Rapport d'achèvement: République d'Haïti Cinquième Projet d'Électricité (Cr. 2053-HA)

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 19579 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF HAITI FIFTH POWER PROJECT (Cr. 2053-HA) July 29, 1999 Finance,Private Sectorand InfrastructureDepartment CaribbeanCountryManagement Unit Latin Americaand the CaribbeanRegionalOffice This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CURRENCY EQUIVALENTS (As of December 1998) CurrencyUnit = Gourdes(G$) G$16.00 = US$1.00 G$ I million=US$62,500 FISCAL YEAR October I - September30 ABBREVIATIONS AND ACRONYMS AFD Agence Francaise de Developpement (FrenchDevelopment Agency) CAS CountryAssistanceStrategy CMEP Councilof Modermization of PublicEnterprises CIDA CanadianInternationalDevelopment Agency EdH Electricite d 'Haiti (Electricityof Haiti) GOH Governmentof Haiti GWh Gigawatt-hours ( 1 millionkilowatt-hours) IDA InternationalDevelopment Association IDB InteramericanDevelopment Bank KfW Kreditanstaltfuer Wiederaufbau (Germnan DevelopmentFinancingAgency) MAP ManagementAssistanceProgram MEF Ministryof Economyand Finance MTPTC Ministryof PublicWorks,Transportand Communications PAD ProjectAppraisalDocument PMU Project Management Unit SAR StaffAppraisalReport TAP TechnicalAssistanceProgram Vice President: David de Ferranti Country Management Unit Director: Orsalia Kalantzopoulos Sector Management Unit Director: Danny Leipziger Task Manager: Philippe Durand IMPLEMENTATION COMPLETION REPORT FOR OFFICIALUSE ONLY REPUBLIC OF HAITI POWER V PROJECT (Cr. 2053-HA) TABLE OF CONTENTS PREFACE........................................................ i EVALUATION SUMMARY........................................................ ii PART I. IMPLEMENTATION ASSESSMENT............................................... 1 A. Background .1 B. Statement/Evaluation of Project Objectives. 2 C. Achievement of Project Objectives. 3 D. Implementation Record and Major Factors Affecting the Project. 5 E. Project Sustainability. 7 F. IDA Performance. 7 G. Borrower Performance. 8 H. Assessment of Outcome. 9 1. Future Operation. 9 J. Key Lessons Learned.10 PART II, STATISTICAL ANNEXES ........................................................ 12 TABLE 1: SUMMARY OF ASSESSMENTS ............................................................... 12 TABLE 2: RELATEDIDA CREDITS ................................................................ 13 TABLE 3: PROJECT TIMETABLE ................................................................ 13 TABLE 4: CREDIT DISBURSEMENTS ................................................................ 14 TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION ................................ 15 TABLE 6: KEY INDICATORS FOR PROJECT OPERATION .......................................... 15 TABLE 7: STUDIES ................................................................ 16 TABLE 8A: PROJECT COSTS ................................................................ 16 TABLE 8B: PROJECT FINANCING ................................................................ 16 TABLE 9: ECONOMIC EVALUATION ................................................................ 17 TABLE 10: STATUS OF LEGAL COVENANTS ......................................................... 18 TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS................... 20 TABLE 12: IDA RESOURCES - STAFF INPUTS ....................................................... 20 TABLE 13: IDA RESOURCES - MISSIONS ............................................................. 21 APPENDIX 1 - LAST MISSION'S AIDE-MEMOIRE .................................................... 22 APPENDIX 2 - BORROWER CONTRIBUTION TO THE ICR ......................................... 27 MAP IBRD 30127 This documenthas a restricteddistributionand may be used by recipientsonly in the performance of theirofficial duties. Its contentsmay not otherwisebe disclosedwithout WorldBank authorization. i IMPLEMENTATION COMPLETION REPORT REPUBLIC OF HAITI FIFTH POWER PROJECT PREFACE This is the Implementation Completion Report (ICR) for the Fifth Power Project in Haiti, for which Credit 2053-HA in the amount of SDR 18.6 million (US$24.0 million equivalent) was approved on June 27, 1989, and made effective on January 16, 1990. The Project was restructured in 1996. The credit was closed on January 31, 1999, compared with the original closing date of December 31, 1995. Final disbursement took place on May 5, 1999 for the amount of SDR 111,509.53 equivalent. A balance of SDR 532,942.43 will be canceled from the Credit, assuming full recovery from the Special Account (US$73,542.04 were pending as of 7/31/99). Cofinancing for the project was provided by CIDA. The ICR was prepared by Philippe Durand, Task Manager (LCSFP) with support from Marcelo Osorio (Consultant) and reviewed by Mrs. Marfa Victoria Lister, Quality Assurance Officer (LCSFP), Mr. Max Pulgar-Vidal, Sector Leader (LCC3C) and Mrs. Orsalia Kalantzopoulos, Country Director (LCC2C). Preparation of this ICR began during IDA's final supervision/completion mission in November 1998. The ICR is based on the Staff Appraisal Report, Credit and Project Agreements, supervision reports, field visits, discussions with the project staff, materials in the implementing agency files, and the project file. The Borrower and Electricite d'Haiti (EDH) contributed to preparation of the ICR by providing their own report, information for the statistical tables and comments on the draft ICR which have been taken into account. The Borrower's contribution is shown in Appendix 2. ii IMPLEMENTATION COMPLETION REPORT REPUBLIC OF HAITI FIFTH POWER PROJECT EVALUATION SUMMARY Introduction }. The Fifth Power Project was part of the Government's sector strategy aimed at bringing about improvements in the efficiency, reliability and quality of energy services. Project objectives were in line with IDA's objectives of reducing long-run cost of electricity, and improving EdH's institutional and financial performance. This was IDA's fifth operation in the power sector. The first, second