Public Disclosure Authorized

Document o f
The World Bank

FOR OFFICIAL USE ONLY

Report No: 32 164-NG

Public Disclosure Authorized

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

INTHE A M O U N T OF SDR 113.8 MILLION

(US$172.0 MILLION EQUIVALENT)
Public Disclosure Authorized

T O THE

FEDERAL REPUBLIC OF NIGERIA

FOR A

NATIONAL ENERGY DEVELOPMENT PROJECT

Public Disclosure Authorized

M a y 25,2005

Energy Team
Infrastructure Group
Africa Region

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

Exchange Rate Effective April 30, 2005

Currency Unit = Naira
Naira135 = US$1
US$1.51209 = SDR 1

FISCAL YEAR
January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AG Associated Gas
BMPIU Budget Monitoring and Price Intelligent Unit
BOT Build, Operate, Transfer
BPE Bureau o f Public Enterprises
CDM Clean Development Mechanism
CFAA Country Financial Accountability Assessment
coo Chief Operating Officer
CPAR Country Procurement Assessment Report
CPS Country Partnership Strategy
CPSU Corporate Planning and Strategy Unit
CQ Consultant Qualifications
CREST Commercial Reorientation o f the Electricity Sector Toolkit
CT Current Transformer
DBU Distribution Business Unit
DISCOS Distribution Companies
DNA Designated National Authority
ECN Energy Commission o f Nigeria
ERR Economic Internal Rate o f Return
EPSR Electric Power Sector Reform L a w
ERSU Environmental, Resettlement and Social Unit
ESMF Environmental and Social Management Framework
FGN Federal Government o f Nigeria
FMF Federal Ministry o f Finance
FMPS Federal Ministry o f Power and Steel
FMR Financial Monitoring Report
FMS Financial Management System
FPM Financial Procedures Manual
FR Financial Regulations
GDP Gross Domestic Product
GEF Global Environment Facility
GENCOS Generation Companies
GIS Geographic Information System
GPS Global Positioning System
HT High Tension
HV High Voltage
HVDS High Voltage Distribution Systems
IAS Internal Audit Section
ICB International Competitive Bidding
ICR Implementation Completion Report
IDA Intemational Development Association
IFC International Finance Corporation
 FOR OFFICIAL USE ONLY
IHCNEPA Initial Holding CompanyNEPA
IPP Independent Power Producers
ISA International Standards o f Auditing
IS0 Independent System Operator
ISR Implementation Status Report
KVA Kilo-Volt Ampere
KW K i l o Watt
LNG Liquefied Natural Gas
LT L o w Tension
LV L o w Voltage
LVDS L o w Voltage Distribution System
MDG Millennium Development Goal
MIGA Multilateral Investment Guarantee Agency
MSP Medium Sized Project
NBU New Business Unit
NCB National Competitive Bidding
NEDP National Energy Development Project
NEEDS National Economic Empowerment and Development Strategy
NEPA National Electric Power Authority
NERC Nigerian Electricity Regulatory Commission
NNPC Nigeria National Petroleum Corporation
OPEC Organization o f Petroleum Exporting Countries
PCB Poly Chlorinated Biphenyls
PHCN Power Holding Company o f Nigeria
PIM Project Implementation Manual
PIU Project Lmplementation Unit
PMU Project Management Unit
PSP Privatization Support Project
PT Potential Transformer
RCM Revenue Cycle Management
REA Rural Electrification Agency
ROW Rights o f Way
RPF Resettlement Policy Framework
SBD Standard BiddingDocument
SCADA Supervisory Control and Data Acquisition
SIL Specific Investment Loan
SOE Statement o f Expenditures
SRFP Standard Request for Proposals
TA Technical Assistance
TDP Transmission Development Project
TOR Terms o f Reference

Vice President: Gobind T. Nankani

Country Director: Hafez M. H. Ghanem
Sector Manager: Yusupha B. Crookes
Task Team Leader: S. Vijay Iyer
Program Assistant: Lily Wong Chun Sen

This document has a restricted distribution and may be used by recipients only in the performance o f their
official duties. I t s contents may not otherwise be disclosed without World Bank authorization.
 NIGERIA
NATIONAL ENERGY DEVELOPMENT PROJECT
CONTENTS
Page
A . STRATEGIC CONTEXT AND RATIONALE ..............................................................
4
1. Country and sector issues......................................................................................... 4
2. Rationale for Bank involvement ............................................................................ 10
3. Higher level objectives to which the project contributes ....................................... 10
B . PROJECT DESCRIPTION ............................................................................................
12
1. Lending instrument ................................................................................................ 12
2. Project development objective and key indicators................................................. 12
3. Project components ................................................................................................ 13
4. Lessons learned and reflected in the project design .............................................. -17
5. Alternatives considered and reasons for rejection ................................................. 18
C . IMPLEMENTATION .....................................................................................................
19
1. Institutional and implementation arrangements ..................................................... 19
2. Monitoring and evaluation o f outcomes/results ..................................................... 20
..
3. Sustainability.......................................................................................................... 21
*

4. Critical risks and possible controversial aspects., .................................................. 22

5. Loadcredit conditions and covenants .................................................................... 23
D . APPRAISAL SUMMARY ..............................................................................................
24
1. Economic and financial analyses ........................................................................... 24
2. Technical ................................................................................................................ 25
3. Fiduciary ................................................................................................................ 25
4. Environment and Social. ........................................................................................ 26
5. Safeguard policies .................................................................................................. 27
6. Policy Exceptions and Readiness........................................................................... 27
Annex 1: Country and Sector or Program Background .......................................................... 28
Annex 2: Major Related Projects Financed b y the Bank and/or other Agencies .................. 32
Annex 3: Results Framework and Monitoring ......................................................................... 33
Annex 4: Detailed Project Description....................................................................................... 38
Annex 5: Project Costs ................................................................................................................ 56
Annex 6: Implementation Arrangements .................................................................................. 57
Annex 7: Financial Management and Disbursement Arrangements ...................................... 58
Annex 8: Procurement Arrangements ....................................................................................... 67
Annex 9 A: Economic Analysis ................................................................................................... 84
Annex 9 B: Sector Financial Summary ...................................................................................... 91
Annex 10: Safeguard Policy Issues ............................................................................................. 99
Annex 11: Project Preparation and Supervision .................................................................... 101
Annex 12: Documents in t h e Project F i l e ................................................................................ 103
Annex 13: Statement of Loans and Credits ............................................................................. 104
Annex 14: Country at a Glance ................................................................................................ 106
Annex 15: M a p IBRD 33990 ..................................................................................................... 108
 NIGERIA

NIGERIA NATIONAL ENERGY DEVELOPMENT PROJECT

PROJECT APPRAISAL DOCUMENT

Date: M a y 25,2005 Team Leader: S. Vijay Iyer

Country Director: Hafez M. H. Ghanem
Sector Manager: Yusupha B. Crookes
Project ID: PO90104
Lending Instrument: Specific Investment Loan
Sectors: Power (100%)
Themes: Infrastructure services for private sector
development (P); State enterprisehank
restructuring and privatization (S); Rural services
and infrastructure (S)
Environmental screening category: Partial
Assessment
Safeguard screening category: Limited impact

Borrower:
Federal Government o f Nigeria
Nigeria

Responsible Agency:
National Electric Power Authority
Plot 441 Zambezi Crescent
Maitama
Nigeria
Tel: +(234-9)-413-6684
nepapmu@,rosecom.net
Bureau o f Public Enterprises
1, Osun Crescent
Federal Capital Territory
Nigeria
Tel: (234-9)-413-4636 Fax: (234-9)-413-4671
www .bpeng;.org
FY 2006 2007 2008 2009
Annual 40.00 60.00 60.00 13.00
Cumulative 40.00 100.00 160.00 173.OO

The Project’s principal objective i s to continue support for the Government’s energy sector reform effort
and facilitate the sector’s smooth transition to the new market and institutional structure. The expectation
i s to see the emergence o f stronger power companies, policy and regulatory institutions, and increased
private sector and community participation, in all aspects o f the electricity business. The project-term
outcomes include efficiency, supply and service improvements in the power sector, demonstration o f
possible models to scale-up electricity access and preparatory work required to launch the gas pipeline
and related power generation project. These developments are expected to provide the enabling
conditions for the emergence o f a competitive energy industry in Nigeria that i s better equipped to
contribute to growth and improved delivery o f socio-economic services. The Project i s responsive to the
GEF Operational Program No. 6, as it will address barriers to the expanded use o f renewable energy
technologies.

Project description Re$ PAD B.3., Technical Annex 4

1. The transmission component comprises investments for upgrading and operating the transmission
system to higher standards o f supply and reliability. Technical assistance comprises support to establish
an operations and maintenance contract for the new Transmission Company, prepare several future
investment projects and for management o f potential environmental impacts.

2. T h e distribution component comprises investments to scale-up the Commercial Reorientation o f

the Electricity Sector Toolkit (CREST) program in selected clusters in the 11 new successor distribution
companies and technical assistance to develop new models o f private sector participation in the
distribution business.

3. The access expansion and intensification, and renewable energy component will support design
and implementation o f several pilots, the National Renewable Energy Master Plan and the development
o f market models for renewables and cross-sectoral energy applications.

4. Technical assistance and capacity building for preparatory work related to the gas pipeline and
gas-to-power project, capacity building and operations o f the NEPA Project Management Unit and
HIV/AIDs prevention and communications.

2
 5. Continued support for implementation o f sector reforms and privatization as mandated under the
Electric Power Sector Reform Act, March 2005.
I

Which safeguard policies are triggered, if any? Re$ PAD D.5, Technical Annex 10
Environmental Assessment (OP/BP/GP 4.0 1) and Involuntary Resettlement (OP/BP 4.12)

The Project principally involves rehabilitation o f existing transmission and distribution infrastructure,
involving temporary inconvenience to adjacent properties and commercial activities. Network
extensions, where made, will only be along existing rights o f way (ROW) and o n unused land to the
extent possible. Therefore potential environmental and social impacts are expected to be generally
minimal. Some localized impacts may occur, requiringappropriate mitigation. Since the specific sub-
project locations have not yet been identified, an Environmental and Social Management Framework
(ESMF), together with a Resettlement Policy Framework (RPF) were prepared and disclosed both in-
country and globally.

Significant, non-standard conditions, if any, for:

Re$ PAD C.5
Board presentation:
NA
Loadcredit effectiveness:
NA
Covenants applicable to project implementation:

3
 A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Introduction

1. Nigeria’s National Economic Empowerment and Development Strategy (NEEDS) emphasizes

rapid development o f energy resources as being critical for growth and poverty reduction. Accordingly,
the Federal Govemment of Nigeria (FGN) has recently accelerated efforts for energy reforms and the
eventual privatization o f various businesses. This project i s timed to support the Government’s
accelerated efforts. I t s goal i s to facilitate the sector’s transition into a competitive and efficient industry,
organized along commercial lines, with significant private participation in all i t s aspects.

2. The renewed reform momentum in the electricity sub-sector i s triggered by the passage o f the
Electric Power Sector Reform Act in March 2005. Several positive developments preceded the passage
o f the Act. A high-powered reform implementation committee established in 1999 initiated steps to
secure increased investment, mainly targeting power generation. An incentive program was mooted to
promote private generation through independent power producers (IPPs) and private sector management
o f existing thermal plants through a Rehabilitate-Operate-Transfer mechanism. As a result the f i r s t o f
these PPs, the 480 MW Agip project was commissioned in April 2005, whilst negotiations andor
executions for further addition o f 1600 M W by way o f IPPs by other companies are in progress. Taken
together, public sector generation plants and private IPPs now under construction will boost generation
capacity by nearly 3000 MW over the next couple o f years. The Government has allocated increased
public capital resources towards transmission system rehabilitations, in addition to external donor
support.’ In parallel, various facets o f the reform program were developed and implemented under the
stewardship o f the key sector institutions -the Federal Ministry o f Power and Steel (FMPS), the Bureau
of Public Enterprises (BPE) and the National Electric Power Authority (NEPA). Their efforts have
consistently received Bank support through a couple o f Credits2 and under a knowledge-based policy
dialogue program. The reforms gained momentum with the unbundlingo f N E P A into eleven distribution
business units (DBUs), six generation units and a Transmission Business Unit between January and
October 2004. These units are now operating as “virtual” companies as a prelude to their eventual set up
as registered public companies under the new Act.

3. The DBUs commenced operations as profit centers in January 2004 with a substantial devolution
o f authority and accountability. Under the knowledge engagement, the Bank helped Nigeria develop the
“Commercial Reorientation o f the Electricity Sector Toolkit” or CREST program - a set o f initiatives
that target loss reductions, energy accounting, commercial improvements and customer service
enhancements. The CREST program seeks to build value in the distribution business in order to pave the
way for further reforms and private sector participation. The first approach to such value enhancement
(i.e. demonstrating a sharp increase in the revenues collected in each distribution business unit), therefore,
has been to tackle the unacceptably high levels o f losses, curb theft, rectify inadequate metering,
rehabilitate the run down condition o f assets and improve customer service to mitigate the negative image
o f NEPA. CREST pilots have been successfully implemented in all the 11 DBUs, yielding significant
improvements in all these attributes o f the-business. For example, NEPA’s revenues increased from
approximately Naira four billion per month in 2002 to over six billion per month in 2004. Business
improvements achieved in these pilots include, new customer service centers, technology-driven

’
~~

Nigeria sought and obtained the Bank’s support to finance much needed transmission system rehabilitation
through the US$lOO million Transmission Development Project (TDP) in 2001.
Besides the TDP, support has come from a power sector component in the Privatization Support Project (PSP).

4
innovations such as payment o f bills through mobile phone services, and rapid response vehicular squads
to address customer complaint^.^ An innovative program to make loss reductions eligible for carbon
finance credits i s also taking shape.

Box 1: The CREST Program

The program seeks to introduce efficiencies into electricity distribution management through a best
xactice framework that i s anchored on the following principles:

Right incentives for distribution business to be a net cash generator for: (i) reduced tariffs in
the long run and for supply o f quality power; and (ii) gradually eliminate the need for
Government support.
Operational philosophy to change from that o f a service provider to that o f retail trade in
electricity.
Reengineering business processes with innovative technology adaptations, leveraging
Information Technology for efficiency, energy balancing, performance monitoring, and new
HR practice.
Reorientingthe market with introduction o f competition, well established regulation,
standards o f service, retail outsourcing and developing technical and human slulls within the
local market, for sustainable private sector participation.

The key action elements o f CREST are:

e Distribution business outsourcing (either in ring-fenced distribution zones/clusters or in retail

pockets such as housing estates, markets, and industrial areas) on bulk service to customers.
e Distribution function outsourcing.
0 Metering o f all customers.
e Rationalize bill estimation value in the interim.
e Electronic and spot-billing o f customers, including provision o f printed bills and collection o f
‘on-the-spot’ payments through cash cards (cashless transactions).
0 Energy audit o f distribution feeders.
e Remote reading o f major customers to eliminate fraud in meter reading and collusion between
unscrupulous stafflcustomers.
e High voltage distribution systems to reduce theft and losses.
e Internet based customer records for greater transparency and information.
e Customer service centers for improving utility-customer interface.
e Rapid response mobile customer service units.
e Focusing on collecting government receivables.
e Asset and facilities management.
e Performance measurement and monitoring.
e Database and data mining initiatives including GIWGPS techniques.

A US$15 million component to finance the scale-up o f CREST initiatives i s under implementation as part o f TDP.

5
4. A key lesson from CREST pilots i s that investments made in specific areas or customer pockets
in electricity distribution yield high returns in terms o f operational, financial and customer service
enhancements. It i s therefore prudent to apply CREST to load centers that are critical for growth and
where power matters most for overall economic development. The Government’s strategy i s to therefore
leverage the CREST program to create “islands o f excellence” in groups o f selected areas at a time.
These areas or clusters as they are referred to, are the focus o f this Project’s design. A cluster i s a group
of customers that are served by an electrically demarcated distribution and sub transmission n e t w ~ r k . ~
The project aims t o implement CREST-style improvements in these clusters and replicate the positive
outcomes o f earlier pilots described above. Efforts will also be made to ease bulk power supply
constraints in these clusters by corresponding investments to improve the transmission network.

5. The electricity reform program, o f which the unbundling and CREST interventions are a part, has
moved into high-gear with the enactment o f the Electric Power Sector Reform L a w (EPSR Act).’ The
Govemment has entered into a second round o f reforms to translate i t s policy intentions into real changes
and achieve sustainable outcomes in the next 3 - 5 years. Under the stewardship o f the National Council
on Privatization, and in partnership with FMPS and NEPA, the BPE i s leading the implementation o f the
time-bound provisions o f the EPSR Act (see B o x 2). NEPA has been transformed into an Interim
Holding Company (referred to as the Power Holding Company o f Nigeria plc) and the 18 business units
are being incorporated as successor companies - a single national Transmission utility, 11 Distribution
and 6 Generation companies. Independent management structures and business plans for these companies
are being developed. The BPE i s launching a program to invite private investment in these companies,
with a strong preference for outright privatization, where feasible. The Nigerian Electricity Regulatory
Commission (NERC) i s being established. Mandated institutions under the EPSR Act include the Rural
Electrification Agency and the Rural Electrification Fund to promote country-wide electricity access
expansion. The expectation i s that over the next 3 - 5 years, the power sector will emerge as a
competitive industry, with private sector actors owning and operating significant parts o f the business,
and operating with viable economic and financial fundamentals. Furthermore, substantial growth in
access to electricity i s envisaged through an efficient combination o f federal, state, private sector and
community models. The emergence o f this commercialized sector would eventually put to rest the
tortured legacy o f several years o f chronic power shortages and related economic blight.

6. Several challenges and choices have to be addressed in the transition period. The most optimistic
scenario for privatization foresees over a half o f the 18 companies being divested over the next two years.
At the end o f the transition period, companies could therefore be under different forms o f private
participation or s t i l l under public management. Strategic investment and management choices therefore
have to be made in a manner that could enhance the value o f the companies to attract prospective
investors. The transition would also have to cater to consumer expectations o f improved power supply
and service quality. The national debate preceding approval o f the Act has also created expectations for
rapid expansion o f electricity access. The Government i s already implementing a major program in
partnership with o i l companies to establish large capacity PPs, such as the recently commissioned 480
MW IPP by Agip. The Government will not only have to find ways to service the growing IPP
obligations, but also invest in transmission system enhancements necessary to dispatch additional power.
Furthermore, there i s a compelling need to address distribution efficiency enhancement to improve the
sector’s financial performance.

For a more detailed explanation o f the cluster concept, please refer to Annex 4. Specific clusters for targeted
improvements are being prepared by N E P A for project implementation.
’ EPSR Act 2005 dated March 11,2005.

6
 The NEPA Initial Holding Company (MC) i s to be formed within six months, with the shares to
be held jointly by BPE and Ministry o f Finance. Assets and liabilities o f N E P A are to be
transferred to the M C .
Staff o f N E P A are to be transferred to I H C or the Regulatory Commission.
All rights and obligations (e.g. pensions) are to be properly maintained and allocated.
Incorporation o f NEPA Successor Companies within eight months o f initial transfer date with
shares in successor companies to be held jointly by Ministry o f Finance and BPE, and assets,
liabilities, employees o f M C to be transferred to successor companies within one year.
The A c t provides for NERC to be set-up as a formal, independent regulatory agency and govems
the appointment and tenure o f its six commissioners.
NERC and Licensee(s) shall develop:
Customer service standards.
Customer complaint handling standards and procedures.
Codes of practice for the needs of special customers.
Proceduresfor dealing with customers who have dificulty paying bills.
Proceduresfor applyingfor electricity service.
Procedures for disconnecting non-paying customers.
Information to be made available to consumers, and the manner of its dissemination.
A Rural Electrification Agency will be established and will operate under the close supervision of
the Minister o f Power and Steel.
A Rural Electrification Fund will be established to promote access o f electricity to rural areas.

7. Compared to power, the reforms in the gas sector are at an earlier stage o f development. Progress
i s being made o n enacting new legislation for the natural gas sector as well. The reforms would enable
Nigeria to harness abundant natural gas resources for power generation and industrial uses, as against the
large scale gas flaring that occurs now. Hence, the support needed i s more in the realm o f technical
assistance to fashion reform instruments. Intensive preparatory work i s needed to realize the vision o f
developing natural gas resources in the southern parts o f the country and transporting it via pipeline to the
northem and eastem regions o f the country.

Issues Constraining Achievement of Better Sector Results

8. Low Access. Access to cost-effective and sustainable energy services i s critical to re-launching
the Nigerian economy and meeting MDG and NEEDS targets. However, barely 40 percent o f all
Nigerians have access to electricity services, with only a fifth o f rural households covered. This leaves
about one hundred million Nigerians literally in the dark. T o increase “real” access to 75 percent by 2020
would require over US$10 billion in investments. This i s in addition to the US$6 billion or so required
for expanding power generation from the currently available 3,200 MW to about 10,000 MW in the same
period. Total investment costs alone could be approximately two to three percent o f Nigeria’s annual
GDP over that period, with financing o f operating deficits being additional to this amount. Increasing
access at a rapid pace will also require different and more efficient models as opposed to the grid-based
expansion-only model employed at present. The capital investment part o f the current rural electrification
access program i s executed by the FMPS and by the States. Costs are high, sometimes in the order o f
U S $ 1,000 per connection, and community participation and contributions are minimal. Reticulation

7
networks once completed are handed over to NEPA for operations and service to customers. Inview o f
the chronic shortage o f power in the system and the low tariffs for rural domestic consumers, NEPA has
l i t t l e interest or ability to service these networks and supply power to any reasonable standard. The most
frequent results observed therefore are a gradual deterioration o f capital assets, large scale vandalism and
theft o f materials and little or n o service. The ongoing reform process will change the rules o f the game,
allowing new institutions and stakeholders to participate in access expansion. Therefore, new
mechanisms for involving stakeholders and expanding access have to be developed and tested, to serve as
inputs in developing altemative ways o f providing access.

9. Weak Asset Base and Business Model. Power production facilities are in poor shape and
therefore, rarely operated to capacity. Against a nameplate capacity o f nearly 6,000 MW, only a
maximum o f 3,200 MW i s available for supply today. Transmission and distribution networks are
dilapidated, poorly maintained and inefficiently operated. On the business side, there i s a large gap
between power sold and power billed, and between power billed and revenue collected. As a result, the
sector loses nearly two Naira for every k i l o watt-hour (kWh) o f electricity sold, which, combined with
l o w efficiencies in generation and distribution, result in an annual cash deficit o f over US$120 million to
the utility. Lack o f metering, outdated information systems and inconsistent billing practices are the
principal causes for severe revenue losses. Electricity tariffs are not cost-reflective, but tariff revisions
are not possible unless supply and service conditions measurably improve. Management practice lags
what i s prevalent in other countries and a lack o f commercial culture pervades the system. Operation and
maintenance o f the systems to prescribed standards and generating adequate cash from retail operations
will require reengineering o f outdated business processes, upgrading o f management skills and incentives
and appropriate investments in knowledge and human resources.

10. Absence o f Appropriate Regulation. Currently there i s no independent price or service

regulation for gas or electricity supply. In theory, the Federal Ministry o f Power and Steel (FMPS) i s
supposed to exercise regulatory powers, but it i s not equipped t o discharge this function. It does not have
the necessary policy or technical staff, and the oversight responsibility i s not independent, but rather i s
executed through a Technical Committee chaired by the Minister and primarily staffed by N E P A
officials. Lack o f administrative capacity and the nascent state o f emerging sector regulation poses
significant challenges for public or private operators o f the various companies in the transition period.

11. The Challenge o f Privatization. Privatization o f the electricity sector i s viewed as a panacea for
addressing the sector’s problems and reforms are being driven by expectations that privatization can be
quickly realized. Inthe current global environment, where appetite for investment in the power
businesses o f developing countries i s low, it i s unclear to what extent the private sector in Nigeria and
overseas would respond to the reform signals. The policy, legal, and regulatory environment required to
attract and sustain private investment i s nascent. Complex staffing and financial liability issues such as
un-serviced debt and un-fundedpension liabilities pose further barriers to attract investors. Nigeria i s a
very large country with great diversity in electricity access rates, average per capita energy demand,
availability o f energy sources and customer mix. As such, different companies born out o f the
restructuring would require different strategies to attract private participation. Some, for example the
largely rural Yola distribution company, may not be attractive for private participation in any form for
some time to come. Other companies or areas may invite investor interest more readily. Privatization
op*ons, in addition to the immediate sale o f assets would need to be considered. Thesrcauld include
~

concessions, outsourcing arrangements and management contracts, arrangements under which private
sector management can be secured with little or n o investment obligation. T h e Govemment thus faces the
transition challenge o f making the right choices, undertaking the appropriate preparation for inviting
private participation, and sequencing i t s actions effectively. Although challenging, the transition period i s
also an opportunity for the Govemment to “create value” and “reduce risks” o f the sector through the
right interventions that demonstrate a viable business model to attract private investors into the sector.

8
12. Absorbing and Paying for IPPs. The Government has asked o i l companies active in the country
to develop large IPPs with a view to bridge the generation gap. These companies are developing large
projects, each in the 400 - 1200 MW range, with the security o f government guarantees and hedged by o i l
revenues. The case for improvements even in the transition i s made compelling by the emerging need to
service these substantial IPP obligations. The obligations are expected to rise from around US$70 million
per annum presently to US$230 million in 2007. Capital cost obligations to IPPs i t s e l f would absorb
nearly all the revenues that NEPA collects from sale o f power today.6 Hence both the sector and the
government are vulnerable, unless efficiency improvements and revenue growth can be quickly realized.
As IPPs are commissioned, there i s an urgent need for concomitant actions to establish transmission
infrastructure to evacuate power and distribution improvements to mobilize enhanced revenues to service
IPP payments.

Government Response to Resolution o f Sector Issues

13. T h e Government strategy seeks to strike a balance between short- and longer-term actions in
managing the transition phase. The key elements o f the Government’s strategy to be implemented in the
next three years and to set the stage for the sector’s eventual take-off are to:

(i) Complete N E P A restructuring, audit assets and liabilities and apportion these among the
various companies, and sort out its staffing, pension and other personnel liabilities,
including necessary right-sizing o f staff.

(ii) Establish and operationalize the NERC.

(iii) Prepare private participation solicitations such as sale o f assets, concession, management
contracts, for an initial slate o f distribution and generation companies.

(iv) Continue implementation o f distribution commercialization initiatives to improve

efficiency and deliver better services through public private partnership initiatives along
with stand alone utility interventions, especially in areas where electricity i s a key input
to growth, such as in urban and industrial clusters.

(v) Reinforce and expand the transmission system to ensure efficient and reliable power
flows; and to develop a framework for a technical operations and maintenance (0 & M)
contract.

(vi) Explore alternatives for reducing government guarantees to IPPs by possible direct
revenue assignments from upgraded and/or outsourced distribution zones or clusters.

(vii) Increase focus o n intensification o f access in peri-urban and rural areas through the
participation o f communities, stateflocal governments and private action.

(viii) Commence preparation o f a public-private partnership program to develop natural gas for
country-wide access -for power generation through IPPs, and industrial use.

(ix) Increase diversity o f energy resources by promoting renewables through a national

Renewable Energy Master Plan.

The tariff obligations to the IPPs represent approximately 2 UScikWh in fixed costs against an average tariff o f
approximately 4.4 UScikWh in 2004. In cash terms, the fixed costs alone are approximately equal to the current
average revenue yield o f 2.3 UScikWh.

9
 14. The different sector entities (Ministry, BPE, NEPA) broadly agree on the nature and sequencing
o f reform and investment measures during the transition. The consensus and the way forward i s to be
captured in a “Transition Action Plan” paper. BPE i s coordinating the preparation and execution o f the
Transition Action Plan with the principal stakeholders o f the sector. The plan document will provide a
description o f the short- and medium-term strategies, their sequencing and the expected outcomes from
the reform process. It will also provide clear identification and definition o f the roles and responsibilities
o f different policy makers and executing agencies. The mechanism and level at which the strategic
collaboration will take place will also be described in the paper.

15. This clear government articulation will facilitate the focus o f this project support and that o f
future Bank projects into the right areas. The strategy, when articulated, would also be consistent with
IDA’Sapproach under the new Country Partnership Strategy being presented to the Board with this
Project. While it i s hoped that privatization will turn out to be a viable sector remedy, the Federal
Government o f Nigeria (FGN) i s also realistic regarding expectations -both in terms o f market risks and
the sector’s ability to hedge such risks. Thus, and in the case that large amounts o f private sector
investment do not materialize, the government intends to seek support for measures that strengthen the
public sector to achieve increased sustainability and access in the sector.

2. Rationale for Bank involvement

16. Recognizing the central role that electricity plays in the country’s growth and poverty reduction
strategy, and in light o f the challenges highlighted in the previous section, the World Bank’s strategy i s
one o f consistent and long-term engagement. As o f now, the World Bank i s the only large international
development institution active in the sector. Other development partners, such as the African
Development Bank are interested and might re-engage once the sector begins to show irreversible reform
results. The Bank has several advantages in providing sustained support to the energy sector. Firstly, it
can commit the scale o f funding and the prolonged period for which it i s required to achieve visible
impacts in a large country like Nigeria. Secondly, i t s staff has the experience to address the key issues -
reforms, utility management engineering, regulation, strategic communications and
commercializatiodprivatizationo f utilities. Finally, energy utilities will need substantial financing from
private sources, and the Bank Group i s perhaps uniquely positioned in terms o f expertise and knowledge
to assist the government in establishing the necessary conditions and environment to make this possible.
The Bank’s value-addition comes from: (i) knowledge-based adaptation o f global best practice in utility
management and innovation to create value in the Nigerian context; (ii) leverage o f IDA resources
towards minimizing business and regulatory risks and promoting private participation; (iii) ability to
enhance economic benefits through a focus on growth clusters; and (iv) use o f innovative performance-
based mechanisms such as carbon finance to reduce risks and encourage private participation.’ The
proposed Project embraces all these principles in designing i t s interventions.

3. Higher level objectives to which the project contributes

17. This Project i s presented to the IDA Board o f Executive Directors for approval with the new
Country Partnership Strategy (CPS) for Nigeria. The CPS will assist Nigeria implement the NEEDS’
long-term goals o f wealth creation, employment generation and poverty reduction. These goals are to be

Carbon fmance refers to an innovative mechanism where projects in developing countries that demonstrate
reduction o f greenhouse gas emissions can s e l l emission credits to global buyers seeking to meet their obligations to
reduce emissions. This market i s created by efforts to reduce global climate change including commitments adopted
voluntarily in several U.S. states, those embodied by an European Union - Emissions Trading Scheme, (EU-ETS), as
well as the Clean Development Mechanism (CDM) created under the United Nations Framework Convention o n
Climate Change (UNFCCC) and i t s Kyoto Protocol.

