Document ofThe World Bank

Report No: 21921-UNI

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 90.2 MILLION(US$114.29 MILLION EQUIVALENT)

TO THE

FEDERAL REPUBLIC OF NIGERIA

FOR A

PRIVATIZATION SUPPORT PROJECT

May 21, 2001

Private Sector UnitAfrica Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 11, 2001)

Currency Unit = NairaN 1 = US$0.007416

US$1 = N 134.85

FISCAL YEARJanuary 1 to -- December 31

ABBREVIATIONS AND ACRONYMSBPE Bureau of Public Enterprises MIS Management Information SystemCAS Country Assistance Strategy M-Tel Nigerian Mobile Telecommunications Limited (Ltd.)CDF Comprehensive Development Framework NBC National Broadcast CommissionCFAA Country Financial Accountability Assessment NaCC National Control CenterCPAR Country Procurement Assessment Report NCB National Competitive BiddingDFID Department for Intemational Development NCC Nigerian Communications Commission

of the United KingdomDPP Detailed Procurement Plan NCP National Council on PrivatizationEMCAP Economic Management Capacity Credit NEPA National Electric Power AuthorityEPIC Electric Power Sector Reform Implementation NEPP National Electric Power Policy

CommitteeEPP Emergency Power Program NERC National Electricity Regulatory CommissionFAAN Federal Airport Authority of Nigeria NFMC National Frequency Management CouncilFAD Finance & Administration/Accounts Department NGO Non-Governmental OrganizationFEC Federal Executive Council NITEL Nigerian Telecommunication Limited (Ltd.)FGN Federal Government of Nigeria NNPC Nigerian National Petroleum CompanyFMAP Financial Management Action Plan OCSPR Procurement Services Policy GroupFMF Federal Ministry of Finance PAD Project Appraisal DocumentFMOC Federal Ministry of Communications PE Public EnterpriseFMPS Federal Ministry of Power and Steel POMC Project Oversight & Monitoring CommitteeFMS Financial Management System PPF Project Preparation FacilityGDP Gross Domestic Product PPI Private Participation in InfrastructureGPP Global Procurement Plan PSP Privatization Support ProjectGPN General Procurement Notice QCBS Quality Cost Based SelectionGPSP Global Procurement Strategic Plan RFP Request for ProposalICB Intemational Competitive Bidding ROT Rehabilitate-Operate-TransferIDA Intemational Development Association SBD Standard Bidding DocumentIFC Intemational Finance Corporation SME Small and Medium EnterpriseIMF International Monetary Fund SPE Special Purpose EntityIPP Independent Power Producers SRIC Sector Reform Implementation CommitteeITU International Telecommunications Union SSA Sub-Saharan AfricaLSG Lagos State Government TSRIC Telecommunications Sector Reform Implementation CommitteeLSWC Lagos State Water Corporation USAID United States Agency for International DevelopmentMIGA Multilateral Investment Guarantee Agency

Vice President: Callisto E. MadavoCountry Manager/Director: Mark D. Tomlinson

Sector Manager/Director: Demba BaTask Team Leader/Task Manager: Paul Ballard

NIGERIAPRIVATIZATION SUPPORT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 10

C. Project Description Summary

1. Project components 132. Key policy and institutional reforms supported by the project 133. Benefits and target population 144. Institutional and implementation arrangements 15

D. Project Rationale

1. Project alternatives considered and reasons for rejection 192. Major related projects financed by the Bank and other development agencies 193. Lessons learned and reflected in proposed project design 214. Indications of borrower commitment and ownership 225. Value added of Bank support in this project 23

E. Summary Project Analysis

1. Economic 232. Financial 233. Technical 244. Institutional 245. Environmental 256. Social 277. Safeguard Policies 28

F. Sustainability and Risks

1. Sustainability 292. Critical risks 313. Possible controversial aspects 33

G. Main Credit Conditions

1. Effectiveness Condition 332. Other 34

H. Readiness for Implementation 36

1. Compliance with Bank Policies 36

Annexes

Annex 1: Project Design Summary 37Annex 2: Detailed Project Description 43Annex 3: Estimated Project Costs 51Annex 4: Cost Benefit Analysis Summary 52Annex 5: Financial Summary 57Annex 6: Procurement and Disbursement Arrangements 63Annex 7: Project Processing Schedule 71Annex 8: Documents in the Project File 73Annex 9: Statement of Loans and Credits 75Annex 10: Country at a Glance 77Annex 11: Project Implementation Framework and Action Plan 79

MAP(S)

NIGERIA

PRIVATIZATION SUPPORT PROJECT

Project Appraisal Document

Africa Regional OfficeAFTPS

Date: May 21, 2001 Team Leader: Paul BallardCountry Manager/Director: Mark D. Tomlinson Sector Manager/Director: Demba BaProject ID: P070293 Sector(s): DV - PrivatizationLending Instrument: Specific Investment Loan (SIL) Theme(s): Energy; Private Sector; Telecom & Informatics;

TransportPoverty Targeted Intervention: N

Program Financing Data[ ] Loan [X] Credit I ] Grant [ ] Guarantee [ Other:

For Loans/Credits/Others:Amount (US$m): 114.29

Proposed Terms (IDA): Standard CreditGrace period (years): 10 Years to maturity: 35Commitment fee: 0.5% Service charge: 0.75%Financing Plan (US$m): Source Local Foreign TotalBORROWER 68.43 14.97 83.40IDA 23.35 90.94 114.29AGENCY FOR INTERNATIONAL DEVELOPMENT 0.00 16.43 16.43BRMSH DEPARTMENT FOR INTERNATIONAL 0.00 10.84 10.84DEVELOPMENT

Total: 91.78 133.18 224.96Borrower: THE FEDERAL REPUBLIC OF NIGERIAResponsible agency: THE BUREAU OF PUBLIC ENTERPRISESBureau of Public Enterprises (BPE)Address: Plot number 2876, Osun Crescent by Ibrahim Babangida Way - Maitama District, P.M.B. 442, Garki-AbujaContact Person: Mr. Nasir el-Rufai Director GeneralTel: 234-9-413-4637 Fax: 234-9-413-4665 Email: bpegen@micro.com.ng,Bpe@bpeng.org, http//www.bpe.bpeng.org

Other Agency(ies):The Nigerian Communications Commission; the Federal Ministry of Commnunications; the Federal Ministry of Power andSteel; the National Electric Power Authority; the Lagos State Water Corporation.

Estimated disbursements ( Bank FY/US$m):FY j 2002 2003 2004 2005 2006 2007

Annual 12.91 28.05 28.41 25.85 15.82 3.25Cumulative 12.91 40.96 69.37 95.22 111.04 114.29

Project implementation period: 5.5 yearsExpected effectiveness date: 09/15/2001 Expected closing date: 12/31/2006

COSPADF,, Rev Ma, 20)0

A. Project Development Objective

1. Project development objective: (see Annex 1)

The project's development objectives are: (1) to support transparent and effective implementation of theFederal Government of Nigeria (FGN)'s privatization program, as a basis for fostering acceleratedeconomic growth, through expanded private investment and improved efficiency in the productive sectors,and in infrastructure; and (2) to create an enabling environment for private sector participation andcompetition in infrastructure services, notably in telecommunications and electric power.

2. Key performance indicators: (see Annex 1)

The key performance indicators for these objectives are:

(i) Expanded private investment, productivity and employment:Under the FGN's privatization program during 2001-05, about one hundred PEs in industry,agriculture, services and infrastructure will be transferred to private ownership. This willaccelerate economic growth and reduce fiscal drain to PEs, through significantimprovements in output, investTnent, efficiency and employment in the privatized andliberalized sectors, and contribute to capital market expansion.

(ii) Increased Private Participation and Efficiency in Infrastructure:In telecommunications, the Nigerian Telecommunication Limited (NITEL) will be privatizedby end-2001, and competition will be introduced from 2001 by opening up all segments ofthe market. In electric power, the National Electric Power Authority (NEPA) will berestructured from a fully integrated utility into separate business units for transmission,generation and distribution by 2002. Some generation plants will be concessioned to privateoperators during 2001 and 2002, distribution entities will be privatized in 2003 and 2004, andsome generations plants will be sold to private investors and operators from 2003 to 2006. Inthe Lagos State water sector, an international tender for private sector participation throughconcessioning will take place by end-2001.

(iii) Creation of Pro-Competitive and Transparent Markets and Regulatory Frameworks inInfrastructure:The FGN will create pro-competitive regulatory frameworks, with a cost-effectiveinstitutional set-up, for the principal infrastructure sectors to be privatized. This will permitentry of new private operators on a competitive, level-playing-field basis. Intelecommunications and electric power, FGN has adopted policy statements differentiatingclearly the roles and responsibilities of policy making, regulation and ownership. Based uponthese, new telecommunications and electricity laws will be presented to the NationalAssembly for approval in 2001. The Nigerian Communications Commission (NCC), as anindependent agency, will extend its mandate to regulate all telecommunication services andinfrastructure providers by 2001. A new independent agency will be established to regulatethe power sector.

(iv) Increased Basic Infrastructure and Utilities' Services in Rural and Urban Areas:The project will support expanded and lower cost access to basic infrastructure services,through expanded private participation in these sectors: (a) in telecommunications,tele-density will be increased to over 1 line per 100 inhabitants by 2003; and the number of

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villages with access to communication facilities will be doubled by 2005; (b) in electricpower, metered connections will be increased by 1 million households by 2006, from thepresent level of about 2.5 million, and operational generation capacity and revenues earnedwill be increased substantially; (c) in Lagos State, water production by Lagos State WaterCorporation (LSWC) will double by end-2005 through efficiency gains by private operatorsin terms of market coverage, reduced technical losses and customer billings and collections,which will increase by fifty percent.

(v) Reduced Public Deficit for PEs, notably in Infrastructure:The fiscal drain from PEs' claims on FGN's budget will be reduced: (a) intelecommunications, tax revenues from service providers will substantially increase; and (b) inelectric power, FGN funding of costs of rehabilitating NEPA's generation and distributionfacilities would cease from 2003. In the Lagos State water sector, government subsidies willcease, but concessional finance would be sought and on-lent to private operators.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 20309 Date of latest CAS discussion: 5/11/00

TIhe World Bank Group's Interim Country Strategy Note was discussed at a Board meeting on May 11,2000. This project will be presented to the Board together with a joint World Bank-IFC Interim StrategyUpdate. A basic principle guiding the World Bank Group's strategy is to help the Federal Government ofNigeria (FGN) build capacity to manage its resources effectively and implement policies that will attractprivate investment to enhance economic efficiency and growth. The strategy's key elements includetechnical assistance to provide advisory services for FGN's privatization program, including divestiture ofPEs in the major infrastructure sectors, notably telecommunications and power.

Tlhe Privatization Support Project (PSP) is consistent with the World Bank Group's assessment of priorityassistance needs. It will complement the Economic Management Capacity Credit (EMCAP) which isassisting the FGN in strengthening key aspects of economic management. The PSP will supportimplementation of the FGN's privatization program, and notably the sector reforms in telecommunicationsand electric power. Limited support will be provided to emergency rehabilitation and private sectorparticipation in the water sector in Lagos State.

2. Main sector issues and Government strategy:

Main sector issues: The main issues are: (a) poor performance of public enterprises, which dominatemajor sectors of the economy and are a drag on economic growth, productivity, and investment; (b) misuseof monopoly powers, notably in infrastructure, resulting in unreliable delivery and availability of services,including for the poor; (c) excessive bureaucratic controls and government intervention; (d) inadequatepolicy and regulatory frameworks which impede competition, discourage private entry and privateinvestrnent; (e) weak capacity to implement reform; (f) mismanagement, corruption and nepotism.

Public Enterprise Sector Structure and Performance: During the 1970s and 1980s, Nigeria developed alarge public enterprise sector covering a broad spectrum of economic activities. These covered large basicindustries, manufacturing, agriculture, services, public utilities and infrastructure. They includedtelecommunications, power, steel, petrochemicals, fertilizer, vehicle assembly, banks, insurance and hotels.There are currently about 600 public enterprises (PEs) at the federal level and about 900 smaller PEs at thestate and local levels. The estimated 1,500 enterprises account for about 30-40 percent of aggregate fixed

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capital investment and about 50-60 percent of formal sector employment. It is estimated that successiveNigerian governments invested over two decades about Naira 800 billion (approximately US$90 billionequivalent) in the PE sector, which remains today one of the largest in Africa. (See Table 1) The returns onthese large investments have generally been poor, and in a number of cases negative. The presence ofnon-performing PEs - some of which are currently mothballed, notably in the fertilizer, aluminum smelting,pulp and paper, sugar and steel industries - has effectively impeded entry by potentially more efficientprivate operators.

Table 1: Share of Public Enterprises in Development Indicators of Selected African Countries

Country #of PEs % of GDP % of Investment % of Employment

Nigeria 600 50% 57% 66%

Cote d'Ivoire 150 n/a 18% n/a

Ghana 181 n'a 25% 55%

Kenya 175 n/a 21% 9%

Tanzania 420 13% 26% n/a

Burkina Faso 44 5% 20% n/a

Senegal 50 9% 33% n/a

Source: "Commercialization and Privatization Policy in Nigeria ", Obadan Mike, I. and Ayodele A.Sesan, National Center for Economic Management and Administration, Ibadan, Nigeria, 1998n/a = not available

Weak and Deteriorating Public Infrastructure Services : With services delivered by poorly performingstate enterprises, Nigeria's infrastructure has become dilapidated and unreliable. The growth andcompetitive potential of the economy have been impeded by limited access to and poor delivery of services.In electric power, telecommunications, ports, water supply, and other sectors, the major inefficiencies ofPEs add substantially to the costs of production of private firms, as well as to health problems. TheNational Electric Power Authority (NEPA)'s unreliable power supply is estimated to impose an additionalcost of aTound US$1 billion annually on the economy. Only 12 percent of Nigerians have metered access toelectricity (many others have access through illegal connections). Telephone coverage is only 3 telephonelines per 1,000 persons with most of these lines confined to the major urban centers - one of the lowesttele-densities in the world. With escalating demand for reliable and affordable services, the general publichas stepped up its pressure for efficient public services that are more responsive to consumers. In LagosState, access to piped potable water is limited to less than 30% of the population. The water utility, LSWC,is technically insolvent and close to physical collapse, due to a chronic lack of maintenance and financialresources for emergency repairs.

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Government Strategy

Overall Government Strategy - Broad-based PE Reform: Faced with continuing poor performance ofPEs and limited managerial capacity, the FGN's strategy is to undertake a three-phase privatizationprogram aimed at improving efficiency, promoting transparency and realizing results in the medium-term.The FGN has decided to transform its role from owner, financier and operator of PEs to one ofpolicy-maker and, where necessary, regulator for the provision of public services. A key objective is toincrease infrastructure access substantially given weak and unreliable supply.

Leral Framework for Privatization: Under the 1999 Privatization and Commercialization Act, the FGNestablished the National Council on Privatization (NCP) chaired by the Vice President, to oversee theprivatization program. The Act made the Bureau of Public Enterprises (BPE) the implementing agency andsecretariat to NCP.

The Act is based upon the FGN's realization that far-reaching reforms of PEs are needed. It embodies amarket-oriented approach, introducing private participation to reap the efficiency benefits of greatercompetition, new technologies, and modem management techniques. It reflects the FGN's recognition thatearlier approaches for improving PE performance tried by previous administrations - notablycommercialization and corporatization - had not worked effectively. Since 1990, many PEs had beencorporatized, and some were partially privatized - often through issuance of shares on the Lagos StockExchange. Their performance failed to improve significantly due to continued government interferencewith appointments of Boards and senior staff members, policy decisions and distorted price regimes.

Federal Government of Nieeria 's Privatization Strate':. In July, 1999, the FGN adopted athree-phased privatization program for the 1999-2004 period as follows:

Phase 1: Full divestiture of FGN's shares in banks, cement companies and oil marketing firms listed onthe Nigerian Stock Exchange;

Phase 2: Full divestiture of FGN ownership in hotels, vehicle assembly plants, and other industrial,agricultural and service sector enterprises operating in competitive markets; and

Phase 3: Partial divestiture of FGN shares in major public enterprises operating in non-competitive,but potentially competitive, sectors such as the telecommunication company (NITEL), the nationalpower company (NEPA), Nigerian Airways, and the oil refineries; as well as privatization of twomajor fertilizer companies.

Of one hundred PEs in the FGN's privatization program, over fifty are in Phase 2. Phase 1 is now nearingcompletion after delays due to problems in completing the sales of some companies jointly owned withstate governments - notably in the cement sector. The FGN has advanced the privatization of selected PEsfrom Phase 3, notably those representing the most pressing constraints to the economy and requiring majorsector policy reforms such as telecommunications and electric power.

Priority Focus on Infrastructure: Telecommunication and Power: The FGN began preparation of thereforms in telecommunications and electric power in early 2000. This work is now well advanced withProject Preparation Facility (PPF) financing of consultants and advisors to help prepare modem,market-oriented policies; design legal, regulatory and institutional frameworks; and prepare the corporaterestructuring of NEPA.

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Telecommunications Sector Reform Program : In telecommunications, a new NationalTelecommunication Policy (NTP) was adopted in September 2000. This provides for full liberalization ofthe market to private operators and divestiture of the two principal, state-owned telephone companies -NITEL (the fixed line operator) and M-Tel (the mobile operator). The NTP limits the role of thegovemment to policy formulation and expands the mandate and strengthens the legal and institutionalframework of the Nigerian Communications Commission (NCC). It aims to establish a competitiveindustry structure through fixed-line and wireless licensing. As a first step in implementation of the NTP,the FGN successfully completed a public auction of three digital mobile licenses in January 2001, andappointed technical and financial audit consultants to carry out the necessary due diligence to prepare forthe divestiture of NITEL As a preparatory step for this, FGN announced the merger of NITEL and M-Tel(which provides analog mobile services) under the name NITEL. FGN allocated a digital mobile license toNITEL at a price of US$285 million (the auction price of the other digital mobile licenses).

The FGN's goals are to: (1) achieve a major expansion in access to connectivity in 2001-03 to a total of 2million fixed and mobile lines; (2) strengthen the capacity of the Nigerian Communications Commission(NCC) as an independent telecommunication regulator, to create a flexible regulatory environment in themedium-term taking account of new technologies and international trends towards convergence; (3)establish a National Frequency Management Council (NFMC), and upgrade equipment and facilities atNCC for improved management of the radio spectrum. The NTP and strengthened regulatory frameworkwill reduce the market power of NITEL, through adoption of improved interconnection rules and pricingarrangements. Initially regulatory discretion will be limited by building regulatory rules largely intocontracts and licenses.

NITEL is scheduled to be privatized by end-2001. Investment and legal advisors for this transaction arealready being recruited by BPE. The FGN recognizes the need to demonstrate that the benefits oftelecommunications' reform will accrue to both urban and rural areas. To avoid increased polarization inservice provision between urban and rural areas and to enhance rural connectivity, a demonstration ruraltelecommunication program is under preparation. This will test altemative approaches to expanding accessthrough private investment, including rural telecoms licensing.

The project will support the design and implementation of the new legal and regulatory framework fortelecommunications; the strengthening of NCC's capacity; the privatization of NITEL; the purchase andinstallation of upgraded radio frequency equipment; and the design and implementation of a demonstrationrural access program.

Power Sector Reform Program: The FGN is preparing a major reform of Nigeria's electric power sectorthat includes early opening to private participation. The FGN has recently approved a new policystatement, the National Electric Power Policy (NEPP), setting out institutional arrangements forintroducing competition and for an appropriate regulatory framework for the sector. Under the NEPP, thegovemment will focus on providing the overall direction for power sector development, ensuring the generalconsistency of electric power policy with other national policies, and enacting the necessary laws,regulations and other measures required to support its policies. The Federal Ministry of Power and Steel(FMPS) will propose policy options to FGN conceming legislation, policy on investments, etc., monitorand evaluate the implementation and performance of govemment policy, and establish and monitor policiesfor increasing access to electricity, particularly in rural and semi-rural areas. State govenmments will haveresponsibilities for the development of off-grid electrification.

The new policy lays the basis for creating an industry structure that will develop competition byestablishing a number of privately-owned or concessioned generation companies that will compete for the

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business of distribution companies and large users of electricity. This structure would be achieved by thefollowing steps : (i) unbundling NEPA's vertically integrated structure into several generation anddistribution entities and a transmission entity that would also act initially as the national electricity dispatchentity/system operator, (ii) divestiture of the state's ownership in the thermal generation and distributionfacilities, and either divestiture of the state's ownership or long-term concessioning of the hydropowerfacilities, (iii) allowing private independent power producers (IPPs) and electricity suppliers to enter thepower market, and (iv) establishment of arm's-length trading mechanisms among these entities.

Competition in the wholesale power market would be developed in stages once the industry is restructured.In the first stage, competition would be limited to competitive bidding to take over some of NEPA's thermalpower stations under medium term Rehabilitate-Operate-Transfer back (ROT) concession agreements withNEPA. This stage would also cover the competitive procurement of long-term power supply from up to1500 MW of new generating plants developed by IPPs with the benefit of the FGN's credit support. Thesecond stage will start once the new entities formed from the restructuring of NEPA are formed and largelyprivatized, and the new sector regulatory agency and regulations are in place. It will focus on developingcompetition through rights to enter into bilateral contracts between generation and distribution companies.Each distribution company would have a portfolio of power purchase contracts with various generators,and each generator would have a portfolio of power sales contracts. Short-term imbalances betweenpower demand and supply would be handled during this stage through a system of imbalance tariffs.Under this, generators will be required to provide power in excess of or to curtail production belowcontracted supply.

Competition in the market would be further developed over the medium-to-long term by: (i) allowing largeusers of electricity to purchase directly from generators or electricity suppliers; (ii) removing retail salesmonopolies from the franchises of distribution companies; and (iii) separating the retail sales business ofdistribution companies from the low voltage distribution business with limits on cross-ownership.

The new power policy provides for the establishment of the National Electricity Regulatory Commission(NERC) as an agency independent from the government and all companies operating in the sector. TheNERC would regulate the sector with powers, duties and a constitution laid down in a new Electricity Act,and would issue licenses to companies operating in the Nigerian power market. Through these licenses, theNERC would be responsible for (i) decisions on regulatory approval for electricity tariffs; (ii) business andcapacity expansion plans for generation, transmission and distribution; (iii) enforcement of competitionover the transmission network including regulation of transmission connections, transmission access rightsand fair cost reflective use-of-system prices; (iv) enforcement of competition over electricity generation,distribution and sales; (v) ensuring that major investments for expanding generation capacity are carriedout by competitive tender; (vi) setting and enforcing national quality standards; and (vii) enforcing the legalrights of consumers. The NERC's activities would be funded from a source independent from FGN'sbudget such as license fees and charges for its services to the industry. The detailed design of the newpower regulatory body will be based upon a review of institutional options, taking account of recentinternational experiences.

Preparations for NEPA's restructuring and ultimate divestiture are being accompanied by a major effort toensure improved basic availability and reliability of power supplies in the short term. The FGN has toaddress the following four short-term priorities to have a reasonable prospect of successfully moving powergeneration, distribution and supply into private ownership and management: (i) fulfill its commitment togreatly reduce power shortages by end-2001; (ii) manage the process of private entry into power generationwithout jeopardizing sector viability or unduly increasing the costs of power supply; (iii) attract reputableinvestors to the Nigerian power sector; and (iv) restructure NEPA's functions in preparation for

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privatization and the development of a competitive trading environment for power. NEPA's action plan todeal with the shortages proposes to : (a) rehabilitate its existing supply facilities, through contracting outmanagement of NEPA generation plants to private operators on a rehabilitate-operate-transfer (ROT)basis; (b) competitively engage new private independent power producers (IPPs); and (c) implement anemergency power program (EPP).

Also included under the short-term action plan are steps to : (d) implement a substantial interim tariffincrease to start the process of moving tariffs to cover costs fully, and put in place an automatic tariffadjustment plan that accounts for changes in the exchange rate, inflation and fuel prices; (e) contract out toprivate agencies the billing and collection of payments for some of NEPA's customers; (f) establish aSpecial Purpose Entity (SPE) to take over NEPA's obligations to purchase power from private producers,with adequate financial support for this purpose, and (g) undertake a program to eliminate vandalism tomajor power supply facilities and substantially reduce vandalism to other power supply facilities.

The project will finance technical assistance and capacity-building required for the design andimplementation of the FGN's power sector reform program, including priority measures in the short-termaction plan. The main components cover: the creation of the new legal and regulatory framework, and ofthe revised tariff system; the establishment of the new regulatory body; the creation of the new dispatch andsettlement system; the unbundling of NEPA, and privatization of the generation and distribution units of therestructured NEPA; as well as the establishment of a regulatory and institutional framework for ruralpower supply. The project will play a pivotal role in putting in place the framework within which themassive future investments required in power supply would be undertaken. Consultancy support for theROT, EPP, IPP programs will be provided under the project.

FGN's Privatization Modalities and Procedures.: The FGN's privatization program is beingimplemented through the appointment of competitively selected investment advisors to undertake thepreparation and execution of especially larger PE divestiture transactions, under the supervision of theBPE. Sector-specific inter-ministerial divestiture committees under the auspices of the NCP, and chaired bythe concerned sector ministers are responsible for overseeing preparation of related sector reforms. Theyinclude other top officials and stakeholder representatives - including from the private sector, labor unions,professions and academia. For major PE divestitures, especially those that are currently monopolies,notably in infrastructure, the NCP's procedures involve two stages: (a) review and reform of the sectoralpolicy environment and regulatory framework to ensure transparency, efficiency and competition; followedby (b) preparation and implementation of a divestiture strategy for the PEs in the sector.

The 1999 Privatization and Commercialization Act, categorized PEs slated for divestiture based upon : (1)the percentage of FGN shareholding to be sold; (2) the percentages to be sold to strategic investors and toNigerian individuals; (3) the percentage to be retained by FGN; and (4) those PEs to be commercializedrather than privatized. It thus distinguished the following categories : (a) 36 PEs - mainly the large strategicones in infrastructure, utilities, heavy industry and mining - slated for maximum 40 percent sale tostrategic investors, and at least 20 percent to Nigerian individuals, with a maximum of 40 percent to beretained by FGN; (b) 25 PEs (cement, oil marketing, agro-allied, vehicle assembly, banks, and hotels)slated for full divestiture; and (c) 33 PEs slated for partial or full commercialization - including river basinauthorities, media, game parks, and the Nigerian National Petroleum Company (NNPC).