and fourth previous operations in 1976, 1980 and 1985, respectively were satisfactorily implemented. The third previous operation in 1982 was rated unsatisfactory. Project Objectives 2. The main objective of the project was to support Haiti's economic development strategy by providing the reliable supply of power necessary for economic growth and, in particular, for industrial and commercial activities. More specifically, the project aimed at: (a) expanding the generating facilities in the city of Port-au-Prince in accordance with a least-cost expansion program; (b) supplying electricity to the cities of Hinche and Thomonde; and (c) improving EdH's efficiency through the execution of (i) a program to reduce non-technical losses; (ii) institutional improvements; and (iii) training programs to strengthen EdH's managerial and technical capacity. Implementation Experience and Results 3. The project was approved in June 1989 and became effective in January 1990. It was restructured in July 1996 after the credit disbursements suspension, imposed following the embargo on Haiti by the international community from 1991 to 1994, was lifted. The project was restructured taking into account the conditions of the country after the embargo and the assistance offered to the country by other donors. During the embargo, the electricity system deteriorated dramatically and EdH was in precarious financial condition. Consultants appointed to study a strategy to develop the power sector concluded recommending full privatization of EdH. Following this recommendation, AFD/CIDA from France/Canada funded a Technical Assistance Program to Electricite d' Haiti (EdH) to improve its operations, IDB approved a grant to finance consultant services to assist the Government in analyzing options for privatizing EdH, and IDA restructured the project to focus on expanding badly needed generation capacity in Port au Prince and improving EdH's efficiency prior to its privatization. 4. The project partially achieved its objectives. The power generating facilities were expanded by 31 MW and availability of electricity service at Port-au-Prince increased from four hours in 1995 to eighteen hours in 1998, a pilot loss reduction program was successfully implemented and a pre-feasibility study for the installation of a new 60 MW diesel plant was iii completed. However, EdH's overall efficiency was not improved. Electricity losses increased and EdH's financial conditions very greatly deteriorated. Electricity losses increased from 40% in 1989 to 55% in 1997. Rates of return have been negative: -6.2% in FY 96 and -9.66% in FY 97 and total accounts receivable at end of FY 98 were equivalent to 8.2 months of consumption. 5. The Government of Haiti (GOH) progressed slowly towards the concession of the electric utility (EdH) to a private operator. In 1996, the GOH implemented two substantive actions, the enactment of the Law of Modernization of Public Enterprises and the establishment of the Council for the Modernization of the Public Enterprises (CMEP). The Law permits the transfer of public enterprise operations to private companies under the modalities of concession, capitalization or management contracts. Following the enactment of the Law, the CMEP, assisted by consultants financed by IDB, conducted studies to assess options for private participation. However, the progress has been very slow, due to lack of high level decisions. It was not until January 1999, that the GOH decided to select the concession option. At present, IDB is preparing a project that would include consultant services to assist the GOH in the implementation of this option. 6. The major factors that affected project implementation were: (i) the three year economic embargo imposed upon the country; (ii) EdH's critical financial situation following the embargo; (iii) the critical economic situation of most of the country's population which aggravated the problem of payment arrears and electricity theft and was an obstacle to tariff increases that were necessary to allow EdH's financial viability; (iv) the country's political instability: there were seven governments during the project implementation period ; (v) government's intervention in EdH's technical operations, which mainly affected the decision on the type of generating units and their procurement process, and the contract for the technical assistance to EdH; and (vi) weak EdH's institutional capability due to lost of qualified staff. 7. Several covenants were not met, primarily those with regards to the financial position of EdH. These shortfalls were as follows: EdH's rates of return have been negative as compared to 4.0% covenant, level of electricity losses is 55% as compared to 35% covenant, and the customers per employee ratio was 78 in FY 1998 as compared to 80 covenant. Summary of findings, Future Operation, and Key Lessons Learned 8. The project outcome is unsatisfactory. Although the main project objective, the expansion and improvement of EdH's electricity-generating facilities in the city of Port-au-Prince was achieved, the deterioration of EdH's efficiency and the uncertain project sustainability makes the overall outcome unsatisfactory. EdH's electricity facilities in Port-au-Prince were expanded within the project cost estimates and availability of the other EdH's generating facilities improved. As a result of both the expansion of EdH's generating facilities and improved maintenance of the existing ones, generation increased from 466.5 GWh in 1995 to 663.0 GWh in 1998 and availability of electricity service in Port-au-Prince increased from four hours in 1995 to eighteen hours a day in 1998. However, given EdH's critical financial condition and inefficiencies, the maintenance of both the new and existing generating units is likely to decline unless the Government accelerates the actions required to transfer EdH's operations to a private investor. 