energie du mali

Kennedy School of Government Case Program

CR14‐05‐1811.0

This case was written by Professor José A. Gómez‐Ibáñez and is intended for class discussion only and not as a source of primary data or as an example of appropriate or inappropriate policy. The case was funded in part by the World Bank. The author thanks the officials of the government of Mali and EDM and especially Dr. Ibrahim Togola and Tom Burrell of the Mali Folkecenter for their assistance. The author is responsible for all errors. (0905)

Copyright © 2005 by the President and Fellows of Harvard College. No part of this publication may be reproduced, revised, translated, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the written permission of the Case Program. For orders and copyright permission information, please visit our website at www.ksgcase.harvard.edu or send a written request to Case Program, John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge, MA 02138

EDM (Energie du Mali)

In the spring of 2005, the government of Mali was negotiating major changes in the concession of Energie du Mali (EDM), the private firm that operated Mali’s electricity and water services. Five years earlier, in 2000, the government had held an international competition for a 20‐year concession that was won by Saur International, the utility operating division of the giant French construction conglomerate Bouygues. The company and the government soon became embroiled in disputes over the formula for adjusting tariffs and the difficulties the concessionaire was having in raising funds for promised investments. The two parties agreed in January 2005 that the concession should be converted into an affermage or lease contract, in which the private company would be responsible only for operations and maintenance while the government assumed responsibility for new investment. But they had yet to agree on the key details of the transition, including the amount that the government would pay to buy back EDM’s assets and the terms of the new lease.

The negotiations were being watched anxiously by the international donor community, and particularly by the World Bank and the French bilateral aid agency, the Agence Française de Développement (AFD). Since the early 1990s, the World Bank, AFD and other donors had been promoting private participation as a mechanism for improving performance and increasing investment in infrastructure. The policy had had mixed results around the world, with many successes but also a number of high profile failures. But it had experienced the most difficulty in sub‐Saharan Africa, where interest from private investors had been weaker, a relatively high proportion of the private concessions, leases, or management contracts had been cancelled and a number of others, like EDM, were in crisis. Some wondered whether leases or management contracts were more appropriate than concessions in sub‐Saharan Africa. And many feared that

EDM (Energie du Mali) ______________________________________________________ CR14‐05‐1811.0

the failure of the EDM negotiations would sharply reduce the prospects for any form of private involvement in the region’s infrastructure.

Mali and Sub‐Saharan Africa

Mali is a large landlocked country on the southern border of the Sahara desert with an estimated 2002 population of 12.6 million. Only 3.6 million Malians lived in urban areas, principally in the capital Bamako and in a dozen much smaller secondary cities including the legendary Timbuktu. Mali’s primary exports were cotton and gold, and it was Africa’s largest producer of cotton seeds. These activities generated a 2002 per capita income of only US$2781, however, so that almost three quarters of Malian’s lived on less the $1 per day. Donor aid made up roughly 20 percent of the national income and 80 percent of investment.

Mali shared many of the same problems of other countries in sub‐Saharan Africa. Sub‐Saharan Africa had just 9 percent of the world’s population but half of the countries that were poor enough to qualify for the World Bank’s most generous lending terms, half of the world’s conflict or post‐conflict states, two‐thirds of the world’s HIV infections, and the highest proportion of people living on less than $1 per day. The countries of the region were on average significantly poorer than the developing countries in most other regions. In 2004 sub‐Saharan Africa had an estimated per capita income of $760, a figure only slightly higher than that in South Asia ($610) and well below those of Latin America ($3,730) or Eastern Europe and Central Asia ($3,750). The average for the sub‐Sahara was strongly affected by the presence of the Republic of South Africa, which was substantially better off than its neighbors. If South Africa were excluded, the region was the poorest in the world.

The countries in sub‐Saharan Africa were also, on average, smaller and more rural. The region included some countries with large populations, notably Nigeria (121 million), Ethiopia (69 million), the Democratic Republic of Congo (51 million), and South Africa (45 million). But only 10 of the 48 countries in the region had populations of over 15 million persons,2 while the remaining 38 had an average population of only 4 million.3 Only 33 percent of the population in sub‐Saharan Africa lived in urban areas, a figure comparable to that in South Asia (39 percent) but less than half that of Latin America (77 percent).

1 The currencies used in this case are U.S. dollars and CFA francs. Between 2000 and 2005 the CFA franc

strengthened rising from approximately 750 to the dollar to 550 to the dollar. 2 In addition to the four mentioned earlier, they include Tanzania (36 million), Kenya (32 million), Uganda (25

million), Mozambique (19 million), Madagascar (17 million), Ivory Coast (16 million), and Cameroon (15 million) 3 The 38 smallest countries had a combined population of 166 million persons out of the total 605 million persons

who lived in sub-Saharan Africa in 2002.

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Infrastructure in Sub‐Saharan Africa

Infrastructure, along with education and HIV, was among the top concerns of politicians and the general public in sub‐Saharan Africa.4 Poverty and low levels of urbanization meant that access to infrastructure services was a much more significant problem in the region than in the rest of the world. The disparity was greatest in electricity: only 15 per cent of households had access to electricity in the average sub‐Saharan country compared to 31 per cent in the average South Asian country, 79 percent in Latin America, and 88 percent in Middle East and North Africa (Exhibit 2). But sub‐Saharan Africa also lagged behind other regions in access to clean water sources and telecommunications (Exhibits 3 and 4).

Those with access to infrastructure did not necessarily receive good service. Electricity and water cuts were common as production often fell short of demand, and delivered water did not always meet the quality standards of the World Health Organization. In many countries even small firms felt obliged to maintain their own standby diesel generators. And a survey in six African countries found that more businesses (48 percent) considered electricity to be a major or very severe obstacle to their growth than corruption (40 percent).5

The affordability of infrastructure tariffs was an understandable concern in the region, and the desire for low tariffs made it difficult to finance investments to expand production capacity or extend networks to serve new customers. Extending the networks was the most difficult problem since it cost as much as $1000 to connect a household to the electricity grid or piped water network in communities on the periphery of existing service areas, and often more for households living in isolated communities. Paying for connections was beyond the means of many poor households, even if the expense could be financed over time.

Although affordability was an issue, many households and businesses seemed willing to pay significant sums for improved infrastructure services if they were convinced that higher tariffs were the only way to get better service. The rapid spread of mobile telephones in the region during the 1990s was a case in point, since mobile telephone subscribers had to buy their own handsets in addition to paying charges of $0.10 to $0.30 per minute. Customers might pay more for reliable electricity or water service since businesses could dispense with standby generators and households would suffer fewer illnesses. Similarly, households without access might be able to pay a portion of the connection costs in as much as they would save on the expensive and inferior substitutes they currently used, such as batteries or kerosene for electricity and carter or tanker water for piped water.