10
achieved through three main interventions: (i) enhanced service delivery for human development; (ii)
improved environment and services for non-oil growth; and (iii) greater transparency and accountability
for better governance. The Project will contribute to the realization o f the first two goals.

18. Under Enhanced Service Delivery for Human Development,NEEDS envisages electricity access
as one way to improve the delivery o f essential social services and expand economic opportunities. In
view o f the difficulties in estimating rural electricity coverage in a system highly deficient o f power
supply, the project defines measurable targets on the basis o f “how many more households and
enterprises” gain access to electricity. At present, the only mode o f access expansion in Nigeria i s
network expansion -under which the FMPS and the States execute capital projects and hand-over assets
to N E P A for operation. As pointed out earlier, this approach i s high cost, time taking and produces poor
quality outcomes for the beneficiaries. The Project seeks to address the huge challenge o f expanding
electrification in a modest way by first determining viable alternatives to the current mode o f grid-based
access expansion, and an increased role for renewable energy.

19. Under Improved Environment and Servicesfor Non-oil Growth, the focus i s o n improving the
coverage and quality o f basic infrastructure to accelerate economic growth. Past experience in Nigeria
and other similar large countries has demonstrated that pro-growth interventions fail to generate synergy
if dispersed over a wide geographical area. Therefore, the CPS places reliance on selected interventions
in lead states to assure removal o f critical roadblocks to growth in rural and urban environments. The
Project translates this “growth focus infrastructure” approach into one o f improving power supply and
service in “clusters”. Thus the Project investments will be channeled into improving the business
fundamentals, efficiency o f operations, customer orientation and commercial management in electrically
“ring-fenced” areas or clusters to realize quick results. Such clusters could be potential growth centers
such as industrialhommercial areas or peri-urban locations with concentration o f economic activity.
Nigeria has the resources and capacity to scale up successfid models countrywide. The Project will also
generate some global environmental benefits in the form o f carbon emission reductions which would be
eligible for carbon credits.

11
 B. PROJECT DESCRIPTION

1. Lending instrument

20. The instruments are a Specific Investment Loan (SIL), and a GEF Medium Sized Project grant,

2. Project development objective and key indicators

21. The Project’s principal objective i s to continue support for the Government’s energy sector
reform effort and facilitate the sector’s smooth transition to the new market and institutional structure.
The expectation i s to see the emergence o f stronger power companies, policy and regulatory institutions,
and increased private sector and community participation, in all aspects o f the electricity business. The
project-termoutcomes include efficiency, supply and service improvements in the power sector,
demonstration o f possible models to scale-up electricity access and preparatory work required to launch
the major gas pipeline and related power generation project. These developments are expected to provide
the enabling conditions for the emergence o f a competitive energy industry in Nigeria that i s better
equipped to contribute to growth and improved delivery o f socio-economic services.

22. Progress toward outcomes will be measured by:

(i) Outputs on reforms that include: (a) emergence o f new institutions in the form o f NERC,
successor electricity companies, the Rural Electrification Agency and the Rural
Electrification Fund; (b) development o f workable private participation models in a few
companies andor clusters; (c) launch o f 1 - 2 access expansion pilots; and (d) analytical
inputs to establish rational and efficient domestic energy pricing structure.

(ii) At a cluster and sector-wide level, as the case may be, value addition will be measured by
indicators that include: (a) higher voltage level reliability indices for transmission; (b)
improved technical/commercial efficiency and customer service quality indicators for
distribution; (c) improved values o f standard financial indicators; and (d) number o f new
consumers connected. Prior to including any cluster under the project, a baseline o f these
indicators will be established, against which the Project outputs and impacts will be
evaluated. Targets will vary from cluster to cluster depending o n initial conditions, customer
mix, the location and the type o f interventions made.

(iii) Qualitative measures will include periodic customer satisfaction surveys, visual inspections
and site visits and feedback from civil society in formal and in informal settings. Monitoring
and ex-post independent verification o f carbon emission reductions achieved will be
undertaken in order for the sector to earn additional performance-based payments.

Global Development Objectives

23. The project i s consistent with the recognition o f renewable energy as an important element o f
overall energy supply. The Project i s responsive to the GEF Operational Program No. 6, as i t will begin
to address barriers to the expanded use o f renewable energy technologies, by creating an enabling
environment for grid-connected and off-grid renewable energy sources. The envisaged outcomes are
closely linked to two strategic priorities for the climate change focal area. These include: (a) inputs to
develop power sector regulatory framework and policies for renewable energy promotion; and (b)

12
innovative interfaces to other development and investment efforts, that require energy supply, for
example in agriculture, water supply, rural small and micro enterprises, education, and public health.

3. Project components

24. The Project proposes to deepen assistance for electricity and gas sector reforms and support
investments required for a smooth transition, In electricity, such assistance will include support for the
establishment and operation o f the market structure and sector institutions; realization o f the transmission
system upgrades; and distribution investments and management in selected clusters. In the gas sector, the
Project will support the development o f a domestic gas market on the basis o f a unified, coherent
institutional approach to address all critical issues. This entails unifyingmultiple mandates into a single
Steering or Oversight Committee reporting directly to the President, assisted by working groups that
address different subject areas relating to policy, commercial and technical aspects. Terms o f reference
for the Committee and the working groups will borrow heavily from those for the existing Presidential
Committees -the main difference in approach being reliance on one collaborative, rather than several
competing arrangements. Subject to success in achieving the desired outcomes, and a well managed
reform transition phase, a scaled up IDA operation for further investments could be possible within the
next two years.

25. In the electricity sector the Project would finance investments in some system-wide activities,
such as equipment for transmission system loss reduction, power quality improvement and improved
control systems as well as creation o f new IT systems for customer interface and metering o f all industrial
and commercial customers. The investments in distribution, however, will be cluster-based. One model
being contemplated i s outsourcing distribution operations in a cluster to a private entity, which in turn can
contract power generation from NEPA successor companies or private IPPs to supply electricity to the
cluster with a higher degree o f reliability. I t i s expected that such operations will create a pool of local
and foreign private sector companies that could, through the experience o f managing smaller distribution
and generation assets in Nigeria, gain the ability to operate larger companies and manage Nigerian risk.
This approach would enhance the likelihood o f successful privatization outcomes for the new companies,
reduce r i s k s and enhance the retums for public and private investment. Collaboration with IFC and
MIGA - as well as the potential for hard currency payments from carbon finance - i s envisaged in
making private participation models feasible. A project description by component i s attached in Annex 4.

13
Summary Project Description

26. The following table summarizes the Project description by component, cost and financing.

Project Description All figures in US$ million

Component Description Total IDA GEF %IDA

Cost Fin. Fin. &GEF

1. Transmission System Development

System Rehabilitation and Capacity Expansion 105.1 99.8 0.0
Development of new lines 2.6 2.6
National Electricity Load Demand Study 1.5 1.5
Updated Transmission Grid Design 1.0 1.0
0 & M contracting for Transysco 2.0 2.0
Bid preparation Kainji Rehabilitation 0.5 0.5
Engineering and Implementation Supervision 2.0 2.0
Environmental, Social and Solid Waste Management 1.0 1.0
Contingency and unallocated 10.0 9.5
Sub Total Component 1 125.7 119.9 95

2. Distribution Efficiency Enhancement

Distribution system Upgrade 25.0 23.8 0.0
Engineering Supervision 0.5 0.5
System Protection and Coordination Work 0.5 0.5
Database development for Distribution Operations 3.0 3.0
Technical and Business Development Advisors 0.5 0.5
Preparation of Business Plans for Distribution Companies 1.0 1.0
Capacity Building for Distribution Companies 0.5 0.5
Contingency and unallocated 2.2 2.1
Sub Total Component 2 33.2 31.9 96%

3. Access Expansion, Intensification and Renewables

Cofinancing of Access expansion/intensification pilots 8.0 6.5 0.6
Design, Development and Implementation of pilots 1.1 1.0 0.1
Implementation Support for Renewable Energy Master Plan 0.5 0.3 0.2
Innovation of Cross-sectoral Energy Applications 0.4 0.3 0.1
Sub Total Component 3 10.0 8.1 1.0 91

4. -
Technical Assistance Project Management Unit
Development of Gas Pipeline and Gas-to-Power Projects 5.0 5.0 0.0
Env., Resettlement and Social Unit Capacity Buidiing 1.0 1.0
Development of Corporate Planning and Strategy Unit 0.7 0.7
Incremental Operating Costs 1.0 1.0
HIWAIDs Prevention and Communication Campaign 0.5 0.5
Sub Total Component 4 8.2 8.2 100

5. -
Technical Assistance Reforms and Private Participation
Advisory Services for Distribution Business Development 1.0 1.0 0.0
Development of Risk Mitigation Instruments 1.0 1.0
Communications and Outreach 1.2 1.2
Capacity Building for Sector Institutions 0.7 0.7
Sub Total Component 5 3.9 3.9 100%

Total 181.0 172.0 1.0 96%

Note: The component on cofinancing o f access and intensification pilots includes an estimated
US$O.9 million from local and state govemments and private sectodcommunities.

14
27. Component One: Transmission. This component will principally support investments in
transmission system upgrades including: (a) grid reinforcements; (b) reactive power compensation; (c)
transmission supply strengthening for distribution clusters and access expansiodintensification pilot
areas; and (d) system metering and control enhancements, including extension o f the SCADA System and
bulk metering reinforcement. To the extent that several o f these interventions will create better system
optimization and more efficient operations, they will result in carbon emission reductions that can be
monetized. The non-investment component w i l l support the development o f several new projects
including: (a) a new 330 kV transmission line with an eastem routing to close the loop on the existing U-
shaped backbone 330 kV transmission system. The new line would significantly increase the grid
capacity and reliability o f the entire network by enabling supply to the north and eastem parts o f the
country; (b) a national electricity load demand study and updated transmission grid design plan; (c) bid
preparation for K a i n j i Hydro complex rehabilitation; and (d) engineering and implementation supervision.
A specific provision has been made to defray costs o f environmental, social and solid waste management
including better management o f Poly Chlorinated Biphenyls (PCBs) and Sulfur Hexafluoride (SF6), a
powerful greenhouse gas used for insulation in high voltage electricity switchgear. The component
includes preparatory work to launch a technical operations and maintenance (0 & M) contract for the
Transysco. The 0 & M contract would include knowledge transfer, enabling the staff to gain world-class
experience in the field o f modem transmission management and preventive maintenance. Payments for
carbon savings could be linked to the performance o f the 0 & M contract to reduce SF6 emissions.

28. Component Two: Distribution. Under the ongoing TDP, the Bank has provided support to
N E P A for a knowledge-based CREST program, supported by investments under the current
management.* The results o f the CREST program have demonstrated substantial technical and
commercial value addition to NEPA business. Therefore, under this Project, CREST investments and
support will be scaled up for NEPA and i t s successor distribution companies. The substantial technical
and business impact o f CREST has n o w made it a strategic entry point for attracting private participation
in distribution. Hence, in addition to investment for CREST scale-up to NEPA, the Project will support
through technical assistance (implemented by BPE under Component 9,the actions required to further
develop and adopt two possible models o f public-private partnership to enhance CREST. This will
involve leveraging private sector capacity to complement IDA financing for the investments necessary to
improve the distribution system, and deliver more efficient and effective services. These two approaches
are described below:

(i) Distribution business outsourcing, under which a selected part o f the distribution network or
-
a customer cluster would be ring-fenced and outsourced to a private party for a 3 5 year
period under competitive tender. The bidding would be o n the basis o f investments required
for achieving desired performance levels. The cluster operator would manage the retail
business by purchasing power in bulk from N E P A or other generators and distributing it to
customers in the cluster. The operator would pay wheeling charges to N E P A or i t s successor
for the use o f the distribution network. All investments financed by the Govemment and
managed by the operator in improving the network would be duly accounted for. The Project
would assist in developing the model that would include support for the investments in
upgrades which are required to be made by the utility. NEPA i s already experimenting with
this approach through a pilot in Aba with private participation.

* Commercial Reorientation o f the Electricity Sector Toolkit or CREST aims at improving efficiencies through
business process reorientation and technological innovations.

15
 (ii) CREST distributionfunction outsourcing would be developed in other clusters, where
investments in goods and services related to implementation o f the CREST program will be
f i n a n ~ e d .These
~ investments would be targeted to strengthen distribution infrastructure,
improve quality o f supply and customer satisfaction, curb electricity theft and improve
revenue realization. The Project proposes to develop bidding documents and support the
bidding process for this approach. The contract would be on a BOT basis for some initiatives
like metering where the BOT contractor might for example be responsible for installation o f
meters, meter reading and generation o f bills for the entire BOT period o f 3 - 5 years. For
other activities like customer service centers, the contractor could be responsible for setting
up and operating the center, and for customer grievance resolution by coordinating with
utility staff under an incentive arrangement, which would have to be worked out under the
proposed TA support to BPE for the design o f private participation options. Under this
arrangement IDA would support investments as far as the costs o f goods and installation are
concerned. The borrower utility would bear the cost o f services and operating expenses
under the BOT arrangement.

29. Component Three: Access Expansion and Intensification, and Renewable Energy. This
component will support the design and implementation o f several access expansion, intensification and
renewable energy pilot projects. The pilots are expected to provide inputs for the policy, legal, regulatory
and institutional frameworks being developed. T h i s component will help to develop market models for
renewables, such as standard, bankable contractual agreement for grid-connected small hydro power and
market penetration for solar P V technologies. Support will be extended also for the implementation o f
the National Renewable Energy Master Plan to reinforce i t s outcomes. The component will also support
cross-sectoral energy-based development compacts.

30. Component Four: Technical Assistance and Capacity Building. This component intends to
finance the development work for the proposed South-North gas pipeline and related gas-to-power
projects. Specifically the following four activities will be financed: (i)gas Act implementation support;
(ii) regulatory Commission set-up, capacity building and initial operations; (iii)developing rational
energy pricing and taxation regimes; and (iv) review o f the financial, commercial and technical viability
o f the gas transmission pipeline and associated power projects. The component will also support the
capacity building and operations o f the PMU, including i t s Environmental, Resettlement and Social Unit
(ERSU) and i t s eventual re-incarnation as a specialized Project Management Unit in the form o f a
Corporate Planning and Strategy Unit for the Government. A small component for HIV/AIDs prevention
and communications has also been included.

3 1. Component Five: Ongoing Support to Sector Reforms. In terms o f the Project’s overall
development objective o f providing support to the Government’s electricity sector reform program, this i s
a critical component, particularly given the leading mandate o f BPE under the provisions o f the EPSR
Act. This component comprises provision o f specialized technical assistance to lay the groundwork for
sustainable private sector participation in the sector. Specifically, the following four activities are
contemplated:

0 Continued support for ensuring the speedy establishment, effective operation and
capacity buildingneeds for various sector institutions under the reform program.

These include: high voltage distribution systems, metering with remote reading and automatic reading facilities,
reactive power compensation by installation of online capacitors, customer care centers, spot billing and payment
mechanisms, and rapid response customer service vehicles.

16
 e Advisory services to privatize the electricity sector distribution business and to develop
two other alternate options: (i) distribution business outsourcing; and (ii) CREST
distribution function outsourcing.

e Design o f customized privatization risk mitigation instruments for achieving positive,

sustainable privatization outcomes.

e Formulate and implement communication and outreach initiatives for energy sector
stakeholders to build consensus and facilitate the implementation o f the reform program.

4. Lessons learned and reflected in the project design

32. Lesson 1: Project Design. With regard to the design o f this Project, some o f the lessons o f
experience considered are as follows:

(a) Global experience suggests continuation o f investments to the sector during the reform
transition period, particularly when such investments assist loss reduction and contribute
to ending the culture o f non-payment. Improvements in the sector’s business processes
and attributes are important for private sector participation. Investments are also
important for the provision o f stable services so as to maintain political and public
support for the longer-term reform process.

(b) In identifying and preparing bids for the areas to be offered for private sector
management, it i s important to balance areas requiring cross-subsidy with areas likely to
generate surpluses. Such combinations o f positive and negative cash flow areas could
possibly be offered to investors under one bid package, in order to limit the need for
continued Government support to “unattractive” areas (i.e. those requiring subsidy and
therefore o f less interest to the private sector) beyond the transition stage. The possibility
o f differentiated pricing for various categories o f end-users should also be considered.

(c) Customer satisfaction surveys updated at least annually, are a useful tool for monitoring
results and keeping stakeholders engaged under the Project. A competent, domestic civil
society organization i s generally best placed to carry out such periodic customer surveys
and to provide external monitoring feedback.

33. Lesson 2. Customized Training. On training, there will be a growing need for middle and
lower level managers o f the successor companies to develop cutting edge management and decision-
making skills. A customized training program was recently formulated in association with Virginia
Technical University, U S A to provide hands-on utility management training together with site visits to
several utilities to complement classroom training. Each participant had the opportunity to address
specific management challenges faced in Nigeria. Several outputs from this training have been directly
incorporated into the design o f this Project. This helped in improving both the quality and timeliness o f
the project preparation process. The lesson learnt i s to customize training and development inputs and to
tailor them to real-life situations, rather than to follow a conventional study tour/classroom training
approach.

34. Lesson 3. Complementary Knowledge Products are Critical to Success and Can Help with
Coordination. The Bank team has recently been pro-active in terms o f knowledge products, such as the
Power Sector Leaders’ Workshop series, which serves a coordination function and allows unconstrained
exchange o f views among stakeholders. The successful CREST program i s one example o f a knowledge

17
product with very practical and positive applications. It i s therefore likely that the practice o f at least two
knowledge workshops a year will continue during the proposed Project, and will also be helpful in
addressing the capacity building and coordination issues for the new actors. The lesson learned i s that a
catalytic role played by an external party such as the Bank or another donor, in adding value to Sector
Leaders' decision making processes, may often be required to share knowledge and improve the quality o f
decision making.

35. Lesson 4. Improved Communications Tailored to Various Stakeholders. The impact o f

positive communications with stakeholders was evident at a recent National Stakeholders' workshop
organized by the BPE. All through the transition period, there will be a continuous need to keep
stakeholder and public expectations in line with ground realities. A strategic communication program
spanning the transition period has been shown to produce positive results in mitigating risks and fostering
favorable investor perceptions in other countries that have gone through similar reform processes.

5. Alternatives considered and reasons for rejection

36. Implementation through multiple sector agencies versus a single agency. An implementation
option that was initially considered and later rejected, was to give each sectoral institution the
responsibility for implementingi t s respective project component. Under this option, for example,
Transysco would have been responsible for goods and services procurement pertaining to transmission;
the DBUs would each have procured their part o f the CREST distribution investments; and support to the
gas sector would have been procured through the Ministry. This alternative was rejected, however, in
favor o f one single implementing agency to execute most components so as to lower transaction costs
and develop a core team with project management expertise that could be positioned to provide longer-
term strategic support to a range of sector clients, in thefuture.

37. Includinglarger distribution investments in this project versus a future follow-on project.
The Project could have included a larger distribution investment component to cater to the substantial
need for network improvements. Such investments would then have been deployed under private sector
distribution business outsourcing or distribution function outsourcing models. However, at the
intervention o f BPE it was recognized that development o f these private participation options could take
some time. Therefore, the choice was made to include only technical assistance under this Project to
develop these options and defer the investments required to a future project that could be developed in
tandem with progress in the privatization process.

18
 C. IMPLEMENTATION

1. Institutional and implementation arrangements

38. There will be two implementingagencies under the Project: the NEPA-PMU will implement
components 1 - 4, whilst BPE will implement component 5.

39. Rationale for Institutional Arrangements. One o f the key lessons leamed from the ongoing
projects in Nigeria i s that project management capacity development takes time. In order to ensure timely
and high-quality implementation, established agencies with demonstrated capacity should be involved.
B o t h executing agencies -NEPA-PMU and BPE - come with an established track record. This Project
i s designed to eventually decentralize all technical and operational functions, and build utility
management capacity at the individual company level, while retaining policy, strategy, and planning
functions at the centralized federal level.

40. The P M U i s currently in charge o f implementing the TDP. I t i s rated satisfactory in all aspects o f
project implementation. As an implementation agency for this project, it will have five sets o f clients -
transmission (Transysco), all the 11 distribution companies, the access component where the clients
include State Governments, E C N and Community based organizations, the gas sector P I U operated by the
Ministry o f Power and Steel and the PMU’s own ERSU which will have to ensure broad environmental
and social compliance o f all aspects o f the project. T h i s unified implementation arrangement for several
clients would be efficient because: (i) project implementation will be coordinated among all relevant
institutions and successor entities; (ii) economies o f scale and uniformity in quality and specifications in
procurement can be realized; (iii) synchronized policy making (on technical and other aspects) among all
the Project stakeholders will be possible; (iv) the transaction and implementation costs can be minimized;
and (v) single-point tracking o f all project outcomes, accounts and safeguard compliance will be
facilitated.

41. Though project implementation will commence with P M U housed in NEPA, by using the
capacity created under the ongoing project, the PMU will subsequently be transformed into a “Corporate
Planning and Strategy Unit” (CPSU) during the life o f the Project. T h e PMU/CPSU will be initially
overseen by the Board o f NEPA and work in close coordination with the FGN and Project States, the
Bureau o f Public Enterprises (BPE), the Energy Commission o f Nigeria (ECN), the Designated National
Authority (DNA - for the carbon components) and the unified Steering Committee for the development
o f the Gas Project. The CPSU will eventually be housed in the FMPS or folded into one o f the new
sector institutions. Options can be explored in due course to locate the CPSU within the Ministry o f
Power and Steel to function as a planning, implementation and monitoring unit for the entire sector and
beyond or setting it up as a stand alone company that provides a broad range o f support in the same areas
to the NEPA-successor entities on a fee-based system. A determination in this regard will be made during
the course o f the Project.

42. The BPE will implement component 5. I t i s currently an implementation agency for the PSP, and
has been so for the last three years. After some initial problems, BPE has now developed requisite project
management capacity and has therefore been included as an implementing agency under this Project.
This component comprises several important consultancy services, critical to the reforms and
privatization.

43. Though BPE’s core procurement and project accounting staff are familiar with World Bank
procurement processing and project management procedures, there are some reservations regarding i t s

19
capacity to execute the project in a satisfactory manner. These reservations are based on a review o f i t s
performance o f executing the ongoing PSP. Weaknesses in financial management arrangements include:
inadequate information systems, poor quality reports, weak control over payments, large amounts o f
overdue un-retiredadvances and weak internal audit. Therefore, prior to this Project becoming effective,
i t i s proposed to strengthen BPE’s procurement and financial management capacity through the hiring o f
a consultant specializing in procurement and execution o f major TA activities. A comprehensive review
o f procurement, financial management and implementation capacity assessment o f BPE will be repeated
in the first six months o f project implementation.

44. The Finance Section (FS) o f the P M U (FS/PMU) and the Finance Department o f BPE (FD/BPE)
will be responsible for managing the financial affairs o f the Project. I t will, amongst other things, be
responsible for ensuring compliance with the financial management requirements o f the Bank and the
government, including forwarding the quarterly Financial Monitoring Reports and audited annual
financial statements to IDA. The Internal Audit Sections o f the PMU and BPE will perform necessary
modem internal audit functions for the Project. The IDA Credit Agreement will require the submission
o f Consolidated Audited Project Financial Statements for the Project to IDA within six months after each
year-end. Samples o f audit reports are included in Annex XXI o f the Financial Accounting Reporting and
Auditing Handbook (FARAH) o f the World Bank. Experienced and well-qualified extemal auditors will
be appointed by the P M U and BPE (on a TOR acceptable to IDA) to audit Project accounts, financial
statements and transactions, irrespective o f the source o f financing. The Project financial management
risk i s assessed to be moderate and mitigated through adequate supervision by Bank staff, and the
provision o f external independent audit.

45. Flow o f Funds and Financial Reporting. Through the Federal Ministry o f Finance (FMF), the
FGN would pass on IDA funds to BPE and the PMU/CPSU respectively. These project execution entities
will in turn allocate credit proceeds to the receiving agencies based on their share o f the investments.
Regarding flow o f funds and banking arrangements, IDA will disburse the credit through two Special
Accounts: (i) a Special Account for the P M U using the report-based disbursement method; and (ii) a
Special Account for the BPE using the transaction-based disbursement method.

2. Monitoring and evaluation o f outcomes/results

46. Performance monitoring o f the proposed Project would include: (a) the performance indicators as
included in Annex 3; (b) the results o f periodic stakeholder workshops and customer surveys; and (c)
progress reports on preparation o f investment programs and the execution o f contracts.

47. The intended intervention and intermediate results by project component are as follows:

48. Component One: Transmission System Improvements - if successful, more electricity will be
transported from the generation source to the distribution point, in a more efficient way. This will
directly increase the amount o f power available downstream. This investment i s planned to increase
capacity in at least twelve substations.

49. Intermediate Results: Improved supply capacity (equivalent to incremental energy flows o f 500
MW capacity) through the upgrading o f 2 transmission substations (330/132 kV) and the upgrading o f 10
sub-transmission (132/33 kV) stations by Year 3.

50. Component Two: Distribution Cluster Investments - selected areas that can be tracked over the
implementation period, will be upgraded with appropriate investments that are designed to improve the
tail-end voltage that i s supplied to the final user (i.e. closer to 220 V rather than the present -180 V which

20
can damage and hinder the performance o f appliances), reduce system losses, increase collections
(through increased NairakWh), reduce outage times and improve customer satisfaction.

5 1. Intermediate Results: Improvement in tail-end voltage by 4% in Year 2 and 10% in Year 3 over
the baseline (baseline to be established in Year 1); reduction in system losses by 5% in Year 2 and 10% in
Year 3 over the baseline (baseline to be established in Year 1).

52. Component Three: Electricity access expansion and intensification, and support to renewable
energy master plan -intensification refers primarily to increasing the number o f users in peri-urban
areas (once the transmission investments permit an increase o f power supply to end-users). Expansion
will be achieved through a limited number o f rural electrification pilots, primarily to develop financial
and institutional models that can be scaled up under a future project. A renewable energy business model
will be developed to provide inputs to the Renewable Energy Master Plan.

53. Intermediate Results: Design and development o f 1 - 2 rural electrification pilots per year, and
a renewable energy business model developed by the end o f Year 2.

54. Components Four and Five consist o f institutional capacity building and the management o f
technical assistance. Progress in achieving intermediate outputs and procurement o f consultancy services
will be documented in ongoing reports and supervision.

55. Carbon Credits monitoring will track actual reductions o f greenhouse gas emissions in
transmission and distribution via independent verification by a third party entity, prior to carbon incentive
payments being determined. This mechanism provides additional comfort and reinforces independent
monitoring o f project outputs.

56. The Project will have a 3-year implementation period. There will be n o Mid-Term Review
(MTR). Instead there will be two annual reviews and an Implementation Completion Report (ICR) at the
end o f the Project, to be jointly prepared by IDA and the concerned implementing agencies.

3. Sustainability

57. Reform outcomes will be sustained through the new regimes and institutions that would emerge
over the transition period. These include successor companies to NEPA, NERC -the sector’s regulator
and the Rural Electrification Agency and Rural Electrification Fund to promote rural energy access.
Development o f appropriate privatization options for the distribution businesses will enable Nigeria to
realize value and lock-in efficiency gains. The technical 0 & M arrangements for Transysco will be
instrumental in longer-term capacity building and institutionalization o f best management practice.

58. The distribution business and function outsourcing models are to be designed to maximize local
private sector participation in provision o f energy services. Power utilities in developed countries
typically outsource a variety o f business processes, such as metering and billing, customer care services
and maintenance. This efficient practice i s possible because there are a number o f providers o f such
services available. Nigeria today lacks such private sector capacity. This Project will attempt to develop
such an energy services market. This development would ensure longer-term sustainability for a
competitive electricity market and industry.

59. The carbon credit mechanism for transmission and distribution loss reductions will be available
until 20 12. This will provide an additional incentive for maintaining positive results. In transmission,
this will be ensured through the technical 0 & M contract and in distribution, via a multi-year
performance based incentive payment regime for carbon emission reduction.

21
4. Critical risks and possible controversial aspects

60. It i s important that the high degree o f political commitment to reform, innovate and seek new
solutions to entrenched problems i s maintained and reinforced. The remarkable progress in the last 12 -
18 months has been made possible by the initiative o f the current power sector leadership team in Nigeria
to be bold and challenge established thinking and perceptions. A l o t will depend on this new spirit and
enthusiasm being sustained by the current leadership, and the ability o f decision makers to communicate
effectively with stakeholders to engender voluntary active support and build alliances with private sector,
politicians and communities.

61. In order for the reform momentum to be sustained and accelerated in the next three years, an
extraordinary effort o f consensus building and strategic communication, both within the sector and to the
public, would be needed. Agencies responsible for various reform related functions have to work in
tandem and create synergies. A communication component has been included in the Project to facilitate
the process o f stakeholders’ consultation and consensus building. Communication specialists would poll
key stakeholders t o map interests, values, and perceptions. This will establish a baseline against which
reform results can be benchmarked. The program will include consumers, media, political leaders,
private sector and sector staff.

62. The government’s ability to recognize the “real costs’’ o f the sector and translate this recognition
into pricing i s limited by the poor service that consumers currently receive. The ongoing difficulties
experienced with adjusting petroleum product prices do not make i t any easier for government to increase
power tariffs, There i s an understanding among decision makers that tariff increases have to take place in
step with improved service delivery. Over the next three years, as the reforms take hold, and the NERC i s
established, a determined move towards cost-effective tariffs should be possible. In view o f the transition
support nature o f this Project, tariff revisions are not contemplated as a part o f the conditionality
fi-amework.

Risks Risk Mitigation Measures Risk Rating

To Project Development Objective
Continued Government commitment
and consensus over the transition
strategy and action plan for the
establishment o f new market structure
and privatization.
Capacity o f newly formed utilities in
terms o f financial and human resources
to capture the benefits o f proposed
investments.
Limited capacity or interest o f State
government entities to develop and
implement innovative access expansion
projects, especially in off-grid rural
areas.
with Mitigation
Phased and flexible engagement during the S
transition period to synchronize with progress o n
reform.
Introduction o f private sector management o f S
investments through turn key/outsourcing
initiatives.
(a) The value o f the investment subcomponent has M
been kept low to concentrate o n a limited
number o f pilot projects.
(b) Technical assistance and capital cost subsidy
are provided to facilitate design and
implementation o f these pilots.

