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Implementation Completion Report (ICR) Review - Energy Sec. Adj.

1. Project Data:   
ES Date Posted:
Project Name:
Energy Sec. Adj.
Project Costs(US $M)
 100.0  100.0
Loan/Credit (US $M)
 100.0  100.0
Sector, Major Sect.:
Forestry, Central government administration, Oil & gas, Power, General energy sector,
Agriculture fishing and forestry; Law and justice and public administration; Energy and mining; Energy and mining; Energy and mining
Cofinancing (US $M)
 0  0
L/C Number:
Board Approval (FY)
Partners involved
Closing Date
12/31/1999 01/31/2002
Prepared by: Reviewed by: Group Manager: Group:  
Alvaro J. Covarrubias
Christopher D. Gerrard Alain A. Barbu OEDST

2. Project Objectives and Components:

a. Objectives
The objective of this energy sector adjustment operation was to support a comprehensive program of reforms in the energy sector within the framework of the Government’s mid-term reform program agenda outlined in the 1996-1999 Policy Framework Paper (also articulated in the CAS that was presented to the Board on January 29, 1998) by improving the efficiency and competition in the energy sector, strengthening private sector participation and increasing the access of the population to energy while protecting the environment. This objective was specified in the Letter of Sector Development Policy which was submitted by the Government to the Bank in February 1997. The objective was not revised.

b. Components
The objective of the program was to be achieved:

(A) In the petroleum sector by:

    A.1. Adopting a new Petroleum Code encouraging private exploration while limiting intervention of PETROSEN (the state-owned oil company).
    A.2. Liberalizing the procurement, importation, transportation, storage and distribution of petroleum products by abolishing existing monopolies and encouraging competition.
    A.3. Abolishing the US$ 2.30/bbl refining fee paid by consumers to SAR (a monopoly private refinery) and replacing it with a temporary declining surtax on imported refined petroleum products.
    A.4. Establishing a differential import duty on refined products (except for kerosene and LPG which are considered social products).
(B) In the electricity sector by:
    B.1. Incorporating SENELEC (the state-owned power company) by law and transferring all state-owned generation, transmission and distribution assets to the incorporated SENELEC.
    B.2. Enacting a new electricity law and the corresponding enforcement decrees;
    B.3. Establishing an independent regulatory agency for the power sector;
    B.4. Privatizing SENELEC.
(C) In the household sector by:
    C.1 Enacting a new Forrestry Code to descentralize the use of wood fuel resources;
    C.2 Transferring responsibilities of wood fuel and charcoal to communities.

c. Comments on Project Cost, Financing and Dates
Originally, the credit of SDR74 million was to be disbursed in two tranches. The first one of SDR18.5 million was to be disbursed after compliance with the conditions for Board presentation and credit effectiveness. These conditions, the program components A.1, A.3, and part of A.2 for the petroleum sub-sector and B.1 and B.2 for the power sub-sector indicated above were met and, at time of credit effectiveness, seven months after Board approval, the first tranche was disbursed. The second tranche was to be disbursed after execution of program components A.4, B.3, and B.4. Given the fact that the liberalization part of condition A.3 had not been met and that a privatization attempt of SENELEC had failed in September 2000, in February 2001 the Bank decided to extend the credit closing date to January 31, 2002, and split the remainder of the credit into a second tranche of SDR22.0 million -- which was disbursed when the liberalization part of A.3 was complied with -- and a third tranche of SDR33.5 million to be disbursed when SENELEC had been taken again to the "point of sale" with a Strategic Partner having bought at least 33.3 percent of the shares of SENELEC, the Government retaining 41 percent, and the balance being offered to local small investors and employees of SENELEC. The second attempt to privatize SENELEC succeeded in November 2001, the third tranche was disbursed and the Government held negotiations with the selected Strategic Partner. However, these negotiations languished due to SENELEC’s and Strategic Partner's financial situation and in July 2002 the Government declared unsuccessful the second privatization attempt and took full control of SENELEC.

3. Achievement of Relevant Objectives:

The outcomes of the program development objectives were mostly unsatisfactory. While most of the objectives were met in the petroleum sub-sector, few were attained on wood management for use of firewood and charcoal in households, fuel substitution, and implementation of the Forestry Code. Although a new electricity law in line with the Bank paradigm for the power sector was enacted and a power sector regulatory agency (CRSE) was established, they have had insignificant influence on power sector development because the privatization of SENELEC was not achieved. Moreover, the Government, by reverting to the State all assets of SENELEC (Law 2002-01) and taking over operations of the power sector, has left the electricity sector as it was before the adjustment program started. This significant failure dwarfs the achievements in the petroleum sub-sector.

