only on the basis o f large multi-counhy markets, and (iii) manage the risks o f climate-related power shortages in hydro- dependent countries. In recognition o f the potential benefits, in August 1995, SADC member countries created the Southern A h c a n Power Pool (SAPP) by concluding an Intergovernmental Memorandum o f Understanding and related agreements which together govern the operation o f the power pool. The utilities o f 12 southern African countries are members o f the SAPP.

1.2. SAPP started as a cooperative pool, that is, a pool under which members would seek to maximize economic and system reliability benefits through trade, while retaining maximum autonomy for individual members. However, in the longer term the SAPP aims to facilitate the development o f a competitive electricity market in the SADC region. Currently there are two market mechanisms used in SAPP energy exchanges: medium-to-long term bilateral power purchase agreements and the Short Term Energy Market. An update o f the long-term least-cost generation and transmission expansion study (the ‘Pool Investment Plan’) for the SAPP was started midSeptember 2006, and i s expected to be completed before end-2007.

1.3. DRC has enormous hydropower potential, estimated at about 100,000 MW - or 13 percent o f global hydropower potential. M u c h o f this potential i s located in a single site, the Inga dam site on the Congo River, located 125 miles downriver f rom Kinshasa, with a potential capacity estimated at about 45,000 MW. With energy resources on this scale, D R C has the potential to play a pivotal role in meeting not only i t s domestic energy needs, but also the energy needs o f neighboring countries and beyond. Today, the Inga site provides power both southward (notably to the Southern African Power Pool - the SAPP) and northward (to the Central Afhcan Power Pool - the CAPP). Power supplied f rom D R C will be a critical enabling factor for the development o f a competitive power market in both sub-regions, with reliable, low-cost power supporting industrial competitiveness, private sector investment and regional growth and development. As a consequence, D R C generally and the Inga specifically are currently central to most discussions in southern and central Africa to developing hydropower resources on a regional basis.

1.4. The New Partnership for Africa’s Development (NEPAD) has designated the development o f the Inga site as a priority under the regional development programs. As such, NEPAD, the A h c a n Development Bank (AfDB) and other institutions are supporting the development o f Inga’s power potential in three distinct but interrelated stages: (i) in the short-term, the rehabilitation o f the existing facilities, which operate at less than 40 percent o f installed capacity; (ii) in the medium-term, the development o f a new hydro-power facility, with about 3,500 MW o f capacity (likely the Inga I11 site or, possibly, an init ial phase o f the Grand Inga project); and (iii) in the longer-term, the full development o f the additional 40,000 MW potential o f the site (the “Grand Inga” Project).

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1.5. Reflecting i t s geographic position and the centrality o f the Inga site, D R C i s a member o f both the SAPP and the CAPP. Currently, DRC's state electricity utility, Socie'tP Nationale d 'Electricit& (SNEL), has long-term bilateral contracts for power exports to South Africa and Zimbabwe (about 100 MW each). These sales generate valuable foreign exchange revenues for DRC. For i t s regional neighbors to the south, DRC's hydro-power (from Inga and other sites) provides benefits that include a low-cost and low-carbon alternative to thermal generation capacity (especially for those countries, such as Zimbabwe, that have n o low-cost, indigenous sources o f electricity) and a diversified source o f power for countries extensively reliant o n domestic hydropower. Discussions are currently underway about linlung Zambia to Tanzania, thereby providing a route for DRC's power to also supply countries in eastern A h c a . It i s anticipated that the incremental hydro-production from Inga wil l substitute for carbon intensive fossil generation and so may be eligible under the Clean Development Mechanism.

1.6. DRC's hydropower potential (and specifically the resources available at Inga) i s anticipated to play an increasingly central role in the further development o f the SAPP. SAPP members have drawn up a l i s t o f high priority projects, backed by both SADC and NEPAD. Electricity supplied by D R C will be pivotal to some o f these projects. These projects will allow Inga to supply significantly more power to the SAPP member countries, both through increased sales to existing customers and to new off-takers.

1.7. There are, however, several constraints preventing this demand from being met via the existing infrastructure. They include the transfer capacity o f a part o f the regional interconnection between DRC and Zambia; capacity and performance restrictions o f the AC power system in the Katanga region in DRC; capacity and operational status o f the High Voltage Direct Current (HVDC) link between Inga and Katanga; and the need to refurbish the generating plants in the DRC, notably at Inga.

1.8. The Projects in the Southern African Power Market Program (SAPMP) APL series currently in preparation or being implemented will remove some o f these constraints. Zambia and the DRC are to upgrade their current 220-KV regional transmission corridor to a much higher specification to allow other SAPP counties to tap Inga's energy supplies. To this end, Zambia's Copperbelt Energy Corporation (CEC) and S N E L are discussing a project to construct a new 220-KV line running in parallel to the existing interconnection between Chingola in Zambia and Karavia near the southern DRC city o f Lubumbashi. In addition to the new transmission line, the two countries will also repair the existing 220-KV line. More details on the SAPMP are provided in section C below.

1.9. DRC's hydro resources are also viewed as central to the development o f the CAPP. SNEL currently exports about 50-80 MW from Inga north to Brazzaville (Republic o f Congo) along a 220- h l o v o l t (KV) connection. SNEL has had discussions about supplying industrial clients in Pointe Noire (Republic o f Congo), possibly via a transmission l ine through the Cabinda region o f Angola, which would simultaneously allow power off-take in Cabinda. T h e CAPP has initiated donor-funded studies o f this and other prospective regional inter-connection projects. I t i s expected that exports in the medium term to Brazzaville will decrease as power plants being commissioned in the Republic o f Congo, including the hydro plant at Imboulou, come on line. However, the Inga supply will remain an important source o f supply security for Brazzaville. Loolung further afield, there i s also potential for electricity generated at Inga to supply the West A f i c a Power Pool.

1.10. Towards the east o f the country, the focus o f the regional collaboration in the energy sector in the Great Lakes region i s la Socidtd Internationale d 'Energie des Grands Lacs, a jo int company wholly-owned by Burundi, Rwanda and D R C and established in 1984, with the support o f the World Bank, to build and manage a group o f joint energy sector operations in the Great Lakes region. The

2

company’s main operation i s the Ruzizi I1 hydropower plant at Mumosho in the DRC, which supplies power to all three countries. The company has faced extensive financial and operating difficulties (in part the legacy o f the years o f conflict in the sub-region); the World Bank, building on security improvements in the area, i s currently supporting efforts to help the utility strengthen i t s operations and financial position. However, even as these efforts go forward, other challenges emerge, including the recent drops in the water level in Lake Kivu that reduce Ruzizi 11’s output potential.

1.11. In summary, D R C generally, and Inga specifically, l ie in many respects at the center of gravity o f discussions on regional power in sub-Saharan Africa. DRC, however, has not yet managed to capitalize on this opportunity. A range o f projects currently under commission or consideration will allow DRC and i t s neighbors, near and far, to tap the country’s extraordinary hydropower potential, in particular from the Inga site. These efforts, however, necessarily hinge on the rehabilitation o f the existing Inga site in two distinct ways: first, rehabilitating Inga provides incremental power to supply the SAPP and the CAPP countries; second, larger scale development of the Inga site (such as Inga 3, which will require over US$4 bi l l ion in investment) depends on D R C demonstrating the ability to assure the sound operation o f the existing Inga 1 and 2 facilities.

B. Country Context

1.12. The size o f DRC’s promise has, unfortunately, been undermined by i t s challenges. It i s potentially one o f Afhca’s richest economies, with extensive mineral, energy and natural resources. I t is a potential dynamo for regional growth, with i t s large labor force and potential market size, extensive navigable inland waterways and land links to nine states. Yet hopes o f tapping this rich potential have been repeatedly thwarted. Successive governments have failed to translate the country’s assets into improved standards o f living for the Congolese people. The level o f physical and social devastation caused by decades o f mismanagement, starting in the colonial era, worsening during the regime o f Mobuto Sese Seko and compounded by extended periods o f conflict since 1997, has been great.

1.13. Today, the country i s embarking on systematic efforts to overcome the legacy o f mismanagement and conflict. The recent elections mark an important moment in Congolese history when the government, parliament and local authorities have assumed power through a democratic process. With a new cabinet appointed in early February 2007, the post-election period provides a rare opportunity to push forward with much-needed reforms. These efforts, however, will face a complex array o f factors: the delicate democratic transition currently underway, the legacy o f conflict, ongoing regional tensions, economic and social collapse, and the weight o f a legacy o f corruption.

C. Sector Issues

1.14. Despite the country’s enormous power potential, D R C has managed neither to capitalize on the opportunity o f significantly higher electricity exports across Afnca nor to provide adequate energy services for the vast majority o f i t s own population. Household access i s now less than before the war, at 6.5 percent o f households, compared to the SSA average of 20 percent, leaving the country in the bottom 15 o f SSA nations. Frequent blackouts hit even high priority parts o f the network. Electricity consumption per head was 9lkWh in 2002, down from 161 kWh in 1980. Traditional biomass f u e l i s now estimated to account for 86 percent o f total energy use in the country, with diesevoil at 8 percent, electricity shrinking to 4 percent and coal accounting for the remaining 2 percent.

1.15. The proximate cause o f these very l o w energy access rates i s the state o f DRC’s electricity infrastructure. All parts o f the network deteriorated extensively in the 1990s, as a result o f extensive

3

theft (both o f physical components and via financial embezzlement) as the security situation worsened, direct conflict damage and a lack o f maintenance (including a dearth o f replacement parts). Underlying all these factors i s a weakening of the institutional capacity to maintain the system. In particular, SNEL, the vertically-integrated parastatal power utility that dominates electricity generation, transmission and distribution in DRC, faces wide-ranging financial, management, governance and operational challenges. Improving the quality and quantity o f electricity service in DRC will require significant improvements in SNEL’s operations and maintenance program. SNEL will, as a covenant of the Project Grant: (i) not later than October 31 of each year, adopt a maintenance program for the facilities under the Project and a related budget for the succeeding $seal year, acceptable to the Association, (ii) thereafter implement such program, modiJied as necessary to properly maintain the facilities, and (iii) not later than October 31 of each year, report on the implementation of the such year’s maintenance program.

1.16. Looking forward, the government has identified several priority objectives for revitalizing the electricity sector: (a) supporting local business needs and satisfying unmet domestic demand, thereby supporting economic recovery and growth; (b) stemming losses that negatively impact the financial position o f the sector; and (c) exporting electricity to generate foreign exchange and improve the strategic positioning o f DRC within a regional context.

1.17. Demand. Total demand (as represented by sales) in 2005 was about 5700 GWh, with low voltage power accounting for about 50 percent. Demand i s projected to increase annually by about 7 percent in the coming five years, but could increase significantly more as the electricity infrastructure expands.

1.18. Generation. Only a small fraction o f DRC’s vast energy resources has been exploited. Despite having potential production capacity estimated at about 100,000 MW from hydro power alone, the country’s total installed capacity i s approximately 2,400 MW, or less than 3 percent o f that potential. O f this, hydropower accounts for nearly 99 percent, with the remaining supplied by about 60 small and isolated solid-fuel thermal plants. A handful o f large industrial enterprises maintain their own production capacity. The two hydro plants at Inga between them account for 1775 MW o f installed capacity (351 MW at Inga I, 1424 MW at Inga 2), or roughly 70 percent o f the country’s total.

1.19. Some o f the electricity generation infrastructure dates back to the colonial era - the oldest installed facility was constructed in 1929 - and has not been systematically maintained, overhauled or updated. Rehabilitation has tended to be on an ad hoc, emergency basis, resulting in outdated and unreliable machinery. As a result, only 48 percent o f installed capacity i s actually available. Total annual electricity production in 2005 was about 7,100 GWh, or slightly less than 50 percent o f what the installed capacity could potentially generate. With some o f the smaller hydro-facilities wholly inoperative and only about one third o f the small thermal plants functioning, some urban centers in more remote regions have had their grid electricity supply completely cut off.

Even this l imited installed capacity r u n s significantly below potential.

1.20. The state o f the Inga plants epitomizes the state o f the country’s generation capacity. Currently, available capacity at Inga 1 and 2 totals about 700 MW out o f 1775 MW o f installed capacity. Both plants need urgent repairs as wel l as extensive rehabilitation for longer-term viability, in addition to extensive re-shaping, dredging and clearance o f the heavily-silted canals that supply the turbines. Given Inga’s role as the backbone of DRC’s generation capacity, the Government o f DRC (GoDRC) views rehabilitation o f the two plants as a high priority in order to improve the reliability and quantity o f supply o f electricity from Inga for both domestic and export markets.

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1.21. Transmission. The transmission system in DRC consists o f several unconnected electricity sub-networks. There are three principal components that together span 5547 km (3447 miles): a high voltage l ine (500kV) that r u n s 1740 km (1081 miles) from Inga to the Katanga region, and three large sub-networks, composed o f high-voltage l ines varying between 50kV and 220kV (Western network, Southern network, and an Eastern network). In addition, there i s a variety o f independent mini-grids, organized around smaller urban and industrial centers across the country, powered by small power plants.

1.22. The distribution system i s structured around four principal networks that between them account for 90 percent o f total electricity consumption in the DRC and approximately 400,000 connections. This includes about: (i) 290,000 connections in the Kinshasa region; (ii) 35,000 connections in the Bas Congo region; (iii) 54,000 connections in the Katanga region; and (iv) about 32,000 connections in the Kivu region. The distribution system includes roughly 1920 miles of medium voltage (6.6 to 30kV) lines and 7239 miles o f l ow voltage (0.4kV) lines. As with the generation and transmission facilities, maintenance o f the distribution system has primarily been on an emergency repair basis, with virtually n o systematic rehabilitation. A l itany o f shortcomings has rendered the entire system highly unreliable, including saturated lines and transformers, and dilapidated poles.

Distribution.

1.23. Kinshasa i s dependent on Inga for virtually all o f i t s power, with a small amount provided from the Zongo plant. Maintenance issues at Inga and limited capacity on the existing 220kV Inga- Kinshasa transmission line restricts supplies to the capital to about 400 MW. There i s an estimated additional 200 MW o f unmet demand. In addition, limitations in the current distribution system and lack o f connections further constrain consumption. The result i s that the 290,000 connections in Kinshasa (representing an access rate o f roughly 35 percent) experience frequent load shedding.

1.24. The S N E L network i s characterized by significant losses at a l l stages o f generation, transmission and distribution. Overall distribution losses are estimated at around 25 percent, but i t i s difficult to determine given weaknesses in the controls systems. In Kinshasa, the difference between energy delivered to the domestic network and total collections, which represents technical, non- technical and collection losses, amounts to over 60 per cent.

1.25. An understanding o f the poor state o f DRC’s energy infrastructure starts with the national electricity utility. SNEL manages the main components o f the generation, transmission and distribution networks described above, including the isolated mini-grids that power some outlying towns, delivering 95 percent o f a l l electricity produced in DRC. The company currently employs 6,500 staff. SNEL’s technical and operational abilities appear to be sufficient to run the Inga facilities and the related transmission systems, but in overall terms remain weak as a result o f a funds, lack o f s lu l ls upgrading and the loss o f qualified personnel during the conflict. SNEL’s weak financial position, and internal governance and management weaknesses further undermine its efficacy. For example, SNEL’s turnover in 2005 was US$174.3 mi l l ion (Le. total consumption billed), but only about 55 percent o f moneys owed to SNEL for that year were paid, with domestic consumers and notably government agencies and parastatals the least l ikely to pay. SNEL’s turnover (gross sales) in 2005 was equivalent to U S cents 3 .0kWh sold. For the same year, given the combined effect o f network losses (technical and non-technical) and non payment, the revenue collected per kwh generated was equivalent to only U S cents 1 .5/kWh.

1.26. These weaknesses and failures have helped to severely weaken SNEL’s financial position and i t s ability to deliver key power services. The GoDRC has recognized that making progress on any o f these fronts will require thorough reform at SNEL. The GoDRC and SNEL, currently

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operating under new management, have stated their joint commitment to increasing the quality and transparency o f SNEL’s financial management (see discussion on governance below).

1.27. SNEL’s tariff structure i s divided into three key categories: high, medium and low voltage. Electricity for commercial customers in all three categories i s priced in U S dollars to reduce the financial impact o f Congolese Franc inflation. Residential customers in the l o w voltage category are bi l led in Congolese Francs. High voltage industrial customers are small in number - there are currently about 20, including export customers - but account for about 45 percent o f sales. The average tariff in 2005 was about US cents 2.8kWh. Some o f the customers in this group, particularly other parastatals, have had large payment arrears but, for political reasons, continue to be supplied. Medium voltage clients number approximately 1,300 and account for approximately 15 percent o f sales; the tariff in 2005 was about U S cents 7.3kWh. L o w voltage customers, comprising residential, commercial and ‘public facilities’, have increased rapidly in recent years and there are now approximately 400,000 connections, accounting for approximately 40 percent o f sales. Tariffs for commercial low-voltage customers average about U S cents 11.6kWh.

1.28. Low-voltage tariffs for residential customers are much lower because they are denominated in Congolese Francs and had not been adjusted for several years to compensate for the depreciation o f the national currency. In addition to l o w tariffs, the large majority (80-90 percent) o f residential customers are not equipped with meters and are bil led through a lump-sum tar i f f system. In 2005, the average residential tariff was equivalent to U S cents 1.2 kWh. Given the combination o f l o w collection rates and the lump-sum tar i f f system, the average collected revenue was slightly below U S cents 0.4 kwh. SNEL’s tariffs, particularly for residential customers, are l o w and do not reflect the full marginal cost o f service provided. The utility increased tariffs for residential customers early in 2007 by about 50% as an initial step which should bring average tariffs for this category to about U S cents 1.7kWh. GoDRC has commissioned a tar i f f study to help it to further evaluate options. However, it was felt that a reform sequence that tackled major pricing changes before improving service quality would be inappropriate at this juncture.

1.29. Corporate Governance Structure. The corporate governance mechanisms under which SNEL operates include the Board o f Directors and a Management Committee. Externally, SNEL i s under the joint supervision o f the Ministries o f Portefeuille and Energy, with the former ministry supervising administrative and financial aspects o f SNEL’s activities and the latter exercising technical supervision across the energy sector; both ministries have representation on SNEL’s Board o f Directors. There are some areas where supervision overlaps between the two ministries, including when SNEL establishes external partnerships. There i s currently n o electricity regulator, although discussions are underway to evaluate this option.

1.30. Private Sector Participation. Private sector involvement in the electricity sector in DRC has primarily been limited to private investment in generation, notably in connection with extractive industry operations in the Katanga region. The Government and SNEL have also been working to develop partnerships with the private sector in generation, transmission and distribution (including efforts at Inga 1 and 2). To date, however, SNEL and other Government efforts to engage the private sector have been ad hoc and have lacked consistency and transparency. Efforts are now underway to institute a more systematic approach in this area. Recognizing the importance o f creating a sound framework for attracting private sector partners on conditions that best protect the development interests o f DRC, the Government and SNEL are exploring how to institutionalize stronger processes for partnering with the private sector (see discussion below on electricity sector governance program).

1.31. One potential area for large private investment i s the development o f Inga 3, a new hydroelectric plant at the same site with a generation capacity o f about 3,500 MW. A consortium -

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named the Western Power Corridor Project, or ‘Westcor’ - was launched in 2004 as a collaborative effort between the electricity supply companies o f DRC, Angola, Botswana, South Af i ica and Namibia to develop the Inga 3 plant with a view to exporting power to southern Africa along a western corridor. Total costs are estimated at about US$5 billion, including wel l over US$1 bi l l ion in related transmission investments to connect to SADC customers. This effort will require extensive private sector financing to be financially viable. The Bank i s helping the Ministry o f Energy (MoE) to strengthen i t s capacity to evaluate and promote private sector involvement in the further development o f the Inga site.

D. Governance Challenges in the Electricity Sector

1.32. GoDRC has sought to prioritize reliable power provision as a driver o f economic development. While allowing for private participation in the sector, the GoDRC recognizes that S N E L remains a key operator in the sector and that improvements in the sector will depend to a large extent on improving SNEL’s efficacy. SNEL, however, has historically faced significant governance weaknesses and failures. These have undermined the utility’s ability to operate efficiently, weakening its financial position and preventing it from delivering key power services to the people o f DRC. At the same time, there i s need to improve governance within the sector beyond SNEL, notably by reducing non-payment by power consumers and establishing a transparent, equitable and sound framework for attracting private sector partners to the sector who are viewed by the authorities as vital to the further development o f the sector.

1.33. The governance failings can be distinguished into two basic types: those relating to strategic decision-making and the second to financial aspects at the level o f everyday operations. These failings encompass SNEL’s internal management and operations, as wel l as external parties, including the Government, contractors and customers. Recognizing the centrality o f the power sector to DRC’s development, GoDRC and the management o f S N E L have been developing a program to improve both sector and utility governance. Init ial steps by S N E L and GoDRC have included (i) commissioning from an external firm a diagnostic o f SNEL’s financial control systems (financed as part o f project preparation), (ii) commissioning an external audit o f SNEL’s financial statement after a hiatus o f several years, and (iii) commissioning an external review o f SNEL’s corporate governance mechanisms. In order to deepen and solidify these actions, a series o f actions to enhance governance in the electricity sector has been developed (see Attachment 1 to Annex 4 below). The implementation of key actions to enhance governance in the electricity sector is a covenant under the Project’s Legal Agreements.

2. Rationale for Bank involvement

2.1. Improving the quantity and quality o f electricity services, both for domestic and export markets, i s a priority activity for GoDRC. The proposed Project i s consistent both: (a) on a national level, with the Transitional Support Strategy for DRC (January 26, 2004) and the proposed new CAS (which will soon be discussed), notably the strategic element o f infrastructure reconstruction, as well as increasing government revenues and improving living conditions in the critical Kinshasa urban area, and (b) on a regional level, with efforts o f NEPAD and other organizations to promote low-cost regional power development. Notwithstanding Bank support to the sector to date, D R C continues to require assistance to better exploit the potential at Inga 1 and 2, and to better meet domestic demand, including in the Kinshasa urban center. Bank support can help the Government to better develop this resource to serve the dual benefits o f increased domestic consumption and increased export revenues, while also improving the capacity o f the system to transmit and distribute this power for the benefit o f consumers. The Bank’s involvement will also underpin reforms o f S N E L designed to improve the

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financial sustainability and transparency o f the sector. Bank support should also provide a more solid foundation for the Government to engage constructively with potential private sector investors. The scope o f the Bank’s support can also be adjusted during Project implementation to promote synergies with private sector interests that mature into sound investments.

2.2. The Bank is, through the APL series for the Southern African Power Market Program (SAPMP), providing long term support to both SADC and NEPAD initiatives that aim to increase the availability and reliability o f l o w cost, environmentally-friendly electric energy in southern Africa. The Program consists o f a series o f inter-related phases that will increase both the inter-connectivity o f national power systems in the SAPP and the capacity available in the power pool. The original APL series supporting the SAPMP was designed with three phases. APL-1 finances rehabilitation o f the HVDC line which runs from Inga to the Katanga region close to the Zambian border. In the three years since APL-1 was approved, extra rehabilitation needs have emerged at Inga and demand for power both within the SAPP and the D R C has grown, necessitating the elaboration o f a new and separate effort to support the rehabilitation o f Inga within the APL series. In this context, the proposed Project, SAPMP APL-lb, wil l generate incremental power at the Inga site, a portion o f which wi l l be exported via the H V D C l ine being rehabilitated under SAPMP APL-1. This Project has been formulated as a new phase o f the APL series because the further investment at the Inga hydroelectric plant directly underpins APL-1. Roll ing this Project into the existing APL series also reflects the view within the SAPP that the Inga component i s an integral part o f the SAPMP regional vision. The SAPMP i s described in more detail in Section B below.

3. H i g h e r level objectives t o which the Project contributes

3.1. The Project will provide more electricity to more people in DRC, including over 350,000 additional people in Kinshasa, as wel l as improve the quality o f service to the more than 1.5 mi l l ion people in Kinshasa currently with access. Improving the quantity and quality o f electricity to urban and peri-urban areas i s consistent with the Transitional Support Strategy for D R C and the proposed CAS, and i s an important pillar o f the country’s development strategy. Moreover, incremental power exports generated as a result o f the Project will represent a sustainable source o f foreign exchange earnings for the GoDRC, helping to improve the balance o f payments and support the government’s budget position.

3.2. By rehabilitating the Inga power plants, a pillar o f regional power trade, the Project will also provide benefits on a regional basis. The Project wi l l notably increase access o f consumers to cheaper and more reliable power than would otherwise be available in the various SAPP and CAPP countries receiving exports f rom DRC. Equally important, the Project wi l l also provide an important touchstone for expanding regional power trade and regional-oriented investments in generation and transmission, which are keys to reducing costs and improving energy security for the interconnected members o f these power pools. The proposed Project i s also in line with relevant broad-based regional strategies, including the Regional Integration Assistance Strategy ( U S ) for southern A h c a (2003), the Strategic Framework for IDA’S Assistance to A h c a (SFIA) (IDNSecM2003-0406) o f 2003, and the Southern Africa Sub-Regional Strategy Paper (SecM98-272), which placed regional cooperation high on the policy agenda o f the counties in southern A h c a , and the A h c a Action Plan reviewed by the Board in 2005.

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B. PROJECT DESCRIPTION

1. Lending instrument

1.1. The proposed Project, APL-lb, constitutes a new fourth phase o f the SAPMP APL series (see description below). This Project has been included in the SAPMP APL series because i t provides important support to the success o f the APL-1 phase, and prospectively the APL-3 phase, of the series by generating the incremental power to be transported by the transmission infrastructure financed by these phases. Given the particularly close links o f the proposed Project with the existing APL-1 (which finances upgrading o f the transmission l ine emanating f rom Inga for export to the SAPP -- see section 2 below for more details), this proposed Project i s presented as APL-lb. The first phase o f the SAPMP APL, APL-1, was approved by the Board on January 24, 2004 and became effective on May 17,2004; APL-2 i s scheduled for Board presentation in mid-2007.

1.2. At the same time, the APL instrument allows the simultaneous financing o f the domestically-oriented components o f the Project alongside the regionally-oriented components, in an integrated fashion. The domestic components include the rehabilitation and expansion of the distribution network in Kinshasa. The second line f rom Inga to Kinshasa will primarily serve Kinshasa customers (and will also transport some power f rom Inga to the Republic o f Congo). In addition, the various capacity building components will help SNEL and MoE to better serve the growing domestic demand. Since the project has a regional scope, regional IDA funding has been mobilized.

2. Program objective and Phases

2.1. The overall program objective o f the SAPMP (as set out in the APL-1 PAD) i s to increase the availability and reliability o f l o w cost, environmentally-friendly electric energy in the southern Africa region, thereby increasing competitiveness o f industry and fostering economic growth. The Program comprises the highest priority projects identified in the ‘Pool Investment Plan’ prepared by the SAPP.

a. APL-1 (P069258): The first phase finances investments to strengthen and increase the capacity o f DRC to export power to the SAPP countries, notably f rom Inga, primarily by rehabilitating and upgrading the H V D C transmission line f rom Inga to Kolwezi in the Katanga region and the rehabilitation and upgrading o f the A C network that extends from there to Zambia. The f irst phase i s currently under implementation, but has faced significant delays. These delays were due in part to init ial delays in finalizing the technical designs and in establishing familiarity with Bank processes; as a result o f these delays, APL-1 i s wel l behind schedule, resulting in a current overall Implementation Status rating o f ‘Moderately Unsatisfactory’. In addition, there have been significant cost overruns as a result o f various factors, such as the increase in the price o f metals and other electrical materials, depreciation o f the U S dollar relative to the currencies in which the major contracts are expected to be denominated, and further deterioration o f the assets. The design issues have recently been resolved and the procurement for major contractors i s now well underway; the possibility o f a supplement to the original credit i s being considered to meet the anticipated cost overruns. The proposed Project will support the achievement o f the APL-1 ’s objectives both by increasing the generation capacity at Inga, a priority for the SAPP, and by strengthening SNEL’s capacity.

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b. APL-2 (P084404). This phase will finance the transmission interconnection o f the Malawi national electricity gnd to the SAPP transmission grid via a transmission l ine to Mozambique. The interconnection will allow Malawi to sell excess energy into the SAPP, as wel l as facilitate power purchase in drought years. The APL 2 will be accompanied by complementary investments in the domestic power sector. The project i s scheduled for presentation to the Association’s Board in mid-2007.

c. APL-3: This phase will connect Zambia to Tanzania, facilitating the connection o f Uganda and Kenya to the SAPP in the future, hence significantly expanding the size o f the pool and bringing new trading opportunities to al l members.

2.2. The proposed Project constitutes a supplement to the SAPMP APL series. As described in the previous section, this Project i s closely linked in particular with the APL-1 project, as it would enhance the quantity and reliability o f power generated at Inga to be exported along the SAPP transmission network that i s being upgraded under the APL-1 project; accordingly, this proposed Project has been given the appellation “APL-lb.” The addition o f this phase APL-lb does not affect phases APL-2 or APL-3, including the triggers for those phases. In addition, while the implementation o f the rehabilitation and upgrading activities under APL-1 will support the A P L - l b Project objectives (see below) by increasing the amount and reliability o f DRC exports to the SAPP countries, the adverse impact o f further significant delays in implementing the APL-1 project will l ikely be mitigated by SNEL by dispatching the available power at Inga to other prospective clients (notably to Kinshasa or, assuming some rehabilitation o f the H V D C line, to Katanga customers).

3. Project development objective and key indicators

3.1. The development objectives o f the Project are to improve operational efficiency in the electricity sector and expand generation, transmission and distribution capacity in order to better serve domestic power demand and to support regional power market integration.

3.2. K e y indicators for the Project’s intended final outcomes will be the increase in GWhs o f energy delivered from Inga to Kinshasa and for export to the SAPP and commercial clients in the Katanga region. Intermediate outcome indicators will be: (i) rehabilitated generation capacity at the Inga I and 2 plants; (ii) kilometers o f the second transmission line strung between Inga and Kinshasa; (iii) GWhs delivered to the Kinshasa distribution network f rom Inga site; (iv) GWhs delivered from Inga to the SAPP countries and to industrial customers in the Katanga region; (v) SNEL’s rate o f collection o f accounts receivables from l o w voltage customers in Kinshasa; (vi) revenues collected per kWh delivered to the Kinshasa distribution network; (vii) number o f additional households connected in Kinshasa; (viii) number o f qualifications to the external audits o f SNEL’s financial accounts; and (ix) publication o f public/private partnership agreements for the electricity sector. These indicators will be measured by SNEL.

4. Project components

4.1. The Project consists o f five components as follows:

ComDonent 1 : Generation (US$ 226.7 million): Rehabilitation o f the hydroelectric facilities at Inga, including c iv i l works on the intake canal to improve the water f low through the plant and rehabilitation o f turbines and other facilities to increase the operational capacity and reliability o f the Inga plant (1 and 2) from its current level o f about 700 MW to about 1300 MW o f reliable production.