22
 Risks
Lack o f institutional coherence and
multiple mandates.
To Component Results
Implementation delays caused due to
l o w level o f system redundancies.
Poor demand side power factor
management leading to voltage drop
despite investments.
Planned H V D S investments delayed
due to customer densities in selected
clusters.
Inability to address rent-seeking
behavior in metering, billing and
collection processes.
Overall Risk Rating
5. Loadcredit conditions and covenants
64. There are no B o a r d Conditions. The only effectiveness condition i s that satisfactory legal
opinions on the Development Credit Agreement and Project Agreements are made available.
Risk Mitigation Measures I RiskRating
Dialogue and engagement with principal S
stakeholders.
Introduction o f hot-line technologies. M
Downstream power factor management through N
introduction o f capacitors in the distribution
component.
U s e o f taller poles, insulated cables and deployment M
o f other technical solutions.
(a) Efficient management o f business processes S
through outsourcing.
(b) Deployment o f technical solutions like
automated meter reading, spot billing, pre-paid
meters.
(c) HR interventions, communications and training
for NEPA staff at customer interface.
Substantial
23
 D. APPRAISAL SUMMARY

1. Economic and financial analyses

65. Project Benefits and Internal Rate o f Return. T h e Project proposes a blend o f investments in
transmission system rehabilitation, system reinforcement and strengthening/expansion o f distribution
facilities in particular clusters. The economic and financial analysis o f the Project i s therefore based on a
cost-benefit analysis of the main investment subcomponents at the cluster level. Results o f the financial
and economic analysis are shown in the following table.

66. The Base Case EIRR and FIRR calculation i s given in the table below.

Value EIRR FIRR

Transmission Svstem Develoument Comuonent 43.6% 13.2%
I Distribution Efficiencv Imurovement Comuonent I 37.0% I 25.0% I
I Total Base case I 43.2% I 16.6% I

67. Net present value for the economic analysis at a 12% discount rate yields approximately US$303
million. The financial NPV again at 12% works out to nearly US$30 million.

68. The project investments yield six distinct benefits: incremental electricity demand served,
reduction o f losses (technical and non-technical), improved power quality and supply reliability, avoided
captive generation, improved revenues and enhanced customer satisfaction. The incremental demand has
been computed o n the basis o f the average across the board energy tariff and the average cost to serve per
unit o f energy handled by NEPA. The economic benefits are sensitive to loss reductions, load growth and
revenue improvement. The EIRR varies from 29% to 47% under different scenarios. Economic benefits
are expected to be in the mid to high range since there i s a large unmet demand for power in Nigeria.

Financial Assessment

69. The Project i s centered o n supporting the transition to reform. One o f the key actions to be
accomplished in the transition i s the restructuring o f NEPA and the incorporation o f i t s new successor
companies. Financial restructuring o f assets and liabilities, capitalization o f the new companies and
development o f 5-year business plans for each o f the new companies are a part o f the reform process. A
major financial restructuring exercise i s currently underway and, as such, this summary analysis i s limited
to taking a short-term and consolidated view o f the sector.

70. Since the inception o f the reform program in 1999, and its gathering momentum from 2002,
NEPA’s financial results have shown an improving trend. The positive trends accelerated in 2003 and
2004 as a result o f the CREST interventions described earlier. The key highlights o f the operational and
financial performance in 2003/2004 are as follows:

0 Management actions in tackling losses and uncollected billing have increased cash
inflows -monthly collections increased to an average o f N5.9 billion in 2004, as against
N4.2 billion in 2002 and N4.9 billion in 2003, without any tariff increase.

0 Revenue yield per kWh o f bulk energy handled by NEPA rose from an average o f 2.68
NkWh in 2003 to 3.33 NkWh in the 4thquarter o f 2004.

24
 0 T & D losses in the ten months to October 2004 dropped to 34% against 40% in 2003.

0 Energy sold increased by 6.4% in 2004 as compared to 2003, while energy billings are
nearly 16% higher in the same period.

71. Despite these positive developments, the gap between NEPA’s revenue requirement to cover
costs and actual cash received i s still high, averaging around two billion Naira per month (roughly
US$16 million). T o compound the problems, tariffs have been constant in Naira terms since 2002.’’
Thus there i s s t i l l a long way to go in terms o f improving the sector’s business fundamentals. Therefore
institutional reform and financial restructuring are critical to obtain positive fiscal results. In order to
assess the potential benefits o f reforms, the project financial analysis compares a “reform scenario”
against a base case o f “no-reforms’’ in the sector. More detail on the two scenarios i s provided in Annex
9B. The fiscal deficit o f the sector reduces from approximately US$2.5 billion in 2010 in the Base Case
to US$450 M i l l i o n in 2010 under the Reform Case, with rather conservative assumptions. With a
somewhat more aggressive reform track, the deficit situation in the sector can be completely eliminated
over the next five years. T h i s Project’s targeting o f support to faster reforms, efficiency improvements
and maximizing revenue growth are therefore the right interventions from a financial standpoint.

2. Technical

72. The investments under the NEDP Project have been designed to support Nigeria’s electricity
sector transition strategy, viz.:

0 Remove immediate bottlenecks in the transmission and distribution system by improving

supply capacity to key growth clusters.
0 Improve power quality by investments in system reactive power compensation
equipment.
0 Increase supply reliability o f the transmission and distribution network.
0 Reduce energy losses in the system.
0 Improve cash flows through higher revenue collection.
0 Facilitate the functioning o f the wholesalehetail market structure through improved
institutional structures and enhanced private sector participation.
0 Enhance customer satisfaction and quality o f service delivery.

73. These investments were identified through studies and pilots prepared under the Bank-supported
Transmission Development Project, notably two studies done by Tractebel International (2003 and 2004)
and CREST distribution pilots financed by N E P A with knowledge-based inputs from the Bank team.

3. Fiduciary

74. Procurement Issues. As a result o f the CPAR o f 2000 and a subsequent Institutional
Development Facility (IDF) Grant to help execute the agreed action plan, the Federal Government has
made substantial progress with procurement reform. A draft Procurement L a w was submitted to
Parliament in early 2005, and circulars were issued to Government agencies to establish procurement
units and recruit procurement staff, that would constitute over a period o f time, the Federal Government’s
Procurement Cadre. The Budget Monitoring and Price Intelligence Unit (BMPIU), established within the

loCumulative domestic inflation has reached about 50% over the period 2002-2004; and in the same period the
Naira has depreciated 15% and 44% against the U S dollar and Euro respectively.

25
Presidency, with responsibility for the procurement reform agenda, instituteda due process mechanism
for all contracts to ensure that public procurement i s carried out in accordance with the required principles
and procedures. This Unit currently carries out prior reviews o f contracts above US$500,000 to ensure
compliance with existing regulations. The B M P I U i s also a member o f a high level Cash Management
Committee chaired by the Minister o f Finance to certify that contracts for which budgetary payments are
requested, have met the due process requirements.

75. In view o f the continued progress on systemic procurement reform in Nigeria and the fact that the
two implementation agencies that will manage the procurement functions o f the proposed Project have
considerable experience in implementing World Bank-financed projects, the project procurement r i s k i s
rated as Average.

76. Financial Management. The P M U i s currently implementing a project financed by IDA. The
financial management arrangement for the existing project, which will be used for this Project, has
consistently performed well except for the inadequate staffing o f the internal audit section. The NEPA
PMU i s the only project implementation agency in Nigeria to use the Bank’s more sophisticated report-
based disbursement method. The current arrangement will require some strengthening to meet the
implementation needs o f the new Project. This w i l l involve recruitment o f additional accountants and
internal auditors, training o f new staff in Bank procedures, upgrading o f computerized financial
management systems, and significant updating o f the financial procedures manual. These capacity
building activities can be carried out in parallel with project implementation, since the PMU, as presently
configured, can commence work on the new Project immediately. With respect to BPE, the financial
performance under the ongoing PSP is, however, not fully satisfactory. Specific capacity reinforcement
o f BPE’s procurement and FM functions are planned. Annex 7 further details these arrangements and
actions.

77. The 2000 C F A A assessed the risks arising from the outside environment as high. A review o f the
implementation o f C F A A recommendations in January 2005 revealed that substantial reforms have been
implemented over the last two years. Although much s t i l l remains to be done, the impact o f the reforms
has been positive. The review noted that the fiduciary assurance environment in FGN remains weak.
Given such an environment, strong internal control i s required and this can be achieved by strengthening
the project financial management. The control risks arising from the Project are assessed as moderate.
The overall Project financial management risk will continue to be Moderate provided the capacity
strengthening actions specified in Annex 7 are implemented.

4. Environment and Social

The Project is rated Environmental Category B.

78. The Project principally involves rehabilitation o f existing transmission and distribution
infrastructure, involving temporary inconvenience to adjacent properties and commercial activities.
Network extensions, where made, will only be along existing rights o f way (ROW) and on unused land to
the extent possible. Although the potential environmental and social impacts o f the infrastructure
investments under the proposed Project are expected to be generally minimal, potentially significant
localized impacts may occur, thus requiring appropriate mitigation. Since the specific sub-project
locations have not yet been identified, an Environmental and Social Management Framework (ESMF),
together with a Resettlement Policy Framework (RPF) was prepared. These documents have been placed
for public information and review, in-country through the local media and the national network o f NEPA
Zonal offices; and globally, through the Bank’s InfoShop and the N E P A PMU’s website
(m.nepapmu.org).

26
79. The ESMF and the RPF respectively provide for a systematic screening process for the
investment components, namely: (i) distribution level infrastructure in the clusters to be selected during
project implementation; and (ii) transmission level investments such as augmentation and rehabilitation o f
existing infrastructure and upgrading the capacity o f substations, lines and other transmission systems.
They define procedures and institutional responsibilities and set out guidelines to be employed for sub-
project level environment and social assessments, evaluation o f potential impacts and preparation o f
appropriate mitigation measures during project implementation. A series o f possible adverse impacts
have been identified, together with proposed mitigation measures. The Resettlement Policy Framework
(RPF) sets out the process and entitlements to be followed in the event that involuntary resettlement may
occur due to re-establishment o f safety margins between power lines and other structures, or acquiring
land for substations, customer care centers etc.

80. The existing ERSU in the P M U will be responsible for overseeing project compliance o f the
environmental and social guidelines established under the ESMF and RPF. Since i t s role under this
project represents a significant scale-up from i t s current responsibilities under TDP, suitable capacity
enhancement has been provided for (Component 4 - ERSU capacity building: US$1.O million). A part o f
these credit proceeds would be used to establish ERSU-like units in the new successor companies to
NEPA. Furthermore, a specific provision o f US$1.O million to handle potential PCB hazards in old
transformers has been allocated under the transmission component. A set aside o f US$1.O million for any
potential resettlement claims arising out o f involuntary resettlement has also been made in the Project
financing.

5. Safeguard policies

Safeguard Policies Triggered by the Prqject Yes No

Environmental Assessment (OP/BP/GP 4.0 1) I/
Natural Habitats (OP/BP 4.04) I/
Pest Management (OP 4.09) I/
Cultural Property (OPN 11.03, being revised as OP 4.11) I/
Involuntary Resettlement (OP/BP 4.12) I/
Indigenous Peoples (OD 4.20, being revised as OP 4.10) I/
Forests (OP/BP 4.36) I/
Safety o f Dams (OP/BP 4.37) I/
Projects in Disputed Areas (OP/BP/GP 7.60)* I/
Projects on International Waterways (OP/BP/GP 7.50) I/

8 1. The Project has several positive environmental externalities. These include, reduction o f global
greenhouse gas emissions through promotion o f renewable technologies, significant system loss
reductions leading to avoided thermal generation and control o f SF6, a powerful greenhouse gas used for
insulation in high voltage electricity switchgear.

6. Policy Exceptions and Readiness

82. The Project complies with all World Bank policies and n o exceptions are necessary. The
Project’s procurement plan for the first eighteen months i s ready and has been reviewedby the Bank.

* By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination of theparties’ claims on the
disputed areas

27
 Annex 1: Country and Sector or Program Background
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

Geography and Population

1. Nigeria has the largest population o f any country in Africa, estimated at 132 million, growing
annually at a rate o f 2 percent. I t has a land area o f 924,000 sq. km, and i s richly endowed with energy
resources. Nigeria i s the largest o i l producer in sub-Saharan Africa, and i s ranked sixth in the world with
an output o f over two million barrels per day. I t has abundant natural gas resources, with proven reserves
of nearly 187 trillion cubic feet (Tcf).

Economic and Political Conditions

2. Nigeria has the largest economy in West Africa with a GDP o f US$43.5 billion (2002). Annual
per capita income has grown to an estimated US$390 from US$290 just a few years ago, reflecting robust
economic performance over the last two years. GDP growth averaged 10.9 percent in 2003 and
(estimated) 6 percent in 2004. Poverty in Nigeria remains high though, and i s widespread in the northern
and remote southern areas o f the country. Urban poverty i s also on the rise -it i s estimated that about
48 percent o f urban dwellers are living in poverty. The peaceful transition o f power to democratic
civilian government in 1999, re-elected in M a y 2003, has created favorable conditions for economic
progress and governance reforms. These favorable trends have re-awakened the interest o f the
international community in Nigeria, and re-kindled hope among Nigerians.

Electricity Sector

3. N E P A was established in 1972 as the publicly owned utility responsible for the power sector in
Nigeria. It i s responsible for four functions: generation, transmission, distribution, and since 1990, rural
electrification. NEPA has installed power generation capacity o f about 6,000 MW, o f which about 67
percent i s thermal and the balance hydro-based. Generating plant availability i s l o w with frequent
transmission and distribution outages. Dilapidated transmission and distribution networks cause high
energy losses, which together with l o w rate o f access and uneconomic tariffs, result in poor operational
and financial outcomes. Poor service has forced more than 90 percent o f industrial customers and
significant numbers of residential consumers to install their own power generators, at a high cost to
themselves and the Nigerian economy.

4. NEPA’s transmission and distribution networks are in poor condition and overloaded. NEPA’s
transmission network consists o f about 11,000 km o f transmission lines (330 kV and 132 kV), 24,000 km
o f sub-transmission lines (33 kV), about 19,000 km o f distribution lines (1 1 kV) and about 22,500
substations. A substantial part o f the country i s not connected to the grid. The transmission network i s
poorly configured for reliability -lines have a radial pattern with few loops and parallel routes to
improve the reliability o f supply to load centers. The 132 kV transmission and 33 kV sub-transmission
lines often extend over distances that are too long for efficient and reliable load flows.

5. NEPA’s business operations are inefficient. The system suffers from chronic under-investment,
poor maintenance, unrecorded connections and under-billing arising from a preponderance o f un-metered
connections. Furthermore, where these exist, meters are dysfunctional or tampered with, and fraud by
customers and meter readers i s common. N E P A currently has 35,000 staff o n i t s payroll, whereas more
efficiently run power utilities with facilities o f comparable magnitude employ fewer than 20,000 staff. As

28
a result, NEPA’s financial performance, as well as i t s ability to serve customers satisfactorily has been
consistently under par.

6. The capital investment part o f the rural electrification access program i s executed by the FMPS
and by States. Costs are high, sometimes in the order o f US$l,OOO per connection, and community
participation and contributions minimal. Reticulation networks once completed are handed over to NEPA
for operations and service to customers. In view o f the chronic shortage o f power in the system and the
l o w tariffs for rural domestic consumers, NEPA has little interest or ability to service these networks or
supply power to any reasonable standard. The most frequent results observed are a gradual deterioration
o f capital assets, large scale vandalism and theft o f materials and l o w expectations o f service from NEPA.

7. The FGN initiated comprehensive sector reforms in 1999 to address these deep-rooted problems
in the sector and to hamess the country’s generous energy resources for the country’s benefit through
rapid access expansion. The reform program has delivered a gradually improving trend o f performance
and capital asset renewal in the core sector, including rehabilitation o f generating plants, construction o f
host power stations, incentives and programs to encourage IPPs, and upgrade and expansion o f
distribution and transmission systems. After some initial setbacks, new electricity reform legislation has
been enacted in March 2005, creating the basis for intensive restructuring, setting up a competitive
industry structure and establishing new institutions such as the Nigerian Electricity Regulatory
Commission, Rural Electrification Agency, and the Market Operator and Independent System Operator.

The Oil Sector

8. The o i l industry i s the backbone o f the Nigerian economy, accounting for 95% o f foreign
exchange earnings and over 80% o f Gross Domestic Product. However, n o more than 5% o f Nigeria’s
labor force i s employed in the sector. Estimates o f the total crude o i l reserves are 25 billion barrels,
although new offshore discoveries are likely to push this figure to 30 billion barrels. Current production
i s approximately 2.2 million bbl/day, all o f it from the Delta, with 40% from Delta State and 40% from
Rivers State alone. Nigeria i s the fifth largest o i l producer in the Organization o f Petroleum Exporting
Countries (OPEC), and sixth largest in the world, and plans to double i t s output by 2010. The country
represents approximately 8% of USA imports, and has eamed some US$300 billion in o i l revenue over
the past four decades.

9. Nigeria joined OPEC in 1971 and established NNPC in 1977, a state-owned and managed
company that operates injoint ventures (JV) with foreign o i l companies in both the upstream and
downstream sectors. NNPC further manages four refineries with a total capacity o f 430,000 bbl/day, a
complex petrochemical plant, maintains 2 1 depots and a network o f pipelines across the country, and
markets crude o i l and petroleum products. I t also distributes natural gas through NGC, a wholly owned
subsidiary established in 1988.

10. The industry i s dominated by five major JV operations managed by affiliates o f a number o f well-
known multinationals: Shell, Exxon Mobil, Chevron Texaco, Eni S.p.A., and TOTAL S.A., each in
partnership with NNPC. SPDC (Shell) represents h a l f o f o i l production in Nigeria; however, i t s presence
i s felt more strongly than other o i l companies in Nigeria because its activities are spread uniformly
onshore over the entire Delta and because it was the first company established. Other foreign companies
involved are British Gas, BP, Conoco, Deminex, Petrobras, Statoil, Sun Oil, and Tenneco. The
production o f the five major operations i s as follows (2003 estimate).

29
I Operating Partner Volume Produced % of Total
(bbl/day) (2.2 m bbYday)
SPDC 900,000 41%
Exon Mobil 600,000 32%
CNL 125,000 6%
Nigerian Agip Oil Co 200,000 9%
Elf PetroleumNigeria 125,000 6%
Total 5 JVs 1,950,000 89%

The Gas Sector

11. Nigeria's gas reserves are estimated in energy terms at twice i t s o i l reserves, with a potential for
production o f around 100 years, compared to that o f o i l o f 30 years. Nigeria has the tenth largest proven
gas reserves in the world, approximately one third o f African gas reserves, estimated at about 187 trillion
cubic feet (Tcf) in 2003. The reserves are equally shared between associated gas (AG), a by-product o f
o i l extraction and non-associated gas (NAG). Gas i s produced both onshore and offshore. In 2003,
Nigerian gas production averaged 5100 h4MScUday equivalent to 50 B c m per year. Currently, gas that i s
not flared, i s used for LNG (25%), re-injected into the reservoir (15%), and only 11% i s used
domestically, most o f it for power generation.

12. Most o f the gas in the Delta i s AG, and i s therefore found in the same locations as oil. In 2003,
owing to a lack o f gas utilization infrastructure, legal framework and l o w domestic gas prices, Nigeria
flared 43% o f the gas it produced through flares located throughout the Delta (20 Bcm). Although the
amount o f gas flared i s high, this i s significantly below the 98% flared in 1971 and preliminary figures
from 2004 show a decline to 32%. Gas i s flared through 100 flaring sites. Nigeria alone flares 17% o f
the world total, while representingonly 3% o f the global petroleum production.

13. Nigeria initially set 1984 as the year to end routine gas flaring, but failed to meet this deadline. I t
reset the year 2008 as i t s target for achieving zero routine gas flaring. All o i l companies have committed
to the 2008 zero flaring target, and are developing plans to collect and process the gas. A large number o f
export projects based o n AG as well as NAG sources, planned and under implementation will be adding
up to more than 100 billion cubic meters o f gas per year. This includes the current expansion o f the
existing LNG export plant and new LNG projects, the West African Gas Pipeline, which i s currently
under construction, as well as other major projects. If all these projects are implemented, the gas demand
from the local market may not even be essential to reach the 2008 flare out. However, to achieve
sustainable development in Nigeria, a local gas market needs to develop and the power sector i s logically
the main driver o f this development. A national development o f the gas sector will create more jobs than
projects oriented for exports. The domestic availability o f gas will enhance the competitiveness o f the
Nigerian economy as industries based o n gas develop and power supply becomes more reliable.

14. The Bank has had an extensive policy dialogue supported by donor funding from several agencies
including the Energy Sector Management Assistance Program (ESMAP), Public Private Infrastructure
Advisory Facility (PPIAF), U S Department of Energy (US DOE), and the Global Gas Flaring Reduction
Partnership. Several workshops and studies such as the Sector Diagnostic and Options Study,
Implementation Plan, draft Downstream Gas A c t and recommendations for a draft Natural Gas Fiscal
Reform Act have been prepared. In 2004, the Government prepared a draft Natural Gas Policy statement
summarizing i t s approach to sector reform and programs to develop the gas sector in Nigeria, to reach the
flare-out in 2008. T h e draft Downstream Gas Act and draft Fiscal Act are awaiting ratification by the
Assembly. The Government o f Nigeria and NNPC, under the sponsorship o f the Global Gas Flaring
Reduction Partnership hosted a workshop for setting global standards for flaring reductions in 2004. The
workshop concluded that the Government should establish and lead a dedicated collaboration vehicle to

30
drive the overall effort on associated gas utilization and flare reduction to achieve the gas flare-out in
2008. Nigeria has also joined the Extractive Industries Transparency Initiative (EITI).

15. I t i s important to meet the flare-out because gas flaring wastes resources. Gas flaring in Africa o f
around 37 billion cubic meters per year, if diverted fully for power generation in efficient power plants,
would produce approximately 50 percent o f the current power consumption o f the African continent, and
more than twice the level o f power consumption in sub-Saharan Africa (excluding the Republic o f South
Africa). Flaring also harms the environment. The emissions from the annual world wide flaring o f 100
billion cubic meters o f gas produce approximately 300 million tons o f C 0 2equivalent, which i s more than
10 percent o f the committed emission reductions by developed countries under the Kyoto Protocol for the
period 2008 - 2012.

16. W h i l e not covered in the Gas Act, Liquid Petroleum Gas (LPG) features prominently in Nigeria's
gas strategies. An important fuel for the poor, L P G has a negligible market presence in gas-rich Nigeria,
which has the lowest per capita consumption in West Africa. Building on work supervised by the Bank
and funded by Energy Sector Management Assistance Program, the Government has established a high-
level L P G Gas Steering Committee to revive the domestic market.

31
 Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

Ratings
Sector Issue Project (Bank-financed projects only)
zompleted Projects OED Ratings
Outcome Sustain- ID Impact
ability
Rehabilitation and maintenance Power System Maintenance and Unsatis- Unlikely Modest
o f the power system and Rehabilitation Project (1990-1995) factory
institutional strengthening Loan 3 116-UNI
Expansion o f the distribution Power VI (approved 1982) Unsatis- Unlikely Negligible
system, training and institution- Loan 2 0 8 5 4 " factory
building
Hydro-generation, transmission, Power V (approved 1979) Unsatis- Unlikely Negligible
village electrification Loan 1766-UNI factorv
Latest Supervision
(PSR) Ratings
Ongoing Projects Implementation Development
Progress (IP) Objective (DO)
Power sector Reform, Privatization Support Project MS S
restructuring and privatization (approved 2001) Credit 3520-UNI
Transmission Development Overall Sector Reform Program S S
(approved 2001) Credit 3559-UNI
Community based Urban (approved 2002) U U
Development Credit 36540-UNI
NG Lagos Urban Transport (approved 2002) MU Mu
Project Credit 37200-UNI
National Urban Water Sector (approved 2004) S S
Reform Credit 39240-UNI
Other development agencies
TA in N E P A restructuring USAID
TA and possible investment in Swiss Government
transmission, dispatch and
control

Note: MS Marginally Satisfactory

S Satisfactory
U Unsatisfactory
Mu Marginally Unsatisfactory.

32
 Annex 3: Results Framework and Monitoring
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT
Project Development Objective
Facilitate smooth transition to new
narket and institutional structure.
Outcome 1. (Component One:
rransmission)
Increase efficiency and enhance
supply availability in the power
sector.
Outcome 2. (Component Two:
Distribution)
Increase service levels and
distribution efficiency in selected
clusters.
Outcome 3. (Component Three:
Intensification and Access
Expansion Pilots)
Demonstration o f possible models to
scale-up electricity access in
selected rural clusters and
intensification o f connections in
peri-urban areas.
Outcome 4. (Component Four: TA
including for Gas Sector
Development)
Launch o f gas sector reform
implementation for development o f
natural gas resources.
Results Framework
Outcome Indicators
Zector-level outcome
a) Emergence o f new institutions:
gERC, REA, Market Operator and
so.
b) Undertaking preparations for
ichieving increased private
~articipationin the Nigerian
Aectricity market.
l u s t e r level outcome (before and
ifter measure)
10% improvement in input voltage
it 3311 1 kV interface by end o f Year
3 (current baseline to be
:stablished).
Zluster level outcomes (before and
ifter measure) against baseline to be
:stablished.
[a) Revenue enhanced ( 10%).
(b) Service quality, end-user voltage
at 220 volts (10%).
(c) Number o f consumers connected
(10%).
(a) Number o f consumers connected
increases by 10% over cluster
baseline (baseline to be established).
(b) Cost per connection decreased
5% relative to cluster baseline
(baseline to be established).
(c) Higher degree o f
private/community/state level
involvement (qualitative measure).
Sector-level outcome
Preparatory work to launch the gas
pipeline and related power projects.
33
Use o f Outcome Information
‘0 evaluateprogress towards
TEEDS stated goals on energy
ector reform.
{valuate longer-term prospects o f
he sector and i t s economic and
iscal impact.
lemonstrate the potential for scaling
ip such efficiency and supply
:nhancements.
3eate confidence and build value in
he business model for potential
nvestors.
%,seminate to improve image o f
rector and strengthen support for
reforms.
To serve as inputs to policy and
regulation development.
To assess the applicability and
scalability o f models to rapidly
enhance access in order to achieve
NEEDS and SEEDS targets.
To assess progress towards making
gas resources available countrywide
and the development o f a domestic
gas-to-power market.
 Intermediate Results
One per Component
Component One:
(a) System wide Transmission
Improvements.
Alleviation o f bottlenecks and
transport more electricity from the
generation source to the distribution
point.
Intermediate Results:
(b) Cluster level transmission
improvements.
Improvement in input voltage at 33
kV level. Lower input voltage
compromises end user voltage levels
making it difficult to use appliances.
Component Two:
(al) Distribution Cluster
Investments.
(a2) Improvement in quality o f
supply to retail consumers.
Intermediate Results:
(b) Reduction in system losses.
System losses are a measure o f
efficiency in distribution operations
and reduction in system losses
indicates a direct improvement in
financial viability.
Component Three:
Intermediate Results:
(a) Design and development o f 1 - 2
rural electrification pilots per year.
(b) Renewable energy business
model developed by end o f Year 2.
(c) Implementation o f renewable
energy master plan commenced by
end o f Year 2.
Results Indicators for Each
Comnonent
Component One:
(a) Increased Supply Capacity in
selected Transmission Substations
(at least two 3301132 kV and at least
ten 132133 kV substations).
(b) Improvement o f input voltage to
the 33111 kV interface improves by
10% by Year 3.
Component Two:
(al) Number o f clusters developed,
with demonstrable improvement in
service levels, i.e. improved tail end
voltage.
(a2) Improvement in tail end voltage
by at least 10% over the baseline in
each cluster.
(b) Reduction in system losses by
25% over baseline.
Component Three:
(al) Number o f pilots launched.
(a2) Number o f customers benefited.
(b) Renewable energy business
model developed.
(c) Implementation o f renewable
energy master plan commenced.
34
Use of Results Monitoring
Zomponent One:
ncreased supply capacity to
aturated bottlenecks in the grid
lirectly increases the amount o f
jower available downstream o f the
nvestment point.
deasuring the Voltage level at the
lelivery point to the cluster
Ioundary gives a combined
ndication o f the upstream results o f
:apacity increases and reactive
)ewer compensation investments.
Zomponent Two:
Measured by P M U staff and voltage
:o be recorded at the tail end of
:very distribution feeder.
Measured by PMU, and w i l l be
tracked as Naira b i l l e d k W h o f
energy purchased at bulk voltage
level.
Component Three:
Provide inputs to policy formulation
and access scale-up initiatives.
P M U staff will monitor progress in
consultation with Federal Ministry
o f Power and Steel.
Progress will be documented and
updated in Quarterly Reports
produced by PMU.
Component Four:
rechnical Assistance for P M U and
its evolution to CPSU.
Zapacity Building for a single
igency to deliver a range o f services
to all clients in terms o f core project
management expertise.
IntermediateResults:
Project implementation ratings are
satisfactory.
Component Five:
Support for Reforms and
Institutional Development by BPE.
Intermediate Results:
(a) N e w institutions established and
companies launched.
(b) Offers for private participation
developed.
(c) Stakeholder communications and
outreach strengthened.
Component Four:
Project performance satisfactory and
on schedule; capacity assessment o f
environmental and social unit rated
satisfactory; coordination with gas
sector satisfactory and preparation
for gas pipeline project and
associated power projects on track.
Component Five:
(a) Contracts for various TA
activities processed and approved.
(b) BPE maintains satisfactory
project implementation capacity
ratings.
(c) Annual Customer Surveys
conducted.
(d) Number o f stakeholder
workshops held.
35
Component Four:
Annual reviews and quarterly
progress reports.
Single agency providing services to
all sectoral institutions w i l l improve
coordination, reduce costs and
expedite implementation.
Gas Sector work:
Outputs w i l l feed into development
o f public private partnershp models
for project development.
Component Five:
TA will directly support progress o n
reforms and the development o f
public private partnership models for
investment in the power sector.
Delivery and communication o f such
models i s a key responsibility vested
in BPE as a result o f the new
legislation.
BPE w i l l produce periodic progress
reports in terms o f implementation
o f reforms, and w i l l oversee the
implementation o f a customer
survey carried out by a civil society
organization.
 :
9

g t
a m

s s
2 2

4 m s
m
5 s
m

0 0 ,
 :
s

2a 3m

I
 Annex 4: Detailed Project Description
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

COMPONENT 1: TRANSMISSION SYSTEM DEVELOPMENT (US$125.7 M)

1. The Nigerian power system suffers endemic problems stemming from an undersized, poorly
maintained transmission network. The gap between capacity and demand leads to frequent load shedding,
leaving large parts o f the population and the private sector with poor quality supply or no supply at all.
Significant investment resources -estimated at US$1.6 billion - are needed in order for the saturated
system to arrive at sufficient capacity and for the grid to reach an “n-1” redundancy that would allow for
maintenance and minor faults to be handled without loss o f the network supply function.