4 Antonio Estache, “What do We Know about Sub-Saharan Africa’s Infrastructure and the Impact of its 1990s

Reforms?”, World Bank draft working paper, May 24 2005, p. 7. 5 Estache, “What do We Know?”, p. 31.

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The Record of PPI in Africa

Some of the early pioneers in private participation in infrastructure (or PPI for short) had been motivated in part by ideological concerns; this was particularly true of Chile in the late 1970s and Britain in the early 1980s. But the next group of adopters was motivated primarily by pragmatic considerations, and particularly by fiscal crises that made it impossible to continue to subsidize the large deficits of state‐owned utility companies. Argentina began to privatize its infrastructure in 1989, for example, after chronic budget deficits resulted in hyper‐inflation that brought the economy to a standstill. Similarly, Mexico began to privatize its infrastructure that same year after a series of fiscal and debt crises during the 1980s, and India’s reforms were stimulated after economic mismanagement caused the country to nearly run out of foreign reserves in 1991. By the mid 1990s, many of the multilateral and bilateral aid agencies began to promote PPI as well. The aid agencies had been discouraged by the failure of attempts to improve the efficiency of government‐owned infrastructure companies in the 1970s and 1980s. PPI promised to improve the efficiency of infrastructure providers and to tap private capital markets to finance investments, thereby allowing governments and donors to shift some of their scarce resources to social sectors.

Sub‐Saharan Africa proved to be a difficult region for PPI, however. A World Bank data base on PPI showed that sub‐Saharan Africa attracted only $33 billion in private infrastructure investment between 1990 and 2003, less than 4 percent of the $801 billion attracted by all developing countries in that same period.6 Moreover, 49 percent of the investment in sub‐Saharan Africa went to a single country—South Africa—and 65 percent went to a single sector—telecommunications. The second most important sector, energy, received only 22 percent of the investment, mostly in the form of new generating stations built by Independent Power Producers (IPPs) and backed by take‐or‐pay contracts with state‐owned mining or electricity companies. There had been relatively little private investment in electricity distribution and transmission and almost none in water and sanitation.

Even so, there had been some notable successes. The telecommunications sector was the most obvious case as telephone lines per capita quadrupled in sub‐Saharan Africa between 1996 and 2002 (Exhibit 4). And in other sectors there were some countries and companies where the PPI experience was very favorable. In the Ivory Coast, for example, a private company had operated the water system since independence in 1960 while a separate private company had provided the electricity service since 1990. Similarly, in Senegal a private company had successfully provided water service to the capital Dakar since 1996.

6 As quoted in John Nellis, “The Evolution of Enterprise Reform in Africa: From State-owned Enterprises to Private

Participation—and Back?”, photocopied, World Bank, April 15, 2005, p. 20.

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But, telecommunications aside, the failures seemed as numerous as the successes and several high profile cancellations and disputes had tarnished the reputation of PPI in the region. In the electricity sector, for example, approximately half of the countries in sub‐Saharan Africa had attempted to involve the private sector in the management of their electricity distribution companies, but in roughly half of these cases either the effort was aborted before the contract was awarded or the contract was cancelled after only a few years.7 The outbreak of conflict forced the abandonment of privatization in a few countries, although the Ivory Coast demonstrated that conflict need not be fatal for private utilities. That country’s private water and electricity companies had survived the civil war of 2002‐2003 and the subsequent (and hopefully temporary) division of the country by continuing to offer service without taking sides in the dispute. More often PPI collapsed amidst accusations by the private and the public sectors that the other side was not living up to its responsibilities (Exhibit 6 and 7).

The difficulties were causing the established international infrastructure companies to be more wary of Africa. For example, the major French water company Vivendi had left Chad and now remained only in Niger, while the British water giant Biwater was leaving Tanzania. By 2004 Saur was operating only four systems in Africa: the water and electricity companies in Ivory Coast, the water company in Senegal, and EDM in Mali. And late that year Bouygues sold Saur along with most of its water and electricity companies and established a new subsidiary, Finagestion, to manage the few companies Bouygues retained, mainly in Africa and Italy. As the large first‐world companies retreated, they were being replaced to some extent by companies from other developing countries. For example, Rites, a subsidiary of Indian Railways, had won concession to operate the railways in three African countries, while South Africa’s state‐owned electricity company, Eskom, was operating electricity concessions in several countries.8

EDM as a Public Enterprise (1960‐1995)

EDM was established in 1960, shortly after Mali’s independence, using capital from the Malian government and the French aid agency ADF and important technical support from the French state‐owned electricity company, Electricité de France (EdF).9 Initially, EDM operated small diesel‐fired generating plants in Bamako and several secondary cities. The cost of producing electricity was very high, however, both because electricity consumption was far too low to exploit economies of scale and because of the high cost of transporting diesel fuel overland to Mali. EDM could bring in fuel by truck through the Ivory Coast or by rail through Senegal, but either route involved trips of over 1000 kilometers on poorly maintained roads and railways.

7 Philippe Benoit, “Viewpoint: A Snapshot of PPI in Sub-Saharan Africa’s Power Sector,” draft January 12, 2005. 8 Eskom was in Uganda and Malawi. 9 Initially the Malian government owned 55 percent of EDM, ADF 39 percent and EdF 6 percent. ADF gave its

shares to the government in 1984. EdF’s shares were diluted over time with additions to capital.

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The high cost of diesel encouraged the Malian government to look for opportunities to develop hydro power. The first small hydro plant, capable of generating 5.7 megawatts (MW), was built at Sotuba and began producing power in 1967. Sotuba’s capacity was absorbed by the mid 1970s, and the resulting blackouts forced the extensive rehabilitation and expansion of the thermal plants outside Bamako and eventually the development of a new dam at Sélingué which came on line in 1980 with the capacity of 46.2 MW. Sélingué’s capacity was absorbed by the early 1990s, which fueled plans for a third hydro plant at the Manantali dam.

EDM’s problems were made more difficult by the mismanagement that plagued many state‐owned enterprises. EDM’s customer records were notoriously inaccurate, for example, so that many consumers didn’t receive bills and many of those who were billed never bothered to pay. The company rarely cut off those who didn’t pay and, if it did, EDM employees often could be bribed to restore service or make illegal connections.

Matters were made worse because the government treated EDM as something of a cash cow. EDM was one of the largest and most important enterprises in Mali, and one of the few places where significant amounts of cash accumulated. As in other African countries, the government was one of the utility’s biggest customers and government agencies would often not pay their bills if they needed the funds for other purposes. But Mali found other more innovative ways to tap EDM’s resources. When the Bamako central market burned down in a fire caused by illegal electricity connections, for example, the government got a court judgment that EDM was at fault and had to pay to have the market rebuilt even though the connections were illegal.