Subsequently, the FGN recognized that the Act's limitations upon the percentage of share holding the FGNcould divest to strategic investors, coupled with the minimum to be held for sale later to Nigerianindividuals, could significantly limit government withdrawal from PE ownership. This risks limiting theinterest of private, and especially foreign, strategic investors in acquiring these enterprises, and reducing

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the sales prices. In July, 2000, the FGN therefore adopted a revised policy that: (a) permits sale of up to51 percent of a PE's share capital to strategic investors; (b) eliminates the long-term requirement of aresidual shareholding by FGN; and (c) provides for sale to Nigerian savers and investors of the balance ofshares not sold to strategic investors, subject only to the absorptive capacity of the capital market.

Privaization Process Guidelines . As other countries' privatization experiences indicate, the process andprocedures for PE divestiture transactions are key to ensuring transparency, efficiency and timeliness ofimplementation. Recognizing this, in 1999 FGN adopted guidelines and a blueprint for implementation,pursuant to the 1999 Privatization and Commercialization Act. These guidelines established a streamlinedprocess by which the NCP sets the broad parameters of policy and strategy for divestiture transactions, anddelegates detailed preparatory work and execution to sectoral divestiture committees, subject to NCPclearance of key strategic decisions. Stakeholder consultation and participation are emphasized to ensurethe sustainability of the program. The BPE serves as executing agency, while BPE's director-general is afull member of the NCP. Two modes of divestiture were adopted: (a) For very large PEs, a strategicinvestor is selected first, followed by subsequent sale of shares to Nigerian investors on a broadlydistributed basis across the country and phased over time. (b) For other PEs, privatization proceedsdirectly through offerings of government shares on the stock market to Nigerian investors.

Privatization Process Issues: While the guidelines aimed at ensuring greater transparency and efficiency,they had a number of important potential short-comings : First, by mixing technical and price criteria in theprocess of bidding and selection of strategic investors, they left open a significant element of subjectivity inthe final selection process. In effect, the final selection of the winning bidder could be subject to negotiationand agreement by the NCP, rather than being based upon the outcome of competitive bidding based uponprice. Second, while in several cases they have been very effective - e.g. in power and telecoms - thesectoral reform committees have not always worked effectively in ensuring coordination between the keygovernment agencies concerned - notably the privatization agency, the sector ministries and, where theyexist, the sector regulatory agencies. This resulted in difficulties coming to closure on sector policy insome sectors, notably air transport. Thid the NCP has lacked oversight and control over key PEmanagement decisions (such as major new investments, incurring of new debts, disposal of assets, hiring ofnew employees) in the period prior to divestiture. This leaves open the possibility of PE managementactions at odds with the reforms.

The FGN has decided to take actions to strengthen its privatization procedures, through: (1) strengtheningand improving transparency of bidding procedures; (2) formally establishing NCP authority over all key PEdecisions prior to divestiture; (3) formalizing arrangements for sale to Nigerian savers and investors ofremaining FGN shares in privatized PEs through regional allotments to ensure balanced geographic andregional distribution, and (4) warehousing of shares through a privatization trust. (See below for details.)

Other Key Privatization Policy Issues: PE Severance Compensation and Competition Policy: Twofurther issues confronting implementation of FGN's privatization program are : (a) design and adoption of aconsistent policy framework governing severance compensation of PE employees (severance pay, pensions,etc.); and (b) establishing an effective competition and anti-trust policy framework, including an overallinstitutional framework for infrastructure regulation. This is important for later divestitures in sectors otherthan telecommunications and power.

PE Severance Compensation Policy: FGN recognizes that a critical element in implementation of PEdivestitures will be efficient and equitable handling of necessary pension funding, severance payments andemployee retrenchment. Many PEs to be divested have staffing levels substantially above intemationalnorms for their sectors, and will need to retrench significant numbers of employees to enable private

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operators to achieve the efficiency gains. It will be critical that FGN develops and adopts at an early stagea consistent overall policy goveming severance compensation (including pensions), particularly where thesemay exceed statutory severance provisions. Other countries' experiences have shown this to be vital toensuring an efficient, equitable, and sustainable privatization program, and to containing the fiscal costs ofretrenchment.

The project will finance technical assistance for a review of policy options in this area. The project will goon to support consensus-building and implementation for a consistent PE retrenchment strategy and policyframework. Work has already begun to prepare this framework, including consultations with keystakeholders.

Competition Policy: The FGN recognizes that privatization of PEs in sectors where competitive pressuresfrom intemational markets may initially be limited and where monopolies exist, will call for effectivecompetition and regulatory policies. To provide a consistent economy-wide setting for these, and to coverother sectors, FGN has decided to commission a review to draw up options for a competition and anti-trustpolicy. No single solution has yet been determined to be the most appropriate at this time for Nigeria'sneeds for competition policy and general infrastructure regulation. Whichever institutional approach isadopted in the medium run, the regulatory rules will need to be established at the individual sectoral level,although they should be based upon common principles linked closely to competition policy.

Emergency Repairs Support for Lagos State Water Supply Private Sector Participation: Selectedstate governments with FGN support are launching efforts to divest their water supply utilities and toincrease private sector participation in the sector. An initial program involves the preparation andimplementation of a private sector participation scheme in the Lagos State Water Corporation (LSWC).The Intemational Finance Corporation (IFC) was granted a mandate in October 1999 to provide technicalsupport for this transaction as principal advisor. A sector reform and divestiture strategy has beenprepared (April 2000) and the Lagos State Govemment (LSG) adopted a private sector participation planfor LSWC in December 2000. LSWC faces the risk of immediate collapse of water supply due to years ofweak maintenance, under-investment and poor management. Over US$200 million are estimated to berequired to rehabilitate and expand LSWC's facilities to meet social needs, and this will form part of theconcessioning plan for LSWC. Meantime, a moderate stop-gap investment in crucial spare parts and minorequipment (mainly power generators), management upgrading, and strengthening of billing and collectionare required to contain the risks of system failure.

The project will finance stop-gap investments in spare parts, minor equipment replacement, in managementsystems upgrading, and in strengthening of billing and collection to facilitate the program for private sectorparticipation in LSWC. It will also finance selected consultancy and advisory services to prepare LSWC'sprivate sector participation plan.

3. Sector issues to be addressed by the project and strategic choices:

The project address key constraints in the PE sector by supporting technical design, capacity building andimplementation for the FGN's PE privatization program, including reforms in two key infrastructuresectors - telecommunications and electric power.

Privatization and Sector Reform: The project will support implementation of the govemment'sthree-phase strategy of PE privatization, particularly Phases Two and Three. This will be throughcapacity-building in key institutions ( NCP, BPE) and general transactions assistance to facilitate andaccelerate privatization of selected PEs in the productive sectors, services, and infrastructure.

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Policy Framework for the FGN's Privatization Program: The project will support adoption ofstrengthened guidelines and procedures for PE divestiture to ensure efficiency and transparency. The FGNwill undertake the following actions:

(a) Bidding Procedures for Large PE Divestiture Transactions, notably in infrastructure, will bestrengthened and made more objective by: (1) using pre-qualification (rather than business plans) toensure that bidders have strong technical and financial credentials, and that they respond on a uniformbasis to government policy requirements for the particular PE (as spelled out in the informationmemorandum); (2) after pre-qualification, basing final selection of the winning bidder upon a singlepre-defined financial parameter (in most cases it will be the highest share purchase price, but it couldtake the form of the highest concession fee or the lowest tariff; (3) public opening of ftnancial bidspublicized and broadcast in the media, followed by expeditious (within one week) government finalapproval of the bid outcome; (4) front-loading the divestiture process, with bidders conducting duediligence before submitting financial bids, together with pre-signed contracts and bid bonds. This willfacilitate timely closure, without need of ex post negotiations. These changes will contribute to a "levelplaying-field" for private investors. In effect, the above steps would mean that non-price factors aretaken into account through: (i) pre-qualification of bidders meeting the stipulated criteria on a pass-failbasis; (ii) use of weights - explicitly stated in the bidding documents - applied to price bids. On thisbasis, as now, BPE would submit the three highest scoring bids to NCP, recommending a winner forapproval, based upon the bid outcome.

(b) Bidding Procedures for Large PEs will apply to private contracting out of infrastructure andpublic services, including IPPs, ROTs and EPPs in the power sector.

(c) Bidding Procedures for Smalter PE transactions will be accelerated and made less costly by usingsimplified techniques, such as asset sales, liquidations and auctions, where appropriate.

(d) Privatization Council (NCP) Authority over Key PE Decisions, will be officially established -through publication in the Official Gazette.

(e) Arrangements for Sale of Remaining FGN Shares in Privatized PEs will be made public throughissuance of guidelines in the Official Gazette. These will cover the system of regional allotments, andthe proposed share warehousing system in a "privatization trust" - that is to be managed by acompetitively selected private fund manager.

(f) Liberalized Shareholding Limits for Strategic Investors (of up to 51 percent of a PE's sharecapital) will be made public through the Official Gazette.

(g) Strengthening of Coordination between Sector Policy Reforms and Privatization, through issuanceof official instructions in the Official Gazette conferring authority on the Sector ReformImplementation Committees (SRICs) for coordination and for submission of policy recommendationsto the NCP prior to consideration by the Federal Executive Council (FEC).

(h) Adoption by FGN and wide publication among stakeholders of a Privatization Process andProcedures Manual based upon the above principles and practices.

The project will also support the design and adoption of a consistent policy governing PE employeeseverance compensation.

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The project gives priority to reform and privatization in the telecommunications and electric power sectorsbecause of: (i) their importance to increased economic efficiency and activity, growth and employment -especially in the private sector; (ii) their scope for improving living standards by expanding access toservices in these sectors from their present low levels; (iii) their large investment needs, that cannot befinanced and managed by the state alone and require private sector participation; (iv) their requirements forlonger term capacity-building support, to achieve the transition from state-operated to privately run, morecompetitive sectors.

Infrastructure Regulation and Liberalization: The project will support the establishment, prior to PEdivestiture, of legal and regulatory frameworks, and of sector-specific regulatory rules. These will be aimedat balancing the interests of investors, consumers and government; providing clear, consistent andindependent regulation; and minimizing government interference and the scope for corruption.

Initially, regulation will be largely based upon standard rules (governing such issues as price adjustments,interconnection, contract renegotiation, conflict resolution, etc.) built into licenses, contracts and concessionagreements, with limited scope for regulatory discretion. Discretionary approaches, where needed, will beadopted gradually once regulatory capacity and experience are established.

Institutional Support, Capacity-Buildin2, and Communications: To ensure the sustainability of thereforms, the project will strengthen the concerned government institutions, as well as the procedures forundertaking the reforms and measures to build support among the public at large.

Institutional Support and Capacity Building: The project will provide support for programs of capacitybuilding and training of BPE staff, as well as study tours and awareness raising for representatives of otherkey stakeholder groups. Long term international advisors and highly qualified Nigerian professionals willbe hired. In addition, an international expert team with privatization experiences has been hired to provideup-to-date knowledge and experience in privatization. Training will be provided in preparation andexecution of complex large divestiture transactions, design of related regulatory reforms, and financial,legal, economic and corporate management aspects. BPE will arrange training in these areas - throughcontracting out to a qualified and experienced training organization. BPE also plans to send selected staffto privatization agencies overseas for short-term on-the-job training. To build stakeholder support, studytours will be undertaken for key stakeholder group representatives (notably parliamentarians, governmentofficials, labor and other civil society representatives). To help strengthen the capacity of Nigeria'sjudiciary to address commercial and business law issues related to PE divestiture, NCP has agreed with theleadership of the judiciary to undertake a training program for judges and court officials in these aspects ofcommercial and business law.

Communications and Public Awareness: FGN recognizes the need for a comprehensive andbroad-based communications and public awareness program. The main elements of its program are: (a)intemational marketing and promotion both for the overall privatization program, as well as for specific PEdivestiture transactions (aimed at eliciting interest of potential strategic investors); (b) nationwide andregional publicity and awareness programs through the general media, focus groups, and locally organizedpublicity and outreach campaigns; (c) nationwide and regional publicity and information campaigns toelicit investor and saver interest in purchasing shares in PEs; and (d) speeches and presentationsinternationally, nationally and locally by senior FGN officials involved in the implementation of theprivatization program.

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Limited Equipment Support: The project focuses mainly upon capacity-building and providing technicaland institutional support. However, limited accompanying investments in equipment will be supported.These are aimed at: (1) building FGN's technical capacity for effective radio spectrum management in theteleconununications sector, which is vitally needed given the increasing importance of wirelesstechnologies; and (2) supporting emergency rehabilitation and repairs in the Lagos State Water Corporation(LSWC), designed to facilitate divestiture by preventing prior system failure.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

_~~~~~~~ML Tta ' - financ>Tpt Uin1. General Privatization Support Privatization 43.20 19.2 39.89 34.92. BPE Institutional Support Privatization 57.21 25.4 12.77 11.23. Privatization Consensus Building Privatization 66.47 29.5 8.43 7.44. Telecommunications Sector Reform Telecommunicati 18.49 8.2 16.96 14.8

ons &Informatics

5. Electric Power Sector Reform Electric Power & 25.23 11.2 24.62 21.5Other EnergyAdjustment

6. Lagos State Water Corporation - Urban Water 14.36 6.4 11.62 10.2Restructuring and Private Sector SupplyParticipation

Total Project Costs 224.96 100.0 114.29 100.0

Front-end fee 0.00 0.0 0.00 0.0Total Financing Required 224.96 100.0 114.29 100.0

2. Key policy and institutional reforms supported by the project:

The project supports key elements of the FGN's privatization program and infrastructure reforms:

* strengthening of the po&lcY framework for PE divestiture, including streamlining ofprocedures for divestiture, capacity building in BPE and NCP, and adoption of aconsistent policy for PE severance compensation. Key elements of the project are adoptionby FGN of : (1) transparent guidelines and bidding procedures for PE divestituretransactions; and (2) institutional arrangements for strengthening coordination ofdecision-making on privatization with related sector policy reforms;

* implementation of legal and regulatory reforms in the electric power sector, andrestructuring. unbundling and divestiture of NEPA, including a short-term action plan,aimed at: (i) major improvements in supplies and service reliability; (ii) efficiency

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improvements for private business; and (iii) expanded access generally and for rural areasThis will be acheived through competitive private sector entry, investment and operation;

* implementation of telecommunications sector liberalization, regulatory reform. andprivatization of NITEL aimed at major expansion in connectivity through privateinvestment and entry of new private operators. This will improve service quality, expandrural access and lead to more affordable tariffs, due to competition;

* implementation of Phases Two and Three of FGN's privatization program, focused uponroll-back of state involvement in kev productive sectors, services, and infrastructure,through divestiture of about one hundred PEs. This will improve economic efficiency in thenon-oil sectors and expand private-sector led growth;

* facilitation of private sector participation in the Lagos State Water Corporation, throughemergency repairs and interim management strengthening to prevent system failure prior todivestiture, as well as provision of specialized consultancy services.

The FGN has adopted new national policy frameworks for telecommunications (in September 2000) andfor electric power (in March 2001). A new law for each sector will be presented to the National Assemblyfor approval and enacted by end-2001.

All transactions for PE divestitures will be carried out in line with the privatization guidelines and biddingprocedures to be adopted in 2001 by FGN. The main elements and principles of these have been agreedwith the International Development Association (IDA) at credit negotiations. The FGN and the WorldBank Group will regularly monitor compliance with this framework during project implementation.

3. Benefits and target population:

The main project benefits will be: (a) increased economic growth resulting from increased investment andefficiency by the private sector; (b) lower public sector deficits; (c) lower cost, improved infrastructureservices for business and residential consumers; and (d) reduced poverty levels, due to improved access toand availability of infrastructure at more affordable prices.

The privatization of PEs in the power, telecommunication and urban water sector will initially improveaccess and affordability for urban consumers. However, the rural access programs in electric power andteleconmmunications - to be supported by the project -will put in place affordable private and communitysupply in rural areas. The new regulatory frameworks to be adopted will encourage these initiatives andensure inter-connection with the main national networks. Rural and other poor consumers will thus alsobenefit from the project. In the urban water sector, the Lagos Water private sector participation plan isexpected to be the first in a series of such initiatives in the Nigerian states. They will be complemented byprograms supporting private and community-based small-scale water supply in secondary towns andvillages - for which separate World Bank Group assistance is under preparation. Improved infrastructurewill in particular assist small and medium enterprises (SMEs) for whom current deficiencies pose a largerconstraint to expanding output and productivity and growth than for large private firms.

In the productive sectors - notably in energy-based industries such as fertilizers and aluminum smelting, aswell as sugar - the privatization of existing and currently mothballed PEs will open opportunities for newprivate investment. Privatization will overcome uncertainties concerning government intentions which posea major impediment to new investors entering the market concemed.

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4. Institutional and implementation arrangements:

Implementation period: The project will be implemented over a five-year period (2001-06).

Executing Agency: The executing agency for the FGN's privatization program is the National Councilon Privatization (NCP).

The NCP is chaired by the Vice President of the Federal Republic of Nigeria. Its members include allCabinet ministers and top FGN officials with overall economic policy functions. These include the Ministerof Finance, the Chief Economic Adviser and Minister of Planning, and the Governor of the Central Bank.The NCP also co-opts the concerned sector minister responsible for a given PE when decisions are made onthe privatization of that enterprise and on related sector policies.

The NCP has established five Committees -- Policy and Monitoring, Technical, Finance, Publicity andMobilization, and Transactions Marketing. The committees oversee and provide advisory support to keyaspects of the privatization program. They include senior FGN officials as well as private sector and otherstakeholder representatives, appointed for their professional expertise and integrity.

For each major sector undergoing policy reformn and privatization, the NCP has established a sector reformimplementation committee (SRJC). Their function is to guide and oversee the preparation andimplementation of sector reforms. There are eleven SRICs covering oil and gas, aviation, transport,industry, agriculture, tourism, solid minerals, insurance, water resources, in addition to the Electric PowerSector Reform Implementation Committee (EPIC) and the Telecommunications Sector ReformImplementation Committee, (TSRIC). The SRICs are chaired by the respective line ministers, who reportto the Vice President. The committees are essentially consultative and advisory fora for key stakeholders.

Sector policy and regulatory issues, and design of sector policy reforms, are the responsibility of the lineministries. Meanwhile, the NCP and BPE are responsible for overseeing and managing privatizationstrategy and transactions. To ensure consistency in decision-making for privatization and for related sectorpolicy reforms, in September 2000 FGN decided that sector policy and regulatory reforms related toprivatization are to be reviewed by the respective SRIC, prior to submission to the NCP for approval.

Implementing Agencies: The implementing agencies for project will be as follows:

(a) The Bureau of Public Enterprises (BPE) is responsible for the management of the FGN'sprivatization program - including the corporate restructuring and privatization programs fortelecommunications (NITEL) and power (NEPA). The BPE is also responsible for recruitment andsupervision of the technical consultants assisting the telecommunications and electric powerSRICs. The BPE will implement the communications and public awareness programs for theFGN's privatization program. The BPE serves as secretariat for the NCP and its five standingcommittees, as well as for the SRICs. The BPE is headed by a Director-General reporting to theVice President of Nigeria. The incumbent was appointed in November, 1999 and has strong priorprivate sector experience and professional credentials. The BPE has a staff of about 100professionals. While a number of these have financial, legal, economic and corporate skills, theirexperience is limited on large, complex infrastructure PE divestitures linked to sector andregulatory reform programs. The BPE is strengthening its capacity by recruiting a smallinter-disciplinary professional advisory group ( or "core team") within its current structure. This

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team of ten highly qualified Nigerian professionals - hired from the private sector on a contractbasis - is being funded by the United States Agency for International Development (USAID). Sofar, four have been recruited and an additional six are being recruited in 2001.

(b) The Telecommunications Sector Reform Implementation Committee (TSRIC) willwork with the Nigerian Communications Commission (NCC) on development of a universal accessstrategy and in defining the optimal institutional arrangements to implement the strategy and carryout demonstration projects.

(c) The Nigerian Communications Commission (NCC) will be responsible forimplementation of the regulatory strengthening sub-component, and the radio frequencymanagement sub-component of the project. It will also work with the TSRIC on execution of therural access sub-component.

(d) The Federal Ministry of Power and Steel (FMPS) will be responsible forimplementation of the national power policy, as well as for the sub-component supportingexpansion of non-grid power access in rural and urban areas. However, procurement and paymentof consultants for these studies will be handled by BPE.

(e) The EPP Task Force of NCP, headed by the Chairman of the Board of NEPA will beresponsible for implementation of the sub-component fnancing the ROT and EPP advisoryservices. BPE, as secretariat for the task force, will handle procurement and payment of theconsultants.

(f) The Nigerian Electricity Regulatory Commission (NERC), to be established under theproject would, once established, be responsible for implementing the power sector regulatorysub-component.

(g) The Lagos State Water Corporation (LSWC) will be responsible for implementation ofthe Lagos State Water Corporation project component, through onlending arrangements with LSGand from FGN to LSG.

Project Management and Coordination: Under the project, the principal implementing agencies (BPE,NCC, LSWC, and NERC ) will each build strengthened capacity to handle procurement and financialmanagement. The BPE will be responsible for overall coordination of project implementation andmonitoring among the implementing agencies.

The BPE is strengthening its own capacity to handle procurement, financial management, and reportingfunctions through recruitment of an experienced project accountant and a procurement specialist (initiallyfor one year). These strengthened capabilities will backstop and give technical support to the BPE sectorteams handling the PE divestiture transactions. The project will also provide capacity building tostrengthen BPE's sectoral teams - notably initially for power and telecoms.

Project Oversight and Monitoring Committee: To ensure effective cross-agency coordination andoversight of the PSP, a Project Oversight and Monitoring Committee (POMC) will be established under thechairmanship of the Minister of Finance in his capacities as deputy chairman of the NCP. The POMC willcomprise the chief executives of each of the implementing agencies and will meet at least biannually. Itsfunctions will be to : (a) oversee and monitor physical implementation and use of project and counterpart

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funds; (b) to serve as a "clearing house" for coordination of activities among the PSP implementingagencies - including preparation and monitoring of annual work plans and budgets, and allocation ofresources, including counterpart funds; and (c) bring to the attention of FGN, as needed, actions required toimprove project implementation and management. External financial consultants will be retained for theproject as a whole by the largest implementing agency - BPE. They will report to the POMC and willprepare consolidated project accounts and progress reports.

Project Monitoring and Evaluation: The BPE will monitor and evaluate implementation of the reformprograms supported by the project, and will publish quarterly and annual progress reports. BPE willconduct, with the assistance of specialist independent consultants, periodic evaluations (every 24 months)of the economic impact of the FGN's privatization program in terms of its benefits to the national economyand to the sectors involved. The BPE will make available to all participating financiers copies of the reportsproduced by consultants under the PSP as well as those produced by supervision missions.

Financial Management and Auditing:

At the time of credit effectiveness, the BPE, the NCC and the LSWC will be the principal implementingagencies for the project. In due course, the Nigerian Electricity Regulatory Commission (NERC) will beestablished as the fourth principal implementing agency. Each of these agencies is expected to operate aseparate Special Account for its respective project component. Prior to funds being released for the NERCcomponent, a World Bank Group financial management specialist will assess NERC to ensure thatappropriate financial management (capacity, internal controls and external audit) and procurementarrangements are in place. Each agency's finance and administration (or accounts) department (FAD) willbe responsible for ensuring compliance with financial management, procurement and reporting proceduresacceptable to the government, the World Bank Group and other collaborating partners, for their respectiveproject components.

Each implementing agency's financial management system (FMS) must be capable of producing timely,relevant and reliable financial information enabling its management to plan, implement, and monitor theagency's progress towards the achievement of its project objectives. For this, their FMSs will be developedin accordance with the Financial Management Action Plans presented in Annex 5. Salient features of theAction Plans include: appointment of a Financial Management Committee for BPE and strengthening of theexisting Management Committees at NCC and LSWC; staff recruitment and capacity building; preparationof a Financial Procedures Manual; establishment of a Fixed Assets Register and a Contracts Register;monthly bank reconciliations; quarterly reporting of financial information. The project financialconsultants to be retained by BPE (see above) will prepare quarterly consolidated financial statements andprogress reports; cash flow management, including variance analysis; independent monitoring by internaland external auditors.

By credit effectiveness, the implementing agencies will not have in place FMSs that can provide, withreasonable assurance, accurate and timely inforrnation as required by the World Bank Group forPMR-based disbursements, i.e. the project Management Report (PMR). However, the appointment of keyaccounting and procurement staff in each agency, coupled with development of their respectivecomputerized financial management systems, should facilitate the introduction of PMR-baseddisbursements within 18 months of credit effectiveness. A financial management review of the project willbe undertaken by a World Bank Group financial management specialist within 12 months of crediteffectiveness to assess progress. Meanwhile, in the short-term, existing disbursement procedures will befollowed i.e. Direct Payment, Reimbursement and Special Commitment.

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Retro-active Financing: Several project components are already under implementation. At creditnegotiations, retro-active financing of 10 percent of the credit amount ($11.42 million) was requested bythe FGN and agreed by IDA. This will meet eligible financing requirements for: (a) BPE ($8.0 million) forongoing telecoms and power sector reform design, and general privatization support; (b) LSWC ($3.0million) for payments to contractors for emergency repairs and consultants to prepare private participationin LSWC; and (c) NCC ($0.42 million) for telecommunications reform.

Co-financing: Co-financing for the project is envisaged from other donor agencies - on a parallel financingbasis. The United States Agency for Intemational Development (USAID) is providing support to BPE forcapacity-building, training and technical assistance for divestiture implementation. USAID has committedUS$2 million and plans further financial support over 2001-06 to both BPE and NEPA. This support willinclude financing: (i) the "core team" of contract Nigerian professionals to support BPE's Director-Generalin managing the privatization program; (ii) support for consensus-building with key stakeholder groups,including trade unions and the private sector; for reviews of business environment factors affecting PEdivestitures in specific sectors; and for capacity building for BPE; and (iii) engineering and managementconsultants to strengthen NEPA's organizational capability to unbundle its functions and to set up internalcost and profit centers. Total USAID cofinancing support for the PSP over 2001-06 is expected to beUS$16.43 million. Cofinancing of US$10.84 million equivalent by the United Kingdom Department forInternational Development (UK-DFID) is indicatively planned. This will be mainly for recruitment ofinternational sector specialists, training and capacity building in BPE, consensus building andcommunications.

Procurement: Each implementing agency ( BPE, LSWC, NCC, and later NERC) will have responsibilityfor procurement activities for its respective project component. To address presently inadequatelyexperienced procurement personnel, procurement consultants will be retained by each agency. This willensure compliance with World Bank Group procurement procedures and expedite implementation ofproject activities. To ensure that in-house capacity is built up and remains at project completion, theprocurement consultants will provide training to agency staff and will assist in preparing a globalprocurement strategic plan. The BPE has already recruited a part-time procurement specialist and willrecruit a full-time procurement specialist for the project. In addition, the BPE has commenced staff trainingin procurement through attendance at a World Bank Group procurement training course.