2. Overall benefits from the transmission investments foreseen in the project would be an improved
capacity and quality of supply to industrial and residential clients and reduced technical losses that in turn
will improve NEPA’s balance sheet and make more o f the generated electricity available to the clients.
The investments will result in the generation o f carbon emission credits that would create performance-
based incentives for project sustainability.”

Subcomponent 1: Transmission Grid Reinforcements

3. Due to rapid load increase, many o f the transmission substations in Nigeria are overloaded or near
their designed capacity while others are in acute need o f repair. The project will support investments in
substation extensions and grid capacity upgrades to cope with the growing demand and bring service to
the large number o f NEPA clients that are connected but due to supply constraints, do not receive the
desired service. The investments are based on the current load situation and recommendations made in
the Tractebel “Transmission System Development Plan” (financed under the ongoing TDP project).
Supply capacity will be increased particularly in the Lagos area, a limited number o f 330 kV stations, as
well as in a larger number o f 132 kV injection substations supplying electricity to Nigeria’s main growth
areas. In cases where the line capacity constitutes a significant bottleneck, the project intends to finance
line-restringing o f existing transmission lines with higher capacity conductors. The added capacity as a
result o f this project component will not only lead to improved service, but will also reduce the
customers’ dependence on expensive and polluting captive diesel generators. The resulting lower
emissions o f carbon dioxide will generate emission reduction credits that will be eligible for payments
from the sale o f carbon credits. The investments will be verified for compliance to the Environmental and
Social safeguard framework referred to in Annex 10. A list o f identified investment objects for
consideration i s included in the Table below.

’’ The World Bank’s carbon finance business (CFB) has reviewed and cleared a Project Idea Note (PIN) developed
~

for this Project.

38
 GENERAL GRID REINFORCEMENT
STATIONS Yo LOADING COST ESTIMATE US$(M)

330/132KV SUBSTATIONS
Katampe (Abuja) up-rating with Ixl5OMVA 330/132kV transformer 100% 5
Jos up-rating with Ixl50MVA 330/132kV transformer 86% 4.5
lkeja West up-rating with Ixl50MVA 330/132kV transformer 97% 4.5
Akangba up-rating with 1XI 5OMVA 3301132kV transformer 82.20% 3

132/33KV SUBSTATIONS
lkorodu up-rating with IxGOMVA 132/33kV transformer 94% 2.5
Alimosho up-rating with IxGOMVA 132/33kV transformer 127% 1.5
Alausa up-rating with IxGOMVA 132/33kV transformer 92% 1.5
Ejigbo up-rating with IxGOMVA 132/33kV transformer 99% 1.5
Onitsha up-rating with IxGOMVA 132/33kV transformer 96% 1.5
Aba up-rating with IxGOMVA 132/33kV transformer 117% I.5
Port Harcourt (Town) up-rating with IxGOMVA 132/33kV transformer 70% 1.5
Port Harcourt (Main) up-rating with IxGOMVA 132/33kV transformer 90% 1.5
Kaduna up-rating with IxGOMVA 132/33kV transformer 92% 1.5
Kumbotso up-rating with IxGOMVA 132/33kV transformer 109% I.5
Ogba up-rating with IxGOMVA 132/33kV transformer 124% 1.5
Mando up-rating with IxGOMVA 132/33kV transformer 88% I.5
llorin up-rating with IxGOMVA 132/33kV transformer 110% I.5
Effurum up-rating with IxGOMVA 132/33kV transformer 78% I.5
Ojo up-rating with IxGOMVA 132/33kV transformer 100% 1.5
Awka up-rating with IxGOMVA 132/33kV transformer 79% I.5
Sokoto up-rating with IxGOMVA 132/33kV transformer 90% 1.5
Birnin Kebbi up-rating with IxGOMVA 132/33kV transformer 90% 1.5
Abuja up-rating with IxGOMVA 132/33kV transformer 92% 2.5

SUBSTATIONS WITH MOBILE TRANSFORMERS

-
Kubwa construction of 2xGOMVA 132/33kV substation 77% 5.5
Mando TS reinforcement with IxGOMVA 132/33kV transformer 30.60% 2.5
Kumbotso TS reinforcement with IxGOMVA 132/33kV transformer 80.80% 2.5
Aba Town TS reinforcement with IxGOMVA 132/33kV transformer 84.70% 2.5
Owerri TS reinforcement with IxGOMVA 132/33kV transformer 79.40% 2.5
Jericho TS reinforcement with IxGOMVA 132/33kV transfomrer 96.70% 2.5
Zaria TS reinforcement with IxGOMVA 132/33kV transformer 80.90% 2.5

LINE RESTRINGING PROJECTS

Up-rating of Afam -Port Harcourt 132kV DCL (32km) 100.00% 4.8
Up-rating of Alaoji - Owerri 132kV DCL (60k) 100.00% 7.8

SUBSTATION REHABILITATION PROJECTS

Rehabilitation of Switchyard foundation of Alagbon Substation 7.5

TOTAL 88.1 MILLION

Subcomponent 2: Reactive Power Compensation

4. In a separate Tractebel study issued in 2004, the Nigerian network i s analyzed from a reactive
power and compensation point of view. The findings point to major savings in losses as well as possible
power quality and voltage level improvements by introducing reactive power compensation equipment as

39
capacitor banks, reactors and static-Var compensation units on strategic points in the 132 and 33 kV part
o f the network.

5. The project intends to finance procurement and installation o f the related equipment estimated to
save up to 42 Mw o f peak load transmission losses while at the same time increasing quality o f supply
and overall power factor. This loss reduction would create effective capacity without new generation or
major grid investments and would also be potentially eligible to benefit from the sale o f carbon credits.

Subcomponent 3: Transmission Supply strengtheningfor Distribution Clusters

6. Service reliability to customers in Nigeria i s currently hampered by a series o f constraints ranging

from lack o f generating capacity, poor transmission capacity, lacking voltage and frequency control to
problems in the distribution segment with poorly maintained equipment, electricity theft etc. In order for
the CREST distribution cluster investments to have the desired effect, it i s therefore important to identify
and correct as many upstream constraints as possible so that sufficient amounts o f high quality electricity
are delivered to the cluster boundary. If not, the effects o f intense distribution improvements risk being
overshadowed by recurring supply failures. The transmission investments will comprise substation
refurbishments, line restringing and localized grid capacity increases where needed to reduce some o f
these upstream constraints to deliver a successful CREST program.

Subcomponent 4: Transmission System Metering and Control

7. SCADA System extension. With the current gap between demand and grid capacity, load
shedding i s likely to be a recurring phenomenon in Nigeria for years to come. Today the load shedding i s
done on the 132 kV level and in some rare cases on the 330 kV level, which means that all downstream
clients on such selected feeders are disconnected. With the state-of-the-art SCADA control system being
implemented through the ongoing TDP project there i s an opportunity to increase the selectiveness o f
load shedding and to minimize i t s impacts on vulnerable clients. This component would therefore extend
the reach o f the National Dispatching Center and the SCADA system to the 33 kV level, making i t
possible for NEPA to distinguishbetween feeders carrying power to clients with high costs o f
unavailability such as hospitals and larger industries and feeders mainly supplying residential loads. The
component would also finance investments in communication equipment linking the national control
center and the regional control centers for increased reliability and added information flows. The added
33 kV supply data made available to the national control center by the investments would in addition
benefit the ISONarket operator when monitoring the DBU supply agreements in the new market model.
A more rational dispatch system may have additional benefits resulting in lower carbon emissions.

8. Genco/Transysco/DBU Grid Metering. The project aims to sustain the investment support
already ongoing in the TDP project for facilitating reforms, unbundling o f NEPA and the wholesale
market structure. The Project will finance bulk metering equipment for the grid interfaces between the
newly formed GENCOs and Transysco to facilitate the data collection for the wheeling service performed
by Transysco as well as current transformers and telemetering equipment for improved meter reading
ability and information flow from the TransyscoDBU boundary. This investment will, in combination
with the metering and SCADA system already in place, constitute the required technological base for a
well functioning market governed by the ISONarket Operator.

Subcomponent 5: Technical Assistance

9. Implementation Support. Considering the large number o f supply and installation type
contracts intended to be procured under the credit, the project aims to relieve some o f the detailed
supervision workload on the CPSU by funding consultant services for implementation support such as

40
site supervision and review o f engineering documentation and deliverables under the different
subcomponents. The project will also support implementation o f the environmental safeguard framework
including a study o f solid waste management in Transysco for handling o f materials detrimental to the
environment such as transformer oils containing PCB and SF6 gas from Substation Switchgear.

10. Technical Operations and Maintenance Contract. In an environment o f constant load

shedding, supply interruptions and grid failures, the current Transysco management i s forced to act
principally as an emergency service with little or no time for preventive maintenance and forward looking
operations. T o remedy this situation and manage the change towards a best practice company, the
Transysco management team needs to be improved and invigorated. The Nigerian Government has
therefore decided to issue a contract for technical operations and maintenance functions o f Transysco. A
private operator would take over the management o f the assets for a pre-determined period o f 3 - 5 years
while the overall financial responsibility, especially with regard to transfer pricing and contracts with
other unbundled N E P A entities, would remain under current Transysco/NEPA control. The contract
would include knowledge transfer, enabling NEPA staff to gain world-class experience in the field o f
modem transmission management and preventive maintenance. The preparation o f a suitable framework
for this assignment including identification o f performance indicators and drafting o f bidding documents
i s funded through the ongoing TDP project.

11. The funding o f the 0 & M contract would partly be self-generated through the expected
additional flow o f Carbon Credit Revenues stemming from the investment projects currently being
prepared. This will in turn create a performance-based incentive for the future contractor to support high
quality and sustainable on-going operations and maintenance. The Project aims to make limited financing
available to bridge the gap until sufficient overall Transysco and carbon credit revenues enable the
contract to be financed out o f the Transysco balance sheet.

Technical Feasibilitv and Detailed Engineerinv Studies

12. Detailed Engineering studies for the Afam-New Haven-Jos transmission line. The Nigerian
Transmission system i s routed in a U shape through the densely populated Westem states. The power
therefore has to make a significant detour in order to reach the Northern and Eastern parts o f the country
leading to large losses and saturated systems. This situation i s likely to worsen as large parts o f the
planned IPP based generation i s located in the country’s gas rich south eastern states while the demand
growth i s principally found in urban growth centers like Lagos and Abuja making i t increasingly
important to have the capacity to wheel power over large distances. T o relieve this situation NEPA
proposes to add an eastern routing to i t s backbone 330 kV transmission system. The new line would
significantly increase the grid capacity, as it would enable the supply destined for these parts o f the
country to take a shorter path while relieving the western route from the added burden o f providing
transfer capacity. It would also close the main 330 kV system in a loop feed that would increase
availability and reliability also in areas already served through the existing network. Due to the length
and voltage level required, significant land areas will have to be allocated to assure the right o f way. The
Project i s therefore likely to warrant substantial studies to find the optimal line routing and to assure
minimal negative impact on affected communities as well as compliance to World Bank environmental
and social safeguards. The project aims to finance a complete set o f preparatory studies, including
environmental and social safeguards, in order to have the component ready for investment funding when
additional sources o f financing become available.

13. Bid Preparationtechnical support for the rehabilitationof Kainji Hydro Power Station.
Building on a rehabilitation design study made for one o f Nigeria’s oldest hydropower installations, the
Kainji Hydro Power station, the Project will support technical assistance in preparing bidding documents
and provide advisory services during the procurement process for the rehabilitation o f the plant.

41
General Grid Design Studies

14. Loadmemand Study. The state o f the electricity system and the rapid demand growth in
Nigeria has led to large pockets o f suppressed demand consisting o f both residential and industrial clients.
The size o f these latent demand pockets is, however, not fully known to the government and the utility. It
i s therefore difficult for NEPA to size and correctly plan for future capacity expansion. N e w investments
in additional capacity are difficult to size correctly in the absence o f such information. The Project
therefore intends to fund a loaddemand study for the complete network and adjacent areas that would
enable N E P A to have a clear picture o f the real demand potential and how the future investment program
should be sized.

15. Transmission Grid design plan. Based on the result o f the loaddemand study the component
will also include funding for an updated transmission system development plan for the National Grid with
special focus on major load centers. This will enable Transysco to address the complex decisions i t i s
facing in creating a reliable backbone grid-supply to cities like Abuja, Port Harcourt, etc. The study will
build o n the 2003 development plan to correctly prioritize and size future grid investments for
incremental development.

COMPONENT 2: DISTRIBUTION EFFICIENCY IMPROVEMENT (US$33.2 M)

Subcomponent 1: Distribution System Upgrade

16. Apart from generation shortages and transmission constraints, the distribution segment o f the
business i s a major barrier in realizing the objective o f continuous and reliable power to consumers. The
broken business model o f Nigeria’s electricity sector i s apparent most clearly at the distribution end o f the
business where neither customers get the service they deserve nor NEPA gets the revenues it needs to
support better service. Being the part o f the business with the closest customer interface, distribution
performance i s critical to ensure appropriate service delivery that wins the confidence o f the customer by
improving the day-to-day lives o f Nigerians, while moving toward the millenniumdevelopment goals.

17. The distribution subsector i s in dire need o f investments, with poorly maintained infrastructure
and high system losses o f around 40%. Outages are frequent due to system failures and overextended
networks. Upstream improvements are not fully being translated into better supply quality and service at
the customer interface level. Maintaining the distribution system to prescribed standards and generating
adequate cash in i t s operation requires reengineering o f business processes, improved management s l u l l s
and appropriate investments. Furthermore, since the distribution business provides cash flows from the
customer that sustain the entire sector, the revenue stream for generatiodtransmission activities cannot be
secured unless inefficiencies in distribution are addressed. Given the problems faced by the Nigerian
distribution sector, it i s essential to adopt a comprehensive multi-pronged strategy to ensure viability o f
the business, secure revenue streams, and sustain upstream investments in transmission and generation
sectors.

18. The Bank has facilitated development o f the Commercial Reorientation o f the Electricity Sector
Toolkit’’ (CREST) program to launch such a distribution improvement strategy. Principally, the CREST
program comprises o f various initiatives based o n the global insight and experience o f fixing
dysfunctional business models. The strategy needs to encompass interface with the customer, correct

l2 Improving distribution efficiency, commercial character and customer interface, implementing fast track
solutions to the pressing generation shortage with private sector participation and reducing the need for sovereign
guarantees and interventions to enhance the rate o f electrification, through grid-based and off-grid approaches are
the three main tracks o f this program.

42
investment choices driven by knowledge inputs, adaptation o f innovative technology interventions with
reengineered business processes and promotion o f right incentives and adaptation o f operational
philosophy to foster a customer-focused, efficient electricity market.13

19. The Project will support investments that aim at improving the distribution business in terms of:
(i)networks for reliable supply to be measured by better voltage and reduced outage times; (ii)
commercial character o f the business as measured by enhanced billing and increased revenues; and (iii)
customer interface measured by time requiredto respond to complaints, new connections, etc. The
Project w i l l also facilitate development o f capacity in the successor distribution entities in terms o f
technical, commercial and personnel systems and capabilities. The main rationale o f these investments i s
to create value in the Nigerian electricity business and demonstrate i t s viability in a replicable manner.

20. Given Nigeria’s large investment requirements, the desired developmental impact would not be
achieved i f investments are thinly spread and if they are not directed to achieve specific outcomes in
identified areas. In order to address this concern, it i s proposed to adopt a cluster approach in
implementation o f the Project. A Cluster would be a group o f customers that are served by an electrically
demarcated distribution and sub-transmission network. The CREST program and related investments
would be implemented in these clusters to create “islands o f excellence”. Investments in distribution sub-
sector would be coordinated with those in transmission sector so as to ease transmission congestion to
these clusters. Hence efforts would be made to develop these clusters in such a way that measurable and
tangible improvements take place in terms o f improved distribution sector performance. The results
would thus be improved revenues, reduced losses and enhanced customer satisfaction in terms o f quality
o f supply, reduced fault redressal times, and reduced billing complaints.

21. Features of a typical cluster. A cluster would be defined as the electrical network served by a
33111 kV substation. Typically, such a substation would have up to six 11 kV feeders. These 11 kV
feeders, the distribution transformers (that would step down the voltage from 11 kV to 4 151220 V), the
LT network along with the metering and related arrangements at the customer points would together
constitute the distribution network. The incoming 3 3 kV feeder would constitute the sub-transmission
network. Each such cluster would be serving around 50,000 consumers or a population o f roughly
250,000 each. The clusters are demarcated thus to facilitate measurement o f energy input into the
network fed by the 3311 1 kV substation.

Typical Investments in a Cluster

22. Investments will be made in goods and service^'^ related to implementation o f the following
initiatives:

(a) Improved reliability and quality o f supply for customers, firstly through High Voltage
Distribution Systems (HVDS), involving investments in small capacity transformers, HT
and aerial bunched cable, insulators, poles and other accessories, and secondly by
reactive power compensation by installation o f online capacitors.

(b) Mechanisms to facilitate efficient metering would include enhancing the coverage and
quality o f metering for HT and LT customers involving HT trivector meters, LT trivector
meters (CT operated) for LV commercial loads above 20 kW, single-phase and three-
phase (whole current) meters for other LV loads apart from other metering equipment.
Modern metering options such as Automatic Meter Reading, prepaid metering, spot

l3A s described earlier in B o x 1, Section 1.

l4A description o f goods and services that will be procured i s given in Annex 8.

43
 billing with hand-held terminals and others will be suitably deployed. Metering o f
Maximum Demand consumer premises and that o f non-Maximum Demand consumer
premises, through use o f modems and other accessories for remote reading would be
introduced where required.

(c) Better cash flow management by introduction o f spot billing which involves hand-held
terminals, printers, modems and associated accessories. In addition, collections would be
improved through opening up alternate avenues for customers to pay their bills.

(d) Addressing customer concerns through set up o f customer care centers, and improved
attention to customer concerns through launch o f rapid response program involving
appropriate vehicles with GIs, GPS facilities and equipment, fault repair kits, wireless
sets and any other required accessories.

23. These investments are designed to strengthen distribution infrastructure, improve quality o f
supply and customer satisfaction and increase cash generation. The main operational impact o f
investments would be in the areas o f quality o f supply, pilferage o f electricity, customer service, and
improving distribution business processes.

(a) Quality of supply. Voltage profiles are generally poor, with consumers receiving 180
volts or even lower instead o f the standard 220 V supply. At such l o w voltages,
household consumers risk ruining appliances if used - often times these cannot be used
at all. Business applications for industrial and commercial customers are similarly
affected. The CREST initiative will address the voltage problem through reconfiguration
o f distribution lines to a High Voltage Distribution System (HVDS). Under the current
system, large capacity transformers are the norm, serving numerous customers from one
transformation point. Typically a 500 KVA capacity transformer would supply around
400 customers. T h i s configuration requires electricity at l o w voltages (LV) o f around
400 volts to be transported over long distances. Because o f long line lengths, customers
at the far end o f the line experience l o w voltages. Furthermore, such long lines sag, and
are therefore prone to frequent breakdowns and easy theft, besides being unsafe. The
HVDS remedies these shortcomings by:

e Replacing each such large transformer by several smaller capacity transformers

to step-down from 11 kV to 220 V at several points along a supply line instead o f
at one terminal point. As a result, transformation occurs closer to the
consumption point, i.e. fewer consumers are served per transformer, thereby
limiting voltage drops and dramatically improving the supply profile. In pilot
HVDS projects implemented under CREST, actual measurements o f consumer-
end voltages show vast improvement -from 160 volts in some cases to the
desired level o f 220 volts.

0 The higher voltage lines also deter theft, while also dramatically reducing
technical losses by reducing the amount o f current output in the system.15
Technical loss reduction results in higher energy efficiency and in lowering of

l5These losses are calculated as the square o f the current multiplied by the resistance. Hence with a 500 KVA
transformer, the output current i s 350 amperes resulting in losses o f 350x350~ resistance value o f the wires.
Alternatively with a 25 KVA transformer the output current i s 3 1 amperes. In this case the losses w i l l be 3 1x3 l x
resistance value o f the wires. Hence this system w i l l lead to a dramatic reduction in technical losses.

44
 carbon emissions that can be monetized into revenues through sale o f carbon
credits.

(b) Pilferage of electricity

0 A long LV line invites theft as it i s relatively simple to tap into. O n the other
hand, HV lines are placed higher from the ground, and are practically impossible
to tap into. Furthermore, a H V D S configuration employs insulated aerial-
bunched cables to connect the transformer to distribution points, which
eliminates all possibility o f theft.

0 Remote reading o f industrial and high revenue yielding customer premises also
reduces pilferage o f electricity significantly, while facilitating monitoring the
quality o f supply to such customers who are critical to the business.

(c) Improving Customer service and distribution business processes. Poor customer
service i s one o f the major complaints against NEPA. The most frequent ones relate to
wrong billing, undelivered or late delivery o f bills, improper accounting o f paid bills and
apathy to consumers reporting faults or interruptions in supply. Also, weak business
processes result in inefficiencies apart from customer dissatisfaction. The CREST
interventions that address these issues include:

0 Introduction o f customer friendly billing systems such as spot billing, using

hand-held electronic machines. Inthis method, bills are printed and delivered on
the spot at the customers’ premises when their meters are read, and NEPA’s
customer database i s updated electronically. Customers have the additional
advantage o f staggered payment due dates thus reducing crowding at cash
collection centers on or near the due date. Apart from improving customer
service, this intervention compresses the cash flow cycle, and introduces
electronic data recording, facilitating diligence on this critical revenue generating
part o f the business.

0 Expansion o f the marketing, bill distribution and bill collection network by

outsourcing these activities. Some mechanisms would be internet based interface
mechanisms for bill verification and payment, open-access bill information and
payment facilities such as through banks, retail outlets and mobile phone service
providers.16

0 Segregation o f technical and commercial functions to improve efficiencies in the

business and creating exclusive machinery for customer interface, such as
establishment o f multi-level grievance redress systems, email complaint facility
and toll-free complaint lines.

0 Inorder to address customer interface issues and complaints rapidly and

effectively, CREST will facilitate establishment o f “networked” customer service
centers with trained staff. Such centers and related “phone-in” complaint desks
would operate in tandem with a system o f Rapid Response Vehicles equipped
with uniformed workmen and necessary toolkitshpares. These vehicles will be

l6 The Lagos DBU has introduced a novel method for customers to pay bills over their mobile phones using short-
messaging-texts or SMS, into a passkey secured electronic bank account or through cash cards.

45
 stationed at strategic points and can be called in for addressing faults and
complaints. Under pilots implemented in Ibaadan, Abuja, and Port Harcourt,
customer care centers with rapid response vehicles have produced positive results
and merited significant customer appreciation. These networked customer
service centers would also facilitate data mining and tracking the revenue streams
more efficiently.

0 Assets and facilities management would be strengthened through standard

software and infrastructure provision as necessary. T h i s would help reduce the 0
& M and other costs in the business.

0 Performance monitoring mechanisms that draw upon the HR database would be

introduced.

0 Critical Database and data mining initiatives (for billing and other business
processes) including GIS/GPS techniques.

Implementation Strategy - The Cluster Approach

24. Determination of size of the cluster. A cluster could comprise any o f the following altematives:

0 The network o f a distribution transformer and i t s downstream infrastructure.

0 A 11 kV feeder emanating from a 33/11 kV substation.
0 A 33/11 kV substation and the downstream network.

25. W h i l e each o f these alternatives facilitate ring fencing and energy audit, a 33/11 kV substation
has specific advantages over other altematives. Given that a 33/11 kV substation feeds substantial load it
would be possible to align decentralized generation to serve the particular cluster. Distribution operations
can be carried out with reasonable overheads and some economies o f scale, if the cluster size i s optimal.
This would also facilitate private participation and cluster based outsourcing.

26. Rationale behind the cluster approach. Incontrast with conventional investment approach to
electrical infrastructure, the cluster approach would facilitate the following advantages in the Nigerian
context:

(a) The sector in general and the distribution sub-sector in particular require large
investments for efficient operations. The available resource envelope under the Project
may not demonstrate clear impact if it i s too thinly spread across the country. Therefore
malung investments based on a result specific strategy, in clearly demarcated areas,
would facilitate achievement o f tangible and measurable impacts.

(b) It i s easy and practical to establish a baseline for key performance indicators such as
quality o f supply (tail end voltage), distribution losses (technical and commercial), billing
and collections, response and resolution times for various activities that involve customer
interface and so o n at a cluster level. Changes in these indicators arising from
interventions made in these clusters can also be easily measured.

(c) The measurement o f impacts in clusters would also facilitate economic and financial cost
benefit analysis o f investments.

46
 (d) Since it i s not possible to remove all the transmission constraints in the system through
this project, transmission investments can be targeted to improve supply to those specific
clusters where they can complement CREST distribution interventions.

(e) Scaling up a successful cluster approach to the entire system i s only a matter o f applying
more investments into a larger number o f clusters over time.

27. Horizontal and vertical investment components. Even though investments would be
principally fashioned as vertical components targeted to improve distribution in specific clusters, certain
investments would have to be system wide that would strengthen improvements across all the clusters on
a country-wide basis. I t i s expected that with implementation o f the NEDP, the number o f such clusters
(“islands o f excellence”) would increase substantially, eventually covering more o f Nigeria by this
approach. For realizing this goal some system wide measures, such as development o f a universal billing
system and software, accounting and financial systems and related hardware and software, local and wide
area networks and information technology infrastructure are essential. The Project would therefore apply
some o f the investments towards activities that have a “horizontal” system wide scale, and complement
“vertical” cluster-based interventions. Together such horizontal and vertical interventions would create
the necessary conditions to improve efficiency, build business value and enable incremental private sector
participation. Typical horizontal investment components that would be implemented on a system wide
basis are:

a Development o f a universal billing system and software.

a Accounting and financial systems and related hardware and software.
a Local and Wide area networks, with related information technology infrastructure and
software.

28. Inorder to integrate the cluster approach with various initiatives that are sought to be funded
under the distribution component o f the NEDP, it i s proposed to follow an output-based disbursement
approach. This approach would establish the linkages between performance and disbursement o n one
hand and enhance DBU involvement in preparation o f sub-project proposals under overall P M U
coordination. Certain initiatives under the Project would involve procurement o f goods and services.
Typically such components would be implemented by a combination o f goods and services and would
necessitate a turn key approach for implementation. Outsourcing o f the operation o f these components
would also be required by the utility after implementation o f these initiatives. Customer Service centers
and Rapid Response vehicles are examples o f components that would be covered by this approach.

Institutional Arrangements

29. The cluster approach i s being adopted for the first time in Nigeria o n this scale. Therefore,
institutional arrangements, procurement, and capacity within the executing agencies would have to be
developed. As successor entities to NEPA, the DBUs are naturally the front-line implementing agencies.
The DBUs are in the process o f identifyingclusters that are to be taken up under the project and
establishing the performance indicator baselines for each o f these clusters. The project coordination for
the implementation will be carried out by the N E P A PMU, using the capacity created under the ongoing
Transmission Project. For the time being the P M U will remain as part o f the NEPNInitial Holding
Company. In relation to this component, this unit will be responsible for: (i) project implementation
coordination and facilitation; (ii)ensuring economies o f scale, uniformity in quality and specifications for
all goods and works and canying out the prescribed process; (iii) enabling synchronized policy making
(on technical and quality aspects) among all the DBUs; and (iv) overseeing M & E and project outcome
reporting processes.

47
30. In view o f the limited capacity o f the DBUs to implement several cluster improvement sub-
projects simultaneously, it i s proposed to execute some sub-projects on a turn key basis. The cluster
based tum key approach would facilitate private participation by establishing market determined
implementation costs, promoting business capacity and skills in the local markets and ensuring speed and
quality. Such a parallel turn key approach i s necessary to ensure that the scale o f the investments
envisaged under the Project i s completed within the 3-year implementation period. The turn key strategy
would be complemented by training programs for the chief operating officers and implementing staff in
the DBUs. This will not only enhance their skills and implementation capacity, but also ensure effective
oversight o f the turn key sub-projects.

Public Private Partnership Initiatives

3 1. Based o n the learning experience o f CREST pilots and the turn key approach described above, the
Project envisages support for the development o f two public-private partnership mechanisms for scaling-
up CREST country-wide. Technical assistance for this development will be executed by BPE under
Component 5. RequiredIDA-supported investments to implement these public-private partnership
models would follow as part o f future projects.

Option I:Distributionbusiness outsourcing

32. A selected part o f the distribution network or a customer cluster would be electrically ring-fenced
and concessioned to a private party. The concessionaire would trade electricity by purchasing power in
bulk from N E P A or other generators, and retail it to customers within the cluster. The concessionaire will
pay wheeling charges to N E P A or the successor entity for the use o f distribution network. All
investments made by the operator in improving the network would be duly accounted for. N E P A i s
already experimenting with this approach through a small-scale pilot in Aba.

33. The details with regard to size o f clusters (whether the entire DBU or part o f it), and the terms,
conditions and process for selection o f the concessionaire are to be worked out over the next one year
under BPE’s stewardship. The 12 Revenue Cycle Management (RCM) contract areas could provide a
logical place to initiate this approach. A recent study conducted by NEPA has concluded that the current
R C M contracts are not achieving their purpose. This i s in part due to the remuneration for the RCM
contractors not being linked to performance and the absence o f any investment obligations by RCMs.
The proposed approach would address these concerns and reorient the R C M arrangement towards
achieving higher commercial performance and accountability.