The most important way in which the government tapped EDM resources during the 1980s was by setting up a separate agency, OERHN10, to manage the Sélingué dam. EDM seemed to be having too many problems to be trusted with the new dam, and was perceived as a French‐supported company while the dam had been funded by several other countries besides France. The decision proved an unanticipated boon to the government, however, because OERHN could charge EDM more for its electricity than it cost to produce, passing the profit on to the government. As a result, EDM’s tariffs never reflected the full savings of Sélingué’s hydro power.

EDM’s problems led the donors to press for reform of the enterprise through performance contracts. In 1986 the World Bank, which had participated in the financing of the Sélingué hydro plant, discovered that OERHN had not been inspecting the dam and that serious structural problems had developed that would require rebuilding the four turbine systems. The key donors decided that money to rehabilitate Sélingué would be forthcoming only if the government agreed to an annual technical inspection of the dam and implemented a performance contract with EDM.

Performance contracts had been developed in France in the 1960s, and had become the most common tool for public enterprise reform in developing countries by the 1980s. A company 10 L’Office d’Exploitation des Ressources Hydrauliques du Haut Niger.

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and its supervising ministry would negotiate a contract spelling out the key performance targets that the company had to meet and the financial and other support that the ministry was prepared to provide. The idea was to give the managers freedom from day‐to‐day political interference by the ministry in return for holding them accountable for a few key targets. Performance contracts failed to improve performance in most countries, largely because neither party took their commitments very seriously. The managers often missed their targets while the governments usually reneged on promises to increase tariffs or provide subsidies.11 In any event, the approach had little chance to prove itself in Mali because the government was overthrown in a coup only two years after EDM signed its first performance contract.

Mali’s first government after independence had been led by President Modibo Keita, who built a one‐party state and pursed a socialist path of development. Keita was overthrown in 1968 in a military coup led by Moussa Traoré, who established a dictatorship with himself as president. Military rule began to unravel in 1990 when the Tuareg, a tribe in the northern part of the country, rose up to protest their poor treatment. The violence that followed undermined support for the government and in 1991 General Amedou Toumanny Touré led a successful coup. General ATT, as Touré is affectionately nicknamed, won his people’s gratitude by declaring that he had no interest in ruling the country and scheduling elections for 1992. Alpha Oumar Konaré won the presidency that year, and was reelected to a second five‐year term in 1997.

The return of democracy in 1992 slowed efforts to reform EDM at first, if only because the cabinet was reshuffled so frequently. Gradually a team emerged that was interested in economic reform, led by the finance minister12. The minister thought that Malian development was better served by developing a reliable and affordable electricity system instead of diverting EDM resources elsewhere, and his position was reinforced by pressure from the donors. The government had been asking for help in financing the third hydro project at Manantali, but at a meeting in Paris in April 1993 the donors—including the French, Germans, Canadians, and the World Bank—made reform a precondition. The performance contract was not working, and Mali could forget about Manantali unless it consolidated OERHN with EDM, hired a private company to manage EDM, raised tariffs, and improved bill collection.

EDM under Delegated Management (1995‐1998)

A management contract was the least intrusive of several options for private participation in EDM. Under a management contract, the government retains the ownership and appoints the board of directors while the private company fills a half dozen or so of the key management positions. In a lease or affermage contract, by contrast, the government cedes to the private company the responsibility for operating the enterprise, including appointing its own board of

11 For a discouraging account of the African experience see Nellis, “The Evolution of Enterprise Reform in Africa.” 12 Soumailia Cisse.

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directors, but retains responsibility for financing investments. A third option is the concession contract in which the private company is responsible for investments as well operations.

There was some confusion as to whether EDM’s management contract was a first step toward an eventual lease or concession or as sufficient in itself. Some of the donors clearly saw it as preparation for a concession, while some of the Malian’s working in EDM viewed it as a temporary device to establish a more modern and professional approach to management. In any event, an international competition for the contract was won by a French‐Canadian consortium led by Saur and including Hydro Québec and EdF. The consortium included firms from all the key donor countries and each member was assigned responsibility for different aspects of EDM, such as billing and collections, human relations, and electricity and water production and distribution.

The management contract was for four years, beginning in January 1995. For the first two years the consortium would be compensated on a person‐month basis for the expatriate managers in residence. At the end of two years, and once better information systems were in place, there would be a technical review to assess how well the managers were doing and to set performance standards for the following two years. Compensation in the final two‐year period would be based on person‐months, plus or minus 15 percent depending on improvements in bill collections, technical losses, and other performance measures.

The contract went well for the first year or two, after which relationships between the foreign managers and the Malian board of directors deteriorated rapidly.13 The foreign managers were credited with improving customer relations, conducting lots of training and making some badly needed investments. But they made little headway in improving the reliability of the generators or in straightening out EDM’s accounting system. These shortcomings were made more obvious in the summer of 1996 when the combination of growing demand and a drought that reduced Sélingué’s output led to many months of serious blackouts. There were disagreements about priorities both within the management consortium and between the consortium and the board of directors. The board had to approve the budget, and used this leverage over both major and symbolic issues, such as the purchase of vehicles for the senior staff. The chairman of the board of directors, who had held very senior posts in OERHN and EDM previously, exploited the differences within the consortium skillfully. In March 1998, with almost a year still remaining, the board finally cancelled the contract.

The cancellation provoked another April meeting of the donors in Paris, at which they pressed the government for a commitment to move to a full concession in which the private concessionaire would control the board as well as the management. This more radical measure became more acceptable in the following year, as the performance of EDM deteriorated again. Sélingué was being rehabilitated, which meant that the turbines had to be taken out of service one

13 Alain Henry, “La résiliation de la DGG á EDM”, Département des Politiques et Etudes, AFD, about 1999.

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at a time. In addition, another drought further reduced output and some of the thermal plants broke down as well. At one point in 1999 EDM had only 8 MW of generating capacity on line.

The Concession Begins (2000‐2002)

With the help of international consultants funded by the donors, the Malian government designed a 20‐year concession. The concession contract specified in detail the increases in new connections and investments, reductions in technical losses, and the tariffs required. In the first five years, for example, EDM had to increase the number of electricity customers from 80,000 to 143,000 and the number of water customers from 60,000 to 80,000. By the end of the concession (in 2020) EDM was to have 300,000 electricity customers and 195,000 water customers. EDM was also to increase the number of urban centers provided with electricity from 34 to 97 by 2020. To achieve these goals, the contract anticipated that EDM would make investments of 180 billion CFA francs in the first five years, although this target was not to be binding if the firm met its targets for new customers. The contract also specified a formula by which tariffs would be adjusted every calendar year for the first ten years. For example, the electricity tariff adjustment formula, which is described in an appendix to this case, was based on a weighted index of the changes in the prices of imported spare parts, diesel fuel, power purchased from independent generators and the average salaries of government functionaries. For the final ten years prices were be to set be a regulator following the British price‐cap approach.14

Presumably with the final ten years in mind, the government also established an electricity and water regulator, CREE15, with a mandate to protect consumers, to promote competition where possible and to serve as an arbitrator in disputes between the government and any electricity or water concessionaires. CREE had to approve any tariff increases proposed by a concessionaire, and was authorized to suggest alternative tariffs. Tariffs had to “cover all expenses and charges justified by operating needs” and “include a proper rate of return that allows the operator to attract and fairly reward the invested capital.”16 CREE was designed to be independent from the government in that CREE’s five commissioners were appointed to staggered 5‐year terms and removable only for “serious” cause and CREE’s budget was financed by a small surcharge on electricity and water bills. The commissioners had to be an electrical engineer, a water engineer, a lawyer, and economist specialized in tariff setting, and a financial analyst. The five commissioners would elect one of them to serve as president of the commission.