The project will involve : (a) predominantly procurement of consulting and advisory services; but also (b)procurement for supply and installation of equipment, notably for the telecommunications radio frequencymanagement system in NCC, and for the emergency replacement equipment and parts needs of Lagos StateWater Corporation. All procurement of consulting and advisory services will be undertaken based upon the"Guidelines for Selection and Employment of Consultants by World Bank Group borrowers", datedJanuary 1997, as updated in September 1997 and January 1999. All procurement of goods and equipmentwill be carried out in accordance with the "Guidelines for Procurement under IBRD loans and IDACredits", (revised January, 1997 and January, 1999).

As conditions of disbursement for their respective components the implementing agencies, with assistancefrom the procurement consultants, shall each prepare a Procurement Procedures Manual, to be appliedduring project implementation. Detailed procurement arrangements are presented in Annex 6. A completeProcurement Capacity Assessment of the implementing agencies and a Procurement Action Plan to addressweaknesses identified in the Assessment are in the project file.

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D. Project Rationale

1. Project alternatives considered and reasons for rejection:

IDA considered the options of supporting the FGN's privatization and infrastructure reform programsthrough: (a) policy-based lending alone, as an alternative to technical assistance; and (b) stand alonesector-specific operations. The first of these - (a) above - did not respond to the FGN's request to theWorld Bank Group to help provide internationally experienced technical support in the design andimplementation of its privatization program. The FGN's objectives are to ensure efficient and transparentimplementation, and to help build international confidence in the administration's resolve to addressproblems facing the economy. The second alternative - (b) above - was rejected because of thecross-sectoral institutional structure adopted by the FGN for reform and privatization of PEs, the synergiesthat derive from such approaches, and the World Bank Group's positive experience with them in othercountries.

The option of combining technical assistance with financing for major rehabilitation investments to supportsector reforms was also rejected. This was because of : (i) the aims of maximizing private participationand obtaining private finance, and of committing fresh public investment funding only as a last resort; and(ii) uncertainty in the pace of reform programs could conflict with time-bound contractual commitments ofinvestment operations.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Power Sector Operations: The World Bank Group is considering a range of support for FGN's powerreform program: (a) The PSP will support the policy, regulatory and institutional reforms required totransform Nigeria's power sector, with substantial private participation and independent private supply. (b)The proposed IDA Transmission Development Project would finance investment, technical assistance,capacity-building to modernize Nigeria's power transmission system. This would include creation of anindependent transmission company, which is essential for implementing decentralized power tradingarrangements in the private sector. (c) The FGN has also requested the World Bank Group to help attractprivate participation in power generation through ROT concessions and emergency power supply. (d)World Bank Group support for rural electrification, based on the strategy to be developed under the PSP,would be considered at a later stage.

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T;,f;fU 1 ... f;; 0;--;:;:;;:;:;;; Latest SupervisionSeto ISssue Projec 0j ;0f000t0k0 j: (PR $00Raifngsf

Implementation Development

Bank-financed Progress (IP) Objective (DO)

Public Sector Management Economic Management S SCapacity Building Project

Strengthen power transmission to Transmission Developmentfacilitate privatization of generation Project (proposed)and distnbution

Ports modemization investment and Ports Modemization Projectsector reform implementation (proposed)

Divestiture of Nigeria Airways to IFC/PSAS Mandate with FGNstrengthen international air transport for Divestiture of Nigeria

Airways

Improved water supply in Lagos State IFC/PSAS Mandate with Lagosthrough concessioning as part of State Govemment forstate-by-state reforms Concessioning of Lagos State

Water Corporation

Other development agenciesMacro-economic framework for PE DFID: Support to New Debtprivatization - debt Management Office

Macro-economic framework for IMF: US$1 billion Stand-bystabilization and economic growth and Operationstructural reforms

Capacity building, training and design USAID: T.A. project inof business environment reforms to support of BPEsupport privatization

Capacity building and training in energy USALD : Ongoing and plannedand transport sectors T.A. projects for energy and

transport.

Capacity building, technical assistance UK-DFID: T.A. project inand communications support for FGN's support of BPE (underprivatization program preparation)

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

- 20 -

3. Lessons learned and reflected in the project design:

The project design takes account of lessons learned in similar privatization programs supported by theWorld Bank Group, notably: (i) country-specific issues that have affected performance; (ii) experienceswith implementation of cross-sectoral privatization programs; and (iii) sector specific issues experienced inreform programs:

* Country-Specific lessons: It has been difficult to achieve lasting, measurableimprovements to Nigeria's public services from prior assistance efforts. The key lessonslearned from previous World Bank Group projects in Nigeria - notably intelecommunications, power and water supply - are that institutional sustainability,borrower commitment and adhering to standard international procurement procedures areessential pre-requisites. The project addresses these concerns by ensuring that key actionsare completed up front (i.e. prior to Board presentation). This includes most notably theestablishment of a clear and sound overall framework for policy-making and forimplementation of PE divestitures and sector reforms. It is important that the implementingagency has adopted, and is committed to following, transparent and efficient procurementprocedures in the selection and awarding of advisory, consulting, and equipment contracts.This is reflected in the procurement action plans agreed with the BPE, NCC, and LSWC.

e Experiences with Privatization Programs: The project design reflects lessons learnedfrom implementation of similar cross-sectoral privatization programs in Sub-SaharanAfrica and in other regions: (a) Adoption of efficient and transparent procedures for PEdivestiture transactions is key to stakeholder confidence and sustainability These need toinclude competitive bidding to determine winning bidders, with pre-qualification used asneeded to ensure bidders' technical and managerial credentials. (b) Adoption of consistentprivatization policies is key to ensure economically efficient and socially responsibleoutcomes. This is especially important for PE employee severance and retrenchment toensure equitable treatment, while minimizing fiscal costs, and in addressing businessenvironment and policy constraints. (c) Effective coordination of high-level governmentpolicy-making for PE divestitures with decisions on related sector reforms - especially ininfrastructure - is critical to effective implementation. (d) Communications andawareness-raising with concerned stakeholder groups concerning privatization generallyand for specific transactions is vital to maintaining support for the program. This isespecially the case in large and ethnically diverse societies. The project addresses theseissues through: (i) upfront adoption by BPE of strengthened privatization procedures; (ii)early adoption of a general policy framework for PE employee severance compensation;(iii) explicit review of business environment and regulatory factors affecting sectors of PEsprior to divestiture preparation; and (iv) conduct by BPE of a major, nationwidecommunications and public awareness program on privatization.

* Sector Specific lessons: The project design reflects lessons learned from similar reformselsewhere in the utilities and infrastructure sectors. The 1999 Privatization andCommercialization Act provides a clear basis for PE reform and private partnerships,although further primary legislation is needed to allow unbundling and majorityprivatization of utilities and to provide a credible basis for regulation of infrastructureservices. The key lessons in utility reforms are the need to: (i) develop sectoral policiesthat promote competition whilst protecting consumer, environmental and social interests;(ii) create legal and regulatory frameworks that attract strategic investors and develop

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efficient markets; (iii) provide access to capital to improve and expand services to existingand new customers; and (iv) increase access and availability of services, especially in ruralareas. The project addresses all four aspects in the following manner: (a) as part of projectpreparation, new policies have been prepared for the telecommunication and powersectors; (b) legislative and regulatory frameworks that reflect the sector policies under theproject will be developed and strengthened; (c) the conditions for privatizing the supply oftelecommunication and power services will provide incentives for private investment toimprove and expand services; and (d) strategies for expanding access to telecommunicationand power services in rural areas will be developed under the project.

4. Indications of borrower commitment and ownership:

Soon after assuming power in June 1999, the Obasanjo administration signaled its strong commitment toprivatization of state-owned enterprises as a critical element of its strategy for economic recovery andaccelerated growth. A number of actions underscored this commitment: (a) the creation in July 1999 ofthe National Council on Privatization (NCP) chaired by the Vice President of Nigeria, reporting directly tothe President; (b) the early adoption of a list of major PEs to be privatized - including notably in electricpower and telecommunications; and (c) the restructuring of BPE under strengthened leadership in 1999.President Obasanjo approached the President of the World Bank Group very soon after coming to officerequesting support for early implementation of key PE divestitures - notably in power and telecoms. In2000-01, significant progress has been made with implementation of Phase One of the privatizationprogram, with the sale of FGN share holdings in eight PEs, including two cement companies and twobanks. The FGN has made important progress in preparation of the telecommunications and electric powerreform programs. This includes adoption of a new National Telecommunications Policy (NIP) opening thesector fully to competition in 2001, and of a National Electric Power Policy (NEPP). These, as well asadoption of strengthened privatization procedures, are actions completed prior to Board presentation of theproposed IDA credit.

Other actions taken by the FGN that confirm its commitment include : (a) enactment of the 1999Privatization and Commercialization Act, followed by the 2000 decision to increase the shareholding to besold to strategic investors to 51 %; (b) establishment of sector reform conmnittees including top FGNofficials and stakeholder representatives that are playing a key role in design of the reforms; (c)appointment of a new board of directors and chief executive for the NCC, including private sectorrepresentatives; and (d) conduct of workshops for stakeholders to share knowledge and encourage debate inkey reform areas, such as concessioning in transport and infrastructure, an international forum on Africanprivatization experiences, and two power sector reform leaders' workshops (held in 2001 with World BankGroup assistance) to define and build consensus on FGN's short-term power action plan for 2001-02. In thecase of the Lagos Water divestiture, the Lagos State Government has appointed a Chief Executive Officer(CEO) from the private sector for LSWC, to carry through the private sector participation program withsupport of IFC, and has created a Privatization Committee comprising three Commissioners and LSWC'sCEO.

While the Obasanjo administration is strongly committed to an accelerated privatization program,significant stakeholder groups are resisting the reforms. These include PE managers and employees, seniorgovernment officials and civil servants, notably in sectoral ministries, who perceive that their current powerand perquisites will be reduced as the privatization program is implemented. In the National Assembly, arange of politicians view privatization as a threat to national sovereignty, and an unwarranted reduction inthe role of the state. In part such opposition is due to adherence to often outmoded economic thinking,

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which will take time to change in a large country that has been relatively isolated from internationalinfluences over the past decade. This situation is further complicated by the deep-seated ethnic and regionaldifferences in Nigerian society, which can complicate the sale of public enterprises generally, and inparticular of PEs located in different regions, unless it is fully supported by the local elites and localpopulation. Adequate safeguards are needed to mitigate such risks, including public awareness-raising andconsensus-building on the aims and progress of the PE privatization program as it proceeds.

5. Value added of Bank support in this project:

Under the project, the World Bank Group will provide vitally needed technical support to FGN to helpmanage key elements of the country's economic recovery program. The World Bank Group can provideboth advice and technical assistance funding on a multi-lateral and objective basis to support complexsector reforms and privatization notably in the major infrastructure sectors. Through past collaborationwith a wide array of advisory firms, the international investment community and donor agencies, the WorldBank Group is well positioned to provide such assistance and to help build confidence among potentialinvestors.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$5.4 million; ERR = 27 % (see Annex 4)O Cost effectiveness* Other (specify)Apart from the Lagos Water component, as a TA operation the project is not suitable for quantitativeeconomic analysis, since important economic benefits are indirect and cannot be computed with accuracy.The economic benefits anticipated are described in Section C.3 above.

The Lagos Water component comprises an emergency investment in replacement equipment and spare partsto ensure continued service without major disruption pending private sector participation in LSWC, and toimprove billings and collections. For this, the base case economic rate of return was estimated at 27 percentand the net present value of benefits at US$5.4 million equivalent.

2. Financial (see Annex 4 and Annex 5):NPV=US$ 4.8 million; FRR = 19 % (see Annex 4)Not required for a technical assistance operation.

The Lagos Water component is expected to generate strong incremental cashflows for LSWC. Theincremental financial return to LSWC is estimated at 19 percent, using a discount rate of 10 percent. Thenet present value of financial flows is estimated at US$4.8 million equivalent.

Fiscal Impact:

The project is expected to have significant fiscal impact on a gross basis, though this will be offset by thecosts to government of the debt workouts and retrenchment programs involved in the privatization program,as well as remaining public investment requirements: (a) government losses and subsidies will bereduced; (b) fiscal revenues will increase from proceeds of license auctions, divestiture of the PEs, andeventually from the expanded tax base following market growth in the privatized sectors. However, PEs'accumulated debts, severance and pension liabilities are expected to be considerable. Privatization andsector reform will improve the medium to long term fiscal outlook, and contain fiscal hemorrhaging.However, substantial net fiscal gains are not anticipated in the short run.

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3. Technical:

Telecommunications . Radio Spectrum Management.: With rapidly expanding use of less expensive, morecost-effective wireless technologies for mobile and cellular communications, efficient allocation of radiofrequencies has become a high priority. Currently, Nigeria's Federal Ministry of Communications -through the Frequency Management Oversight Committee (FMOC) - and the telecommunications regulator(NCC) - lack up-to-date equipment to manage and oversee frequency allocation and use. In addition, thereis inadequate coordination between NCC and FMOC and with the National Broadcast Commission (NBC),responsible for licensing radio stations.

Based upon the findings of a Radio Spectrum Management Study, to be funded partly by a grant from theUnited States Trade Development Agency, the project will assist in the definition of requirements,preparation of bidding documents and procurement of new radio spectrum monitoring systems. Moreeffective systems for coordination of radio spectrum management will be agreed between FMOC, NCC andNBC.

4. Institutional:

4.1 Executing agencies:

The FGN has decided to take actions to improve the management of the privatization program and themajor infrastructure sector reforms. Under the project, the FGN will strengthen its guidelines forpreparation and execution of PE divestiture transactions - including bidding procedures. These will improvethe effectiveness and efficiency of the privatization program, through more systematic use ofpre-qualification procedures, especially for larger transactions, and use of a single financial variable as thebasis for final selection of the winning bidder.

An additional issue that will be tackled is that the current legal framework does not give sufficient statutoryauthority to the privatization agency (BPE) to oversee PEs' operations during the period leading up to theirdivestiture. This is needed to prevent actions by PE management and boards that work against privatizationand undermine company value. FGN has decided to make important improvements in its guidelines andprocedures governing the privatization program, which will be supported by the PSP.

There has been a lack of clarity in lines of authority for strategy and policy in the major sector reformprograms, notably in power and telecommunications. FGN has therefore decided that the role and authorityof the SRICs and their responsibility to present proposed reforms to the NCP for approval will bereinforced - see Section B.3.

4.2 Project management:

As noted above - Section C.4 - FGN has decided to strengthen the capacity of the main implemenffngagencies notably the BPE in order to accelerate and improve the quality of its PE divestitureprogram.

Organization of the PE Divestiture Effort: To maximize the results and economic impact attained byend-2002, BPE will focus on a smaller number of (about 15-20) priority PEs and organize its staffaccordingly. It will assign sector divestiture teams on a full-time basis to manage these divestitures andrelated sector policy and regulatory reforms in the priority sectors, including telecommunications andpower. Each sector team will: (a) first arrange for conduct of a quick assessment on the selected PE (as

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needed), (b) then organize a review of the business and sectoral policy environment and regulatoryframework to enable the concerned SRIC to recommend necessary reforms to these; (c) thirdly manageselection and supervision of investment advisers in preparation of a divestiture strategy; and finally, (d)manage implementation of the divestiture of the PEs in the sector. This organizing framework is the basisfor BPE's project implementation plan - which is summarized in Annex 11.

BPE Institutional Support

BPE Capacity Building Action Plan: The BPE has a staff of about 100 professionals, of whomseventy-three are newly recruited.The agreed actions are : (a) The BPE will hire three long terminternational advisors with privatization experiences in power, transport, and oil and gas sectors from 2001to 2003, to provide up-to-date, private market knowledge and experience of these key sectors. (b) TheBPE will recruit a "core team" of ten highly qualified Nigerian professionals - to be hired from the privatesector on a contract basis, for the life of the PSP. (Of these, four joined BPE in August, 2000; one willcome on board soon; and five more will be recruited in 2001.) (c) The BPE has also recruited specialistsin divestiture transactions, labor and retrenchment issues, communications and public awareness andManagement Information System (MIS) (with funding support from USAID). (d) Training will beexpanded in 2001-02, covering preparation and execution of complex large divestiture transactions, anddesign of related regulatory reforms. BPE will also arrange in-house training in financial and legal matters.In addition, BPE plans to send selected staff to successful privatization agencies overseas for short-term(max. 2-3 months) on-the-job training. Meanwhile, BPE's directors will also attend management trainingcourses overseas.

Fundingfor BPE Institutional Support and Capacity Building: While BPE regular staff salariesare fully financed out of the FGN's budget, under the PSP, IDA and other donors would fund internationaladvisor and "core team" support, as well as staff training and capacity building.

BPE Organizational Structure : BPE has recently re-organized on a "matrix" basis. Under this, staff inall of its five departments (Council Affairs, Finance and Administration, Planning and Monitoring,Operations, and Legal Services) are assigned to work on sector transaction teams as well as to fulfill theirdepartmental assignments. This is aimed at giving most if not all BPE professional staff exposure to PEdivestiture transactions work. However, as divestiture transactions work is expected to increase greatlyduring 2001-02, it will be important to ensure that: (a) priority is given to continuity in staffing of sectorteams responsible for managing major divestitures, and (b) certain key specialized services - notably legalservices, financial services, handling of severance and retrenchment issues, communications - are staffed ona full-time basis.

4.3 Procurement issues:

These issues are covered in Section C.4 above.

4.4 Financial management issues:

These issues are covered in Section C.4 above.

5. Environmental: Environmental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The main environmental issues with respect to the project relate to the need to mitigate environmentalhazard and risk factors adequately in the plants and operations of the PEs concerned, prior to their

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divestiture by BPE. The PE divestiture program includes major PEs in sectors where significantenvironmental issues can be expected to arise. These will at least need review and analysis, and wherewarranted, mitigation and clean up. It is important to note, therefore, that the BPE will adopt standards andguidelines for preparation of environmental assessments and implementation of actions required. This isparticularly the case for the power sector but also for telecommunications, as well as the productive sectors- e.g. pulp and paper, steel, petrochemicals, fertilizers, etc. Since the project will finance divestiture workon PEs in the power, telecommunication, and Lagos Water sectors, environmental pre-audits have beenundertaken on the PEs concemed. For other PEs to be selected for divestiture under the project, the FGNthrough BPE has prepared, with the assistance of consultants, environmental guidelines governing itsoverall privatization program. These are to be approved and adopted by the NCP by December 31, 2001.

However, since the project focuses principally upon providing technical support for implementation of theFGN's overall privatization program, and not investment in PEs, the environmental assessment andmitigation work is best done during project implementation as part of the process leading up to divestiture.The principal actions in preparation for the IDA credit have been to: (1) undertake a pre-audit survey ofthe main PEs in the telecoms, power, air transport and Lagos Water sectors to be privatized to identify theextent and principal types of environmental clean-up and mitigation activity that will need to be carried outbefore PE divestiture; and (2) prepare, for adoption by FGN and BPE, standards and guidelines forpreparation of environmental assessments and implementation of mitigation work prior to divestiture,which would cover remaining PEs.

Technical consultants were hired by BPE to assist in preparing the pre-audit surveys. This work wascarried out during October, 2000-December 2000 and steps were completed for adoption of anenvironmental action plan by BPE prior to Board presentation of the IDA credit for the project.

5.2 What are the main features of the EMP and are they adequate?

The environmental management plan (EMP) for the project has been reviewed by a World Bank Groupsenior environmental specialist and is satisfactory. In implementing the PE privatization program, the BPEwill apply the environmental assessment (EA) guidelines to be adopted by FGN to assess environmentalrisks, mitigation and clean-up requirements, as part of the preparation of each PE divestiture. The prioritysectors and PEs for in-depth environmental assessment and mitigation work have been identified as part ofthe pre-audit work. Based upon the EA, mitigation and clean-up work would be undertaken as part of PEdivestiture implementation.

Each enterprise will have on its premises a Senior Official responsible for environmental managementactivities.This person will liaise with the environmental advisor of the BPE and the Federal Ministry ofEnvironment on environmental laws and regulations pertaining to the activities of the enterprise. Thisperson will also participate in training and be part of the capacity building for environmental management.

The environmental advisor of the BPE will coordinate and support the development of environmentalmanagement plans that link city/local government EMPs with those of the PEs to be privatized. Theenterprises will develop and incorporate EMPs into their management structures. The project 's EMP hasbeen prepared by specialist consultants and includes:

execution of environmental monitoring programs for the enterprises;knowledge and compliance with applicable environmental laws and regulations;conduct of occasional drills to alert staff and workers on how to react and operate incases of emergencies;development of capacity to execute coherent sampling and monitoring programs as part of

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remediation plans; andmedical monitoring, including HIVIAIDS awareness programs.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: February 7, 2001

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

During the conduct of the environmental pre-audit survey, local governmental, private sector and civilsociety groups m the localities of the PEs concerned were contacted and their views on environmentalissues and impacts relating to the PEs concerned were canvassed and assessed. Seminars and workshopswere held with stakeholder groups for this purpose, and to discuss preliminary findings of the pre-audit aswell as key elements for the environmental assessment guidelines to be adopted.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

T he mechanism to monitor and evaluate the impact of the project will be developed as part of the full andpartial environmental audit for each individual PE. Each EMP will identify activities with potentialenvironmental impacts, describe methods to mitigate and monitor those impacts, identify personsresponsible for implementing the elements of the plan and appropriate training for those individuals, andprescribe a schedule and cost estimate for implementation. Surveys of privatized PEs to be undertaken tomonitor and evaluate the project's economic impact would also include an assessment of environmentalmitigation measures.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The principal social issue related to the project concerns the severance compensation and retrenchment ofPE employees. Attached to this is the need for FGN to adopt and implement a policy for PE severance andcompensation, that is equitable, fiscally affordable, and economically efficient.

FGN already has significant experience with severance compensation and retrenchment of PE employees inprior efforts to reduce over-employment in the PE sector. In Nigeria Airways, for instance, some 1,000employees have already been retrenched during the past several years. In addition, NEPA recentlyannounced retrenchment of 3,000 employees.

Intemational experiences indicate that it is important for a consistent across-the-board policy to be adoptedsetting out the terms and conditions of PE employee severance compensation and retrenchment to ensureequity, and to minimize the fiscal costs. Severance payments beyond statutory requirements - if any -should be based upon considerations of realistic estimates of future wage losses resulting fromre-employment difficulties and dislocation problems.

To ensure a consistent policy framework for the PE severance compensation and retrenchment program, apolicy design review is being undertaken by BPE. This will prepare proposals for an overall PE severanceand retrenchment policy. This review is already being carried out with assistance from consultants fundedby the Bank and USAID. The study will enable guidelines to be adopted by FGN in 2001.

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6.2 Participatory Approach: How are key stakeholders participating in the project?

The principal stakeholder groups are : potential private investors, PE managers and employees, tax payersand the public at large, general customers and the urban and rural poor (through increase in access toservices), the service providers (through cessation of govemment interference), and the government(through reduction of subsidies). The FGN has taken an active approach to enlisting the support of theseconstituencies through its public information efforts. The NCP has organized workshops and seminarsconducted by BPE to explain and discuss the privatization program with major stakeholder groups and toelicit feedback and comments. In addition, the BPE has organized public information events - includingmedia announcements and broadcasts in national television and radio - to discuss the privatization programwith key stakeholder groups and the general public. At the same time, private sector and labor unionrepresentatives have been appointed to serve on the NCP committees.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

See 6.2 above.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The project includes funding for hiring cornmunications' advisers and consultants to undertake a majorpublic awareness and education program related to the PE privatization program.

6.5 How will the project monitor performance in terms of social development outcomes?

Surveys will be undertaken periodically (e.g. every 24 months) among concerned stakeholder groups toobtain feedback on the effectiveness of the PE divestiture program.

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) S Yes 0 NoNatural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * NoForestry (OP 4.36, GP 4.36) 0 Yes 0 NoPest Management (OP 4.09) 0 Yes 0 NoCultural Property (OPN 11.03) 0 Yes 0 NoIndigenous Peoples (OD 4.20) 0 Yes 0 NoInvoluntary Resettlement (OD 4.30) 0 Yes * NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes S NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes * No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

See Section E.5 above with respect to environmental issues.

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F. Sustainability and Risks

1. Sustainability:

The project involves substantial risks with respect to the political and business environment in which theimplementation of the program of PE divestitures and major sector reforms is to take place. However, aspart of an integrated economic reform program, President Obasanjo and his administration have shownthemselves firmly committed to canying it through. The FGN has considerably strengthened the NCP andBPE, providing high-level leadership committed to reform and transparency as well as enhancedprofessional capacity. These are key factors to the sustainability of the program. Recognizing it will taketime for the benefits of the program to be realized, the FGN has stressed its need for the support of theWorld Bank Group and other donor agencies to ensure sustainability and the mitigation of the attendantrisks.

Nigeria's history has been marred by isolation from intemational trends and experiences with respect toeconomic policy and public sector reforms. However, the FGN's efforts aimed at stemming corruption aremaking significant progress through establishment of new institutional mechanisms for ensuringtransparency and accountability. President Obasanjo, who prior to his inauguration was chairman of theinternational board of Transparency International, has established the Independent Corrupt Practices andOther Offenses Commission. The commission is soon to expedite action on several dozen cases, a numberof which will be high profile. FGN's coordinated fight against entrenched corruption is reflected in thecreation of: (a) a Budget Monitoring and Price Intelligence Unit to ensure due process, efficiency andprudence in public expenditure; and (b) an Economic Policy Coordination Committee to ensure anintegrated economic development strategy consistent with national priorities. In addition, in January 2001,FGN approved the country procurement assessment report (CPAR) - setting more effective policies for allFGN procurement - and the country financial accountability assessment (CFAA) - setting higher standardsof accountability.

Changes in thinking on public policy will take time to become accepted. Powerful vested interests mayresist or attempt to influence the outcome of FGN's ambitious divestiture program. The concepts ofprivate participation in infrastructure, and of modern pro-competitive economic regulation in these sectors,are relatively new to Nigeria. However, decades of neglect and lack of investment in key sectors of theeconomy appear to have made Nigerians supportive of the need for change to rebuild the economy andpublic institutions as a basis for longer run prosperity.