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0 Component 2: Transmission (US$ 93.8 million): Construction of a 400 KV transmission l ine f rom Inga to Kinshasa. The second line will complement the existing 220 KV IngaKinshasa transmission line, which both increases the amount o f power that can be delivered to Kinshasa and improves the security o f transport o f power f rom Inga to Kinshasa.

0 Component 3: Distribution (US$ 88.5 million): Strengthening and expanding the distribution system in Kinshasa, including (a) the acquisition of l o w voltage cables and transformers, and (b) the extension o f the grid into currently un-electrified areas o f Kinshasa and the connection in these areas o f 50,000 new customers.

0 Component 4: Capacity Building and Governance (US$ 41.2 million): The component comprises two subcomponents:

o Subcomponent A: Strengthening SNEL’s operational capabilities, notably in billing/collection activities, planning and maintenance. The component wi l l also finance capacity building activities (in finance and other areas) designed to enhance governance within the utility specifically and in the sector generally.

Subcomponent B: strengthening the Ministry o f Energy’s (MoE) capacity to develop sector reform and to support further development o f the Inga site.

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Comuonent 5: Proiect Execution (US$ 48.8 million): The component will support the effective implementation o f the Project’s works, including the appointment o f a supervisory engineering consultant and o f the Procurement and Financial Management Agent (PFM Agent).

4.2. The following table summarizes tentative costs and proposed sources o f financing (figures include price and physical contingencies).

5. Lessons learned and reflected in the Project design

5.1. The major lessons from the Bank’s prior experience are as follows:

(a) The need to strengthen internal financial controls and revenue collection mechanisms to ensure that incremental revenues are generated from additional power generation and that these additional moneys are used to sustain the sector. Accordingly, the Project includes a

These figures include taxes o n consulting services estimated at about 18%. hid. Also includes refinancing o f PPF in the amount o f US$3 mill ion. Goods and works wil l not be subject to import duties or other taxes. Accordingly, no taxes are included, except as

noted above for consulting services for Components 4: Capacity Building, and 5: Project Execution.

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series o f governance enhancement actions to improve SNEL’s financial management practices. In addition, the appointment o f the P F M Agent wil l serve to strengthen procurement and financial management with respect to the Project specifically.

(b) The importance o f complementing physical investment with strengthened managerial actions, in particular targeted at reducing the non-technical and collection losses, which can deprive uti l i t ies o f the revenues needed to maintain the facilities financed under a project. Accordingly, the physical components are complemented by a component designed to improve revenue collection.

(c) Given the institutional weaknesses resulting in part f rom the conflict and post-conflict period, the need to limit the scope o f actions in challenging post-conflict context. Accordingly, the Project attempts to focus on a limited set o f discrete physical actions under a limited sector approach (construction o f a transmission line, rehabilitation o f the Inga site and rehabilitation o f the Kinshasa distribution system, al l o f which l ie along the IngalKinshasa corridor), rather than a broader more geographically dispersed set o f actions.

(d) The need to balance power development that addresses export and large industrial clients with actions that benefit smaller domestic customers and households. Accordingly, the Project i s designed to address both types o f complementary activities.

(e) T h e importance o f promoting ownership o f activities, promoting sustainability through the use o f existing structures, while also ensuring adequate technical management o f capital investments. Accordingly, the Project design relies upon and empowers SNEL’s existing technical divisions rather than on the creation o f a special implementation unit, while providing for strategic support (e.g., through the financing o f a supervisory engineering firm to support SNEL).

( f ) The importance o f strengthening the capacities o f GoDRC and SNEiL in soliciting and engaging with potential private sector partners. T h e Association i s financing financial and legal advisors, as well as assisting the GoDRC in evaluating options for private sector involvement. Similarly, the Project provides funding for financial and legal advisors in respect o f the development o f Inga 3, which will involve commercial partners.

5.2. The Project will rely on implementation arrangements that build o n SNEL’s technical capacities and role in the sector. However, given SNEiL’s weaknesses in procurement and financial management, the design also takes into account the success o f other Bank-financed projects with alternative procurement and other fiduciary arrangements that compensate for Weaknesses in these areas through the use o f the PFM Agent. In addition, the Association has experience to date in working with SNEL on the generation, transmission and distribution systems targeted under the Project, namely: (i) the Inga power plants (under the EMRRP Project); (ii) o n the transmission system linking Inga with both Kinshasa (under the EMRRP Project) and southward to the SADC countries (under SAPMP APL-1 project); and (iii) on the distribution system in Kinshasa (under the EMRRP Project). The implementation o f the Project should benefit fkom these earlier experiences.

6. Alternatives considered and reasons for rejection

6.1. Various alternatives were considered, both in terms of the overall scope o f the Project and i t s components.

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One alternative Project configuration considered (Component 1) was the rehabilitation o f power plants located in Katanga. W h i l e these plants also help to serve the export market and industrial customers in Katanga, this activity was not ultimately included in the Project scope as it involved an activity that was geographically and operationally distant f rom the core activities within the Project, and so did not meet the benefits o f relative simplicity in Project design that are gained by focusing o n the IngaKinshasa corridor.

There were various alternatives considered with respect to the routing o f the transmission line and to i ts sizing (Component 2). The route selected was viewed as the preferred option takmg into account environmental and social aspects (see discussion in the environmental/social section below). In addition, 220 kV and 400 kV l inehbstat ion configurations were considered. The former was rejected as it was not viewed as being cost effective over the long run, given that it would not meet Kinshasa’s anticipated growing demand and would potentially require the eventual construction o f a third separate line. The latter was rejected as premature, since the growth in demand over the next several years would not require a full 400 kV l ine and substations. Instead, an intermediate solution was selected in which the line would be constructed with a 400 kV configuration (building the towers and stinging the l ine itself i s costly, and so i t i s efficient to make the pre-investment in stringing 400 rather than 220 kV lines), while the construction o f the substations to operate the l ine at 400 kV was postponed to a later date.

0 Different configurations were considered for expanding the distribution network in Kinshasa (Component 3). Ultimately, the largest areas o f Kinshasa that do not currently have electricity were chosen to be targeted under the Project. Other alternatives that were considered were electrifying a greater number o f areas, but the remaining areas were relatively smaller and dispersing the electrification activity among too many areas was less cost-effective.

Consideration was also given to expanding the geographic scope o f the areas to be targeted under the Project, including under the generation, transmission and distribution components. Given the operational and managerial challenges facing SNEL, there were numerous advantages from limiting the scope o f the Project to a geographically discrete area. For example, Kinshasa was selected for the distribution component in part because it is directly related to the Inga production and transmission components and also because it i s relatively cost effective to extend the grid to i t s urban and peri-urban areas.

0 Avenues for greater private sector participation in the short-term were also considered, but there were concerns regarding the benefits for DRC, in particular given the current context where the deteriorated nature o f the sector might result in an unsustainable cost o f capital or result in the mortgaging o f the sector’s productive assets, thereby preventing these assets in the near term from servicing DRC’s domestic and other needs. Recognizing the importance o f private investment for the growth o f the sector, the Project supports DRC and S N E L in developing a sound framework for attracting and developing sound public/private partnerships.

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C. IMPLEMENTATION

1. Partnership arrangements

1.1. The Project involves co-financing. The AfDB i s expected to provide about US$lOO million, principally for some works at Inga and for rehabilitation and expansion o f the Kinshasa distribution network. GoDRC has approached the European Investment Bank (EIB) regarding financing for the second transmission line; GoDRC i s also exploring funding from sources from the People’s Republic o f China for the transmission line as well as for expansion o f i t s distribution network. The co- financing agreements are to become effective n o later than June 2008, with engmeering design and procurement beginning wel l before then (using in part engineering support to be financed with the IDA grant). In addition, the Agence Franqaise de De‘veloppement i s exploring the possibility o f providing support to strengthen SNEL’s commercial activities. Within the Bank Group, both IFC and MIGA are exploring opportunities for investing in the sector. The GoDRC and SNEL are also exploring financing for the sector (including the Project facilities) f rom other financiers (both public and private). GoDRC and SNEL recognize the need to ensure that such arrangements protect the development interests o f DRC. SNEL has agreed under the Project legal agreements: (9 only to enter into agreements relating to thefinancing of rehabilitation or other works, or any concessioning or other similar arrangements regarding the Project facilities, under terms that protect the development interests of DRC in a financially and technically sound and equitable manner, and (il, to consult with the Association prior to entering into any such agreement. In addition, i t i s important to ensure that activities of other financiers and operators regarding the Project facilities are coordinated and that they comply with the Environmental, Social and Resettlement (ESR) Plan. Under the Project, SNEL has undertaken to ensure that all financiers of activities or operators at the Project facilities wil l co-ordinate their activities with those financed by the Association in a manner acceptable to the Association, and shall require such activities to be carried out in conformity with the ESR Plan.

1.2. In addition, various donors are actively exploring the further development o f the Inga site. The AfDB i s planning to finance a series o f extensive feasibility studies for Inga 3 and Grand Inga. The Canadian International Development Agency has provided financing for a study o f Inga 3 focused initially on environmental issues.

2. Institutional and implementation arrangements

2.1. The Project will primarily rehabilitate and expand the integrated power grid owned and operated by SNEL. Accordingly, the Project will principally be implemented by SNEL. Project implementation will rely on existing departments within SNEL’s Operations and Support groupings, which include separate departments dedicated to the following functions: (i) the facilities at Inga; (ii) the transmission system linking Inga to Kinshasa; (iii) the distribution network in Kinshasa; and (iv) commercial operations for the Kinshasa area. In addition, M o E will be responsible for i t s own capacity building activities (under Component 4(b) o f the Project).

2.2. M o E and SNEL have created a project coordination grouping (to be formalized as part o f a Project Coordination Unit - the “PCU’ - as a condition of efectiveness) responsible for coordinating implementation o f the Project. The PCU will be headed by a project co-coordinator appointed by the MoE. The PCU comprises staff f rom both S N E L and MoE, and includes two key subunits:

(a) SNEL’s project coordination team, established within SNEL to provide coordination under the Project among the various SNEL departments and to ensure proper execution o f the various administrative and other tasks associated with implementation o f a donor-financed

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operation (including support on procurement issues and ensuring coordination with and among the various Project co-financiers), and

(b) the M o E unit, which draws from the MoE’s CATE team and i s responsible for executing the capacity building components directed at MoE and for supporting M o E in providing overall strategic direction o f the Project.

Each team has a designated leader, who will report to the PCU coordinator.

2.3. W h i l e SNEL possesses a moderate amount o f procurement experience, i t s internal controls for financial management and procurement are considered too weak to confide these functions entirely to SNEL for a Project o f this size and complexity. To address thefiduciary risks, a P F M Agent, operating under terms of reference acceptable to the Association, wi l l be engaged by MoE during Project implementation to carry out the procurement andJinancia1 management function for the Project; the P F M Agent w i l l be employed as a condition of effectiveness of the grant.

3. Monitoring and evaluation of outcomes/results

3.1. SNEL w i l l monitor physical implementation o f the SNEL Project Components through i ts traditional monitoring and control systems, supplemented by support f rom the PCU. SNEL currently measures through i t s power f low and financial monitoring systems the electricity generated and distributed through i t s system, as wel l as revenues. T h i s monitoring system will provide the basis for measuring the outcomes and results. In addition, while i t i s currently diff icult for SNEL to effectively measure the level o f technical and non-technical losses in the Kinshasa distribution system, the Project will strengthen SNEL’s capacity to determine these levels, which will be monitored under the Project. The financial audits o f SNEL will supplement this monitoring system. The Environmental and Social Management Unit (ESMU), supported by specialized technical assistance, will supervise implementation o f the ESR Plan. The PCU will monitor implementation o f the M o E Project Components and be responsible for overall project monitoring.

3.2. In addition, reviews will be carried out at least twice a year by the Bank, together with the PCU, to assess progress in implementing the agreed activities. The reviews will be coordinated with other donors financing the Project. The PCU will be responsible: (i) for preparation o f the necessary documentation for the reviews; (ii) planning o f review meetings and (iii) planning site visits.

3.3. A midterm review wil l be carried out 18 months after effectiveness o f the Association’s grant to assess progress under the Project, achievement o f overall objectives, and the contributions o f the various partners. The PCU wil l be responsible: (i) for preparation o f the necessary documentation for the reviews and (ii) for planning the midterm review meeting. The review will evaluate progress in reaching Project objectives, compliance with Project undertakings, including implementation o f the ESR Plan, and identify measures needed to reach objectives.

4. Sustainability

4.1. Several factors should support the sustainability o f the Project.

0 First, the nature o f the physical investments requires l imited subsequent ongoing operating costs (i.e., hydropower production entails l imited variable costs as compared to diesel or other similar fuel generation).

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Second, gains in revenue from the billinglcollection activities under the Project should support the effectiveness and sustainability o f SNEL’s overall capacity building activities. SNEL’s actions with respect to governance enhancement should also help.

Third, the Project i s expected to generate increased financial resources for SNEL, which should enable it to improve i t s maintenance operations.

Fourth, there appears to be increased demand within DRC for reliable power services, thereby creating both constructive pressure on the utility, but also support within Government, to improve SNEL’s performance.

Fifth, the SAPP i s likely, in aggregate, to be in a net power deficit by the time o f Project completion, thereby ensuring a reliable source o f demand and hence export revenues f rom the incremental generation capacity to be financed by the Project.

5. Critical risks and possible controversial aspects

5.1. The Project presents several critical r isks and possible controversial aspects. Controversial aspects include SNEL’s historical poor governance, an area to be addressed through the governance enhancement actions under the Project.

Table 2: Principal Risks, Ratings and Mitigation Measures

capacity, and delays in implementing the Project

costs for the physical components

SNEL governance issues and uncertain commitment to governance reforms

S

S

S

S

H-High; S-Substantial; M-Moderate; L-Low Mitigation

0 Government actions to increase socio-political dialogue and to generate tangible economic gains, which build o n the marked improvement over the last several years in the overall polit ical context. The successful implementation o f the recent elections. The recent successful installation o f a new government should further support these efforts.

0 Targeted preparation o f bidding documents during Project preparation phase

0 Existing studies o n Inga and transmission system 0 Use o f a P F M Agent to manage procurement under the project 0 BorrowerEiank experience with similar bid packages

Institutional support to Ministry and SNEL; building o f f project management u n i t s used in other DRC Projects

0 Reliance o n feasibility reports and experience under other Bank projects in the power sector in D R C

0 The Project has been designed in a modular approach that permits resizing o f individual components and sub-components to accommodate the possibility o f cost overruns Development o f the SNEL governance enhancement program Inclusion o f capacity building component Clear understandings w i th SNEL management and Government regarding expectations Use o f a PFM Agent to assist o n procurement and financial management aspects under the Project

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Risks Risk Rating

Mitigation

5.2. Conclusion: Overall, the Project r i sk i s Substantial

Uncertainties regarding sources o f funding, including donor and private sector involvement

Technical hurdles

6. Loadgrant conditions and covenants

M Strong Government commitment to construction o f the project facilities Strong interest f rom donors and other sources Undertaking f rom Government that activities financed by third parties to be carried out in compliance with the ESR Plan Clarify with Government/SNEL nature o f co-financing arrangements SNEL to require coordination o f al l activities with IDA-financed activities Assist government in developing strategy for engaging private sector

Use o f external technical support, notably detailed design and supervisory engineering firm

L Upfront Project engineering

6.1. The conditions o f effectiveness are:

0 Execution o f a GoDRC/SNEL subsidiary loan agreement, in form and substance satisfactory to the Association.

Establishment o f the PCU and a financial management system for the Project, acceptable to the Association, including: (a) recruitment o f a PFM Agent (including adoption o f an accounting software); (b) adoption by the P C U o f a manual o f accounting and financial procedures; (c) recruitment of an internal auditor; (d) recruitment o f an external auditor; and (e) adoption o f an anti-corruption action plan for the Project.

0 Establishment within SNEL o f an Environmental and Social Management Unit (ESMU), under terms o f reference and with staffing acceptable to the Association.

6.2. The main Grant covenants are:

0 The ESR Plan will be implemented in a manner satisfactory to the Association.

0 GoDRC shall employ the PFM Agent (the procurement and financial management agent) throughout Project implementation.

0 The E S M U within SNEL will be operated under terms o f reference and with staffing acceptable to the Bank.

0 SNEL shall: (i) not later than October 3 1 of each year, adopt a maintenance program for the facilities under the Project and a related budget for the succeeding fiscal year, acceptable to the Association, (ii) thereafter implement such program, modified as necessary to properly maintain the facilities, and (iii) not later than October 31 of each year, report on the implementation o f the such year’s maintenance program.

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0 SNEL (i) shall only enter into agreements relating to the financing o f rehabilitation or other works, or any concessioning or other similar arrangements, regarding the Project facilities under terms that protect the development interests o f D R C in a financially and technically sound and equitable manner, and (ii) shall consult with the Association prior to entering into any such agreement.

0 SNEL shall ensure that all financiers o f activities or operators at the Project facilities w i l l co- ordinate their activities with those financed by the Association in a manner acceptable to the Association, and shall require such activities to be carried out in conformity with the ESR Plan.

SNEL shall employ a supervisory engineer during Project implementation, under terms o f reference satisfactory to the Association.

0 SNEL shall adopt a dam emergency preparedness plan by December 3 1,2007 that reflects the comments o f the Association.

0 GoDRC and SNEL shall implement their respective following undertakings regarding enhancing governance in the electricity sector:

a. SNEL shall have i t s financial statements audited annually, which shall be published in i t s annual report by the third trimester o f each subsequent fiscal year;

b. GoDRC shall strengthen the oversight effectiveness o f SNEL’s Board o f Directors by providing for the designation: (i) o f one external director responsible for overseeing audit issues, (ii) a second external director responsible for overseeing procurement issues, and (iii) a third external director responsible for strengthening the f low o f information between SNEL and the Board;

c. SNEL shall undertake an evaluation o f i t s public/private partnership agreements;

d. GoDRC and SNEL shall promptly and regularly publish al l contracts entered into after March 1, 2007, relating to sale, concessioning, joint-venturing or other arrangements with the private sector;

e. GoDRC and SNEL shall adopt a process for public/private partnerships that provides for sound and equitable financial and technical partnerships, ensures transparency and favors competition;

f. GoDRC and S N E L shall implement conflict o f interest and financial disclosure requirements for SNEL’s Board Directors and SNEL’s senior executives; and

g. SNEL shall implement the capacity building activities under the Project designed to improve i t s governance, including strengthening i t s financial control and procurement systems.

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D. APPRAISAL SUMMARY

1. Economic and Financial Analyses

1.1. The economic and financial analyses are based on a set o f largely common factors:

a. Inga Rehabilitation - Increase in MW. The rehabilitation o f the generation facilities i s expected to increase production capacity at the site by about 600 MW, from about 700 MW to about 1300 MW. The increase will be incremental, averaging about 150 MW per year beginning end 2009 through end 2012. From a purely technical perspective, given the run-of-river quality o f the Inga site and the hydrological conditions, the plant load factor could be 85 percent or higher. However, given that there i s not expected to be a demand for the totality o f the potential output o f Inga during off-peak hours, the analysis o f the benefits o f the Project i s based on an assumption o f a 70 percent load factor. Thus each incremental MW o f capacity can be expected to generate 6,132 M W per year.

b. Second InmKinshasa Transmission line. The second transmission l ine from Inga to Kinshasa i s anticipated to be commissioned in 2010 and i s expected to increase the capacity to deliver power to Kinshasa from the current 450 MW (along the oversaturated existing 220 KV line) to well over 700 MW.

c. Markets for Incremental Power. The incremental power generated at Inga i s anticipated to be destined for three distinct markets: (a) domestic consumption in Kinshasa, and to a lesser extent in Bas Congo, (b) exports, primarily to the SAPP and potentially to the CAPP countries (notably for Brazzaville in the Republic o f Congo, where demand for power from Inga i s expected to diminish as i t s own hydropower site comes on line), and (c) consumption by mining and other large industrial consumers in the Katanga and other areas.

d. Kinshasa Distribution. Currently, the Kinshasa distribution system i s oversaturated, with transformers operating at precariously high levels o f capacity, which result in localized loss o f power and contribute to high technical losses. The Project will alleviate this stress on the system by financing rehabilitation o f the existing system. In addition, the Project wi l l also electrify several areas in Kinshasa not currently served where nearly 2,000,000 people live. The Project will fund 50,000 new connections in these areas, and, by providing the distribution backbone, will provide the basis for further connections at a relatively lower cost per connection.

e. Losses (including Auxi l iaw Use o f Power). The following system losses and other uses are assumed for purposes o f the economic and financial analysis: (1) for generation at the Inga site: auxiliary systems are assumed to consume 0.3 percent of generation; (2) for transmission losses: (i) 10 percent for the HVDC line f rom Inga to Katanga, including transmission and conversion for HV and MV clients, and (ii) 2.5 percent for the 220 kV AC line from Inga to Kinshasa, with in addition 0.5 percent in step-down losses; and (3) for the distribution system in Kinshasa: init ially 15 percent technical losses and 10 percent non-technical losses, with technical losses gradually reducing from 15 to 12 percent as a result o f the capital improvements financed under the Project. In addition, S N E L faces significant collection losses o f about 50 percent for sales into the Kinshasa system (65 percent for smaller residential customers), but only marginal losses for sales to exports (which figures have been applied also to mining customers for purposes o f this analysis).

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f. Benefits and Revenues. The economic benefits are distinguishable into two major types: (a) the economic benefit from selling to domestic consumers, which has been evaluated based on a willingness-to-pay analysis; and (b) the economic benefit f rom the export o f power, which has been evaluated as a function o f the sales price at export. For simplicity, the sale o f power to domestic mining customers has been evaluated in the same manner as exports, namely the sales price. By comparison, the bases for the financial analysis for exports and sales to mining customers i s identical to the economic analysis, but differs from the economic analysis for domestic customers in Kinshasa in two respects. First, while the economic analysis incorporates the benefits o f power delivered to customers (i.e., net o f technical losses only), the financial analysis i s based on actual revenues collected (i.e., net o f technical, non-technical and collection losses). Second, the actual tar i f f charged by SNEL, rather than the willingness-to-pay, i s used for the financial analysis.

A. Economic Analysis

1.2. The benefits o f the Project would include increased availability and improved quality o f power supply for domestic use and exports, and resource savings from the reduction o f system losses. Further, the Project would assist SNEL’s institutional development through technical assistance to upgrade the technical, financial and managerial capabilities o f SNEL’s staff and systems. The institutional support i s expected to bring about sustained improvement in SNEL’s operational efficiency and financial performance.

1.3. The Project’s distribution component i s an integral part o f the best solution to address current inefficiencies and problems with the distribution system, while the transmission investment constitutes a part o f the least-cost transmission investment to transmit additional power f rom existing and future generating power plants to the Kinshasa load center. The analysis conducted by SNEL for each component o f the Project has been reviewed and found to be satisfactory. The Project constitutes a major part of SNEL’s least-cost investment activities. The Project has been analyzed over the period 2008-2030. The capital costs as wel l as operating and maintenance costs associated with the Project are shown in Annex 9. A minimum measure o f economic benefits associated with the Project i s represented by incremental sales. These in turn are divided between sales on the domestic market and exports. Sales to the mining sector and for exports are valued at the latest contractual price level negotiated o f U S cents 2 .5kWh which could increase up to U S cents 3.9kWh in 2015. Incremental sales on the domestic market are valued at the average willingness to pay for electricity supply which has been estimated at U S cents 6.15 kWh. Details o f the analysis are shown in Annex 9. The current average domestic tar i f f is, by i t s nature, more a measure o f the adequacy o f tariffs than of the true economic merit o f the project, and i s evaluated as part of the financial analysis below.

1.4. The results o f the economic analysis show that under these assumptions, the net present value o f the Project i s US$501 mi l l ion and the internal rate o f return i s 29 percent. Consumers are the biggest beneficiaries o f the Project, followed by SNEL. The results o f the sensitivity analysis demonstrate that the Project i s robust to significant variations in its main variables (i.e. capital cost and sales revenues):

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25%

1.5. The alternative configurations for meeting the Project’s objectives are limited. One alternative would be the construction o f a new hydropower plant; however, a new construction i s estimated to be costlier (US$1 mi l l ion or more per installed MW) than the rehabilitation o f the existing Inga plant (estimated at US$0.3 mi l l ion per installed MW); the new construction would also take longer than rehabilitating the existing turbines. Another alternative i s the construction and operation o f a thermal power plant near Kinshasa to supply the main domestic load center. The investment costs alone would be at least about two to three times the cost o f rehabilitating the Inga hydropower plant or about US$400-600 mi l l ion for generation alone (excluding fuel costs, a major item in a thermal power plant). T h i s would eliminate the need for a large part o f the transmission line, but would necessitate either the construction o f a fuel pipeline (estimated at over 2 5 0 h from Matadi, DRC’s main port, which itself i s in need o f extensive rehabilitation), or ferrying the fuel through a variety o f means (barges along the Congo river and then by truck), which presents major logistical issues and reliability concerns. In addition, DRC would have to pay on an ongoing basis, the costs for fuel that i s hampering thermal power plants in many other countries. The least cost option to supply the needed energy for the domestic and export markets i s the rehabilitation o f the Inga hydropower plant and the construction o f the second transmission line f rom Inga to serve Kinshasa. The no-project alternative would deprive D R C o f the needed improvements in the power sector and the anticipated US$501 mi l l ion o f net economic benefits (as calculated on an NPV basis).

1.6. Regional Dimension o f the Project. The Project has additional economic benefits at a regional level that have not been directly quantified. First, the increases in the available capacity in DRC and in the energy flows between DRC and the other SAPP countries are essential steps to deepen the short and long term markets for power trading in the region. By decreasing the total reserve capacity in the southern Africa region, important savings in investment capital can be made. Furthermore, the Project increases the security o f power supply in the southern Africa region. Based on historical data, the probability o f occurrence o f a major drought in the SAPP countries every 10 years i s high. One exception i s DRC, which benefits f rom the very large catchment area o f the Congo River spread on both sides o f the equator. Thus, the Project will enable the use o f DRC’s generating plants as a backup to mitigate the impact o f a possible drought on electricity production in the rest o f the SAPP countries. Finally, the increase o f cheap hydro electricity supply wil l substitute for thermal plant generation and contribute to the reduction o f fossil fuel emissions.

B. Financial analysis

1.7. The entirety o f the investment and operating costs associated with the Project will be borne by SNEL. However, in part because o f l o w electricity tariffs and poor revenue collection in Kinshasa, the financial returns for SNEL are significantly lower than the economic returns. In the Base Case, the NPV i s US$293 mi l l ion and the financial rate o f return i s 20 percent (as compared to US$501 mi l l ion and 29 percent for the economic analysis). The NPV o f the Project for SNEL remains positive under the various scenarios considered.

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Financial Internal Rate o f Return o f the Proiect Financial Analysis - Sensitivity NPV FIRR(%) Base Case 293 20.4% (1) 20% increase in investment costs 216 17.4% (2) 20% reduction in revenues in Kinshasa 254 19.3% (3) 20% reduction in revenues from mining and exports 198 17.8% Low case: (1) + (2) + (3) 81 14.1%

1.8. From a cashflow perspective, the Project should improve SNEL’s financial position, even taking into account the on-lending terms. Even in the least favorable scenario studied, the FIRR o f 14.1 percent i s significantly above the 5 percent on-lending interest rate. Also, the payment schedule (with i t s 5 year grace period) would ensure that the f i rs t principal repayments take place only after the investments are completed and have started to generate additional cashflow for SNEL.

2. Technical

2.1. The technical design o f the Project i s considered to be sound. The physical components o f the Project are based on comprehensive feasibility studies. These feasibility studies have been approved by the Government and have been reviewed by the Association. International consultants wi l l be employed under the Project to assist SNEL in engineering design, bid documents and project management.

2.2. Generation and distribution rehabilitation components were selected based on a technical assessment o f options ranging from no rehabilitation, to repairinglrenewing the system or replacing the system entirely. The generation rehabilitation work i s expected to improve plant performance and performance parameters will be guaranteed by the rehabilitation contractor.

2.3. The new transmission l ine involves standard technology for high voltage transmission line and substation construction. Specifications for equipment are consistent with the design and structure o f the existing network and include al l appropriate safety measures. The design outlined in the feasibility study has been approved by SNEL. The company proposes to engage a single contractor for the detailed design, supply and installation o f the transmission line. SNEL will also use a single design firm and supervisory engineer for the generation, transmission and distribution components, which will ensure accountability and facilitate Project management.

2.4. The Project will employ modem technological practice in rehabilitating the distribution networks including: (a) utilizing underground cabling technology to replace rundown overhead electric lines in urban areas; (b) replacing old equipment with more efficient and standard equipment; and (c) continuing the phasing out of non-standard medium voltages to provide more reliable and efficient operation o f the distribution system and to minimize the costs o f network maintenance and expansion.

3. Fiduciary

3.1. As noted above (under Institutional and implementation arrangements), while SNEL possesses a l imited amount o f procurement experience, i t s internal controls for financial management and procurement are considered too weak to confide these functions entirely to S N E L for a Project o f this size and complexity. To substantially reduce the fiduciary risks, a Procurement and Financial Management Agent (PFM Agent) will be engaged by M o E to carry out the procurement and financial management functions for the Project. Payments for contractual services under al l components will be jointly authorized by the PFM Agent and SNEL, except: (i) for subcomponent 4(b) executed by

22

MoE, which will be managed by the P F M and MoE, and (ii) for the PFM Agent contract itself, which will be authorized by the PCU. See also the discussion in Annex 7 (Financial Management) and Annex 8 (Procurement) for related analysis.

4. Social

4.1. Social, environmental and resettlement issues are addressed in the context o f the Project’s ESR Plan. SNEL’s concession at the Inga 1 and Inga 2 hydroelectric power stations consists o f 21,000 hectares. T h i s concession includes the future sites for Inga 3 and Grand Inga. The ESR Plan’s review concluded that the population who had the land use rights at the time o f the construction o f Inga 1 and Inga 2 had been adequately compensated. Most o f these people live outside the concession.

4.2. The rehabilitation o f the Inga 1 and Inga 2 hydropower plants does not involve any land acquisition or resettlement. The routing for the second transmission l ine f rom Inga to Kinshasa ending at the Kingatoko substation has not yet been finalized. Land acquisition wil l be required. The Project’s resettlement framework (RPF) and framework for managing cultural properties (MCHF) were disclosed in-country and were subsequently disclosed in the Infoshop in Washington on January 18,2007.