14 The electricity contract specified that the formula would apply for only the first ten years but the water contract did

not. For an account of this and many other inconsistencies in the contracts and authorizing legislation see Richard Schlirf Rapti, “The Privatization of EDM S.A. in Mali: Doomed by Design”, photocopied draft, MacroConsulting, May 30, 2005.

15 Commission de Régulation de l’Electricté et de l’Eau. 16 From article 42 of the 2000 law reorganizing the electricity sector (ordinance 00-019). The law did not specify a

body to which CREE decisions could be appealed, but presumably they could be appealed to the courts.

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The Ministry of Mines, Energy and Water retained responsibility for technical supervision of EDM. Within the ministry there was an agency for electricity, the DNE, and one for water, the DNH.17 Most senior ministry, DNE and DNH officials had worked in the management of EDM at some point in their careers.

An international competition was held with the concession awarded to the highest bidder for 60 percent of the stock in EDM (the government would keep the rest). Three consortiums led by Saur, the U.S. electricity company AES and the French water company Vivendi participated, although the Vivendi bid was disqualified.18 Saur offered 13.2 billion CFA francs (approximately $17.6 million19), six times more than the AES bid of 2.2 billion CFA francs. The concession was signed in November 2000 and went into effect in December 2000. The government also called for open applications to be CREE commissioners, but that process was started late and took long so that the five commissioners were not in place until September 2001, ten months after the concession had started.

Relations between EDM and the government were fairly cordial at first. The delivered price of diesel in Mali had more than doubled during 2000, so that, applying the adjustment formula in the contract, EDM calculated that electricity and water tariffs be increased by 28.7 and 16.1 percent, respectively, for 2001. Since CREE was not yet in place, the Ministry of Mines, Energy and Water reviewed the proposal and EDM and the ministry agreed on a small downward revision based on using a slightly different diesel price index. Later that year the government decided the price increase was too large and controversial, and EDM and the government agreed to reduce the price increases to 5 percent for electricity and 10 percent for water for the second half of the year, with the government paying EDM 10.6 billion CFA francs in compensation for lost revenue.

During the year, EDM won high marks for its efforts to reduce blackouts and improve customer relations. The blackouts would be eliminated only when Manantali came on line but, in the meantime, EDM improved the reliability and efficiency of the existing thermal plants and even brought in a 10 MW diesel generator temporarily to help get through the summer months of 2001. EDM’s approach to bill collection was now firmer, as might be expected, but also more polite.

Problems Develop (2002‐2004)

The start up of Manantali in 2002 exposed serious problems in the concession contract. Manantali, located on the Senegal River, was a multi‐national project with a capacity of 200 MW.

17 Direction Nationale de l’Electricité and Direction Nationale de l’Hydraulique 18 A fourth consortium led by SNC Lavalin and Eskom qualified but did not bid. Saur’s consortium included IPS

West Africa, a part of the Aga Kahn Group. 19 Converted at 750 CFA francs to the dollar.

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Mali had the rights to 52 percent of Manantali’s output while Senegal had rights to 33 percent and Mauritania to 15 percent. Manantali was overseen by a special multi‐national agency that, after an international competition, awarded the contract to operate and maintain the plant to Eskom, South Africa’s government‐owned electricity company.

When the first of Manantali’s five 40 MW turbines started to produce power in late January 2002, the people of Mali expected a dramatic reduction in electricity prices. EDM paid only 27 CFA francs per kilowatt‐hour (kWh) for the power it bought from the new dam, while it cost the company roughly 140 CFA francs to generate a kWh by burning diesel. When EDM applied the formula in the contract, however, it calculated that electricity and water prices should go up by 4.87 and 13.19 percent, respectively, in 2002 even assuming that Manantali would gradually increase output that year. To the public it seemed bizarre that another price increase would be needed now that Manantali was finally producing.

To make matters worse, 2002 was an election year. Konaré had decided not to run for a third term, and General ATT, the hero of the 1991 coup, had thrown his hat in the ring. Given that the government had increased prices in 1999 to help prepare EDM for privatization, the public had seen electricity prices rise by nearly 30 percent and water prices by nearly 40 percent between 1999 and 2002. Not surprisingly, all of the candidates, including ATT, campaigned against the energy and water price increases. ATT won the July election and assumed office shortly after.

It took most of 2002, and the help of several consultants, to figure out the problems in the tariff adjustment formula. At a first glance the formula looked sensible. But the formula applied the diesel price index to all of the electricity that EDM produced, ignoring the fact that roughly half of EDM’s production was from the Sotuba and Sélingué dams. Worse and more subtle, the formula weighted the electricity EDM produced and the electricity it purchased (e.g. from Manantali) in a way that gave no credit for shifting to cheaper purchased energy unless the unit price of the purchased energy also declined. In short, consumers did not get the full benefit of EDM’s hydro resources. (For a more detailed explanation see the appendix to this case.)

But if the formula didn’t make sense, it was still a part of the contract and there was no agreement about what to replace it with. EDM was particularly unhappy to abandon the protection of the contract by opening it to renegotiation. The new administration of President ATT asked EDM to rollback some of the 2002 price increases for the last two months of the year, and EDM and the government agreed on compensation of 12 million CFA francs for EDM. Soon after, EDM, using the formula, called for another 16 percent increase in electricity prices to go into effect in 2003. CREE, using some different assumptions but the same formula, calculated that only a 7.6 percent increase was needed for 2003. But the new government wanted electricity and water prices to go down by 9.6 and 10.0 percent, respectively. EDM complied, but it took most of the year for the firm and the government to agree on compensation of 7.2 billion CFA francs.

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Early in 2003, during the discussion of that year’s tariff increase, the government removed the president of the CREE for “serious offenses”. The government didn’t provide any explanation, but the removed CREE president didn’t offer a public defense either. Some observers believe that the first CREE president had been corrupted by EDM—it was rumored that he drove a car supplied by EDM, for example, and that he dined often with EDM’s managing director. But others say that he was not corrupt but was removed because he insisted that the government honor its contract with EDM, even if it had defects. That summer the commissioners elected another member to be CREE’s second president. The new president had joined CREE only in July 2002, having replaced a commissioner who had resigned. The new president was an electrical engineer and former EDM employee who had risen to be EDM’s managing director approximately 15 years earlier but had then left the firm for another post in government.