The sustainability of the PE divestiture program and the infrastructure sector reforms - especially in powerand telecommunications -will depend upon a number of factors: (a) the willingness of private investorsand operators to take on the commercial risks in investing in the enterprises in question once they areprivatized; (b) the ability of the governments (federal and state) to fully adopt new policies and institutionalstructures in support of expanded private participation on a transparent, competitive market basis; (c) thewillingness and ability of governments (federal and state) and public institutions to improve their behavioras consumers, by becoming current in paying their bills; and (d) the mobilization of sufficient capital andinvestment resources from the private sector.

The project has been designed to address the above risks in a number of ways:

(I) The policy and political risks are being addressed through upfront adoption and publication by FGN ofkey policies and procedures for the overall privatization program, as well as of reform programs for themajor infrastructure sectors - notably power and telecommunications. These will provide the basicframework for implementation of the project, and compliance will be monitored regularly by FGN and theWorld Bank Group.

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(2) The regulatorv risk is being addressed through early design and adoption of pro-competitive regulatoryframeworks and creation of independent regulatory bodies, prior to PE divestitures. In addition, a majoreffort at public education and awareness-raising will be mounted to help build constituencies in support ofthe reforms. The FGN appreciates the importance of addressing these risks through promotion ofliberalized markets and pro-competitive regulatory frameworks. Actions already taken include : (a)adoption of the National Telecommunications Policy and strengthening of the NCC through appointmentof an independent Board of Directors and Chief Executive, coupled with the recent successful auction byNCC of four digital mobile licenses; (b) the replacement of the management of the National Electric PowerAuthority (NEPA) with a pro-reform, private sector oriented Technical Board, reporting directly to thePresident, as well as adoption by FGN of a new Electric Power Policy.

(3) The governance and business environment risks will be addressed through adoption by NCP of clear,publicized procedures for transactions, as well as efforts to streamline business regulations. The NCP'sdecision to further liberalize the extent of shareholding by strategic investors from 40 percent to 51 percentwill provide a greater degree of comfort to investors. Adoption of the Anti-Corruption Act andestablishment of the Independent Corrupt Practices and Other Offenses Commission are also importantsteps by the FGN to address this risk. Private investor perceptions of Nigeria in the power and telecomssectors so far have varied. In telecoms, numerous investors (local and foreign) have shown interest.Resolution of the legal and regulatory framework will be key in this sector. In power, the response onpower generation has been good, as indicated by numerous expressions of interest to bid on emergencypower generation capacity. On the other hand, following the experiences of recent reforms in Indian states,for distribution the risk remains that foreign investor interest may be limited and may focus only on a fewlarger markets leaving smaller systems essentially to local investors. This issue is being addressed in theprogram through early recruitment of the privatization advisors, to work alongside the NEPA unitrestructuring advisors and legal/regulatory advisors so that market risk perceptions can be addressed.

(4) The implementation risk is being addressed through an early and sustained effort at capacity buildingand training, notably on procurement. In particular, USAID has already conducted a series of trainingprograms for BPE staff, and several senior BPE professionals have attended a World Bank Groupprocurement training program. Other actions include : (a) appointment of two procurement specialists byBPE in 2001; (b) BPE's recruitment of a core team of Nigerian professionals, with international projectand corporate finance experience; as well as (c) enhancement of BPE employees' salaries to levelssubstantially above civil service scales, thus contributing to a strongly motivated workforce.

(5) The social risk is being addressed through the following means: (a) stakeholder participation (in theNCP and in public awareness workshops), (b) upfront design of adequate mitigation measures, includingopening markets to competition on a level-playing-field basis, as well as (c) adoption of consistent,equitable and efficient policies in areas such as PE retrenchment and environment. The President of theNational Labor Congress is an active member of the NCP. BPE has implemented an effective program ofconsultations with unions, involving focus groups with PE workers for discussion of workers' concernsover inter alia severance pay, redundancy issues, employee share-ownership, service benefits.

In the power sector a Rural Electrification Agency will be established to accelerate the access of ruralpopulation to electricity. The new power policy also explicitly recognizes the importance of life-linesubsidies being extended to the poor.

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2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectivePolicy and Political Risk - insufficient S Upfront adoption of overall PE divestitureand/or inconsistent Government process guidelines, and of sector policy reformcommitment to sound PE divestiture frameworks esp. in major infrastructure sectorsprocess and sector reform programs, -power, telecommunications. The guidelinesincluding key policy changes (e.g., tariffs) would be adopted and published by FGN prior- esp. in power and telecoms to first disbursement of the general privatization

components. All PE divestiture and privateinfrastructure supply transactions would beimplemented consistent with these guidelines.Compliance would be regularly monitored byFGN and the World Bank Group. Early andcontinuing public awareness-raising andcommunications programs to inform and involvekey stakeholders.

Regulatory Risks - Government political S Upfront agreement on key policies and on meansinterference in regulatory frameworks for for regulatory independence, major capacityesp. infrastructure sectors weakens building effort in new regulatory bodies, andregulatory credibility and level through public education, and use of largelyplaying-field. Private investment supply rule-based regulation initially with limitedresponse delayed. discretion - esp. in major infrastructure sectors.

Adoption and publication of sound,pro-competitive sector policy frameworks onpower and electricity are conditions of Board forthe PSP. Compliance would be regularlymonitored by the FGN and the World BankGroup. Early and careful assessment of residualpublic investment financing needs (e.g., powertransmission).

Govemance Risk - continuance of S Strengthened privatization procedures, andnon-transparent and corrupt practices pro-competitive policy and regulatoryaffect private investor and public response frameworks in major infrastructure sectors -

power, and telecommunications.Beyond scope of the project alone:Implementation of FGN's Anti-Corruption Lawand program, and new FGN Procurementsystems and procedures and financialaccountability guidelines. Complementarity withother Bank programs of assistance.

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Entrenched Vested Interest Risk - S Participatory approach to design and decisionGovernment unable to overcome making on PE privatization program and keyresistance of powerful entrenched vested sector reforms, under auspices of NCP. Majorinterests public awareness-raising and communications

programs with stakeholders started early andcontinue through project implementation.

Social Risk - counter-reactions from key S Continuance of the effective program launchedstakeholders caused by inequities in by NCP/BPE of consultations with labor unionsrelated social policies - e.g., PE and PE workers, and with community groups inretrenchment, etc. different regions, in preparation for major PE

divestiture transactions in 2001/02. Early designand adoption of a consistent overall policyframework for PE retrenchment as well as otherrelevant social policies - e.g., pensions.

Interim Service Decline and Collapse Risk H Upfront preparation of emergency repair and- Breakdowns in major infrastructure capacity restoration programs (in power andservices (esp. power, water) create crises water) to ensure minimal adequate servicethat distract Government from structural provision pending implementation ofsector reform and PE divestiture efforts medium-term sector reforms.

Beyond scope of project: World Bank Groupfinancing under preparation for complementaryinvestments in rehabilitation and improvedcapacity (e.g., power transmission, state-levelwater supply, etc.)

Business Environment Risk - bureaucratic S Greater coordination and more effectivecontrols and constraints on business implementation of investment promotionactivities weaken private investor activities and simplification of businessresponse regulations and red tape.

From Components to OutputsImplementation Risk - Inadequate S Sustained effort from project preparationtechnical capacity in implementing through implementation to build capacities inagencies slows down, weakens execution principal implementing agencies, withof reform efforts consolidation of capacities (e.g., procurement) in

privatization agency and clear prioritization ofPE divestiture and sector reform programs inearly years

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Ownership and Coordination Risks - lack H Upfront definition and agreement on PEof clarity and consensus on divestiture process and procedures, with cleardecision-making, coordination and designation of responsibilities among FGNimplementation responsibilities - esp. for agencies, under leadership of NCP/BPEsector reform and PE divestitures ininfrastructure (power,telecommunications, air transport)weakens and confuses program executioneffort

Complexity Risk - design of sectoral S Extensive effort during project preparation toreforms (esp. in power) calls for multiple involve all stakeholders in design of policycoordinated changes in sector structure reforms, combined with intensive training andand organization to be accomplished in capacity building effortsquite short time, that exceeds institutionalcapacity for change

Overall Risk Rating s

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

Policy and Political Risks, Entrenched Vested Interests Risks (see above) :As noted above, vociferous andinfluential stakeholder groups and political groups - notably among consumers, PE employees, and inpolitical parties including in Parliament, may mount strong efforts to discredit and weaken the FGN'sprivatization and sector reform efforts.

Interim Service Decline and Collapse Risk (see above): As noted above, the risk has already proven highthat major inadequacies in the current organization and management of key public services in infrastructure- most notably power at the national level, but also water at the state level - can result in sudden servicedeclines and temporary system collapse. This poses major political and logistical challenges to the reformeffort, and has necessitated the Obasanjo administration to take concerted action for the short-term todesign and implement emergency supply programs - such as NEPA's Action Plan in the power sector,emergency repair program in LSWC in water. The ultimate success of the overall reform - especially in thepower sector - will be contingent upon the effective and timely implementation of these emergencyprograms.

The risk mitigation measures being taken to address the above two govemment risk factors are outlinedabove in Section F. I and F.2.

G. Main Credit Conditions

1. Effectiveness Condition

The Federal Government of Nigeria (FGN) shall cause BPE, NCC and LSWC to adopt financialprocedures manuals, establish financial management systems, and appoint external auditors for theproject, acceptable to IDA.

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2. Other [classify according to covenant types used in the Legal Agreements.]

As conditions of disbursement, the Federal Government of Nigeria shall:

* For the components/sub-components to be implemented by BPE, adopt and publish a privatizationprocess and procedures manual for preparation and execution of PE divestiture and PPItransactions, satisfactory to IDA;

* For the components/subcomponents to be implemented by each implementing agency, cause BPE,NCC, and LSWC respectively to furnish a project implementation manual, and an annual workplan for June 30, 2001-December 31, 2002, open its respective project Account and deposit in itthe initial deposit (in the amounts of US$3,900,000 for BPE, US$600,000 for NCC, andUS$500,000 for LSWC);

* For the sub-components to be implemented by NERC, cause the NERC to be established with asatisfactory organization and staffing structure, and to adopt a financial procedures manual andfinancial management system, satisfactory to IDA;

* For the Lagos Water component, cause Lagos State and LSWC to execute two subsidiary creditagreements, respectively transferring the proceeds for the Lagos Water component of the IDAcredit from the Borrower to Lagos State, and from Lagos State to LSWC.

As dated or continuing covenants, the FGN has agreed as follows:

(a) For the sectoral reform and general privatization support program, the FGN will:

* adopt general environmental guidelines and social safeguards, satisfactory to IDA, for thepreparation and execution of PE divestiture and PPI transactions (No later than December 31,2001);

3 maintain NCP/BPE as administrator of its privatization proceeds account, and have this accountaudited within six months of the end of each fiscal year; and

* carry out the project in accordance with the project Implementation Manual, and divest PEs inaccordance with the Privatization Process and Procedures Manual, the guidelines for compensationand severance of public enterprise employees, and the guidelines for the preparation ofenvironmental management plans.

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(b) For the telecommunications sector, the FGN will:

* present to the National Assembly for approval, after adoption by the Executive Council, the draftof a new telecommunications law (No later than September 30, 2001);

* take the Nigerian Telecommunications Co. Ltd. (NITEL) and the Nigerian MobileTelecommunications Co. Ltd. (M-Tel), to point of sale; (No later than December 31, 2001);

* launch work on the implementation of the rural demonstration project, under a contract financedunder the project (No later than May 31, 2002); and

* launch installation work for the new radio spectrum management system, under a contract financedunder the project (No later than June 30, 2002);

(c) For the electric power sector, the FGN will:

o present to the National Assembly for approval, a draft electricity law, taking the Association'scomments into account.

* within three months after enactment of the electricity law, establish a Special Purpose Entity interalia to assume NEPA's power purchase obligations to private producers, and provide adequatefinancing therefor.

* cause NEPA to refrain from entering into new escrow arrangements for the purchase of powerfrom private operators.

v refrain from providing new guarantees for the payment obligations of state-owned entities underagreements to purchase power from privately owned or operated power generators or suppliers,unless such payment obligations are adequately funded.

The key milestones under the FGN's electric power sector reform program and the timelines for theircompletion have been nagreed with IDA. These are given in the Project Implementation Framework andAction Plan (Annex 11). This Plan includes key actions to be taken by the FGN to implement theprivatization program, as well as the electric power sector and telecommunications sector reformssupported by the project. These were agreed with the FGN at credit negotiations and will form the basis forthe BPE's project implementation manual.

A Mid-term Review of the project will be undertaken by the Borrower and the World Bank Group byend-July, 2003 at the latest. Based upon its findings, actions will be taken as needed to strengthen projectimplementation.

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H. Readiness for Implementation

[ 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

O 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

El 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

Z 4. The following items are lacking and are discussed under loan conditions (Section G):

The Project Implementation Framework and Action Plan (Annex 11) - incorporating the key milestones andactions to be undertaken under the project - has been reviewed and agreed with the FGN. The implementingagencies will prepare project implementation manuals including detailed procurement plans for June 30,2001 through December 31, 2002, as conditions of disbursement for their respective components.Procurement documents for major advisory contracts to be undertaken during 2001 notably in power andtelecommunications have been completed, and a number of these activities are already underway to befinanced out of the PPF or retro-active financing under the proposed IDA credit.

1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.O 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

arDcmbBa Msfark D. Tomlinson

Team Leader Sector mHln Iermiecot Country Mnager/lDirectOr

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Annex 1: Project Design SummaryNIGERIA: PRIVATIZATION SUPPORT PROJECT

Kt H _ chy of 9b* k sMonitpring A Evalton Critical Assume sSector-related CAS Goal: Sector Indicators: Sectorl country reports: (from Goal to Bank Mission)To foster economic growth by Economic growth rate of Government statistics - FOS Political stabilityencouraging private sector average 4.6 % per year datadevelopment and to improve 2001-05 with contribution of Government continues on theefficiency, productivity and privatized and liberalized IMF/Bank economnic reports path of a positiveservice-delivery by PEs enterprises. macroeconomic reform andincluding key infrastructure Surveys of privatized private sector growth ledbased sectors. enterprises and sectors program

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Reduction of the role of the By end of the program:State in conmmercial activities- through privatization of Reduction in public enterprise Government/BPE reports and Adequate management ofPEs and creating an enabling share of non-oil GDP of 60% statistics political, social and otherenvironment that promotes risks usually associated withprivate sector participation in Privatized enterprise average NCP/BPE progress reports privatizationsthe economy, and in performance increases:particular private provision of Productivity +12.5% Sufficient investor appetiteservice in Investment +62.5% Transactions are nottelecommunications, power Output +12.5% hampered by legal action,and urban water sectors. Leverage -5% administration delay.

Average net increase in National accounts, reports ofemployment per sector of 30% privatized utilities andin privatized and liberalized infrastructure enterprisessectors

200% increase in number of Lagos Stock Exchange reportnew shareholders50% increase in total stockmarket capitalization

* Telecommunications Improvement in telecoms Empirical validation Buy-in of all stakeholders andSector: Increased access services to increase teledensity significant private sectorto teleconmunications to over 1% (one phone line Surveys of privatized participationservices and private per hundred people) (*) enterprises.sector participation

100% increase in number ofvillages with access to NCP/BPE progress andtelecommunications facilities monitoring reports(*) ITU statistics for the

telecommnunication sector.

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* Power sector: Increased Over 4000MW of online Empirical validation Adequate management ofpower service delivery generation capacity and unit Power sector statistics political, social and other

revenues of over Naira risks4/Kwh (*)

75% of disputes resolved NERC reporteffectively (*) Survey of privatized

enterprises

* Urban Water PSP: PSP arrangement for delivery Project supervision and Adequate management ofof Lagos water effective. consulting reports. political, social and other

risks.Water production capacityincreased from 320MI/day to LSWC progress report620MI/day (*)

Customer records improved -

increase in customers billedfrom 110,000 to 220,000Collections increased from30M to 60M per month. (*)

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Key p'erforwmnceMew;Ir v Of 00*t" - ikyors _Monkring t ev*Wn CriticAsoumgp!!a

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:General PrivatizationSupport, InstitutionalStrengthening andConsensus Building:Privatization program Sector reform work NCP/BPE Progress reports. Government continues toimplemented in accordance successfully conducted where enjoy support for sectorwith program implementation appropriate reform from key stakeholderstimetable

80% Phase II and III Surveys of privatized PEs and Saleability of key messagestransactions successfully sectors.concluded with majorityownership in each enterprisetransferred to private sector(by 2005) (*)

Greater public awareness of Effective implementation of Periodic analyses and opinion Effective consultations withthe program and efficient communications masterplan reviews key stakeholders, especiallyconduct of consensus building labor unionsactivities Greater understanding of the

benefits of privatization

Capacity and institution More efficient implementationbuilding of BPE structure and arrangements Progress reports

Highly motivated andwell-trained BPE staff withimproved skill sets,

80% of BPE staff to haveattended approved trainingcourses (*)

Development of publicDesign and adoption of enterprise severance and Project supervision andconsistent policy framework compensation and consulting reports.governing compensation of retrenchment policyretrenched public enterpriseemployees

Telecommunication Sector:

Deregulation of the sector, Adoption of national telecoms Telecoms policy Government continues toopening access for policy Telecoms Act enjoy support for sectorcompetition Passage of telecoms bill reform and privatization. from

Improved market-friendly key stakeholders (especiallyrules and regulations legislature)

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Privatization of Nitel/M-Tel Nitel/M-tel privatized Progress report

Strengthening of capacity of Institutionally strengthened NCC Reportregulator NCC with well trained staff Cooperation of key

More efficient systems and stakeholdersprocedures for disputeresolution, licensing and tariffregulation

Improved radio spectrum Development of frequency Radio spectrum monitoring Cooperation of keymanagement management capacity modernization plan stakeholders (including NCC,

Purchase and installation of Operationalization of NBC, Ministries and licensedupgraded radio frequency frequency allocation and private operators)equipment monitoring system Effective procurement system

Increased access of hitherto Design and implementation of Rural access strategyunserved consumers rural access program Results of demonstration

projects

Power Sector:Preparation and Development of national Adoption of National Power Government remainsimplementation of enabling power policy Policy committed to reform of thearchitecture Passage of Electricity Act power sector

Development of legal and Regulator's reportregulatory frameworkEstablishment of NERC

More competitive market NEPA unbundled and Report on restructuring plan.structure. unbundled units privatized

SPE established Creation of Joint StockTariff adjustment plan Companies.adoptedDesign of a wholesale market Information Memoranda forfor power distribution and generation

companies.

Reports from distributioncompanies and regulatoryagency.

Increased generation capacity Implementation of EPPs, Supervision and progress Sufficient investor appetiteROTs and (where viable,) reportsIPPs

Increased rural access Design and implementation of Progress reportsrural access program

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Urban Water Reform:LSWC Privatization -

Preparing of Private Sector Preparatory studies completed LSWC and engineering Private sector willing toParticipation in water sector Financial bids invited company progress reports participate

Continued political supportEmergency rehabilitation of

Implementation of emergency critical system components Progress and supervision LSWC capable of operatingaction plan to ensure LSWC completed - reports rehabilitated facilities in theremains operational and interim period.becomes more attractive topotential bidders during thePSP transaction preparationperiod

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'iSo:w =~~~~~~~~~~~~~~~~~~~~~~Cut~~

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)

BPE General Privatization T.A. and Training Project supervision and Project implementationTransaction Support (US$43.20 million) progress reports. arrangements remain in place

Disbursements reports and are effective.BPE InstitutionalStrengthening T.A. and Training

(US$57.21 million)

Consensus Building T.A. and Training(US$66.47 million)

Telecommunication Sector T.A. Training and High quality advisors offer toReform Equipment(US$18.49 million) provide assistance to the

reform programs.

Power Sector Reform: T.A. Training and No undue delays in hiringEquipment(US$25.23 million) advisors.

Urban Water Reform:Lagos Water Private Sector T.A. Training and Counterpart funds areParticipation Equipment(US$14.36 million) available in a timely fashion.

(*): Key performanceindicators

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Annex 2: Detailed Project DescriptionNIGERIA: PRIVATIZATION SUPPORT PROJECT

The Privatization Support Project will assist the implementation of the Federal Government of Nigeria(FGN)'s PE privatization program. It includes five components: (i) General Privatization Support; (ii) BPEInstitutional Strengthening; (iii) Privatization Consensus Building; (iv) Telecommunication Sector Reform;(v) Power Sector Reform; and (vi) Urban Water Sector Reform : Lagos State Water Emergency Repairs.

By Component:

Project Component I - US$43.20 millionGeneral Privatization Support

This component will be implemented by the BPE. Under the three-phase privatization program, announcedby President Obasanjo in July 1999, the FGN has set the goal of divesting about 100 PEs throughprivatization or commercialization. These include major PEs in the productive sectors, in services and ininfrastructure. They cover the following sectors: (a) in manufacturing : cement, vehicle assembly, machinetools, pulp and paper, sugar mills, aluminum smelting, steel, petrochemicals, and oil refineries; (b) inservices : hotels, oil marketing, and financial institutions and banking; and (c) in infrastructure:telecommunications, power, ports, railways, air transport, airport passenger handling, and freightforwarding.

The project will, as a priority, support the FGN's programs for sector reform and privatization in twomajor infrastructure sectors - telecommunications and power. It will also finance preparation and executionof PE divestiture transactions in the other sectors. The project will finance competitively selectedinvestment advisers, and legal and technical advisers, employed by the BPE, to undertake transactions workunder its oversight and supervision. It will finance consultant studies to prepare evaluations and do designwork on general privatization, business environment, regulatory and sector policy issues, to ensure effectiveimplementation of the privatization program. This will include design work to establish a consistent overallpolicies for PE employee retrenchment, treatment of PE debts, and competition policy, and a review ofcapital market absorptive capacity.

A more detailed presentation of FGN's strategy and implementation plan for the privatization program isgiven in Annex 11.

Project Component 2 - US$57.21 millionBPE Institutional Support

This component will be implemented by the BPE. The project will finance and strengthen the govemmentinstitutions responsible for undertaking the privatization program and sector reforms.

It will provide BPE with technical advisory support including : (a) long-term intemational advisors forfour sectors - telecommunications, electric power, transport and oil and gas; (b) a "core team" of Nigerianprofessionals; (c) an intemational expert team on privatization techniques; (d) in the electric power sector,it will fund the full-time technical team to be recruited to support EPIC (see Annex 11).

The project will finance training BPE staff and to other stakeholders including: (a) in-house and localtraining in privatization, regulatory issues, and sector policy reforms; (b) a staff exchange program with

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successful privatization and regulatory institutions overseas; (c) management training overseas for keystaff; (d) training of judges in commercial and business law; and (e) study tours for stakeholders onspecific program elements.

The project will finance operating costs of the BPE, as special purpose institution outside the civilservice.The FGN - as part of its financing for the project - will finance all BPE regular staff salaries andthe major share of BPE's operating costs through BPE's budget. Aid donors (USAID and UK-DFID) andIDA will fund BPE technical advisory support, training, and some incremental operating costs.

A more detailed presentation of the BPE capacity building and institutional support program is given inAnnex 1 1.

Project Component 3 - US$ 66.47 millionPrivatization Consensus Building

This component will be implemented by BPE. In addition to strengthening BPE's structure, there is also aneed to build consensus among the new members of the legislature and the public at large due to thesometimes conflicting views and understanding of the effects of the privatization program on the economy.The FGN will therefore mount a major communications and public relations campaign at home and abroadto explain and publicize the reforms with the help of specialist advisors. This will be complemented byworkshops and seminars in Nigeria on the main issues confronting reform, organized under the auspices ofNCP and the respective line ministries for these sectors, and hy study tours for Nigerian policymakers andstakeholders to countries that have implemented similar reforms.

The main elements of NCP's communications program - to be carried out by BPE with the assistance ofexpert international and local consultants and communications firms - are: (a) internationalmarketing and promotion both for the overall privatization program, as well as for specific major PEdivestiture transactions (aimed at eliciting interest of potential strategic investors); (b) nationwide andregional publicity and public awareness raising programs through the general media (broadcasting - TVand radio; and print), as well as focus groups (e.g. as already held for PE employees and union members),and locally organized publicity and outreach campaigns; (c) nationwide and especially regional publicityand information campaigns in each of the thirty-six states of the Nigerian federation to elicit investor andsaver interest in purchasing shares in PEs once divestiture to a strategic investor has been completed; (d)speeches and presentations internationally, nationally and locally by senior FGN officials - including fromthe NCP - involved in the implementation of the privatization program. These activities are beingundertaken by international and national communications and public relations firms, under the overallmanagement of BPE's communications and public affairs department.

Elements (a) and (c) above involve procurement of consulting services, media time, as well as printing ofprospectuses for the 100 PE divestiture transactions in Phases Two and Three of the FGN's privatizationprogram. This will be part of a major two-pronged outreach effort by FGN aimed at: (i) attractinginternational strategic investors, especially in the major infrastructure and energy sectors; and (ii)encouraging and facilitating broad-based Nigerian saver and investor interest in purchase of remainingFGN shares in privatized PEs. The latter is being done through a regional allotment program that, in a firststage, allocates blocks of the remaining FGN shares evenly across 36 states and 362 federal constituencydistricts, giving thein inhabitants first refusal to purchase them. Much of this outreach effort is expected tobe funded by FGN out of privatization proceeds. The FGN will be the principal financier of theprivatization consensus building component of the project.

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Project Component 4 - US$18.49 millionTelecommunication Sector Reform

Sub-Component 4.1: Development of National Policy on Telecommunication (0.21 million)

The implementation agency for this subcomponent is BPE, on behalf of the Telecommunications SteeringReform Implementation Committee (TSRIC). BPE has also funded this sub-component. The objective ofthis sub-component was to prepare a new National Telecommunications Policy (NTP) that would replacethe policy published in October 1999. The government established TSRIC (chaired by the Minister ofCommunications) to oversee this effort. This sub-component has been successfully completed. After beingreviewed, discussed and approved by the TSRIC, NCP and the Executive Council in September 2000, theFederal Ministry of Communications (FMOC) published its new National Telecommunication Policydocument. The new policy calls for opening the sector for competition in all segments of the market,establishing NCC as an independent regulator for the telecommunication industry, privatizing thestate-owned telecommunication operator (NITEL), encouraging private sector participation in all segmentsof the sector, promoting regulatory and market initiative to address universal access, and ensuring thatInternet develops rapidly in both urban and rural areas.

Sub-Component 4.2: Legal and Regulatory Reform and New Entry (US$0.66 million).