5. Environment

5.1. The site o f the Inga 1 and Inga 2 hydroelectric power stations i s located approximately 150 km from the mouth o f the Congo River. The area i s sparsely populated and consists mostly o f savanna with gallery forests in the valleys. The construction o f Inga 1 was finished in 1972 and Inga 2 in 198 1. The Inga 1 and Inga 2 hydropower stations use the same 9 km long canal for their water supply. Only a fraction o f the water f rom the huge Congo River has been diverted into this canal for hydropower production. The environmental impacts o f the construction and operation o f the Inga 1 and Inga 2 Hydropower Plants were and s t i l l are moderate and manageable, and there are n o legacy issues to consider. The transmission line f rom Inga to the Kingatoko substation in Kinshasa passes mostly through agricultural land. A sensitive forest area near the Inga hydropower station has been avoided. The transmission l ines pose manageable environmental impacts which wil l be mitigated by the actions described in the Environmental and Social Management Plan (ESMP). The Environmental and Social Impact Assessment (ESIA) and related documentation were disclosed in- country and were subsequently disclosed in the Infoshop on January 18,2007.

6. Safeguard policies

6.1. The project has been classified as a Category B project. The anticipated environmental impacts o f the rehabilitation o f the Inga 1 and Inga 2 hydropower plants are moderate and manageable. There will be almost n o change in the hydrological regime o f the Congo h v e r . Dredging and re-profiling o f the 9 km canal will be needed to bring the capacity closer to the design capacity. The dredging sludge will be tested for chemical pollution. Based o n the test results, a safe disposal place will be identified. There are macrophytes and likely PCB problems which need to be managed. Water quality monitoring wi l l be strengthened in order to optimize reservoir management. HIV/AIDS will be managed during construction. The ESMF and other documents within the ESR Plan describe environmental and social aspects o f the Project that will need to be managed, at the level o f individual components, including applicable environmental and social regulations. The present Project has been categorized as a Category B project, as a result o f the expected moderate impacts. An Environmental and Social Management Unit will be established within SNEL (as a condition ofeffectiveness) to assist in implementing the ESR Plan. The contractors will prepare their

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own environmental and social management plans, which will be based on the ESMP prepared for the project. The Project poses a moderate potential reputational risk for the World Bank.

6.2. Dam Safety. Consistent with OP 4.37, and according to TORS developed in consultation with the relevant Bank specialist, a consultant dam safety engineering firm has completed for SNEiL a review o f the hydroelectric facilities at the Inga site. N o significant concerns were identified, and a strengthened program o f maintenance was recommended. Under the grant, SNEL has agreed that i t shall adopt a dam emergency preparedness plan by December 31, 2007, that reflects the comments of the Association. SNEL has employed a consultant to assist it in the preparation o f the plan. SNEL has also agreed, as a covenant of the Grant, to submit to the Association, by October 3 l s t of every year, a facilities and network maintenance plan and associated budget for the forthcoming financial year for Inga and the other Project facilities, and to report on implementation of the plan.

6.3. International Waterwavs. OP 7.50 applies to projects that involve the use o f international waterways. The Inga rehabilitation component (Component 1) will involve the use o f the Congo River, an international waterway that D R C shares with 8 counties and, as such, OP 7.50 applies. However, the Inga dam i s a "run o f the river" plant, and the proposed activities (rehabilitation o f the dam, dredging and reprofiling o f the intake canal) will not modify the water volume. On this basis, and as set out in paragraph 7(a) o f OP 7.50, this Project i s exempt f rom the requirement to notify other riparian states about the Project, as the activities will alter neither the quality nor the quantity o f the water flowing to other riparian states, nor will the Project be adversely affected by the other riparians' possible water use.

6.4. Pest Management. The vector control program for black flies at the Inga site wi l l involve the use o f the pesticide Permethrin, which will be effected in accordance with the Pest Management Plan (PMP), which has been approved by the Bank. Disclosure o f the PMP in-country and in the Infoshop was made in April 2007.

6.5. Cultural Propertv. The M C H F (framework for managing cultural properties) has been prepared, was approved by the Bank and was released in-country and fi led in the Infoshop in January 2007. Sensitive sites include caves in the targeted project area.

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OPBP 4.0 1) [XI [ I Natural Habitats (OPiBP 4.04) [I [XI Pest Management (OP 4.09) [XI [ I Cultural Property (OPN 11.03, being revised as OP 4.1 1) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI [ I Indigenous Peoples (OPiBP 4.10) [I [XI Forests (OPBP 4.36) 11 [XI Safety o f Dams (OPiBP 4.37) [XI 11 Projects in Disputed Areas (OPiBP 7.60)' [I [XI Projects on International Waterways (OPiBP 7.50) [XI [ I

7. Policy Exceptions and Readiness

7.1. The Project complies with al l Wor ld Bank applicable policies and n o exceptions are required. The Project i s ready for presentation given:

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a. the procurement plan for the f i rs t two years has been established;

b. the RFP for the detailed engineering firm has been issued, and the technical proposals are being evaluated,

c. the request for expressions o f interest for the PFM Agent has been launched;

d. the request for expressions o f interest for the firm to strengthen SNEL’s financial systems has been launched; and

e. the SNEL and MoE project coordination teams are operational, and the PCU structure has been delineated.

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Annex 1: Regional, Country and Sector Background AFRICA: Regional and Domestic Power Markets Development Project

(Southern African Power Market Program, APL-lb)

A. Regional Context

Southern African Power Pool

1 . Southern Africa exhibits substantial variations in energy resource endowments, degrees o f industrial development, levels and patterns o f power consumption and power costs. These differences present opportunities for coordinated development o f the regional power sector to: (i) generate savings through aggregation o f loads with different load profiles, (ii) achieve efficient use o f energy resources by exploiting large scale power generation schemes that are viable only on the basis o f large multi-country markets, and (iii) manage the risks o f climate- related power shortages in hydro-dependent countries. In recognition o f the potential benefits, in August 1995, SADC member countries created the Southem A h c a n Power Pool (SAPP) by concluding an Intergovernmental Memorandum o f Understanding and related agreements which together govern the operation o f the power pool. The ut i l i t ies o f 12 southern A h c a n countries are members o f the SAPP.4

2. SAPP started as a cooperative pool, that is, a pool under which members would seek to maximize economic and system reliability benefits through trade, while retaining maximum autonomy for individual members. However, in the longer term the SAPP aims to facilitate the development o f a competitive electricity market in the SADC region. Currently there are two market mechanisms used in SAPP energy exchanges: medium-to-long term bilateral power purchase agreements and the Short Term Energy Market. An update o f the long-term least-cost generation and transmission expansion study (the ‘Pool Investment Plan’) for the SAPP was started mid-September 2006, and i s expected to be completed before end-2007.

DRC Hydro Resources in a Regional Context

3. D R C has enormous hydropower potential, estimated at about 100,000 MW - or 13 percent o f global hydropower potential. Much o f this potential i s located in a single site, the Inga dam site on the Congo River, located 125 miles downriver f rom Kinshasa, with a potential capacity estimated at about 45,000 MW. With energy resources on this scale, D R C has the potential to play a pivotal role in meeting not only i t s domestic energy needs, but also the energy needs o f neighboring counties and beyond. Today, the Inga site provides power both southward (notably to the Southern African Power Pool - the SAPP) and northward (to the Central African Power Pool - the CAPP). Power supplied from D R C wil l be a critical enabling factor for the development o f a competitive power market in both sub-regions, with reliable, low-cost power supporting industrial competitiveness, private sector investment and regional growth and development. As a consequence, DRC generally and the Inga specifically are currently central to most discussions in southern and central Africa to developing hydropower resources on a regional basis.

Inter-connections among the main grid systems o f Botswana, DRC, Lesotho, Mozambique, Namibia, 4

South Africa, Swaziland, Zambia, and Zimbabwe form the basis o f the regional network. Angola, Ma law i and Tanzania are not yet connected.

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4. NEPAD has designated the development o f the Inga site as a priority under the regional development programs. As such, NEPAD, the AfDB and other institutions are actively supporting the development o f Inga’s power potential in three distinct but interrelated stages: (i) in the short-term, the rehabilitation o f the existing facilities, which operate at less than 40 percent o f installed capacity; (ii) in the medium-term, the development o f a new hydropower facility, with about 3,500 MW o f capacity (likely the Inga I11 site or, possibly, an initial phase o f the Grand Inga project); and (iii) in the longer-term, the full development o f the additional 40,000 MW potential o f the site (the “Grand Inga” Project).

5. Reflecting i t s geographic position and the centrality o f the Inga site, D R C i s a member o f both the SAPP and the CAPP. Currently, DRC’s state electricity utility, Sociit6 Nationale d ’Electricit6 (SNEL), has long-term bilateral contracts for power exports to South Africa and Zimbabwe (about 100 MW each). These sales generate valuable foreign exchange revenues for DRC. For i ts regional neighbors to the south, DRC’s hydro-power (from Inga and other sites) provides benefits that include a low-cost and low-carbon alternative to thermal generation capacity (especially for those countries, such as Zimbabwe, that have n o low-cost, indigenous sources o f electricity) and a diversified source o f power for countries extensively reliant on domestic hydropower. Discussions are currently underway about linkmg Zambia to Tanzania, thereby providing a route for DRC’s power to also supply countries in eastern Africa. I t i s anticipated that the incremental hydro-production from Inga will substitute for carbon intensive fossil generation and so may be eligible under the Clean Development Mechanism.

6. With excess generation capacity in the region forecast to diminish, DRC’s hydropower potential (and specifically the resources available at Inga) will play an increasingly central role in the successful further development o f the SAPP. SAPP members have drawn up a l i s t o f high priority projects, backed by both SADC and NEPAD. Electricity supplied by DRC will be pivotal t o some o f these Projects. These projects will allow Inga to supply significantly more power to the SAPP member countries, both through increased sales to existing customers and to new off-takers.

7. There are, however, several constraints preventing this demand from being met via the existing infrastructure. They include the transfer capacity o f a part o f the regional interconnection between D R C and Zambia; capacity and performance restrictions o f the A C power system in the Katanga region in DRC; capacity and operational status o f the High Voltage Direct Current (HVDC) link between Inga and Katanga; and the need to refurbish the generating plants in the DRC, notably at Inga.

8. The Projects in the Southern Afkican Power Market Program (SAPMP) APL series currently in preparation or being implemented wil l remove some o f these constraints. Zambia and the DRC are to upgrade their current 220-KV regional transmission corridor to a much higher specification to allow other SAPP countries to tap Inga’s energy supplies. To this end, Zambia’s Copperbelt Energy Corporation (CEC) and SNEL are discussing a project to construct a new 220-KV line running in parallel to the existing interconnection between Chingola in Zambia and Karavia near the southern D R C ci ty o f Lubumbashi. In addition to the new transmission line, the two countries will also repair the existing 220-KV line. More details on the SAPMP are provided in section C below.

9. DRC’s hydro resources are also viewed as central to the development o f the CAPP. SNEL currently exports about 50-80 MW from Inga north to Brazzaville (Republic o f Congo) along a 220-kilovolt (KV) connection. SNEL has had discussions about supplying industrial

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clients in Pointe Noire (Republic o f Congo), possibly via a transmission line through the Cabinda region o f Angola, which would simultaneously allow power off-take in Cabinda. The CAPP has initiated donor-funded studies o f this and other prospective regional interconnection projects. It i s expected that exports in the medium term to Brazzaville will decrease as power plants being commissioned in the Republic o f Congo, including the hydro plant at Imboulou, come on line. However, the Inga supply wil l remain an important source o f supply security for Brazzaville. Looking further afield, there i s also potential for electricity generated at Inga to supply the West A h c a Power Pool.

10. Towards the east o f the country, the focus o f the regional collaboration in the energy sector in the Great Lakes region i s la Sociktk Internationale d’Energie des Grands Lacs, a jo int company wholly-owned by Burundi, Rwanda and D R C and established in 1984, with the support o f the World Bank, to build and manage a group o f jo int energy sector operations in the Great Lakes region. The company’s main operation i s the Ruzizi I1 hydropower plant at Mumosho in the DRC, which supplies power to all three countries. The company has faced extensive financial and operating difficulties (in part the legacy o f the years o f conflict in the sub-region); the World Bank, building o n security improvements in the area, i s currently supporting efforts to help the utility strengthen i t s operations and financial position. However, even as these efforts go forward, other challenges emerge, including the recent drops in the water level in Lake Kivu that reduce Ruzizi 11’s output potential.

11. In summary, DRC generally, and Inga specifically, l ie in many respects at the center o f gravity o f discussions on regional power in sub-Saharan A h c a . DRC, however, has not yet managed to capitalize on this opportunity. A range o f projects currently under commission or consideration will allow DRC and i t s neighbors, near and far, to tap the country’s extraordinary hydropower potential, in particular f rom the Inga site. These efforts, however, necessarily hinge on the rehabilitation o f the existing Inga site in two distinct ways: first, rehabilitating Inga provides incremental power to supply the SAPP and the CAPP countries; second, larger scale development o f the Inga site (such as Inga 3, which will require over US$4 bi l l ion in investment) depends on DRC demonstrating the ability to assure the sound operation o f the existing Inga 1 and 2 facilities.

B. Country Context

12. The size o f DRC’s promise has, unfortunately, been undermined by i t s challenges. I t i s potentially one o f Africa’s richest economies, with extensive mineral, energy and natural resources. I t i s a potential dynamo for regional growth, with i t s large labor force and potential market size, extensive navigable inland waterways and land links to nine states. Yet hopes o f tapping this rich potential have been repeatedly thwarted. Successive governments have failed to translate the country’s assets into improved standards o f living for the Congolese people. The level o f physical and social devastation caused by decades o f mismanagement, starting in the colonial era, worsening during the regime o f Mobuto Sese Seko and compounded by extended periods o f conflict since 1997, has been great.

13. Today, the country i s embarking on systematic efforts to overcome the legacy o f mismanagement and conflict. The recent elections mark an important moment in Congolese history when the government, parliament and local authorities have assumed power through a democratic process. With a new cabinet appointed in early February 2007, the post-election period provides a rare opportunity to push forward with much-needed reforms. These efforts, however, wi l l face a complex array o f factors: the delicate democratic transition currently

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underway, the legacy o f conflict, ongoing regional tensions, economic and social collapse, and the weight o f a legacy o f corruption.

B 1. Political backdrop

14. The recently concluded presidential elections, won by incumbent President Joseph Kabila, mark a new chapter in DRC’s turbulent recent political history. The second run-off vote passed o f f remarkably smoothly. The elections come after a forty-year history o f political instability and conflict. Decades o f misrule under Mobutu saw D R C entering the 1990s in a state o f economic and political collapse. The institutional mechanisms associated with an effective state - legislative, judicial, regulatory and others - became increasingly hollowed out from within, leading to recurring political instability and increasing levels o f violence throughout the decade. The civ i l war that erupted in 1997 pitted a variety o f Congolese rebel movements and quickly became a complex regional conflict, involving several neighboring countries. After several false dawns, a durable peace process was instigated in 2001 leading to the withdrawal o f foreign troops and the formation in 2003 o f a transitional government o f national unity with representation o f a l l key armed groups, opposition groups and civ i l society. In December 2005, a new constitution was approved by popular referendum, leading directly to the recent elections for a directly elected government.

15. The elections mark the culmination o f extended efforts to put in place a sustainable peace and reconciliation process. The international community has provided intensive support, notably through the deployment o f a 16,500 strong UN peacekeeping force (MONUC). The mediation o f the United Nations and the Afncan Union, as well as the support o f key bilateral partners has also been critical. With the successful holding o f elections, DRC i s entering a new phase o f i t s post-conflict recovery.

16. The elections are an achievement not to be under-estimated, marlung the f i rs t time in Congolese history that the government, parliament and local authorities have assumed power through a largely free and fair democratic process. With a new cabinet appointed in early February, the post-election period will be a rare opportunity to push forward with much- needed reforms. At the same time, the political context i s l ikely to remain turbulent. While widespread violence - with the exception o f localized fighting in the north and east o f the country - has subsided since 2003, the political transition was marked by disunity. Ongoing challenges face the government, as reflected in the instability in Kinshasa in March 2007.

17. President Kabila and his new government face several immediate challenges. First, a fragile majority in parliament may stymie stabilization and reform efforts. Second, significant opposition - both political and popular - remains in Kinshasa itself following the election. Third, disaffection in several regions will l ikely pose a challenge to central government authority. The way in which these risks are handled will be critical for the viability and sustainability o f external interventions in DRC.

B2. Economic & Social Backdrop

18. The legacy o f conflict, mismanagement and political paralysis over the past forty years has been a near-collapse o f DRC’s economy. Per capita income has declined from US$380 in 1960 to US$120 in 2004. Between 1997 and 2002, disease, deprivation and casualties in the civ i l conflict caused more than 3.3 mi l l ion deaths.

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19. During the Mobutu era, the Congolese economy was dominated by export-oriented extractive industries. These provided l i t t l e by way o f jobs or other income-generating opportunities, with the vast majority o f the population remaining in subsistence-level agriculture and informal activities. The war intensified the economic hardship. Investment slumped, bringing the export-oriented industries to the verge o f collapse. Conflict destroyed livelihoods and stripped millions o f people o f livestock, property, tools and other productive assets. Physical infrastructure deteriorated. Intangible infrastructure - particularly the machinery o f government and state institutions - also withered. .

20. Since 2001, a degree o f economic stability has returned. Inflation fell to below 10 percent in 200 1. Price liberalization has increased food availability in urban areas. Improved public expenditure management has grown public revenues, and structural reforms in the public and financial sectors have been launched. As a result, economic growth turned positive in 2002 and has remained above 5 percent since. These efforts have been rewarded by a strong private sector response, with US$2.7 bi l l ion in new investments in a range o f sectors - including telecom, construction, agro-business and extractive industries - registered since 2003. Investment at this scale provides a hint o f the country’s enormous economic potential. For now, though, improvements in state institutions and the economy have not reached all regions o f the country.

2 1. Despite this nascent economic recovery, human development indicators for DRC’s people remain poor. The logistical challenges in DRC remain formidable. Many provincial capitals are difficult to reach by road. It has been estimated that 3.5 mi l l ion people remain internally displaced. 75 percent o f the population lives on less than a dollar a day. While detailed statistical information i s lackmg, available indicators point to declining l i fe expectancy and increasing childhood mortality. Most o f the MDGs are likely to be missed. The challenges are formidable.

B3. Governance backdror,

22. The Mobutu regime was synonymous with extensive corruption, embedding the expectation o f significant and rapid private gain from public office. The conflict and political transition allowed these governance failures to continue, in part through a lack o f effective sanctions mechanisms. As a result, corruption remained endemic, with D R C ranked 144 out o f 158 countries by Transparency International. State institutions and parastatals are key sectors that have been particularly badly affected.

C. Sector Issues

C1 Overview, Access and Demand

23. Despite the country’s enormous power potential, DRC has managed neither to capitalize on the opportunity o f significantly higher electricity exports across A h c a nor to provide adequate energy services for the vast majority o f i t s own population. Household access i s about 6.5 percent o f households, compared to the average for sub-Saharan A h c a (exclusive o f South Africa) o f 20 percent, leaving the country in the bottom 15 o f sub-Saharan Africa. Frequent blackouts hit even high priority parts o f the network. Electricity consumption per head was 9 l k W h in 2002, down from 161 kWh in 1980. Traditional biomass fuel i s now estimated to account for 86 percent o f total energy use in the country, with diesel/oil at 8 percent, electricity shrinking to 4 percent and coal accounting for the remaining 2 percent.

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24. The proximate cause o f these very low energy access rates i s the state o f DRC’s electricity infrastructure. All parts o f the network deteriorated extensively in the 1990s as a result o f extensive theft (both o f physical components and via financial embezzlement) as the security situation worsened, f rom direct conflict damage and, most importantly, from a lack o f maintenance and a dearth o f replacement parts. Underlying al l these factors was the weakening o f the institutional capacity to maintain the system. SNEL, the vertically- integrated parastatal power utility that dominates the generation, transmission and distribution o f electricity in DRC, faces wide-ranging financial, management, governance and operational challenges. Improving the quality and quantity o f electricity service in D R C wil l require significant improvements in SNEL’s maintenance and upkeep program. SNEL has agreed, as a covenant under the Grant Legal Agreements, to submit to the Association, by October 31st of every year: (9 a facilities and network maintenance plan and associated budget for the forthcoming financial year, and (ii) a report on maintenance expenditures incurred to date in the currentfinancial year.

25. Total demand (as represented by sales) in 2005 was about 5700 GWh, with l o w voltage power accounting for about 50 percent. Demand i s projected to increase annually by about 7 percent in the coming five years, but could increase significantly more as the electricity infrastructure expands.

26. Loolung forward, the Government has identified several priority objectives for revitalizing the electricity sector: (a) meeting local business needs and satisfying unmet domestic demand, thereby supporting economic recovery and growth; (b) stemming losses that negatively impact the sector’s financial integnty; and (c) exporting electricity, to generate foreign exchange and improve the strategic positioning o f D R C within a regional context.

C 1. The Network

27. DRC’s entire electricity network i s under severe strain. The combination o f the saturated transmission system, limited generation capacity and technical operating constraints (that include high loss rates and poorly maintained equipment) combine to produce an electricity supply system with a very small capacity margin and inadequate levels o f redundancy in the system to avoid or mitigate frequent breakdowns. The problems are exacerbated by a weak institutional framework.

Generation

28. Only a small fraction o f DRC’s vast energy resources has been exploited. Despite having potential production capacity estimated at about 100,000 MW from hydro power alone, the country’s total installed capacity i s approximately 2,400 MW, or less than 3 percent o f that potential. Of this, hydropower accounts for nearly 99 percent, with the remaining supplied by about 60 small and isolated solid-fuel thermal plants. A handful o f large industrial enterprises maintain their own production capacity. The two hydro plants at Inga between them account for 1775 MW o f installed capacity (351 MW at Inga I, 1424 MW at Inga 2), or roughly 70 percent o f the country’s total.

29. Even this limited installed capacity runs significantly below potential. Some o f the electricity generation infrastructure dates back to the colonial era - the oldest installed facility was constructed in 1929 - and has not been systematically maintained, overhauled or updated. Rehabilitation has tended to be on an ad hoc, emergency basis, resulting in outdated

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and unreliable machinery. As a result, only 48 percent o f installed capacity i s actually available. Total annual electricity production in 2005 was around 7,100 GWh, or slightly less than 50 percent o f what the installed capacity could potentially generate. With some o f the smaller hydro-facilities wholly inoperative and only about one third o f the small thermal plants functioning, some urban centers in more remote regions have had their gnd electricity supply completely cut off.

Power Station

Western Region

Number o f Turbines Capacity (MW) Installed Operational Installed Available

27 7 1864 722 L

Southern Region Eastern Region Other

30. The state o f the Inga plants epitomizes the state o f the country’s generation capacity. Currently, available capacity at Inga 1 and 2 totals about 700 MW out o f 1775 MW o f installed capacity. Both plants need urgent repairs as wel l as extensive rehabilitation for longer-term viability, in addition to extensive re-shaping, dredging and clearance o f the heavily-silted water intake canals that supply the turbines. Given Inga’s role as the backbone o f DRC’s generation capacity, the GoDRC views rehabilitation o f the two plants as a high priority in order to improve the reliability and quantity o f supply o f electricity from Inga for both domestic and export markets.

20 14 476 365 6 6 58 58 10 6 48 25

3 1. GoDRC i s also prioritizing other generation projects, including (a) targeted rehabilitation o f existing plants in Katanga to support exports and supply prospective mining customers; and (b) electrification (and in some cases re-electrification) o f major urban centers.

2,446

Transmission

1,170

32. The transmission system in DRC consists o f several unconnected electricity sub- networks. There are three principal components that together span 5547 km (3447 miles):

A high voltage direct current line (500kV) that runs 1740 km (1081 miles) f rom Inga to the Katanga region;

Three large sub-networks, composed o f high-voltage lines varying between 50kV and 220kV:

- The Western network, connecting Inga, Kinshasa and Lubumbashi, with further regional inter-connections for export o f electricity to the Republic o f Congo;

A Southern network in the Katanga region, receiving power f rom Inga and interconnected with Zambia;

An Eastern network interconnected with Burundi and Rwanda.

-

- A variety o f independent mini-grids organized around smaller urban centers and industrial centers across the country, powered by small power plants.

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33. The transmission system i s under significant strain. Equipment i s outdated, maintenance levels have been insufficient and new investment minimal. The system also has inadequate capacity to meet demand. In particular, lines connecting to Kinshasa and in the capital are heavily overloaded and operating beyond their design limits. The 220kV line connecting Inga and Kinshasa i s oversaturated. The very high voltage line that connects Inga to the Katanga region currently carries only about one quarter o f i t s design capacity.

Distribution Network Bas Congo Kinshasa Katanga

North & South Kivu Other Isolated Systems

Distribution

Connections 35,000 connections

290,000 connections 55,000 connections 3 2,000 connections 21,000 connections

34. The distribution system i s structured around four principal networks that between them account for 90 percent o f total electricity consumption in the DRC and approximately 400,000 connections. The distribution system includes roughly 1920 mi les o f medium voltage (6.6 to 30kV) lines and 7239 miles o f l o w voltage (0.4kV) lines:

As with the generation and transmission facilities, maintenance o f the distribution system has primarily been on an emergency repair basis, with virtually n o systematic rehabilitation. A l itany o f shortcomings has rendered the entire system highly unreliable, including saturated lines and transfonners and dilapidated poles.

35. Kinshasa i s dependent on Inga for virtually al l o f i t s power. Maintenance issues at Inga and limited capacity on the existing 220kV Inga-Kinshasa transmission l ine restricts supplies to the capital to about 4 5 0 M W . There i s an estimated additional 200 MW o f unmet demand. Limitations in the current distribution system and lack o f connections further constrain consumption. The result i s that the approximately 290,000 connections in Kinshasa (representing an access rate o f roughly 35 percent) experience frequent load shedding. Moreover, insufficient capacity, growing demand and a dilapidated network has resulted in significant voltage drops in the system in Kinshasa; in order to prevent further drops and greater instability in the network, SNEL i s severely limiting new connections.

System Losses

36. The SNEL network i s characterized by significant losses, at all stages o f generation, transmission and distribution. The capital’s dilapidated distribution network and overloaded transformers result in heavy losses in Kinshasa. Distribution losses have been estimated at around 25 percent; according to gross estimates, these are split between 15 percent for technical losses and 10 percent for non-technical losses. In addition, o f the total consumption bil led in Kinshasa, only about 50 percent i s actually collected.

C2. SNEL - The Vertically Integrated Parastatal Power Utility

37. An understanding o f the poor state o f DRC’s energy infrastructure starts with the national electricity utility. SNEL manages the main components o f the generation, transmission and distribution networks described above, including the isolated mini-gnds that power some

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outlying towns, delivering 95 percent o f a l l electricity produced in DRC. T h e company currently employs 6,500 staff. Details o f SNEL’s organizational structure are provided in Attachment 1 to Annex 6.

38. SNEL’s technical and operational abilities appear to be sufficient to run the Inga facilities and the related transmission systems, but in overall terms remain weak as a result o f a lack o f ski l ls upgrading and the loss o f qualified personnel during the conflict. O f fundamental concern to the viability o f SNEL’s operations are i t s financial position, internal governance and management weaknesses, and a poorly calibrated tar i f f regime. Taken together, they have caused S N E L to struggle to improve electricity services in the country.

39. The electricity sector in DRC has only been managed in an integrated fashion since the establishment o f S N E L in 1970 from six private regional companies. As a result, the electricity system that S N E L inherited had not been built to consistent technical standards, being instead composed o f different technical, equipment and planning standards (such as differing specifications for transformers or varying voltage levels in transmission lines). The lack o f inter-operability between components represents an engineering challenge and entails higher maintenance costs, for both components and training.

40. During the war, S N E L was divided into three distinct entities, with very limited links between them. While the company has since been re-unified, management remains weak. The majority o f decisions are made at the corporate level, but because reporting lines to the regional divisions remain weak, implementation i s patchy. A chronic lack o f institutional support - such as vehicles, equipment and up-to-date IT resources - considerably weakens management capacity. The company was recently re-organized into three main groupings. The Corporate Grouping runs the strategic functions that define long-term objectives, plans implementation and monitors performance. The Operations Grouping undertakes the principal activities o f the company, including generation, transmission, distribution and marketing functions. The Support Services Grouping provides the human and financial resources for the activities o f the other two groups. S N E L i s in parallel undertaking a corporate revitalization plan, including efforts to improve management o f i t s finances and operations. A more detailed description o f S I W L i s provided in Annex 6.

41. SNEL faces significant challenges in running the commercial aspects o f i t s business. Collection o f revenue for power provided i s weak. For example, SNEL’s turnover in 2005 was US$174.3 mi l l ion (i.e. total consumption billed), but only about 55 percent o f moneys owed to S N E L were paid, with government agencies and parastatals the least l ikely to pay.

Collection Rates

42. These weaknesses and failures have helped to severely weaken SNEL’s financial position, and have helped to constrain the uti l i ty’s ability to deliver key power services. The

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GoDRC has recognized that making progress on any o f these fronts will require thorough reform at SNEL. The GoDRC and SNEL, currently operating under new management, have stated their jo int commitment to increasing the quality and transparency o f SNEL’s management. As the table above illustrates, improving billing and collection i s vital and i s a priority o f SNEL management. Improving internal financial control systems i s also key to any financial recovery effort. Organizational and financial evaluations audits have already been launched.

C3. Tariffs

43. SNEL’s tariff structure i s divided into three key categories: high, medium and low voltage. Electricity for commercial customers in all three categories i s priced in U S dollars in order to reduce the financial impact o f Congolese Franc inflation. Residential customers in the l ow voltage category are bil led in Congolese Francs, which has resulted in a reduction in tariffs in dollar terms.

0 High voltage industrial customers are small in number - there are currently about 20 -but account for about 45 percent o f sales. The average tar i f f in 2005 was about U S cents 2.8kWh. Some o f the customers in this group, particularly other parastatals, have had large payment arrears but, for political reasons, continue to be supplied.

Medium voltage clients number approximately 1,300 and account for approximately 15 percent o f sales; the tariff in 2005 was about U S cents 7.3kWh.

0

0 L o w voltage customers, comprising residential, commercial and ‘public facilities’, have increased rapidly in recent years and there are now approximately 400,000 connections, accounting for approximately 40 percent o f sales. Tariffs for commercial low-voltage customers average about U S cents 1 1.6kWh. The large majority (80-90 percent) o f residential customers, by contrast, lacks a functioning meter and instead pay for electricity services via a lump-sum system. Customers are grouped into five categories. Whi le the system specifies a nominal upper limit o f consumption, the lack o f meters or consumption audits means that most customers are actually billed irrespective o f actual consumption. SNEL recognizes that this i s a major source o f non-technical losses and i s exploring ways to address this issue (including implementing a trial system in which meters will be placed further upstream in l o w and medium voltage supply boxes, allowing exact consumption o f a l l downstream residential connections to be measured). Tariffs for l o w voltage customers were increased in early 2007 by about 50 percent in an effort to compensate for the reduction in tariffs relative to their original dollar equivalency.