34. The concession could be for a period o f five years, after which the private party would transfer
the cluster to the MC/NEPA or the private company that could be controlling the DBU as the case may
be. The distribution business outsourcing could be for the entire DBU in cases where sufficient numbers
o f private sector parties indicate sufficient interest and appetite to take the market risks for the scale o f
expected operations under a modest sovereign guarantee framework. Therefore, prior consultations with
potential interested parties, foreign and local, are necessary before finalizing the modalities and form o f
offers and guarantees.

Option 11: CREST Distributionfunction outsourcing

35. This approach would be an alternative in cases where sufficient interest and/or appetite for taking
market risk under the business outsourcing model i s not forthcoming or for those DBUs and clusters that
are not attractive from a business standpoint. Model bids would be developed for private parties to
undertake CREST program initiatives, individually or collectively, on a turn key basis for a fixed time
period for the entire DBU or a ring-fenced part o f it. While the contract would be on a BOT basis for

48
initiatives like various forms o f metering, bill preparation and delivery, and the construction and operation
o f customer service centers and related customer interface initiatives, it would be in the form o f build-
transfer for other initiatives like HVDS and reactive power compensation. T o illustrate, under the B O T
for single and three phase LV meters, the contractor shall be responsible for meter reading and generation
o f bills for the entire B O T period, which i s expected to be around three years. In case o f customer service
centers, the contractor shall be responsible for operation o f the center and for customer grievance
resolution by coordinating with the utility staff.

36. Under this arrangement the Bank could support investments as far as the costs o f goods and
installations are concerned, and the borrower utility will bear the cost o f services and operating expenses
under the BOT arrangement. This bidding process could be attempted in several areas including the
R C M areas.

Other Subcomponents: Technical Assistance

37. The component includes several technical assistance activities to support the CREST scale-up,
develop the technical improvements for the system and acquire and execute the various software and
hardware needed to install the horizontal, system wide improvements discussed earlier. There i s also
provision for distribution business planning for the DBUs and for capacity building and training.

COMPONENT 3: ACCESS EXPANSION AND INTENSIFICATION; RENEWABLE

ENERGY (US$lO.O M)

38. Nigeria i s currently going through a process o f reforms in the electricity sector and changes in the
policies, institutions and regulation for rural electrification are contemplated. There i s very little practical
experience or knowledge outside o f rural electrification projects being implemented o n a conventional
grid expansion basis by the Federal and State governments’ energy ministries. Therefore, to properly
inform the policy and strategy development process, it i s essential to explore other feasible models o f
access expansion, intensification and renewable energy development. This Project i s designed to deliver
that experience through the development and implementation o f specific pilot projects in three states.

39. The proposed pilots are to consider interventions necessary for designing and testing alternate
access mechanisms, including low-cost options. The experience o f the pilots will also provide important
inputs to formulation o f access policies and frameworks, including the implementation o f the Renewable
Energy Master Plan and for expanding the market for renewable energy. Additionally, it i s proposed to
support the development o f cross-sector energy applications through an “innovation TA” a p p r ~ a c h . ’ ~
This component i s being developed in conjunction with a MSP GEF project18which will co-finance the
TA support and investments needed in order to establish a level playing field for renewable energy. The
table below summarizes the main subcomponents and the related financing.

l7 An Innovation Solicitation process invites new ideas o n projects from the community and private sector through a
process of open advertisement. After an initial review, promising ideas are financed under the project for further
development and eventual implementation.
Medium Size Project.

49
* This subcomponent w i l l include a US$O. 1 million technical assistance provision to assess the different types
o f results expected.
** Federal Government, State Government, Beneficiaries, Commercial and micro-finance institutions -to be
determined o n a case-by-case basis. The amount stated here i s an initial estimate.

Subcomponents ( l a ) and (lb): Co-financing of Access Expansion ( l a ) and Intensification Pilots (lb)

40. These two components will enable communities and States to co-finance and develop through
investment support and TA respectively, electricity access expansion and intensification pilot projects:
(a) in areas where the transmission constraints will be overcome to ensure rapid expansion o f access to a
number o f additional rural or peri-urban customers; and (b) in rural areas requiring either mini-grid or off-
grid solutions, that include renewable energy options. The intent o f the pilots i s to address at a smaller
scale the barriers that prevent low-cost solutions to access and development o f renewable energy options,
including design and testing o f new mechanisms and business models that explore new opportunities
created by the EPSR Act.

41. Four different sub sets o f pilot projects are envisioned:

(a) Technology driven pilot projects to test l o w cost distribution design. The feasibility
studies o f these pilot projects are being prepared as a part o f the rural electrification work
being executed by BPE.

(b) Intensification pilot projects in peri-urban areas, in the states o f Cross River, Ogun and
Enugu.

(c) Expansion pilot projects in rural areas, in the same states o f Cross River, Ogun and
Enugu.

(d) Off-grid rural electrification pilot projects, in the same states o f Cross River, Ogun and
Enugu, including renewable energy such as hydro and solar PV.

42. As part o f these pilots, suitable work to develop standardized Power Purchase Arrangements for
Grid-connected small hydro projects (less than 20 MW)” will be undertaken. Furthermore, at least one
pilot will seek to create replicable business delivery models for the expansion o f rural electrification
through solar PV. It will pilot altemative service delivery models that may include leasing, micro
financing, community participation, etc.

l 9 The new Electricity Act provides that generation o f t h i s scale can be developed under license and off-grid 1 MW
or less projects can be developed without license.

50
43. The levels o f investment subsidy and IDNGEF co-financing required by each pilot project will
depend on:

0 The business model adopted for each o f these pilots projects.

0 The level o f tariff that w i l l be determined according to the implementation o f the new
Electric Power Sector Reform Bill.
0 The share o f renewable energy in the project.
0 The result o f the competitive procurement process to select goods and services providers.
Subcomponent 2: Implementation Supportfor the National Renewable Energy Master Plan

44. The Energy Commission o f Nigeria has developed a National Renewable Energy Master Plan to
promote the use o f renewable energy in Nigeria. The plan considers addressing barriers that currently
limit such use, including the lack o f an appropriate legal environment, technical capacity to ensure quality
o f renewable energy equipment, and trained manpower to develop and operate renewable energy projects.
T h e Project will finance technical assistance for supporting the implementation o f the National
Renewable Energy Master Plan. Possible objectives o f this assistance are the preparation o f the
Renewable Energy Policy, the drafting o f the Renewable Energy Act, the design o f the Renewable
Energy Agency, training, and the design o f a financial support for measures aimed at leveling the playing
field between least cost renewable energy technologies and other conventional approaches.

Subcomponent 3: Innovation of Cross Sector Energy Applications

45. Based on international experience on how to increase impacts o f rural electrification, the pilot
projects may include financial and technical support to develop and implement effective cross-sector
interface. This will assist projects in other sectors facing energy supply constraints, and unleash win-win
opportunities. Besides the direct support provided to each o f the pilot projects mentioned above, calls for
proposals will be initiated for local stakeholders andor implementing agencies o f projects. These would
be aimed to propose, design and implement cross-sector interface and initiatives. Consistent with criteria
to be delineated in the calls for proposals, the Project will finance incremental costs o f additional study
and equipment required to realize corresponding cross-sector benefits.

COMPONENT 4: TECHNICAL ASSISTANCE: PROJECT MANAGEMENT UNIT

(US$8.2 M)

Subcomponent 1: Development of Gas Pipeline and Gas-to-Power Projects

46. Currently around 6 b c m o f gas i s sold domestically, mainly to the power sector through two
unconnected gas systems -the ELPS on the west side o f the Niger Delta, and the Eastern Area system.
The ELPS system i s also planned to deliver export gas to the West Afkica Gas Pipeline. There have been
several studies to address different options for the future Nigerian gas transmission system. These studies
include the Bank-financed Sector Diagnostic and Options Studies and the National Gas Strategy. The
proposed system includes a pipeline from the producing areas in the South to the North, serving Abuja,
Kaduna and Kano.

PIU f o r the Gas pipeline and Independent Power Production Proiect

47. A provision o f US$lO million under the Privatization Support Project (PSP) has been made
available by the Bank for the set-up and initial operation o f a Project Implementation Unit (PIU). The
provision i s to be employed towards financing the activities in the PIU’s TOR including the following

51
areas: (a) Gas Demand and Feasibility Study; (b) Gas pipeline Engineering Study; and (c) Environmental
and Social Risk Assessment.

48. The TORSof the P I U overlaps with the TOR o f another committee, established in July 2004, by
the Presidency to develop gas resources for domestic use and exports. Chaired by the Presidential
Adviser on Petroleum and Energy Matters, the members o f the Presidential Committee include the
Minister o f Industry, State Ministers o f Finance, Power and Steel and Agriculture, and GMDs from
NNPC and N E P A and MD o f the Nigeria Gas Company. The Presidential Committee has established a
technical sub-committee coordinated by the Office o f the Adviser on Petroleum and Energy Matters with
representation from the relevant ministries and companies. T h i s Committee's TOR i s to: (a) confirm the
suitability o f L F Consulting Engineers work on Pipeline System Study Report on the project; (b) secure
public and private sector funds for the project; and (c) secure private sector execution o f power plant and
fertilizer plants. The Committee has recently prepared an interim report, which has been submitted to the
President. The report seeks the mandate to proceed to the development phase for the project, and employ
the consultant ILF, whose work financed by NNPC under an earlier contract has been the basis for the
report. The Committee asks for US$1.5 million for this work.

49. The Bank has recommended to the FGN to merge the two committees in an effort to move the
work on the gas pipeline forward on the Nigerian side, in particular, to establish a single Steering or
Oversight Committee reporting directly to the President. Working groups should address policy,
commercial and technical issues and might reside in separate ministries, reporting through their Ministers,
or be separately constituted, reporting directly to the Steering Committee. Terms o f reference for the
Committee and the working groups would borrow heavily fkom those for the existing Presidential
Committees - the main difference in approach being reliance on one collaborative, rather than two
competing arrangements.

50. The key objectives o f the FGN's reform program in the gas sector are to: (a) extend gas
penetration in the domestic market (especially to power generation, but also to industry); (b) encourage
project development and new entrants; (c) capture economic value; and (d) end gas flaring. The main
barriers to the achievement o f the goals are: (a) absence o f a coherent gas policy; (b)
fragmentedoverlapping government sector responsibilities, involving potential conflicts o f interest; (c)
vertically integrated government monopoly; (d) non-commercial, non-transparent gas pricing; (e)
distorted fiscal regime, resulting in government subsidization o f major projects and discrimination against
new, non-oil producing entrants; ( f ) project-specific negotiation o f fiscal terms; and (g) lack o f legal
framework in the downstream gas sector.

5 1. The proposed new Gas Act would address these barriers by: (a) assigning sole responsibility for
policy to the Minister o f Petroleum Resources; (b) establishing an independent Gas Regulatory
Commission for technical and economic issues (licensing, safety, promotion o f competition, third party
access compliance); (c) unbundlingo f Nigeria Gas Corporation into gas sales and gas marketing
companies with private sector participation; (d) creation o f a Transmission Network Operator with
responsibility for coordination o f network operations only (i.e. n o gas ownership); and (e) ensure
transparent pricing based on competition and o n regulatory ceilings for captive customers. Inaddition,
the proposed Natural Gas Fiscal Reform Act will support: (a) elimination o f distortionary tax treatment,
such as consolidation o f gas costs with oi€income for tax purposes; and (b) introduction o f a
comprehensive upstream and downstream, flexible fiscal regime applied to all projects.

52. The Gas component under this Project aims to support the Government's strategy in the gas
sector and will include the following four subcomponents:

52
 (a) Gas Act implementation support. Continued legal and regulatory support to the FGN
to ensure the implementation o f the Downstream Gas Act and i t s regulations and the
Natural Gas Fiscal Reform Act.”

(b) Regulatory Commission. The Commission i s introduced by the Downstream Gas Act
and this subcomponent supports the set-up o f the Commission, capacity building and
initial operations:

Prepare options and recommendations for regulations to implement the

regulatory principles in the Gas Act. Examples: Preventing abuse o f dominant
positions, operations o f Transmission Network Operator, including the possible
need for a Network code, codes o f conduct dealing with the behavior o f regulated
entities, regulation o f health, safety, environment and land use.
Conduct analysis and make recommendations on processes and procedures for
regulation, processes and procedures for interaction o f the regulator with other
authorities.
Make provisions for transparency in its activities and independent decision-
making.
Build capacity for the Commission, including staffing, and establish linkages to
NERC.

(c) Energy Pricing and Taxation. The Draft Gas L a w gives the Commission power to
regulate gas prices charged for monopoly services which are not sufficiently competitive
to protect the interest o f consumers. It also gives the Commission power to undertake
periodic pricing methodology reviews for which it shall consult with Licensees. The
subcomponent should determine a rational pricing methodology for the whole energy
chain, from upstream gas production to end user gas and power prices. The methodology
should fulfill the following primary requirements: (a) economic efficiency; (b) financial
viability for the participants in the market; and (c) avoidance o f cross-subsidization. The
analyses shall take into account all taxes in the energy chain, from upstream petroleum
taxes to end user taxes on gas, power and petroleum products.

(d) Review the financial, commercial and technical viability o f the transmission gas pipeline.
This subcomponent would include review of:

Feasibility studies prepared by the Steering Committee.

Coordination o f gas market development with power expansion planning.
Financing options for the pipeline, focusing on Public-Private Partnership
options.

Subcomponent 2: Environment, Resettlement and Social Unit (ERSU) Capacity Building

53. ERSU i s housed within the P M U and i s responsible for monitoring and evaluation o f project-
related environment and social activitieshmpacts. ERSU will also have responsibility, when necessary,
for preparing Resettlement Action Plans for future sub-projects in line with the Resettlement Policy

2o T h e two drafts are yet to be ratified by the Parliament. Regulations for the Downstream Gas Act need to be
drafted. This would include Draft licenses and license procedures, licensees’ responsibilities and obligations,
regulatory techniques and related regulations for Rates transmission and distribution services and Open-access
provisions.

53
Framework. The scope o f ERSU’s work also includes designing and supervising environmental audits to
determine the need for remedial actions, if any, where past waste disposal methods are found to have
resulted in PCB contamination o f the soil at any o f the substations selected for reinforcement under the
project. In addition to resources for ERSU capacity building and additional staffing, a project cost
allocation o f up to US$1 million has been provided in case it turns out that cleanup o f PCBs i s required
during project implementation, and a similar provision in case o f any land acquisition and/or involuntary
resettlement becoming necessary.

Subcomponent 3: Development of Corporate Planning and Strategy Unit

54. Though project implementation will commence with the P M U at NEPA, for which capacity has
been created under the ongoing TDP, the P M U will be subsequently transformed into a “Corporate
Planning and Strategy Unit” (CPSU) during the l i f e o f the Project. The PMU/CPSU will be initially
overseen by the Board o f NEPA and work in close coordination with the FGN and Project States, the
Bureau o f Public Enterprises (BPE), the Energy Commission o f Nigeria (ECN), the Designated National
Authority (DNA - for the carbon components) and the unified Steering Committee for the development
o f the Gas Project. The CPSU will eventually be housed in the Federal Ministry o f Power and Steel
(FMPS) or folded into one o f the new sector institutions. Options can be explored in due course to locate
the CPSU within the FMPS to function as a planning, implementation and monitoring unit for the entire
sector and beyond, or alternatively, setting i t up as a stand alone company that provides a broad range of
support in the same areas to the NEPA-successor entities on a fee-based system. A determination will be
made during the course o f the Project.

Subcomponent 4: Incremental Operating Costs

55. The P M U will be supported under the Project to undertake the increased responsibilities relative
to its performance under the ongoing Transmission Development Project. Specifically, the Project would
finance the incremental expenses incurred by the P M U on account o f project implementation,
management and monitoring, including office space rental and utilities, office supplies, bank charges,
advertising, communications, vehicle operation, maintenance and insurance, building and equipment
maintenance costs, travel and supervision costs, and salaries o f supporting staff, but excluding salaries o f
officials o f the Borrower’s c i v i l service.

Subcomponent 5: HIV/AIDs Prevention and Communication Campaign

56. Provision to implement an HlV/AIDS prevention and awareness program will be included in the
bidding documents for all construction work (rehabilitation and new lines and substations) and will
commence with Bank-financed sub-projects. The NEPA successor companies will also be assisted with
developing an HIV/AIDS prevention and awareness program as part o f their respective corporate policies.
The HIV/AIDS prevention and awareness program will be coordinated with the National Action
Committee on AIDS (NACA) in developing the corporate policies for the NEPA successor companies.

COMPONENT 5: POWER REFORMS (US$3.9 M)

57. BPE i s the frontline agency for implementation o f the reforms. Initial TA and capacity building
for reforms, as well as the design o f the Market Rules and Grid Code has been available to BPE through
an ongoing credit, PSP. Most o f the activity to date has been on diagnostics. With the enabling
legislation now in place, IDA will support the implementation o f actions mandated by the law and related
capacity building. Four key reform activities are to be supported:

54
 e NEPA Restructuring- to support the set-up and operations o f an Initial Holding
Company (IHC); creation and capitalization o f the successor companies;21establishment
o f a proposed special purpose entity to deal with NEPA’s debt and liabilities including
stranded (unfunded) energy purchase obligations in future; development o f a strategy for
treatment o f NEPA’s pension obligations; and mechanisms for right-sizing o f staff.

e Establishment and operation o f the regulatory agency (NERC) -to provide and
enforce the technical and economic framework for the operation o f the wholesale
electricity market. Inparticular, this includes clear definition o f principles for tariff
adjustment, multi-year tariff order, protection o f consumers’ and public interest, and
articulation o f performance and safety standards for licensed market participants.

e Capacity building -to support the technical, financial and management capacity
requiredto enable credible functioning o f the new entities. Local participation in training
will be a key factor o f building and sustaining s k i l l s for the largest number o f staff as
rapidly as possible.

e Legal, regulatory and contractual arrangements for electricity trade -to support
the creation and operation o f Market Rules and the Grid Code that set out the commercial
and technical procedures by which generators and distribution companies may use the
transmission system.

58. The component will specifically support advisory services for the development o f public-private
participation models for distribution privatization, distribution business outsourcing and CREST
distribution function outsourcing models. These altematives have been described in detail under
component 2. Inparallel, work towards design o f customized privatization risk mitigation instruments for
achieving positive, sustainable privatization outcomes would be commissioned.

59. Key players in the sector have underscored the importance o f a well managed communications
and outreach strategy. Such a strategy will inform the public about the reforms, creation o f successor
companies, and the implications o f a competitive market structure in the power sector. BPE, which has
the mandate to lead the reform effort, has already launched a program o f National Stakeholder
workshops. These early efforts have only served to emphasize the magnitude o f the communications
challenge and the need for continuous outreach as the sector evolves. The Project therefore proposes to
support the BPE Power Sector Communication efforts through provision for: (a) a communications audit
and needs assessment; (b) design o f a communication strategy for NEPA reform; (c) implementation o f a
public communications program for N E P A reform that will explain the rationale, costs and benefits o f
N E P A reform and the costs o f not doing so; (d) publicizing regulations and other measures to protect the
consumer; (e) enhancing NEPA staffs understanding o f the timetable and implications o f NEPA reform;
and (0 disseminating safety net measures as and when these are decided at the key stakeholder level.

21
The successor companies need to become stand-alone entities with business plans, share capital, staffing, and
funding sources for working capital. This multi-year effort i s unlikely to be fully accomplished within the duration
o f this Project; the goal i s to put the process o n an irreversible track.

55
 Annex 5: Project Costs
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

1. The project costs by component details are provided in table at Section B, para. 26.

2. The project financing by expenditure categories i s detailed in the following table.

:ategory Amount of Credit Allocated IDA

1 Works/Supply/Installation 131.4
2 Goods
BPE 0.5
NEPA 4.0
3 Consultant Services
BPE 3.c
NEPA 16.C
4 Training Study Tours Workshops
BPE 0.4
NEPA 0.1
5 Incremental Operating Costs 1.(
ContingencyRJnallocated 14.;
Total Credit Proceeds 172A

3. The project costs breakdown by source o f expenditures i s provided in the table below.

56
 Annex 6: Implementation Arrangements
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

PERIOD: FY2006 - FY2009

IMPLEMENTATION

1. Borrower and Executing Agency. The Borrower i s the Federal Government o f Nigeria (FGN),
represented by the Federal Ministry o f Finance (FMF). Responsibility for project oversight rests with the
Federal Ministry o f Power and Steel. There are two executing agencies -the NEPA P M U will
implement components 1- 4, while BPE will implement component 5.

2. The P M U i s currently in charge o f implementing the TDP. I t i s rated satisfactory in all aspects o f
project implementation. As an implementation agency for this Project, it will have five sets o f clients -
transmission (Transysco), all the 11 distribution companies, the access component where the clients
include State Governments, E C N and Community based organizations, the gas sector PIU operated by the
Ministry o f Power and Steel and the PMU’s own ERSU which will have to ensure broad environmental
and social compliance o f all aspects o f the project. Though project implementation will commence with
this PMU, by using the capacity created under the ongoing Project, the P M U will be subsequently
transformed into a “Corporate Planning and Strategy Unit” (CPSU) during the life o f the Project. The
PMU/CPSU will be initially overseen by the Board o f N E P A and will work in close coordination with the
FGN and Project States, the Bureau o f Public Enterprises (BPE), the Energy Commission o f Nigeria
(ECN), the Designated National Authority (DNA - for carbon components) and the unified Steering
Committee for the development o f the Gas Project. The CPSU will eventually be housed in the FMPS or
folded into one o f the new sector institutions.

3. The BPE will implement component 5 o f this Project. I t i s currently an implementation agency
for the PSP, and has been so for the last three years. After some initial challenges, BPE has now
developed requisite project management capacity and has therefore been included as an implementation
agency under this Project. This component comprises several important consultancy services, critical to
the reforms and privatization. Though BPE’s core procurement and project accounting staff are familiar
with World Bank procurement processing and project management procedures, there are some
reservations regarding i t s capacity to satisfactorily execute the Project. These reservations are based o n a
review o f the performance under the ongoing PSP. Weaknesses in FM arrangements include: inadequate
financial management information system, poor quality FMR, weak control over payment vouchers, large
amount o f overdue un-retired advances and weak internal audit. Therefore, it i s proposed to strengthen
BPE’s procurement and financial management capacity through the support o f a consultant specialized in
procurement and execution of major TA activities. A comprehensive procurement, financial management
and implementation capacity assessment o f BPE will be repeated in the first six months o f project
implementation.

4. Project Implementation Manual (PIM). NEPA P M U will prepare and adopt a detailed P I M to
guide implementation at the utility and cluster levels. The PIh4 will set forth all operational and
procedural steps regarding sub-project evaluation, reviews and approval, flow o f information, detailed
description o f PIU functions, operational agreements among participating agencies, procurement and
financial management arrangements and standards and tasks, standards for reports, change management
and amendment procedures.

5. Monitoring and Evaluation. M & E procedures and reports are described in Section C2.

57
 Annex 7: Financial Management and Disbursement Arrangements

NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

I. Summary of the Financial Management Assessment

A. GENERAL

Obiective o f the FinancialManagement Svstem

1. The objective o f the Financial Management Systems (FMS) i s to support the implementing
agencies in deploying Project resources to produce the requiredoutputs and with attention to economy,
efficiency and effectiveness. Specifically, the FMS should be capable o f producing timely, relevant and
reliable financial information. Such information would enable the implementing agencies to plan,
coordinate, monitor and appraise the Project's overall progress towards the achievement o f i t s objectives.
Furthermore, it will ensure that costs are minimized and that Project funds are used for the purposes
intended.

Implementation Arranpement

2. T h e Federal Ministry o f Power and Steel has overall responsibility for the project
implementation. However, this responsibility will be delegated to a P M U that will use the capacity
created under the ongoing TDP. The P M U i s expected to be transformed into the CPSU during the course
o f this Project. Project implementation will be carried out on a day-to-day basis in line with the Project
Implementation Manual and Bank guidelines. The reforms and privatization component, i.e. component
5, will be implemented by BPE, which i s currently implementing the PSP.

3. The Finance Section (FS) o f the P M U (FSPMU)and the Finance Department o f BPE (FDBPE)
will be responsible for managing the financial affairs o f the Project. They will, amongst other things be
responsible for ensuring compliance with the financial management requirements o f the Bank and the
government, including forwarding quarterly Financial Monitoring Reports (FMR) and audited annual
financial statements to IDA. They will maintain adequate FM arrangements to support the deployment o f
Project resources in an economic, efficient and effective manner to achieve the stated development
objectives. The arrangements will provide relevant information to the PMU/CPSU and BPE to facilitate
the performance o f their functions. The Intemal Audit Sections o f the P M U and BPE will carry out the
necessary internal audit functions. Both the Finance and Internal Audit DepartmentlSections will be
staffed by qualified accountants.

4. All accounting and internal audit staff will be sufficiently trained in Bank procedures, including
disbursements, financial management requirements and procurement.

B. RISK ANALYSIS

Inherent R i s k s

5. The Country Financial Accountability Assessment (CFAA), which was conducted in CY 2000
assessed the risk o f waste, diversion, and misuse o f funds as high. The risks were to be mitigated through
the implementation o f the CFAA recommendations. In this regard, substantial reforms have been
implemented in the last two years. A review o f the implementation o f C F A A recommendations in
January 2005 revealed that some o f the identified weaknesses have been addressed under the Economic

58
Management Capacity Assistance Project, and through other government initiatives aimed at improving
financial management and accountability. The review also established that further improvements remain
to be achieved, but the overall trend i s in a positive direction. The review, however, did note that the
fiduciary assurance environment in FGN still remains weak.

6. To minimize the aforementioned risks and ensure that appropriate safeguards are in place prior to
Project effectiveness, an assessment o f the financial management capacity o f the implementingagencies
has been carried out, and appropriate actions and risk mitigation measures identified.

Control R i s k s

7. The risk that the project’s financial management arrangements are inadequate for economic,
efficient use o f project f k d s with proper reporting arrangements i s assessed as moderate. This i s subject
to: (a) the weaknesses described in paragraph 9 being satisfactorily addressed; and (b) the financial
management action plan described later in this Annex, i s fully implemented.

Strength and Weaknesses

8. Strengths: The main implementing agency -the NEPA P M U -i s currently implementingan

IDA-financed project - TDP. The financial management arrangement for the TDP, which will be
employed for this project as well, has consistently performed well. The finance section i s adequately
staffed and the personnel are familiar with World Bank procedures. Financial Monitoring Reports, which
are produced on a timely basis, are o f a good quality and are being used as a basis for disbursement -
TDP i s the only project in Nigeria that i s using the report-based disbursement method. The second
implementing agency -BPE -i s currently implementing the PSP and therefore has experience in
implementing an IDA-assisted project.

9. Weaknesses: T h e main weaknesses are: (a) Internal audit function i s weak in terms o f quality o f
staffing and performance in both implementing agencies; (b) With respect to the PMU, both finance and
internal audit staffing will be inadequate to simultaneously implement the ongoing TDP and this Project;
(c) there are weaknesses in the BPE FM performance in the ongoing PSP, including inadequate financial
management information system, poor quality FMR, weak control over payment vouchers, and large
overdue and unretired advances; (d) the PMU’s computerized financial management system and financial
procedures manual need to be updated to ensure that the financial management arrangement can fully
support implementation o f the new Project as well as the ongoing TDP; and (e) the computerized
accounting system o f BPE needs to be overhauled to improve i t s output (including generation o f good
quality FMRs) and to fully support the needs o f the new Project.

C. FINANCIAL MANAGEMENT SYSTEMS

10. Funds Flow and BankingArrangements

(a) The overall project funding will be from the IDA credit and Government counterpart
funding. IDA will disburse the credit through two Special Accounts, which will be
managed by the PMU/CPSU and BPE respectively.

(b) The PMU/CPSU and BPE will each maintain the following accounts:

(i) A SA in U S Dollars to which the initial deposit and replenishments from IDA
will be lodged.

59
 A Current (Draw-down) Account in Naira with an established commercial bank
to which draw-downs from the Special Account will be credited once or twice
per month in respect o f incurred eligible expenditures. Following immediate
payments in respect o f those eligible expenditures, the balance on this account
should be zero.

A Domiciliary (Interest) Account in U S Dollars into which interest on the SA

balances will be credited.

A Current (Project) Account in Naira with an established commercial bank to

which Counterpart Funds will be deposited.

A Current (Interest) Account in Naira with an established commercial bank to

which interest on project account balances will be credited.

Also, the PMU/CPSU and BPE will each maintain an IDA Ledger Loan Account
(Washington) in U S Dollars/Naira/SDR to keep track o f draw-downs from IDA credit.
The account w i l l show: (a) deposits made into an established commercial bank by IDA;
(b) direct payments by IDA; and (c) opening and closing balances. This record will be
reconciled monthly with the Disbursement Summary provided by the Bank.

All bank accounts will be reconciled with bank statements on a monthly basis by the
PMu/CPSU and BPE. The bank reconciliation statements will be reviewed by
designated officials, and identified differences will be expeditiously investigated.

The PMu/CPSU and BPE will be responsible for preparing and submitting applications
for withdrawal to the World Bank. Appropriate procedures and controls will be instituted
to ensure that disbursements would be carried out in an efficient and effective manner.

Detailed banking arrangements, including control procedures over all bank transactions
(e.g. check signatories, transfers, etc.) and disbursement will be documented in the
Financial Procedures Manual.

Funds Flow Diagram

Sources o f Funds
Government

*
Project Account (N)
balance) Naira A/C

vendors, etc.

60
Disbursement Arrangements

Disbursement Methods

11. All disbursements are subject to the conditions o f the Development Credit Agreement and the
procedures defined in the Disbursement Letter.

(a) Report-Based Disbursement. The Reports-based disbursement method will be used by

the PMU. Good quality Financial Monitoring Reports will be submitted on a quarterly
basis within 45 days o f the quarter end each time with a Withdrawal Application and
copies o f recent bank statements. All disbursements will be subject to the conditions o f
the Development Credit Agreement, the Project Agreement and the procedures defined in
the Disbursement Letter.

(b) Transactions-BasedDisbursement. By the time o f Project effectiveness, the BPE

component i s not expected to be ready for report-based disbursements. Therefore, BPE
will follow the transaction-based disbursement procedures (as described in the World
Bank Disbursement Handbook), i.e. direct payment, reimbursement, and special
commitments. All applications for the withdrawal o f proceeds fi-om the credit will be
fully documented, except for: (i) contracts with an estimated value o f less than
US$200,000 for consulting firms, and less than US$lOO,OOO for individual consultants;
(ii)training, study tours, workshops; and (iii) incremental operating costs which may be
claimed on the basis o f certified Statements o f Expenditures (SOEs). Documentation
supporting all expenditures claimed against SOEs will be retained by FD/BPE, and will
be available for review when requested by IDA supervision missions and project
auditors.