During 2003, the AFD and the World Bank sought ways to help CREE and EDM develop a more constructive relationship, including paying for consultants to help the two agencies develop a shared financial model to evaluate the implications of changes in tariffs or other circumstance. The idea was that a common model would make it easier to negotiate over tariff compensation and related issues. But under its new president, CREE became gradually more aggressive with EDM. Some observers credit the change to the recruitment of two senior EDM managers to join CREE’s senior staff. One man, who became the executive director of CREE, had been EDM’s deputy director of investments in electricity, while the other had held a similarly senior post on the water side of EDM. The two were alleged to have brought to CREE valuable information about EDM’s performance and where costs could be cut. But CREE’s president blamed EDM’s unconstructive attitude and reluctance to share data. Bouygues’ managers had a reputation in certain quarters for protecting their companies aggressively. And, given the conflict underway, EDM was particularly concerned that any data it supplied to build the shared financial model might be misused against it. The model‐building exercise soon had to be suspended.

Matters came to a head in the beginning of 2004, when CREE proposed that electricity and water prices should be reduced that year by 8.6 and 1.1 percent, respectively, and without any compensation to EDM. CREE had discarded the contract’s tariff formula as too unfair, and had instead based the tariffs on its own analysis of EDM’s costs. Over the next year CREE and EDM would debate, sometimes in the Bamako press, about whether EDM’s costs were high or not. EDM was criticized for the size of its expatriate staff and the management fees that it paid to Saur and other members of the consortium of investors. In its first three years EDM had an average of 12 to 13 expatriate managers on the payroll at an annual cost of between 1.5 and 1.9 billion CFA francs, an amount equal to roughly one quarter of the salaries of the over 5000 Malian’s who worked for the company. In addition, EDM paid Saur and others management fees of between 1.2 and 1.7 billion CFA francs per year. It was also alleged that EDM hid its profits by keeping excessive maintenance reserves, for example, or providing cellular telephones for all the senior managers and their families.

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To the public, the most telling evidence that something was wrong was the fact, reported by CREE, that Mali’s electricity rates were the highest in West Africa by a substantial margin. Most Malian electricity was sold at 140 to 180 CFA francs per kWh while other countries, including the land‐locked Burkina Faso, charged 80 to 100 CFA francs per kWh (Exhibit 7).20 And this was despite the increase in the proportion of Malian electricity generated by hydro from 52 percent in 2001 to 73 percent in 2002 and 83 percent in 2003. An internal study by AFD argued that the comparison was unfair because some West African countries (including Burkina Faso) subsidized their electricity sectors and because EDM suffered from the small scale of its systems. EDM produced only one‐third the electricity of neighboring Senegal and one‐tenth that of the Ivory Coast , for example, and roughly 20 of the 34 cities or localities it served were isolated from the national grid21 and depended on small and costly diesel generators. EDM was required to charge the same tariffs nationwide, so the very high costs of the isolated systems were averaged in with the cheaper cost of the main grid.

While the critics charged that EDM’s operating costs were too high, they were also concerned that its investments were too low. In 2001 EDM engaged Propraco, a branch of AFD responsible for promoting private investment, to help raise capital. But EDM and Propraco abandoned this effort within two years on the grounds that the constant controversies about tariffs made it impossible to attract private investors. As a private company, EDM was not eligible for concessional loans or grants from the World Bank, AFD or most other donors—those were for government agencies only. EDM still might finance some investments through cash flow, but not nearly as much as everyone had hoped for. Things were not so bad on the electricity side for now: Manantali was coming on line (financed by the donors), although EDM still needed to continue to invest in extending the grid and improving access. On the water side, however, Bamako was fast running out of drinking water treatment capacity and new treatment plants were needed soon. And water pressure was often low because of lack of capacity in the distribution system.

The Negotiations (2004‐2005)

By mid 2004 it was clear to all parties that the concession contract had to be changed, and in October the government and EDM signed a protocol to negotiate with the assistance of an international mediator funded by the World Bank. The protocol called for negotiations to be completed by mid February 2005, but that deadline was later extended to March 2005 and then to July 2005. There had been a series of three formal negotiating sessions—in Washington in November, in Paris in January, and in Bamako in March—plus a number of technical meetings in‐between. However, progress was slow: at one session the government had agreed in principle to a

20 Mali had a social tariff of 80 CFA francs for customers who consumed less than 50 kWh per month. Data from

CREE as summarized in Ibrahim Togola, Tom Burrell and Youssouf Sanogo, “Case Study Report: Mali, West Africa”, photocopied July 2004, p. 9.

21 Two other localities were served by electricity imported from the Ivory Coast.

13


lease or affermage contract and at another EDM had dropped its demand that adequate compensation for 2004 be a condition for any broader agreement.

Negotiations did not improve relations between EDM and CREE. In September 2004, just before the protocol was signed, the new CREE executive director who had come from EDM died suddenly. An autopsy confirmed poison was the cause, which provoked completely unfounded speculation in the press that EDM might have played a role. Then in the first formal negotiating meeting in November, EDM insisted that CREE should not participate but only observe. CREE was not a formal party to the contract, EDM argued, and was supposed to remain neutral in the event of disputes. Excluding CREE did not quiet it, however. In January, the same month as the second formal negotiating session, CREE announced that EDM was due no compensation for 2004. EDM had claimed a loss of 7 billion CFA francs but CREE argued that EDM had earned a profit of 1 billion CFA francs once padded expenses were excluded. And in February CREE upped its estimate of EDM’s profit to 3 billion, leaving a 10 billion franc difference between it and EDM.

The negotiations raised many issues, including whether EDM should remain in private hands. Opinion seemed divided within the various offices and agencies of the Ministry of Mines, Energy and Water. Most officials agreed that EDM had made progress: it was well on its way to meeting targets for increasing customers, for example, and productivity per employee was way up (see Exhibits 8 and 9). But the new water connections had been partially subsidized by some donor grants left over from when EDM was a public agency. And the concession had been sold to Mali as a means of attracting private investment, which had not happened. Moreover, some ministry officials thought that “any fool” could do as well as the new EDM managers given the substantial tariff increases they had been granted and the fact that the government agencies were now, for the most part, paying their electricity bills. Others were less sure that tariffs would have been increased or bills paid if the company were still in public hands.

Another basic issue was whether converting from a concession to a lease or affermage contract would improve matters. Under affermage, two companies would be established: an asset holding company owned by the government and a private operating company that would lease the assets from the government.22 The tariff would consist of distinct components, such as:

22 In the negotiations the government insisted on two separate EDM operating companies: one for electricity and one

for water. EDM thought two operating companies would increase overhead but had agreed.