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L u mp-Su m Categories

‘Social’ Level 1 : Neighborhoods o f

Monthly Actual Actual Monthly Nominal consumption Monthly Billing (US$)* Unit Charge (US

(kWh) Billing (FC) cents IkWh) ** <loo 250 0.52 0.52 300 1080 2.25 0.75

Level 2: Neighborhoods o f I 400 1440 3.00 0.75

44. The tariff adjustment framework in D R C involves several government actors. Tar i f f changes are proposed by SNEL and brought to the tariff-setting committee (Comitk de Suivi de Tarzj) for discussion. The committee comprises representatives from five ministries (Energy, Finance, Economy, Planning, and the MinistBre du Portefeuille) and the National Energy Commission, as well as SNEL, but the shape o f the final proposal i s decided by the Ministry o f the Economy, which then transmits i t to the full Cabinet.

Medium Staiding

45. In summary, the tar i f f system in DRC has wide-ranging shortcomings. First, high levels o f non-payment o f bills from many customers, combined with a lump-sum system for residential customers that acts to decouple electricity consumption from billing, results in total revenues that do not cover SNEL’s operating and maintenance costs. Second, the combination o f residential customer billing in Congolese Francs and high inflation in the intervening period has meant that residential tari f fs have decreased in real terms. Third, the payment burden i s unequally distributed, with certain classes o f customers accounting for a disproportionately high share o f total consumption charges. W h i l e significant changes to the tar i f f structure and levels may be appropriate (the Government has commissioned a tar i f f study which wil l provide input to this analysis), significant changes in this area will likely await improvements in service quality.

Neighborhoods

Neighborhoods Level 4: Outlying

C4. SNEL Comorate Governance

900 5116.5 10.66 1.18

46. SNEL was created, as a legal entity, by ‘ordonnance-loi’ no. 70-033, o f M a y 16, 1970. Building on this, law no. 78-196 o f M a y 5, 1978 sets out in detail the charter and the legal basis on which the company operates, including i t s objectives, corporate structure and financial arrangements. As set out in Attachment 1 to Annex 6, law no. 78-196 stipulates the corporate governance mechanisms for SNEL, including the Board o f Directors, the Management Committee and the CollBge des Commissaires aux Comptes (see description in Attachment 1 to Annex 6). In addition, the law stipulates that SNEL i s under the jo int supervision o f the Ministries o f Energy and o f Portefeuille. The former ministry exercises technical supervision, with competency to oversee the organization o f SNEL’s internal services, i t s operations, staff remuneration and the annual report. The latter ministry supervises administrative and financial aspects o f SNEL’s activities, including actions that affect SNEL’s financial position (including external loans), budgetary and financial plans and real estate transactions. There are also areas where supervision overlaps between the two ministries, including when SNEL establishes external partnerships.

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47. As set out in the relevant law, the supervisory ministries exercise their authority via three means, namely:

0 Ex-ante authorization, required for certain acquisitions, works or goods that exceed a certain threshold (about US$500,000 for certain transactions), loans with a tenor exceeding one year and the acquisition or sale o f external financial interests.

‘Passive approval’, where approval i s deemed to have been granted when the relevant ministry does not intervene within the space o f a month; these activities include the internal organization o f S N E L ’ s departments, personnel issues, budgets and financial forecasts, and year-end activity and financial reports.

‘Opposition’, whereby the supervisory ministry blocks a decision o f the Board within five days o f the notification having been received (which implies that any Board decisions are not deemed to have been executed until five days after their receipt at the relevant ministry).

0

0

48. Despite this legal framework for SNEL’s corporate activities, the company faces numerous corporate reporting and management issues. Reporting and management lines between the Government and SNEL are somewhat unclear in practice. SNEL’s Board o f Directors, composed o f the four-person ‘internal’ Management Committee plus five ‘external’ directors (all of whom are appointed by the President o f the Republic), plus a representative from each supervisory ministry, does not have an explicit framework o f goals and objectives guiding the company’s activities. The in fomat ion f low between SNEL and the Board has at times been inadequate, undermining the ability o f the Board to exercise oversight. Recognizing these weaknesses, the Government and SNEL are taking actions to strengthen corporate governance (see discussion on governance in Attachment 1 to Annex 4). There i s currently no statutory electricity regulator, although discussions are underway to evaluate this option.

C5 Rural Electrification

49. A Rural Electrification Unit was established within SNEL in 2005 to implement the rural electrification initiative launched by the Government the previous year. The Government has recently commissioned a strategic, regulatory and implementation study for this area. A draft i s currently being reviewed by the Government and SNEL. In general, electrifying the country (including the currently un-electrified large urban centers) i s a priority o f the government.

C6. Private Sector Participation

50. Private sector involvement in the electricity sector in D R C has primarily been limited to private investment in generation, notably in connection with extractive industry operations in the Katanga region. The Government and SNEL have also been working to develop partnerships with the private sector in generation, transmission and distribution (including efforts at Inga 1 and 2). To date, however, SNEL and other Government efforts to engage the private sector have been ad hoc and have lacked consistency and transparency. Recognizing the importance o f creating a sound framework for attracting private sector partners on conditions that best protect the development interests o f DRC, the Government and S N E L are exploring how to institutionalize a more systematic and stronger process for partnering with the private sector (see discussion below on electricity sector governance program).

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51. One potential area for large private investment i s the development o f Inga 3, a new hydroelectric plant at the same site with a generation capacity o f about 3,500 MW. A consortium - named the Western Power Corridor Project, or ‘Westcor’ - was launched in 2004 as a collaborative effort between the electricity supply companies o f DRC, Angola, Botswana, South Africa and Namibia to develop the Inga 3 plant with a view to exporting power to southern Africa along a western corridor. Total costs are estimated at about US$5 billion, including wel l over U S $ l bi l l ion in related transmission investments to connect to SADC customers. This effort will require extensive private sector financing. The Bank i s helping M o E to strengthen i t s capacity to evaluate and promote private sector involvement in the further development o f the Inga site.

C7. Bank Group Support to the Electricitv Sector

52. IDA. T o date, IDA has, in addition to the SAPMP APL-1 project described above, provided funding to the sector in DRC through three Projects: (i) the Emergency Multisector Rehabilitation and Reconstruction Project (“EMRRP”, Cr. 3703-DRC), (ii) the Emergency Economic and Social Reunification Support Project (“EESRSP”, Cr. 3824-DRC) and (iii) the Emergency Living Conditions Improvement Support Project (“ELCISP”, Cr. H-164-DRC):

0 The EMRPP has provided US$90 mi l l ion equivalent in support for a range o f upgrading Projects, including: (a) about US$15 mi l l ion for l imited repair and maintenance works at the Inga 1 and 2 facilities; (b) strengthening the reliability o f the existing 220 KV l ine from Inga to the capital; (c) upgrading the distribution network in Kinshasa and other main towns; and (d) rehabilitation o f small thermal and hydro facilities in Katanga and other towns. All the contracts for these works under the EMRPP were signed last year and the contractors have remobilized following the electoral period.

0 The EESRSP Project has allocated about US$3 mi l l ion for the rehabilitation o f the existing Ruzizi plant, as well as US$990,000 o f small investments in the rehabilitation o f the network in Kindu.

0 The ELCISP Project has allocated US$5 mi l l ion for the rehabilitation and strengthening o f the urban distribution networks in six large towns across the country.

53. IDA has also financed a range o f capacity building and technical assistance activities: (a) logistical support to SNEL, including for project procurement and supervision, (b) sectoral studies directed at tariffs and rural electrification, and (c) institutional support to SNEL/Government in negotiating export trade arrangements.

54. IFC and M I G A : IFC and MIGA are exploring potential operations in the electricity sector, including support to the further development o f the Inga site.

D. Governance Challenges in the Electricity Sector

55. GoDRC has sought to prioritize reliable provision o f electricity as a driver o f economic development. While allowing for private participation in the sector, the GoDRC recognizes that SNEL remains a key operator in the sector and that improvements in the sector wi l l

38

depend to a large extent on improving SNEL’s efficacy. SNEL, however, has historically faced significant governance weaknesses and failures. These have undermined the utility’s ability to operate efficiently, weakened it financially, and prevented it from delivering key power services to the people o f DRC. At the same time, there i s need to improve governance within the sector beyond SNEL, notably by reducing non-payment by power consumers and establishing a transparent, equitable and sound framework for attracting private sector partners to the sector who are viewed by the authorities as vital to the further development o f the sector. The governance failings in the sector encompass SNEL’s internal operations, as well as external parties, such as the Government, contractors and customers.

56. These failings can be distinguished into two basic types: those relating to strategic decision-making and the second to financial aspects at the level o f everyday operations. Examples o f each are given belpw.

Strategic Decision-Making

0 Investment and Staffing Decisions. Historically, decision-making within S N E L was driven at times by privileged stakeholders, rather than corporate objectives. W h i l e recognizing that any power company, and in particular a state-owned company, must respond to a variety o f constituencies and dnvers in making strategic decisions, there was excessive influence that led the company to largely ignore i t s non-industrial customers. Perhaps more importantly, this dynamic arguably created an environment o f weak governance - which in turn allowed secondary strategic decisions (such as smaller level service decisions) to be made to support similar private rather than corporate objectives. Secondly, a perception was created that decisions were driven excessively by non-corporate criteria, which undermined staff morale.

0 Joint-Venture Contracting. There i s currently a lack o f clarity regarding the jo int venture contracting practices o f SNEL and other Government entities, which appear to be handled in an ad hoc manner. In addition to potentially leading to disadvantageous contracts for the public sector, i t leads to a perception o f weak governance.

Financial Aspects at Operational Level

0 Financial Operating Issues. The major governance issues facing SNEL relate to financial weaknesses, including (a) misappropriation o f corporate funds; and (b) misprocurement, including inappropriate selection o f suppliers/contractors, and uncertain receipt and fraudulent invoicing o f goods.

0 Failure to Pay for Power by Consumers. An important financial drain for SNEL are the consumers (both public and private) who tap into the power lines illegally or refuse to pay their bills, consuming power without ever paying for the electricity they consume. I t i s currently estimated that these forms o f misappropriation o f power represent an important part o f SNEL’s non-technical and collection losses.

57. Given that these failings encompass SNEL’s internal management and operations, as well as external parties, the mechanisms to improve governance must be tailored to address a

39

spectrum o f governance challenges, both in and outside the utility and at senior management and operational levels. Recognizing the centrality o f the power sector to DRC’s development, GoDRC and the management o f S N E L have been developing, with Bank support, a program to improve both sector and utility governance. Init ial steps by S N E L and GoDRC have included (i) commissioning from an external firm a diagnostic o f SNEL’s financial and procurement control systems, (ii) the systematic publication o f annual reports to improve communication and transparency, (iii) commissioning and publication of an external audit o f SNEL’s financial statements, and (iv) commissioning an external review of SNEL’s corporate governance mechanisms. In order to deepen and solidify these actions, a program o f actions to improve governance in the sector and within SNEL has been developed, within a broader context o f public enterprise reform generally. The details o f the program are set out in Attachment 1 to Annex 4 below. The implementation by GoDRC and SNEL of key actions to promote governance in the electricity sector is a covenant under the Project,

40

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies AFRICA: Regional and Domestic Power Markets Development Project

(Southern Afncan Power Market Program, APL-lb)

Reconstruction Project (“EMRRP”), FY03

Reunification Support Project (“EESRSP”), FY04

Emergency Living Conditions Improvement Support Project (“ELCISP”), FY05

Emergency Economic and Social

Southern Afi-ica Project Management Plan

1. As set out in Annex 1 section C above, IDA has, in addition to the SAPMP APL-1 project, provided financing to the energy sector through three projects: the Emergency Multisector Rehabilitation and Reconstruction Project (“EMRRP”, Cr. 3703-DRC), the Emergency Economic and Social Reunification Support Project (“EESRSP”, Cr. 3824-DRC) and the Emergency Living Conditions Improvement Support Project (“ELCISP”, Cr. H-164- DRC) .

PO8 1850 S S

MU Mu PO88619 M S M S

Title I Project ID I Latest DO I Latest IP Emergency Multisector Rehabilitation and I PO57296 1s 1s

41

Annex 3: Results Framework and Monitoring AFRICA: Regional and Domestic Power Markets Development Project


Results Framework

PDO

To improve operational efficiency in the electricity sector and expand generation, transmission and distribution capacity in order to better serve domestic power demand and to support regional power market integration.

Increased reliable generation at Inga 1 and 2 plants

Increased power delivery capacity to Kinshasa from Inga site

Improved operating efficiency o f transmission and sub-transmission system Increased power delivery from Inga for export to SAPP countries and to Katanga industrial and other customers

Improved financial efficiency o f SNEL

Improved commercial efficiency o f SNEL

Increased connection in Kinshasa and electrification o f previously un- electrified areas Strengthened SNEL financial reporting

Improved transparency in SNEL’s external partnerships

Project Outcome Indicators

Increase in GWhs o f energy delivered to Kinshasa and to SAPP and Katanga region clients.

Intermediate Outcome Indicators

Aggregate rehabilitated generation capacity at the Inga 1 and 2 plants

Kilometers o f second transmission l ine strung

GWhs o f energy delivered to Kinshasa distribution network from Inga

Incremental GWhs delivered to SAPP countries and Katanga region customers from Inga

Revenues collected in Kinshasa per kwh delivered to Kinshasa

Percent o f accounts receivable collected by SNEL in Kinshasa

Number o f additional households connected in Kinshasa

Number o f qualifications to external audits Publication o f public/private partnership agreements for electricity sector

Use o f Project Outcome Information

To measure overall progress towards meeting the Project’s development objectives.

Use of Intermediate Outcome Monitoring

To monitor progress against engineering timelines and ensure appropriate rehabilitation sequencing. To measure status o f second transmission line construction and identify possible obstacles To monitor and manage ‘weak links’ in delivering energy to Kinshasa To assess trade prospects and hurdles with SAPP and demand and delivery on the HVDC line to Katanga To gauge impact o f efforts to improve collection rates and SNEL’s overall management To gauge impact o f efforts to improve collection rates and SNEL’s overall management To track pace o f electrification and identify any implementation obstacles To identify weaknesses in financial control systems Ensure full disclosure o f external partnerships with SNEL

42

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Annex 4: Detailed Project Description AFRICA: Regional and Domestic Power Markets Development Project

(Southern African Power Market Program, AF'L-lb)

A. SUMMARY OF PROJECT COMPONENTS

1. The Project consists o f five components as follows:

Component 1 : Generation (US$226.7 million): Rehabilitation o f the hydroelectric facilities at Inga, including civ i l works on the intake canal to improve the water f low through the plant and rehabilitation o f turbines to increase the operational capacity and reliability o f the Inga plant (1 and 2) from i ts current maximum o f about 700 MW to about 1300 MW o f reliable production.

0 Component 2: Transmission (US$93.8 million): Construction o f a 400 KV Inga- Kinshasa transmission line. The second line will complement the existing 220 kV IngaiKinshasa transmission line, relieving the current saturation o f the existing line and thereby improving the security o f transport o f power f rom Inga to Kinshasa, as wel l as increasing the amount o f power that can be delivered to Kinshasa.

0 Component 3: Distribution (US$88.5 million): Expansion and strengthening the distribution system in Kinshasa, including the acquisition o f l ow voltage cables and transformers, the extension o f the grid into currently un-electrified areas o f Kinshasa and the connection in these areas o f a total o f 50,000 new customers.

Component 4: Capacitv Building and Governance (uS$41.2 million): The component comprises two subcomponents:

o Subcomponent (a): Strengthening SNEL's operational capabilities, notably in commercial activities, planning, dam safety and technical training. The component wi l l also support actions to enhance governance within the uti l i ty specifically and in the sector generally.

Subcomponent (b): Strengthening the Ministry o f Energy's capacity to develop sector reform and to support the further development o f the Inga site.

o

Component 5 : Proiect Execution WS$48.8 million), including Project preparatory activities): Effective implementation o f the Project works, in an environmentally and socially sound manner, including appointment o f supervisory engineering consultants, environmentalhocial consultants and the P F M Agent.

Each o f these components i s described in further detail below.

B. DETAILED PROJECT COMPORTNTS

Project Component 1: Generation (US$226.7 million, of which US$198.3 will be flnanced by IDA and US$28.4flnanced by other sources)

2. There are 6 turbines at Inga 1, with nameplate capacities o f 55 MW each, and maximum capacities o f 58.5 MW (total max. capacity at Inga 1 i s 351 MW) and there are 8 turbines at the Inga 2 plant (separated into two groups o f four, entitled 2 A and 2B), each with nameplate

44

capacities o f 162 and maximum capacities o f 178 MW (total max. capacity at Inga 2 i s 1,424). The total nameplate capacity at the two plants i s 1626 MW and the total maximum capacity i s 1775 MW. The plant today i s operating nearer to 700 MW, as a result o f poor maintenance and some questionable design choices, with significant intermittent reductions as a result o f l o w reliability. Production capacity at the Inga plant i s l imited by turbines that no longer function, and other factors such as siltation and rock formations that limit the water f low through the intake canal.

3. In order to address these issues, the Project will rehabilitate the turbines and other installations at the Inga 1 and 2 plants to make available about 1300 MW o f reliable production. In addition, SNEL i s exploring the option o f redesigning two o f the uni ts which require the most extensive rehabilitation to increase the unit output (potentially at Inga 2B). To this end, a study will be carried out as part o f the work o f the firm selected to handle the rehabilitation, and will be overseen by the Supervisory Engineer. In addition, in order to achieve a production capacity o f about 1300 MW, the canal needs to be re-profiled and dredging undertaken. The Association will finance rehabilitation works for the turbines and related facilities at Inga 1, for the turbines and related facilities at Inga 2A and the canal dredging and reprofiling. Donors and other partners will provide financing for the other facilities, and SNEL wil l ensure that these other activities are coordinated with thosefinanced by the Association.

4. The rehabilitation work and canal re-profiling i s expected to increase production capacity at the site by about 600 MW, from about 700 MW to about 1300 MW, and to improve i t s reliability. The increase will be incremental, averaging about 150 MW per year beginning end 2009 through end 2012. Given the run-of-river quality o f the Inga site and the hydrological conditions, each incremental MW can be expected to generate 6132 Mwh, assuming a 70 percent plant load factor.

Project Component 2: Transmission (US$93.8 million,Jinanced by other sources)

5. There are currently three transport networks emanating from Inga. The f i rs t is the eastward H V D C KinshasaKolwezi (Katanga) line, which transports power to the SAF'P and to Katanga mining and other customers. The second i s the northern IngaKinshasa corridor, which transports power to Kinshasa and to Brazzaville. The third i s the IngaBas Congo line, a smaller transmission system to provide power to the c i ty o f Matadi and other areas in Bas Congo (located to the west o f Inga). A fourth corridor under consideration (as part o f the CAF'P) would transport power northwest to Cabinda, Angola and onward to Pointe Noire, Republic o f Congo. The second transmission l ine from Inga to Kinshasa to be erected under Component 2 o f the Project i s expected to increase the capacity to deliver power to Kinshasa from the current 450 MW (along the oversaturated existing 220 KV line) to wel l over 700 MW. T h i s second line will also provide increased security of supply to Republic of Congo through this corridor.

6. T h i s second l ine from Inga to Kinshasa will enhance the security o f supply o f power available for Kinshasa, as well as Brazzaville. The line would be about 260 Km in length and would be configured as a 400 kV line, but init ially operated in 220 kV until demand in Kinshasa would justify the additional investments needed to operate the l ine at 400 kV (e.g., in substations at the Inga and Kinshasa ends o f the line). It i s anticipated that the new line would largely follow the route o f the existing 220 kV l ine that follows the Inga-Kwilu-Kimwenza axis.

7. The component would include: (a) construction o f a double circuit 400 kV line from Inga (Camp Kin location) to Kingantoko, wi th a fibre optic line, (b) construction o f a 220 KV double circuit line f rom the dispersion substation at Inga to Camp-Kin (at the Inga site) with a fibre optic line, (c) construction o f a 220 kV double circuit l ine from Kingantoko to the end point o f

45

the Kimwenza-Lingwala line (single circuit) - i.e., in the Kinshasa area, with a fibre optic line, and (d) construction o f a 220 kV line f rom the end point o f the Kimwenza-Maluku line to the Kimbanseke end point (see discussion under distribution component).

Project Component 3: Distribution (US$SS.5 million, of which US$26.2 million financed by I D A and US$62.3 million financed by other sources)

8. Currently, the Kinshasa distribution system i s oversaturated, with transformers operating at precariously high levels o f capacity, resulting in localized loss o f power and increased levels of technical losses. The Project will alleviate this stress on the system by financing rehabilitation o f the existing system, thus improving the quality o f service and reducing system losses (cost estimated at about US$50 million). One objective i s to progressively shift customers f rom the antiquated 6.6 kV distribution network to the 20 kV distribution network. The Project will also finance rehabilitation activities at three key substations serving Kinshasa, namely the 30 kV substations located at Liminga and Lingwala and the 20 kV Utexco substation (estimated cost US$3 million), and increase 220 KV transformer capacity in the system. These activities will complement the rehabilitation activities being carried out under the IDA-financed EMRRP Project . 9. In addition, the Project will also electrify new areas within greater Kinshasa that do not currently receive power, notably the Kimbanseke area located to the east o f the c i ty (the largest un-electrified area within greater Kinshasa), with a population estimated at above 1.2 mill ion. Electrification o f Kimbanseke will require the erection o f a new substation (estimated cost US$6 million). In addition, the Project will electrify the Kinseso, Mpasa 1/2/3 and Malweka areas which are, other than Kimbanseke, the largest remaining un-electrified areas in Kinshasa, with populations estimated each in the 250,000-350,000 range.

10. The Project will also finance 30,000 new connections in Kimbanseke, and 20,000 new connections in the other three areas. As the Project will, in essence, be providing for a distribution backbone in these areas to be electrified, further connections over and above the project-financed 50,000 are anticipated. In addition, the addition o f these newly constructed distribution networks to the Kinshasa grid should help to reduce overall technical loss rates.

Project Component 4: Capacity Building and Governance - SNEL and M o E (US$41.2 million, of which US$34.7 million financed by IDA, US$1.5 million financed by SNEL, and US$5.0 million financed by other sources)

11. This component includes a capacity building sub-component to benefit SNEL and a separate sub-component to benefit the Ministry of Energy.

Subcomponent 4(a) - SNEL (US$36.7 million, of which US$30.2 million financed by IDA, US$1.5 million financed by SNEL, and US$S.O million financed by other sources):

12. The Project will strengthen the capacity o f SNEL in four principal ways: (a) support to strengthen SNEL’s commercial management and operations, (b) support for improved planning and maintenance, (c) improved training o f SNEL staff, and (d) improved governance.

13. Improved Commercial ODerations. SNEL’s capacity to conduct commercial operations (namely billing and collections) will be strengthened through such actions as improved client databases, improved billing and collection systems, and other support. A consultant will be employed by SNEL to conduct a diagnostic o f the weaknesses in i t s billing and collection

46

systems and to develop a program to strengthen operations in this area. In addition, the Project w i l l support the acquisition and deployment o f about 60,000 meters, including about 50,000 meters for the new customers in the newly electrified areas and about 10,000 pre-payment meters for an established area (such as the Gombe area), and about 300 MV meters for medium voltage clients (the installation o f the meters will be funded by SNEL).

14. Improved Planning. Training and Maintenance. The Project will finance consultants to assist SNEL in developing a strategic expansion plan to electrify urban centers and other areas throughout the country. In addition, the Project will finance training for SNEL staff in such areas as planning, strategy and operational areas. The Project will also finance a diagnostic o f the maintenance needs, including in training o f staff. AfDB would finance follow-up training activities designed to strengthen the maintenance and operating capacity o f SNEL staff. The Bank wil l also strengthen SNEL ’s capacity to manage environmental and social aspects o f i t s operations, initially by providing support to the environmental and social unit (ESMU) to be established within SNEL (as a condition ofeffectiveness).

15. Strengthened Dam Safetv. An independent assessment was carried out o f the facilities which concluded that there were n o major issues, but that SNEL would benefit from a strengthened maintenance program. S N E L will strengthen i t s capacity to carry out dam safety maintenance activities at the Inga installations, including the preparation of an emergency preparedness plan.

16. Vector Control (Onchocerciasis-related). Black f l ies (Simulium Damnosium), a vector for onchocerciasis, are prevalent at the Inga site and surrounding health zones (Inga and Seke- Banza, with a total o f 160,000 inhabitants). The presence o f the disease has decreased in the last two years due to mass distribution o f Invermectid Mectizan(R), a potent antiparasite drug mixture. T h i s drug i s distributed in the region with the support o f the African Program for Onchocerciasis Control, which i s executed by WHO and funded through a Wor ld Bank trust fund. However, the flies s t i l l represent a major issue for the population. The nuisance factor i s severe and has important socio-economic effects including on school attendance.

17. SNEL and the Ministry o f Health have been working to address this issue. The Project activity will focus on addressing the black fly nuisance on the Inga site and surrounding health zones. It will: (i) control black fly larvae by spraying Permethn, an insecticide, in the river six times a year in high season, (ii) strengthen the existing Inga Entomological Mission (EM), which will monitor impacts, (iii) strengthen the spraying team, (iv) provide the necessary equipment (spraying boat) and pesticide. Particular attention will be paid to monitor hydro- biological impact, strengthen capacities for entomological monitoring and evaluation, and ensure sustainability o f the interventions. It i s anticipated that the WHO/APOC (African Program for Onchocerciasis Control) will be contracted to implement the control activities under the joint supervision o f M o H and SNEL, and to strengthen the existing capacity in the EM. A Pest Management Plan (PMP) has been prepared and released in-country and in the Bank’s InfoShop (see discussion in Annex 10). Total estimated cost i s US$2.2 million, including about US$ 1.2 mi l l ion for pesticides, US$ 0.1 mi l l ion for a pesticide spraying boat and U S $ 0.9 mil l ion for consulting services.

18. Improved Governance. The Project will support the implementation o f a series o f actions to enhance governance within SNEL and the electricity sector generally. The actions are built around three pillars: strengthening SNEL’ s capacity; improving oversight and transparency; and strengthening partnerships in the sector, notably publidprivate partnerships. The component will include support to strengthen SNEL’s financial and procurement systems, which will draw from the diagnostic study commissioned as part o f project preparation. I t will also include a sub-

47

component to strengthen SNEL’s commercial activities (notably bi l l ing and collection), which should improve governance both within S N E L and in i ts customer base. In addition, the Project wi l l fund annual financial audits and annual procurement audits. S N E L will also systematically produce and disseminate annual reports, which will include the audited financial statements. A fuller description o f the governance enhancement activities i s set out in attachment 1 to this Annex 4.

Subcomponent 4(b) - MoE (US$4.5 million,$nanced by IDA):

19. This component will strengthen the capacity o f MoE:

a. to formulate a strategy to further develop the Inga hydropower resources (including the proposed Inga 3 Project and related Western Corridor Project, and opportunities for export into the Central Africa Power Pool), including hiring financial, legal and other advisors, as needed, and

b. to develop and analyze structuring options for the sector, including in particular setting a framework for publidprivate partnerships (including the concessioning o f power assets and the negotiation o f joint-venture agreements).

20. The Project will build on the results o f the tariff, rural electrification and sector studies being executed under the EMRRP.

Project Component 5: Project Execution (US$48.8 million, of which US$3 7.5 financed by IDA and US$11.3 million financed by SNEL)

21. The component will strengthen SNEL’s and M o E capacity to carry out the rehabilitation and expansion activities provided for under the Project, including through the acquisition o f supervisor engineering services. In addition, a P F M Agent will be hired to manage procurement and financial management aspects relating to Bank and other donor financing to be provided under the Project. This component will also finance the cost o f managing and implementing the ESR Plan (see discussion in Annex 10). The component wi l l also provide financing for operating, logistical, training and other support required by S N E L and M o E for Project coordination through the Project Management Units (estimated cost o f US$3.5 million, o f which IDA will finance US$2.5 mi l l ion - including US$2.0 mi l l ion for the S N E L PCU team and US$500,000 for the MOE PCU team; the balance o f US1.0 mil l ion will be provided by S N E L through in-kind support). In addition, SNEL will contribute i t s staff resources and logistical support to the Project (estimated at n o less than US$lO.O million).

48

Attachment 1 to Annex 4

Enhancing Governance in the Electricity Sector

1. Experience in DRC and elsewhere in the world has demonstrated that the types o f governance challenges facing the electricity sector generally and SNEL specifically are difficult to overcome, and that a multi-faceted approach i s required that addresses aspects both internal to SNEL’s operations and external to the broader context in which it operates. The governance challenges facing the sector (see discussion above in Annex 1) can be distinguished into two basic types: those relating to strategic decision-malung and the second to financial aspects. A series o f actions has been delineated by the Government and SNEL to address these challenges. The actions are designed to empower the utility, the Government as shareholder, and current and future consumers (namely the population). The actions can be grouped around three pillars: (a) improving SNEL’s institutional capacity; (b) enhancing the oversight and transparency o f SNEL; and (c) strengthening partnerships in the sector. Each o f these three pillars i s built on a firm foundation, namely a commitment from the highest governmental authorities to address governance weaknesses in the sector so as to put the sector on a sound commercial basis.

A. Pillar One: Strengthening SNEL’s Institutional Capacity

2. The actions within the first pillar are designed to strengthen SNEL’s institutional capacity, notably in financial management, procurement and other control systems. An external evaluation commissioned by SNEL (with Bank financing) pointed to various weaknesses in SNEL’s financial management and procurement systems. SNEL also faces weaknesses in i t s billing and collection systems, its management information systems (including in tracking energy flows through i t s grid, notably f rom generation through transmission and distribution to i t s ultimate customers), and in i t s personnel functions. SNEL i s also looking to improve i t s communication with stakeholders and needs to strengthen i t s staffing practices.

3. The f irst pillar contains the following set o f actions:

a. i t s financial management systems:

Financial Management Svstems. SNEL i s undertakmg various actions to strengthen

Conduct an external independent diagnostic o f i t s financial management systems, their weaknesses and identify actions to strengthen these systems (completed end 2006).

Employ an external accounting or other similar consulting firm to develop and assist SNEL in implementing strengthened financial management systems, including the implementation o f improved control systems, the acquisition o f related software and equipment, and training. T h i s action will be financed under the Project.

i.

ii.

.. . 111. Conduct annual external financial audits (see discussion below under

oversight‘transparency pillar).

b. procurement systems:

Procurement Svstems. SNEL i s undertaking various actions to strengthen its

i. Conduct a summary diagnostic o f i t s procurement practices (completed end 2006).

49

ii. Employ an external accounting or other specialist consulting firm to strengthen SNEL’s procurement practices. A single firm wil l be employed to assist with both the strengthening o f SNEL’s financial management and procurement systems (financed under the Project).

... iii. Conduct annual procurement audits (see discussion below under

oversightltransparency pillar).

C. Commercial Business Practices. SNEL i s undertaking various actions to reduce billing and collection losses by strengthening i t s commercial practices in this area. As noted above, SNEL ’s losses in collection are estimated at about 45 percent for the Kinshasa region. SNEL i s undertaking the following actions:

i.

ii.