Special Account

(c) To facilitate disbursements for goods, works, services, etc., IDA will make advances into
a commercial bank to cover IDA’Sshare o f eligible expenditures. The initial deposit into
the special account for BPE would be US$200,000, covering an estimated four months o f
eligible expenditures financed by IDA. For the PMU/CSPU, the initial deposit into the
Special Account will be based on a 6-month forecast prepared by the PMU/CSPU and
submitted with the Application for Withdrawal. Subsequent disbursements into the
Special Account will be based on a review o f the 6-month forecast prepared by the
PMU/CSPU and included in the quarterly FMR, and accompanied with Withdrawal
Applications, reconciled bank statements and copies o f all bank statements. With respect
to BPE, the SA will be replenished through the submission o f Withdrawal Applications
on a regular basis -at least once a month -and will include reconciled bank statements
and other documents as may be required until such time as the borrower may choose to
convert to a report-based disbursement mechanism.

(d) T o the extent possible, all eligible expenditures should be paid through the SA. All
disbursements will be channeled through SA although the borrower may choose to pre-
finance project expenditure and seek reimbursement from IDA. Also, the use o f direct
payment and special commitments may be allowed.

(e) Detailed disbursement procedures will be documented in the respective Financial

Procedures Manual.

61
Planning and Budgeting

(f) Cash Budget preparation w i l l follow the financial procedures manual. On an annual
basis, the FSPMU and F D B P E (in consultation with key project implementation staff)
will prepare the cash budget for the coming year based on the work plan and the
procurement plan for the year. The cash budget should include the figures for the year,
analyzed by quarter. The cash budget for each quarter will reflect the detailed
specifications for project activities, schedules (including procurement plan), and
expenditure on project activities scheduled respectively for the quarter.22The annual
cash budget will be sent to the Bank at least two months before the beginning o f the
project fiscal year.

(8) Detailed procedures for planning and budgetingwill be documented in the Financial
Procedures Manual.

Fixed Assets and Contracts Registers

(h) F S P M U and FD/BPE will maintain a Fixed Assets Register, which will be regularly
updated and checked. A Contracts Register will also be maintained in respect o f all
contracts with consultants and suppliers. The FS will prepare Contract Status Reports
quarterly. Control procedures over fixed assets and contracts with consultants and
suppliers will be in line with the Financial Procedures Manual.

Information Systems

(i) B o t h the P M U and BPE have computerized accounting systems, which will be used for
the Project. The PMU will hire a consultant to upgrade the system so that it can support
the new Project as well as the PMU/CPSU. The BPE will hire a consultant to overhaul
i t s system so that it can meet all project reporting requirements. Staff will be trained
adequately.

Financial Reporting and Monitoring

0) Monthly, quarterly and annual reports will be prepared for the purpose o f project
implementation, monitoring and oversight. The reports will be submitted to the Ministry
o f Power and Steel, FMF and IDA. In compliance with government reporting
requirements, Monthly Returns will be made to the Accountant General, for
incorporation in the Government's accounts.

(k) Monthly. On a monthly basis, F S P M U and FD/BPE will prepare and submit the
following reports to the relevant authorities and the head o f the implementing agency:

(i) A Bank Reconciliation Statement for each bank account.

(ii) Monthly Statement o f cash position for project funds from all sources, taking into
consideration significant reconciling items.

22 Guidance on the preparation o f budgets i s available in the Bank publication entitled "Financial Monitoring
Reports: Guidelines to Borrowers."

62
 (iii) A monthly Statement o f expenditure classified by project components,
disbursement categories, and comparison with budgets, or a variance analysis.

(iv) Statement o f Sources and Uses o f funds (by Credit Category/Activity showing
IDA and Counterpart Funds separately).

(1) Quarterly. The following financial monitoring reports will be prepared by FSPMU and
F D B P E on a quarterly basis and submitted to IDA, Ministry o f Power and Steel and
FMF:

(0 Financial Reports which include a Statement showing for the period and
cumulatively (project l i f e or year to date), inflows by sources and outflows by
main expenditure classifications; beginning and ending cash balances o f the
project; and supporting schedules comparing actual and planned expenditures.
The reports will also include cash forecast for the next two quarters.

(ii) Physical Progress Reports which include narrative information and output
indicators (agreed duringproject preparation) linkmg financial information with
physical progress, and highlight issues that require attention.

(iii) Procurement Reports, which provide information on the procurement o f goods,

work, and related services, the selection o f consultants, and on compliance with
agreed procurement methods. The reports will compare procurement
performance against the plan agreed at negotiations or subsequently updated, and
highlight key procurement issues such as staffing and capacity building.

(iv) FMR Withdrawal Schedule listing individual withdrawal applications relating to

disbursements by the reports-based method, by reference number, date and
amount.

(m) Annually. The annual project financial Statements, which will be prepared by F S P M U
and FDBPE, include the following:

A Statement of Sources and Uses of funds (by Credit Categoryhy Activity

showing IDA and Counterpart Funds separately).

Statement of Cash Position for Project Funds from all sources.

Statements reconciling the balances o n the various bank accounts (including

IDA Special Account) to the bank balances shown o n the Statement o f Sources
and Uses o f funds.

FMR Withdrawal Schedules listing individual withdrawal applications relating

to disbursements by the reports-based method, by reference number, date and
amount.

Notes to the Financial Statements.

(n) The financial statements will be audited and submitted to IDA before June 30 o f each
financial year. The following two Bank publications provide indicative formats for the
reports: (a) Financial Monitoring Reports: Guidelines to Borrowers - quarterly FMRs;

63
 and (b) Financial Accounting, Reporting and Auditing Handbook (FARAH) - monthly
and annual reports. The reporting format and all relevant reporting procedures will be
documented in the Financial Procedures Manual.

Accounting Policies and Procedures

(0) IDA and Counterpart Funds will be accounted for by the Project on a cash basis. This
will be augmented with appropriate records and procedures, to track commitments and
safeguard assets. Also, accounting records will be maintained in dual currencies (i.e.
Naira and $).

(p) The Chart o f Accounts will facilitate the preparation o f relevant monthly, quarterly and
annual financial Statements, including information on the following:

(i) Total project expenditures.

(ii) Total financial contribution from each financier.

(iii) Total expenditure on each project component/activity.

(iv) Analysis o f that total expenditure based on categories such as civil works, goods,
training, consultants and other procurement and disbursement categories.

12. Annual financial Statements will be prepared in accordance with SASs/IFRSs (Statement o f
Accounting Standardshternational Financial Reporting Standards).

(9) All relevant accounting policies and procedures will be documented in the Financial
Procedures Manual, a living document that will be regularly updated by the FS.

Audit Arrangements

Internal Audit

(r) The Internal Audit Sections (IAS) will perform internal audit activities for the Project.
Regular internal audit reports will be submitted to the PMs, Head o f the implementing
agency, IDA and the Accountant General. The I A S will be strengthened by the
deployment o f a professionally qualified and experienced internal auditor.

External Audit

(s) Audited Project Financial Statements for the Project will be submitted to IDA within six
months after year-end. Qualified external auditors will be appointed by the P M U h i t i a l
Holding Company and BPE, based on Terms o f Reference acceptable to the Bank, to
perform the audit.

(t) Besides expressing an opinion on the Project Financial Statements in accordance with
International Standards on Auditing (ISAs), the auditors will be required to comment on
whether co-financing funds have been provided regularly and used in accordance with the
financing agreement.

64
 (u) In addition to the audit report, the external auditors will be expected to prepare
Management Letters giving observations and comments, and providing recommendations
for improvements in accounting records, systems, internal controls (including
procurement procedures), compliance with financial covenants in the IDA agreement,
and progress made with implementing the projecb‘achieving the development objectives.

Impact of Procurement Arrangements

(v) A Bank Procurement Specialist (PS) has carried out an assessment o f the Procurement
Capacity o f the implementingentities.

(w) For both IDA and counterpart funds, the Project will use the procurement procedures
outlined in the guidelines: ‘Procurement under IBRD and IDA Credits and Guidelines
for the U s e o f consultants by World Bank Borrowers and by the World Bank as
Executing Agency’. The Project Accountant, internal auditor and support staff needs to
be conversant with the Bank’s procurement procedures, as internal control issues and the
incurring o f liabilities will be matters o f concern to the financial management function.

Financial Covenants

(x) The Project shall maintain financial management systems including records and accounts
and prepare financial statements in a format acceptable to the Bank. The accounts and
financial statement will be audited each fiscal year, and the audited financial statements
will be sent to the Bank not later than six months after period end. A quarterly financial
monitoring reports, including financial reports, procurement reports and progress reports,
will be prepared and forwarded to the Bank not later than 45 days after quarter end.

Supervision Plan

(y) Supervision activities will include review o f quarterly FMRs; review o f annual audited
financial statements and management letter. They also include follow-up o f issues
arising from prior missions; participation in project supervision missions, SOE review, as
appropriate; and updating the Financial Management rating in the Implementation Status
Report (ISR).

65
 D. ACTION PLAN

(z) Prior to the Project launch for implementation, it will be ensured that the Internal Audit
and Finance functions in the P M U and BPE are strengthened, and the necessary U S
Dollar Special Accounts; "Current (Draw-down)" accounts in Naira; and "Interest on
Special Account (US Dollar)" accounts are all established by the respective implementing
agencies. PMU and BPE will also advise IDA the authorized bank signatorieshpecimen
signatures for each account. In addition, the following actions are to be implemented as
specified.

ACTION By Whom By When

1 Appoint extemal auditors for the Project. P M U and BPE August 3 1,2005
2 Upgrade the computerized financial accounting system to ensure that it PMU/Initial Holding August 3 1,2005
can fully support implementation o f the new Project as well as the ComDanv
1 CPSU. This& in addition to the ongoing transmission project.
1 . .

3 I Upgrade the financial procedures manual to ensure that the procedures I PMU/Initial Holding I August 3 1,2005

uld also address curre

66
 Annex 8: Procurement Arrangements
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

A. NIGERIA’S PROCUREMENT ENVIRONMENT

1. As a result o f the CPAR o f 2000 and a subsequent IDF Grant to help execute the agreed Action
Plan, the Federal Govemment has made substantial progress with Procurement Reform. A draft
Procurement L a w was submitted to Parliament in early 2005, and circulars were issued to Govemment
agencies to establish procurement units and recruit staff, which over a period o f time, would constitute the
Federal Government’s Procurement Cadre. The Budget Monitoring and Price Intelligence Unit (BMPTCT),
established within the Presidency, with responsibility for the procurement reform agenda, instituted a due
process mechanism for all contracts to ensure that public procurement i s carried out in accordance with
the required principles and procedures. T h i s Unit currently carries out prior reviews o f contracts above
US$500,000 to ensure compliance with existing regulations. The B M P I U i s also a member o f a high
level Cash Management Committee chaired by the Minister o f Finance to certify that contracts for which
budgetary payments are requested have met the due process requirements.

2. The Unit slated to manage the major procurement functions o f the proposed Project has
considerable experience in implementing World Bank-financed projects and has a good procurement
track record. This fact, taken in conjunction with an assumption that the Government continues to make
progress in the implementation o f i t s procurement reform program, the overall project procurement risk
has been rated Average.

B. GENERAL

3. Procurement for the proposed Project shall be carried out in accordance with the World Bank’s
“Guidelines: Procurement under IBRD. Loans and IDA Credits” dated M a y 2004; and “Guidelines:
Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, and the
provisions stipulated in the Legal Agreement. The various items under different expenditure categories
are described below. For each contract to be financed by the Credit, the different procurement methods or
consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements,
and time frame agreed between the Borrower and the Bank are reflected 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. The procurement process that shall be used by the
implementingagencies shall be defined in the Project Implementation Manual (PIM), which shall include
Procurement and Financial Management Manuals. The Bank shall provide Govemment with a copy o f
generic Procurement and Financial Management Manuals.

4. Supply and Installation o f contracts procured under the Transmission System Development
Component would include:

(a) Grid Substation Reinforcement and Rehabilitation

(i) Supply and installation o f power transformers and related switchgear (330/132
kV.

(ii) Supply and installation o f power transformers and related switchgear for
substations 132/33 kV).

(iii) Supply and installation o f new line conductors D C L 132 kV.

67
 (b) System Reactive Power Compensation

(i) Supply and installation o f capacitor banks, reactors and static Var equipment.

(c) Reinforcement o f Substation

(i) Supply and installation o f power transformers (60 MVA 132/33 kV).

(ii) Supply and installation o f 33 kV circuit breakers.

(iii) Supply and installation o f 33 kV current transformers.

(iv) Supply and installation o f 33 kV voltage transformers.

(d) Bulk Grid Metering

(i) Supply and installation o f generatiodtransmission metering modules including

meters, CTs, VTs and associated accessories.

(ii) Supply and installation o f triple core CTs.

(iii) Supply and installation o f telemetering system.

(e) Extension of SCADA and Communication System

(i) Extended SCADNEMS system.

(ii) Provision o f National Control Centre Communications.

5. Procurement o f Works/Supply and Installation o f Plant and Equipment: supply and

installation contracts procured under the DistributionEfficiency Enhancement Component would
include:

(a) Creation of 33/11 kV Injection Substation

(i) Reinforcement o f 33 kV incoming power into the injection substation.

(ii) Provision o f 33 kV indoor SF6 circuit breakers + all necessary control panels.

(iii) Provision o f 2 x 15 MVA 33/11 kV transformer + all necessary control + cables.

(iv) Construction o f substation building w i t h all the necessary facilities.

(v) Provision o f 4 No. 11 kV indoor control panels + all necessary control +

cablings.

(b) Conversion o f L V D S Line to H V D S

(i) Supply and installation o f 50,25 & 15 KVA CSP transformers.

(ii) Supply and erection o f HT poles.

68
 (iii) Supply o f cables (AB cables, A A C & 3 Core Cables + neutral).

(iv) Supply o f over-head 100 mm AA conductor for re-conductoring.

(v) Supply and installation o f 11 kV automatically switched capacitor banks.

(c) Supply o f CriticalDistributionNetwork Maintenance Materials

(i) Supply o f HT poles.

(ii) Supply o f cables (of various sizes 70 - 185 mm2 3-core HT Cables).

(iii) Supply o f over-head 100 - 150 mm AA conductors,

(iv) Supply o f cable jointing kits o f various sizes.

(v) Supply o f fuses, feeder pillars and R M U s .

(d) HT MeteringEquipment

(i) Supply and installation o f HT Panel Meters with suitable modem

meteringhemote reading options as applicable.

(e) LT Metering Equipment

(i) Supply and installation o f single phase whole current meters with suitable
modem meteringhemote reading options as applicable.

(ii) Supply and installation o f three-phase whole current meters with suitable modem
meteringhemote reading options as applicable.

(iii) Supply and installation o f LT maximum demand, tivector meters/accessories

with suitable modem meteringhemote reading options as applicable.

6. Supply and Installationo f equipment and procurement o f related services under the Access
Expansion, Intensificationand Renewables Component would include:

(a) Pilot Access Expansiom'Intensification Rural ElectrificationProjects in 3 States

(IDA and GEF).

(i) Intensification projects.

(ii) 2 pilots for grid extension projects.

(iii) 2 pilots for intensification & grid extension.

(iv) Pilot for hydro + mini grid.

(v) Pilot for intensification, grid extension and hydro projects.

7. Procurement of Goods and Services: goods and services procured under the Distribution
Efficiency Enhancement Component would include:

69
 (a) Distribution relays.

(b) GIS/GPS Mapping o f distribution network.

(c) Outsourcing o f rapid response vehicles.

(d) Outsourcing o f customer service centers.

8. The Bank’s Standard Bidding Documents (SBDs) will be used for all International Competitive
Bidding (ICB), Limited International Bidding (LIB) and National Bidding Documents agreed with or
satisfactory to the Bank. However, since there i s no National Standard Bidding Document, the Bank‘s
Standard Bidding Document for Goods and Works shall be adopted by the Borrower. For evaluation o f
bids, the Bank’s Standard Evaluation Forms will be used. Contracts, which meet the requirements o f
paragraph 3.13 and 3.16 o f the Procurement Guidelines, may be procured using BOO/BOT/BOOT,
Concessions and similar private sector arrangements and Loans Guaranteed by the Bank. The detailed
procedures when using the above w i l l be agreed with the collaborating partners. Procurement for readily
available off-the-shelf goods that cannot be grouped or standard specifications commodities for individual
contracts o f less than US$50,000 equivalent may be procured under Shopping procedures as detailed in
paragraphs 3.5 o f the Guidelines: Procurement under IBRD Loans and I D A Credits, May 2004 and June
9,2000 Memorandum “Guidance on Shopping” issued by the Bank. The implementing agencies will
ensure that the most current version o f the appropriate SBD or SRFP and standard forms o f evaluation are
used. Less competitive bidding and selection procedures shall not be used as an expedient to by-pass
more competitive methods, and fractioning o f large procurement into smaller ones should not be done
solely to allow the use o f less competitive methods or to avoid IDA review.

9. Selection of Consultants: consultancy services under the Transmission System Development

Component would include:

(a) Technical Assistance and Capacity building

Feasibility studies for Afam-New Haven-Jos transmission line.

Detailed engineering studies for the Afam-New Haven-Jos transmission line.

Safeguards studies for the Afam-New Haven-Jos transmission line.

National electricity loaddemand study.

Detailed transmission grid development plan.

Technical Operations and Maintenance Contract for TransysCo.

Bid preparation and technical support for the rehabilitation o f Kainji Hydro
Power Station.

Implementation support for environmental framework.

Implementation support and engineeringsupervision o f investment components.

10. Consultancy services under the Distribution EfficiencyEnhancement Component would

include:

70
 (a) Engineering supervisiodmanagement.

(b) Capacity building and training.

(c) Protection coordination study in distribution system.

(d) Development o f database for distribution and marketing operations.

(e) Business implementation adviser.

(f) Business plan.

11. Consultancy services under the Access Expansion, Intensification and Renewables
Component (IDA and GEF) would include:

(a) Design, development and implementation o f pilots.

(b) Implementation support for renewable energy master plan.

(c) Design, development and implementation o f innovative cross-sectoral energy

applications.

12. Consultancy services under the Technical Assistance -Project Management Unit
Component would include:

(a) Development o f gas pipeline and gas-to-power projects.

(b) Environmental resettlement and social unit capacity building.

(c) Development o f Corporate Planning and Strategy Unit.

(d) HIV/AIDs prevention and communication campaign.

13. Consultancy services under the Technical Assistance -Reforms and Private Participation
Component would include:

(a) Advisory services for distribution business development.

(b) Development o f risk mitigation instruments.

(c) Communications and outreach.

(d) Capacity building for sector institutions.

14. The Bank’s Standard Request for Proposals (SRFP) would be used for all consulting assignments
estimated to cost US$200,000 equivalent or more. For assignments less than US$200,000, until
acceptable national Standard Request for Proposal documents are developed, Bank’s SRFP document will
be used. Short lists o f consulting services estimated to cost less than US$200,000 equivalent per contract
may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f
the Consultant Guidelines. Consultancy services estimated to cost less than US$200,000 equivalent per
contract may be procured in accordance with provisions o f paragraphs 3.6,3.7 and 3.8 o f the Consultant
Guidelines. Consultancy services estimated to cost US$lOO,OOO equivalent or more per contract may be

71
procured in accordance with provisions o f paragraphs 5.1,5.2,5.3 and 5.4 o f the Consultant Guidelines.
All single-source services irrespective o f the amount may be procured in accordance with provisions o f
paragraphs 3.9,3.10,3.11,3.12 and 3.13 o f the Consultant Guidelines. The appropriate selection method
for each consulting services contract would be established in the Procurement Plan.

15. Capacity Building and Training: The capacity building and training activities will cover
energy sector institutions associated with the project components. Overall strategy focuses on on-the-job
training and hiring consultants for developing training material, conducting training, and support for
training activities through seminars, workshops and training in the region and abroad based on individual
needs as well as group requirements. Training and workshops will be carried out on the basis o f approved
annual programs that would identify the general framework o f training activities for the year, including
the nature o f traininghtudy tours/workshops, the number o f trainees, and cost estimates, to be reviewed
and cleared by IDA. Selection o f training institutions for workshopshraining should be based on a
competitive process using the Consultants' Qualifications (CQ) method o f selection.

C. ASSESSMENT OF THE AGENCIES CAPACITY TO IMPLEMENT PROCUREMENTAND

PROCUREMENTIMPLEMENTATION ARRANGEMENTS

16. An updated procurement capacity assessment o f the P M U was carried out by the Bank's
Procurement Accredited Staff during the November 2004 supervision mission o f the TDP (Cr. 3559-
UNI). The assessment reviewed among others, the organizational structure for implementing the project,
conducted a procurement post review, the procurement arrangements, control systems and procurement
methods and procedures, applicable to each component and the overall project. The interaction between
the P M U staff and the NEPNInitial Holding Company, and all the successor entities were also assessed.
Procurement activities under the proposed Project will be carried out by the PMU, using the capacity
created and the good track record under the ongoing TDP (Cr. 3559-UNI). As a result o f new
investments in the proposed NEDP, the PMU will be expanded to include cells for Rural Energy,
Implementation Support and TA and Reforms related programs.

17. The ongoing TDP and the proposed NEDP will be implemented in parallel for some time. I t will
therefore be necessary to deploy two additional staff, one with engineering background, from NEPA, who
already has adequate experience in World Bank procurement processing and procedures to reinforce the
procurement unit o f the PMU. The day-to-day procurement management responsibilities for Supply and
Installation, Goods, Civil Works and Consultancy contracts will be handled by the PMU. The Borrower
has in place qualified professional staff familiar with IDA-financed projects.

18. For proper implementation o f procurement functions, the capacity building activities in
Attachment 1 to this Annex were discussed and agreed during negotiations: The implementing agency
will comprise o f four sub-units namely: (i) Transmission Systems Development Investment and TA
related to transmission -There will be n o Disbursement or Effectiveness conditions for this
component as there i s capacity within the existing PMU; (ii) DistributionEfficiency Enhancement
Investment and TA related to distribution - Due to the large increase in the amount o f this
investment, there i s the need to recruit on a competitive basis, one additional technical staff to
complement the two staff within the PMU. The recruitment o f the additional one staff will be agreed with
the PMU; (iii) Access Expansion, Intensification and Renewables Investment, T A -A new sub-unit
which will be established under this component, will work closely with the FGN, some States, BPE and
the Energy Commission o f Nigeria to design and support implementation o f pilot projects. The P M U will
recruit a team leader for this sub-unit; and (iv) Technical Assistance -Project Management Unit -
will continue building capacity in the PMU and develop the Corporate Planning and Strategy Unit.

72
19. The P M U will train new staff, manager and procurement staff on contract management,
implementation scheduling and planning not later than September 2005 to strengthen and rebuild the
capacity o f procurement staff. In addition, the P M U may hire the services o f a qualified Procurement
Specialist for the entire Project on approved terms o f reference by IDA.

20. The procurement capacity assessment o f the P M U i s rated Average.

21. Implementation of the Technical Assistance -Reforms and Private Participation will be by
BPE. BPE i s currently an implementation agency for the PSP and has been so for the last three years.
After some initial problems, BPE has now developed requisite implementation capacity and has therefore
been included as an implementingagency under this Project. This component will have a limited number
o f consultancy services procurement which will include: (i) advisory services for distribution business
development; (ii) capacity building for sector institutions such as the NERC, ISO, market operator and
Rural Electrification Agency; (iii) developing and carrying out privatization options for DBUs; and (iv)
developing r i s k mitigation instruments. BPE already has an experienced Procurement Specialist,
supported by a Project Accountant. Both staff are familiar with World Bank procurement processing and
procedures. However, recent implementation performance assessment under PSP supervision shows slow
progress. Therefore, a comprehensive procurement, financial management and implementation capacity
assessment o f BPE will be carried out. Disbursement o f this component will be contingent on BPE
receiving satisfactory evaluation o n all these criteria.

22. The overall Project risk for procurement i s therefore rated Average.

D. PROCUREMENT PLAN

23. The Borrower, at appraisal, developed a procurement plan for project implementation, which
provides the basis for the procurement methods. This plan was discussed in detail during project
negotiations and accepted by the Bank after making the necessary refinements. The Federal Government
o f Nigeria will agree to the disclosure o f the agreed procurement plan on the Bank’s public website after
the Credit has been approved. T h e agreed procurement plan will be in the Project Files. The procurement
plan shall be updated by the project in agreement with the Bank annually or as required to reflect the
actual project implementation needs and improvements in institutional capacity and be disclosed after
Bank’s approval o f the updated Plan. The plan includes relevant information o n supply and installation,
goods, works and consulting services under the Project, as well as the timing o f each milestone in the
procurement process. The procurement plan i s attached as Attachment Ito this Annex.

E. REWEWBYIDA

24. All supply and installation and works contracts estimated to cost US$1.O million equivalent or
more and goods contracts estimated to cost US$500,000 equivalent or more will be subject to IDA prior
review in accordance with the procedures set in Appendix Io f the Procurement Guidelines. Any
amendments to existing contracts raising their values to levels equivalent or above the prior review
thresholds are subject to IDA review. All direct contracting, irrespective o f value, will be subject to IDA
prior review.

25. All single source selection as well as Terms o f Reference (TOR) for all consultancy contracts
irrespective o f the contract value, will be subject to IDA prior review. Consultancy contracts with f i r m s
with estimated value o f US$200,000 or more, and consultancy contracts with individuals estimated value
o f US$lOO,OOO equivalent or more will be subject to prior review by IDA in accordance with the
procedures set in Appendix Io f the Consultants Guidelines.

73
26. Post reviews o f contracts awarded below the above threshold levels will be carried out selectively
by IDA during supervision missions and/or by an independent procurement auditor.

F. FREQUENCY OF PROCUREMENT SUPERWSION

27, In addition to the prior review supervision to be carried out from Bank office, the updated
capacity assessment o f the P M U has recommended two supervision missions to visit the field.

G. CONTMCT A WARD DISCLOSURE REQUIREMENTS

28. Publication o f contract awards in United Nations Development Business (UNDB) online and
dgMarket would be required for all ICB, NCB, Direct Contracting and the Selection o f Consultants for
contracts exceeding a value o f US$200,000. In addition, where prequalification has taken place, the l i s t
o f pre-qualified bidders will be published. With regard to ICB, and large-value consulting contracts, the
Borrower would be required to assure publication o f contract awards as soon as the Bank has issued i t s
“no objection” notice to the recommended award. With regard to Direct Contracting and NCB,
publication o f contract awards could be in an aggregate form o n a quarterly basis in the local media. All
consultants competing for an assignment involving the submission o f separate technical and financial
proposals, irrespective o f i t s estimated contract value, should be informed o f the result o f the technical
evaluation (number o f points that each firm received), before the opening o f the financial proposals. The
implementing agency would be required to offer debriefings to unsuccessful bidders and consultants.

H. E THICS/TRANSPARENCY

29. All procuring entities as well as bidders, suppliers and contractors shall observe the highest
standard o f ethics during the procurement and execution o f contracts financed under the project in
accordance with Paragraph 1.15 o f the Guidelines: Procurement under IBRD Loans and IDA Credits,
May 2004): and Paragraphs 1.22 o f the Guidelines: Selection and Employment of Consultants by World
Bank Borrowers, May 2004.

I. DETAILS OF THE PROCUREMENT ARRANGEMENTS INVOL WNG INTERNATIONAL

COMPETITION

30. The Project’s detailed activities for the first 18 months o f implementation are detailed in the
procurement plan which was discussed and agreed between IDA and the Federal Government of Nigeria
during negotiations and will be incorporated in the PIM.

74
Table A: Thresholds for Procurement Methods and Prior Review

Contract Value 'rocurement :ontracts Subject to

Sxpenditure Category rhreshold (US$) rlethod 'rior Review (US$)

.. Works
Supply & Installation >=1 million ICB All contracts

<1,000,000 NCB None

!. Goods >=500,000 ICB/LIB All contracts

<500,000 NCB/LIB None

<50,000 ShoppingiIAPSO None

All Values Direct Contracting All contracts

I. Consulting Services >=200,000 - firms QCBS All contracts

<200,000 - firms QCBS/LCS/SBCQ None

>=100,000 - individuals IC All contracts

<100,000 - individuals IC None

~
All values Single-Source Selection All contracts
1. Training Annual Plan All Training

Note: ICB International Competitive Bidding

LIB Limited International Bidding
NCB National Competitive Bidding
DCT Direct Contracting
IAPSO Inter Agency Procurement Services Office
SHOPPING IntemationaVNational Shopping
QCBS Quality- and Cost-Based Selection
SBCQ Selection Based o n Consultants' Qualification
IC Individual Consultants
LCS Least Cost Selection
ss Single Source

75
 ATTACHMENT I- DETAILS OF THE PROCUREMENT ARRANGEMENT INVOLVING
INTERNATIONAL COMPETITION

I. General

1. Project information: NATIONAL ENERGY DEVELOPMENT PROJECT.

Project ID No: P090104.
Project Implementing Agencies: NEPA-PMU, BPE.

2. Bank’s approval Date o f the Procurement Plan: M a y 4,2005.

3. Date of General Procurement Notice: Online M a y 2,2005; Paper form (Issue 655, M a y 31,
2005).

4. Period covered by this procurement plan: M a y 2005 to November 2006.

IL Goods, Supply and Installation and Works and non-consulting services

5. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated
in Appendix 1 to the Guidelines for Procurement:

Procurement Method Prior Review Threshold Comments

1. ICB and LIB (Goods) >=500,000 A l l Contracts
2. ICB (Works/Supply & Installation) >=1.0 million A l l Contracts
3. ICB (Non-Consultant Services) >=500,000 A l l Contracts
4. Direct Contracting A l l Values A l l Contracts

(a) List of contract Packages which will be procured following ICB and Direct contracting.
(b) ICB Contracts estimated to cost above US$500,000 equivalent or more per Contract and all Direct
Contracting will be subject to prior review by the Bank.

6. Prequalification: Bidders for: (i) supply and installation o f capacitor banks, reactors and static
Var equipment; (ii) supply and installation o f power transformer and related switchgear for 2 substations
(150 MVA 330/132 kV); (iii) supply and installation o f power transformers and related switchgear for
selected substations (-60 MVA, 132/33 kV); and (iv) rehabilitation o f 132 kV lines shall be pre-qualified
in accordance with the provisions o f paragraphs 2.9 and 2.10 o f the Guidelines.