The implementation agency for this subcomponent is BPE, on behalf of the Telecommunications SteeringReform Inplementation Committee (TSRIC) and the Federal Ministry of Communications (FMOC). TheFGN plans to create a new legal and regulatory environment that establishes a level playing field,encourages private investment and meets social goals. This requires the review, development andimplementation of new and comprehensive telecommunications legislation in Nigeria, and would be coupledwith the review and development of a detailed regulatory framework and preparation of key regulatoryinstruments. Elements of this sub-component are: (a) review of existing legislation and preparation of newtelecommunication and related secondary legislation; (b) preparation of new licenses for NITEL and otherservice providers; and (c) preparation of new and amendment of existing regulatory instruments, such asfrequency management, numbering plan, and tariff and interconnection regulations.

Sub-Component 4.3: Institutional Strengthening of the Nigerian Communications Commission, NCC(US$3.20 million).

This sub-component will be implemented by NCC, the regulator of the telecommunications industry,empowered to issue licenses, assign frequencies and regulate all telecommunications licensees and serviceproviders. It must also perform all regulatory functions consistent with its mandate to promotetelecommunication development in Nigeria. NCC needs to develop greater institutional capacity toperform these functions in an effective manner. This requires NCC to be well structured, appropriatelystaffed with trained persons, and to have in place the systems and procedures to fulfill its mandate.Therefore, this sub-component is aimed at institutional strengthening of the NCC, and includes thefollowing elements: (a) developing an institutional strengthening plan (including organization, financialsystems, business planning and budgeting, procurement; systems and procedures for conduct of NCC'smain activities including dispute resolution, interconnection and tariff regulation and licensing); andfollow-up support to NCC through retained advisers in selected areas; (b) preparing and implementing ahuman resources development and training plan for NCC, including identification of training needs,training institutions, study tours, and twinning arrangements; and (c) financing the procurement of afinancial management system. The preparation of bidding documents for the procurement of this systemwill be included under activity (a) of this sub-component.

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Sub-Component 4.4: Privatization of NITEL (US$3.99 million).

The implementation agency of this sub-component is BPE. The two state-owned enterprises in thetelecommunications sector, NITEL and M-Tel, have been merged recently into one company (NITEL).The merged company will be privatized by selling at least 40 percent of its assets to a strategic partner. Adigital mobile license reserved for NITEL by NCC in advance of the recent mobile auction, will be bundledwith NITEL as a part of the transaction. The activities of this sub-component are: (a) appointing technicaland financial audit consultants to carry out the necessary due-diligence and financial audit of NITEL; (b)privatization advisers (financial and legal) to assist in the sale process; and (c) marketing and promotionprogram.

Sub-Component 4.5: Rural and Universal Access (US$3.54 million).

This sub-component will be implemented by NCC. Most rural areas are virtually deprived of access toeven basic communication services. The government recognizes that it needs to demonstrate quickly thatthe benefits of sector reform and restructuring, including liberalization and privatization in the sector, willaccrue to both urban and rural areas. Therefore, the credit will support: (a) consultants that will beappointed to assist TSRIC's universal access subcommittee in developing a universal access strategy and indefining the optimal institutional arrangements to implement the strategy (most likely an independentspecialized agency or fund); (b) as institutional arrangements are established to administer the universalaccess program, the credit will support the services of consultants hired to assist in identifying viablestrategic options and operational schemes for the provision of the necessary infrastructure and services(these consultants will also develop few detailed demonstration projects, to be supported by the credit, andprepare the necessary bidding documents for the implementation of these projects); and (c) the credit willalso provide seed investment for the demonstration projects.

Sub-Component 4.6: Radio-spectrum Management (US$6.87 million)

The implementation agency for this sub-component is NCC. The new NTP calls for establishing aNational Frequency Management Council (NFMC) in the FMOC under the chairmanship of the Minister ofCommunications. NFMC will comprise representatives from NCC, NBC, Federal Ministry of Aviation,Federal Ministry of Transport, Security Agencies, and representatives of licensed private operators.According to the policy, NFMC will allocate bulk radio spectrum to NCC, NBC. NCC in turn will beresponsible for assigning the frequencies allocated to telecommunications services. The government hasrequested IDA's support to modernize NCC's capacity to carry out its responsibilities in this regard. Thissub-component would consist of three elements: (a) radio-spectrum monitoring modernization plan todevelop institutional capacity, (b) definition of future requirements, and support for the procurement of theneeded equipment and systems; and (c) procurement and operationalization of NCC's part of theradio-spectrum allocation and monitoring system.

Project Component 5 - US$25.23 million

Power Sector Reform

Sub-Component 5.1: Development of National Power Policy (US$0.05 million). The FGN hasrecently approved a policy statement that sets out the new institutional arrangements for introducingcompetition and an appropriate regulatory framework to the power sector. Preparation of this statementwas supported by consultancy services under the PPF for the PSP.

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Sub-Component 5.2: Legal and Regulatory Framework for the Power Market (US$8.76 million)..NEPA is a state-owned vertically integrated power service provider with a monopoly on all functions(generation, transmission, distribution, supply) associated with the public supply of electricity through thenational power grid. Its legal monopoly was removed, however, by the 1999 Privatization andCommercialization Act. Nevertheless, the legal basis for the introduction of competition to the powermarket through private ownership and provision of power supply services needs to be established undernew primary legislation. The regulatory functions for the power sector are currently the responsibility ofthe Federal Ministry of Power and Steel. Under the proposed project, BPE has retained consultants toassist in the development of a legal and regulatory framework for the reformed power sector and theestablishment of an autonomous regulatory agency (US$2.55 million). In addition, the proposed projectwould finance consultants to carry out a cost-of-service study (US$0.52 million), a quality of service study(US$0.52 million) and a tariff strategy study (US$0.52 million), and to provide assistance to the newregulatory agency for developing key regulations covering tariffs, etc. (US$1.07 million). and the projectwould also provide financial support for helping the regulatory agency to cover its start-up expenses(US$3.58 million for initial and limited recurrent costs). These expenses cover recruitment, training, officeequipment, computer hardware and software, etc. incurred during its formative period before it is able toraise sufficient funding for its operations from fees for providing services, such as issuing or renewinglicenses and reviewing tariff proposals, to entities operating in the new power market.

Sub-Component 5.3: Corporate Restructuring of NEPA for setting up corporate entities, and designandformation of the new power market (US$3.08 million). Under the proposed Project, governmentwould retain the services of advisors to assist with restructuring the present vertically integrated structureof power supply by breaking up NEPA's corporate functions into a number of generation entities, atransmission entity, a number of distribution entities, and a system control entity (which may be mergedwith the transmission entity), formation of these entities into separate corporations as joint stockcompanies, and the design and formation of the new wholesale market for power. The design of the newwholesale market operation covers (i) the method of dispatching power generation units, pricing wholesalepower, handling and settlement of contracts and market transactions; and (ii) the preparation of detailedregulations for market operation, system dispatch and contract settlement.

Sub-Component 5.4: Privatization of Entities formedfrom NEPA (US$7.42 million). Under theproposed Project, government would retain the services of: (i) financial/lead privatization advisors todevelop, prepare and execute a strategy for the privatization of the generation and distribution entitiesformed from the unbundling of NEPA (US$3. 18 million), (ii) legal advisors for the privatization process(US$3.18 million), and (iii) technical/environmental consultants (US$1.06 million).

The main tasks for each set of advisors would be as follows:

The financial/lead privatization advisors would assess the financial viability and valuation of theentities to be privatized and advise on any modifications to the structure of the reformed entities, adviseon transaction structures (percent of ownership to be privatized initially, method of privatization, etc.),assess investor interest and concerns, design and implement the pre-qualification process, prepareinformation memoranda, co-ordinate "road-shows", and assist in the conduct of the bidding process andthe transfer of ownership. The remuneration of these advisors is likely to consist of the sum of aretainer fee that would be financed under the proposed PSP, and a success fee that would be paid fromthe privatization proceeds.

The legal advisors would work with the financial/lead privatization advisor to conduct legal due

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diligence on the entities to be privatized, draft articles of incorporation for these entities, preparecontractual and bidding documents required for privatization, assist in assessing comments frompotential investors, and deal with post-award legal issues.The technicalJenvironmental consultants would provide independent descriptions of the assets to beprivatized for inspection by potential investors, propose service quality standards for transmission anddistribution companies, estimate capital expenditures by private owners required to meet thesestandards, estimate the feasible rate of improvement in technical efficiency under private ownership,review current compliance with environmental regulations and associated liabilities, estimate costs ofremedial works to meet regulated standards, advise on allocation of these costs between Governmentand privatized companies, and assist in drafting the technical and environmental sections of concessioncontracts and share purchase agreements.

Sub-Component: 5.5: Supportfor power generation concessions (US$4.36 mUlion): The President ofthe Federal Republic of Nigeria requested the World Bank Group to help FGN retain the services ofintemational engineering and legal advisors for developing a competitive bidding process to procure about450 MW of power capacity under Build-Own-Operate arrangements as part of Government's EmergencyPower Program (EPP) for overcoming the country's power shortages quickly (US$0.71 million). Theseadvisors were financed under the PPF to prepare a Request-for-Proposals with draft project agreements(power sales agreement, fuel supply agreement, site lease agreement, project implementation agreement).The President also requested the World Bank Group to help concession some of NEPA's power generationplants to private operators under Rehabilitate-Operate-Transfer arrangements. The project thus includesfunding for consulting services for the concessioning of some of NEPA's hydropower stations (US$1.59million), as well as for expert support for procuring and negotiating contracts with IPPs (US$2.06million).

Sub-Component: 5.6: Increasing Access to Power Supplyfrom non-grid sources in both rural andurban areas (US$1.57 million). Many towns and most rural communities in Nigeria are not covered bythe national power grid, and hence some state and local governments have installed local substitute powersupply systems. In addition, many peri-urban areas of towns covered by the national power grid are alsonot served by the associated local distribution grids. At least two-thirds of Nigeria's population does nothave access to electricity supply, and increasing the level of access to electricity is a key objective ofgovernment policy. The Directorate of Electrical Inspectorate Services in the Federal Ministry of Powerand Steel oversees govemment's current rural electrification program, and is in the early stages ofdeveloping a rural electrification policy. An extensive range of issues needs to be examined for this policy.The project would finance the services of consultants and specialists in rural and non-grid electricity supplyand marketing to help examine these issues and develop a strategy for increasing access to electricity.

Project Component 6 - US$14.36 millionLagos State Water Corporation - Restructuring and Private Sector Participation

This component will support (i) the financing of emergency action plans identified as essential to supportLSWC prior to the introduction of a private sector participation solution through a privatization transactionto be led by IFC as the principal privatization transaction advisor, and (ii) the financing of a part of thespecialist consultant costs for the privatization transaction.

IFC's mandate as the principal transaction advisor is structured in two phases: Phase I for due diligenceand strategy development and Phase II for the implementation of the selected private sector participationstrategy. At the time of this Project Appraisal Document (PAD), the IFC transaction team is nearing the

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completion of Phase I, with studies costing about $2.0 million funded through a variety of sources. Thephase I report will outline among others several private sector participation options for LSG'sconsideration.

Subcomponent 6.1: Fundingfor implementation of Lagos State Water Corporation (LSWC) privatesector participation transaction and commercial improvements to improve transaction success(US$2.47 million). Once LSG has approved the preferred private sector participation option, Phase II ofthe activity will be implemented. Consultants for Phase II will be mobilized and the following activitiesundertaken toward participation in LSWC:

* Develop and finalize private sector participation agreement (concession, lease,or others).Prepare and implement regulatory framework

* Prepare and implement financial restructuring* Prepare and implement labor program* Perform asset valuation of LSWC* Arrange financing for post-privatized services (possibly IBRD/other funding)* Investor marketing* Bidder due diligence and pre-qualification* Contract pre-negotiation- Call for bids* Bid evaluation and award* Transaction closing

All Phase II consultants have been deternined except for the asset valuation consultant. All funding forPhase II has also been sourced, except for a Technical Advisor, Asset Valuation Consultant, CommercialImprovement Consultants and Legal Consultants. The costs for the Legal Consultants (aboutUS$900,000) is expected to be funded by the French Govemment. The proposed Project will fund thecosts of the Technical Advisor, Asset Valuation Consultant and a number of Commercial ImprovementConsultants, estimated at US$310,000, US$310,000 and US$1,860,000 respectively. LSWC is in aninsolvent financial position. Commercial Improvement Consultants will assist LWSC in implementingcustomer database, billing and collection improvements. These improvements are expected to improve thefinancial standing of LWSC prior to the privatization transaction to enable a successful transaction. Thecompetitive bidding process will be enhanced by the availability of better business data, as a result ofimproved commercial management. Further details of this component are given in the Project File. It isexpected that Phase II will be implemented within 12 to 18 months.

Subcomponent 6.2: Fundingfor the Implementation of an Emergency Action Plan to support LSWCduring privatization transaction (US$11.9 million). The findings of the Phase I studies also indicated thatLSWC is in a dire financial and operational situation. Some essential equipment are in a state of disrepairwithout backup capacity, risking a complete breakdown of the supply system.

The Phase I study recommended essential repairs and rehabilitation works of LSWC in order to keep thesystem operational at the most basic level and avoid physical and commercial collapse of LSWC until theprivate sector participation transaction has been carried through. The emergency action plan has beendesigned to avoid system collapse, but avoids other rehabilitation requirements which would be carried outas part of the business plan only when the private operator is in place.

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If the corporation were to stop producing water or delivering water suitable for human consumption, amajor crisis could occur and might force the government to resort to emergency measures that could disruptthe private sector participation plan. The emergency action plan therefore prevents the water corporationfrom facing major disruption prior to privatization and thus contributes to an orderly privatization.

The emergency action plan consists of repairs for essential equipment and services, including replacementof items (parts or whole equipment). Further details of this component are given in the Project File.

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Annex 3: Estimated Project CostsNIGERIA: PRIVATIZATION SUPPORT PROJECT

Local Foreip TotalProjc Cost BY Comeonent US $million US $mifflon US $million

1. General Privatization Support 11.05 26.73 37.782. BPE Institutional Support 22.13 28.18 50.313. Privatization Consensus Building 33.95 23.99 57.944. Telecommunications Sector Reform 1.56 15.31 16.875. Electric Power Sector Reform 4.03 19.57 23.606. Urban Water Sector Reform - Lagos Water 1.69 11.90 13.59

Total Baseline Cost 74.41 125.68 200.09Physical Contingencies 0.06 0.86 0.92Price Contingencies 17.31 6.64 23.95

Total Project Costs 91.78 133.18 224.96Total Financing Required 91.78 133.18 224.96

Local Forein. TOWProject Sy Caev - US $million US $m0lon US $mmion

Civil Works 0.42 0.00 0.42Goods 1.00 3.19 4.19Supply and Installation 0.20 13.47 13.67Consultants 62.37 105.68 168.05Training and Study Tours 0.19 10.84 11.03Incremental Operating costs 27.60 0.00 27.60

Total Project Costs 91.78 133.18 224.96Total Financing Required 91.78 133.18 224.96

Identifiable taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 224.96 (US$m). Therefore, the project cost sharing ratio is 50.8% oftotal project cost net of taxes.

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Annex 4

NIGERIA: PRIVATIZATION SUPPORT PROJECT

Economic Analysis

1. Background

The economic analysis considers the revenue improvements to be achieved with the technical assistance insub-component 5.1 of the project and the technical improvements to be carried out per sub-component 5.2of the project. It employs a cost benefit analysis, using A "with" and "without" project methodology, and afive year analysis period at a 10 percent discount rate. All taxes were removed in the conversion fromfinancial to economic costs. No macroeconomic conversion factors have been used to convert financial toeconomic flows. The assumptions for "with" and "without" project scenario are the same as in the financialanalysis.

In the "with" project scenario, the extra financial revenue accruing to LSWC does not represent anyadditional use of water by consumers, since this increase in revenue is mainly due to bringing previouslyunbilled customers onto the LSWC's customer database. No economic benefit is attributed to this financialflow.

The only benefit that is measured in the economic analysis is the opportunity cost of the potential reductionof available piped water due to the deterioration of the supply network in the "without" project scenario.Currently, consumers not supplied by LSWC are being supplied by other vendors at higher prices. It isassumed that only 20 percent of the reduction in piped water supply is replaced by tanker supplied water, ata cost of N1 50 per cubic meter. The rest of the reduction in volume is not assumed to have any economicvalue to the consumer (a significant amount of water currently supplied to consumers is wasted).

The base case economic IRR was estimated at 27 percent and net present value of benefits at $5.4 million.

2. Sensitivity AnalysisSensitivity and Switching Values Analysis were performed on the critical variables - project cost andvolume reduction in supply in the "without" project case.

Scenario Description Financial Economic

NPV / IRR NPV / IRR

Base Case See assumptions for base case $4.8m / 19% $5.4m / 27%

Project Cost Up by 20% $2.3m / 14% $3.0m / 19%

Water Reduction Only 20% reduction in volume supplied in $2.6m / 15% $2.0m /17%w/o project scenario.

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Scenario Description Result

I By how much does project cost need to increase 47%for economic NPV = 0

2 What is the minimum reduction in supplied 18%volume in w/o project scenario for economicNPV to be positive?

Financial Analysis

1. Background

The financial analysis considers the revenue improvements to be achieved with the technical assistance insub-component 5.1 of the project and the technical improvements to be carried out per sub-component 5.2of the project. Other components and sub-components of the proposed credit are purely technicalassistance operations, where economic and financial analyses are not required. These analyses have beendone using information reported in the findings of IFC and IFC's consultants during Phase I of IFC'sassignment as principal financial advisor to LSG on the privatization transaction of LSWC.

2. Main Assumptions

The assumptions are based on information from the IFC Project Profile Report on Lagos WaterPrivatization dated August 30, 2000, the Ortech/Consult4/Management System Consultants Corp. finalreport on "Assistance to increase the billing amounts and improve efficiency of revenue collection" datedJuly 23, 2000, and Arthur Andersen's Phase I Inception Report on LSWC dated May 5, 2000.

A summary of sub-components 5.1 and 5.2, and their implications and thus assumptions used in thefollowing analysis is as follows (A detailed description of the planned investment can be found in theProject File):

* Technical Component: During the technical evaluation done by IFC's consultants, it wasdetermined that LSWC's system is deteriorating very badly with much equipment becomingunserviceable. Some essential systems e.g. transmission mains were in imminent risk offailure. A plan was put forward to arrest the situation, prevent system collapse and secure themaximum amount of water from the existing system. This is estimated to consist of $11.9million in capital works - technical repair and component replacement works. In the absenceof further detailed information, the financial summary of LSWC does not assume that thiscomponent will generate additional revenues for LSWC, but that it will merely maintain thestatus quo of revenue and costs. Without this component however, the financial situation ofLSWC will most likely deteriorate quickly (the FIRR analysis assumes a "without" projectscenario involving the loss of a quarter of LSWC revenues by the end of the first year, andremaining constant thereafter). This investment is assumed to be implemented within the firstyear.

* Commercial Component: Several commercial measures were identified to be implemented toprovide for a fast track improvement program in the commercial operations of LSWC. LSWC

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will undertake these measures with the assistance of consultants to be provided through thecommercial technical assistance under sub-component 5.1. These measures are estimated tocost $1.9 million, and will generate additional revenue due mainly to increased billings. Thisprogram is assumed to be implemented within the first year.

Other Assumptions

* The cost of the project is assumed to be received by LSWC as a grant.* A project life of five years has been assumed, with a residual of eight times final cashflow.* The additional billings generated by the conmmercial imnprovements are assumed to result in

additional administrative expenses of N6.4 million. This figure was estimated as a direct ratioof expected new revenue to current revenue, multiplied by current expenses for computers,postage and cables, stationery and printing, telephone & telex and collection expense.

* Base year financial data have been estimated/obtained from LSWC's financial statements foryear ended December 31, 1998. The balance sheet data is considered to be less reliable - forexample, LSWC does not have a comprehensive asset register. In fact, Phase II of IFC'sprivatization transaction will include an asset valuation exercise. As an approximation and inthe absence of further data, the existing revenue and expenses are assumed to be retained forthe forecast years.

• In line with LSWC practice, water sales revenue is accounted for in the profit and lossaccounts on a cash basis (and not on an accrual basis).

* Local inflation has been assumed at 11 percent per year.- As an approximation, depreciation for existing assets is maintained. Depreciation of new

assets have been assumed to be straight line over 20 years.e LSWC is technically illiquid and operates at a deficit. It has been assumed that cash flow

deficits is made up through LSG contributions to LSWC's equity each year.

The cost and additional revenues of the sub-components are summarized in the following table.

COMPONENT COSTS ADD. REVENUE (Naira) Remarks

Technical Component $11,890,000 No additional revenuesassumed. Status quomaintained.

Commercial Component

Commercial Consultancy $1,860,000

Customer Database Survey N50,000,000 Per year

Tariff Review N25,000,000 Per year

Billing and Collection N20,000,000 First year only

Customer Management N9,000,000 First year only

Add. Admin Expense N6,489,117

The projected financial summary of LSWC is presented in the table at the end of this annex.

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The emergency action plan helps by (i) averting a larger crisis from the risk of failure of LSWC's system,and (ii) provide some immediate improvement to LSWC's financial ratios by decreasing the annualoperational deficits. This is shown in the financial summary.

It is clear however, that LSWC is operating at annual operational deficits. The current proposedinvestments under the project is not on its own aimed at achieving sustainability, rather it is to achieve whatis considered a minimum basic level which will facilitate the privatization transaction for LSWC. It isexpected that the private sector participation transaction will be the vehicle to turn LSWC around towardsa sustainable operation without the need for state subvention.

3. Results

The base Case financial IRR was estimated at 19 percent. The cashflow were discounted using a discountrate of 10 percent, which is the Bank/IDA's typical hurdle rate for water and sanitation projects. The Netpresent value of financial flows were estimated at $4.8 million.

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Fhnco1 Stnmary fr RvPue Emm Poiect EnbtisLaam Sh* aCoCrpowi&m

Yearsaiding2OO0bi2005(In t'm&nd of - )ntUS

Yew I1 12031 1 1 mm X_SJ Fomat For ] Ftcas I Fcm Fa Fciat

Reeui 6,C081 7,721 7,721 7,721 7,721 7,721

Ot D Fp IZ63t5 14,086 14,086 14,086 14,08t5 14,086

CostofPnndir 11,16 1Z387 1 12,37 1 1Z

ATmtave " Otff" O0td 1,476 1,699 1,699 1,699 1,699 1,699

Q ht Ong (6,555) (665) ( (365) (t653 (

Nu hrre (20,111) (20,653) (19,970 (19,354) (18,799) (1829S9

F rksS lbrrr:

S"wfFwx

h1ma1Souas (137211) (Wt90) (12,390) (1;390) (12,390) (12,390)IBRDlar

IDA Cjo&s (Grant 13,7 0

Eqwtyhivmel 9,56 12,393 1Z390 1,39 12390 1Z

TOWI Sacus 10,10 0 0

t ~~~~~~~~11 CRo ECa J w0 0

WaigC CWai h-as Idhg c (1,784)

Tda A Ricrs 10,1 l

AmftOjTat A&%s 5,759 5,189 4,674 4211 3,7 3,41

less Cut Liafb (7,790D (7,018| (632) (5,696) (5,132) (4,623)

NetCunt Ases orWakrlgC t g3 1) (1,8309 (1,648) (1 ,485) (1,338' (10)Nd Ficed and O1t Lrg Tam Ass 131,126 111,915 95,224 84743 68,196 57,343

Total Nd Ass 129,095 110 5 93,576 7928 66,85 56,138

Lag Tamrn Dd1 79,532 71,650 64,550 58,153 52,3 47,19

Eqity 49,563 38,435 29,026 21,104 14, 8,93

ToaILTDebt"aai F129.095 I IQ08 935R 79! 66 56,138

CpT&g1 mras%ofRecei -108°/ -82°, -82/ -82° / 8/

NdVhan as% dRc.e -3310' -26P,/ -259°/ -251o/ -243/ -237D/

Rdm on Aaa hls Capiia -12°/ .I50/ -19/ -26/ -39

DSvix¢Co~

% of Toal (ZCp F ae Fiw d w byhtmtuims* O(/ O(X O(X/ o)/ 0X/

Cut tRatio 0. 0. 0. . 0. 0.Debt as % of Total Cap2t,m 650/ // 73I 78°/ 840

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Annex 5: Financial Summary

NIGERIA: PRIVATIZATION SUPPORT PROJECT

Financial Management Action Plan (for BPE, NCC and LSWC)The Financial Management Action Plan is condensed in this Annex. Individual Action Plans for BPE, NCC and LSWC

are available in the project file.

A GENERAL

Bureau of Public Enterprises (BPE)

Reporting to the project Oversight and Monitoring Committee (POMC), financial consultants for theproject as a whole will be retained by BPE, as the lead implementing agency, to prepare quarterlyconsolidated financial statements and progress reports.

BPE will be responsible for ensuring that financial management, procurement and reporting proceduresfor its component of the credit will be acceptable to the government, the World Bank Group and othercollaborating partners. The financial management system (FMS) for the BPE component must supportmanagement in their deployment of limited resources with the purpose of ensuring economy, efficiencyand effectiveness in the delivery of outputs required to achieve desired outcomes. Specifically, theFMS must be capable of producing timely, understandable, relevant and reliable financial informationthat will enable management to plan, implement, monitor and appraise the project's overall progresstowards the achievement of its objectives.

Nigerian Communications Commission (NCC)

The NCC was established by the Federal Government of Nigeria under Decree 75 of 1992 as the mainregulatory body in the telecommunication sector. It will be one of the project's implementing agenciesand will be responsible for ensuring that financial management, procurement and reporting proceduresfor its component of the credit will be acceptable to the government, the World Bank Group and othercollaborating partners.

The financial management arrangements for the NCC's component must be capable of producingtimely, understandable, relevant and reliable financial information that will enable management to plan,implement, monitor and appraise the project's overall progress towards the achievement of itsobjectives.

Lagos State Water Corporation (LSWC)

The LSWC was established by the Lagos State Government under the Lagos State Edict No 25 of1986 as a body corporate with the responsibilities for controlling and managing all waterworks andgroundwater in the State. The Corporation is governed by a Board of Directors whose members areappointed by the State Governor. The LSWC will be one of the project's implementing agencies andwill be responsible for ensuring that financial management, procurement and reporting procedures forits component of the credit will be acceptable to the government, the World Bank Group and othercollaborating partners.

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The financial management arrangements for the LSWC's component must be capable of producingtimely, understandable, relevant and reliable financial information that will enable management to plan,implement, monitor and appraise the project's overall progress towards the achievement of itsobjectives.