Commission a diagnostic review and an action plan to strengthen i t s commercial practices. This action will be financed under the Project.

Employ an external consulting firm to develop and assist S N E L in implementing the action plan, including the development o f improved billing and collection practices, the acquisition o f related software and equipment, and training. T h i s action will be financed under the Project.

The acquisition and installation o f meters, including 50,000 in an init ial phase. . . . 111.

d. Management Information Svstems. In connection with enhancing i t s financial control system, SNEL will also strengthen i t s management information systems to improve the quality and flow o f information within the utility (including fi-om decentralized centers to i t s headquarters in Kinshasa). As a related aspect, SNEL wil l improve i t s ability to track energy flows (including identifying sources o f losses) through i t s system, which underpins the financial and commercial operations o f the company. S N E L will undertake the following actions:

i. Employ the external consulting firm responsible for strengthening i t s financial management systems to assist in strengthening i t s management information systems and i t s ability to track energy flows. This support will be financed under the Project.

Install meters at strategic points in i t s grid to improve i t s ability to track energy flows. The installation o f meters in the Kinshasa network i s being financed under the Project as part o f the distribution and transmission components o f the Project.

ii.

e. StaffindPersonnel Function. SNEL needs to strengthen i t s personnel function to support more transparent and effective staffing.

i. Managerial Appointment Process. SNEiL will review i t s recruitment and promotion processes for managers.

ii. Staff Recruitmenflerformance ReviewPromotion Process. SNEL wil l review and reform i t s recruitment, performance review and promotion processes for staff so as to create a sound incentives framework for staff.

f. Strengthened Communication. The management o f SNEL has recognized the importance o f maintaining a strong culture o f communication in order to inform i t s stakeholders - including staff - and current and prospective partners about i t s activities and corporate priorities.

50

i. T o inform outside stakeholders, SNEL prepared annual reports for 2004 and 2005. SNEL’s management i s looking to improve the breadth and depth o f these reports, including presenting i t s financial statements in the report. The Project will support SNEL’s management in this effort by financing the preparation and publication o f annual reports for the succeeding four years.

ii. A stronger informatiodcommunications culture directed at SNEL staff, i t s partners and consumers i s also a necessary complement to other actions, so as to both raise awareness and to encourage stronger internal actions in support o f the governance enhancement effort.

g. Strengthened Joint-Venturing Capacity. GoDRC and SNEL will improve their capacity to undertake the legal and financial analyses necessary to develop sound and equitable public/private partnerships and other jo in t ventures.

i. Strengthen SNEL’s Legal Department (support being provided by the Bank)

ii. Strengthen SNEL and MoE’s financial evaluation capacity (support being provided by the Bank).

B. Pillar Two: Enhancing Oversight and Transparency o f SNEL

4. The second pillar addresses issues o f oversight and transparency; it is designed to enhance the control o f SNEL’s activities by i t s Board and enhance the participation o f other stakeholders in the sector by improving transparency. This pillar contains the fol low set o f actions:

a. External IndeDendent Financial Audits and their Publication. After a three-year hiatus, SNEL commissioned an external audit o f i t s accounts (for 2005, as well as 2004), which was completed in February 2007. SNEL intends to commission these audits annually and to publish them (notably in i t s annual report). Specific steps include:

i.

11.

... 111.

The external audit for FY 2005 was completed in February 2007.

SNEL will conduct annual financial audits by an independent auditor. Audits for the next several years will be financed under the Project. The audits wi l l be completed by June 30 o f each year (in accordance with the audit requirements for recipients under IDA-financed projects).

The audit for FY2005 (completed in March 2007) was published in local newspapers in April 2007. Going forward, the audited financial statements will be included in SNEL’s Annual Reports, which will be published by September o f each year.

b. External Procurement Audits. SNEL will commission annual procurement audits. These audits will feed into the institutional strengthening activities to be carried out under Pillar One. Specific steps include:

i.

ii.

S N E L will conduct annual procurement audits (to be financed under the Project). The audits will be completed by March o f each year.

These procurement audit reports will be published,

5 1

c. Board o f Directors. Prospects to improve SNEL’s management begin at the top o f the organization, notably with i t s Board o f Directors. As part o f the public enterprise reform effort, the Government i s exploring mechanisms to strengthen oversight o f i t s public enterprises and create the mechanisms so that companies such as SNEL can be more commercially oriented in their operations. The Government i s considering different mechanisms for promoting effective Board oversight. For example, in the recent past, Board members were vetted by a selection committee. A strengthened appointment process will be developed as part o f the public enterprise reform initiative (draft laws in this regard are currently under consideration). One o f the constraints which has faced the Board o f SNEL has been inadequate information flow, as well as difficulties in traclung key actions such as the preparation o f audits and procurement aspects. T o strengthen the effectiveness o f the Board o f Directors o f SNEL:

i. Specific external directors will be given responsibility for audits, procurement issues, and improving information f low to the Board o f Directors. The designation o f specific external directors with these responsibilities should help to enhance the ability o f the Board to fo l low these areas by providing for a lead external director.

ii. The process and criteria for appointing the ‘external’ directors on the Board will be reviewed, as well as the nature o f the Board’s oversight o f SNEL management, with a view to enhancing oversight, while also fostering an environment that i s more commercially oriented. Act ion in this area i s expected within the next several months as part o f the overall public enterprise reform effort.

iii. A review o f SNEL’s legal charter to determine whether the above-mentioned proposals require modification o f the charter.

d. Senior Management Amointment Process. The CEO and Senior Management o f the utility are central to efforts to strengthen governance within the utility. The appointment (or confirmation) process o f the CEO and o f the other senior executives who make up the Management Committee i s key. Clear criteria are needed for the selection o f the CEO and other senior executives that emphasize technical qualifications, while also recognizing other qualities that can provide for strong and effective leadership. In this regard:

i. The process and criteria for appointing SNEL’s senior managers will be reviewed by the Government, as part o f the public enterprise reform effort, with a view to providing a systemic process designed to foster a more commercially oriented enterprise.

e. Conflict/Disclosure re: SNEL Board Directors and Kev Executives. Strong policies for avoiding conflicts o f interest and financial disclosure requirements are important tools to improve governance. The Government i s currently finalizing a Ministerial order in this area which will govern SNEL and other public enterprises; the order i s expected to be issued by M a y 2007. In this regard:

i. The directors and senior executives o f SNEL will provide financial disclosure statements and follow financial conflict o f interest proscriptions.

52

C. Pillar Three: Enhancing Strategic Partnership Arrangements

5 . The third pillar targets improving the strategic partnership arrangements entered into with other key actors in the sector, namely prospective private (including public foreign) sector investors and public sector consumers. T h i s third pillar includes the following set o f actions:

a. Joint-Venturing and other Partnerships. The Government’s stated policy i s to open the sector to greater private sector investment, whether though joint-venture arrangements, concessioning or other forms o f public/private partnership. To date, SNEL and other involved ministries have taken an ad hoc approach to these transactions, highlighting the need for a systematic and sound approach to engaging with the private sector.

i. MoE will launch, over the next several months, a review o f the current partnering practices o f SNEL and other government entities and ministries regarding the power sector.

ii. GoDRC, under the leadership o f the M o E and SNEL, will develop a framework for soliciting, evaluating and negotiating with prospective private sector investors that promotes financially and technically sound investments, ensures transparency and favors competition.

... 111. MoE/SNEL will commission a review o f the existing agreements regarding

electricity sector assets to establish an inventory and facilitate a deeper understanding o f the approaches used to date.

iv. All public/private partnership agreements signed after March 1, 2007 will be published in the local press and in other media.

v. S N E L and GoDRC will strengthen their legal and financial evaluation capacities to support negotiations (see discussion above under Pillar One). To this end, SNEL is obtaining external legal support to conduct a diagnostic o f its needs in this area (which i s being financed by the Bank).

b. Parastatal/Companv Pavments. Numerous public enterprises have systematically failed to pay their electricity bills, which has multiple negative impacts, such as undermining SNEL’s financial position, encouraging over-consumption by the entities, and creating an atmosphere in which failure to pay for electricity becomes accepted. In addition, while the GoDRC has terminated the practice o f imposing on SNEL preferential tariffs for certain companies, SNEL continues to have the discretion in this regard - which i t i s interested in limiting (so as to protect i t s financial position). To strengthen payments f rom parastatals and other company clients:

i. The Government will organize periodic meetings with SNEL and i t s public sector debtors (including ministries and parastatal companies) to review the status o f payments due to and owed by S N E L with an ultimate v iew to establishing a system to provide for the payment o f these amounts in a timely manner.

ii. SNEL will, every six months, review the use o f preferential tariffs; these reviews should serve to limit the application o f these preferential tariffs both in terms o f the number o f beneficiaries and their duration.

53

D. Program Summary

6. The program and i t s timing are summarized in the following table.

I

P i l l a r

Inst i tut ional

b

Strengthening a. Financial Systems

Procurement Systems

Action

i. Diagnostic o f Financial system ii. Procurement o f ‘turnkey” firm to strengthen financial system (technical assistance, software and hardware, training)

iii. Audit o f 2005 accounts

iv. Publication o f 2005 accounts

v. Procurement o f auditor for 4 year period (FY 06,07,08,09) v. Audit o f 2006 accounts vi. Publication o f 2006 accounts

vii. Audits o f subsequent fiscal years (’07 on) viii. Publication o f Audits ’07 onwards

i. Summary diagnostic o f procurement system ii. Procurement o f fm to strengthen SNEL’ s procurement system

iii. Procurement o f annual procurement auditor for multi-year period (FY 07,08,

iv. Annual procurement audits

v. Procurement by M o E o f Procurement-- Financial Management (PFM) Fiduciary Agent for the Project

Timing

Completed end 2006 Initiated Feb. 2007

Consultancy hired Aug 07 Revised systems: end ‘07 Implementation: beginning 2008

Completed end March 2007 Published in local press

(EO0

April 2007 End August, 2007

End June 2007 To be included in 2006 Annual Report t o be published by Sept. 2007 (see below) June 30 o f succeeding year As part o f Annual Reports for that fiscal year (by Sept 30)

Completed end 2006

Combined with Financial systems support. See above End November 2007

End March o f succeeding fiscal year

Initiated Feb. 2007

Contract signature: P O I )

August 2007

54

Pi l l a r I

I

I

I t e m

Commercial Practices

Management Information Systems

StaffingRersonnel Function

Strengthened Communication

Strengthened Joint- Venturing Capacity

Act ion

i. Recruitment o f a consultant t o conduct a diagnostic o f Commercial Systems, develop an action plan and implement “turnkey” technical support (systems, equipment, training) to strengthen billing and collection and action plan

i. Summary diagnostic o f selected management information systems ii. Procurement o f turnkey technical assistance to strengthen management information svsterns

i. Appointment o f Personnel Consulting Firm ii. Review by SNEL o f managerial and staff appointment and promotion arocesses iii. Strengthening the recruitment svstem

i. Publication o f Annual Report for FY 2006 ii. Publication o f Annual Reports for FY ’07, including Financial Statements for the year iii. Delineation o f a Governance Communication Campaign (for internal and external stakeholders) iv. Implementation o f the Governance Communication Campaign

i. Strengthened SNEL’s Legal Department, including training and external negotiations support

ii. Strengthening financial evaluation capacities (SNEL and Ministry)

Timing

Procurement initiated Mar. 2007 (EOI) Consultancy hired Nov. 07 Action p lan Mar. 2008 Implementation: ’08- ‘09

Completed end 2006

2008

M a r 2008

2008

2008

Sept 2007

By Sept. 30 o f the succeeding year

Mar. 2008

Beginning early 2008 onwards

Consultant t o conduct diagnosis: Procurement initiated Feb ’07 (EOI) Capacity building actions: 2008

Finalization o f contracts for ini t ial financial consultant

55

Pi l lar

TWO

a.

b

d

e.

THREE

a.

I t e m Ac t ion

Oversight and Transparency Financial Audits and Publication Systems and Annual Reports Procurement Reviews

Annual - see above under Financial

Publication o f the annual procurement audit

i. Designation o f an external director Board o f Directors

responsible for audit issues ii. Designation o f an external director responsible for oversight o f procurement asoects iii. Designation o f an external director responsible for improving information f low to the Board o f Directors iv. Review o f the mandate o f the Board o f Directors so as to strengthen SNEL’s business orientation v. Implementation o f a strengthened process for the nomination o f directors (including charter changes as necessary) within the context o f the overall public enterprise reform

SNEL Senior Management

i. Implementation o f a strengthened process for the appointment o f SNEL’s senior executives (members o f i ts Management Committee), within the context o f the public enterprise reform (including charter changes as necessary) ii. Implementation o f Strengthened SNEL Senior Executive Appointment Process (including charter changes as necessary)

ConflictOlisclosure Processes

i. Implementation o f conflict o f interest and financial disclosure requirements for Board Members and SNEL Senior Executives (requirements to be set out in Ministerial Order)

Strengthening Partnership Arrangements Joint-venturing, Partnering processes

i. Launch by M o E o f review o f current publidprivate partnering practices

Timing

Mid-year (see above under financial systems) Publication 2nd trimester o f each year

End 2007

End 2007

End 2007

2007

2007-2008

2007-2008

Mid 2008

Ministerial order to be issued by end M a y 2007

Sept. 2007

56

submission to i t s Board o f a preliminary framework for partnering with the private sector that provides for financially and technically viable ventures, ensures transparency and favors competition iii. Adoption o f a framework for partnering w i th the private sector that provides for financially and technically viable ventures, ensures transparency and

August 2007

favors competition iv. Analysis of the public/private Recruitment of a agreements consultant - May-Aug.

v. Review o f agreements under negotiation vi. Strengthened SNEL/Gov. legal and financial capacities in evaluating and

2007 Beginning M a y 2007

Beginning second ha l f '07 - See discussion above -

negotiating publiciprivate partnerships vii. Publication in the local press and

under Pil lar One Beginning M a y 2007

other media a l l h t u r e contracts signed in the electricity sector with or with the participation o f the Government or SNEL

b Payments by public sector consumers

i. Trimestrial review, with SNEL, the Portfolio Ministry and the public sector t o establish the payment due to SNEL by other parastatals and government ministries and entities ii. Semestrial review o f the preferential tari f f pol icy

Beginning June 2007

Beginning July 2007

57

Annex 5: Project Costs AFRICA: Regional and Domes t i c P o w e r Marke ts Development Pro ject

(Southern A h c a n P o w e r M a r k e t Program, AF'L-lb)

Local Foreign Total Project Cost By Component and/or Activi ty US$ US$ US$

mi l l ion million mi l l i on

Contin- Total gencies (w/Taxes

& Cont.) 1. Generation: (a) Inga 2A units 17.5 55.5 73.0 (b) Inga 1 units and common facilities 10.6 29.5 40.1 (c) Inga 2 - other facilities 5.2 19.2 24.4

13.7 86.7 8.1 48.2 4.0 28.4 Y

(d) Inga Short-term works 0.5 3.0 3.5 (e) Civil works - Intake canal reprofiling 6.8 10.2 17.0 (0 C iv i l works - Intake canal dredging 8.2 24.7 32.9

Sub-total: 48.8 142.1 190.9

0.5 4.0 3.3 20.3 6.2 39.1

35.8 226.1

5. Project Execution:

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2. Transmission: N e w 400 kV transmission l ine Inga -Kinshasa 13.2 69.4 82.6

Sub-total: 13.2 69.4 82.6 11.2 93.8 11.2 93.8

3. Distr ibution: (a) Electrification o f Kimbanseke 4.8 16.9 21.7

areas (c) Rehabilitation o f r ing substations in Kinshasa and 2.3 12.6 14.9 new substation in Kimbanseke, and increased 220 KV transformer capacity (d) Network rehabilitation in Kinshasa (Lot A) 2.5 6.7 9.2 (e) Network rehabilitation in Kinshasa (Lot B) 3.4 13.4 16.8 (0 Distribution short-term works 0.5 3.0 3.5

Sub-total: 15.7 60.3 76.0

(b) Network extension in Kisenso, Mpasa & Malweka 2.2 7.7 9.9

4. Capacity Building and Governance: A. SNEL (i) Strengthened commercial business

(ab Acauisit ion and Installation o f meters

3.4 25.1 1.6 11.5

2.3 17.2

1.5 10.7 3.2 20.0 0.5 4.0

12.5 88.5

Note: T h e figures exclude taxes and duties o n goods and works, but includes taxes on consulting services estimated at 18 percent

59

Annex 6: Implementation Arrangements AFRICA: Regional and Domestic Power Markets Development Project


1. The Project will be implemented primarily by SNEL (notably Components 1, 2, 3, 4(a) and 5) and by M o E (Subcomponent 4(b)).

A. SNEL Organization

2. SNEL has about 6500 staff. The company was recently re-organized into three main groupings. The Corporate grouping r u n s the strategic functions that define long-term objectives, plans implementation and monitors performance. The Operations grouping undertakes the principal operational activities o f the company, including generation, transmission, distribution and marketing functions. The Support Services grouping provides the human and financial resources to support the activities o f the other two groupings. A more detailed description of S N E L is provided in Attachment 1 to this Annex 6.

3. Project implementation will rely on existing departments within SNEL, primarily within i t s Operations and Support Services groupings, which include separate departments dedicated to the following functions: (i) the maintenance and operation o f the facilities at Inga, (ii) the transmission system, including the IngaKinshasa corridor targeted under the Project; (iii) the maintenance and operation o f the distribution network in Kinshasa; and (iv) commercial operations in the Kinshasa area.

B. MoE Organization

4. M o E i s responsible for developing and implementing the policy o f the GoDRC in both the energy and water sectors. The M o E has recently set up a Cellule d’Appui Technique Energie (CATE) to provide technical support to the Minister. A coordinator has been appointed, and CATE’s staff will be strengthened under the Project to improve the ability o f the ministry to develop and evaluate strategic and reform initiatives in the electricity sector. A more detailed description o f the M o E i s provided in Attachment 2 to this Annex 6.

C. Project Coordination Unit and Sub-units

5. M o E and SNEL have created a project coordination group, which as a condition of effectiveness) will be formalized as a Project Coordination Unit (PCU), responsible for coordinating implementation o f the Project. The PCU comprises staff f rom both SNEL and MoE, and includes two subunits:

(a) SNEL’s project coordination unit, created within SNEL to provide coordination among the various SNEL departments under the Project and to ensure proper execution o f the various administrative and other tasks associated with implementation o f a donor-financed operation (including support on procurement issues), and

(b) the M o E unit, which draws from the MoE’s C A T E technical assistance team and i s responsible for executing the M o E capacity building component under the Project and for supporting the M o E in providing overall strategic direction o f the Project.

6. The PCU will be headed by a Project Coordinator, representing the MoE. The PCU will also include the P F M Agent, and an internal auditor (see Annex 7), as well as representation f rom the

60

Ministry o f Portefeuille, which has oversight functions over SNEL (see discussion in Annex 1 on SNEL’s corporate governance structure) and from the Ministry o f Finance.

D. On-lending Terms for Project Funds provided by GoDRC to SNEL

7. The proceeds o f the IDA grant relating to the Project activities to be carried out by SNEL (namely al l activities other than ‘Component 4(b): M o E Capacity Building’ and the employment o f the PFM Agent) will be provided by GoDRC to SNEL through a subsidiary loan agreement. The funds will be provided for a te rm o f twenty years, with a five year’s grace period, at an interest rate o f 5 percent per annum (with the foreign exchange risk borne by SNEL).

E. Procurement Implementation Arrangements

8. As described in Annex 8, given the limitations o f SNEL’s existing procurement systems, and the limited procurement experience o f the MoE, a procurement agent (the PFM Agent) will be employed by the MoE (under the PCU) to assist with procurement actions to be carried out for the benefit o f SNEL and M o E under the Project. The P F M Agent will operate under the following terms and conditions:

The PFM Agent will be responsible for carrying out the processing o f procurement actions, with SNEL providing al l technical input for activities under the SNEL Project Components and with M o E providing technical input for the M o E Project Component.

All contracts relating to the SNEL Project Components will be signed by both the PFM Agent (as agent for MoE) and by SNEL and al l contracts relating to the M o E Project Component will be signed by the P F M (as agent for MoE).

All non-objection requests shall be submitted by the P F M Agent, with the technical approval o f SNEL, in the case o f contracts under the SNEL Project Components.

Disbursement requests will be signed by PFM, with the prior written technical approval o f SNEL, for a l l disbursement requests for contracts under the SNEL Project Components.

The external financial audits relating to SNEL will be procured and managed by the PCU through the PFM Agent.

9 . The P F M Agent will provide training in procurement matters to SNEL and MoE personnel, notably in connection with procurement actions under the Project. T h e procurement o f the P F M Agent i t se l f will be carried out by M o E with the support o f a procurement agent acceptable to the Association.

F. Financial ManagementDisbursernents under the Project

10. The financial management aspects are described in Annex 7. A s noted above under the discussion o f procurement aspects, all disbursement requests will be submitted by the PFM Agent to the Association, and disbursement requests relating to funding for the SNEL Project Components will require the prior writ ten technical approval o f SNEL.

61

G. Project Monitoring

11. The PCU wil l be responsible for ensuring overall project monitoring. S N E L wil l monitor physical implementation o f the Project through i t s traditional monitoring and control systems, supplemented by support from the PCU, and will report at least semi-annually on progress. SNEL currently measures through i t s power f low and financial monitoring systems the electricity generated, and distributed through i t s system, as well as revenues. T h i s monitoring system will provide the basis for measuring the outcomes and results. In addition, while it is currently diff icult for SNEL to effectively determine the level o f technical versus non-technical losses in the Kinshasa distribution system, the Project will strengthen SNEL’s capacity to determine these levels, which will be monitored under the Project. SNEL’s ESMU, supported by specialized technical assistance, will supervise implementation o f the ESR Plan. The PCU will monitor implementation o f the M o E Project Components, with the support o f CATE. In addition, reviews will be carried out at least twice a year by the Bank, together with the PCU, to assess progress in implementing the agreed activities. The reviews will be coordinated with other donors financing the Project.

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SNEL Organizational Structure

1. SNEL was recently reorganized along the following functional groupings:

- The Corporate Grouping undertakes the following strategic and advisory functions: defining long-term objectives, planning their implementation and monitoring performance. Units include: (i) research and development; (ii) organization and monitoring; (iii) the general secretariat; (iv) standards; (v) prevention and security; (vi) the legal division; (vii) the advisory office; (viii) the project management unit for the SAPMP APL-1 project.

- The Operations Grouping undertakes the principal operational activities o f the company, including generation, transmission, distribution and marketing. The units include: (i) production and transport; (ii) distribution for the interconnected provinces; (iii) distribution for the Kinshasa region; (iv) supplies and markets; (v) equipment; (vi) the EMRRP project management unit; and (vii) rural electrification.

- The Support Services Grouping which provides the human and financial resources for the activities o f the other two divisions. The units include: (i) human resources; (ii) finance; and (iii) commercial activities.

2. SNEL’s corporate governance structure includes two principal bodies, the Board o f Directors and the Management Committee:

The Board o f Directors (Conseil d ’Administration) i s the principal decision-making and management body o f SNEL. I t i s composed o f nine Directors, including 5 external directors selected by the President o f the Republic, including the Chairman o f the Board. The appointment o f these directors i s for five years and i s renewable. The remaining four directors are the senior executives o f SNEL who serve on the SNEL Management Committee (described below). In addition to these nine directors, the oversight ministries (Energy and Portefeuille) each appoint an additional director.

The Management Committee (Conseil de Gestion) i s responsible for implementing the decisions o f the Board o f Directors, managing and supervising the company’s activities and preparing the financial statements. It i s composed o f the same four senior SNEL executives who s i t on the Board o f Directors, namely the Chief Executive Officer (Administrateur DdlkguC General (ADG)), the Assistant Chief Executive Officer, the Chief Technical Director, and the Chief Financial Officer. The committee also includes a union representative. The ADG chairs the committee.

3. In addition, the corporate governance structure includes a financial oversight body, the Colkge des Commissaires aux Comptes, a unit external to SNEL. The members play a supervision and monitoring role with regard to SNEL’s financial operations and as such are equivalent to an external inspection function. The members are appointed by the President o f the Republic but are remunerated by SNEL.

63

SNEL Organigram

CHIEF TECHNICAL OFFICER

i

BOARD OF DIRECTORS I

CHIEF FINANCIAL OFFICER

I I MANAGEMENT COMMITTEE

GENERATION AND DISTRIBUTION INVENTORY AND FINANCE TRANSMISSION DEPARTMENT PROCUREMENT DEPARTMENT -

CHIEF EXECUTIVE OFFICER

SECRETARIAT OF

ASSISTANT CEO

HUMAN RESOURCES DPT.

ADVISORY OFFICE

LEGAL DEPARTMENT 1 DEPARTMENT OF STUDIES AND

DEPARTMENT DEPARTMENT ~

STANDARDS

KINSHASA REGION DISTRIBUTION DEPT

GENERAL SECRETARIAT - Accounting General Services Press and External Relations Information and Documentation

COMMERCIAL ACTIVITIES RURAL ELECTRIFICATION EQUIPMENT

UNIT DEPARTMENT

I

RESEARCH AND DEVELOPMENT DEPARTMENT

I I

Expansion Planning Economic and Financial Analyses External Financing Mobilization

CONTROL DEPARTMENT

Organization General Monitoring and Control I T

1


Ministry of Energy Organizational Structure

1. The M o E portfolio comprises the electricity and water sectors. The M o E has formal supervisory authority over SNEL and REGIDESO with respect to technical aspects. Previously, the ministry also handled petroleum issues, but the o i l portfolio was recently transferred from M o E to a newly created ministry o f petroleum.

2. The M o E i s responsible for the government’s policy in the electricity and water sectors, including: (a) drawing up the Government’s strategy in these sectors, and designing and managing sector policies; (b) establishing administrative ru les and regulations; and (c) technical oversight over SNEL and REGIDESO, the electricity and water public enterprises.

3. The Ministry o f Energy comprises the following administrative functions:

H. E. the Minister and H. E the Vice Minister o f Energy; Front Office functions, including a Chief o f Staff; Secretary General-Energy and a Secretary General-Water responsible for managing the administration o f the energy and water portfolios, respectively; the National Energy Commission which advises the M o E on energy policy issues; the CATE (the energy technical support unit, the Cellule d’Appui Technique Energie) established to provide institutional and technical support to MoE, to support the development and implementation o f M o E strategies and policies, and to support specified project-related tasks and monitoring o f donor funded projects; the Westcor support unit, to assist in the development o f the Westcor initiative; and the Energy Sector Unit to assist the Government’s overall general public enterprise reform effort.

65

Annex 7: Financial Management and Disbursement Arrangements

(Southern African Power Market Program, APL-lb) AFRICA: Regional and Domestic Power Markets Development Project

A. Executive Summary

1. The financial management arrangements for the Project have been designed with consideration for the country’s post-conflict situation. T h e arrangements aim to facilitate disbursements and to ensure effective use o f Project resources and funds while at the same time using the country’s own systems to the extent possible. T o this end, overall coordination o f the financial management aspects o f the Project will be the responsibility o f the Project Coordination Unit (PCU), supported by a Procurement and Financial Management agent (PFM Agent).

2. The principal objective o f the Project’s financial management system will be to support the Project in the use o f resources to ensure efficiency and effectiveness in delivering the results required to achieve Project objectives. The financial management system must be capable o f producing timely, understandable, relevant and reliable financial information that will enable the Project’s management to plan, implement, monitor and assess the Project’s overall progress toward i t s objectives.

3. The Financial Management team (FM team) o f the PCU will be outsourced to a P F M Agent selected on a competitive basis and composed o f 3 staff. The P F M Agent will be headed by a qualified and experienced Financial Manager. The FM team wil l be responsible for: (i) designing and establishing a computerized financial management system; (ii) approving disbursement o f funds to services providers, contractors and consultants; (iii) maintaining up-to-date accounting records and ledgers; (iv) recording fiduciary transactions for all activities pertaining to the Project for which the FM team o f the PCU i s held responsible; (v) fiduciary reporting; (vi) submitting audit reports; and (vii) ensuring that a proper internal control system i s in place to achieve accountability at all levels. Such an arrangement will enable the management o f the P C U to focus on i t s main responsibility o f coordination and supervision o f Project activities.

4. The team will be further strengthened through the recruitment o f an Internal Auditor. The internal audit function will be camed out by a qualified and experienced international (individual) consultant recruited on a competitive basis. The consultant will be located at the PCU and will review the Financial Management Reports (FMR) submitted by the PCU and the Ministry o f Energy, and will carry out regular internal audit controls. This will include the verification o f eligibility o f expenditures ex-post as wel l as physical inspection o f works and goods acquired by the Project at central and departmental levels.

5. A Designated Account will be opened in U S Dollars in a commercial bank acceptable to the Association. The account will be maintained by the PFM Agent established at the PCU. Disbursement from the IDA Grant will be transaction-based (that is, replenishment and reimbursement). Funds will be disbursed to contractors and providers o f services, equipment, and goods, subject to the approval o f the Project Coordinator o f the PCU, in consultation with the Financial Manager o f the P F M Agent.

6. Qualified, experienced and independent external auditors will be appointed o n approved terms o f reference. The external financial audit, including eligibility o f expenditures and physical inspections, will cover al l aspects o f Project activities and will be carried out on an annual basis.

66

7. An anticorruption action plan will be developed by Grant effectiveness and will include oversight mechanisms such as development o f an effective mechanism to receive complaints and to investigate claims o f wrongdoing. Among other anti-corruption measures, the frequency o f supervision missions will be increased and at least three missions will be conducted during the f i rs t two years o f the project implementation (and will benefit f rom field-based financial management staff).

Key weakness Outdated and poorly adapted legal and regulatory framework

Inadequate budget preparation cycle

Non compliance with standard budget execution procedures

Inadequate debt management

B. Country Financial Management Issues

Priority recommendations The legal and regulatory framework for public finance management must be completely revamped, in particular the Financial Law (organic law). Review the budget cycle and establish the budget timetable by law. Strengthen ex ante budgetary controls to ensure adherence to normal budget execution procedures and limit the incidence o f exceptional procedures. Strengthen coordination between the un i t s involved in public debt

8. The D R C has experienced a long period o f instability, during which the administrative and regulatory institutions in the country seriously deteriorated. Efforts are being made to reestablish these. The recent elections open a new phase in DRC history. After decades o f mismanagement, instability, and conflict, the Congolese have selected their leadership through an open and democratic process.

Irregular, incomplete, unreliable production o f reports Lack o f an accounting framework that meets standard norms Weak management and control o f public funds due to proliferation of bank accounts Weakness o f ex post administrative oversight o f expenditure execution Major need for training and human resources

9. The existing capacity to assume financial management responsibility in the ministries and at decentralized administrative levels i s weak. World Bank documents, notably the Country Financial Accountability Assessment (CFAA) completed in M a y 2005, portrays a highly unsatisfactory economic and financial control environment. In-depth structural reforms have been launched in the areas o f economic governance, public expenditure management, financial sector and public enterprises to strengthen capacity in public administration. With the support o f the international community, the Transitional Government had undertaken reforms in budget preparation and execution, adhesion to Treasury forecasts, preparation o f regular budget execution reports, simplification o f the national budget classification system, and monitoring and supervision o f public enterprises.