9. Overall IDA performance was moderately satisfactory: IDA properly identified and prepared the project but failed to adequately assess the status of project readiness for iv implementation at the time of appraisal; during supervision IDA's performance was satisfactory but failed to achieve an improvement in EDH operational efficiency and financial situation. The Borrower's performance was unsatisfactory: it did not support EdH's actions to improve its commercial performance and it did not take timely decisions for the restructuring and privatization of EDH. The performance of the implementing agency was less than satisfactory: EDH efficiently contributed to project preparation but during project implementation, EDH was not sufficiently committed to reducing non technical losses of electricity and did not take timely measures to improve its financial management procedures or to balance its financial situation. 10. The discussions held under the project and the lessons learned from its implementation contributed to important Government actions that could permit the participation of a private investor in EdH's operations. Options for private participation in the power sector were discussed with CMEP in several opportunities in 1998, in coordination with IDB. A project to assist the Government with the concession of EdH to a private company is being considered by IDB. This project would also include a component to finance the purchase of the goods and spare parts required for the maintenance of EdH's facilities during a period of two years. Successful implementation of this project and the achievement of its objective are fundamental to the sustainability of the project and the development of electricity service. Finalization of the concession arrangements with a private investor is expected in 2000. 1I. EdH has prepared a scheduled maintenance program for all its facilities and quantified the costs to perform it until IDB's proposed operation is effective. The Council for the Modernization of Public Enterprises has prepared a schedule for the appointment of an investment bank, the preparation of documents to invite private companies to bid for the concession of EdH, and the finalization of the concession arrangements with the awarded company. 12. The key lessons learned from the implementation of the project are: (a) EdH is not financially viable under the present institutional arrangements that do not entail sufficient incentives, autonomy or private involvement. Its income is insufficient to meet its costs of operation and maintenance; (b) the main cause for EdH's low income is the high level of electricity losses which have not decreased but constantly grown since the First Power Project financed by IDA, despite the fact that four of the five power projects included the reduction of losses as one of their objectives; the magnitude of these losses is such that their reduction will require substantial investment and very different institutional arrangements, with a motivated management; (c) the lack of adequate maintenance to the power facilities is another crucial issue. EdH is neglecting the maintenance of its facilities due to both lack of financial resources to acquire spare parts and insufficient power capacity reserve to allow stopping operation of its facilities for their maintenance; (d) the Government has initiated actions to concession EdH to a private company. The private company should bring into EdH new capital which is indispensable for expanding the power facilities and drastically reducing electricity losses; v (e) the failure in achieving the loss-reduction objective in this project and in the previous ones, has been due in part to lack of an adequate preparation of a comprehensive program which include detailed design of its components, list of equipment, implementation schedule and complete cost estimates of the implementation and follow-up actions. The preparation of these elements should have been completed under project preparation, not during its implementation as was done in the project; (f) the SAR for the project did not include a political risk analysis. The analysis of this kind of risks should be made whenever the political environment is unstable. In the case of the project, the political environment was very unstable at the time of the SAR; (g) the risk analysis in SARs/PADs should include the preparation of the utility's financial projection based on historical levels of efficiency, not on expected and uncertain improved levels. In the case of the project, EdH's financial projections assumed substantial efficiency improvements, in particular an unrealistic drastic reduction of electricity losses; (h) the support from government, including use of public force, is essential to successful implementation of a loss-reduction program. The project pilot program for loss reduction showed that EdH's employees did not have safe access to many neighborhoods and that the resale of electricity by customers not paying EdH was a problem; (i) Technical Assistance Programs (TAP), and even performance-based management contracts, proved once more that they are ineffective and should be avoided. These arrangements lack accountability, incentives, power to implement measures and financial resources to implement such measures; IMPLEMENTATION COMPLETION REPORT REPUBLIC OF HAITI FIFTH POWER PROJECT PART I - IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. From 1986 to 1999 Haiti has passed through one of its worst political and economic crises. After a civil rebellion obliged President Duvalier to resign power in 1986, there were several military governments until February 1991 when a democratic government was elected. This government did not last long; in September 1991, following a coup d'etat, a period of dictatorship came with a military government. The international community did not recognize this military government and applied an economic embargo to the country. The embargo was lifted in December 1994, when the democratic Government of President Aristide was reestablished. Following the embargo decision, IDA suspended credit disbursements to Haiti. At the time when credit disbursements were suspended, only a few preliminary activities had been started and only about US$0.1 million of the credit had been disbursed. During the project implementation period (1989-1999), the country has had seven different governments. 