B FINANCIAL MANAGEMENT ACTION PLAN

Financial Management Committee (FMC)

BPE will appoint a representative Financial Management Committee (FMC to review the ProjectManagement Report (PMR) every quarter. NCC has a Management Committee comprising the ChiefExecutive Officer and Departmental Heads. Under the credit, the Committee will review the ProjectManagement Reports (PMRs) every quarter. LSWC has a Management Committee comprising theChief Executive Officer, the General Manager, the Project Co-ordinator, and the departmental AGMs.Under the credit, the Committee will review the Project Management Reports (PMRs) every quarter.

Each of the PMRs will comprise:

Financial Statements, as discussed below. Members of the respective FMC/MCs will review andapprove Quarterly and Annual Financial Statements; they will also examine material variances betweenbudget/actual figures, seeking remedial action as appropriate within an agreed timeframe.

Project Progress, i.e., Output Monitoring Report (OMR). The format and details of the OMR willneed to be developed. An important aspect of the OMR will be the accompanying narrativeinterpreting the project's progress with agreed financial performance indicators and how costs to daterelate to those planned at appraisal, and the likely effect on the project by completion.

Procurement Management (including Goods, Works and Services).

Staffing

BPE: A Project Accountant has been appointed to direct and guide the financial operations. AProcurement Specialist as well as support staff will be in place. Varying levels of staff training will berequired in financial, management and government accounting; information systems and computerapplications; and, in particular, procedures relating to utilization of funds (e.g., Special Accounts,SOEs, Special Commitments, Procurement, etc.). On-the-job coaching will also be provided.

NCC: The Finance & Accounts Department (FAD) will have the primary responsibility for thefinancial management system. The FAD has three professionally qualified accountants, one of whomwill be appointed as Project Accountant to direct and guide the financial operations of the project. AProcurement Specialist as well as support staff will be in place. Varying levels of staff training will,however, be required in financial, management and government accounting; information systems andcomputer applications; and, in particular, procedures relating to utilization of funds (e.g., SpecialAccounts, SOEs, Special Commitments, Procurement, etc.). On-the-job coaching will also beprovided.

LSWC: A professionally qualified Project Accountant will head the Finance and Accounts Unit andwill work closely with the Chief Executive Officer, the AGM (Finance and Administration) and theAGM (Planning and Budget) in directing and guiding the financial management operations of the

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project. The Privatization Accountant, a Procurement Specialist and support staff will be in place.Staff training will be required in some of the following areas: financial, management and governmentaccounting; information systems and computer applications; procedures relating to utilization of funds(e.g., Special Accounts, SOEs, Special Commitments, Procurement); etc. On-the-job coaching willalso be provided.

Financial Procedures Manual/Internal Audit

BPE: The Project Accountant, in consultation with the Director Finance and Administration, theDeputy Director Finance and Accounts, the Director of Operations and the Procurement Specialist willdocument the intemal control systems in a Financial Procedures Manual. Project activities will beperiodically reviewed by the Internal Audit Unit of the BPE.

NCC: The Project Accountant, in consultation with the Head of Finance and the ProcurementSpecialist, will document the intemal control systems in a Financial Procedures Manual. Projectactivities will be periodically reviewed by the Internal Audit Unit of the NCC. However, for that Unitto effectively discharge its responsibilities, it will require strengthening as the Unit's Head is currentlyon study leave.

LSWC: The Project Accountant, in consultation with the AGMs Finance and Accounts; Commercial;Operations; and Planning and Budget, the Project Co-ordinator, and the Procurement Specialist, willdocument the internal control systems in a Financial Procedures Manual. Work on developing theManual is already underway. In due course, the Manual, as a living document, will be regularlyupdated to meet new needs. Project activities will be periodically reviewed by the Internal Audit Unit ofthe LSWC. Plans are underway to strengthen and refocus the Unit under the leadership of a qualifiedchartered accountant as it is presently under-resourced.

Accounting System and Information Technology

BPE: Pending the computerization of BPE's financial management systems, the Project Accountantwill introduce a spreadsheet system (Excel) as a transitional arrangement to facilitate timelyaccounting for the project Funds. In due course, the proposed interim arrangements will be subsumedwithin the BPE's new financial management systems. Provision has been made in the Budget forhardware and software requirements.

NCC: Although the financial management reporting system at the NCC is computerized, the softwarewill require some modifications to ensure that the financial management information needs of theproject are adequately accommodated. Pending the assessment of the software capabilities, the ProjectAccountant will introduce a spreadsheet system (Excel) as a transitional arrangement to facilitatetimely accounting for the project Funds. In due course, the proposed interim arrangements will besubsumed within the NCC's financial management systems.

LSWC: The LSWC operates a manual accounting system at present. However, it is planning tocomputerize its financial management system during 2001. A Consultant has been engaged to developan IT Strategy for the Corporation. Pending the computerization of LSWC's financial managementsystems, the Project Accountant will introduce a spreadsheet system (Excel) as a transitionalarrangement to facilitate timely accounting for the project Funds. In due course, the proposed interimarrangements will be subsumed within the LSWC's new financial management systems. Funds havebeen identified for hardware and software requirements.

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Planning and Budgeting

BPE: Counterpart Funding will be approved in line with the government's budgetary process. TheProject Accountant, in consultation with the Director Finance and Administration, the Deputy DirectorFinance and Accounts, the Director of Operations, the Procurement Specialist and the FMC will beresponsible for preparing the Project's Quarterly/Annual Cash Flow Forecast.

NCC: Counterpart Funding will be approved in line with the government's budgetary process. TheProject Accountant, in consultation with the Head of Finance, the Procurement Specialist and theManagement Committee, will be responsible for preparing the Project's Quarterly/Annual Cash FlowForecast.

LSWC: Counterpart Funding will be approved in line with the govemment's budgetary process. TheProject Accountant, in consultation with the AGMs Finance and Accounts, Commercial, Operations,and Planning and Budget (who is a qualified chartered accountant), the Project Co-ordinator, theProcurement Specialist and the MC, will be responsible for preparing the Project's Quarterly/AnnualCash Flow Forecast.

Government Accounting-Cash Versus Accruals

The BPE, NCC and LSWC will individually meet the government's requirement for monthly cashaccounting to the Office of the Accountant General (Federation and State). This requirement is notexpected to change in the short to medium term. Thus, for the foreseeable future, project funds will beaccounted for on a cash basis. In due course, for management reporting purposes, the FMC of BPE,the Management Committee and the Board of NCC, and the MC of LSWC will decide whether toconvert to an accruals basis of accounting.

Procurement of Goods and Services (for BPE, NCC and LSWC)

World Bank Group and govemment procurement regulations will be observed. Financial managementstaff will be conversant with those procedures, as internal control issues and the incurring of liabilitieson behalf of the project will be matters of concern to the financial management function.

Procurement procedures will be documented in the Financial Procedures Manuals of BPE, NCC andLSWC. A Procurement Management Report, showing procurement status and contract commitments,will be prepared quarterly by each implementing agency.

Banking Activities-Flow Of Funds

The BPE, NCC and LSWC will each maintain 3 bank accounts as follows:

(a) Current Account in Naira with Bank X (Part 1 Account) to which draw-downs from the SpecialAccount will be credited once per month (towards the end of the month) in respect of incurred eligibleexpenses. Following the immediate payment of those liabilities, the balance on this account should bezero at the end of each month.

(b) Current Account in Naira with Bank X (Part 2 Account) to which Counterpart Funding will bedeposited. Initially, a three months float will be provided and, thereafter, it will be replenishedmonthly.

(c) Special Account with Bank X in US Dollars/Naira.

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Additionally, an IDA Ledger Loan Account (Washington), showing movements on the credit, will bemaintained by BPE, as the lead implementing agency. All bank accounts will be reconciled monthly;identified differences will be expeditiously investigated. Control procedures for the operation of allbank accounts will be documented in the Financial Procedures Manual.

Withdrawals/Disbursements (for BPE, NCC and LSWC)

By effectiveness, the implementing agencies will not be ready for PMR-based disbursements (WorldBank Group's Loan Administration Change Initiative Handbook, LACI, September 1998). Thus, inthe short term, existing disbursement procedures as outlined in the World Bank Group's DisbursementHandbook will be followed, i.e. Direct Payment, Reimbursement and Special Commitment. However,the appointment of financial management staff, coupled with the development of the financialmanagement systems of BPE, NCC and LSWC, should facilitate the introduction of PMR-baseddisbursements within 18 months of credit effectiveness.

PMR integrates project accounting, procurement, contract management, disbursement and audit withphysical progress through the Project Management Report (PMR), as summarized above. In duecourse, the adoption of PMR should enable the implementing agencies to move away fromtime-consuming voucher-by-voucher disbursement methods to quarterly disbursements to the SpecialAccount based on the PMR.

Fixed Assets/Consultants/Civil Works (for BPE, NCC and LSWC)

A Fixed Assets Register will be prepared, regularly updated and checked. A Contracts Register will bemaintained for all contracts with consultants. A Procurement Management Report, showingprocurement status and contract commitments, will be prepared quarterly.

Financial Reporting (Monthly and Quarterly/Annually)

Monthly Cash Reporting

In compliance with the government's reporting requirements, each implementing agency will beresponsible for preparing a Monthly Return to the Office of the Accountant General of theFederation/State for incorporation into the National/State Accounts.

Quarterly/Annually

The Financial Statements of BPE, NCC and LSWC are likely to include:

A Statement of Sources and Uses of Funds by Loan Category/by Activity;

Project Balance Sheet as at the reporting date;

Notes on significant accounting policies and accounting standards adopted by management whenpreparing the accounts; and on any supplementary information or explanations that may be deemedappropriate by management to enhance the presentation of a "true and fair view";

Special Account Statement/Reconciliation showing deposits and replenishments received, paymentssubstantiated by withdrawal applications, interest that may be earned on the account and the balance at the

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end of the fiscal year;

SOE Withdrawal Schedule, listing individual withdrawal applications relating to disbursements bythe SOE Method, by reference number, date and amount;

A Cash Forecast for the next two quarters.

Indicative formats for Financial Statements are outlined in a number of World Bank Grouppublications - Financial Accounting Reporting and Auditing Handbook (FARAH, January 1995), TheLoan Administration Change Initiative Handbook (LACI, September 1998) and the Draft ProjectFinancial Management Manual (February 1999).

External Audit (for BPE, NCC and LSWC)

Relevantly qualified, experienced and independent auditors will be appointed on approved terms ofreference. Audited financial statements will be submitted to the Bank within six months after thefinancial year end. Besides expressing a primary opinion on the financial statements in compliancewith International Auditing Standards (IFAC pronouncements), the auditor will be required to include aseparate paragraph commenting on the accuracy and propriety of expenditures withdrawn under SOEprocedures and the extent to which these can be relied upon as a basis for loan disbursements.Regarding the Special Account, the auditor will also be expected to form an opinion as to the degree ofcompliance with World Bank Group procedures and the balance at the year-end. Additionally, theauditor will be required to prepare a separate Management Letter giving observations and comments,and providing recommendations for improvements of accounting records, systems, controls andcompliance with financial covenants.

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Annex 6: Procurement and Disbursement ArrangementsNIGERIA: PRIVATIZATION SUPPORT PROJECT

Procurement

General: All goods and supply and installation to be financed under the IDA credit would beprocured in accordance with the appropriate IDA Guidelines ("Guidelines - Procurement underIBRD Loans and IDA Credits", January 1995 and as revised in January and August 1996,September 1997, and January 1999. All consultant services to be financed under the IDA Creditshall be selected in accordance with the Bank Guidelines ("Guidelines - Selection and Employmentof Consultants by World Bank Borrowers", January 1997, revised in September 1997 and January1999). Project elements and their estimated costs and proposed method of procurement aresummarized in Tables A, Al, and B. Procurement of Works, Goods and services would be theresponsibility of the specialist staff recruited into the finance and administration departments andsuitably trained staff within each of the Implementing Agencies (BPE, LSWC and NCC).

Procurement Organization and Capacity Assessment: The procurement responsibility will becarried out with assistance from Procurement Consultants (until procurement capacity is built upin each implementing agency). To ensure that in-house capacity is built up and remains at projectcompletion, consultants with international procurement expertise will be engaged on a retainerbasis to provide assistance on "as needed" basis. The Procurement Consultants shall also have theresponsibility to train the designated procurement staff of the Implementing Agencies. The BanksStandard Request for Proposals (RFPs) for Selection of Consultants (July 1997, and revised inApril 1998 and July 1999) shall be used for consulting services, while the Bank Standard BiddingDocument (SBD) for Supply and Installation of Plant and Equipment (February 1999), forProcurement of Goods (January 1995, revised March 2000), and the Standard Bid EvaluationForm for Procurement of Goods and Works (April 1996) shall be used for procurement of supplyand installation of plant and equipment, goods and works in consultation with the IDA. A formalassessment of the capacity of BPE, LSWC and NCC for this task has been carried out according toProcurement Services Policy Group (OCSPR) guidelines dated August 11, 1998 (see document inproject file).

Advertising: A General Procurement Notice (GPN) is mandatory and would be published beforeBoard presentation in the UN Development Business and in a national newspaper as providedunder the Guidelines. The GPN would be updated on a yearly basis and would show alloutstanding Intemational Competitive Bidding (ICB) for goods contracts and all InternationalConsulting Services. In addition, a Specific Procurement Notice is required for all ICB and allconsulting services with a value in excess of US$100,000 prior to the preparation of the short list.

Procurement under the project

Consulting Services and Training/Study Tours: The total value for consulting services will be $166.91 million (US$86.20 million would be financed by IDA), and for Training services will be$11.27 million (US$5.20 million would be financed by IDA ). These services among others,includes studies and reports, consultancy services for legal and regulatory framework for the powermarket, legal and regulatory reforrn for telecommunications, financial and legal restructuring ofcompanies and sale implementation, training, workshops, study tours and focus group discussionsfor the various components of the project. Selection and appointment of consultants for studies and

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support of project execution will be carried out in accordance with the Bank Guidelines. TheBank's Standard Request for Proposals will be used for the solicitation and appointment ofconsultants. Simplified contracts will be used for short-term assignments i.e. those not exceedingsix months, carried out by individuals. As a rule, consultant services will be procured thoughQuality and Cost Based Selection (QCBS) methodology. In addition, where appropriate to theassignment, quality-based selection will be used.

All consultancy assignments estimated to cost US$100,000 or more would be procured throughQCBS and would be advertised in Development Business and in at least one national newspaper.In addition, the scope of the service will be advertised in an intemational newspaper or magazineseeking "expressions of interest." In the case of assignments estimated to cost less thanUS$150,000, the assignment may be advertised nationally and the shortlist may be made upentirely of national consultants, provided that at least three qualified national firms are available inthe country and foreign consultants who wish to participate are not excluded from consideration.Consultant services estimated to cost less than the equivalent of US$100,000 may be contracted bycomparing the qualifications of consulting firms which have expressed an interest in the job or whohave been identified. All consulting services for individual consultants will be procured underindividual contracts in accordance with the provisions of paragraphs 5.1 to 5.3 of the Guidelines.Some consltancy services may with the agreement of IDA be procured on a single-source basis.

Supply and Installation and Goods: The total value for Supply and Installation under the projectis US$13.67 million (US$12.83 million would be financed by IDA), while the total value of goodsis US$4.93 million (US$3.71 rnillion would be financed by IDA). The project would financeprocurement of new radio-spectrum monitoring and communication equipment, office equipment,computers hardware and software etc. under ICB procedures for the NCC component. Supply andInstallation, as well as Goods Procurement for the Lagos State Water Corporation component, willinclude: electric power generation and other equipment for emergency repair works, pumps,filtration systems, bulk meters, chemicals for water treatment, vehicles and computer equipment.To the extent possible and practicable, goods and equipment to be procured by the ImplementationAgencies would be grouped into bid packages to take advantage of bulk purchase.

Most of the above procurement would consist of replacement items (parts and whole equipment)which are meant for emergency rehabilitation works on existing facilities. In these cases, theimported equipment will be from original manufacturers, and it is envisaged that procurement willbe done directly with the specific equipment manufacturers, through Direct Contracting proceduresin accordance with Bank Guidelines, and prior review of all procedures and documentation. In lightof the emergency nature of this component retroactive financing has been approved for a portion ofthe above packages. However, LSWC has been advised that advance procurement action is takenat its own risk and does not commit IDA to making the Credit available for the project. To theextent possible and practicable, all goods and equipment to be procured by the ImplementationAgencies would be grouped into bid packages to take advantage of bulk purchase.

Procurement Methods: Each contract for goods estimated to cost the equivalent of US$100,000or more would be procured under ICB procedures using IDA Standard Bidding Documents. Eachcontract for goods estimated to cost less than US$ 100,000 up to an aggregate of US$ 1,000,000would be procured through National Competitive Bidding (NCB) using procedures acceptable toIDA. Procurement for readily available off-the-shelf goods that cannot be grouped or standardspecification commodities for individual contracts of less than US$30,000, up to an aggregate ofUS$300,000.00, would be procured under National shopping (NS) or International shopping

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procedures as detailed in paragraph 3.5 and 3.6 of the Guidelines: Procurement under IBRD Loansand IDA Credits". The aggregate limit of $6,500,000 for direct contracting procedures.

Each quarterly progress report of the project would include a table setting out the number andvalue (in US$ equivalent) of contracts issued through Local, International Shopping and NationalCompetitive Bidding during the quarter as well as the cumulative total value (in US$ equivalent) ofcontracts under each of these two procedures from the date of the project start-up.

Civil Works: Procurement of Pipe Anchorage estimated for an amount of US$0.42 million, underthe Lagos Water (LSWC) component, will not be financed by IDA.

IDA Prior Review: Table B provides the prior review thresholds. Each contract for goodsestimated to cost US$100,000 equivalent will be subject to IDA prior review as per paragraph 2 ofappendix I of the Guidelines. Other contracts will be subject to post review in accordance withparagraph 4 of Appendix I of the Guidelines. All consulting contracts costing US$100,000equivalent or more for firms, and US$50,000 or more for individuals, will be subject to IDA priorreview. All single-source selection of consultants, terms of reference for consulting services andoverseas training will be subject to IDA prior review. Any exceptional extensions to non-priorreview contracts raising their values to levels equivalent or above the prior review thresholds willbe subject to IDA clearance. All training programs will be reviewed and agreed bi-annually, as partof the procurement plan.

Procurement Plans: BPE, NCC, and LSWC will prepare a Global Procurement Strategic Plan(GPSP), and a Detailed Procurement Plan (DPP) for the first year of the project, showingprocessing time and steps for each procurement contract and will forward these documents to IDA.The GPP and the DPP, which will be updated yearly, shall be sent to IDA for clearance not laterthan three months before the end of each fiscal year. The implementing agencies have agreed toprovide for the Bank's review, DPPs for each procurement process until March 2003, andpreliminary ones for subsequent years. These plans which are under active preparation would formpart of the Project Implementation Manuals of the Implementing Agencies under the proposedCredit.

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Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Prourmer MOthod

1. Works 0.42 0.42

C) 0 () (0.00) (0.00)2. Goods 0.53 2.26 1.97 0.17 4.93

(0.48) (1.74) (1.49) (0.00) (3.71)3. Services 129.19 37.72 166.91

o) () (86.20) (0.00) (86.20)4. Supply and Installation 7.18 0.00 6.49 0.00 13.67

(7.18) (0.00) (5.65) (0.00) (12.83)

5. Training and Workshop 0.00 0.00 11.03 0.24 11.27

(0.00) (0.00) (5.20) (0.00) (5.20)Recurrent 0.00 0.00 9.75 18.01 27.76

(0.00) (0.00) (6.35) (0.00) (6.35)Total 7.71 2.26 158.43 56.56 224.96

(7.66) (1.74) (104.89) (0.00) (114.29)

Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies.

2/ Includes civil works and goods to be procured through national shopping, consulting services, services ofcontracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local governmentunits.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Selwuon mUo~thcConsutant Servic.

Expnditure Cat"oy O0m0 Q8s SFB LOS CK ;;Other N.B.F. Toatc.*tA. Firms 113.29 4.00 3.00 2.00 0.00 4.00 36.81 163.10

(75.13) (3.00) (2.00) (1.00) (0.00) (3.00) (0.00) (84.13)B. Individuals 0.00 0.00 0.00 0.00 2.91 0.00 0.91 3.82

(0.00) (0.00) (0.00) (0.00) (2.07) (0.00) (0.00) (2.07)Total 113.29 4.00 3.00 2.00 2.91 4.00 37.72 166.92

(75.13) (3.00) (2.00) (1.00) (2.07) (3.00) (0.00) (86.20)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.

N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Credit.

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'

EX::n tur caeoy b US$illin)metho rS milos

1. Works N.B.F. NA

2. Goods Equal or greater than 0.10 ICB\DC AllLess than 0.10 NCB No

Equal or less than 0.03 NS/IS No3. Services and Training Equal or great than 0.1 QCBS, QBS, Other All(Firm)4. Services and Training Equal or great than 0.05 CQ, Other All(Individuals)5. Services all Single Source All6. Miscellaneous

Total value of contracts subject to prior review: US$75 million

Overall Procurement Risk Assessment

High

Frequency of procurement supervision missions proposed: One every 4 months (includes specialprocurement supervision for post-review/audits)

Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of credit proceeds (Table C)

Table C: Allocation of Credit Proceeds

`Exp,ndft0 C.gory Amount In US$mJf1on Pi - "1. Supply and Installation 11.54 100% foreign; 100% local (ex-factory);

40% local2. Goods 3.02 90%3. Consultants' Services 77.00 100%4. Training and Study Tours 4.85 100%5. Incremental Operating Cost 5.06 For BPE 80% in 2001, 70% in 2002,

60% in 2003, 50% in 2004, and 40% in2005 and thereafter

For NERC 90% in 2001-3, 70% in 2004and thereafter

6. Refunding of PPF 2.007. Unallocated 10.82

Total Project Costs 114.29

Total 114.29

Disbursement Arranaements

The implementing agencies would be expected to adopt quarterly PMR-based reporting system .... within18 months (i.e., on or about December 31, 2002 . In cases where country/project circumstances warrant,direct payment and /or special commitment procedures may be allowed as agreed by IDA.

The proceeds of the IDA credit would be disbursed against 100 percent of foreign expenditures forconsultants services, training and study tours; against 100 percent of foreign expenditures, and 100 percentof local expenditures at ex-factory cost, and 40 percent of other local expenditures for supply andinstallation; against 90 percent for goods; and against a declining annual percentage for incrementaloperating costs (for BPE: 80 percent in 2001, 70 percent in 2002, 60 percent in 2003, 50 percent in 2004,40 percent in 2005; and for NERC : 90 percent in 2001-3, and 70 percent in 2004-5). As projected by theWorld Bank Group's standard disbursement profiles, disbursements would be completed by four monthsafter project closure. Disbursements would be made against standard IDA documentation.

Use of statements of expenditures (SOEs):

All applications to withdraw proceeds from the credit will be fully documented, except for: (i) expendituresof contracts with an estimated value of US$100,000 each or less for goods, ii) US$100,000 for consultingfirms, (iii) US$50,000 or less for individual consultants, iv) training, and v) incremental operating costs,which may be claimed on the basis of certified Statements of Expenditures (SOEs). Documentationsupporting expenditures claimed against SOEs will be retained by BPE and the other ImplementationAgencies and will be available for review when requested by IDA supervision missions and projectauditors. All disbursements are subject to the conditions of the Development Credit Agreement and theprocedures defined in the Disbursement Letter.

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Special account:To facilitate disbursement of eligible expenditures for supply and installation, goods and services, theBorrower shall open and maintain in US Dollars four separate special deposit accounts: the BPE SpecialAccount, the NCC Special Account, the NERC Special Account, and the LSWC Special Account in acommercial bank to on terms and conditions satisfactory to the Association, including appropriateprotection against set-off, seizure and attachment. The authorized allocation of each special account wouldbe an estimated 4 months of eligible expenditures financed by IDA. The details are provided in theDevelopment Credit Agreement. To the extent possible, all of IDA's share of expenditures should be paidthrough the special account.

The Special Account will be replenished through the submission of Withdrawal Applications on a monthlybasis and will include reconciled bank statements and other documents as my be required until December31, 2002 after which further deposits to the Special Accounts will be on a quarterly basis as determinedthrough the Project Management Reporting System. Disbursements will be channeled through the SpecialAccount, but in lieu of using the Special Account, the Borrower may choose to pre-finance projectexpenditures and seek reimbursement from IDA.

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Annex 7: Project Processing ScheduleNIGERIA: PRIVATIZATION SUPPORT PROJECT

Eroject Schedule Planned |tuallTime taken to prepare the project (months) 12 16

First Bank mission (identification) 10/18/99 10/18/99

Appraisal mission departure 10/18/2000 02/26/2001

Negotiations 12/05/2000 04/05/2001

Planned Date of Effectiveness 09/17/2001

Prepared by:

The Bureau of Public Enterprises

Preparation assistance:

Project Preparation Facility of US$2 million.