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Tariff = R1 + R2 + R3 +R4 + R5,

where R1 was the operating cost paid to the operating company, R2 a fuel cost pass‐through, R3 any taxes the government chose to levy on the operating company, R4 a development charge to help finance new investment and R5 a charge to pay off the asset holding company’s debt. The operating company would collect the tariff and pass on R3 to the government and R4 plus R5 to the asset holding company. The lease contract would include a formula for R1 and R2, with R1 depending in part on performance. The government would set R4 and R5 to cover the investments it thought consumers needed and could afford.

EDM and its owners at Bouygues believed that affermage was more practical than either a management contract or a concession. Affermage avoided the problems created under a management contract because the managers and the board of directors of the operating company were responsible to different shareholders. And affermage avoided the difficulties that concessions had experienced in attracting private capital, especially in sub‐Saharan Africa. In fact affermage would reduce the cost of capital because the asset holding company, owned by the government, would be eligible to receive concessional loans from donors. A concessional loan from the World Bank carried an interest rate of only two to three percentage points, for example, roughly one fifth the cost of private capital. In addition, affermage would remove a source of friction between the government and EDM by giving the government the flexibility to decide when and where investments were needed. Affermage supporters recognized that it was impossible to keep the operator completely out of investment decisions, however, in as much as the level of investment determined the level of operating costs and performance. Indeed, EDM proposed that the operator’s budget include an investment allowance so that it could make small investments without having to secure approval from the asset holding company.

Finally, there was the issue of what role, if any, a regulatory agency should play in an affermage system. Some critics argued that Mali’s problems stemmed in part from combining the Anglo‐Saxon and the Francophone approaches to regulation. The Anglo‐Saxon concept of an independent regulator with substantial discretion was at odds, they claimed, with the Francophone notion of a contract. But others claimed that it had been useful to have a regulator with discretion when the contract had proven so flawed.

The last formal negotiating session was scheduled for July 11 in Washington.

15


Exhibit 1 Characteristics of Developing Countries by Region

Region

GDP 2004

(US$ millions)

Population 2004 (thousands)

GDP per capita 2004

(US$)

Percent urban

2003 Sub‐Saharan Africa 719,022 543,990 760 33 East Asia and Pacific 2,367,508 1,870,228 1,270 39 Europe and Central Asia 1,768,088 472,073 3,750 64 Latin America and the Caribbean 2,018,715 542,322 3,730 77 Middle East and North Africa 600,256 293,994 2,040 59 South Asia 878,785 1,447,673 610 39 World (including developed) 40,887,837 6,345,127 6,440 49 Sources: GDP and population for low and middle income countries in 2004 as reported by World Bank Group at http://www.worldbank.org/data/quickreference/quickref.html. Percent urban for low and idle income countries as reported by World Bank, World Development Indicators 2005, World Bank, table 3.10 at http://www.worldbank.org/data/wdi2005/wditext/Tables3.htm.

Exhibit 2 Access to Electricity in Developing Countries by Region, 1996 and 2002

All households

Rural households

Urban households

Region 1996 2002 1996 2002 1996 2002 Sub‐Saharan Africa n.a. 15% 7% 8% 47% 54% East Asia/Pacific n.a. 54% n.a. 52% n.a. 88% East Europe/Central Asia n.a. 99% n.a. 96% n.a. 100% Latin America and the Caribbean n.a. 79% 40% 45% 92% 93% Middle East/North Africa n.a. 88% 47% 41% 92% 96% South Asia n.a. 31% 26% 29% 83% 86% Note: “n.a.” means not available. Source: The figures are from countries in the regions for which detailed access data are available; Antonio Estache, “What do We Know about Sub-Saharan Africa’s Infrastructure and the Impact of its 1990s Reforms?”, World Bank draft working paper, May 24 2005.

16

http://www.worldbank.org/data/quickreference/quickref.html

http://www.worldbank.org/data/wdi2005/wditext/Tables3.htm


Exhibit 3 Access to Improved Water Sources in Developing Countries

by Region, 1996 and 2002

All households

Rural households Urban

households Region 1996 2002 1996 2002 1996 2002

Sub‐Saharan Africa 53% 64% 44% 54% 79% 83% East Asia/Pacific 75% 75% 69% 70% 90% 88% East Europe/Central Asia 92% 87% 86% 79% 97% 97% Latin America and the Caribbean 82% 90% 66% 80% 94% 96% Middle East/North Africa 80% 85% 70% 75% 86% 91% South Asia 76% 72% 73% 68% 92% 84% Source: The figures are from countries in the regions for which detailed access data are available; Antonio Estache, “What do We Know about Sub-Saharan Africa’s Infrastructure and the Impact of its 1990s Reforms?”, World Bank draft working paper, May 24 2005.

Exhibit 4 Access to Telecommunications in Developing Countries

by Region, 1996 and 2002 Telephone

subscribers per 1000 people

Mainline subscribers per 1000 people

Cellular subscribers per 1000 people

Region 1996 2002 1996 2002 1996 2002 Sub‐Saharan Africa 22 90 20 30 2 59 East Asia/Pacific 62 140 53 72 9 69 East Europe/Central Asia 180 475 173 219 7 257 Latin America and the Caribbean 157 378 145 193 12 188 Middle East/North Africa 98 257 90 123 8 132 South Asia 17 61 16 33 1 29 Source: The figures are from countries in the regions for which detailed access data are available; Antonio Estache, “What do We Know about Sub-Saharan Africa’s Infrastructure and the Impact of its 1990s Reforms?”, World Bank draft working paper, May 24 2005.

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Exhibit 5 Map of Africa with Countries with

Electricity Concessions or Management Contracts, 2005

Source: Anton Eberhard, “Regulation of Electricity Services in Africa: An Assessment of Current Challenges and an Exploration of New Regulatory Models”, paper presented at the conference Towards Growth and Poverty Reduction: Lessons from Private Participation in Infrastructure in Sub-Saharan Africa”, Cape Town, June 6-7, 2005, p. 5.

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Exhibit 6 Status of Water and Electric Power PPIs in Sub‐Saharan Africa, 2005

Country

Popula‐tion (000), 2002

GDP in US$ capita, 2002

PPI

Years in force

Type

Notes Central Africa

Cameroon 15,729 702 Power 2001‐present

Concession In crisis

Central African Republic

3,819 332 Water Lease 1991‐present (?)

Saur withdraws in 2000. Not sure if others continue.

Chad 8,348 232 Power n.a. n.a. Recently terminated Congo 3,633 705 Democratic Republic of Congo

51,201 91 IPP n.a.

Equatorial Guinea

481 2,448 Power n.a. n.a.