2. The breakdown of civil discipline subsequent to the several changes of government and the political situation began to seriously undermine EdH's performance. Frequent changes in management, due to political considerations, shortage of qualified staff and inadequate coordination among the various departments, aggravated EdH's condition. Skilled professionals, attracted by higher salaries and more stability in developed countries, started to leave the country. The main problems confronting the sector were extremely high energy losses and poor conditions of the power thermal plants. Energy losses escalated rapidly, reaching an average of 35% of total production in 1987 compared to 30% in 1986. Electricity service was very unreliable, with frequent outages and breakdowns. The four thermal plants that served the Port-au-Prince area (Janvier, Delmas, Varreux and Carrefour, totaling 101.3 MW) were old and unreliable or poorly maintained. Extensive work was carried out under the Fourth Power Project, including complete overhauling of the Delmas' four units as well as maintenance and improvements of the Varreux and Carrefour plants. As a consequence of high electricity losses and the shortage of qualified staff, EdH's financial performance deteriorated dramatically. Rate of return on revalued fixed assets decreased from 5% in 1986 to 1.5% in 1987, and accounts receivable from private customers increased from an equivalent average of 60 days in 1986 to 75 days in 1987. 3. At the end of the embargo, the political, economic and social conditions of the country were critical. Politically, the government faced the need to restore political stability as its first priority. Economically, after more than three years of embargo, the country was devastated. The power sector was not the exception: the conditions of the power facilities, specifically the thermal plants, were catastrophic due to the extended period without spare parts required for their proper maintenance. Socially, the situation was calamitous. Poverty had dramatically increased and consequently, people's capacity to pay for basic services, including electricity, decreased. Four years after the embargo was lifted, the country has not been able to recover political stability. 2 Government has lacked a Prime Minister for almost two years and no Prime Minister has remained in power for more than one year 4. The project was appraised in June 1987 and negotiated in November 1987. After the change in government in 1988, it was updated in March 1989 and renegotiated in April 1989. The project was restructured in July 1996 following the lift of the international embargo. B. STATEMENT/EVALUATION OF PROJECT OBJECTIVES Project Objectives 5. The main objective of the project was to support Haiti's economic development strategy by providing the reliable supply of power necessary for economic growth and, in particular, for industrial and commercial activities. More specifically, the project aimed to: (a) expand the generating facilities in the city of Port-au-Prince, in accordance with a least-cost expansion program, (b) supply electricity to the cities of Hinche and Thomonde; (c) improve EdH's efficiency through the execution of (i) a program to reduce non-technical losses; (ii) institutional improvements; and (iii) training programs to strengthen EdH's managerial and technical capacity. 6. The project was initially comprised of seven components: (i) installation of two 20-MW gas turbine generating units in Port-au-Prince; (ii) construction of a single-circuit, 42 km-long sub-transmission line of 23 kV from the Peligre hydropower plant to Hinche; (iii) procurement of equipment and tools for maintenance of distribution systems and a loss-reduction program; (iv) preparation of feasibility studies for future medium-speed diesel units; (v) a pre-investment study to assess the economic merits of serving the Ciment d'Haiti plant from EdH's main grid; (vi) preparation and implementation of a program to reduce non-technical losses; and (vii) a program to carry-out EdH's institutional development, including the implementation of a training program. 7. In 1995, after the lift of the embargo, IDA and the Borrower agreed to restructure the project taking into account the country needs for urgent addition of power capacity and to extend the closing date from December 31, 1995 to December 31, 1998. During the embargo, the electricity system deteriorated dramatically. Electricity service was only available four hours a day and EdH was in precarious financial condition. Consultants were appointed to study a strategy to develop the power sector; their recommendation was full privatization of EdH. Following this recommendation, several donors were willing to assist the Government in improving EdH's performance and its further privatization. In 1995, the French Agency for Development (Agence Francaise de Developpement, AFD) and the Canadian International Development Agency (CIDA) funded a Technical Assistance Program to enable EdH to improve its operations. In 1996, IDB approved a grant to finance consultant services to assist the Government in analyzing options to transfer EdH's operations to a private company through concession, capitalization or management contract. Considering that EdH's institutional development would be widely covered by the support to be provided by other donors, IDA accepted Government's request to reallocate most of the credit funds in support of the institutional component to increase the category for the generating component and restructured the project accordingly. 