Bank staff who worked on the project included:

Name SpecialityPaul Ballard Team Leader, AFTPSTrevor Byer Co-Team Leader, AFMNGAnil Kapur Privatization Specialist, LCSFPShenhua Wang Privatization Specialist, AFTPSMohammad Mustafa Telecommunication Specialist Coordinator, CITPOJuan Navas-Sabater Telecommunication Policy/Rural Specialist, CITPOPeter Smith Telecommunication Regulation Specialist, CITPODavid Satola Telecommunication Lawyer, LEGOPJohn Besant-Jones Power Specialist Coordinator, INFEGTonci Bakovic Power Reform Specialist, CPWMangesh Hoskote Power Specialist, AFTEGScott Sinclair Power Guarantee Specialist, PFGIan Alexander Power Policy Specialist, PSAPTMalcolm Davies-Cosgrove Power Rural Specialist, AFTEGDenise Leonard Manager, Private Sector Advisory - Policy and Transactions, PSAPTSolomon Quaynor Senior Investment Officer, PSAPTBernard Portier Principal Engineer, PSAPTDavid Henley Sr. Sanitary Engineer, AFTU IEugene Okongwu Sr. Sanitary Engineer, AFTUlFook Chuan Eng Financial Analyst, AFTU1Jumoke Jagun Investment Officer, PSAPTMaggie Zhou Investment Officer, PSAPTMike Omaliko Investment Officer,CAFA3Frank Ajilore Investmnent Officer,CAFA3Ola Idris Animashaun Investment Officer,CAFA3Enrique Domenge Investment Officer, CAFTGAndrew Bartley Senior Investment Officer, CPW

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Bola Bamidele Young Professional, YPPKaren Hudes Senior CounselAnthony Martin Hegarty Financial Management Specialist, AFTQKMikael Mengesha Senior Energy Specialist, AFTQKBayo Awosemusi Procurement Specialist, AFMNGJane Tola-Sijuade Disbursement Trainer, AFMNGGeorgette Johnson Team Assistant, AFTPSMaureen Blassou Program Assistant, CITPOLizmara Kirchner Program Assistant, CITPOKashmira Daruwalla Procurement Analyst, CITPO

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Annex 8: Documents in the Project File*NIGERIA: PRIVATIZATION SUPPORT PROJECT

A. Project Implementation Plan

B. Bank Staff Assessments

Country Procurement Assessment Report, CPAR, November, 2000Financial Management Assessments Action Plans for BPE, NCC and LSWC, October and December2000*Procurement Assessments and Action Plans for BPE, NCC and LSWC, August and December 2000*Aid-Memoire of Bank Pre-Appraisal Mission, November/December, 2000*

C. Other

Public Enterprise (Privatization and Commercialization) Act 1999.National Council for Privatization - Blueprintfor the Privatization Program (December 1999 - March2003).BPE's brochure with a description of its mandate and organization, 2000.BPE audited accounts, 1998, 1999.BPE Nigeria: Privatization Procedures and Policies Note, April, 2001 *BPE Environmental Pre-Audit Report on Privatization Program, February 7, 2001 (lodged withInfoshop)*BPE: Privatization Program Phase 2a Implementation Plan, February and April, 2001

Telecommunication Sector

Federal Republic of Nigeria - "National Telecommunications Policy", September, 2000.Terms of Reference for advisors assisting with the preparation of new telecommunications regulatoryframework and licenses*Terms of Reference for advisors assisting with the preparation of new licenses for NITEL and M-Tel*Terms of Reference for advisors assisting with NCC's institutional development, resident advisory services,and staff training and development for NCC*Terms of Reference for privatization financial and legal advisors (NITEL and M-Tel)*Terms of Reference for consultant services for modemization of the radio spectrum management function*Terms of Reference for the Development of a Rural Communications Strategy and Implementation of aPilot Project*

Electric Power Sector

Federal Republic of Nigeria - National Electric Power Policy, March, 2001Terms of Reference of cost-of-service study.Terms of Reference for the legal and regulatory advisors for the electric power sector.Terns of Reference for the restructuring and corporatization of advisors for the electric power sector.Terrns of Reference for the privatization and strategic transaction advisors for the electric power sector.Terms of Reference for advisors to develop a rural energy strategy.First Nigeria Power Reforn Leaders' Workshop, Washington D.C., February 26-27, 2001 - minutes and

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technical documentationSecond Nigeria Power Reform Leaders' Workshop, Washington D.C., April 3-4, 2001 - conclusions andtechnical documentation

Air Transport Sector

Decision relating to the implementation of the Yamoussoukro Declaration Concerning the Liberalization ofAccess to Air Transport Markets in Africa.

Lagos Water

Terms of Reference for IFC to act as financial advisor to LASG for the privatization of LSWCTerms of Reference for consultants to IFC (Technical, Legal, Accounting-Financial, Regulatory)IFC's interim strategic report ("60-Day Report")Hard and electronic copies of base case economic and financial assessment model

*Including electronic files

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Annex 9: Statement of Loans and Credits

NIGERIA: PRIVATIZATION SUPPORT PROJECTMay-2001

Difference between expectedand actual

Original Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'dP069086 2001 Community Based Poverty Reduction 0 00 60.00 0.00 59.49 0.67 0.00P066571 2000 SECOND PRIMARY EDUCATION PROJECT 0.00 55.00 0.00 51.52 18.56 0.00

P065301 2000 ECON.MGMT.CAP.BLDG. 0.00 20.00 0.00 15.44 -0.34 0.00P064008 2000 SMALL TOWNS WATER 0.00 5.00 0.00 3.93 -0.65 0.00P002084 1991 WATER REHAB 256.00 0.00 0.00 17.29 17.29 17.29

Total: 256.00 140.00 0.00 147.68 35.52 17.29

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NIGERIASTATEMENT OF IFC's

Held and Disbursed PortfolioMay-2001

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1997 AEF Radmed 0.26 0.00 0.00 0.00 0.26 0.00 0.00 0.001997 AEF Telipoint 0.10 0.00 0.00 0.00 0.10 0.00 0.00 0.001995 AEF Vinfesen 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.001994 Abuja Intl 1.75 0.71 0.00 0.00 1.75 0.71 0.00 0.001964/66/89 Arewa Textiles 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.002000 CAPE FUND 0.00 7.50 0.00 0.00 0.00 2.25 0.00 0.002000 Diamond Bank 20.00 0.00 0.00 0.00 10.00 0.00 0.00 0.001992 FSDH 0.00 0.86 0.00 0.00 0.00 0.86 0.00 0.001981/85/88 Ikeja Hotel 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.001993 Tourist Co Nir 0.00 0.00 2.50 0.00 0.00 0.00 2.50 0.001998 AEF Ansbby 0.10 0.00 0.00 0.00 0.00 0.00 0.00 0.001996/98 AEF Bailey Bridg 0.68 0.00 0.00 0.00 0.68 0.00 0.00 0.001996 AEF Courdeau 0.26 0.00 0.00 0.00 0.26 0.00 0.00 0.001997 AEF Ekesons 0.15 0.00 0.00 0.00 0.15 0.00 0.00 0.001994 AEF Etema 0.66 0.00 0.00 0.00 0.66 0.00 0.00 0.001999 AEF Global Fabri 0.32 0.00 0.00 0.00 0.00 0.00 0.00 0.001999 AEF Hercules 1.30 0.00 0.00 0.00 1.30 0.00 0.00 0.001999 AEF Hygeia 0.38 0.19 0.00 0.00 0.38 0.19 0.00 0.001996 AEF Mid-East 0.00 0.00 0.12 0.00 0.00 0.00 0.12 0.001997 AEF Moorhouse 1.35 0.00 0.00 0.00 1.35 0.00 0.00 0.002000 AEF Oha Motors 0.90 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 29.21 9.63 2.62 0.00 17.89 4.38 2.62 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic2000 AEF Gurmeet 0.70 0.00 0.00 0.002000 AEF SafetyCenter 0.50 0.00 0.08 0.001995 AEF-NABEGU CO. 1.00 0.00 0.00 0.002000 Citibank Nigeria 40.00 0.00 0.00 0.002000 FSB 22.50 0.00 0.00 0.002000 GTB 20.00 0.00 0.00 0.002000 IBTC 20.00 0.00 0.00 0.00

Total Pending Commitment: 104.70 0.00 0.08 0.00

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Annex 10: Country at a Glance

NIGERIA: PRIVATIZATION SUPPORT PROJECTSub-

POVERTY and SOCIAL Saharan Low- - -. . ..Nloeria Africa income Development dlamond

Popuiation. mid-year (miMions) 123.9 642 2.417 Life expectancyGNP per capita tAtMa3 metlhod. USS) 310 500 410GNP (Atlas methotl, US$ biflons) 38.4 321 988

AvertaB annuial rowth. 1993-99

Population M%) 2.8 2.6 1,91.9GNLabor force %) 2 8 2.6 2.3 p Gross

per ~ , primaryMost recent estimate (iatest year t#vatblo, 1993-99) capita . enrollment

Povertyv t of population below natonal goee line) s6Urban opulation (% of total pogul#on) 43 34 31tife e xcectartcv at brth (vear5l 53 50 60

infatt mortality (Per 1,00 lfve btlbs) 76 92 77Child malntorition (% of chfldren tinder5) 39 32 43 Access to safe waterAccess to improved water source 1% of populationO 39 43 64lilteracy (% of population age 15+) 37 39 39Gross Drimarv enrollment ( of school-ege population) 98 78 95 Nigeria

Male 109 85 102 Low-income groupFemale 87 71 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS1979 1989 1998 1"99

Economic ratios*GOP (US$ billions) 47 3 23.8 32.2 34,1Gross domestic itnvestmenhlGDP 22.1 17.7 28.3 24,2 TExports of goods and services/GOP 24.8 32.7 33.2 36.5 radeGross domestic savinas/GOP 27.8 25.3 23.4 18,4Gross national savings/GDP 28.4 17.0 18.6 13,0 T

CurttentaccountbalancelGDP 3.5 -1.0 -9.7 -11t DomesticInterest Payments/GDP 0.5 6.2 4.6 57 I *nvestmentTotal debt/GOP 13.2 126.3 87.9 92.8 SavingsTotal debt service/exports 2.2 20.9 37.7 31.1Present value of debt/GOP .. .. 91.2Present value of debt/exports .. .. 261.7

Indebtedness197949 19S9-99 1998 1999 1999-03

(average annual growth)GDP 0.2 2.7 1.8 1.0 2.5 NigeriaGNPpercarita -2.7 0.4 -1.9 0,2 .02 Low-income groupExporleof goods anr services -3.6 5.1 4.9 -12.2 4.0

STRUCTURE of the ECONOMY1979 1989 1998 1999 Growth of investment and GDP 1%)

(% of GOP) 30

Aariculture 28.7 31.3 39.0 20

Industry 37.8 43.2 33. 10Manufacturing 8.8 5.3 5.4

Services 33.5 25.5 27.6 . 10 04 99

Private consumption 58.3 64.3 63.0 66.7 -20General government consumption 13.9 10.4 13.5 14.9 -GOI - e GDPImports of moods and services 19.1 25.2 38.1 42.3

(average annual growth) 1979-S9 1989-99 1998 1999 Growth of exports and Imports (%)

Agriculture 2.2 2.9 1.5 257

Industry -2.7 2.0 2.9 . 0Manufacturing 1.1 2.3 2.8 .B

Services 2.3 3.5 0.1 .

Private consumption -1.6 -0.81 -3.1 .6 96 97

General eovernment consumption -4.6 1.6 24.6 .. 10Gross domestic investment -10.2 5.8 -7.4 17.6 15Imports of goods and services -13.2 4.4 -2.8 18.6 - Exports -ImportsGross national product 0.3 3.4 0.9 3.0

Note: t999 data are preliminary estimates.

The diamonds show four kev indicators in the country (in bold) compared with its income-group average. If data are missina, the diamond willbe incomotete.

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Nigeria

PRICES and GOVERNMENT FINANCE1979 1989 1998 1999 Inflation (%/)

Domestic prnces(% change) 80Consumer prices 11.7 50.5 10.3 6.6 60

Implicit GDP deflator 11.5 44.4 -5.2 12.9 40

Govemment finance 20

(% of GDP, includes current grants) 0Current revenue 20.7 13.8 28.5 30.5 -20 94 95 96 97 98 9

Current budget balance 12.0 -1.4 13.2 11.1 GDPdeflator - O CPIOverall surplus/deficit -2.5 -7.2 -13.4 -7.4

TRADE

(US$ millions) 1979 1989 1998 1999 Export and import levels (USS mill.)

Total exports (fob) 16,767 9,812 10,114 11,927 20.000Crude petroleum 15,655 9,411 9,218 11,393Liquified natural gas . .. .. 322 15.s OOManufactures .. 39 140 27

Total imports (cif) 15,971 6,544 10,269 12,176 10000Food 1,638 425 1,397 1,583 5,0 _ _:_ -0 _Fuel and energy 442 46 123 158 U hhkCapital goods . .. .

Exportpnceindex(1995=100) 117 107 71 94Import price index (1995=100) 59 80 94 93 * Exports U ImportsTerms of trade (1995=100) 198 133 76 101

BALANCE of PAYMENTS

(US$ millions) 11979 1989 1998 1999 Current account balance to GDP (%)

Exports of goods and services 17,631 9,979 10,972 12,871 )5Imports of goods and services 13,543 7,679 12,934 14,901 10

Resource balance 4,089 2,301 -1,962 -2,030 mNet income -2,026 -2,668 -2,669 -3,445 s -Net current transfers -388 118 1,516 1.662 o

Current account balance 1,675 -249 -3,115 -3,813 5 flUFinancing items (net) 1,765 1,521 3,000 2,147 -10 tChanges in net reserves -3,440 -1,272 115 1,666 -15

Memo:Reserves including gold (US$ millions) 5,580 1,797 7,107 5,441Conversion rate (DEC, localIUS$) 0.9 9.4 88.0 95.0

EXTERNAL DEBT and RESOURCE FLOWS1979 1989 1998 1999

(US$ millions) Composition of 1999 debt (US$ mill.)Total debt outstanding and disbursed 6,245 30,122 28,343 31.617

IBRD 478 2,906 2,278 1,989 A: 1,989IDA 38 30 564 624 G: 6,516 _:624

Total debt service 392 2,117 4,235 4,082 0:2,244IBRD 65 411 466 443IDA 1 1 4 7

Composition of net resource flows ¶Official grants 2 128 0 0Official creditors 59 461 -1,763 -1,994 F: 5,829Private creditors 1,234 522 -418 0Foreign direct investment .. 2,443 1,351 1,494 E 14,415Portfolio equity 0 0 0 0

World Bank programCommitments 182 702 0 0 A - IBRD E - BilateralDisbursements 51 450 222 114 B - IDA D - Other multlateral F - PrivatePrincipal repayments 21 200 314 307 c - IMF G - Short-temlNet flows 31 250 -93 -194Interest payments 45 212 156 142Net transfers -15 38 -249 -336

Development Economics

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AdditionalAnnex 11

Annex 11: Project Implementation Framework and Action Plan

This Annex presents key elements and actions, and sector background, for the implementation program forthe Project components related to the Federal Government of Nigeria (FGN)'s sector reform andprivatization program, including: (A) general privatization support to BPE; (B) telecommunications sectorreform; and (C) power sector reform. It includes key actions and timelines that were agreed between FGNand IDA at credit negotiations.

A. General Privatization Support to BPE

The FGN has embarked on a very ambitious and comprehensive privatization program by internationalstandards. It has made its privatization program a flagship for its strategy for economic growth, improvedpublic services and infrastructure and employment creation, through expanded private and foreigninvestment. To this end, FGN is stressing transparency in order to attract high quality, experienced andreputable private investors and operator, and to restore Nigeria's image abroad as an investmentdestination.

FGN adopted in 1999 guidelines and a blueprint for implementation, pursuant to the 1999 Privatization andConmmercialization Act. These provide for a streamlined process by which the NCP sets the broadparameters of policy and strategy for all divestiture transactions, and in particular for major PEdivestitures, and then delegates detailed preparatory work to sectoral divestiture committees, comprisingstakeholder representatives including concerned sector ministries, subject to oversight of the NCP's fourstanding committees, and to NCP clearance of key strategic decisions.

The BPE, as privatization agency, serves as executing agency, and BPE's director-general is a full memberof the NCP. The guidelines explicitly recognize the importance of competitive recruitment of highlyexperienced international transactions advisers to undertake detailed technical transaction preparation andexecution work. They also include two modes of divestiture sale: one, for very large strategic PEs, involvesthe prior selection of a strategic investor, with sale of shares to Nigerian investors on a broadly distributedbasis across the country which would be done subsequently and staggered over time; the other, for otherPEs, could involve earlier sale through offerings on the stock market of Government shares to Nigerianinvestors. Significant emphasis is also given in the guidelines to the importance of stakeholder consultationand participation as a basis for ensuring the sustainability of the privatization program.

The PSP will support the FGN's overall privatization program through three project components : (1)Privatization Transactions Support; (2) BPE Institutional Support; and (3) Communications andConsensus Building. Key design and implementation issues in these areas are presented below.

(1) Privatization Transactions Support

A. FGNPrivatization Program Framework: The FGN is carrying out a three-phase PE privatizationprogram. Under Phase One, divestiture of 14 PEs -- chiefly through share sales - is virtually completedwith selection of seven (7) core investors and generation of a total gross proceeds to be realized of about 23billion Naira (16 billion from core investor sales and 7 billion from public offers). Some problems havebeen encountered with sale of regional allotments of shares to Nigerian investors, and with regionalcommunity and labor union acceptance of the privatization of certain PEs (e.g. Benue Cement,

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Unipetrol ). Under Phases Two and Three, about 100 PEs are slated to be divested - including NEPA,NITEL, and Nigeria Airways for which preparation is already underway.

B. Steps and Modalities for PE Divestiture: For preparation and execution of the PEs under Phases Twoand Three - except for power, telecoms, air transport, and some others for which advisers have beenrecruited - BPE is adopting the following approaches: (a) "Quick assessments" of the PEs have beencommissioned to provide up-to-date performance, operational, technical and financial information -especially for large PEs in major sectors, as a basis for scoping out the preparation work required for theirdivestiture; (b) For a number of major sectors where PEs are to be divested, sector strategies will beprepared first, in order to define the key regulatory and policy parameters and sector policy reformsrequired before divestiture can proceed; (c) Investment advisers - together with technical, legal andfinancial consultants - will be retained for major transactions for which strategic investors will be sought.For smaller PEs, NCPIBPE would actively consider simpler, faster and less costly divestiture techniques(e.g. asset sales, liquidations, auctions) to enable assets to be brought back to economic use promptly andto minimize further deterioration. (d) For all PEs, especially for smaller PE divestitures, "batching" oftransactions (esp. in the same sector) would be considered to ensure a consistent marketing approach and tominimize costs.

C FGN's PE Divestiture "Pipeline" : The "pipeline" of PEs slated for divestiture by NCP/BPEincludes a significant number of very large PEs in the productive sectors (e.g. sugar, pulp and paper,fertilizers, aluminum smelting, steel, vehicle assembly, petrochemicals, oil refineries, gas pipelines, etc.) aswell as in a range of infrastructure and utility sectors (airports, ports, railways, power,telecommunications, post etc.). The FGN's privatization program is thus a very broad and far-reachingone that will require time to prepare and implement, especially given the state of current knowledge of thesectors, and the absorptive capacity of the market.

D. Priorit: List ofPEs for Divestiture : In order to prioritize PEs for divestiture in terms of economicimpact and reduction of fiscal drain, one to three larger PEs have been identified in each of thirteen sectorsand will be considered as "core" - or priority - enterprises for divestiture during 2001-03. These are: (a)hotels (Nigeria Hotels); (b) insurance (NICON); (c) sugar (Savannah Sugar); (d) fertilizer (NAFCON);(e) palm oil (three mills/estates); (f) aluminum (ALSCON); (g) oil refinery (Port Harcourt/ Kaduna); (h)airlines (Nigeria Airways); (i) ports (Lagos); (j) oil/gas pipelines (PPMC); (k) telecommunications(NITEL); (I) railways (NRC); (m) power (NEPA). In addition, one river basin development authority willbe slated for "commercialization".

E. Organization of the PE Divestiture Effort: To enhance the program's impact during 2001-03, withinthe frame of FGN's overall PE privatization effort, BPE will give special attention to the priority PEs andorganize its staff accordingly, by assigning sector divestiture teams on a full-time basis to focus onmanaging the divestitures and related sector policy and regulatory reforms in the priority sectors. Eachsector team will : (a) first arrange for conduct of a quick assessment on the selected PE (as needed), (b)then for a review of the business and sectoral policy environment and regulatory framework to enable theconcemed SRIC to recommend necessary reforms to these to ensure transparency, efficiency andcompetition; and (c) thirdly manage selection and supervision of investment advisers in preparation of adivestiture strategy and implementation of the divestiture.

F. Enabling Policies for Privatization: To ensure a sound policy and social framework for theprivatization program, FGN through NCP/BPE is giving priority in the first year of the project to design

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and adoption of key policies, and operational guidelines -notably in the areas of (a) PE employeeseverance compensation and retrenchment; (b) PE debt restnucturing guidelines; (c) competition policy;and (d) capital market absorptive capacity:

* (a) Compensation and Severance of PE Employees: To ensure sustainable and equitabletreatment of this key policy issue, FGN has decided to define and adopt early on a consistentoverall policy and operational guidelines for PE employee severance payments, includingadequate pension provisions. Where ex gratia (golden handshake) payments are anticipated tobe needed - as is expected for a number of PEs - these would be based upon uniform principlesrelated to estimated employee wage losses to ensure equity and to minimize fiscal costs. Areview is currently being undertaken - with assistance of expert consultants funded by USAIDand the Bank - to determine the bases and key elements for the policy as well as operationalguidelines, based upon an empirical assessment of prevailing labor market conditions inNigeria. The FGN plans to prepare and have adopted by NCP by end- 2001 the policyframework and operational guidelines , to ensure a consistent framework for all major PEdivestitures.

* (b) PE Debt Restructuring Guidelines: To accelerate the PE divestiture process, FGN hasidentified the need to determine early on a clear policy and operational guidelines for treatmentof PE debts. By setting standard approaches for handling similar classes of PE debts, this willenable financial restructuring of PEs by transactions' advisers to proceed more rapidly, whileallowing FGN decision-making to focus upon exceptions requiring high-level governmentattention. FGN has decided that the PE debt guidelines will be prepared and adopted by NCPby end 2001.

e (c) Review of Options for the Legal Framework for Regulatorv and Competition Policy:Privatization of PEs in certain sectors where competitive pressures from international marketsmay initially be limited, will call for creation of an effective framework of competition andregulatory policies. Already regulatory frameworks are being established for some key sectors(e.g. telecommunications, power, etc. and are expected to be set up for others (e.g. transport).To provide a consistent overall economy-wide legal setting for these, and to cover othersectors, FGN has decided to commission - through BPE - a review of options for the legalframework for regulatory and competition policy, including private participation ininfrastructures sectors, supported by expert consultants, to draw up options for a competitionand anti-trust policy. This review will be undertaken by end 2001.

* (d) Capital Market Absorptive Capacity Review: A key element of FGN's privatization strategyis to encourage a rapid growth in shareholding by Nigerian savers and investors throughout thecountry, through issuance via public offerings of up to 49 per cent of shares in privatizedcompanies. With about 100 large PEs slated for divestiture during 2001-05, this would resultin a major expansion of Nigeria's currently quite small stock market, by internationalstandards. It will be important to conduct early on an empirical assessment of likely capitalmarket absorptive capacity. FGN has decided to conmmission this review through BPE and thatit would be undertaken by end-September 2001.

(2) BPE Institutional Support

BPE Capacitv Building. Staff Development and Training: BPE has a professional staff of about 100,seventy-three of whom are newly recruited. Given the scale of the privatization program, especially the

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utility sector programs which are very large, and linked to sector and regulatory reform, BPE will need tostrengthen its capacity. The Project will provide support for programs of capacity building and training ofBPE staff, as well as study tours and awareness raising for representatives of other key stakeholder groups.

BPE Capacity Building Action Plan: (a) BPE will hire four long-term international advisors withprivatization experiences in telecommunications, power, transport, and oil and gas sectors from 2001 to2003, to provide up-to-date, private market knowledge and experience in these key sectors. (b) BPE isrecruiting a "core team" of ten highly qualified Nigerian professionals - to be hired from the private sectoron a contract basis, for the life of the PSP. Of these, four joined BPE in August, 2000 and six more areunder active recruitment and will be on board in 2001. (c) BPE has also recruited an expert team -comprising international specialists in divestiture transactions, labor and retrenchment issues,communications and public awareness and MIS to strengthen these functions (with funding support fromUSAID). (d) Since seventy-three BPE staff are newly recruited, training will be needed in 2001-02 in theareas of preparation and execution of complex large divestiture transactions, and design of relatedregulatory reforms, as well as more generally in financial, legal, economic and corporate managementaspects. BPE will arrange in-house training in these areas - through contracting out to a qualified andexperienced training organization. In addition, BPE also plans to send selected staff to successfulprivatization agencies overseas for short-term (max. 2-3 months) on-the-job training. Meanwhile, BPE'sdirectors will attend management training courses overseas. (e) To help build up the experienced regulatorycapacity that will be needed for the new power regulatory agency (NERC) starting in 2001, BPE will hireinternational regulatory consultants and experts to train a strong cadre of Nigerian regulatory staff (withfunding support from UK-DFID). (f) To build stakeholder support and understanding, a program of studytours will be undertaken for key stakeholder group representatives (notably parliamentarians, governmentofficials, labor and other civil society representatives) focused upon specific aspects of the sector reformand privatization programs where exposure to recent international experiences can prove instrumental - e.g.design of regulatory institutions and policies, etc. (g) To help strengthen the capacity of Nigeria's judiciaryto address commercial and business law issues related to PE divestiture, NCP/BPE has agreed with theleadership of the judiciary to undertake a training program for judges and court officials in the areas ofcommercial and business law. The programs under (e)-(g) above would be carried out in stages over the lifeof the PSP.

Project Implementation Support : The PSP has been structured to provide support to FGN's overallprivatization program, including divestitures and reforms in other sectors. To support BPE effectively inthis, and to build BPE's organizational capacity, while avoiding duplication of services, the projectimplementation support will be organized in the form of a team comprising full-time financial management(program accountant) and procurement support (including recruitment of two procurement specialists).

Pi-ocurement Capacitv: Given its ambitious scope and time frame timely execution of the prioritized PEdivestiture program during 2001-02 will depend critically upon highly competent and effective procurementof advisory and consulting services by BPE. Moreover, procurement skills are also important for themanagement of divestiture transactions and related bidding procedures. To address the need to build upBPE's procurement capacity quickly, BPE plans to undertake the following actions: (1) recruitment byend-September 2001 of two procurement specialists in BPE (at least one full-time) to train and backstopBPE staff, (2) giving priority to training of a critical mass of BPE staff in procurement and transactionswork in first half of 2001, starting with attendance of eight BPE staff at the December 2000 World Bankprocurement seminar in Abuja; (3) use of international procurement specialists on a short-term basis toassist with bid evaluations for selected major transaction adviser contracts during 2001/2, as alearning-by-doing support to BPE. (See Annex 6 for further details.)

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(3) Communications and Consensus-Building

NTCP/BPE Communications Program: As a key element of its privatization program , FGN hasrecognized the need for effective, comprehensive and broad-based communications and public awarenessraising program for all key stakeholder groups - including parliamentarians, government officials, unions,private sector, and other groups in civil society both nationwide and in different ethno-geographic regionsof the country. This effort will continue through the life of the PSP, with support from FGN, and the Bank,as well as USAID, UK-DFID and other donor agencies. During 2000, BPE has designed and launched amajor communications campaign to build stakeholder awareness and obtain stakeholder feedbackconcerning FGN's PE privatization program. Given the need to understand public concerns and to respondto these in an area as controversial as privatization and in a society as diverse as Nigeria, this effort isclearly well justified. NCP/BPE's communications program is focused upon both international as well asnational audiences, and upon building general awareness of Nigeria's privatization program, as well asupon communications campaigns in relation to specific transactions. The latter will be particularlyimportant for the major divestiture planned in telecommunications (NITEL), and in power (NEPA), forwhich separate campaigns will be started in 2001.

