Mozambique Electricity Project II

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Mozambique Electricity Project II

Project Objective

The goal of the energy sector in Mozambique was to make sufficient energy available to the community at economic cost, to promote efficient use of energy by consumers in order to conserve limited energy resources and to build capacity in the sector. The objectives of the Electricity II Project were to (i) Provide least cost and reliable hydropower supply to new rural centres to improve the quality of life of the population and (ii) Improve the quality and reliability of supply in some existing supply centres so as to increase economic activities in the centres. Total project cost at appraisal amounted to UA 19.68 million which was financed jointly from ADF and EdM resources. No co-financing was involved. ADF was to cover the entire foreign exchange cost of the project to the extent of UA 16.64 million (84.6%) and EdM was to meet local cost of UA 3.04 million.

Main Findings

Overall, the project has been a success and contributes to the socio-economic development of the rural southern areas of the Mozambique. Electricity II reflects several good practices. However, the project has performed less than satisfactory in a number of specific areas.

There were significant delays in the implementation of the project. Although a natural disaster contributed to the delays, there are also other reasons, including: (a) Staff at the Executing Agency’s implementation unit was not fully familiar with all the Bank procedures prior to commencement of the project. (b) There was not sufficient capacity at the Executing Agency’s implementation unit to deal with a number of similar projects simultaneously. (c) The implementation timeframe might have been overly optimistic given that Mozambique was a fragile state emerging from prolonged periods of strife and instability. Its capacity limitations in dealing with a number of similar projects from multiple donors, as well as a severe flood, meant that delays were inevitable. (d) A temporary suspension of construction due to environmentally damaging construction techniques.

It should be recognised that economically viable projects does not necessarily have a high financial rate of return to the operator or public utility. The project has significant secondary spin-offs that cannot easily be reflected in the socio-economic analysis.

Given the number of new connections due to the expansion of the electricity grid, as well as the fact that there are no immediate plans to add additional generating capacity, there is a potential for future electricity shortages. Under these circumstances, it would be unwise to undertake further large-scale rural electrification projects without specific plans to cope with the increase in demand.

Main Lessons

Financial sustainability of rural public utility projects where local residents are unable to afford the full commercial tariff (long term marginal cost tariff) can be improved if the following principles are adhered to:

  • Services cover at least the short term marginal cost and should not be provided at an outright loss or for free;
  • The borrower develops an appropriate financial package to compensate the public utility company for the social services that it provides in areas where full cost recovery is not possible;
  • Electricity supply/generating capacity keeps up with the long term growth in the combined demand of all electricity projects;
  • Institutional development remains an integral component of the project;
  • Loan conditions should specify staff productivity in terms of both staff cost and staff numbers.

Rural electrification projects have significant secondary spin-offs and opportunities which should be investigated and promoted as part of project appraisal process. These include the following:

  • Public-private-partnerships to extend the line and connecting additional users;
  • Positive impacts on rural settlement patterns and land-use.

Possible negative environmental consequences can be minimized or avoided altogether if an environmentalist is included in the appraisal and monitoring processes, even if there are no obvious environmentally sensitive issues at the time of categorisation.