3 8. The restructured project was comprised of five components; (i) installation of additional power generation capacity for EdH in Port-au-Prince, including the acquisition and utilization of medium-speed diesel power units at Varreux and a low-speed diesel unit at Carrefour; (ii) preparation and implementation of a program for the reduction of EdH's energy losses; (iii) a study on the site location and cost estimate of medium-speed generating plants to be constructed by EdH; (iv) a study to examine the current structure of EdH's tariffs; and (v) a reduced institutional development program limited to finance technical assistance for a loss reduction program, improvements of EdH's information, accounting and inventory control systems, and a training program for managers and high-level staff of EdH. The review of EdH's by-laws and the revision of its organizational structure were eliminated since the new goal was the privatization of EdH. Evaluation of Objectives 9. The project objectives were clear and similarly interpreted by the Borrower and the implementing agency at the time of project appraisal. Given the urgent need of the country for additional power capacity and the need for EdH to improve its efficiency, the objectives were also appropriate at the time of project appraisal and in line with IDA's objectives. IDA's objectives for the energy sector were to foster energy conservation, to reduce the long-run cost of electricity, and to improve EdH's institutional and financial performance. C. ACHIEVEMENT OF PROJECT OBJECTIVES Overview 10. Overall, the project partially achieved its objectives. The objectives of expanding generating facilities at Port-au-Prince and supplying electricity to the cities of Hinche and Thomonde were achieved, but the improvement of EdH's efficiency was not achieved. Electricity losses have increased and EdH's financial condition has deteriorated dramatically. Sector Policies 11. The project did not include sector policy objectives. However, with the extreme deterioration of electricity service during the economic embargo, the need for substantial sector policy reforms was evident during project implementation as recommended by consultants appointed to study a strategy to develop the power sector. Based partly on the recommendations of this study, the Government prepared and enacted the Law of Modernization of Public Enterprises. This law permits the participation of private companies in the public enterprises under the modalities of management contracts, concession or capitalization. Additionally, the law created the Counsel of Modernization of Public Enterprises (CMEP) to promote private participation in public enterprises and carry out the transfer of operations of public enterprises to private companies. Financial Objectives 12. The financial objectives of the restructured project were not achieved and financial covenants were not met. EdH's financial performance has been very unsatisfactory. In FY 98, its financial losses amounted to US$ 5.0 million. Rate of return was -6.2% in FY 96 and it even 4 worsened in FY 97 to -9.66%. Accounts receivables are equivalent to 8.2 months of consumption. The auditor certified the project accounts and the SOEs without qualification, but issued a disclaimer of opinion for EdH's 1996 and 1997 financial statements. Audit report for FY 98 was not yet available at the time of the ICR preparation. Institutional Development 13. The institutional development objectives were partially achieved. Maintenance of the generating facilities improved considerably and availability of electricity service increased from four hours in 1995 to eighteen hours in 1998. However, these improvements were overshadowed by the extremely high electricity losses that reached the level of 55% in 1998. The causes for the increase of electricity losses are several: lack of the utility's commitment to this objective; lack of Government's support to enforce the cut of service to illegal customers; and lack of financial resources to implement a comprehensive loss-reduction program. The credit amount allocated to this program was intended to finance only consultant services, and not the large amount of equipment and goods required for this kind of program like meters, labs, vehicles and cable; thus, only a pilot program was financed from the project. Due to the high level of losses, EdH's operational deficits were also high, thus limiting its ability to financially afford loss control measures and to properly maintain its facilities. As a result, if no external financial resources are injected to EdH, it is likely that even the improvements obtained in the maintenance of generating facilities will be lost; this injection of resources would materialize if EdH was privatized. 14. The technical assistance provided under grants given by AFD from France and CIDA from Canada did not contribute much either to the improvement of EdH's performance. The program was provided during a three and a half year period, from July 1995 to December 1998 and was a positive factor in improving the operation of EdH's generating facilities. However, deficient terms of reference, lack of incentives for consultants' performance, lack of performance indicators and insufficient financial resources were the main constraints preventing better or lasting results from this assistance. 15. Some positive actions have been taken towards the concession of EdH to a private company, which would be the most effective long term solution for the power sector. The enactment of the Law of Modemization of Public Enterprises in 1996 was undoubtedly a substantive action. Following the enactment of the Law, the CMEP, assisted by consultants financed by IDB, conducted studies to assess options for private participation in the power sector and, as a result, has selected the concession option. At present, IDB is preparing an operation that would include consultant services to assist the GOH in the implementation of this option. Physical Objectives 16. The physical objectives were substantially achieved. The power generating facilities were expanded by 31 MW at the Varreux and Carrefour power stations, electricity generation increased from 466.5 GWh in 1995 to 663.0 GWh in 1998, the cities of Hinche and Thomonde have electricity service, a pilot loss reduction program was implemented, a tariff study was conducted and a pre-feasibility study for the installation of a new 60 MW diesel plant was completed. 