4. Significant Outcomes/Impacts:

The oil exploration function was removed from PETROSEN. It is now carried out by the private sector through risk exploration and participation contracts. Monopolies for downstream oil activities and commercialization of petroleum products have been abolished. Prices for petroleum products reflect international crude oil prices and commercialization is subject to cap prices. Subsidies for LPG and for fuels for power generation have been abolished. The US$ 2.3/bbl surcharge over petroleum products held by the SAR has been eliminated. The Forestry Code was enacted.

5. Significant Shortcomings (include non-compliance with safeguard features):

The institutional situation of the electricity sector has not improved. The Electricity Law stays in effect and the sector regulatory agency is established, but this legal framework has little effect, as SENELEC went back to a state-owned and managed enterprise, and capacity and quality of service continues to be less than expected at credit effectiveness. The reversal has been done by the government that took office after the adjustment credit became effective. The implementation of the the Forestry Code was hindered by institutional and financial shortcomings. There is a proliferation of institutions with conflicting interests, and issues related to wood exploitation, transport, distribution and commercialization have not been resolved. Lack of financial resources has decreased only modestly the use of wood by replacing it by butane, kerosene and improved wood stoves.
6. Ratings:ICROED ReviewReason for Disagreement/Comments
Institutional Dev.:
Bank Performance:
SatisfactoryUnsatisfactoryQuality at entry was at best "marginally satisfactory" because the condition to disburse the second credit tranche at "point of sale" of SENELEC, as stated in the ICR, was a major flaw in the design of program conditionality (when the second attempt to privatize took SENELEC to "point of sale" and the third credit tranche was disbursed, the Government canceled the sale during negotiation of the contract). Moreover, the Government reverted to the State all assets of SENELEC. The ICR describes a supervision performance which was really unsatisfactory (although it formally rates it "marginally satisfactory"). Overall, this yields a (marginally) unsatisfactory rating for Bank performance
Borrower Perf.:
Quality of ICR:

7. Lessons of Broad Applicablity:

Three important lessons can be highlighted from the unsatisfactory outcome of this adjustment lending operation:
(i) If during project supervision there is a change of government soon before or after privatization of a public enterprise, Bank staff and management should carry out an extra effort to ensure political ownership of the privatization by the new government. However, success is not always guaranteed: the effort was done in this case but it did not bear fruit.
(ii) The Bank should acknowledge the high risks associated with disbursing adjustment money based on bringing a public enterprise "to point of sale" and consequently design further safeguards in case the privatization does not materialize in a sustainable manner. In this operation the Bank was left in the position to disburse in spite of having serious concerns about achieving the program objectives. In the end, the privatization did not occur.
(iii) Bank management should balance better the incentives and resources allocated to project preparation/appraisal and project supervision. There is a tendency to put more incentives into project preparation/appraisal than in supervision, a situation that may have affected the supervision of this lending operation.

8. Audit Recommended?  Yes

          Why?  (i) Important lessons can be derived regarding the Bank and country factors behind the failure of the adjustment program; and (ii) it will take stock of the situation in the power sector following the Government's latest decisions.

9. Comments on Quality of ICR:

The ICR generally complies with the Bank guidelines for ICRs, except that it was issued 17 months after credit closing date -- far in excess of the 6 month requirement. It presents a fairly good description of program preparation, achievements and failures, and points out important lessons learnt. However, the ICR would have benefited from a review by an editor who would have certainly detected gaps and inconsistencies, and simplified the text of the ICR. For example: (i) the equivalence between local currency and US dollar is missing; (ii) in Section 1 Project Data, an original MTR dated 11/01/2002 is inconsistent with an original credit closing dated 12/31/1999 and actual credit closing date on 01/31/2002 (there was a program restructuring in February 2001 but not MTR); (iii) ratings are missing in Annex 5; (iv) ratings for Borrower performance shown in Annex 6 do not match ratings shown in Section 2 and text in paragraph 7.6; (v) Annex 7 does not list the supporting documents.Overall, OED rates the quality of the ICR as marginally satisfactory.

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