Produce and publish execution reports in a timely manner using the computerized public expenditure system database. Finalize, adopt, and effectively implement a double-entry accounting framework. Strengthen the procedures for opening and maintaining bank accounts, ensuring proper reporting o f transactions. Reinforce the capacity of the Inspectorate General o f Government.

Establish strategies and plans to uplift the capacity o f staff responsible for the management and tracking of public finances,

10. The relevant conclusions and major recommendations f rom the 2005 Country Financial Accountability Assessment are la id out in the table below:

I management.

67

11. Although there i s cause for cautious optimism, it wi l l take a long time for these reforms to yield substantial improvements in the management o f public funds. Given the fragility o f the fiduciary environment, and the weak governance and risks associated to the Project, the only financial management and disbursement arrangements which provide the fiscal and fiduciary safeguards required for Projects financed by IDA are the arrangements described in the present annex.

C. Institutional Arrangements for Financial Management

The Project Coordination Unit (PCU)

12. Responsibility for the financial management and operational aspects o f the Project will be assigned to the Project Coordination Unit (PCU) set up by the MoE, and consisting o f the SNEL Project Coordination Team and o f a M o E Team. The P C U will implement and manage the Project activities as well as managing Project funds.

13. The financial management functions that are the responsibility o f the PCU will be outsourced, on the basis o f competitive selection, to an auditing firm acting as P F M Agent for the Project. T h i s FM team will be staffed with three consultants located at the P C U premises, headed by a qualified and experienced Financial Manager. The team will also comprise a Treasurer and an Accountant. This arrangement will enable the management o f the PCU to focus on i ts main responsibility o f coordination and supervision o f project activities.

Financial Management Assessment of the Ministry of Energy

14. The capacity assessment conducted during the Project preparation phase through the C F A A exercise revealed several capacity shortages in key ministries with respect to financial management and procurement. These weaknesses include: (i) a lack o f sufficiently qualified staff in the areas o f financial management; (ii) a lack o f a tracking and reporting system and a formal accounting system within the ministries acceptable to the Association; and (iii) non-familiarity o f ministry staff with IDA-financed project procedures for reporting requirements, disbursement arrangements and auditing. Therefore, the financial management system in place does not meet the Association’s financial management requirements.

Financial Management Assessment of SNEL

15. The review o f the S N E L financial management system as well as the audit reports and various external studies reveal significant weaknesses in term o f internal control, accounting system and external oversight. S N E L faces a range o f financial governance issues. These include weaknesses relating to contracting for goods and services, and shortcomings in the collection o f revenues for power provided. The studies suggest that there i s a lack o f transparency and predictability in SNEL’s resources management, and the accounting system currently in place does not allow proper reporting and management o f funds.

16. The overall conclusion o f the financial management assessment i s that in order to satisfy the World Bank’s minimum financial management requirements, a unit independent o f S N E L using IDA financial management procedures should be established. For this purpose, a P F M Agent will be recruited to lead the financial management function o f the PCU, with the team consisting o f three consultants (Financial Manager and Treasurer and Accountant). Management o f the Designated Account\ wi l l be the responsibility o f the P F M Agent under the direction o f the PCU.

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D. Summary Risk Analysis

17. An effective financial management system wil l be vital for the Project because o f the need to deliver services quickly over a large geographic area to a wide variety o f stakeholders. The objectives o f the Project’s financial management system are: (i) to ensure that Project funds are used only for their intended purposes efficiently and economically; (ii) to enable the rapid disbursement o f Project funds to implementing agencies; (iii) to ascertain that funds are properly managed; (iv) to enable the preparation o f accurate and timely financial reports; (v) to enable project management to monitor the efficient implementation o f the Project; and (vi) to safeguard the Project assets and resources.

18. In the context o f these objectives, the specific r isks and proposed mitigation measures, the latter in the form o f a Financial Management Action Plan, are summarized in the table below:

Risk Assessment and Mitigation (H-High, S-Substantial, M-Moderate, L-Low)

Inherent risk Country level

Entity level

Project level

Control Risk S

Risk Mitigating Measures Incorporated into Project

Design

The Government o f D R C i s highly committed to a reform program that includes the strengthening o f the budget classifications, implementation o f an interim Integrated Financial Management Information System. A new legal framework is being prepared. However, there are s t i l l weaknesses in capacity and in audit & preparation o f the first set o f consolidated accounts. Efforts are continuing to strengthen accounting and audit capacity.

Use o f IDA FM procedures Creation o f a P C U and use o f IDA FM system requirements. The government wil l adopt an anti-comption plan and other safeguards by Project effectiveness. Recruitment o f P F M Agent with significant experience and an Internal Auditor (Intl) on a competitive basis.

N

N

Y

Remarks

The CFAA report outlined significant P F M weaknesses at government level as well as sector ministries level: (i) in term o f budget formulation and execution, financial reporting, and oversight systems, (ii) weak linkage between agreed policies, budget planning and execution; (iii) lack o f an adequate tracking and reporting system and a formal accounting system within the ministries; (iv) the lack o f transparency and predictability in public resource management at central government and public enterprise levels; (v) insufficiently qualified staff in the areas o f financial management.

The assessment o f SNEL revealed significant internal control weaknesses and a lack o f transparency. SNEL faces governance issues.

The Project aims to finance infrastructures and equipment in an environment that is characterized by the lack o f f iduciary capacity.

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Budgeting

Accounting

Internal Control

Funds F l o w

Financial Reporting

M

S

H

S

S

Risk Mitigating Measures Incorporated into Project

Design

Annual work p lan and budget required each year. The Project’s Administrative, Accounting and Financial Manual (AAFM) will define the arrangements for budgeting, budgetary control and the requirements for budgeting revisions. Annual work plan and budget required. The Project will adopt international accounting standards, and accounting procedures and policies wil l be documented in the AAFM. The FM functions wil l be outsourced to a P F M Agent and installation o f a computerized accounting system completed. Training on IDA FM procedures planned. Manual o f accounting and financial procedures required before Grant effectiveness and recruitment o f an internal auditor.

(i) Payment requests will be approved by the P F M Agent prior to disbursement o f funds to contactors o r consultants. (ii) Audits o f performance wil l be conducted and wil l be integrated to ensure a close link between physical progress and financial reporting. (iii) An internal auditor will be recruited to carry out regular physical inspection, assess the eligibil i ty o f expenditures and review o f the quarterly FMR. To reduce delays and ensure a proper financial reporting system, a computerized accounting system wil l be put in place and wil l be under the responsibility o f the P F M Agent.

N

Y

Remarks

The accounting system currently used by SNEL does not support the Management in making decisions.

The distribution o f responsibilities between the SNEL and the MoE requires clarification. Internal audit function exists, but i s largely compliance and transaction oriented and adds l itt le value to the control framework. Without these measures, funds, especially for implementation agencies and the PCU, may not be used in an efficient and economical way and exclusively for intended purposes.

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Risk Rating

Risk Mitigating Measures Conditions Remarks Incorporated into Project for

Design Effectiveness (YB)

Overall Risk Rating

19. The Financial Management Action Plan described below has been developed to mitigate the overall FM risks.

M

s

Financial Management Action Plan

~~ ~~~

(i) The Project’s institutional The auditing profession in DRC is arrangements allow for the sti l l generally weak. International appointment o f adequate auditing standards are followed in the external auditors. industry. Audit reports are generally (ii) Annual auditing timely, and management letters arrangements will be put in contain issues that assist management place. to ensure the continuing adequacy o f

the financial management arrangements.

Y

Issue Remedial Action Recommended Responsible Due date body

Staffing Recruitment o f the P F M Agent I P C U I Effectiveness

Effectiveness

Administrative, Adoption o f an Administrative, Accounting and 1 P C U I Effectiveness

E. Financial and Administrative Management

Accounting and Financial Manual Internal Auditing

External Financial Auditing

20. Upon Grant effectiveness, the overall coordination o f the fiduciary aspects o f the Project will be under the responsibility o f the PCU:

Financial Manual o f procedures

Terms o f reference for the selection o f the P C U Effectiveness internal auditor agreed and expressions o f interest advertised Selection o f the internal auditor, as agreed by the Bank

External Auditors agreed and expressions o f interest advertised Selection o f the External Financial Auditor

Terms o f Reference for the selection o f the P C U

Overall Responsibilities

Anti-corruption action d a n

2 1. The FM team o f the PCU will be responsible for all financial management, accounting and audit aspects o f the Project, including: (i) designing and establishing a computerized financial management system; (ii) approving disbursement o f funds to services providers, contractors and consultants; (iii) maintaining up-to-date accounting records and ledgers; (iv) recording fiduciary

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completed

d a n Development and adoption o f an anti-conuption P C U Effectiveness

transactions for all activities pertaining to the Project for which the FM team o f the PCU i s held responsible; (v) fiduciary reporting; (vi) submitting audit reports; and (vii) ensuring that a proper internal control system i s in place to achieve accountability at a l l levels. At least three sets o f financial reports will be prepared and consolidated by the FM team o f the PCU, namely the annual budget o f the Project, the quarterly Financial Monitoring Reports (FMRs), and the Project financial statements.

Administrative, Accounting and Financial Manual of Procedures

22. The accounting systems and policies, administrative (including procurement) and financial procedures employed by the Project will be documented in the Project’s Administrative, Accounting and Financial Manual (AAFM). This will be used by (i) the Project staff as a reference manual; (ii) by the Association to assess the acceptability o f the Project accounting, reporting and control systems; and (iii) by the auditors to assess Project accounting systems and controls and to design specific Project audit procedures. Specific procedures will be documented for each significant accounting function. They will be written to depict document and transaction flows, and will cover the following aspects: f low o f funds; record keeping and maintenance, the chart o f accounts, formats o f records and books o f account; authorization procedures for transactions; planning and budgeting; financial reports (including formats, linkages with the chart o f accounts and procedures for reviewing these); and auditing arrangements. The AAFM will also describe the PCU organizational chart and administrative and procurement procedures as agreed in Section I11 o f Annex 2 to the Financing Agreement.

Planning and Budgeting

23. The PCU will prepare an annual work plan and budget for implementing Project activities talung into account the Project’s objectives. The work plan and budgets will identify the activities to be undertaken and the role o f respective parties in implementation. Annual work plans and the budgets wi l l be consolidated into a single document by the PCU, which will be submitted to the Ministry o f Energy for approval, and thereafter to the Association for n o objection no later than November 30 o f each year preceding the year in which the work plan i s to be implemented. The consolidation will be done after the PCU ensures, through i t s technical teams, that the plan and budget meet the Project objectives.

Stafing: Financial Management Agency

24. The PCU w i l l retain staffing resources that are adequate for the level o f Project operations and activities and are sufficient to maintain accounting records relating to Project-financed transactions, as well as to prepare the Project’s financial reports. The FM team wil l be responsible for (i) maintaining the Project expenditure accounts (ii) approving payments to service providers, contractors and suppliers o f goods; (iii) drafting the Project financial statements (budget, FMR and annual accounts); and (iv) auditing and reporting to the Association. Such an arrangement will enable the management o f the P C U to focus on i ts main responsibility o f coordination and supervision o f project activities. The PFM Agent will have the overall FM responsibility including for budgeting, accounting, reporting, disbursement and auditing functions. The PFM Agent wil l also, where required, help build the capacity o f the staff o f SNEL.

Record Keeping and Maintenance

25. The FM team o f the PCU will b e responsible for maintaining the Project’s records related to expenditures incurred by the PCU. All accounting documents o f contracted implementing agencies

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will be kept at their premises and made available upon request during supervision missions and audit missions carried out by internal and external auditors.

Financial Reporting

26. Consolidated financial management reports (FMR) will be designed to provide quality and timely information on Project performance to Project management, and relevant stakeholders. Formats o f the various periodic FMRs to be generated from the financial management system will be developed using the Wor ld Bank’s Guidelines for Borrowers on Financial Monitoring Reports. The quarterly FMR includes financial statements (e.g. sources o f funds and Projects revenue and uses o f funds; statement o f expenditures classified by Project component, disbursement category, expenditure types and implementing agent, showing comparisons with budgets; cash forecast; physical progress report; notes to the FMR Special Account activity statements and information o n contracts above and below the prior review threshold). In compliance with International Accounting Standards and IDA requirements, the Project will produce annual financial statements. These include: (i) a balance sheet that shows assets and liabilities; (ii) a Statement o f Sources and Uses o f Funds showing all the sources o f Project funds, expenditures analyzed by Project component and Grant category; (iii) a Statement o f Cash Receipts and Payments which recognizes al l cash receipts, cash payments and cash balances controlled by the Project; (iv) a Special Account Activity Statement; (v) an implementation report containing a narrative summary o f the implementation progress o f the Project; (vi) a summary o f withdrawals using FMR, listing individual withdrawal applications by reference number, date and amount; and (vii) notes related to significant accounting policies and accounting standards adopted by management and underlying the preparation o f financial statements. The FMR and financial statements, whose format wil l be developed by grant effectiveness, will be submitted for audit at the end o f each semester or other periods to be stated.

Integrated Financial Management System

27. For the Project to deliver on i t s objectives, a computerized financial management system will be developed based on software to be acquired by the PCU (to be performed by grant effectiveness). The system should integrate budgeting, operating and accounting systems to facilitate monitoring and reporting. The formats o f periodic reports would be developed and agreed with Project management.

F. Audit arrangements

Internal Auditing

28. A separate Internal Audit function outsourced to an international (individual) consultant will be established to support the PCU. The consultant will be located at the PCU offices. The role o f the position will be to ensure that the Project’s fiduciary procedures and regulations are adhered to by al l the implementing agencies. The selected consultant will inspect accounting procedures used by the PCU to ensure that they conform to the established procedures. This inspection will cover the verification o f expenditures including payments o f works and acquisition o f furniture and equipment. The scope o f the consultant’s mission will also include review o f the quarterly FMR as well as any financial statements submitted to the Association by the PCU and other entities. The Administrative, Accounting and Financial Manual, as well as the terms of reference for the selection of the consultant, w i l l contain a description o f the roles and responsibilities o f the internal audit function and the arrangements that guarantee the necessary level o f independence.

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External Financial Auditing

29. A firm o f qualified independent auditors will be contracted by the PCU to carry out the audit o f the financial statements o f the Project on an annual basis. The selection o f the successful firm will be based on a Terms o f Reference that sets forth the scope o f the audit. The audit firm will also be recruited on terms that meet the Association’s requirements relating to independence, qualifications and experience. The scope o f the audit wi l l cover the activities performed by any entity managmg Project funds, mainly SNEL, the PCU, and the Ministry o f Energy. The audited financial statements, together wi th the auditor’s report and management letter covering identified internal control and accounting system weaknesses, will be submitted to the Association no later than six months after the end o f each accounting period. A single audit opinion will be issued with respect to Project income and expenditures, special accounts and the FMRs. A second audit opinion will be issued on specific controls such as compliance with procurement procedures and FMR requirements and consistency between financial Statements and management reports and field visits. The audit report w i l l thus refer to any incidences o f non-compliance and to any ineligible expenditures identified during the audit mission.

Closing the Accountability Cycle: Following up on Audit Queries

30. The duties o f the management o f the PCU wil l include the review o f audited financial statements and internal and external audit findings. The outsourced internal auditing function will require corrective actions to be taken by the PCU and any other implementation agencies as relevant, to address any weaknesses in the fiduciary management system or incidences o f non-compliance with procedures. The internal audit function will also use the results o f the audits in monitoring the performance o f other agencies at national and regional level. This arrangement i s intended to ensure the satisfactory follow-up o f audit findings.

G. Conclusion of the Assessment

3 1. The outsourcing o f the key financial functions to a P F M Agent will enable the establishment o f a financial fiduciary management system for the Project that satisfies the Bank’s minimum requirements under OP/BP 10.02. The financial management arrangements, including the actions intended to strengthen these, will be adequate to provide, with reasonable assurance, accurate and timely information required by the Association on the status o f the Project. The actions which are required by effectiveness o f the grant to facilitate the establishment o f this system are set out in the Financial Management Action Plan described above.

H. Supervision Plan

32. Financial management supervision missions will be conducted over the Project’s lifetime, at least on a semi-annual basis (and will benefit f rom the field presence o f a financial management expert). But due to the fiduciary risks associated with this Project, more supervision missions budget will be allocated in order to increase the frequency o f controls. I t i s planned at least three supervision missions during the f i rs t year o f the project implementation (including reliance on field- based staff). The missions’ objectives will be to ensure that adequate and effective financial management systems are maintained for the Project throughout its lifetime. A review will be carried out regularly to ensure that expenditures incurred by the Project remain eligible for IDA funding. The Implementation Status & Results Report (ISR) will include a financial and procurement management rating for the component.

74

I. Disbursement arrangements and flow o f funds

Disbursement of funds to the Project Coordination Unit

33. The PCU will open a Designated Account in order to manage program expenditures, as follows:

0 Designated Account: T o facilitate Project implementation and reduce the volume o f withdrawal applications, the PCU will open and maintain a Designated Account in U S Dollars in a commercial bank on terms and conditions acceptable to the Association. This account will finance all eligible Project expenditures.

The ceiling will be US$300,000 for the Designated Account. The amount has been calculated to represent approximately four months o f eligible expenditures. Upon Effectiveness, IDA will deposit US$ 150,000 in the designated account representing 50 percent o f the ceiling.

0

34. The Designated Account will be used for al l payments inferior to 20 percent o f the deposited amount and replenishment applications will be submitted, at least once a month. Additional deposits into the Designated Account will be made against withdrawal applications supported by appropriate documents. The option o f disbursing funds thought direct payment on contracts above a pre- determined threshold will also be available. Withdrawal applications for such payments will be accompanied by relevant supporting documents such as copies o f contract, contractor’s invoices and appropriate certifications. The Designated Account will be audited annually by external auditors acceptable to the Association as part o f the overall Project audit.

35. Disbursement from the IDA Grant will be transaction-based (that is, on a replenishment and reimbursement basis). The option o f disbursing the funds through direct payments on contracts above a pre-determined threshold will also be available. Withdrawal applications for such payments will be accompanied by relevant records such as copies o f the contract, contractors’ invoices and appropriate certifications.

Disbursement offunds to SNEL by the PFM

36. The P F M will make disbursements to SNEL for operating expenses and other small amounts based on budget transfers, as set out in a Memorandum o f Understanding (MoU) agreed between the PFM and SNEL. The M o U i s required prior to the transfer o f funds from the PFM to SNEL. The M o U will provide al l details on the terms and conditions o f the replenishment o f the account set up at the M o E and the transfers themselves would be accompanied by supporting documentation in the form o f IFRs or SOEs. Payments will be made in accordance with the payment modalities, as specified in the MoU, with an init ial advance not to exceed US$50,000. Payments will be made into commercial bank accounts opened by SNEL. The PFM will effect subsequent payments to SNEL upon submission o f supporting documentation for the previous payment, as specified in the M o U (FMR, and a Statement o f Expenditures (SOE)). In addition, the P F M will rely o n the findings o f the internal auditor prior to approval o f the payments where applicable. The PCU, with the assistance o f the P F M Agent and the internal auditor, will reserve the right to verify the expenditures ex-post and refunds might be requested if contractual clauses were not respected.

Uses of Statement of Expenditures

37. Disbursements for a l l expenditures should be made against full documentation except for contracts valued at less than: (i) US$l,OOO,OOO for works; (ii) US$250,000 for goods; (iii)

75

US$lOO,OOO for consulting f i rms and (iv) US$50,000 for individual consultants as well as operating costs which will be claimed on the basis o f SOEs.’ Training and operating costs wi l l also be claimed on the basis o f statement o f expenditures (SOEs). All supporting documentation for SOEs will be retained at the PCU. They will be kept readily accessible for review by periodic IDA, PCU supervision missions and external auditors.

Category (1) Works re: Rehabilitation o f Inga Plant (Inga 1

J. Allocation o f Grant Proceeds

Amount o f the Percentage of Grant Allocated Expenditures to be in US$ million Financed

Plan) (8) Refinancing o f PPF (9 ) Unallocated

ce equipment, transport

4.1 100 percent 3 .O

35.4 Total Amount 296.7 I

The proposed thresholds are in l ine with the procurement PR thresholds indicated in Annex 8,

76

Annex 8: Procurement Arrangements


A. General

1. Procurement for the Project for contracts financed in whole or in part by IDA will be carried out in accordance with the World Bank's "Guidelines: Procurement Under BRD Loans and IDA Credits" o f M a y 2004, revised October 2006; the "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers'' o f M a y 2004, revised October 2006; and the provisions stipulated in the Legal Agreements. The various items under different expenditure categories are described in general below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement o f Works: Works procured under this Project will include: the rehabilitation o f the hydroelectric facilities at Inga 1 and 2, the rehabilitation o f turbines at Inga 1 and 2, dredging and re-profiling o f the feeder canal at Inga, and rehabilitation and expansion o f the power distribution system in Kinshasa. The procurement wi l l be done using the Bank's Standard Bidding Documents (SBD) for al l contracts. Works estimated to cost US$1 mi l l ion per contract and above will be procured through ICB. Works estimated to cost less than U S $ l mi l l ion per contract may be procured through NCB. Works may also be procured through Direct Contracting with the prior approval if IDA. A prequalification will be carried out for works contracts estimated to cost US$ lO mi l l ion and above, exceptions to which require the prior approval o f the Bank. The construction o f a second power transmission l ine from Inga to Kinshasa will be financed by co-financiers using their own procurement procedures.

3. Procurement of Goods: Goods procured under the Project will include pesticides, a pesticide spraying boat, vehicles, and computers and office equipment. The procurement wi l l be done using the Bank's SBD for all contracts. Goods estimated to cost US$200,000 per contract and above will be procured through ICB. Goods estimated to cost less than US$200,000 per contract may be procured through NCB. Goods estimated to cost less than US$50,000 per contract may be procured through Shopping. Goods may also be procured through LIB and Direct Contracting with the prior approval o f IDA.

4. Procurement o f non-consulting services will include onchocerciasis vector control, laboratory analysis o f dredging sludge, training and workshops.

5. Selection of Consultants: Consulting services will consist o f feasibility studies, design, preparation and evaluation o f bidding documents, and supervision associated with the works listed above; environmental and social impact assessments and associated management plans; strengthening maintenance programs; strengthening procurement and financial management performance; legal financial and technical assistance; and financial and procurement audits. Contracts with consulting f i r m s may also be procured through Quality Based Selection (QBS). Contracts estimated to cost less than US$lOO,OOO may be procured through Selection Based on Consultant Qualifications (CQS). The Single Source Selection (SSS) o f f i r m s requires the prior approval o f IDA. Individual consultants may be selected in accordance with the provisions o f Section V o f the Consultant Guidelines.

77

6. Operating Costs: Incremental operating costs associated with the implementation o f the Project wi l l consist o f vehicle operating costs, other transportation costs, office rental and utilities, stationary and other office consumables, travel allowances, insurances, and production o f reports.

B. Assessment o f the agency’s capacity to implement procurement

7. Country context. A Country Procurement Assessment Review was carried out in 2002 and found that the existing national regulations are inadequate for use in IDA-assisted Projects. The main problems with the national procurement practices that were identified in this review are: weaknesses o f the legal framework and lack o f enforcement; inefficient and costly procedures and practices; weak procurement organizations and capacity; weak audit and unit-corruption mechanisms; and payment delays that result in higher contract prices. An action plan to implement the agreed recommendations i s being implemented through the IDA-assisted Economic Management Technical Assistance Project. However there has been little progress with the national procurement reforms as other political and development priorities have had to be addressed, following many years o f c iv i l war and economic decline. The dialogue with the Government on procurement reform was at a virtual standstill in the period preceding the Presidential elections and was resumed after the appointment o f the new cabinet. The overall country procurement risk i s high.

8. A number o f Post Procurement Reviews (PPR) have been carried out in recent years that identified weaknesses in the procurement on projects under implementation and have resulted in some instances in a declaration o f misprocurement.

9. SNEL and MOE. The procurement capacity o f the main project implementing agencies, SNEL and MOE, has been assessed and was found to be inadequate for the Project. The key issues and risks that would arise if procurement were entrusted to these agencies include: political interference with the orderly procurement function; insufficient procurement experience o f the staff; lack o f experience with World-Bank assisted projects; insufficient interest o f the private sector in competing for the contracts; and costs exceeding the estimates by a wide margin. The procurement r i sk with entrusting procurement to these agencies would therefore be high.

10. Mitigating measures. To mitigate the high procurement risk, a l l procurement activities will be carried out by a Procurement and Financial Management (PFM) Agent, who will be selected through competition. The TOR for this assignment and the performance evaluation criteria for the consulting firm will be designed to ensure that the PFM Agent has adequate procurement capacity to implement the Project. The PFM Agent’s employer will be the MOE. The selection o f the consultant for the assignment w i l l be done under the direction o f MOE, with the support o f a procurement agent satisfactory to the Association. To carry out the procurement function, the P F M Agent will be staffed at the minimum with one senior procurement specialist (SPS) and one procurement officer. The SPS should have knowledge and experience - some o f it internationally - in (i) the power sector, including generation and distribution, (ii) procurement in general, and (iii) procurement under Wor ld Bank policies and procedures. The PFM Agent will be required to deploy additional staff on a part- time basis who are capable o f backing up the SPS as needed and to carry out an extensive capacity building and training program.

11. Under the coordination o f the PCU, SNEL will be responsible for the technical aspects o f the planning and execution o f the contracts relating to al l Project components, except for those in Component 4(b) relating to the MOE, mainly through the involvement o f the relevant SNEL departments (see Annex 6). SNEL will also benefit f rom the support o f the engineering firm employed for the detailed engineering and supervision phases. SNEL wil l s ign contracts relating to i t s components jointly with the PFM Agent and will participate in contract management in the form

78

o f a clearance o f contractual payments. SNEL will second counterpart staff with procurement knowledge to the P F M Agent to participate in the procurement functions and to gain procurement experience for the ultimate benefit o f SNEL. The organizational responsibilities for the different steps in procurement and contract management wi l l be specified in the terms o f reference for the P F M Agent.

12. The following additional mitigating measures for the Project will be taken:

. Commitment o f M O E to safeguard the procurement process that i s the contractual obligation o f the P F M Agent; . Annual procurement audits; . Capacity building in SNEL and MOE (e.g. improved governance procedures -- see Attachment 1 to Annex 4 -- and training through courses and through secondment to the P F M Agent);

Support for the national procurement reform through other assistance projects;

Keeping cost estimates up to date; and

Wide advertising about business opportunities for the private sector.

.

. C. Procurement Plan

13. The Borrower developed a procurement plan for project implementation which has assisted in the choice o f procurement methods. This plan has been agreed on between the Borrower and the Project Team during negotiations and i s available at the offices o f SNEL in Kinshasa (with the PCU team). It will also be available in the Project Database at the Bank’s external website. The Procurement Plan will be updated in agreement with IDA annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency o f Procurement Supervision

14. In addition to the prior review o f procurement decisions submitted by the Borrower that will be carried out at the Bank’s offices, the results o f the procurement capacity assessment call for one & review o f procurement actions per year.

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E. Details of the Procurement Arrangements Involving International Competition

NCB (Goods)

ICB (Works) NCB (Works)

The contracts are financed in whole or in part by IDA.

Contracts below US$200,000 Contracts o f US$1 million and above

Contracts below US$l million

First 2 contracts A l l contracts

First 2 contracts

1. Goods and Works

(a) Thresholds for Procurement Methods and Prior Review

Direct contracting (Goods and Works)

I Procurement Method I Procurement Methods Threshold I Prior Review Threshold 1

None Al l contracts

I ICB (Goods) I Contracts o f US$200,000 and above I A l l contracts I

1 No.

I LIB(Goods) I None I A l l contracts I

2 3 4 5 6 7 8

Contract Cost (in ment fication by Bank Bid- Comments Estimated Procure- Prequali Review Expected

Description US$ Method (Yes/No) (Prior / Opening Millions) Post) Date

Generation

1.1 Rehabilitation of Inga I1 A 86.7 ICB Yes Prior May 08 Consultant units (G21, G22, G23, and G24) design i s

1.2 Rehabilitation of Inga I 48.2 ICB Yes Prior April 08 Same as above

selection for

underway

Units and common facilities

1.3 Inga Short-term works - 2 4.0 ICB No Prior December To be deter- lots 07 minedbythe

I Shopping (Goods and Works) I Contracts below US$50,000 1 First 2 contracts I

Contracts for works valued at US$lO mi l l ion or more are procured using prequalification o f bidders, exceptions to which require the prior approval o f the Bank.

1 1 2 3 4 5 6 7 8

2. Consulting Services

Contract Description

1.4 Inga - Intake Canal repro filing

1.5 Inga - Intake Canal dredging

(a) Thresholds for Procurement Methods and Prior Review

Cost (in ment fication by Bank Bid- Comments

Millions) Post) Date US% Method (Yes/No) (Prior / Opening

20.3 ICB Yes Prior October Consultant 08 selection for

design i s underway

39.1 ICB Yes Prior April 08 Same as above

2.1

2.2

1 COS I Contracts below US$lOO,OOO I First 2 contracts I

Network rehabilitation (lot 22.2 ICB Yes Prior March 08 Same as above A) & extension in Kinsenso, Mpasa and Malweka Emergency works for 4.0 ICB No Prior December To be deter- distribution - 2 lots 07 minedbythe

engineering study

TOTAL ESTIMATED 224.5 COST

Procurement Method

OCBS and OBS

Short l ists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may comprise entirely national consultants in accordance with the provisions o f paragraph 2.7 of the Consultant Guidelines. All TORS for the selection o f f i r m s and individual consultants are subject to prior review regardless o f the estimated value o f the contract.

Procurement Methods Prior Review Threshold Threshold

None All contracts o f US$lOO.OOO and above

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sss ICs

None All contracts None A l l contracts o f US$50,000 and above

(b) List of consulting assignmentsfinanced through the Grant

Ref. No.