17. The Varreux power station was expanded by six medium-speed diesel generating units with a total installed capacity of 21 MW. Out of the six units, four units totaling 15 MW were 5 financed by the Credit and the other two units, totaling 6 MW, were financed by CIDA from Canada. Installation of these units was completed by mid-1996, and the plant has been in operation since that date, but the units still have some problems pending of fixing by the contractor, namely defects in the speed regulation and steam generators. Final acceptance of the units is pending the repair of the above problems and successful completion tests that are scheduled for July 1999. 18. The Carrefour power station was expanded with a 10 MW low-speed diesel unit. Consultants prepared the technical specifications for this unit which was procured under ICB modality. This unit is under provisional operation since January 1999, but its final commission is scheduled for June 1999 in order to correct some deficiencies found at the rotor. 19. At the cities of Hinche and Thomonde, EdH installed small power generators financed from their own resources. The portion of the credit allocated to finance a transmission line to these two cities was reallocated to increase the category for power expansion capacity. 20. The pilot loss-reduction program executed under the project comprised a zone with some 10,500 customers. The program included the installation of new meters and the monitoring of the electricity supplied and electricity billed within the pilot zone. Electricity losses were reduced by some 16% in the pilot zone but this achievement was not sustained because EdH lacked the financial and human resources to continue monitoring the zone. 21. A pre-feasibility study on a new 60 MW diesel plant, including site selection, was completed satisfactorily. This plant will have to be developed soon to meet the country's needs for additional power. 22. Actions to improve environmental conditions, especially the recovery of liquid effluents, at the Carrefour and Varreux power plants were completed. D. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT Implementation Record 23. The project was originally scheduled to be completed by June 30, 1995 and close on December 31, 1995. It was restructured after the suspension of credit disbursements was lifted in July 1996 and the closing date was extended to December 31, 1998. A further extension to January 31, 1999 was granted. Final project cost was US$ 26.8 million equivalent, compared to US$27.6 million estimated at appraisal. Total IDA disbursements amounted to US$25.4 million. 24. Implementation was not always satisfactory. Procurement of the generating units at Varreux was particularly troublesome. Due to the emergency situation the country was facing after the embargo, the Government requested, and IDA accepted, two modifications to the procurement of these units so as to hasten their availability. The first change was related to the type of generating units (small medium-speed diesel units instead of the gas turbine specified in the project description); the second change was on the procurement modality. A shopping modality was accepted instead of ICB. The results of these changes were negative. During project preparation and again in the first year of project implementation, EdH, assisted by consultants, had prepared bidding documents and technical specifications for the procurement of gas turbines. For the procurement of diesel units, EdH did not have bidding documents ready and 6 did not have consultants to assist them. Given the urgency of the requirements for the generating units, staff from the Ministry of Public Works, Transport and Communications (MTPTC) and EdH prepared simplified, broad specifications and issued bid invitations to potential bidders by fax. Some problems developed because of this procedure. First, EdH received bids including equipment that met the broad specifications, but with substantial differences in design, thus making difficult the comparison of bids. Second, the award criteria was unclear for this kind of situation and, as a result, there were disagreements on the award recommendations between the MTPTC and the consultants appointed by EdH to assist them in the bid evaluation. Third, the Ministry of the MTPTC decided to terminate the contract with the consultants because of the above disagreements. Fourth, EdH's award decision made on the basis of the recommendations of a new consultant was materially contested by one of the bidders. Finally, the equipment supplied under this component has had technical and operational problems which have been due, in part, to incomplete specifications. 25. The Technical Assistance Program (TAP) financed by grants from AFD from France and CIDA from Canada was ineffective. This program was intended to assist EdH in improving the electricity service during the transition period after the lift of the embargo until EdH would be privatized. At that time, privatization of EdH was expected to be completed within one year. Since the expected duration of the TAP was short, AFD, CIDA and GOH agreed on very simplified terms of reference and contract with the consultants; they did not include any efficiency target nor performance indicators. However, since the process for the intended privatization of EdH progressed much slower than expected, at Govemment's request, AFD and CIDA extended twice the TAP from July 1996 to December 1998. Unfortunately, due to the unrealistic expectation on the quick privatization of EdH, the extensions of the contract with the consultants were made on the same terms as the initial contract and the consultants were unable to program their assistance with long-term objectives. The consultants focussed their assistance on short-term objectives only, mainly the increase of electricity service availability. The TAP had no impact on reduction of power losses nor on improvement of EdH's financial situation. 