7. Proposed Procedures for C D D Components (as per paragraph 3.17 o f the Guidelines): N/A.

8. Reference to (if any) Project OperationaVProcurement Manual: The Procurement Plan will
also form part o f the Project Implementation Manual.

9. Any Other Special Procurement Arrangements: (including advance procurement and

retroactive financing, if applicable): N / A .

76
 10. Procurement Packages with Methods and Time Schedule.

Ref. Contract Estimated Procure Prequali Domestic Review Expected Comments

No. (Description) cost ment fication Preference by Bank Bid- / Contract
Method (yesho) (yes/no) (Prior I Opening Signature
- Post) Date Date

A Transmission System
Development
Component
1 Grid Substation 59,600,000 ICB Prior 03/30/06 06/30/06
Reinforcement &
Rehabilitation:
Lot 1: 3301132 kV SIS
Reinforcement,
Lot 2: 132133 kV SIS
Reinforcement,
Lot 3: 132133 kV SIS
Reinforcement,
Lot 4: 132133 kV SIS
Rehabilitation,
Lot 5: Transmission
Line Reinforcement -
- 132 kV.
2 System reactive 20,400,000 ICB Prior 09118/05 11/15/05
- Power compensation.
3 Grid Substation 16,200,000 ICB No I No Prior 02/10106 04/10/06
Reinforcement for
Distribution clusters.
4 Extension o f bulk 4,800,000 ICB No I No Prior 09/29/05 03/01/06
metering and
- telemetering system.
Prior 12/01/05 0310 1/06

+
5 Extension o f 4,100,000 ICB
SCADNEMS to 33
kV systems and
improvement o f
communication
systems.

B Distribution

w
Efficiency
Enhancement
Component
1 Injection Substation 3,000,000 ICB Prior 03/06/06 05/08/06
Reinforcement in
selected Business
- units.
2 Conversion o f LVDS
to H V D S (Supply &
install CSP
6,100,000 ICB
No I No
Prior 03/13/06 06/05/06

Distribution
transformers & a l l
necessary accessories
in selected Business
- Units’).

77
- Domestic Review Expected Comments
Ref. Contract Estimated Procure Prequali
(Description) cost ment fication Preference by Bank Bid- I Contract
No.
Method (yeslno) (y eslno) (Prior I Opening Signature
Post) Date
Supply o f Critical ,500,000 CB No No ?rior )3/20/06 35/22/06
Xstribution
naintenance
naterials:
Lot 1: HT Poles,
Lot 2: 11/33 kV
Clables,
Lot 3: Aluminum
2onductors (150
d),
Lot 4: Cable jointing

I
cits, fuses Feeder
Dillars and WS.
Supply & install HT 1,500,000 .CB No No Prior 03/27/06 05/29/06
Panel Meters with
suitable modem
meteringhemote
reading options as
applicable in selected
business units.
Supply & install ~,000,000 [CB No No Prior 04/03/06 06/05/06
5
Energy Meters with
suitable modem
meteringhemote
reading options as
applicable:
L o t 1: LT Trivector
Meters (CT operated),
L o t 2: Single Phase
Meters,
L o t 3: Three Phase
Meters.
Replacement of faulty 500,000 ICB No No Prior 01/31/06 03/31/06
6

k
Relays in injection
-

II_
substations.

I
7 Outsourcing of Rapid 1,000,000 ICB Prior
Response Vehicles for (2 stage (technical)
No
selected business bidding) 08130106
units. financial
+i%E+m-

c
8 Outsourcing of 1,500,000 ICB Prior
customer care centers (2 stage (technical)
in selected business bidding) lOlO2106
- units.

C Access Expansion,
Intensification and
Renewables
- Component I I
6,500,000 ICB 1 No I No Prior 01/30/06 04130106

L
1 Pilot rural
electrification projects (IDA)
I
~

- in 3 States. 600,000
Ref. Contract Prequali Domestic Review Expected Comments
No. (Description) fication Preference b y Bank Bid- I Contract
Method (yeslno) (yeslno) (Prior I 0pening Signature
~ Post) Date Date
L o t 1: 2-pilots for
intensification project,
L o t 2: 2-pilots for grid
extension projects,
L o t 3: 2-pilots for
intensification and
grid extension,
L o t 4: 1-pilot for
hydro + mini grid,
L o t 5: 1-pilot for
intensification, grid I

extension and hydro.

79
III. Selection of Consultants

11. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in
Appendix 1 to the Guidelines Selection and Employment o f Consultants:

Selection Method Prior Review Threshold Comments

1. QCBS (Firms) >=200,000 All Contracts
2. Individual Consultants (IC) >=100,000 All Contracts
3. Single Source (SS) FirmsAndividuals All Values All Contracts
4. Training All Values All contracts

12. Consultancy services estimated to cost above US$200,000 equivalent per contract and Single
Source selection o f consultants (firms/individuals) for all assignments will be subject to prior review by
the Bank.

13. Short lists entirely o f national consultants: Short lists o f consultants for services estimated to
cost less than US$200,000 equivalent per contract, may be composed entirely o f national consultants in
accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

14. Any Other Special Selection Arrangements: None

15. Consultancy Assignments with Selection Methods and Time Schedule.

Ref. Description of Estimated Selection Review Expected Comments/

No. Assignment cost Method by Bank Proposals Contract
(Prior / Submission Signature
Post) Date Date
A Transmission System
DevelopmentComponent
1 Feasibility Studies for Afam- 220,000 QCBS Prior 1O/ 16/05 02/04/06
New Haven-Jos transmission
line.
2 Detailed Engineering studies 1,880,000 QCBS Prior 11/01/05 04/06/06
for the Afam-New Haven-Jos
I transmission line.
3 I Safeguards studies for the I 500,000 I QCBS [ Prior I 10/04/05 I 02/09/06
I Afam-New Haven-Jos I I I I I
transmission line.
4 National Electricity Load and 1,500,000 QCBS Prior 1210 1IO5 05/04/06
Demand Study.
5 Updated Transmission Grid 1,000,000 QCBS Prior 12114/05 05/14/06
I Design study.
6 I T e c h c a l Operations and I 2,000,000 I QCBS I Prior I 01/10/06 I 06/08/06
I Maintenance Contract for
Transysco.
7 Bid Preparation and technical 500,000 QCBS Prior 11/14/05 0410 1/06
support for the rehabilitation
o f Kainji Hydro Power
Station.
8 Implementation support and 2,000,000 QCBS Prior 12/09/05 05/09/06
Engineering Supervision o f
Transmission Projects.

80
 ~

Ref. Description of Estimated Selection Review Expected Comments/

No. Assignment cost Method by Bank Proposals Contract
(Prior / Submission Signature
Post) Date Date
9 Implementation support for 1,000,000 QCBS Prior 12/09/05 05/09/06
social and environmental
framework.

B Distribution Efficiency
Enhancement Component
1 Engineering Supervision o f 500,000 QCBS Prior 01/08/07 04/02/07
Distribution Project.
2 Capacity Building and 500,000 Various TBD TBD TBD
Training for DISCOM. Methods
_ _ ~
(TBD) ~ __ _ _ _

3 Protection Coordination 500,000 QCBS Prior 08/30/05 11/07/05

Study in the Distribution
system.
4 Development o f Database for 3,000,000 QCBS Prior 02/01/06 07110106
I retail operations.
5 I Studies for solid waste I 1,000,000 I QCBS I Prior I 12/01/05 0510 1/06
management (PCB and SF6).
6 Business Implementation 500,000 QCBS Prior 06/19/05 09/20/05
Adviser.
7 Services for the preparation 1,000,000 QCBS Prior 1210 1105 05/01/06
o f Business Plans for DBUs. ~

C Access Expansion,
Intensification and
RenewablesComponent
1 Design, development and 300,000 QCBS Prior 10/02/05 0 1/25/06
implementation o f pilots. (IDA)
200,000 QCBS Prior 10/07/05 11/21/05
(GEF)
2 Developing innovation o f 300,000 QCBS Prior 0 1116/06 06116/06

03/30/06

02/09/06

12/30/05

TBD

TBD

TBD
and social unit capacity Methods
building. (TBD)

23 Flexibility o f procurement method for US$5 m TA on Gas that will be reflected in Project Agreement.

81
 Ref. Description of Estimated Selection Review Expected Comments/
No. Assignment cost Method by Bank Proposals Contract
(Prior / Submission Signature
Post) Date Date
4 HIVIAIDS Prevention and 500,000 Various TBD TBD TBD
communication campaign. Methods
(TBD)

E TA - Reforms and Private

Participation
Advisory services for 1,000,000 QCBS

development.
2 TA for development o f risk 1,000,000 QCBS Prior 11/01/05 03101/06
mitigation instruments.
3 TA for communications and 1,200,000 QCBS 11/08/05 03/08/06
outreach.
4 Capacity building for sector 700,000 Various TBD TBD TBD
institutions. Methods
(TBD)
5 Distribution Business TBD TBD TBD TBD TBD
Outsourcing Bids for selected
clusters.
6 Distribution Function TBD TBD TBD TBD TBD

l l Outsourcing Bids for selected

clusters.

82
IV. Implementing Agency Capacity Building Activities with Time Schedule

16. In this section the agreed Capacity Building Activities are listed with time schedule.

No. Expected outcome / Estimated Estimated Start Date Comments

Activity Description cost Duration
1 Deployment o f 1 Engineer and 1 N/A For the July 2005 From NEPA
additional staff for Procurement duration o f
activities. the Droiect
Deployment o f 1 additional technical N/A For the July 2005 From NEPA
staff for distribution sub-unit. duration o f
the project
Establishment o f rural and renewable 108,000 For the B y Project
energy sub-unit at the P M U and duration o f Effectiveness
recruitment o f a rural energy the project
consultant.
Training on Contract 200,000 Ongoing Ongoing
admhstratiodmanagement for staff o f
PMU.
Advance procurement training for staff 40,000 Ongoing Ongoing
and managers o f PMU.
Workshops for ERSU staff to 20,000 Ongoing Ongoing
strengthen the capacity o f the sub-unit.
Procurement and Financial Ongoing Prior to Project Capacity building
Management training for BPE staff Effectiveness to be provided for
who will be implementing the project. staff to acquire
knowledge in
procurement and
financial
management
imdementation.

83
 Annex 9 A: Economic Analysis
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

1. Project Benefits and Internal Rate of Return. The Project i s a blend o f investments in
Transmission rehabilitation, system reinforcement and strengthening/expansion o f distribution facilities in
particular areas. The economic analysis o f the Project i s therefore based on a cost-benefit analysis o f the
main investment subcomponents.

2. The Project investments yield six distinct benefits: (i) incremental electricity demand served; (ii)
reduction o f losses (technical and non-technical); (iii) improved power quality and supply reliability; (iv)
avoided captive generation; (v) improved revenues; and (vi) enhanced customer satisfaction. The
minimum value o f the incremental demand has been computed on the basis o f a load growth o f 4% p.a.,
the average across the board tariff o f 4.6 U S c k W h (2003 NEPA audited figures), the alternative supply
cost from captive generation o f 10.4 U S c k W h and the average cost to serve per unit o f energy 4.6
U S c k W h (6.2 NairakWh) handled by NEPA.

3. The Base Case EIRR and FIRR calculation i s given in the table below.

Value EIRR FIRR

Transmission System Development Component 43.6% 13.2%
Distribution Efficiency Improvement Component 37.0% 25.0%
Total Base case 43.2% 16.6%

4. N e t present value for the economic analysis at a 12% discount rate yields approximately US$306
million. The financial NPV again at 12% works out to nearly US$28 million.

Results of sensitivily analysis on the economic andfinancial rate of return

Scenario EIRR FIRR Degree o f sensitivity

(in YO) (in YO) to change
Lower Load Growth (1%) 29.2% 11.2% Low
Higher Average Tariff (USc 6) 47.4% 30.2% Moderate
Lower Average Tariff (USc 3) 39.8% Moderate
Lower Alternative Supply Cost (USc 8) 3 1.4% 16.1% Low

5. The ERR i s particularly sensitive to the expected load growth and improvement in revenues.
Depending on the assumptions used, the sensitivity analysis with respect to EIRR varies from 29% to
47%. The lower end o f the EIRR is, however, highly improbable considering the large unserved areas o f
suppressed demand currently existing in Nigeria. Also, loss reduction investments are highly beneficial
under any load scenario. Network reinforcements which account for major part o f the Transmission and
Distribution investment components -will remain a crucially beneficial element o f the project,
considering the delivery constraints already under current load level. The relatively high returns can be
explained with the nature o f the investments being primarily geared towards increasing capacity and
improving sales in already existing installations and structures. The costs are therefore considerably
lower for the similar benefits arising from “green field” investments.

84
Transmission System Development Component

6. The Economic and Financial returns o f investment o f the Transmission Component have been
based on a conservative cost-benefit analysis as discussed below.

7. The physical benefits from these investments that have been quantifiedz4 are threefold: first, (and
most important) the incremental electricity supplied to consumers; second, the reduction in technical
lossesz5arising from reactive power compensation investments, replacement o f defective equipment,
overloaded transformers and lines etc.; and third the savings to consumers who no longer have to operate
their captive generators.

8. For the purposes o f the economic and financial analysis, cost-benefits have been estimated during
the total lifetime o f the equipment Le., 30 years from project effectiveness. The benefits from incremental
sales are based on a forecast o f 4% annual load increase in the affected areas, calculated for the first 10
years o f the project life cycle. The rate o f load increase in Nigeria i s an estimate since no reliable data
can be found due to the severe supply constraints in the current system. The figure i s however considered
conservative in the light o f the rapid urban growth in Nigeria in the recent past and the high level o f
suppressed and unserved demand. The estimate i s also in the l o w end o f the simulations adopted in the
2003 Tractebel Transmission Grid Development Plan (where simulations used growth rates varying from
3 - 6%). This figure could be higher in areas where high levels o f suppressed demand and load-shedding
are re-curring.

9. The additional sales and associated costs have been valued building on the NEPA’s 2003 cost o f
service figure o f 4.6 U S c k W h distributed over the different segments in the NEPA Value Chain (see
further in Annex 9 B: Sector Financial Summary) as well as the average costs o f self generation. A
component wise summary of the economic Benefit calculations i s as follows:

e Transmission Grid Reinforcements and Transmission Supply strengthening for

DistributionClusters. The benefits have been calculated using the additional kwh sold,
valued at the alternative Captive Generation Cost that the consumers otherwise have to
bear. T o correctly take into account the associated costs to other parts o f the network
from the investment, the corresponding economic costs o f generation and distribution
have been added.

e Reactive Power Compensation. The benefits from the loss reduction have been
calculated using the kwh sold valued at the average tariff received by NEPA (USc 4.6).
These benefits have been adjusted to reflect the downstream distribution costs o f the
incremental energy sales.

10. For the FIRR, a simplified calculation has been made using the associated costs and the actual
sales income based o n the average tariff.

~~

24 Benefits to consumers arising from improved reliability o f service have not been included.
25 A reduction in technical losses means that energy sales can be increased without a corresponding increase in
production.

85
11. Significant assumptions are summarized below:

Assumption Value

Distribution Efficiency Improvement Component

12. The economic and financial returns o f investment o f the distribution component have been based
on a conservative cost-benefit analysis as discussed below.

13. The investment wise physical benefits that have been quantified are as below:

I.High Voltage Distribution System

(a) Technical loss reduction.
(b) N o n technical loss reduction (on account o f reduced pilferage o f electricity).
(c) Enhanced energy billing due to substitution o f energy from captive generation with grid supply.
(d) Increase in sales owing to load growth o n account o f increase in distribution capacity
(through new injection substations).
11. HT Panel Meters
(a) Higher energy billing due to efficient metering.
(b) Increase in sales due to metered new customers (who would have been supplied energy
without metering in the absence o f this investment).
(c) reduction o f transformation losses (with metering o n the HV side o f the transformer).
111. L T Panel Meters
(a) Enhanced energy billing due to efficient metering.
(b) Increase in sales due to metered new customers (who would have been supplied energy
without metering in the absence o f this investment).
(c) Higher energy sales due to segregation o f customer premises.
IV. R a p i d Response Vehicles
(a) Increase in billing due to decrease in outage times.
(b) Reduced energy losses due to detection and elimination o f illegal connections.
V. Customer Service Centers
(a) Higher recoveries induced by better customer outreach.
(b) Increase in sales due to ease o f obtaining new connections to the grid.

86
14. For the purposes o f the economic and financial analysis, appropriate costs and benefits have been
estimated for a ten year period, as most o f these equipments require replacement in that time frame. An
average across the board tariff o f 4.6 USc/ kwh has been adopted for quantifying the energy gains that
result due to these investments. However, in case o f HVDS investments a value o f 10.4 USc/ KWh has
been assigned for monetizing the benefits that accrue due to substitution o f energy from captive
generation with grid supply. This has been done tahng into consideration the avoided costs o f expensive
captive generation and the utility’s cost to serve that demand. Several key assumptions were made while
evaluating the costs and benefits o f various distribution investments. The basis for these assumptions i s
drawn from an analysis o f the historically established distribution costs and benefits in the power utilities
in Nigeria, and measured empirical data emanating from the CREST pilots under implementation.

15. The following table details the general key assumptions made for the economic and financial
analysis o f the distribution investments:

Initiative I Direct Benefits I Other Benefits IO&M

I I
H V D S + Injection Loss reduction resulting in
Substations energy saved: 8%.
Reduction o f non technical
losses due to decrease in theft
o f electricity: 5%.
HT Panel Meters Increase in HT billing: 5%.
I
Voltage improvement resulting in 5% o f the cost o f
substitution o f energy from investment.
captive generation to grid supply:
3%.
Anticipated hike in energy sales
due to load growth o n account o f
new injection substations: 5%.
Increase in energy sales on I 2% ofthe cost o f
account o f new customers: 2%. investment.

Metering o f energy due to

transformation loss: 1.5%.
LV Meter Increase in LV billing: 5%. Increase in energy sales on 3% o f the cost o f
account o f new customers: 2%. investment.

Benefits due to segregation o f

customer premises: 1%.
Rapid Response Increase in billing due to Detection o f illegal connection: 15% o f the cost o f
Vehicles decrease in outage time: 1.5%. 0.5%. investment.
Customer Service Increase in recoveries: 1.5%. Ease o f getting new connections: 5% o f the cost o f
Centers 1%. investment.

87
16. The following are the distinct assumptions made for computing the economic and financial
internal rates o f return for the distribution investments.

Initiative I EIRR FIRR

+
HVDS Injection Reduction in losses (8%). Apart from benefits evaluated for EIRR, an
Substations N e w customers due to voltage additional benefit o f 5% i s assumed o n account o f
improvement (3%). reduction o f non technical losses due to decrease in
Additional sales due to load growth as theft o f electricity.
a result o f the creation o f new injection
substations (5%).
HT Meter Increase in billing (5%). Apart from the benefits assigned for calculation o f
EIRR, the energy billed due to transfer o f
transformation losses have been taken for FIRR as it
i s a direct financial benefit to the utility (1.5%).
LV Meter Increase in LV billing (5%). Apart from benefits evaluated for EIRR, an
Increase o f sales to new customers additional benefit o f increase in billing due to
(1%). segregation o f customer premises (1%) since it i s
analogous to theft.
Rapid Response Decrease in outage time (1 S%). Detection and removal o f illegal connection would
Vehicles result in financial benefits to the utility.

Therefore, apart from benefits evaluated for EIRR,

an additional benefit o f detection o f illegal
connection has been assigned for FIRR (0.5%).

Customer Service Ease o f obtaining new connections to Ease o f getting new customers may not immediately
Center the grid (1%). translate to increase in sales. Therefore, for the
purpose o f computing the FIRR anticipated energy
sales to new customers are not included in the sales.

Associated other costs:

(i) Incase o f Customer Service Centres: Computed as % o f (increase in payments + ease o f
getting new connections).
(ii) Rapid Response Vehicles: Computed as % o f (increase in LV billing due to decrease in outage
time + increase in billing due to detection o f illegal connection).
(iii) For other Investments: Computed as % o f energy delivered in the various areas covered.

88
Detailed Economic Analvsis Table

Economic Internal Rate of Return (EIRR)

investment Associated Total

Year Cost MUS$ O&M cost MUS$ incremental cost Cost Total benefits MUS$ Net Benefit MUS$

FY06 61.630 0.890 1.923 64.443 8.773 -55.670

FY07 54.072 2.344 2.477 58.893 10.224 -48.670
FY08 0.000 2.344 24.672 27.016 64.1 35 37.119
FYO9 0.000 2.344 40.320 42.664 102.434 59.770
FYI0 0.000 2.344 42.701 45.046 108.263 63.218
FYI 1 0.750 2.344 43.579 46.674 110.412 63.739
FYI2 0.000 2.344 44.492 46.837 112.647 65.81 0
FYI3 0.000 2.344 45.442 47.786 114.971 67.185
FYI4 0.000 2.344 46.430 48.774 117.388 68.614
FYI5 0.000 2.344 47.457 49.801 119.902 70.101
FYI6 0.000 1.454 48.320 49.774 114.034 64.259
FYI7 0.000 1,454 48.527 49.982 114.541 64.559
FYI8 0.000 1.454 48.527 49.982 114.541 64.559
FYI9 0.000 1.454 48.527 49.982 114.541 64.559
FY20 0.000 1.454 48.527 49.982 114.541 64.559
FY21 0.000 1.454 48.527 49.982 114.541 64.559
FY22 0.000 1.454 48.527 49.982 114.541 64.559
FY23 0.000 1.454 48.527 49.982 114.541 64.559
FY24 0.000 1.454 48.527 49.982 114.541 64.559
FY25 0.000 1.454 48.527 49.982 114.541 64.559
FY26 0.000 1.454 48.527 49.982 114.541 64.559
FY27 0.000 1.454 48.527 49.982 114.541 64.559
FY28 0.000 1.454 48.527 49.982 114.541 64.559
FY29 0.000 1.454 48.527 49.982 114.541 64.559
FY30 0.000 1.454 48.527 49.982 114.541 64.559
FY31 0.000 1.454 48.527 49.982 114.541 64.559
FY32 0.000 1.454 48.527 49.982 114.541 64.559
FY33 0.000 I.454 48.527 49.982 114.541 64.559
FY34 0.000 1.454 48.527 49.982 114.541 64.559
FY35 0.000 1.454 48.527 49.982 114.541 64.559

NPV MUSD (12%) 303.459

EIRR 43.21 %

89
Detailed Financial Analvsis Table

Financial Internal Rate of Return (FIRR)

Incremental Fixed Associated Sales

Year Capital Cost O&M cost Incremental cost (GWh) Revenue MUS$ Net Revenue MUS$

FY06 61.430 1.530 1.900 210.136 9.666 -55.194

FY07 53.820 2.338 2.349 241.672 11.117 -47.390
FY08 0.000 2.338 22.300 894.893 41.165 16.527
FYO9 0.000 2.338 33.096 1208.323 55.583 20.149
FYlO 0.000 2.338 35.030 1264.460 58.165 20.798
FYll 0.750 2.338 35.744 1285.207 59.120 20.288
FY12 0.000 2.338 36.488 1306.785 60.112 21.287
FY13 0.000 2.338 37.260 1329.225 61.144 21.546
FY14 0.000 2.338 38.064 1352.563 62.218 21.816
FY15 0.000 2.338 38.900 1376.835 63.334 22.097
FY16 0.000 1.448 37.704 1187.125 54.608 15.457
FY17 0.000 1.448 37.778 1189.292 54.707 15.482
FY18 0.000 1.448 37.778 1189.292 54.707 15.482
FY19 0.000 1.448 37.778 1189.292 54.707 15.482
FY20 0.000 1.448 37.778 1189.292 54.707 15.482
FY21 0.000 1.448 37.778 1189.292 54.707 15.482
FY22 0.000 1.448 37.778 1189.292 54.707 15.482
FY23 0.000 1.448 37.778 1189.292 54.707 15.482
FY24 0.000 1.448 37.778 1189.292 54.707 15.482
FY25 0.000 1.448 37.778 1189.292 54.707 15.482
FY26 0.000 1.448 37.778 1189.292 54.707 15.482
FY27 0.000 1.448 37.778 1189.292 54.707 15.482
FY28 0.000 1.448 37.778 1189.292 54.707 15.482
FY29 0.000 1.448 37.778 1189.292 54.707 15.482
FY30 0.000 1.448 37.778 1189.292 54.707 15.482
FY31 0.000 1.448 37.778 1189.292 54.707 15.482
FY32 0.000 1.448 37.778 1189.292 54.707 15.482
FY33 0.000 1.448 37.778 1189.292 54.707 15.482
FY34 0.000 1.448 37.778 1189.292 54.707 15.482
FY35 0.000 1.448 37.778 1189.292 54.707 15.482

NPV MUSD (12%) 30.128

FIRR 16.56%

90
 Annex 9 B: Sector Financial Summary
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT
Introduction

1. The Project strategy i s centered on supporting the transition to reform. One o f the key actions to
be accomplished in the transition i s the restructuring o f NEPA and the incorporation o f i t s new successor
companies. Financial restructuring o f assets and liabilities, capitalization o f the new companies and
development o f 5-year business plan for each o f the new companies are a part o f this reform process. A
major financial restructuring exercise i s therefore currently underway and this summary analysis i s
limited to taking a short-term consolidated view o f the sector.

2. Since the inception o f the reform program in 1999, and i t s gathering momentum from 2002,
NEPA’s financial results have been showing an improving trend. This positive trend accelerated in 2003
and 2004 as a result o f the CREST interventions described earlier. The key highlights o f the operational
and financial performance in 2003/2004 are as follows.

0 Management actions in tackling losses and uncollected billing have resulted in some
increase to cash inflows. Monthly collections in 2004 averaged N5.9 billion, as against
N4.2 billion in 2002 and N4.9 billion in 2003.

0 Revenue yield per kWh o f bulk energy handled by NEPA rose from an average o f 2.68
NkWh in 2003 to 3.33 NkWh in the 4’ quarter o f 2004.

0 T & D losses in the ten months to October 2004 dropped to 34% against 40% in 2003.

0 Energy sold increased by 6.4% in 2004 as compared to 2003, while energy billings are
expected to be 16% higher.

3. Despite these positive developments, the gap between NEPA’s revenue requirement to cover
costs and actual cash collections i s still substantial. The shortfall averages around N2 billion per month or
roughly US$16 million. Furthermore, NEPA has not serviced i t s Government debt for many years and
investments from internal resources in recent years have been minimal. T o compound the problems,
tariffs have been constant in Naira terms since 2002, whereas cumulative domestic inflation has reached
about 50% over the same period, and the Naira has depreciated against the U S dollar and the Euro by
15% and 44% respectively. Hence there i s s t i l l a long way to go in terms o f improving the sector’s
business fundamentals. Comparable experience from other utilities in similar developing country
contexts show that the government-regulated, integrated utility business model does not deliver results
beyond a point. Therefore the reform and financial restructuring i s necessary.

4. In order to assess the potential benefits o f reforms, the project financial analysis compares a
“reform scenario” against a base case o f “no-reforms” in the sector. The base case assumes n o efficiency
improvements, n o tariff increases or any financial restructuring. The reform scenario, based on the
limited experience o f transmission and distribution CREST program results at a cluster-level, assumes a
conservative 5% annual efficiency gain starting in 2006, 15% annual tariff increases starting in 2007 and
debt r e l i e f to the extent o f 75% o f existing debt on the books o f NEPA. The financial shortfall under the
base case would have risen to nearly US$2.5 billion in the year 2010, whereas under the reform
assumptions, this deficit for 2010 will be in the order o f US$450 million. More aggressive attention to
efficiency gains through introduction o f private management, regulated economic pricing o f energy, and
quicker reforms could produce superior outcomes for Nigeria.

91
5. T h i s Project therefore seeks to support a faster transition to a reformed sector and also targets
investments in the network to achieve at least a minimum level o f efficiency improvements and revenue
growth. This will enable NEPA, and by extension, the successor companies to remain functional during
the transition period.

Review of N E P A ‘s Recent Financial Performance

6. The underlying financial situation o f NEPA i s still weak and liquidity remains tight. Some
operational and financial performance improvements have been made since the last financial review in
early 2004. The following tables present the financial and operational statistics for NEPA from 2000
through 2004.

Table 1: Key Income Statement Results

National Electric Power Million US$

Authority (NEPA)
Provisional
-
Actual Actual Actual Actual
- -
2000
2001 -
2002 -
2003 2004

Average Exchange Rate 102 112 122 130 133

during Year (N/lUS%)

Electricity Sent Out (GWh) 14,865 17,230 21,020 22,265 23,679

T & D Losses (including Non- 40% 40% 46% 45% 39%
Technical)
Electricity Sales (GWh) 8,810 10,228 11,242 12,247 14,264
Average Tariff (USc/kWh) 3.84 3.42 4.96 4.67 4.36
Total Operating Revenue 346.0 362.2 648.8 660.3 687.1

Power Purchase, excluding fuel 0.6 21.2 54.4 70.8 63.9

Fuel 10.7 40.1 46.3 36.2 21.7
Payroll 166.9 234.5 200.1 209.2 224.9
Other 0 & M 107.7 109.2 157.0 168.1 194.7
Depreciation 40.9 33.1 37.7 36.6 47.5
B a d Debts and Obsolete Stock 51.5 84.6 205.1 172.5 171.9
Writ e-off
Total Operating Expenses 378.4 522.8 700.6 693.4 724.6

Operating Income (37)

Interest and Other 128.8 20.0 60.0 42.8 32.9

Net Income (161.3) (180.6) (111.8) (75.8) (70.3)

Working Ratio Cash Op Expenses/Op 0.98 1.48 1.16 1.11 1.10

Revenue
Operating Ratio Op Expenses/Op 1.09 1.44 1.08 1.05 1.os
Revenue
Return on Fixed Assets Op Income/Av Net -0.12 -0.47 -0.12 -0.07 -0.07
Fixed Assets

92
7. The following are some observations from Table 1.

0 Energy supply (own generation plus purchased power) increased by 5.8% and 6.2% in
2003 and 2004 respectively and approximately 10% per year o n a compounded average
from 2000 through 2004. Recorded peak loads during the last three years were 3,223
MW in 2002, 3,479 M W in 2003 and 3,403 MW in 2004. With the commissioning o f
Agip in April 2005, the energy supply situation i s expected to improve.