Gabon 1,306 4,353 Water and power

1997‐present

Concession Considered successful

Sao Tome and Principe

157 349

Eastern Africa

Burundi 6,602 153 IPP n.a. Djibouti 693 764 Eritrea 3,991 172 Ethiopia 68,961 121 Kenya 31,540 320 IPP n.a. Water n.a. n.a. Contract terminated as

a result of irregularities Rwanda 8,272 291 Power n.a. Management Somalia 9,480 n.a. IPP n.a. Uganda 25,004 353 Water

(Kam‐pala)

2002‐2003 Management Ondeo did not exercise option to extend contract

Power 2005‐present

Concession With the South African electricity company (Eskom)

Note: “n.a.” means not available; “IPP” is an independent power producer. Sources: see p. 23.

19


Exhibit 6 (continued)

Country



PPI

Years in force

Type

Notes Southern Africa

Angola 13,184 621 Botswana 1,770 3,968 Lesotho 1,800 640 Power n.a. Management Malawi 11,871 142 Power 2001‐2003 Management Initially successful,

later controversial Mozambique 18,537 222 Water

(Mapu‐to)

1999‐present

Lease Saur withdrew from consortium in 2001 but local investors stayed

Power n.a. ‐2001 Management Saur withdraws Namibia 1,961 2,230 Saint Helena 5 n.a. South Africa 44,759 4,072 IPP n.a. Water

(Dolphin Coast)

1999‐present

Concession Investment program renegotiated in 2001; Saur withdrew but others remain

Swaziland 1,069 1,580 IPP n.a. Tanzania 36,276 201 IPP n.a. Power 2002‐2004 Management Considered successful Water

(Dar‐es‐Salam)

n.a. n.a. Biwater contract terminated

Zambia 10,698 404 IPP n.a. Zimbabwe 12,835 528 IPP n.a. Water n.a. n.a. Biwater withdraws for

financial reasons Note: “n.a.” means not available; “IPP” is an independent power producer. Sources: see p. 23.

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Country



PPI

Years in force

Type

Notes Western Africa

Benin 6,558 442 Burkina Faso 12,624 263 Cape Verde 454 1,599 Ivory Coast 16,365 783 Water 1960‐

present Concession (1960‐1967, 1988‐present) and lease (1967‐1988)

Saur. The longest lived PPI in Sub‐Saharan Africa. Still in operation despite civil unrest since 1999.

Power 1990‐present

Lease Saur. The reference privatization in electricity. Still in operation despite civil unrest since 1999.

Gambia 1,388 356 Water and power

1992‐1993 Lease Contract unilaterally terminated after military coup

Ghana 20,471 424 IPP n.a. Water n.a. World Bank withdraws

support due to lack of transparency in selection process

Guinea 8,359 586 Water (Con‐kary)

1989‐2000 Lease Contract renewal negotiations with Saur failed over disagreements on tariffs

Power 1994‐2004 Concession Saur. Not renewed? Guinea‐Bissau

1,449 161 IPP n.a.

Liberia 3,239 200 Note: “n.a.” means not available; “IPP” is an independent power producer. Sources: see p. 23.

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Country



PPI

Years in force

Type

Notes Western Africa, continued

Mali 12,623 278 Water and power

1995‐98, 2000‐present

Management (1995‐98), concession (2000‐ present

In crisis

IPP n.a. Manantali dam Mauritania 2,807 499 Power (attempt

2001‐2002)

Privatization suspended due to insufficient bidders

Niger 11,544 207 Water n.a. n.a. Nigeria 120, 911 273 IPP n.a. Senegal 9,856 628 Water 1996‐

present Lease Considered successful,

although government has failed to pay bills from 2002. Contract up for renewal in 2006

Power 1998‐2000 Concession Concession cancelled for lack of investment. Concession offered a second time but negotiations with short‐listed bidders fail.

Sierra Leone 4,764 181 Togo 4,801 318 Power 2000‐2002 Concession World Bank withdrew

support because of disputes between government and concessionaire

Note: “n.a.” means not available; “IPP” is an independent power producer. Sources: see p. 23.

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Country



PPI

Years in force

Type

Notes Western Indian Ocean

Comoros 747 342 Glorioso Islands

n.a. n.a.

Juan de Nova Islands

n.a. n.a.

Madagascar 16,916 209 IPP n.a. Mauritius 1,210 4,547 IPP n.a. Reunion 745 n.a. Seychelles 80 8,443

Note: “n.a.” means not available; “IPP” is an independent power producer. Sources: This list almost surely contains inaccuracies. It was compiled primarily from World Bank data bases; Castalia Strategic Advisors, “Experience with Private Participation Initiatives in sub-Saharan Africa: What are the Lessons for Future Policy?”, paper presented at the conference Towards Growth and Poverty Reduction: Lessons from Private Participation in Infrastructure in Sub-Saharan Africa”, Cape Town, June 6-7, 2005 ; Anton Eberhard, “Regulation of Electricity Services in Africa: An Assessment of Current Challenges and an Exploration of New Regulatory Models”, paper presented at the conference Towards Growth and Poverty Reduction: Lessons from Private Participation in Infrastructure in Sub-Saharan Africa”, Cape Town, June 6-7, 2005; Plane ; Richard Schlirf Rapti, “The Privatization of EDM S.A. in Mali: Doomed by Design”, photocopied draft, MacroConsulting, May 30, 2005; and Jean Claude Berthelemy et al., Privatization in Sub-Saharan Africa: Where do We Stand?, OECD Development Center Studies (Paris: OECD, 2004), esp. pp. 59-62, 75-79, and 102-107.

23


Exhibit 7 Electricity Tariffs in West Africa in CFA Francs per kWh, 2002

Figure 3: Electricity Tariffs in West Africa (CFA/kWh)

-

20

40

60

80

100

120

140

160

180

Benin BurkinaFaso

Côted'Ivoire

Gambia Ghana Mali Niger Nigeria

Pric

e pe

r kW

h (F

CFA

)

Special tariff(<10kWh/month -1 kW)

Domestic use singlephase (<200kWh/month -2 kW)

Domestic use three phase(<600kWh/month - 6 kW)

Commercial use threephase (<1800kWh/month -12 kW)

Semi-industrial(<2500kWh/month -20kW)

Industrial (<3500kWh/month -250kW)

Source: Presentation of CREE at the conference Energy Week 2003, Bamako, October 2003 as reported in Ibrahim Togola, Tom Burrell and Youssouf Sango, “Case Study Report: Mali, West Africa”, photocopied, July 2004, p. 9.