26. The extension of the credit closing date to December 31, 1998 followed the lift of the disbursement suspension, and was linked to project restructuring in July 1996. It reflected a revised project implementation schedule that had been prepared by EdH and reviewed by IDA. The extension of the closing date to January 31, 1999 was to cover the expected period to complete the installation of the 10 MW diesel unit at Carrefour. However, due to unforeseen problems encountered lately at this unit, final acceptance of this unit is still pending and the credit closed without making the expected final disbursement in the amount of US$ 0.7 million, equivalent to 10% of the contract amount. This payment is offset, however, by a penalty in an equivalent amount that was assessed by EdH for delay by the contractor in meeting the contractual implementation schedule. Major Factors Affecting Implementation 27. Factors outside the control of the Borrower and the Implementing Agencies. The major factors that affected project implementation were the political instability and the three-year economic embargo imposed upon the country and the multiple negative consequences derived from it. The first consequence was the suspension of disbursements of the IDA's credit which interrupted the procurement process of the generating units. A second consequence was the deterioration of the economic situation of most of the country's population, which reduced customer affordability and aggravated the problem of electricity theft and was an important 7 obstacle to tariff increases. This, in turn, aggravated the already critical financial situation of EdH and affected all its other operations, including implementation of the project. 28. Factors subject to Government control. These factors included: (i) lack of decision on the process for the privatization of EdH. The Government changed several times its decision on the modality of EdH's privatization, which caused a substantial delay on the process. This in turn, aggravated EdH's performance because of its uncertain future; (ii) the lack of public support, including the use of public force to EdH's actions devoted to reduce electricity thefts; (iii) the government's intervention in EdH's technical operations. The Government intervened extensively on the procurement process for the generating units at Varreux. The MTPTC disagreed on the award recommendation made by the consultant appointed by EdH and fired the consultant. This action put project implementation in serious danger. Another intervention that proved to be very negative was the preparation and agreement of terms of reference and contract for the TAP without participation of the power utility which had to deal with them. 29. Factors subject to implementing agency control. The main factors were as follows: (i) weak institutional capability. EdH had lost most of its qualified staff prior to project implementation due to lack of incentives, low salaries and political interference in the utility's management. During project implementation the job conditions were even less attractive for qualified staff; (ii) EdH did not make good use of the extensive consulting services made available to it through the Technical Assistance Program financed by AFD/CIDA (the Program included some thirteen consultants during a three and half year period). Much of the blame for this was the lack of EdH's supervision on the consultants work; and (iii) the Commercial and Financial Directorates lacked adequate management during most of the project implementation period. EdH's financial statements deserved a disclaimer of opinion by the auditor. E. PROJECT SUSTAINABILITY 30. Sustainability of the project achievements is uncertain. It is highly dependent on the availability of financial resources for the proper maintenance of the generating units. The most likely solution to this issue is the project IDB is considering in support of GOH's plans to concession EdH's to a private company. This project would include an investment component to meet the maintenance requirements for two years, after which time the private operator will be fully responsible for all maintenance costs. However, finalization of this operation is subject to (i) GOH's full support to the proposed concession of EdH's operations to a private company; and (ii) response from the private sector to the invitation to submit bids for the proposed concession agreement. At present there are no clear answers to either of these two conditions and, consequently, sustainability of the achievements of the project is uncertain. F. IDA PERFORMANCE 31. IDA's performance was satisfactory during the identification and preparation phases. At the identification phase, IDA properly assessed project objectives that were consistent with the GOH's strategy for development. At preparation, IDA rightly assessed the main project issues and the project components necessary to deal with these issues and assisted the borrower in the preparation of the project components concurrently with the supervision missions for Credits 1281--HA and 1527-HA. 8 32. At appraisal, IDA satisfactorily assisted the Government on defining project components consistent with the project objectives and properly assessed the least cost expansion program for the power sector, but failed to adequately assess the status of project readiness for its implementation. Completion of the bidding documents for the procurement of the gas turbines took more than one year after project appraisal. Preparation of the loss reduction program was still at a very incipient level. It did not include a plan of action to implement concrete measures, a list of equipment and goods, nor a detailed cost estimate of the entire program. It only included terms of reference for the appointment of consultants to assist EdH in the implementation of a loss reduction program. With that level of preparation in this program, the target to reduce losses from 40% to 16% was totally unrealistic. IDA had not learned from the previous three operations in which EdH had failed for similar reasons. 