1 1 3 I 1

Estimated Cost (in

US$

Description of Assignment

4.1

4.2

4.3 4.4

4.5

4.6 4.7 4.8

I 1. SNEL

Business systems for 10.2 collection and billing

Strengthening o f f iancial 9.0 and procurement systems

Strategic expansion plan 2.5 Dam safety maintenance 1.5 program

structure

Procurement audits, 4 years 0.3 Preparation o f annual reports, 0.5 5 vears

Diagnosis o f maintenance 2.0

Financial audits, 3 years 0.2

QCBS

QCBS

QCBS QCBS

QCBS

QCBS QCBS QCBS

Prior March 08 Based on diagnostic analysis to be completed in Nov. 2007

diagnostic analysis completed in Nov. 2006

Prior October 07 Based on

Prior June 08 Prior December 07

Prior November 07

Prior October 08 Prior February 08 Prior February 08

I resettlement plan 4.14 I Audit o f implementation o f I 0.15

4.9

4.10

4.11

4.12

social and environmental action lan TOTAL ESTIMATED COST

2. Ministry of Energy Legal and financial Advisory 4.0 services 3. Project Execution Detailed engineering design 23.6 and supervision

procurement and financial management Institutional support 0.25 (supervisory) to Environment Unit

Fiduciary agent for 5.9

Comments

Post)

QCBS Prior July 08

QCBS

Prior April 07

Prior July 07

Prior December 07

82

Annex 9: Economic and Financial Analysis


A. Common assumptions

1. T h e economic and financial analyses are based on a set o f largely common factors:

A.

B.

C.

D.

E.

Inaa Rehabilitation - Increase in MW. The rehabilitation o f the generation facilities i s expected to increase production capacity at the site by about 600 MW, from about 700 MW to about 1300 MW. The increase will be incremental, averaging about 150 MW per year beginning end 2009 through end 2012. From a purely technical perspective, given the run-of-river quality o f the Inga site and the hydrological conditions, the plant load factor could be 85 percent or higher. However, given that there i s not expected to be a demand for the totality o f the potential output o f Inga during off- peak hours, the analysis o f the benefits o f the Project i s based on an assumption o f a 70 percent load factor. Thus each incremental MW o f capacity can be expected to generate 6,132 MWH per year.

Second Inaa/Kinshasa Transmission line. The second transmission l ine f rom Inga to Kinshasa i s anticipated to be commissioned in 2010 and i s expected to increase the capacity to deliver power to Kinshasa from the current 450 MW (along the oversaturated existing 220 KV line) to well over 700 MW. This second line will also provide increased security o f supply to the Republic o f Congo through this corridor.

Markets for Incremental Power. The incremental power generated at Inga i s anticipated to be destined for three distinct markets: (a) domestic consumption in Kinshasa and to a lesser extent in Bas Congo, (b) exports, primarily to the SAPP and potentially to the CAPP countries (notably for Brazzaville in the Republic o f Congo, where demand for power f rom Inga i s expected to diminish as its own hydropower site comes on line), and (c) consumption by mining and other large industrial consumers in the Katanga region. The following allocation to these various markets i s set out in Table 9.1.

Table 9.1 : Markets

Kinshasa Distribution. Currently, the Kinshasa distribution system i s oversaturated, with transformers operating at precariously high levels o f capacity, which result in localized loss o f power and contribute to high technical losses. The Project will alleviate this stress on the system by financing rehabilitation o f the existing system. In addition, the Project will also electrify several areas in Kinshasa not currently served where nearly 2,000,000 people live. The Project will fund 50,000 new connections in these areas and, by providing the distribution backbone, will provide the basis for further connections at a relatively lower cost per connection.

System Losses and Auxi l iaw Use o f Power. The following system losses and other uses are assumed for purposes o f the economic and financial analysis:

a. Generation at the Inga site: auxiliary systems are assumed to consume 0.3 percent o f generation.

83

b. Transmission losses:

i. 10 percent for the H V D C l ine from Inga to Katanga, including transmission and conversion for HV and MV clients (of which about 1.5 percent relating to the step- down and conversion to AC); and

ii. 2.5 percent for the existing 220 kV A C line f rom Inga to Kinshasa, and by extension 2.5 percent for the proposed second transmission line, with an additional 0.5 percent in step-down losses.

c. Distribution system in Kinshasa: (i) initially 15 percent technical losses and 10 percent non-technical losses, with technical losses gradually reducing from 15 to 12 percent as a result o f the rehabilitation works financed by the Project.

F. Collection Losses. In addition, SNEL faces significant collection losses o f about 50 percent &e., collections as a percentage o f billing) for sales into the Kinshasa system (65 percent for residential customers), but only marginal losses for export sales to SAPP countries (as distinguished from other exports) and to high voltage private mining customers.

G. Capital Costs and Operation and Maintenance Costs: Anticipated capital expenditures o n generation, transmission and distribution, as well as operating and maintenance costs are detailed in Table 9.8 o f this annex. Operating and maintenance costs are assumed to be 2.5 percent o f investment costs in generation, transmission and distribution. The analysis also assumes that incremental commercial costs (metering, billing and collection) in Kinshasa will amount to 10 percent o f incremental revenues.

H. Benefits and Revenues. The economic benefits are distinguishable into two major types: (a) the economic benefit f rom selling to domestic consumers, which has been evaluated based on a willingness-to-pay analysis; and (b) the economic benefit f rom the export of power, which has been evaluated as a function o f the sales price at export. For simplicity, the sale o f power to domestic mining customers has been evaluated in the same manner as exports, namely the sales price. By comparison, the bases for the financial analysis for exports and sales to mining customers are identical to the economic analysis, but differ from the economic analysis for domestic customers in Kinshasa in two respects. First, while the economic analysis incorporates the benefits o f power delivered to customers (i.e., net o f technical losses), the financial analysis i s based on actual revenues collected (i.e., net o f technical, non-technical and collection losses). Second, the actual tariff charged by SNEL, rather than the willingness-to-pay, i s used for the financial analysis.

B. Economic Analysis

2. The proposed Project has been analyzed over the period 2008-2038. The analysis conducted by SNEL for each component o f the Project (supported by their external consultants) has been reviewed and found to be satisfactory. The Project constitutes a major part o f SNEL’s least-cost investment activities. The Project’s distribution component i s an integral part o f the best solution to address current inefficiencies and problems with the distribution system, while the transmission investment constitutes a part o f the least-cost transmission investment to transmit the additional power to the Kinshasa load center.

Economic Benefits

3. Economic benefits associated with incremental electricity sales to consumers are calculated using: (i) the consumers’ willingness to pay as proxies o f benefits for domestic sales; and (ii) the export tariff for sales to the mining sector and sales outside DRC. Details o f the incremental energy sales for the domestic

84

market and for exports are shown in Table 9.7. The projected economic benefit streams are presented in Table 9.8.

Willingness to Pay

4. The value o f the willingness to pay (WTP) o f consumers o f electricity has been calculated as a function o f the willingness to pay for three separate classes o f customers: residential, commercial and industrial consumers.

0 Residential Electricity Consumption. About 10 percent o f present total residential electricity use can be considered minimum lighting requirements. In the absence o f electricity supply, households would use kerosene lamps. T h i s portion i s valued at the economic cost o f US cents 37.9kWh. The remainder o f consumption i s conservatively assumed to be valued at U S cents 1.5kWh (the 2006 average domestic tariff revenue) at the margin. This i s a conservative assumption because this residential tariff level i s very l o w and does not necessarily reflect the t rue economic benefit o f power supply for DRC.

0 Commercial Electricity Consumption. For commercial consumers, the willingness to pay i s based on a basket in which 30 percent of consumption i s assumed to derive f rom gasoline fired engines at a cost estimated at US cents 2O.61/kWh7 with the balance provided by SNEL- equivalent sources.

0 Industrial Electricity Consumption. The willingness to pay for industrial customers i s based o n a basket in which 40 percent o f industrial customers are assumed to use diesel engines at a cost estimated at U S cents 20.34 kwh, and the balance i s provided by SNEL-equivalent sources.

5. The weighted average WTP for a kWh o f incremental electricity supply i s derived using the 2005 consumption mix presented in Table 9.2 below. Based on these factors, the Weighted Average WTP for domestic consumption i s U S cents 6.15kWh.

Table 9.2. Willingness to pay

Customer group Consumption mix (UScentslkWh) willingness to pay

Residential 0.70 5.14 3.60 Commercial 0.20 7.93 1.59 Industrial 0.10 9.64 0.96 Aggregate average 6.1 5

Share in 2005 Wilh'IgneSS to pay Weighted

(UScentslkWh)

6. Sales to the mining sector and for exports are valued at the contractual sale prices and related revenues. The latest commercial negotiations between SNEL and SAPP countries have established a reference tariff o f U S cents 2.5kWh. This price remains well below the long run average incremental cost o f new power supply in SAPP and given that demand growth seems to be exceeding additions o f generation capacity in SAPP, SNEL should be able to negotiate higher prices in the future. We have assumed that prices would increase by 25 percent in 2010, and by another 25 percent in 2015 (which yields a figure o f U S cents 3.9kWh in 2015).

7. Under these assumptions, the economic net present value (NPV) o f the Project, calculated at a discount rate o f 12 percent, i s US$501 mi l l ion and the internal rate o f return i s 29 percent. The results o f the sensitivity analysis show that the Project i s robust to significant variations in its main variables (i.e. capital cost and sales revenues). Even in a l ow case scenario that combines a 20 percent reduction in revenues

85

from Kinshasa, mining and exports and a 20 percent increase in investment costs, the NPV o f the Project i s US$234 million. The sensitivities are presented in table 9.3

Sensitivity Analysis Base Case (1) 20% increase in investment costs (2) 20% reduction in revenues in Kinshasa

NPV IRR(%) 501 29% 423 24% 383 25%

(3) 20% reduction in revenues from mining and exports I 429 27% Low case: (1) + (2) + (3) I 234 19%

8. Regional Dimension o f the Proiect. The Project has additional economic benefits at a regional level that have not been directly quantified. First, the increases in the available capacity in DRC and in the energy flows between DRC and the other SAPP countries are essential steps to deepen the short and long t e r m markets for power trading in the region. By decreasing the total reserve capacity in the southern Africa region, important savings in investment capital can be made. Furthermore, the Project increases the security o f power supply in the southern Africa region. Based on historical data, the probability of occurrence o f a major drought in the SAPP countries every 10 years i s high. One exception i s DRC, which benefits from the very large catchment area o f the Congo River spread on both sides o f the equator. Thus, the Project will enable the use o f DRC’s generating plants as a backup to mitigate the impact o f a possible drought on electricity production in the rest o f the SAPP countries. Finally, the increase o f cheap hydro electricity supply will substitute for thermal plant generation and contribute to the reduction o f fossil f ue l emissions.

9. Other Benefits. The Project will also result in the reduction o f system losses as a result o f new and rehabilitated infrastructure in transmission and distribution (thereby reducing transmission losses from Inga to Kinshasa and distribution losses in Kinshasa). In addition to the benefits quantified in the economic analysis, the Project will also assist SNEL’s institutional development through technical assistance to upgrade the technical, financial and managerial capabilities o f SNEL and i t s staff. The institutional support i s expected to bring about sustained improvement in SNEL’s operational efficiency and financial performance.

10. Distribution o f benefits. Domestic consumers are the biggest beneficiaries o f this Project because o f the divergence between the financial price (or what they pay for electricity) and the value to them for the electricity they consume. T h e second largest beneficiary i s SNEL.

11. Least Cost Assessment. The alternative configurations for meeting the Project’s objectives are limited. One alternative would be the construction o f a new hydropower plant; however, a new construction i s estimated to be costlier (US$1 mi l l ion or more per installed MW) than the rehabilitation o f these existing Inga plant (estimated at US$0.3 mil l ion per installed MW); the new construction would also take longer than rehabilitating the existing turbines. Another alternative i s the construction and operation o f a thermal power plant near Kinshasa to supply the main domestic load center. The investment costs alone would be at least about two to three times the cost o f rehabilitating the Inga hydropower plant or about US$400-600 mi l l ion for generation alone (excluding fuel costs, a major item in a thermal power plant). This would eliminate the need for a large part o f the transmission line but would necessitate either the construction o f a fuel pipeline (estimated at over 250km from Matadi, DRC’s main port, which i t se l f i s in need o f extensive rehabilitation), or ferrying the fuel through a variety o f means (barges along the Congo r iver and then by truck), which presents major logistical issues and reliability concerns. In addition, DRC would have to pay on an ongoing basis, the costs for fuel that i s hampering thermal power plants in many other countries. The least cost option to supply the needed energy for the domestic and export markets i s the rehabilitation o f the Inga hydropower plant and the construction o f the second transmission line from Inga to serve Kinshasa.

86

The no-project alternative would deprive DRC o f the needed improvements in the power sector and the anticipated US$501 mill ion o f net economic benefit (as calculated on an NPV basis).

C. Financial Analysis o f the Project

Assumptions spec& to theJinancia1 analysis

12. As described above, the financial analysis and the economic analysis are built around common assumptions, but with several salient differences that yield lower financial returns for SNEL as compared to the Project’s overall economic benefits. There are two major factors:

0 Difference between average electricitv tariffs and the willingness to pay: this difference i s especially large in Kinshasa, were l o w voltage tariffs for domestic users are very l o w because they have remained unchanged in nominal terms for years while the local currency has depreciated (in comparison, LV commercial users are billed in USD and are charged an average tar i f f about 9 times higher).

Non uavment and losses: In Kinshasa, collection rate for electricity bil ls i s only 50 percent, in addition to non technical losses estimated at 10 percent. This means that only about 45 percent o f the power physically supplied to end-users (i.e., net o f technical losses) i s effectively paid to SNEL.

0

13. The financial analysis i s therefore based on the following specific assumptions:

In Kinshasa,:

o Nontechnical losses o f 10 percent

o Average tariffs in 2005 were U S cents 2.4 per kwh (based on a weighted average o f U S cents 1.7 for LV and U S cents 7.7 for MV). Since 2007, the Government has started to implement a strategy o f increasing tar i f fs. Accordingly, the analysis assumes an average tar i f f o f U S cents 2.98 per kwh in 2008 that would be gradually increased to US cents 4.40 per kwh in 20 15 (an aggregate increase o f about 50% over the period).

o Total collection rate o f 52 percent initially in 2008, would improve to 62.5 percent over 6 years as a result of the actions under the Project to increase SNEL’s billing and collection activities. The largest contribution to this improvement would come from residential customers in accordance with the monitoring indicators for the project.

0 For exuorts to SAPP and sales to mines, the price assumption i s the same as in the economic analysis, namely U S cents 2.5kWh initially increasing by 25 percent in 2010 and another 25% in 2015. Collection f rom these high end customers has been estimated at 95 percent, based on the good track-record o f collection from SAPP and private high voltage customers.

Project Rate of Return and Sensitivities

14. Under these assumptions, the financial internal rate o f return of the Project (FIRR) would be 20 percent and the NPV (at a 12 percent discount rate) equal US$293 million. Detailed financial streams are presented below in Table 9.9. The returns remain robust under a variety o f scenarios, as presented in Table 9.4 below. Even in a l o w case scenario combining a 20 percent increase in investment costs together with a 20 percent reduction in revenues from Kinshasa, exports and mining customers, the FIRR would be 14.1 percent.

87

Table 9.4 - Project Financial Rate o f Return - Sensitivity Financial Analysis - Sensitivity NPV FIRR(%) Base Case 293 20.4% (1) 20% increase in investment costs 216 17.4% (2) 20% reduction in revenues in Kinshasa 254 19.3% (3) 20% reduction in revenues from mining and exports 198 17.8% Low case: (1) + (2) + (3) 81 14.1%

Rate of Return by Domestic and Export components

15. This Project i s aimed at serving two distinct markets: high voltage users (private mining companies and SAPP), on the one hand, and electricity distribution in Kinshasa, on the other hand. These markets present different financial characteristics. I t i s possible to dissociate the investments, operating costs and flows o f revenues associated with each market, and analyze each component separately. The results are set out in Table 9.5 and Table 9.6 below.

Table 9.5 - Ex~orts and mines component Sensitivity Analysis - Exports and mines NPV FIRR(%) Base Case 374 55.1% (1) 20% increase in investment costs 354 46.4% (2) 20% reduction in revenues 279 44.6% Low case: (1) + (2) 259 37.6%

Table 9.6 - Kinshasa Distribution components Sensitivity Analysis - Kinshasa NPV PI=(%) Base Case -104 7.7% I( 1) 20% increase in investment costs -177 5.7% I (2) 20% reduction in revenues -144 5.9% Low case: (1) + (2) -217 4.0%

16. The exercise reveals several points:

Under al l the scenarios considered, the investments required to supply mining companies and increase exports to SAPP would be highly profitable, with a FIRR ranging from 55.1 percent in the base case to 37.6 percent in the l o w case scenario.

On the contrary, the investments required to bring incremental power supply to Kinshasa yield an internal rate o f return varying between 7.7 percent in the base case and 4.0 percent in the worst case, largely the result o f the combination o f high collection losses in Kinshasa and low tariffs (by contrast, the economic returns are robust given the relatively higher willingness to pay and the fact that non-technical and collection losses do not reduce the economic benefit derived from the consumption o f the electricity).

Financial Impact of the Project for SNEL after on-lending

17. Currently, SNEL’s operations currently generate l itt le cash-flow for investments and the company operates under significant liquidity constraints. The company would therefore not be able to self-finance significant investments regardless o f their expected profitability. This Project i s very large compared to SNEL current operations. The Project’s cumulative costs are projected to be US$490 mi l l ion over five years, with more than US$350 mi l l ion concentrated over about three years. By comparison, the total revenues collected by SNEL in 2005 were US$106 million.

88

18. The proposed on-lending terms are consistent wi th SNEL’s financial position. 20 year repayment term, and notably the 5 years grace period, would ensure that the repayment o f the principal starts after completion o f the investments, at a time when SNEL would be benefiting from incremental revenues generated by the project. In addition, in coupling these terms with the proposed 5 percent interest rate will enable SNEL to cover debt service with the incremental cashflows from the Project in a sustainable manner (e.g., even under the low case, SNEL’s FIRR i s 14.1%).

89

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D. Financial Analysis o f SNEL

Installed generation Capacity High Voltage Transmission l ines Substations Transformers MV/LV Buried MV lines Buried LV lines

19. SNEL’s generation i s almost entirely hydropower and as a consequence the company faces very l o w variable costs in generation. The replacement value o f SNEL’s assets, can be conservatively estimated to be around US$7.3 bi l l ion (see Table 9.10 below). While SNEL’s financial performance has somewhat improved over the last three years, the overall picture remains that o f a very weak utility, which has not properly maintained or renewed i t s assets.

Unit Cost per unit (in

us$ooos) MW 2,000 Km 250

Number 10,000 Number 15

Km 40 Km 20

Total replacement cost

If SNEL asst Quantity

2,442 5,454

71 3,330 2,566

10,560

CUSS mn)

s Total replacement

million) costs (us$

4,884 1,364

710 50

103 21 1

7,321

20. Given the capital-intensive nature o f i t s operations, a power utility would normally: (i) devote a significant proportion o f i t s operating expenses to maintenance, and (ii) generate a significant positive current cash f low representing a return on the invested capital, allowing the company to service i t s debt and to fund the renewal o f i t s assets. In fact, over the last three years, SNEL has spent on average less than US$15 mi l l ion per year on maintenance and repairs, and has generated an operational current cash f low o f around US$50 mi l l ion per year. T h i s represents respectively 0.2 percent and 0.7 percent o f the replacement value o f SNEL assets. In effect, SNEL has performed almost n o preventive maintenance for years, only carrying out repairs when possible or in the face o f emergency conditions requiring attention (as has occurred at the Inga plant and along the existing IngaKinshasa transmission line). One result i s that less than 40 percent o f installed generation capacity i s effectively in operation.

21. The other major weakness in SNEL operations and lack o f financial performance are the l o w tariff levels and poor collection rates. Behind the aggregate indicators regarding commercial performance, the situation for various segments o f customers i s extremely differentiated:

a. Private commercial users (including LV, MV and HV) contribute the most to SNEL’s revenues. These customers represent only 13 percent o f electricity sales in volume but 48 percent in term o f revenue collected. This i s due to a relatively high average tar i f f (6.8 cents per kwh), as well as a high level o f revenue collection (85 percent).

b. LV residential users (mainly in Kinshasa) contribute the least: they bring only 9 percent o f revenue while they consume 37 percent in volume.

c. Public sector users (State and parastatals) are chronically in arrears or simply do not pay.

d. Exports have generated a significant portion o f SNEL’s actual revenue collection, but the figure has been l o w in part given that electricity was sold at the relatively l o w price o f U S cents 1.5 kwh. This figure has recently increased, which should improve SNEL’s cash f low position.

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The breakdown for different customer classes i s set out below in Table 9.1 1.

I Sub-total Commercial users 13% 6.8 85% 5.7 48%

Table 9.1 1 : Commercial Information by Customer Class Commercial statistics 2005

Share o f Average tar i f f Collection Average revenue Share o f sales (UscentkWh) rate (UscentkWh) revenues

State and parastatals 19% 6.3 23% 1.4 17% LV domestic 37% 1.2 32% 0.4 9% LV commercial 2% 11.6 61% 7.1 10% M V private 8% 7.3 93% 6.8 32% H V private 4% 2.8 98% 2.7 6% Exports 30% 1.6 84% 1.4 26% Total 100% 3.0 53 yo 1.6 100% Sub-total Commercial users 13% 6.8 85% 5.7 48%

Exports 30% 1.6 84% 1.4 26% Total 100% 3.0 53 yo 1.6 100%

I Source: Estimate SNEL. May 2006

22. Improving revenue collection i s key to improving SNEL’s profitability. The contribution o f exports to revenues will be mechanically improved with the contractual revision o f tariffs which should increase unit prices f rom 1.5 to 2.5 U S centskwh. Increasing revenues from Kinshasa will be harder to achieve because o f the technical, organizational and even political/social challenges involved in improving revenue collection f rom hundred o f thousands o f mostly small users.

23. The Project will contribute both indirectly and directly to the objective o f improving SNEL financial position and commercial performance in several ways:

a.

b.

C.

The Project will increase the quantity and quality o f energy delivered to Kinshasa. In addition to increasing volumes, it should also create a situation where increased revenue collection can be justified by improved quality o f service.

T h e Project will, through the rehabilitation o f the distribution network in Kinshasa and the construction o f a second transmission line (which will increase security o f supply), lower technical losses and reduce unserved energy.

The capacity building component targeted at strengthening SNEL’s commercial activities should help to reduce collection losses, thereby yielding incremental revenues, not only on the additional power provided through the Project, but also generally on SNEL’s revenues in Kinshasa.

24. Currently, electricity exports and sales in HV to private users represent slightly less than a third o f the revenue o f SNEL (and US$29.5 mi l l ion in 2005). This share will increase significantly as a result o f the Project. It i s expected that, after the full rehabilitation o f Inga, the Project wi l l bring incremental sales to SAPP and mining companies amounting to US$49.8 mi l l ion annually.

Recent financial performance (2004-2006)

25. Based on data communicated by SNEL, f rom 2004 to 2006, the company has managed to improve i t s level o f generation by about 5 percent and i t s sales o f energy (in US$ millions) by 8 percent. A summary o f SNEL’s overall operating accounts i s presented in Table 9.12.

94

Table 9.12: SNEL - Summary of I Unit

Energy Generated Energy Sold Losses

Energy Sales Average price p e r k Wh

Revenue Collected

GWh GWh

% US$ m.

us cents

US$ m.

- se l f - f ianc ing US$ m.

- current year - arrears Current collection rate Total Collection rate Cash Operating expenses

perating. accounts 2004 2005 I 2006

US$ m. US$ m.

% %

US$ m.

107 106 69.2 81.3 37.6 24.3

41.9% 47.0% 64.7% 61.1%

-45 -56 0.6 0.8

Equity 40.2 25.5 (59.4) (77.2)

Long term debt 181.3 135.0 332.4 357.6 Short te rm debt 273.1 277.0 338.9 361.8 Total liabilities 494.6 437.5 611.9 642.1

urce: SNEL annual audited accounts for 2003 to 2005 - 2002 unaudited - Conversion in USD by WB.

Leverage (net debt/assets) 92% 94% 110% 112%

62 49 37.6% 28.5%

9 26 1.3 5.2 8.0 20.7

in US$ millions

Fixed assets worlung capital Cash Total assets

- 115

95.4 19.5

53.6% 64.6%

-72 1.0

2002 2003 2004 2005 401.4 356.3 537.5 541.8

90.4 78.1 54.6 79.0 2.9 3.1 19.9 21.3

494.6 437.5 611.9 642.1

- 43

24.3%

46 31.1 15.1

- -

I I )n actual results at end of September.

26. SNEL financial structure i s characterized by a high level o f debt (both long term and short term) and negative equity (see Table 9.13). SNEL operates under severe liquidity constraints which complicates i t s dealings with suppliers. The bulk o f SNEL financial debt i s towards the Government. However, the Government also has significant payment arrears towards SNEL for i t s electricity consumption. Regular exercise o f reconciliation and cancellation o f cross-debt between SNEL and the Government could be used to clarify SNEL’s financial position.

27. Over the last couple of years, SNEL has taken steps to improve internal controls in the area o f revenue collection. Revenue collection for HV and MV customers i s centralized, and improved

95

monitoring procedures have been put in place to trace the flow o f funds. A recent external diagnostic indicated that the current procedures and practices are satisfactory in this area, but are deficient with respect to LV customers. As a result o f improved monitoring o f revenue collection and tighter internal controls regarding the use o f funds, the company has been able to increase modestly i t s level of investments and operating expenditures. A breakdown o f SNEL’s operating expenditures i s provided in Table 9.14.

Table 9.14: SNEL - I

Materials and supplies Services Transportation Personnel Miscellaneous

1 operating emenditures 2004 2005 2006

10.0 8.3 9.0 5.2 6.9 7.5 3.7 4.7 6.9

23.1 34.1 44.9 2.8 2.4 3.3

Total cash operating expenditures I US$ m. I 44.8 56.4 71.6

Financial perspectives 2007-201 5

28. The current Project will begin to impact significantly SNEL revenues and operational profitability beginning in 2010 when the second transmission line i s commissioned and incremental generation capacity from Inga i s scheduled to enter into service. A larger impact o f the Project would be felt beginning in 201 1. In the meantime, SNEL will need to increase i t s level o f technical performance with the implication o f more resources devoted to maintenance and increased self-financed investments. This wil l require increased revenues. In i t s 2007 budget, SNEL has presented aggressive targets for improving revenue collection and spending on maintenance.

29. As SNEL devotes more resources to maintenance, i t should see in 2007 and 2008 a continuation of the decline in i t s level o f operating margin as a proportion o f sales compared to 2006. However, operating cash-flow should start to increase modestly in 2009 thanks to incremental revenues from the Project. From 2010 to 2015, SNEL should become more financially viable (see table 9.15). For example, i t should be able to make the necessary expenditures to maintain and renew its assets without external financial assistance, as well as to service i t s debt obligations (e.g., under this Project). This improvement in SNEL’s financial position would result from a combination o f incremental energy sales (primarily the increase in generation under the Project), gradual tariff adjustments and improved revenue collection.

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E E i E

Annex 10: Safeguard Policy Issues

(Southern A h c a n Power Market Program, APL-lb) AFRICA: Regional and Domestic Power Markets Development Project

1. The Project triggered six safeguards policies - OP 4.01 (Environmental Assessment), OP 4.09 (Pest Management), OPN 11.03, being revised as OP 4.11 (Physical Cultural Resources), OP 4.12 (Involuntary Resettlement), O P B P 4.37 (Safety o f Dams) and OP/BP 7.50 (Projects on International Waterways).

2. Eight documents relating to environmental, social and resettlements aspects o f the Project have been prepared, namely: (i) the Environmental and Social Impact Assessment (ESIA), (ii) Environmental and Social Management Plan (ESMP), (iii) the Environmental and Social Management Framework (ESMF), (iv) the Resettlement Policy Framework (RPF), (v) the Management o f Cultural Heritage Framework (MCHF), (vi) the ESIA Executive Summary (French), and (vii) the ESIA Executive Summary (English), as (viii) supplemented by the Pest Management Plan related to the control o f black flies (PMP). These operational documents have laid down the principles and mechanisms for management o f adverse environmental and social impacts, including mitigation measures, operational responsibilities and budget.

3. The documents have been approved by ASPEN and were disclosed in-country and in the Infoshop in Washington on January 18,2007; the PMP was disclosed April 6,2007.

Environmental Assessment (OP 4.01)

4. The Project has been categorized as “B” under OP 4.01 since the infrastructure components raise no major environmental policy, regulatory and institutional issues, and will not compromise people’s health from environmental r i sks and pollution. Project environmental concerns are not significant, and normal environmental management procedures and practices will suffice to avoid or minimize any such concerns. The Project poses a moderate potential reputational r i sk for the Wor ld Bank.

5. An Environmental and Social Impact Assessment (ESIA) containing an Environmental and Social Management Plan (ESMP) and an Environmental and Social Management Framework (ESMF) were prepared. The ESIA describes the environmental management structure o f SNEL, the qualifications, functions and needs o f the project team; general health, safety, pollution prevention, and waste disposal procedures; and a training program for project management and contractor personnel. The ESMF describes environmental and social aspects o f the Project that wi l l need to be managed, at the level o f individual components, including applicable environmental and social regulations. The ESMP specifies mitigation measures for various potential adverse impacts in the pre-construction, construction and operation phases o f the project. Funds for implementing the ESMP are included in the project cost estimates.

6. The following environmental impacts on the infrastructure components have been identified by the environmental and social consultants (some sub-components will be further defined during project preparation but no major environmental or social impacts are expected).

7. Component 1: Rehabilitation o f generation Capacities at the Inaa I and I1 Dower plants. This component will finance the rehabilitation o f generation capacities at the Inga I and I1 power plants to provide power to DRC, as well as to the southern A h c a n and central African power pools. The site o f the Inga 1/2 hydroelectric power station i s located approximately 150 km from the mouth o f the Congo River. The area i s sparsely populated and consists mostly o f savanna with gallery forests in the valleys. The construction o f Inga 1 was finished in 1972 and Inga 2 in 1981. The Inga 1 and Inga 2 hydropower stations use the same 9 km long canal for their water supply. Only a fraction o f the water from the huge Congo River has been diverted into this canal for hydropower production. The environmental impacts o f the construction and operation o f the Inga 1 and Inga 2 hydropower plants were and s t i l l are moderate and manageable, and there are n o legacy issues.

98

8. There will be almost no change in the hydrological regime o f the Congo River. Dredging and re-profiling o f the 9 km canal will be needed to bring the capacity closer to the design capacity. The dredging sludge will be tested for chemical pollution. Based on the test results, a safe disposal place will be identified. There are macrophytes and likely PCB problems which need to be managed. The drinking water supply system for the concession i s integrated into the dam installations and i s completely obsolete and wil l need to be renovated. Water quality monitoring will be strengthened in order to optimize reservoir management.

9. Component 2: Construction o f a transmission line from Inga to Kinshasa: The routing for the transmission l ine from Inga to Kinshasa ending at the Kingatoko substation has not yet been finalized. The final routing o f the line s t i l l needs to be further defined. I t i s expected that land acquisition will be required. The environmental and social consultants studied and compared the impacts o f two routes proposed by an earlier study. The two options are:

0

North routing: this option follows the existing transmission line Inga-Shaba at a distance o f approx. 1 km. on i t s southern side and stops at the eastern neighborhoods o f Kinshasa. South routing: this option goes first diagonally and crosses the Inga-Kwilu, then i t follows the national road and then i t follows the train route for a large part.