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Exhibit 8 Technical Performance of EDM, 1990‐2003

1990 1995 1999 2000 2001 2002 2003 Electricity Localities served 14 16 28 31 32 32 32 Capacity (MW) Thermal 34.8 34.8 34.8 71 92.7 92.7 132.7 Hydro 50 50 50 50 92.62 92.62 91.01 Total 84.8 84.8 84.8 121 185.32 185.32 223.63 Production (GWh) 233.5 312.7 399.7 470.2 521.4 590.2 631.0 Consumption

(GWh) 176.3 242.6 306.3 349.0

386.5

429.6 464.0. Technical losses n.a. n.a. n.a. 25.8% 25.8% 27.2% 26.5% Clients 41,062 66,174 75,279 81,323 86,117 118,806 131,029 Households with

electricity 6.0% 7.1% 9.4% 9.1% 9.3% 12.0% 13% Employees per 1000

clients n.a. n.a. n.a. 12.83 12.26 8.53 8.24 Network Kilometers n.a. n.a. n.a. 2,920.0 2,980.2 3,336.9 3,589.4 Meters/client n.a. n.a. n.a. 36.2 34.9 28.3 27.6 Investment (mil. Of

CFA francs) n.a. n.a. n.a. n.a. 9,774 10,410.3 9,027.7 Water Capacity (000 m3) n.a. n.a. n.a. n.a. 71,100 72,300 72,300 Production (000 m3) n.a. n.a. n.a. n.a. 49,778 54,311 56,994 Sales (000 m3) n.a. n.a. n.a. n.a. 30,668 34,769 38,679 Technical losses n.a. n.a. n.a. 35.4% 38.4% 36.0% 32.2% Clients n.a. n.a. n.a. 56,034 62,222 77,705 82,755 Employees per 1000

clients n.a. n.a. n.a. 8.29 7.56 5.82 5.83 Network Kilometers n.a. n.a. n.a. 1,949.4 2,050.3 2,138 2,193.2 Meters/client n.a. n.a. n.a. 34.8 33.0 27.5 26.5 Investment (mil. Of

CFA francs) n.a. n.a. n.a. n.a. 4,013.8 5,585.7 3,615.2 Source: Monistere des Mines, de l’Energie et de l’Eau, Direction Nationale de L’Energie, Resultats et Previsions de Developpement du Secteur de l’Electricite au Mali, Année 2003 (Bamako: 2004); Ibrahim Togola, Tom Burrell and Youssouf Sango, “Case Study Report: Mali, West Africa”, photocopied, July 2004, pp. 48-49; and Richard Schlirf Rapti, “The Privatization of EDM S.A. in Mali: Doomed by Design”, photocopied draft, MacroConsulting, May 30, 2005, pp. 19-20; Stone and Webster Consultants, “Mali Case Study”, draft report for KfW, April 2005, pp. 16-17.

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Exhibit 9 Financial Performance of EDM, 1996‐2003

(millions of CFA francs) 1996 1997 1998 1999 2000 2001 2002 2003 Electricity sales 18,521 20,216 23,474 25,327 33,024 37,622 45,441 43,904 Water sales 4,969 5,049 5,701 7,074 7,747 9,226 11,542 11,159 Direct transfers from government

0 0 0 0 0 10,647 0 7,200

Other sales and outputs (1)

2,175 920 4,652 3,351 4,756 7,667 12,743 7,806

Total operating revenue

25,665 29,443 33,009 34,961 45,527 65,162 69,725 70,069

Operating expense ‐19,694 ‐22,603 ‐28,414 ‐31,484 ‐44,152 ‐54,945 ‐52,976 ‐53,095 EBITDA 5,971 6,840 4,595 3,477 1,375 10,217 16,749 16,974 Depreciation ‐7,854 ‐8,735 ‐11,346 ‐13,100 ‐11,290 ‐9,686 ‐8,161 ‐16,463 EBIT ‐1,883 ‐1,895 ‐6,751 ‐9623 ‐9,915 531 8,588 511 Financial income ‐1,752 ‐2,559 ‐2,930 ‐3,489 ‐2,986 ‐1,602 ‐3,240 ‐3,749 Other income n.a. n.a. n.a. n.a. 4,762 ‐32 877 3,740 EBT ‐3,635 ‐4,454 ‐9.681 ‐13,112 8,139 ‐1,103 6,225 502 Taxes n.a. n.a. n.a. n.a. ‐349 ‐380 ‐479 ‐509 Net income n.a. n.a. n.a. n.a. ‐8,488 ‐1,483 5,746 ‐8

Notes: ‘n.a.’ means note available. (1) Rent for meters and transfers from international financial institutions.

Sources: 1996-1999 from EDM annual reports; 2000-2003 from Richard Schlirf Rapti, “The Privatization of EDM S.A. in Mali: Doomed by Design”, photocopied draft, MacroConsulting, May 30, 2005, pp. 19-20.

26


Appendix Tariff Adjustment Formula for Electricity

The Formula

The average tariff on January 1 in a future year t, Pt, is calculated by multiplying the average tariff on January 1, 2000, P0, times an index, Indext:

Pt = Indext x P0

The index is the sum of four components:

Indext = k1 + k2 (Gt/G0) (Et/E0) + k3 (St/S0) + k4 [I1 (Dt/D0) + I2 (At/A0)]

where k2 , k3 and k4 are the weights attached to replacement parts, salaries, and fuel and purchased electricity respectively, and where

k1 = 1 ‐ k2 ‐ k3 ‐ k4

Efficiency incentive. The first component of the index, k1 , provides an efficiency incentive because as long as k1 is positive tariffs will increase less than proportionally with inflation.

Spare parts. The second component of the index adjusts for changes in spare parts costs. G is an OECD index of spare parts prices and E is the exchange rate of the CFA franc for the euro.

Salaries. In the third component S is an index of the average salaries of civil servants in Mali.

Fuel and purchased electricity. In the last component I1 and I2 are, respectively, the proportion of EDM’s electricity that it produces its self and the proportion that it buys from independent producers (e.g. from Manantali and, for two isolated communities near the border, from the Ivory Coast). D is an index of diesel fuel prices in Bamako in CFA francs and A is the average price in CFA francs that EDM pays for purchased electricity.

Problems

When the Manantali power station came on line it revealed two problems with the treatment of fuel and purchased electricity. First, the diesel fuel price is weighted by I1, the proportion of energy produced by EDM, even though roughly half of the energy EDM generates is by hydro. Second, the mix of generated and purchased electricity do not necessarily affect the price index because both generated and purchased electricity are weighted by the proportions of

27


electricity from the two sources (I1 and I2) rather than by the proportions times the relative costs of the two sources. For example, if EDM shifts from its own costly diesel generation to cheaper Manantali electricity, the index will not decline as long as the prices of diesel and purchased power do not change (that is if Dt/D0 and At/A0 are zero).

The consultants also found other problems with the formula. For example, using k1 as the efficiency incentive means that the incentive to become more efficient increases with inflation and there is no incentive if there is no inflation. There is no reason to believe that the opportunities for efficiency gains increase proportionately with inflation.

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energie du mali

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