0 Energy sales (billing) in 2004 are expected to rise by over 16% and approximately 10%
per year o n a compounded average from 2000 through 2004.

0 The weighted average electricity revenue declined by 3.8% to 5.8 N k w h and by 6.4% in
U S dollar terms to US$0.044 kwh. The decline i s attributed to the increasing proportion
o f subsidized domestic consumption. The erosion o f electricity tariffs, which have not
been adjusted since early 2002, i s undermining financial performance and compounding
NEPA’s financial difficulties.

0 Payroll represented 30% o f the annual operating expenses and purchased power
approximately 10% o f the annual operating expenses in 2004.

0 The N e t Income has been negative from 2000 through 2004 but has been improving.

0 The worlung ratio shows that cash operating expenses are higher than cash revenue.

93
 Table 2: Key Balance Sheet Statement Results

National Electric Power Authority (NEPA) Million US$

Balance Sheet (in Million US$, Current
Prices)
Actual Actual Actual Actual Provisional
- -
2000
2001 -
2002 -
2003 -
2004

Average Exchange Rate during Year 102 112 122 130 133
(N/lUS$)

N e t Fixed Assets 503.3 907.7 883.4 875.3 1,118.4

Current Assets
Accounts Receivables 44.6 43.5 79.9 90.3 88.4
Other 364.6 413.5 407.5 357.4 295.5

Less: Current Liabilities 604.9 692.8 749.9 756.1 810.7

N e t Current Assets (195.8) (235.8) (262.5) (308.4) (426.8)

Total Assets 307.5 671.9 620.9 566.8 691.7

Long-Term Debt 145.6 259.9 212.9 169.2 121.0

Equity 162.0 412.0 408.0 397.6 570.7

Total Debt and Equity 307.5 671.9 620.9 566.8 69 1.7

Return on Op Income/Av N e t Invested Capital -0.12 -0.34 -0.08 -0.06 -0.06

Invested Capital
Debt Service Ratio Internal Cash G e n e r a t i o a e b t 0.53 -2.30 -0.16 0.11 0.05
Service Due
Self Financing Funds from Internal SourcesJAv 3 -0.10 -0.38 -0.39 -0.11 0.05
Ratio Yrs' Capex
Return on Equity N e t Income/Av Equity -1.05 -0.64 -0.28 -0.19 -0.15
Days Receivable Receivable/Annual Domestic 38.14 37.70 45.38 48.05 45.00
Billing
Exports 394.36 253.41 114.23 369.99 125.44
Current Ratio Current Assets/Current Liabilities 0.68 0.66 0.65 0.59 0.47
Debtmquity Ratio LT Liabilitieshnvested 0.47 0.39 0.34 0.30 0.17
Capital

8. The following are some o f the observations from the balance sheet:

e NEPA has faced significant liquidity problems on account o f weak collections which
have averaged approximately 70%.

e Accounts receivables are quite significant and need to be addressed.

e The long-term debt burden has reduced, but since the equity base has gone up, there
appears to be some conversion from debt to equity.

e In summary, NEPA's financial performance in recent years has improved but remains far
from satisfactory. N E P A i s dependent o n significant Government support to maintain i t s

94
 activities, since it does not generate sufficient resources to meet i t s operation and
maintenance requirements and finance i t s investment program.

NEPA Financial Forecast

9. The financial forecast o f NEPA has been analyzed under two different scenarios based on: (a)
current operation parameters being unchanged (Business as Usual or Base Case); and (b) A Reform
Scenario.

la) Base Case (no reform) scenario

10. Under this scenario it i s assumed that NEPA will continue to perform at its present level o f
efficiency. Basic assumptions for this scenario are as follows:

0 Tariffs are kept at the 2004 levels and no tariff increases from 2005 through 2010.
0 Transmission and distribution losses remain at the 2004 levels.
0 Collection efficiency does not improve.
0 N o debt restructuring and thus existing debt obligations have to be serviced.

1 1. An Operational and Financial Summary for this scenario i s presented below in Table 3. The
financial ratios presented in the table show the worsening position for NEPA.

Table 3: Operational and FinancialPerformance Indicators (Base Case)

2003 2004 2005 2006 2007 2008 2009 2010
Actual Prov. Forecast Forecast Forecast Forecast Forecast Forecast
Monthly average available
capacity (MW) 4,110 4,060 4,649 5,081 5,852 7,374 7,832 8,181
Peak load (MW) 3,479 3,403
Energy sent out (GWh) 22,265 23,679 22,817 24,560 28,312 7,259 39,968 42,045
Energy billed (GWh) 12,247 14,264 14,927 16,076 18,548 24,444 26.229 27,598
% growth in sales +8.9% +16.5% +4.7% +7.7% +15.4% +31.8% +7.3% +5.2%
T & D losses 44.5% 39.3% 34.1% 34.1% 34.1% 34.1% 34.1% 34.1%
Cash collected as % o f
Nigeria billing26 70% 75% 75% 75% 75% 75% 75% 75%
Av Elec. Tariff?’
m NkWh 6.1 5.8 5.8 5.8 5.8 5.8 5.8 5.8
8 USckWh 4.7 4.4 4.2 3.9 3.8 3.7 3.6 3.5
Net cash balance at Dec. 3 1
(US$ millions) 17 6 (237) (574) (913) (1,364) (1,870) (2,478)
Working ratio (cash op 1.53 1.57 1.65
explop rev) 1.11 1.10 1.24 141 1s o
Return on fixed assets:
m Historical basis -7.1% -7.3% -15.6% -17.7% -15.6% -18.5% -21.7% -25.1%
Current ratio 0.6 0.5 1.1 0.7 0.5 0.4 0.3 0.2

.
Debdequity ratio
Historical basis
30% 18% 11% 16% 15% 15% 17% 22%

26 Historical cash collection rates are based o n recorded billing statistics which are not reliable. Percentages
exclude settlement by FGN o f N 2 billion in 2003 and anticipated N 3 billion in 2005 against o l d dues.
27 Average electricity tariff i s for sales to the domestic market and i s exclusive o f the meter maintenance charge and
VAT.

95
12. The projected financial outlook for NEPA will be unsustainable if the efficiency improvements
are not achieved, present end customer tariffs remain unchanged and there i s no debt restructuring. The
implications for FGN in a no reform scenario would be a very high degree o f fiscal support -almost to
the tune of US$2.5 Billion by 2010. This can only be avoided through continued investments in the
sector even during the reform transition period, sustained attention to improving the business operations
in NEPA and the new successor companies, and achievement o f substantial increases in revenues.

(b) Reform Case

13. In view of the need for sustained actions in the sector during the reform transition period, a
reform case has been constructed with the following conservative assumptions:

a 25% reduction in losses achieved over a five-year period. Even though this Project i s
approaching efficiency improvements only in some selected clusters, the 25% reduction
i s reasonable on an overall basis.

0 Tariff increase o f 15% per year over the period 2007 - 2010.

0 Overall debt obligations reduced by 75%, i.e., only 25% o f the existing debt obligations
to be serviced by NEPA.

14. The operational and financial summary for the Reform Case i s presented in Table 4 below. The
results for the Reform Case suggest an improvement in all the indicators, in particular the working ratio,
compared to the Base Case and clearly the level o f fiscal support from the Government reduces
substantially to approximately US$450 million by 2010. It i s important to note that the working ratio in
2009 i s less than 1.O which shows that the revenues collected are able to cover the cash related expenses.

96
 Table 4: Operational and Financial Performance Indicators (Reform Case)

2009
~

2003 2004 2005 2006 2007 2008 2010

Actual Prov. Forecast Forecast Forecast Forecast Forecast Forecast
Monthly average
available capacity (MW) 4,110 4,060 4,649 5,081 5,852 7,374 7,832 8,181
Peak load (MW) 3,479 3,403
Energy sent out (GWh) 22,265 23,679 22,817 24,560 28,312 37,259 39,968 42,045
Energy billed (GWh) 12,247 14,264 14,927 16,297 19,284 26,009 28,508 30,289
% growth in sales +8.9% +16.5% +4.7% +9.2% +18.3% +34.9% +9.6% +6.2%
T & D losses 44.5% 39.3% 34.1% 33.7% 32.4% 30.7% 29.2% 28.4%
Cash collected as % o f
Nigeria billing28 70% 75% 75% 77% 79% 81% 83% 85%
Av Elec. Tariff 29
NkWh 6.1 5.8 5.8 5.8 6.8 8.2 9.9 10.9
USclkWh 4.7 4.4 4.2 3.9 4.4 5.1 6.0 6.5
Net cash balance at Dec
3 1 (US$ millions 17 6 502 649) (586) (434
Working ratio (cash op
exp/op rev) 1.11 1.10 1.24 1.27 1.16 0.99 0.86 0.81
Return o n fixed assets:
Historical basis -7.1% -7.3% -15.6% -16.9% -9.2% -2.6% 4.6% 8.4%
Current ratio 0.6 0.5 0.9 1.o 0.8 0.7 0.8 1s
I Debdeauitv ratio
I d

Historical basis 30% 18% 11% 14% 13% 11% 11% 10%

15. Comparison o f revenue yields per unit o f bulk supply between the Base Case and the Reform
Case shows that remarkable improvements can be achieved through reforms. Revenue yields can be
doubled over the next five years through modest improvements in tariffs and efficiencies.

28 Historical cash collection rates are based o n recorded billing statistics which are not reliable. Percentages
exclude settlement by FGN o f N 2 billion in 2003 and anticipated N3 billion in2005 against o l d dues.
29 Average electricity tariff i s for the domestic market and is exclusive o f the meter maintenance charge and VAT.

97
 Year 2002 2003 2004 2005 2006 2007 2008 2009 2010
Revenue Yield per unit Bulk Supply (N/kWh) - Base 3.32 3.47 3.66 3.98 3.99 4.00 4.02 4.03 4.03
Revenue Yield per unit Bulk Supply (NlkWh) - Reform 3.32 3.47 3.66 3.98 4.02 4.77 5.94 7.35 8.20

Comparison Between Base Case and Reform

Case

10.0 I,

0.o per Bulk Supply

(NlkWh) - Base

Year per Bulk Supply

(N/kWh) - Reform

98
 Annex 10: Safeguard Policy Issues

NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

1. The Project Team has identified two Safeguard policies that may be triggered under NEDP
Environmental Assessment and Involuntary Resettlement. The Team has received the relevant analysis
and proposed mitigation measures from the Government in two public documents.

2. The proposed implementing agency for the investment component (and associated safeguards
mitigation) o f the Project i s the Project Management Unit (PMU) for the ongoing Transmission
Development Project. The PMU has well-developed capacity for execution o f similar investment
activities that have been demonstrated during its implementation o f the ongoing project. I t has been
proposed that during the course o f implementation o f the National Energy Development Project, this unit
should be strengthened and additionally staffed to evolve into a Corporate Planning and Strategy Unit
(CPSU) for the Electric Power Sector. The CPSU, if created, will be able to provide a menu o f
specialized services to various players in the sector, including the successor entities to NEPA.

3. The capacity o f the Environment, Resettlement and Social Unit (ERSU) within the P M U has been
appraised, since this entity i s likely to be the guardian o f the relevant Safeguard Policies and their
application, and to be responsible for seeing that the proposed mitigation measures are implemented
under NEDP. Appraisal o f the unit’s performance and capacity has been conducted by the Environmental
Specialist on the Bank team, as well as external consultants who evaluated the implementation o f the
policies under the ongoing project. The findings are that the unit requires additional capacity in terms o f
staff and training, and this i s accordingly provided for under NEDP. The ERSU has also been
familiarized with the latest Bank Environmental, Health and Safety guidelines applicable to Electric
Power Transmission and Distribution, Occupational Health and Safety, PCBs, and Monitoring.

4. T w o safeguard related studies were undertaken as part o f NEDP preparation, and the results have
been publicly disclosed by the Government as separate documents during appraisal: one i s the
Environmental and Social Management Framework (ESMF) that describes the potential impacts o f the
operation, specifies mitigation measures to be applied to all sub-projects, and contains a template for
environmental management plans (EMP), and the other a Resettlement Policy Framework (RPF). The
findings o f the two studies are summarized in Table 1 below.

5. The environmental assessment indicates that NEDP, which i s classified as a Category I1project
under Nigerian regulations (Le., requires only a partial EA in nearly all cases), i s not likely to have large-
scale adverse impacts on the natural environment, health and safety o f communities and individuals.
However, NEDP i s a sector investment loan, and detailed planning for specific sub-projects will only
occur after project implementation begins. The environmental or social impacts will be detailed as
specific sub-project planning progresses, for which a framework o f general policies and procedures
(ESMF and RPF) have been prepared. These documents set out the principles, organizational
arrangements, design criteria etc. for managing potential environmental and social impacts and providing
compensation and other assistance, should this become necessary. An EMP will be prepared, following
the template in the ESMF, for any sub-project involving significant construction (new or substantially
expanded substations would be the only such sub-projects). If a particular sub-project seems likely to
cause any loss or damage to people’s assets or welfare, a Resettlement Action Plan (RAP) will have to be
prepared for that sub-project. The Appendix to the RPF contains a template to assist the Nigerian
authorities in preparing a RAP in line with the Bank’s policies.

99
 6. Since one o f the possible adverse impacts has been identified as exposure to PCBs during
construction, the NEDP has also budgeted up to US$1.O million to finance any mitigation measures if
required, in connection with waste disposal facilities for PCB-contaminated waste, based on the
experience o f other countries in the Region. The mitigation measures proposed for that particular
scenario include Phase 1 and Phase 2 Environmental Audits, identification o f a waste disposal facility and
contracting an external consultant to evaluate the quality o f the initial audits.

7. This funding, together with strengthening o f the ERSU in terms o f staff and capacity, represent
the Project’s proposed support to the Safeguards issues that may arise from implementation.

Table 1: Possible Adverse Impacts and Proposed Mitigation Measures, NEDP

Adverse Impacts Proposed Mitigation Measures

Noise during 0 Limit construction to daylight hours.
construction.
Management o f PCBs.
0 ERSU should ensure that an Environmental Management Plan (EMP) i s
Poor environmental
management planning.
Damage to cultural
property.
Loss o f assets due to re-
establishing safety
margin between power
lines and structures, or
acquiring land for
substations, customer
care centers, etc..
NEPA retrenchment,
Conduct Phase 1 Environmental Audits.
Conduct Phase 2 Environmental Audits, where Phase IAudit finds
serious contamination.
Identify a waste disposal facility for PCB-contaminated waste.
Contract external consultant to evaluate quality o f initial audits.
prepared for every transformer substation where construction will occur.
(EMP template provided).
A qualified Nigerian archeologist should be employed on a consultant
basis to review the plans for any sub-project located in a traditional
urban area.
Construction contract documents should contain standard guidelines for
responses to “chance finds” o f archeological resources during
construction activities.
Make every effort to avoid loss o f people’s assets by using taller poles,
using insulated wire, re-routing lines, or other means.
Follow the objectives, policies, and procedures set forth in the NEDP
Resettlement Policy Framework.
Prepare a Resettlement Action Plan for every sub-project where loss o f
assets i s foreseen.
Familiarize TransysCo and D i s c o staff with the NEDP Resettlement
Policy Framework and the template for a NEDP Resettlement Action
Plan through a series o f workshops.
Strengthen the public relations capacities o f Discos.
The World Bank must remain alert to the need to assist with
retrenchment packages, as the situation develops.

Source: Sections 6 and 7, NEDP Environmental and Social Impact Management Framework.

100
 Annex 11: Project Preparation and Supervision
NIGEFUA: NATIONAL ENERGY DEVELOPMENT PROJECT

Planned Actual
P C N review March 1,2005 March 17,2005
Updated PID to PIC March 22,2005
Initial ISDS to PIC March 29, 2005
Appraisal April 29,2005 April 29 - 30,2005
Negotiations Early M a y 2005 M a y 4 - 5,2005
Board approval June 16,2005 June 23,2005
Planned date o f effectiveness August 15,2005
Planned date o f mid-term review NA
Planned closing date July 3 1,2008

Key institutions responsible for preparation of the Project:

Federal Ministry o f Power and Steel

Federal Ministry o f Finance
NEPA-PMU, NEPA Successor entities, Transysco
BPE

Bank staff and consultants who worked on the Project included:

Name Title Unit

Task Team
S . Vij ay Iyer Lead Financial Analyst, Team Leader AFTEG
Mohua Mukherjee Senior Private Sector Development Specialist AFTEG
Prasad Tallapragada Senior Energy Specialist - Distribution AFTEG
Eric Fernstrom Energy Specialist - Transmission AFTEG
Christophe de Gouvello Senior Energy Specialist - Rural and Renewable AFTEG
Karan Capoor Senior Financial Specialist - Carbon AFTS4
Jumoke Jagun Investment Officer CASDR
Aman Sachdeva Financial Specialist - Utility AFTEG
Helena K o f i Procurement Analyst AFTEG
Comfort Olatunji Team Assistant AFc12
Lily Wong Chun Sen Program Assistant AFTEG
Bent Svensson Program Manager - Oil and Gas COCPO
Karen Hudes Senior Counsel LEGAF
Chau-Ching Shen Senior Finance Officer LOAG2
Thomas Walton Lead Regional Coordinator AFTSD
Kristine Ivarsdotter Senior Social Development Specialist AFTS 1
Robert Robelus Senior Environmental Assessment Specialist AFTS 1
Mohamed Arbi Ben-Achour Senior Social Scientist AFTS 1
Bay0 Awosemusi Senior Procurement Specialist AFTPC
Tesfaalem Gebreiyesus Senior Procurement Specialist AFTPC
Edward Olowo-Okere Lead Financial Management Specialist AFTFM
Adenike Mustafa Financial Management Specialist AFTFM
Ewah Otu Eleri Rural Energy Specialist 1Consultant AFTEG
NovaTech International, Inc. Environment and Social - Consultants AFTEG

101
Name Title Unit
Task Team

Quality Assurance Team/

Peer Reviewer
Yusupha Crookes Sector Manager AFTEG
Irene Xenakis Operations Adviser AFTOS
L u i z Maurer Senior Energy Specialist EWDEN
Chrisantha Ratnayake Senior Power Engineer AFTEG
Reynold Duncan Senior Power Engineer MNSIF
Mouradj Belguedj Lead Energy Specialist COCPO
Ioannis Kessides Lead Economist DECRG

Bank funds expended to date on project preparation:

1. Bank resources: US$500,000

2. Trust funds: US$O
3. Total: US$500,000

EstimatedApproval and Supervision costs:

1. Remaining costs to approval: US$O

2. Estimated annual supervision cost: US$180,000

102
 Annex 12: Documents in the Project File
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

Project Appraisal Document.

Procurement Capacity Assessment Report,

Financial Management Assessment Report.

Environmental and Social Management Framework for the National Energy Development Project.

NEDP Resettlement Policy Framework.

Electric Power Sector Reform Bill (March 2005).

Federal Republic o f Nigeria Electricity A C T 1966 and associated Electrical Installation Regulations.

Economic and Financial Internal Rate o f Return Calculations (EIRR and FIRR) for the Transmission
System Development Component.

Economic and Financial Internal Rate o f Return Calculations (EIRR and FIRR) for the Distribution
Efficiency Improvement Component.

103
 Annex 13: Statement o f Loans and Credits
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT

Difference between
expected and actual
Original Amount in US$ Millions disbursements
Project I D FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d
PO88150 2005 Economic Reform and Govemance Project 0.00 139.99 0.00 0.00 0.00 140.22 0.00 0.00
PO86716 2005 Sustainable Mngt. Mineral Resources 0.00 120.00 0.00 0.00 0.00 120.25 0.00 0.00
PO83082 2004 NG-MSME 0.00 32.00 0.00 0.00 0.00 33.94 3.37 0.00
PO71817 2004 NG: Local Empowerment & Env.Mgt Proj. 0.00 0.00 0.00 8.00 0.00 7.43 2.35 0.38
PO71075 2004 NG-Urb Water Sector Reform 1 SIL 0.00 120.00 0.00 0.00 0.00 122.28 10.89 0.00
(FY04)
PO63622 2004 NG:Fadama I1 0.00 100.00 0.00 0.00 0.00 92.37 9.77 0.00
PO69892 2004 NG Local Empowerment & Envir.Mgmt. 0.00 70.00 0.00 0.00 0.00 75.05 5.78 0.32
PO80295 2003 Polio Eradication 0.00 28.70 0.00 0.00 0.00 50.71 9.37 0.00
PO71494 2003 Universal Basic Ed. 0.00 101.00 0.00 0.00 0.00 108.38 76.50 0.00
PO74963 2003 NG Lagos Urban Transport Project 0.00 100.00 0.00 0.00 0.00 97.34 28.01 21.80
PO72018 2002 NG Transmission Development Project 0.00 100.00 0.00 0.00 0.00 87.97 63.53 49.64
PO69901 2002 Community Based Urban Development 0.00 110.00 0.00 0.00 0.00 123.97 61.58 37.90
PO70290 2002 2nd Health Systems Dev. 0.00 127.01 0.00 0.00 0.00 125.31 56.07 6.87
PO70291 2002 HIV/AIDS Prog. Dev. 0.00 90.30 0.00 0.00 0.00 80.76 37.32 -0.31
PO70293 2001 PRIVATIZATION SUPPORT PROJECT 0.00 114.29 0.00 0.00 0.00 103.81 58.30 23.59
PO69086 2001 Com.-based Poverty Reduction SIL 0.00 60.00 0.00 0.00 0.00 31.90 10.41 4.91
PO65301 2000 ECON.MGMT.CAP.BLDG. 0.00 20.00 0.00 0.00 0.00 5.14 -3.51 0.00
Total: 0.00 1,433.29 0.00 8.00 0.00 1,406.83 429.74 145.10

104
 NIGERIA
STATEMENT OF IFC’s

Held and Disbursed Portfolio

In Millions o f U S Dollars

Committed Disbursed
IFC IFC
FY Approval Company Loan Equity Quasi Partic. Loan EquitV Quasi Partic
1998 AEF Ansbby 0.10 0.00 0.00 0.00 0.10 0.00 0.00 0.00
1999 AEF Global Fabri 0.32 0.00 0.00 0.00 0.32 0.00 0.00 0.00
1999 AEF Hercules 1.30 0.00 0.00 0.00 1.30 0.00 0.00 0.00
1999 AEF Hygeia 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00
2000 AEF Oha Motors 0.84 0.00 0.00 0.00 0.84 0.00 0.00 0.00
2000 AEF SafetyCenter 0.50 0.00 0.00 0.00 0.50 0.00 0.00 0.00
1997 AEF Telipoint 0.08 0.00 0.00 0.00 0.08 0.00 0.00 0.00
1995 AEF Vinfesen 1.oo 0.00 0.00 0.00 1.oo 0.00 0.00 0.00
1994 Abuja Intl 1.75 0.00 0.00 0.00 1.75 0.00 0.00 0.00
2005 Accion Nigeria 0.00 1.89 0.00 0.00 0.00 0.41 0.00 0.00
2003 Adamac 25.00 0.00 0.00 15.00 11.56 0.00 0.00 6.94
2005 Africa Re 0.00 10.40 0.00 0.00 0.00 0.00 0.00 0.00
2000 CAPE FUND 0.00 7.50 0.00 0.00 0.00 7.09 0.00 0.00
2001 Delta Contractor 15.00 0.00 0.00 0.00 0.20 0.00 0.00 0.00
2000 Diamond Bank 8.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00
2000 FSB 8.40 0.00 10.50 0.00 8.40 0.00 6.00 0.00
1992 FSDH 0.00 0.86 0.00 0.00 0.00 0.86 0.00 0.00
2000/04 GTB 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00
2000 IBTC 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00
1981/88 Ikeja Hotel 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00
2002 NTEF 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2001 UBA 0.00 0.00 10.00 0.00 0.00 0.00 0.00 0.00
2004 UPDC Hotels Ltd 11.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total portfolio: 133.29 21.09 20.50 15.00 74.05 8.80 6.00 6.94

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.
2005 Zenith Bank 0.03 0.01 0.00 0.00
Total pending commitment: 0.03 0.01 0.00 0.00

105
 Annex 14: Country at a Glance
NIGERIA: NATIONAL ENERGY DEVELOPMENT PROJECT
Nigeria at a glance Ql2054

Sub-
Saharan LOW.
Migeria AfrlU inome

$35.7 703 2.310

E O 490 450
43 7 347 1,039

24 23 I.8
2.3 GNI
25 24
pw

47 3 30
47 48 e4
87 103 02
44
57 58 75
32 35 39
87 82
w -a
Bo 85

4993 zwz 2003

E c o n m k ratios'
2%4 48 7 58.4
23 3 23 1 22.7
Trade
47. f 40 8 50.0
202 25 8 31.8
132 15 1 20.2
-14.3 -1O.f -'ID@ -2.7
2.8 4.# 33 2.8
50.3 143.8 652 30.1
23.6 14 8 154 10.4

Indebtedness
'1983-33 199303 2002 2M13 20w-07
(averagemdw)
ODP 48 2.8 15 10 7 5.0
GOP p(r capta 1.9 03 -0.7 84 2.7
Exports of @s and A c e s 4.4 2.1 -1t.t 324 4.5

1983 1393 2002 2003 I Growth d invrsbncnt and #P (961 I

33.2 242 312 2B.4
a 7 5a 7 43 8 a.45
0.9 40 48 4.0
370 172 25 0 24.2
71 4 823 49 4 44.8
17 7
17.5
17 5
50 2
24 7
41 0
23.3
40.8 I -eoi -OP I
198393 1993-03

4.8 40
3.8 15
4.7 27
89 33
-17 4 4
2.2 132
8.5 95 47.0 -11.5
-58 a# 11 B 10.8

W e . 2W3 data are preliminary ntlnunes

in the own-ry (in hid) chmpared with ns i n o m - g n x y , avenge Ifdata are msssng. the diarcand wll
The diamo& show tCrw key i r d i ~ t o r s
be mompie;@

106
 1983 1993 2052 2003

23.2 6P 4 12 8 14.0
18 1 52 e 39 21.0

25 6 382 36.5
1.7 80 21 4.3
-5.3 -1.3

1483

10.370
8.W
$993

@,Q24
8,597
2oM

17.872
75.878
1.E&
2o(M

27,418
24.883
1,925
Expwt and import I d s (US$ mill.)
I
40 91 QQ
12,698 @,la0 14,770 18.692
1.M& 7Tt 1,016 2.428
188 46 4.473 5.8%

18s 8Q 139 181

62 88 $9 100
288 dolD 156 161

1983 1963 2oM 2003

10,738 10,082 18.F152 28,462

la,=? 10,720 18.m 23.233
-3,B¶8 4% -108 5226
-1.527 -2.38 -8.41 -6.444
847 1 .w 1,657
-5.01 1 -2,158 -5.108 -1.556
3.s158. t ,433 2.366 1,345
1,W5 725 2.742 213

1,015 1,410 7.Ml 7.46s

1.e 46 3 120 6 *Z%?

1983 1993 2m 2003

Composition of 2 a M deM [US$ mill.)
17,581 30,888 30.476 35,079
a24 3, Iea 1.255 1,2R)1 A: 1,275
F: 3.271 3: 676
36 116 0i8 787
2,562 1,4Qt 2,QN 2,687
66 588 248 285
1 2 18 22

@(I 51 426
t.015 -88 -810
58t 2.481 3358
0 0 E. 22.621

517 158 438 151

$88 302 20 63
38 310 189 220
150 -8 -288 -157
58 2e t 75 e4
01 -286 -244 -224

The World Sank Gm,up: This tabfewas prepared by cwnaryunit staR f

w es may diffec from M a r W d d 5 a k publrsheddata &Qw54

107
Annex 15: Map IBRD 33990

108
 IBRD 33990
4° 6° 8° 10° 12° 14°
NIGER CHAD NIGERIA
To Niamey
SOKOTO GAZAOUA
1963 Level
Lake
Chad NATIONAL ENERGY
DOSSO SOKOTO 1973 Level DEVELOPMENT PROJECT
KATSINA Yobe R. 2001 Level

R.
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Ri to YOBE UNDER

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MAFARA R. KANKIA KADUNA ZONE JIGAWA HADEJIA PROJECT CONSTR.
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KEBBI GAGARAWA 330 kV DOUBLE CIRCUIT LINES
KANO ZONE BORNO
330 kV SINGLE CIRCUIT LINES
GUSAU
ZAMFARA DUTSE 12° I I I I I I I 225 kV DOUBLE CIRCUIT LINES
KEBBI KANO
MAIDUGURI 225 kV SINGLE CIRCUIT LINES
POTISKUM
KANO AZARE 161 kV SINGLE CIRCUIT LINES
FUNTUA
I I I I I I I I I I I I I I 132 kV DOUBLE CIRCUIT LINES
DAMBOA
132 kV SINGLE CIRCUIT LINES
I I I I I I I 110 kV DOUBLE CIRCUIT LINES
ZARIA
YELWA ASHAKA
CEMENTS 110 kV SINGLE CIRCUIT LINES
BAUCHI GOMBE I I I I I I I
KADUNA 90 kV DOUBLE CIRCUIT LINES
KADUNA BIU
Kainji TOWN BAUCHI MAROUA
90 kV SINGLE CIRCUIT LINES
Reservoir KONTAGORA DADINKOWA
BENIN TEGINA
KADUNA GOMBE 63 kV SINGLE CIRCUIT LINES

10° NIGER
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ABEOKUTA JERICHO UKPILLA OTURKPO
This map was produced by the Map Design Unit of The World Bank.
OGUN ONDO
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SAKETE
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To Papalanto To Sagamu
II I I I I I I I I I I I I I I I I I I
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IRRUA CAMEROON shown on this map do not imply, on the part of The World Bank
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For detail, see ENUGU PAPALANTO
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AKOKA
I II I

CAMEROON

I I
HYDRO I

I I
LIMBE I
ITIRE

I I I
I I I I I
I II I

I I I
I I I
REPUBLIC
I

4° OYOMABANG I I I
I II I

I I
I
I I AJA
I

I I
I
I

I
I
I

I I I

EDEA BRGM I I I I I I I I I I I I I I I I I IJORO I I I

0 50 100 150 200 250 OJO I I

I I I
I I I
I I I I I
HYDRO AMUWO- EQUATORIAL
ODOFIN ALAGBON
NGOUSSO GUINEA
KILOMETERS MBALMAYO AKANGBA
APAPA ROAD Gulf of Guinea
SÃO TOMÉ
4° 6° 8° Gulf of Guinea 0° & PRÍNCIPE 10° GABON
CONGO
KRIBI
APRIL 2005