33. During supervision, IDA's perfornance was satisfactory, but ineffective. IDA was very sensible in its decision to restructure the project, taking into account the GOH's requests and the assistance offered by other donors, and to extend the closing date for three years at once. IDA was also sensible in approving an expedited procurement process for generating units in view of the urgently needed increase in electricity supply. The supervision documentation provides a good and realistic assessment of the status of the project, the environment in which it was being implemented, and the options IDA management faced. It also contributed with recommendations for permanent sector reforms, particularly with regards to a long-term solution - the privatization of EdH's operations. However, despite IDA's support, EdH's was unable to comply with the credit's financial covenants due mainly to the external factors mentioned above and IDA did not exercise the remedies available in accordance with the Credit Agreement. This lack of drastic actions by IDA was likely due to the fact that after the severe consequences the embargo had for the country, the general attitude of all international organizations assisting the country was one of leniency. 34. Overall IDA performance was moderately satisfactory: IDA properly identified and prepared the project but failed to adequately assess the status of project readiness for implementation at the time of appraisal; during supervision IDA's performance was satisfactory but failed to achieve an improvement in EdH operational efficiency and financial situation. G. BORROWER PERFORMANCE 35. Borrower's performance was unsatisfactory. Overwhelmed by the political and economic problems the Government faced after the embargo, its commitment to project objectives faltered. The Government was more interested in short-term results, such as the immediate increase of availability of electricity service at any price, than in taking unpopular measures for long-term results, such as supporting EdH's actions to cut electricity service to illegal customers and allowing the necessary tariff restructuring. However, the Government provided some financial support to EdH by arranging direct payments by the GOH of fuel procured by EdH, that were later settled towards Government electricity consumption. The main problem has been the slow progress in sector restructuring and the privatization of EdH, which was due to lack of high level decisions by Government, caused in part by the lack of a Prime Minister during almost two years. 36. The performance of the implementing agency was less than satisfactory. At preparation stage, EdH was diligent in taking actions and preparing all the information required for project 9 appraisal, including the appointment of consultants, review of consultant reports, preparation of a least-cost expansion plan and financial projections for the sector. However, during project implementation, EdH's performance was unsatisfactory. Specifically, its commercial performance has been highly unsatisfactory. The extremely high level of electricity losses at the beginning of project implementation not only was not reduced, but actually increased. It is true that this problem has several causes, but lack of EdH's commitment on attacking this problem was undoubtedly one of the causes. EdH's financial performance has also been unsatisfactory although has improved as of late, based on EdH's provisional financial results for 1998. The audit reports repeatedly issued disclaimer opinions in reference to EdH's financial statements, mainly due to problems with billing and customer receivables, asset accounting, long-term debt, deficiencies in financial management and accounting software and financial management procedures. In May 1998, based on the auditor's report, EdH prepared a detailed action plan to improve its financial management system. Implementation of the action plan was substantial in December 1998. H. ASSESSMENT OF OUTCOME 37. Overall, the outcome of the project is unsatisfactory. Although the main project objective, the expansion and improvement of EdH's electricity-generating facilities in the city of Port-au-Prince was fully achieved, the deterioration of EdH's efficiency and the uncertain project sustainability makes the overall outcome unsatisfactory. EdH's electricity facilities in Port-au- Prince were expanded within the project cost estimates and experienced a delay of only a few months with respect to the revised project implementation schedule. Additionally, the maintenance and availability of EdH's other generating facilities improved. As a result of both the expansion of EdH's generating facilities and improved maintenance of the existing ones, availability of electricity service in Port-au-Prince increased from eight hours to eighteen hours per day. However, given EdH's critical financial condition and inefficiencies, the maintenance of both the new and existing generating units is likely to be inadequate if Government does not accelerate the actions required to transfer EdH's operations to a private investor, which would allow the sustainability of project-financed investments.. 38. An ex-post analysis of the internal economic rate of return (IERR) for a time slice of EdH's investment program was conducted utilizing the same format as the analysis included in the SAR for a different period. Revenues derived from incremental sales were used as a proxy for benefits. The benefits attributed to EdH's 1995-1998 investment program was assumed at 10% of incremental sales, billed and non-billed, in 1995, 20% in 1996, 40% in 1997, 60% in 1998, 80% in 1999 and 100% from 2001 on. EdH's 1995-1998 investment program's ex-post IERR and NPV discounted at 10% were estimated at 8.0% and US$-10.6 million, respectively. Incremental sales were calculated as the total energy delivered by EdH's power plants less the