10. The high-voltage transmission line has a length o f about 260 km; 90 percent o f the l ine i s located in the Bas- Congo region. Three natural habitats were found in the Project area, but a modification o f the route proposed by the consultants and in certain cases a new design has enabled those critical habitats to be avoided. The proposed transmission l ine route from Inga to the Kingatoko substation in Kinshasa passes mostly through agricultural land. A sensitive forest area near the Inga hydropower station has been avoided. The transmission lines poses manageable environmental impacts which will be mitigated by the actions described in the RPF and ESMP.

11. The routing would pass through mostly unpopulated areas from Inga to the national road. The area i s cultivated with itinerant crops and there i s some hunting activity. From Lufu to Kingatoko the area i s scattered with villages and has extensive cultivation. The l ines passes far from most o f the towns and villages but in cases where towns cannot be avoided, it would passes through areas with l o w to medium population density. At the end o f the line, i t reaches the peripheral zone o f Kinshasa which has l o w to medium housing density. This area has market garden cultivation zones, cash crops and small-scale livestock farms.

12. T h e end point o f the line will be built in Kinshasa. After comparing four possible locations, the consultants recommended to locate the end point at Kingatoko as the one with the least environmental and social impacts.

13. Component 3: Expansion and rehabilitation o f the distribution network in Kinshasa, including 50,000 new connections. The Project will, in addition to the rehabilitation o f portions o f the distribution system, electrify new areas within greater Kinshasa that do not currently receive power. 30,000 new connections will be provided in the Kimbanseke area located to the east o f the city (the largest un-electrified area within greater Kinshasa, with a population estimated at above 1.2 million). Electrification o f Kimbanseke will require the erection o f a new substation. The Project will also provide, in aggregate, 20,000 new connections in the Kinseso, Mpasa 1/2/3 and Malweka areas, which are, other than Kimbanseke, the largest remaining un- electrified areas in Kinshasa, with populations estimated each in the 250,000-350,000 range.

Resettlement (OP 4.12)

14. Component 1: Inga Rehabilitation: The SNEL concession at the Inga 1 and Inga 2 hydroelectric power stations consists o f 21,000 hectares. This concession includes the future sites for Inga 3 and Grand Inga. The ESIA indicates that there are n o significant legacy issues regarding compensation for the population for land use rights at the time o f the construction o f Inga 1 and Inga 2. Most o f these people l ive outside the concession. The area o f the concession was and s t i l l i s sparsely populated. Most villages are located on the hill tops, as a consequence o f the presence o f riverblindness (onchocerciasis), caused by the black fly Simulium damnosium. The incidence o f riverblindness in the area i s presently very low, as a result o f past and present riverblindness

99

control programs. SNEL staff lives inside the SNEL concession in residential houses and in villages. The social amenities in these villages are very good. Presently there are around 6,000 former SNEL workers living within the concession. SNEL i s negotiating with the GoDRC to resettle these old workers outside the concession, but this i s not related to the Project. The rehabilitation o f the Inga 1 and Inga 2 hydropower plants does not involve any land acquisition or resettlement

15. Component 2: Transmission: I t i s estimated that 60-80 homes will be affected by the construction o f the transmission line component (based on the use o f a 100 m right-of-way, which i s more appropriate that the 200 m right-of-way init ially contemplated). The number o f resettlements can be further reduced by optimizing the routing o f the l ine at the Bas-Congo area and avoiding other populated areas. Over 60 percent o f the homes affected are rudimentary, with a small surface area and built with primary materials such as wood, corrugated iron, uncooked bricks

16. Component 3: Distribution: For the distribution component, it i s estimated that 127 homes will be affected. After comparing three sites for the location o f the substation for electrifying Kimbanseke, i t was decided to locate it in an area with the lowest population density in the Kimbanseke neighborhood. The resettlement cost has been estimated at about US$1 million. Resettlement w i l l be conducted according to the recommendations o f the RFP prepared for the project.

17. HIV/AIDS will be managed during construction. With DRC prevalence rates for HIV/AIDS ranging from 1.7 percent to 7.6 percent (depending on the region o f DRC), workplace policies and standard clauses for contractors, especially those whose staff will move from place to place during construction, will be included in the pertinent works and other contracts.

Dam Safety

18. Consistent with OP 4.37, and according to TORS developed in consultation with the relevant Bank specialist, a consultant dam safety engineering firm has completed for SNEL a review o f the hydroelectric facilities at the Inga site. No significant concerns were identified, and a strengthened program o f maintenance was recommended. Under the grant, SNEL has agreed that it shall adopt a dam emergency preparedness plan by December 31, 2007, that reflects the comments of the Association. SNEL has employed a consultant to assist it in the preparation o f the plan. SNEL has also agreed, as a covenant of the Grant, to submit to the Association, by October 3Ist of every year, a facilities and network maintenance plan and associated budget for the forthcomingjnancial year for Inga and the other Project facilities, and to report on implementation of the plan.

International Waterways

19. OP 7.50 applies to Projects that involve the use o f international waterways. The Inga rehabilitation component (Component 1) will involve the use of the Congo River, an international waterway that DRC shares with 8 countries and, as such, OP 7.50 applies. However, the Inga dam i s a "run o f the river" plant, and the proposed activities (rehabilitation o f the dam, dredging and reprofiling o f the intake canal) will not modify the water volume. On this basis, and as set out in paragraph 7(a) o f OP 7.50, this Project i s exempt f rom the requirement to notify other riparian states about the Project, as the activities will alter neither the quality nor the quantity o f the water flowing to other riparian states, nor will the Project be adversely affected by the other riparians' possible water use.

Pest Management

20. Black flies (Simulium damnosium), a vector for onchocerciasis, are prevalent at the Inga site and surrounding health zones (Inga and Seke-Banza, with a total o f 160,000 inhabitants). The presence o f the disease has decreased in the last two years due to mass distribution o f Invermectin/ Mectizan(R), a potent antiparasite drug mixture. However, the flies s t i l l represent a major nuisance for the population. The nuisance factor i s severe and has important socio-economic effects, including on school attendance.

100

2 1. The Project w i l l focus on addressing the black fly nuisance on the Inga site and surrounding health zones by controlling the black fly larvae by spraying Permethrin in the river six times a year in high season and strengthening the existing Inga Entomological Mission (EM), which will monitor the operation’s impact. Particular attention w i l l be paid to monitor hydro-biological impact, strengthen capacities for entomological monitoring and evaluation, and ensure sustainability o f the interventions. Service contracts w i l l be used to contract WHO/APOC (African Program for Onchocerciasis Control) to implement the control activities under the joint supervision o f SNEL and the Ministry o f Health, and to strengthen the existing capacity in the EM.

22. The use o f insecticide Permethnn, triggers the Pest Management safeguard (OP 4.09). A Pest and Pesticide Management Plan has been prepared (and approved by the Bank) and has been disclosed in-country and subsequently in the Infoshop on April 6,2007.

Cultural Property

23. A framework for inanaging cultural properties (MCHF) has been prepared, was approved by the Bank and was released in-country and fi led in the Infoshop in January 2007 (ref. OP 4.1 1). Sensitive sites include caves in the vicinity o f the targeted project area.

Monitoring and Evaluation

24. The Environmental and Social Management Unit (ESMU) to be established within SNEL (as a condition of effectiveness of the grant - see discussion below) will monitor the environmental and social impacts o f the Project. Monitoring will be undertaken at a number o f levels. First, i t will be undertaken by the contractors at work sites during construction. The contractors will prepare their own environmental and social management plan, which will be based on the Environmental and Social Management Plan prepared for the Project. SNEL will also undertake independent monitoring so as to verify the outcomes o f the contractors actions and to audit implementation o f the environmental mitigation measures contained in the plans and construction contract clauses. SNEL will also implement and monitor land acquisition and compensation issues as outlined in the WP. The following parameters will be monitored during project implementation: affluent water quality, waste water, or rainfall runoff discharged from campsites; noise levels during construction; soil erosion including adequate implementation o f erosion control measures as relevant; vegetation clearing to avoid removal o f unique trees for the erection o f towers; and accidents and health.

ESMU

25. Environmental and social safeguard issues will be managed by a new Environmental and Social Management Unit (ESMU), to be established as a condition of effectiveness ofthe grunt. The ESMU will be responsible for implementing the Project’s ESR Plan, as well as environmental and social safeguards issues relating to other SNEL activities. The ESMU’s core staff will init ially be drawn from existing capacity within SNEL, trained in connection with a separate IDA-financed operation. The E S M U will be located within the Monitoring and Control Department, which reports directly to SNEL’s Management Committee. Operating costs for the unit over the Project period, including necessary training, are estimated at about US$300,000.

26. High-level institutional support and technical assistance to the E S M U will be provided through consultant services (estimated at US$250,000 for Project-related activities; additional expenses are anticipated given SNEL’s desire to strengthen their overall capacity in this area). Activities will include support for refining the ESR Plan and advising on implementation planning, guidance on the compensation process and knowledge transfer. Detailed preparation and implementation o f compensation for the Project transmission and distribution components - including crop and orchard damage, resettlement and land and property access redress - will be undertaken by a separate team of consultants, reporting to the ESMU, at an estimated cost o f US$150,000, excluding the cost o f compensation disbursed. I t i s estimated that total compensation for these elements will be in the order o f US$l,OOO,OOO. Provision has also been made for an independent, periodic (including ex-post)

101

‘audit’ o f ESMU’s work, to ensure that the ESR Plan and i t s implementation i s o f high quality (estimated cost o f US$lOO,OOO). Provision has also been made for other ESMU-led specialized activities that may be required during Project implementation, including analyses of dredging sludge and the creation of waste storage sites. The implementation o f the Pest Management Plan at the Inga site will be independently managed (see discussion above); the ESMU will monitor these activities.

102

Annex 11: Project Preparation and Supervision

(Southern Afncan Power Market Program, AF'L-lb) AFRICA: Regional and Domestic Power Markets Development Project

Planned Actual P C N review 11/01/2005 11/01/2005 Ini t ia l PID to PIC 11/10/2005 11/14/2005 Ini t ia l ISDS to PIC 11/10/2005 01/18/2006 Appraisal 11/09/2006 03/08/2001 Negotiations 0111 012006 04/04/2 0 0 1 Board approval 05/29/2001 Planned date o f effectiveness 09/30/2001 Planned date o f mid-term review 04/01/2009 Planned closing date 06/30/20 13

K e y institutions responsible for preparation o f the Project:

SNEL 0 Ministry o f Energy o f GoDRC

Bank staff and consultants who worked on the Project included:

Name Title Unit Philippe Benoit Lead Energy Specialist and TTL AFTEG Pat i ck Auffret Sr. Infrastructure Specialist (Kinshasa) Consultant Rene Mendonca Sr. Power Engineer Consultant Jean-Charles Kra Sr. Financial Management Specialist AFTFM Fabrice Bertholet Financial Analyst AFTEG Josee Bamvi Procurement Assistant AFTTR Rob Mills Energy Economist AFTEG Gerhard Tschannerl Procurement Specialist Consultant Anta Loum L o Language Program Assistant AFTEG Philippe Mahele Procurement Specialist AFTPC Noureddine Bouzaher Sr. Energy Economist M N S S D Pierre Mor in Sr. Procurement Specialist AFTPC Robert Robelus Sr. Environmental Specialist Consultant Mohamed Arbi Ben-Achour Sr Social Scientist AFTS 1

Gilles Veuillot Sr Counsel LEGAF T. Mpoy-Kamulayi Lead Counsel LEGAF Renee Desclaux Finance Officer LOAG2 Agnes Albert-Loth Sr. Finance Officer LOAG2

Fabrice Houdart Operations Analyst AFCRI

Bank funds expended to date on Project preparation: 1. Bank resources: US$415,000 2. Trust funds: 3. Total: US$475,000

Estimated Approval and Supervision costs: US$640,000 1. Remaining costs to approval: US$40,000 2. Estimated annual supervision cost: US$150,000

103

Annex 12: Documents in the Project Fi le


1. Feasibility Study, dated January 2007, prepared by Fichtner Engineering.

2. Environmental and Social Impact Assessment, dated December 2006, prepared by SOFRECO.

3. Study o f SNEL Financial Systems, dated 2006, prepared by PWC.

4. Study on SNEL Corporate Governance, dated 2006, prepared by PWC.

104

Annex 13: Statement of Loans and Credits


~~~

Original Amount in US$ Millions

~~~

Difference between expected and actual

disbursements

PI04497 2007

PO88751 2006 PO86874 2005 PO88619 2005

PO71144 2004

PO78658 2004

PO81850 2004

PO82516 2004 PO57296 2003

Project FY Purpose IBRD I D A SF GEF Cancel. Undisb. Orig. Frm. ID Rev’d

CD-Em. Urban & Social Rehab ERL 0.00 0.00 0.00 0.00 0.00 183.09 0.00 0.00 (FY07) ZR-Health Sec Rehab Supt (FY06) 0.00 0.00 0.00 0.00 0.00 140.69 40.08 0.00 ZR-Emerg SOC Action (FY05) 0.00 0.00 0.00 0.00 0.00 50.82 8.84 0.00 CD-Emergen Living Conditions 0.00 0.00 0.00 0.00 0.00 64.50 12.63 0.00 Impr (FY05) CD-Priv Sec Dev & 0.00 120.00 0.00 0.00 0.00 47.43 13.74 0.00 Competitiveness (FY04) CD-Emerg Demob Reintegr ERL 0.00 0.00 0.00 0.00 0.00 15.16 -25.02 0.00 (FY04) CD-Emerg Econ & SOC Reunif ERL 0.00 50.00 0.00 0.00 0.00 75.34 5.49 0.00 (FY04) ZR Multisectoral HIV/AIDS 0.00 0.00 0.00 0.00 0.00 70.68 -6.26 0.00 CD-Emerg MS Rehab & Recovery 0.00 410.00 0.00 0.00 0.00 294.25 85.44 57.70 ERL (FY03)

Total: 0.00 580.00 0.00 0.00 0.00 941.96 134.94 57.70

STATEMENT OF IFC’s H e l d and Disbursed Portfolio

In Millions of U S Dollars

Committed Disbursed

IFC IFC

FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval

Adastra Miner ... 0.00 0.09 0.00 0.00 0.00 0.01 0.00 0.00 2003 Celtel DROC 8.57 0.00 0.00 0.00 8.57 0.00 0.00 0.00 2005 Kolwezi 0.00 4.80 0.47 0.00 0.00 4.46 0.47 0.00 2005 PCB Congo 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00

Total portfolio: 8.57 5.34 0.47 0.00 8.57 4.92 0.47 0.00

FY Company Approval

~~~ ~~~~~~

Approvals Pending Commitment

Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

Annex 14: Country at a Glance


POVERTY and SOCIAL

2005 ~

Population. mid-year (miilions) GNlpercapita (Atiasmethod, US%) GNI (Atlas method, US$ billions)

Average annual growth, lS99-05

Population (W Labor force (%)

Sub- Congo, Saharan Low-

Dem. Rep.

57.5 PO 6.9

2.7 2.7

M o s t recent estimate (latest year available, lS99.05)

Poverty (% of population belo wnafionalpo vertyllne) U ~ a n population (%of totalpopulatlon) Life expectancyat birth (pars) Infant mortality (per 1000 live births) Childmalnutrition (%ofchiidmnunder5) Access to an impmvedwatersource(Xofpopu1ation) Literacy (%o fpopuiation age 5+j Gross prtmaryenrollment (%of school-agepopulation)

Male Female

32 44 P9 31 46 67 48 51 46

KEY ECONOMIC RATIOS and LONO-TERM TRENDS

1985 1995

GDP (US$ biliions) 7 2 5 6 Gross capital formatiordGDP P 5 9 4 +rls of goods and servtces/GDP 275 285 Gross domestic sav1ngslGDP 144 141 Gross MtiomlsavingsiGDP 8 5 I 1

Current account balancdGDP Interest paymentslGDP Total debt/GDP Total debt servicelexports Present value of debtlGDP Present value of debtlexports

-13 -82 2 7 00

859 2346 248 14

8 8 5 - 9 5 lS95-05 2004

GDP -50 -07 6 6 GDP percapita 8 1 -30 3 5

(aver8ge annual gmuth)

w o r t s of goods and services - 0 1 9 1 201

Afr lca Income

741 2,353 745 580 552 1364

2.3 19 2.3 2.3

35 30 46 59

r)O 80 29 39 56 75

62 93 04

87 99 99 m

2004 2005

6 6 7 1 P 7 145

304 345 3 9 6 2 8 8 P 9

-59 -83 09

1802 5 8

30 9 97 9

2005 2005-09

6 5 6 7 3 4 3 9 8 6 63

Life expectancy

GNI Gross

capita enrollment per primary

I 1 Access to improvedwatersource

-Congo, Dem Rep. Lo mncome gro up

Trade

Domestic Capital savings formation

Indebtedness

- Congo, Dem Rep - Lowincome g m u ~

STRUCTURE o f the ECONOMY

(%of GDP) Agriculture

lgS5 1995 2004

318 57.0 48.4 46.0 Industry 310 7.0 23.4 25.3

Services 37.1 26.0 282 28.7

Household final consumption expenditure 77.9 810 87.9 86.9 General gov't final consumption expenditure 7.7 4.9 8.2 6.6 Imports of goods and services 25.6 23.7 392 42.7

M anufactunng 0 .6 5.3 5.5

1g85-Q5 IBg5-O5 2004 2o (average annual gm Mh) Agriculture 2 7 -18 0.6 Industry -P.4 2.4 0.3

Manufacturing -0.9 -4.3 6.9 Services -8.2 -2.1 8.8

Household final consumption expenditure -3.7 0.3 General gov't final consumption expenditure -9.0 -14.3 Gross capital formation -7.4 4.0 imports of goods and services -P.7 24.5 26.4 V.6

Note: 2005 data are preliminaryestimates. This table was produced from the Development Economics LDB database. 'Thediamondsshowfourkeyindicators inthecountry(in bo1d)comparedwithits incomegroupaverage. Kdataaremissing,thediamondvAiI

be incomplete.

106

PRICES and GOVERNMENT FiNANCE

Domest ic prices (%change) Consumer pnces Implicit GDP deflator 25 8

1985

Government finance (%of GDP, lncludes current grants) Current revenue Current budget balance Overall surplusldeficit

BALANCE o f PAYMENTS 1985

(US$ millions) Ex+olts of goods and services 1979 lmpolts of goods and sewices 1844 Resource balance 0 5

Net income Net current transfers

-373 144

Current account balance -94

Financing items (net) Changes in net reseries

58 36

M e m o : Reserves including goid (US$ millions) Conversion rate (DEC, locsi/US$) 166E-0

EXTERNAL DEBT and RESOURCE FLOWS 1985

(US$ millions) Totaidebt outstanding and disbursed 6.83

iB RD 46 IDA 372

Total debt sewice 498 IB RD P IDA 4

Cornpositionof net resourceflovh Official grants 91 Official creditors 72 Private creditors -36 Foreign direct investment (net inflOV.5) 69 Podfolio equity(net inf low) 0

World Bank program Commitments Disbursements Pnncipai repaynents Net f l ow Interest payments Net transfers

125 58 9

49 7

42

1995

5419 466 4

1905

1744 1471 273

-766 29

-465

426 39

7 02E-2

I995

Q.239 92

1,321

25 0 0

161 0 0

-22 0

0 0 0 0 0 0

2004

4.0 8.1

I t 5 - l O -3 8

2004

1985 2,561 -576

-274 464

-386

248 ua

236 3959

2004

11841 0

1,993

P1 0 11

1,444 257 -4 0 0

378 6 7

0 167

11 156

2005

213 215

29 4 0.9 6.9

2005

2233 3,55 -922

-337 808

-451

327 P4

360 473.9

2005

0 2.050

0 46

226 29 198 I7

160

, l n f i a I l on ('4 I

00 01 02 03 M 05

ICurrent account balance to GDP ('14

r 2 dB1

A. IBRD E - BilEieral €4 -IDA D . Other dtilaterd F - Rivate C-IMF G-Shorl - tr

8/t3/06 N0te:ThiS tablewas produced from the Development Economics LDB database.

107

MAP SECTION

LUBILANJI

TSHELA

LUKULALEMBA

MOANDA

INGA

KINSHASA

ZONGO

SANGA

GBADO-LITEMOBAYI

TSHOPO

MWEKA

DEMBA

MANI

TSHALA

KANIAMA

KILUBI

KIBU

KARAWA

BELIA

AMBWE

KAMPEN

LUILINGU

NYABIONDORUTSHURU

MOKOTOS

RUZUZI I&IIMUNGOMBE

MANGEMBE

KYIMBI

PIANA-MWANGA

MITWAB

DIKOLONGO

KONI

KASENGA

KISANGAMWADINGUSHA

KALULEN’SEKE

N’ZILO

S U D -K I V U

N O R DK I V U

MANIEMA

B A N D U N D U

K ATA N G A

E Q U AT E U R

O R I E N TA L E

K A S A IO R I E N TA L

KASAI

OCCIDENTALBAS-CONGO

KINSHASA

Boma Mbanza-Ngungu

Tshikapa

Mwene-Ditu

Aketi

Boende

Buna

BetambaYumbi

Faradje

Kamina

Kikwit

Feshi

Idiofa Kongolo

Kutu

Likasi

Lubudi

Kilwa

Lodja

Lusambo

Watsa

Kenge

Bulungu

Mangai

Lisala

Lubutu

Lowa

KabaloKabinda

Kapanga

Sandoa

Bafwasende

Banalia

Butembo

Moba

Sakania

Dilolo

Pweto

Basankusu

Bongandanga

Akula

Bikoro

Inongo

Gemena

Imese

Zongo

LibengeBusinga

Bondo

ButaTitule

Bumba

Kolwezi

Kasongo

Uvira

Lulimba

Wanie Rakula

Yangambi

Bunia

Beni

Isiro

WambaMongbwalu

Manono

Kalemie

Ilebo

Ikela

Kalima

Kama

Malela

Matadi

Bukavu

Goma

Kindu

Mbandaka

Kananga

Kisangani

Mbuji-Mayi

Bandundu

Lubumbashi

CONGO

CAMEROON

GABON

CENTRAL AFRICAN REPUBLIC

TANZANIA

UGANDA

S U D A N

Z A M B I A

ZAMBIA

A N G O L A

BURUNDI

RWANDA

MA

LAW

I

CABINDA(ANGOLA)

Tshuapa

Lomela

Kasai

Kwango

Lualaba Congo

Luvua

Ulindi

Aruwimi

Kibali

Uele

Ubangi

Oub

angu

i

Lulua

Lualaba

Lopori

Lomami

Lukuga LakeTanganyika

LakeEdward

Lake Kivu

LakeAlbert

LakeMweru

Lake Malawi

Congo

Luilaka

Salonga

Sankuru

Lukenie

Kasai Lulua Lufira

Loma

mi

Lueo

Lualaba

Kwilu

Lulonga

A T L A N T I C

O C E A N

LakeVictoria

To Bangui

To Kembe

To Bangasso

To Juba

To Pakwach

To Kibuye

To Ruhengeri

To Bujumbura

To Kitwe

To Luwingu

To Lucano

To Damba

To Pointe-Noire

5°N

0°

5°S

10°S10°S

30°E25°E

30°E25°E15°E10°E

5°N

0°

5°S

5°E

5°E

10°E 15°E

LUTSHURUKURU

DEM. REP.OF CONGO

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 100 200 300

0 100 200 Miles

400 Kilometers

IBRD 35198

APRIL 2007


REGIONAL AND DOMESTIC POWER MARKETSDEVELOPMENT PROJECT

SELECTED CITIES AND TOWNS

PROVINCE CAPITALS

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

EXISTING POWER NETWORK:

POWER DISTRIBUTION

HYDRO POWER PLANTS (PUBLIC)

HYDRO POWER PLANTS (PRIVATE)

THERMAL POWER PLANTS

HVDC TRANSMISSION LINE (INGA-SHABA)

220kV TRANSMISSION LINES

110-132kV TRANSMISSION LINES

30-50-70kV TRANSMISSION LINES

PROJECT WORKS:

INGA-KINSHASA PROJECT TRANSMISSION LINE

INGA HYDRO POWER PLANT REHABILITATION

KINSHASA DISTRIBUTION REHABILITATION AND EXPANSION

PhombeyaPhombeyaMatamboMatambo

KaraviaKaravia

LuanoLuano

Nzelo &Nzelo &NsekeNseke

MwadingushaMwadingusha& Koni& Koni

SolweziSolwezi

KolweziKolwezi

Kafue LowerKafue Lower

IngaInga

CapandaCapanda

CambambeCambambe

MatalaMatala

LomaumLomaum

RuacanaRuacana

Kudu CCGTKudu CCGT

KokerboomKokerboom

EhuhaEhuha

KoebergKoeberg

AggensisAggensisAriesAries

GriepGriep

DrakensbergDrakensberg

CamdenCamden

Edwaleni IIEdwaleni II

MuellaMuella

Van DerVan DerKloofKloof

PalmietPalmiet

MerapiMerapi

MatimbaMatimba

PhokojePhokoje

MarvelMarvelInsukaminiInsukamini

SpitskopSpitskopApolloApollo

ArnotArnot

FrancistownFrancistown

KomatipoortKomatipoortCorumanaCorumana

MorupuleMorupule

HwangeHwange

BatokaBatoka

KapichiraKapichira

Cahora BassaCahora BassaMepandaMepandaUncuaUncua Nkula A&BNkula A&B

Alto MalemaAlto Malema

Gokwe NGokwe NBinduraBindura

Kariba S&NKariba S&N

VictoriaVictoriaFallsFalls

PensuloPensulo

KidatuKidatu

PanganiPangani

UbungoUbungo

HaleHale

MteraMtera

KihansiKihansiMwakibeteMwakibete

LüderitzLüderitz

Walvis BayWalvis Bay

ArushaArusha

IringaIringa

DodomaDodomaSingidaSingida

TaboreTabore

KitweKitwe

KimberleyKimberley

East LondonEast London

BloemfonteinBloemfontein

LikasiLikasi

Owen FallsOwen Falls

MwanzaMwanza

MusomaMusoma

KasamaKasama

LichingaLichinga

CuambaCuamba

NacalaNacala

PembaPemba

NampulaNampulaAlto MolocueAlto Molocue

BeiraBeira

CaiaCaia

BulawayoBulawayo

InhambaneInhambane

Temane Gas FieldsTemane Gas FieldsPande Gas FieldsPande Gas Fields

Xai-XaiXai-Xai

Louis TrichardtLouis TrichardtSeruleSerule

DurbanDurban

Richards BayRichards Bay

Port ElizabethPort ElizabethMosselbaaiMosselbaai

JohannesburgJohannesburg MbabaneMbabane

GaboroneGaborone

WindhoekWindhoek

MaseruMaseru

KigaliKigali

KampalaKampala

BujumburaBujumbura

LilongweLilongwe

Dar esDar esSalaamSalaam

HarareHarare

PretoriaPretoria

KinshasaKinshasa

LuandaLuanda

LusakaLusaka

Cape TownCape Town

MaputoMaputo

NairobiNairobi

132 kV Cable132 kV Cableto Zanzibarto Zanzibar

330

kV33

0 kV

400

kV40

0 kV

TT

TTS

S

S

S

S

S

S

S

S

S

S

S

S

S

SS

S

S

S

S

S

S

SS

S

S

SS

S

S

S

S

S

S

S

S

S

T T

T TT

T

T

T

T

PhombeyaMatambo

Karavia

Luano

Nzelo &Nseke

Mwadingusha& Koni

Solwezi

Kolwezi

Kafue Lower

Inga

Capanda

Cambambe

Matala

Lomaum

Ruacana

Kudu CCGT

Kokerboom

Ehuha

Koeberg

AggensisAries

Griep

Drakensberg

Camden

Edwaleni II

Muella

Van DerKloof

Palmiet

Merapi

Matimba

Phokoje

MarvelInsukamini

SpitskopApollo

Arnot

Francistown

KomatipoortCorumana

Morupule

Hwange

Batoka

Kapichira

Cahora BassaMepandaUncua Nkula A&B

Alto Malema

Gokwe NBindura

Kariba S&N

VictoriaFalls

Pensulo

Kidatu

Pangani

Ubungo

Hale

Mtera

KihansiMwakibete

500 kV DC

220 kV

220 kV

220 kV220 kV

220 kV

330 kV

400 kV400 kV

400 kV

400 kV

275 kV

220 kV

330 kV

330 kV

330

kV

330

kV

330 kV

220

kV

220 kV

132 kV

132 kV

132 kV Cableto Zanzibar

110 kV

220 kV

220 kV

400

kV

132 kV

220

kV

110 kV

HVDC

or H

VAC

Tran

smiss

ion

Syste

m

533

kV D

C

Lüderitz

Walvis Bay

Arusha

Iringa

DodomaSingida

Tabore

Kitwe

Kimberley

East London

Bloemfontein

Likasi

Owen Falls

Mwanza

Musoma

Kasama

Lichinga

Cuamba

Nacala

Pemba

NampulaAlto Molocue

Beira

Caia

Bulawayo

Inhambane

Temane Gas FieldsPande Gas Fields

Xai-Xai

Louis TrichardtSerule

Durban

Richards Bay

Port ElizabethMosselbaai

Johannesburg Mbabane

Gaborone

Windhoek

Maseru

Kigali

Kampala

Bujumbura

Lilongwe

Dar esSalaam

Harare

Pretoria

Kinshasa

Luanda

Lusaka

Cape Town

Maputo

Nairobi

UGANDA

SUDAN ETHIOPIA

GABON

CONGO

EQ.GUINEA

DEM. REP.OF CONGO

A N G O L A

N A M I B I A

ZAMBIA

MALAWI

BOTSWANA

SOUTHAFRICA LESOTHO

SWAZILAND

ZIMBABWE

CAMEROON

TANZANIA

BURUNDI

RWANDA

KENYA

20°

10°

0°

30°

20°

10°

0°

20° 30°

30° 40°

LakeTurkana

Lake AlbertCongo

Kasai

Lake

Victoria

Lake Tanganyika

Lake Malawi

LakeKariba

Zambezi

LakeMweru

Ubangi

Orange

Limpopo

Orange

AT L A N T I C

O C E A N

I N D I A NO C E A N

Con

go

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.

IBRD 35356

APRIL 2007

SELECTED CITIES

NATIONAL CAPITAL

RIVERS

INTERNATIONAL BOUNDARIES

SOUTHERN AFRICA

SOUTHERN AFRICANPOWER POOL

POWER LINES

REHABILITATED POWER LINES

SUBSTATIONS

HYDRO POWER PLANTS

THERMAL POWER PLANTS

NUCLEAR POWER PLANTS

COORDINATION CENTER

S

TTT

S

EXISTINGPOSSIBLEFUTURE PROGRAM

0

0 100 200 300 Miles

100 200 300 400 Kilometers

Maseru