Key Program Components: The main elements of NCP's communications program - to be carried out byBPE with the assistance of expert international and local consultants and communications firms - are:(a) international marketing and promotion both for the overall privatization program, as well as for specificmajor PE divestiture transactions (aimed at eliciting interest of potential strategic investors); (b) nationwideand regional publicity and public awareness raising programs through the general media (broadcasting -TV and radio; and print), as well as focus groups (e.g. as already held for PE employees and unionmembers), and locally organized publicity and outreach campaigns; (c) nationwide and especially regionalpublicity and information campaigns in each of the thirty-six states of the Nigerian federation to elicitinvestor and saver interest in purchasing shares in PEs once divestiture to a strategic investor has beencompleted; (d) speeches and presentations internationally, nationally and locally by senior FGN officials -including from the NCP - involved in the implementation of the privatization program. These activities arebeing undertaken by intemational and national communications and public relations firms, under the overallmanagement of BPE's communications and public affairs department. Elements (a) and (c) above involveprocurement of consulting services, media time, as well as printing of prospectuses for specifictransactions.

B. Telecommunications

1. Market Structure and Sector Performance

The telecommunications sector in Nigeria remains underdeveloped and its potential unexploited. It has oneof the lowest telephone densities in the world, low even by African standards. In addition, access totelecommunications services in rural areas is almost non-existent. The FGN has estimated current totaldemand at around 3 million lines, although only about 100,000 people are currently on the official waitinglist, the rest having been discouraged by the lack of facilities, long waiting time and poor quality of service.

Existing operators, public and private, have failed to meet but a small part of this demand. NITEL, theincumbent monopoly provider of fixed services, has a small customer base of about 400,000. Its positivenet income reflects high international tariffs not efficient commercial management. The company isoverstaffed and its networks under-maintained. Mobile services are provided, in a limited way, by one

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state-owned operator, M-Tel, and a large number of private operators. The viability of these operators isundernined by their unfavorable interconnection terms with NITEL, lack of access to capital andmanagement experience, and high tariffs they charge to their customers. Other segments of the market,notably provision of Internet services and private networks for businesses, paging and public telephony arealso open to private provision, but Temain underdeveloped. The primary reason for this is again themonopoly power exerted by NITEL, to which the passive attitude of the Government has also contributedin the past.

2. Regulatory Environment

The Nigerian Communications Commission (NCC) was created by Decree No. 75 of 1992 to regulate theprivate telecommunications sector. This Decree establishes the Commission as a corporate body with aten-member board at its head, which is appointed directly by the President of the nation and can beremoved at any time. However, the NCC had operated since 1994 without a board, under the directmandate of its Chairman (the Minister of Telecommunications) and the Chief Executive Officer (CEO),placing NCC under the de-facto control by the Federal Ministry of Communications (FMOC). However, anew Board and CEO were appointed in February 2000 and April 2000 respectively. A prominent personfrom the private sector was appointed as the new NCC chairman. While the new Board and managementshould derive comfort from the new National Telecommunications Policy (NTP), they may find themselvesconstrained by the terms of the existing Decree. Until a new telecommunications law is enacted, the sectorwill continue to suffer from an uncertain regulatory environment (see below).

Under the Decree, the responsibilities of the FMOC and the NCC are not sufficiently and clearly separated,with numerous areas of overlap, notably in licensing and spectrum management (however, the new NTPdoes address this issue). Indeed, the frequency spectrum management function is insufficiently equipped,both in terms of material and human resources, to face the challenges of an increasing prominence ofwireless services, and equally insufficiently equipped is the NCC as a whole to face the challenges of aderegulated industry.

3. Government Strategy in the Sector

The Government plans to make the telecommunications sector a significant contributor to Nigeria'sdevelopment and economic growth and is engaging in a number of reforms. Specifically, these reformsinclude: (i) the development of a stable and predictable policy, legal and regulatory framework; (ii)strengthening of the regulator and further liberalization of the sector; (iii) the privatization of NITEL andthe establishment of a mechanism to promote private investments in rural and isolated areas of the country.As a preparatory step for the privatization of NITEL, FGN announced the merger of NITEL and M-Telunder the name NITEL and has provisionally allocated a digital mobile license to NITEL for US$285million (the price determined at the auction of the other digital mobile licenses).

In September 2000, the FGN approved a new National Telecommunications Policy (NTP) which delineatesthe future direction of the development of the sector in Nigeria. The following is a summary of the mainelements of the policy:

Competition. The policy aims at opening the sector for competition in all segments of the market.Accordingly, the NCC shall be authorized pursuant to the telecommunications law to issue operatinglicenses to all telecommunications service-providers to participate in all market segments. In order toachieve this goal of market-based competition in the sector, all operators will have mandatory access totechnically adequate and economically efficient interconnection with all other operators on a

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non-discriminatory and cost-oriented basis.

Regulation. The NCC shall be the independent regulator of the telecommunications industry. It shall beempowered to issue licenses, promote and enforce fair competition, regulate tariffs, assign frequencies,protect the interests of consumers, and regulate all telecommunications licensees and service providers. Toaddress the existing weakness in managing the frequency spectrum and the overlap in the responsibilitiesinvolved, the FGN plans to establish the National Frequency Management Council (NFMC) to plan andcoordinate this function. The NCC will be responsible for assigning and registering frequencies fortelecommunications service providers.

Privatization. In accordance with the principle that private market forces will dictate the development ofthe Nigerian telecommunications sector to the greatest extent possible, controlling ownership interest inNITEL shall be transferred from Government to strategic private partners and the company shall berestructured to implement modem operational and management practices. NCC will issue new licenses tothe operator, designating roles and responsibilities in the market. The privatization and restructuringprocesses shall be given highest priority, but shall not postpone or preclude other steps to open thetelecommunications market to further private investment and competitive operators.

Universal access. The Government plans to develop and incorporate universal access terms in the plannedlegislation and regulation and in the new licenses that will be issued. The Government is determined tofocus its role on taking cost-effective measures to remove obstacles that hamper the well-functioning of themarket. The NCC will establish an explicit process for defining universal access policy options andprograms, with participation by industry, community representatives, and other interested parties.

Internet development. Other Government objectives are to ensure that the Internet develops rapidly andthat inhabitants of rural and poor communities have adequate access to communications services. Theinitial steps will be to develop a strategy for rapidly improved Intemet access, information infrastructureand postal development. The Government plans to take several initiatives that will help ensure that rural aswell as urban areas benefit from reform, and help provide a strategy for further development of access tocommunications services.

4. Planned Activities and Phasing of Programs

The FGN has launched an effort to implement the policy elements summarized in the previous section. Theprogram includes: (i) developing a legal and regulatory framework for the sector; (ii) privatizing NITEL;(iii) Strengthening the institutional capacity of the NCC; (iv) modemizing the frequency managementsystem; and (v) developing a rural access strategy and implementing demonstration rural access projects .The following chart indicates the proposed phasing of activities involved and sets key milestones to achievethe goals of reform. While some activities have already taken place and others are on-going, the plannedactivities depicted are key to ensuring that the reform process is successful.

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Schedule of the Reform Program in the Telecommunications SectorQ3-2000 Q4-2000 Q1-2001 0 Q2-2001 Q3-2001 Q4-200 1 1-2002 Q2-2002

Jul lAugiSeplOct |Nov Dec Jan |Feb|Mar Apr IMay|Jun Jul |Aug|Sep Oct INovIDec Jan Feb|Mar Apr May|Jun

Nathonal Telecommunications Policy published by FGN 1 S - - - -…- -

Draft telecom law approved by Executive Council

_ _ w u __E__ ,_,,,..__l. *EE__E__.__.,,,___,NCC to issue new licenses to NITEL and M-TelNCC to award digital cellular licenses

NITEL offered for sale 31-Dec-01

NCbadto approve new organization and development plan ______________-__v

Cmecment of institutional development and training pro,qrammes_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Completion of Strategy Study _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Completion and approval of National Frequency Plan ll___________-tl-- Award contract for new RadioSpectrum Management3Sysunm

Aprove Rural Communications Strategy ||_______s

Announce Tender for Pilot Projedct _ t I I I I l I

Award Contract for Pilot Project(s) 31-May-02

Dated CovenantsDraft telecom law approved by Executive Council 30-Sep-01

NITEL offered for sale 31-Dec-01

Award contract for new RSM system 30-Jun-02

Award Contract for Rural Pilot Project 31-May-02

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C. Electric Power Sector

Electric Power Industry Structure and Performance

The National Electric Power Authority (NEPA) was created in 1972 as the public enterprise responsiblefor the power sector in Nigeria and for introducing the integrated national power supply system. NEPAundertakes five integrated but mutually exclusive functions: generation, transmission, distribution andsupply of electricity to electricity consumers and, since 1990, rural electrification.

NEPA's installed power generation capacity totals 5,888 MW, of which 3,950 MW (67 per cent) isthermal power plant and 1,938 MW (33 per cent) hydropower plant. This capacity is located in fivethermal and three hydro- power stations. NEPA's installed supply capacity is the second largest inSub-Saharan Africa (after that of ESKOM of the Republic of South Africa). Thus if all NEPA's installedgenerating capacity were in operation, NEPA would have sufficient capacity to serve nearly all of thedemand for power on its system, which is estimated to be presently over 5,000 MW. However, much ofthis capacity is non-operational or operates at sub-optimal levels because of poor operational practice andmaintenance. In particular, the power system suffers from low generating plant availability, high outageson the transmission and distribution network, high energy losses from generation to billings, a low rate ofaccess to electricity by the populace, and inadequate electricity tariffs. Consequently more than 90 percentof industrial establishments and huge numbers of commercial and residential establishments have installedand run their own power generators which produce electricity at high cost to themselves and to the Nigerianeconomy.

In the absence of investment and lack of maintenance in network capacity since the late 1980s, NEPA'stransmission and distribution networks are also in poor condition and overloaded. NEPA' s transmissionnetwork consists of around 11,000 km of transmission lines (operating at 330kV and 132kV), 24,000 kmof sub-transmission lines (operating at 33kV), about 19,000 km of distribution lines (operating at 1 lkV),and about 22,500 substations. Even with these impressive statistics, the network does not reach many statecapitals and numerous large towns, especially in the northem and south-eastern parts of the country, with163 of the 589 local government headquarters not connected to the national grid. To date, according toNEPA, about 3,685 towns and villages are connected to the national grid, 80 percent of which are in ruralareas. The transmission network is poorly configured for reliability, since lines follow a radial pattern withfew loops and parallel routes to improve the reliability of supply to load centers. The 132 kV transmissionlines extend over distances that are too long to support their loadings reliably.

NEPA incurs high losses on its system due to the under-investment and poor maintenance noted above, andalso due to electricity consumed from illegal connections and from under-billing (because of broken ortampered meters, fraud by consumers and meter readers, as well as NEPA's inability to bill regularly).

The facilities at the National Control Center (NaCC) for the power system have fallen into disrepair due tolack of maintenance. Its SCADA communication system has never worked properly, allegedly because of

-the poor condition of NITEL's network. In addition, transmission meters are old and poorly calibrated.Hence NaCC has little reliable information on which to manage load flows in the power system.

NEPA currently has about 32,700 people on its payroll, whereas more efficiently run power utilities withfacilities of comparable magnitude to NEPA's employ fewer than 20,000 people.

Despite NEPA's legally-endowed monopoly, a substantial number of small independent power supplysystems have been developed around Nigeria independently of NEPA because of the latter's failure toextend service to large parts of the country. Many households beyond the reach of NEPA's network havetheir own individual generators. Reliable statistics on the numbers of electricity consumers who are notsupplied by NEPA are not available, but it is estimated that they may account for 10 per cent to 15 per cent

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of the population, in which case between 25 per cent and 30 per cent of the population have access toelectricity. Most industrial and commercial establishments in Nigeria have their own power generators tosupply all their power needs or as stand-by capacity to NEPA's supply. The total installed capacity ofdiesel and gasoline-fueled autogenerators amounts to at least about 2,100 MW. This situation is estimatedto increase the energy costs of Nigerian manufacturers by up to 30 per cent.

Regulatory Environment

NEPA was established as a statutory authority through Decree Number 24 of 1972. Its operations fallunder the general surveillance of the Federal Ministry for Power and Steel. Presently there is noindependent regulatory agency that monitors the power sector. Following the then government's removal ofthe boards of directors of parastatals in the mid-i 990s, NEPA's management has reported directly to theFederal Ministry of Power and Steel. The Ministry has the conflicting roles of sector policy maker, sectorregulator and owner's representative for the main power supplier to that market.

Government imposed on NEPA civil service bureaucratic practices, including control of salaries and wagesat levels well below competitive market rates, as well as political objectives and patronage on labor hiringand construction of new facilities. Many of NEPA' s skilled workers have left to operate privately owneddiesel plants or to work in the oil sector where wages are 500 percent higher than they received at NEPA.FGN has refused to allow NEPA to increase its tariffs to offset increases in costs and to meet financialobjectives, and it has withheld funds that it approved for maintenance. NEPA is blamed by the public,Government, and industry for its poor performance, but its problems are also caused by lack of autonomyand excessive govemment interference, particularly in the areas of procurement, finance, tariffs andpersonnel.

Following increases in power outages over the previous months and culminating in two system-widecollapses of NEPA's supply in March. 2000, the President of the Federation personally intervened to stemthe mounting political crisis by announcing on March 14, 2000 the removal of the two top layers ofNEPA's management (the Managing Director and the Executive Directors) and the appointment of anine-member Technical Board which reports directly to him. The President gave the Board the followingfunctions:

Assume executive powers with immediate effect over the affairs of NEPA and for theimplementation of the emergency directive to rescue the dire situation.

Kick-start the countdown to the deadline for regular and dependable power to the nation.

Put NEPA into a suitable shape and condition for privatization, as stated in Government'sbroader economic policy.

FGN's Emergency Action Plan for the Sector

FGN has outlined a five-part emergency plan to avoid further collapses of the power system and to reducethe severe power shortages. This strategy consists of the following components: (i) rehabilitation of asubstantial part of NEPA's production and delivery capacity; (ii) concessioning the operation of somepower stations to private operators under Rehabilitate-Operate-Transfer (ROT) type schemes; (iii) anEmergency Power Project (EPP) of short-term contracts with private power producers to provide additionalpower under Build-Own-Operate (BOO) arrangements; (iv) long-term contracts to purchase power fromprojects developed under Build-Own-Operate-Transfer (BOOT) arrangements by independent powerproducers (IPPs); and (iv) connection to NEPA's network of generating units located at industrial plantsand presently under-used or not operational. Government has requested the World Bank to provide

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technical assistance and partial risk guarantees and IFC funding for the ROT and EPP components, and tohelp fund the strengthening of NEPA's transmission and network control systems.

The first component of this strategy and an up-to-date estimate of the financing requirements forrehabilitation is given in NEPA's "Action Plan (Uninterrupted Power Supply by December 2001)" that waspresented in late April 2000 to the President by NEPA's Technical Board. The Plan aims to enable NEPAto provide uninterrupted power supply by the end of 2001, by having at least 4,000MW of generatingcapacity in operation mainly through rehabilitation of 1,000 MW of generation capacity that is presentlyout of service by the end of 2000 and a further 1000 MW by the end of 2001. The plan also includesrehabilitation of transmission and distribution networks to improve the reliability of these networks, and theinstallation of one million pre-payment meters to improve collection of payments from power consumers.NEPA estimates the financing requirement for the plan to be about Naira 30 billion to the end of 2000 andan additional Naira 26 billion to the end of 2001 (about US$550 million in total).

The ROT concessionnaires will help improve power supply by bringing on-line generating units that havebeen off-line for some time through lack of maintenance, and by operating units at higher utilization ratesthan achieved by NEPA through better operating and maintenance practices. NEPA have retainedengineering and legal advisors to prepare the documentation for soliciting requests for proposals fromprivate power plant operators to put the Afam and Sapele thermal power stations out to the first ROTconcessions, possibly with the availability of a World Bank partial risk guarantee. 'The terrns of theseconcessions will be designed to avoid complications for the restructuring and privatization of NEPA'sfacilities. Once the process for these stations is well advanced, NEPA will start a similar process for otherpower stations. NEPA may require credit support from Government to enter into power purchaseobligations under the terrms of the ROT concessions.

The EPP consists of buying power under short-term contracts from private power producers who wouldinstall generating capacity quickly for this purpose. Following President Obasanjo's request, the Bankassisted FGN to retain international consultants (funded from the PPF for the PSP) to help prepare acompetitive bidding process for an EPP of about 450 MW. The EPP generating units would be located inthe southem thernal power stations (Egbin, Afam, Sapele) for ease of connection to NEPA's transmissionnetwork and Nigeria National Petroleum Corporation's gas pipelines. Electricity offered by EPPcontractors could cost around US 4 to 5 cents/kWh, depending on the duration of the power salesagreement (three to five years) and the cost of gas supplied to the units, which is higher than NEPA'saverage sales revenue. Government may also have to provide credit support to NEPA for entering into theEPP contracts. Government advertised a request for Expressions of Interest (EOI) from contractors to bidfor the EPP contracts, and received an excellent response. The Request-for-Proposals documentation hasbeen drafted by consultants and reviewed by the EPP task force set up under the NPC.

Many IPPs have approached Government and NEPA during 1999 and 2000 with unsolicited proposals todevelop power generation plants under project financing arrangements with long-term (15 years and longer)power sales agreements, and MOUs have been signed for some of them. Most of these IPPs proposegas-fired combined cycle plants. This shows that IPPs view Nigeria as a significant potential market,although major issues conceming credit structure and long-term power off-take arrangements in particular,have to be resolved. Hence a power sales agreement (PSA) has been signed for only one of theseproposals, which happened on December 6, 1999 between the Lagos State Government , NEPA and EnronNigeria Power Holding Ltd. for the installation and operation of electricity generation facilities inn theLagos area, with the FGN as guarantor. The project will provide 270 MW of emergency power frombarge-mounted generators to improve power supply to the Lagos area. The public controversy thatsurrounded the Enron Lagos project after signature of the PSA, led to renegotiation of some of the termsand a new agreement being signed in July, 2000.

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In addition, FGN is focusing on short term ways to improve the collection of revenues from NEPA'scustomers. NEPA's Action Plan thus includes provision for installing one million pre-payment meters byend-200 1. Government has also anmounced its intention to prosecute more forcibly than previously anyNEPA staff or power users that defraud NEPA. The more sustainable solution of putting out customerservices to private licensees or contractors under concessions is mentioned as a long-term option in NEPA'sAction Plan. Hence NEPA is planning to undertake during 2001 a pilot project for concessioning billingand collection to assess the feasibility of using this approach.

FGN's Policy for Reforming the Power Sector

FGN is preparing a major and far-reaching reform and restructuring of Nigeria's electric power sector thatincludes early opening of the sector to private participation. FGN's policy for reforming the power sector isenunciated in a formal policy statement entitled "National Electricity Policy" that was approved in March2001 by the Federal Executive Council. This policy statement sets out the new institutional arrangementsfor introducing competition and an appropriate regulatory framework to the power sector. Under thispolicy, Government will focus on providing overall direction for the development of the power sector,ensure the general consistency of electric power policy with other national policies, and enact promptly thenecessary laws, regulations and other measures required to support its policies. The Federal Ministry ofPower and Steel will propose policy options to FGN concerning legislation, policy on investments, etc.,monitor and evaluate the implementation and performance of government policy, and establish and monitorpolicies for increasing access to electricity, particularly in rural and semi-rural areas. State governmentswill have responsibilities for the development of off-grid electrification.

The new policy lays the basis for creating an industry structure that will develop competition byestablishing a number of privately-owned or concessioned generation companies that will eventuallycompete for the custom of distribution companies and large users of electricity. This structure would beachieved by the following means: (i) unbundling NEPA's vertically integrated structure into severalgeneration and distribution entities and a transmission entity that would also act as the national electricitydispatch entity/system operator, (ii) divestiture of the state's ownership in the generation and distributionfacilities, (iii) allowing private independent power producers (IPPs) and electricity suppliers to enter thepower market, and (iv) establishment of arm's-length trading mechanisms among these entities.

Competition in the wholesale power market would be developed in stages once the industry is restructured.In the first stage, competition would be limited to competitive bidding to take over some of NEPA's thermalpower stations under medium term Rehabilitate-Operate -Transfer (ROT) concession agreements withNEPA initially that would be re-assigned to a special purpose entity (SPE) to be set up after the enactmentof the necessary legislation in order to facilitate the unbundling of NEPA's functions. This stage wouldalso cover the competitive procurement of long-term power supply from up to 1500MW of new generatingplants developed by lPPs with the benefit, as needed, of FGN's credit support. In the second stage, oncethe new entities formed from the restructuring of NEPA are set up and largely privatized, and the newsector regulatory agency and regulations are in place, competition would evolve into rights to enter intobilateral contracts between generation and distribution companies, so that each distribution company wouldhave a portfolio of power purchase contracts with various generators, and each generator would have aportfolio of power sales contracts. The first group of these bilateral contracts would probably originatefrom the SPE by spinning off its power purchase obligations under agreements with ROT concessionnairesand IPPs to the new distribution companies.

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The power market would evolve further over time by allowing competition to develop in the retail powermarket as well as more deeply in the wholesale power market, as sufficient new generation capacity isbrought on stream to cover demand fully, the transmission and dispatch systems are modernized, anddistribution company commercial performance is established and improved. Competition in the marketwould be developed over the long-term by (i) allowing large users of electricity to purchase directly fromgenerators or electricity suppliers, (ii) removing retail sales monopolies from the franchises of distributioncompanies, (iii) separating the retail sales business of distribution companies from the low voltagedistribution business with limits on cross-ownership; (iv) deepening the wholesale market by means of apower pool that has formal membership rules and procedures, (v) ultimately allowing competition to reachextensively into the retail power market with open access for suppliers to the low voltage distributionnetwork.

The new policy provides for the establishment of the National Electricity Regulatory Commission (NERC)as an agency independent of both the government and of all companies operating in the sector. NERCwould regulate the power sector with powers, duties and a constitution laid down in a new Electricity Act,and would issue licenses to companies operating in the Nigerian power market. Through these licenses,NERC would be responsible for (i) decisions on regulatory approval for electricity tariffs, (ii) business andcapacity expansion plans for generation, transmission and distribution, (iii) enforcement of competitionover the transmission network including regulation of transmission connections, transmission access rightsand fair cost reflective use-of-system prices, (iv) enforcement of competition over electricity generation,distribution and sales, (v) ensuring that major investments for expanding generation capacity are carriedout by competitive tender, (vi) setting and enforcing national quality standards, and (vii) enforcing the legalrights of consumers. NERC's activities would be funded from sources independent of FGN's budget suchas license fees and charges for its services to the industry.

The detailed design of the new power regulatory body would be based upon a review of institutionaloptions, based upon recent international experiences.

Preparations for NEPA's restructuring and ultimate divestiture are being accompanied by a major effort toensure improved basic availability and reliability of power supplies in 2001-02, through NEPA's actionplan to rehabilitate its existing supply facilities, through contracting out management of NEPA generationplants to private operators on a rehabilitate-operate-transfer (ROT) basis, through competitive selection ofnew private independent power producers (IPPs), and an emergency power program (EPP). This isbecause of the fragile state of NEPA's power network, which has suffered total system collapses forseveral days as a result of the long backlog of insufficient maintenance, and of under-investment,inadequate management, weak finances and inadequate and non-transparent organization and practices.FGN thus has to address the following four short-term priorities to have a reasonable prospect ofsuccessfully moving power generation, distribution and supply into private control in accordance with itsnew policy for the power sector: (i) fulfill a commitment to significantly reduce power shortages in2001-02, (ii) manage the process of private entry into power generation without jeopardizing sectorviability or unduly increasing the costs of power supply, (iii) attract reputable investors to the Nigerianpower sector, and (iv) restructure NEPA's functions in preparation for privatization and the developmentof a competitive trading environment for power.

These priorities will be addressed under a short-term plan for the power sector that is under preparation byFGN. This plan consists of the following main elements: (i) provide strong, unified leadership for the powerreform program, (ii) initially place the generating units in two of NEPA's thermal power stations (Afamand Sapele) under private control through ROT-type concessions by mid-2002, followed by placing thegenerating units at Delta power station and possibly Egbin power station under ROT-type concessions by

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end-2002, (iii) implement a substantial interim tariff increase to start the process of moving tariffs to covercosts fully, and put in place an automatic tariff adjustment plan that accounts for changes in the exchangerate, inflation and fuel prices, (iv) contract out to private agencies the billing and collection of payments forsome of NEPA's customers, (v) limit the amount of long-term power purchase commitments with IPPs toagreements for which the payment commitments are fundable from net revenues and, if needed, directbudgetary support, and ensure that the terms for credit support and other provisions are not detrimental tothe unbundling and privatization of NEPA's power supply and distribution business, (vi) establish a specialpurpose entity to take over NEPA's obligations to purchase power from private producers, with adequatefinancial support for this purpose, and (vii) undertake a program to eliminate vandalism to major powersupply facilities and substantially reduce vandalism to other power supply facilities.

The policy also provides the basis for developing a strategy for expanding access to electricity by thepopulace in rural and peri-urban areas.

In 1999, FGN created a sector reform implementation committee - the Electric Power ReformImplementation Committee (EPIC) - specifically to spearhead and coordinate the planned reforms in thepower sector. EPIC is chaired by the Minister of Power and Steel, its secretariat is provided by BPE, and itcomprises government, private sector and other stakeholder representatives involved with the power sector.Key elements of the power reform have been delegated to seven sub-committees dealing with the followingsubjects, which report to EPIC: legal and regulatory, electricity market and design, regulatoryagency, technical and environmental, corporatization, policy interface, and community outreach. EPIC wasresponsible for preparation and consensus building for the new National Electricity Policy adopted by FGNin March 2001. EPIC is expected to act as the focal point bringing together key stakeholders to implementthe short term power program for 2001-02. To this end, and given the magnitude and importance of thepower reform agenda, a full-time power team will be set up to support EPIC - comprising four to fiveNigerian professionals with private sector and prior power sector experience - recruited on a contract basis- as well as an international power specialist and short-term consultants to handle specific specialistaspects. This team will be recruited quickly in mid-2001 for a period of 1-2 years initially.

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Milestones of Reform for the Electric Power Sector1420002 01-2001 02-2001 03-2001 042001 Q1-2002 Q2-2002 Q3-2002 04-2002 Q1-2003

Oct Nov Dec Jan Feb Mar Apr Ma Jun Jul Au Sep Oct Nov Dec Ja feMar Apr Ma Jur Jul Au Sep No, Dec Jan Fel Mar

Power Policy Statement Approved _ _ _ _ ____ Establish Project Advisory and Monitoring Team 1 _ T _ 11Prepare rural electrification strategy

LeD l-s dru an eerativ-ns-orsn startwork II I I I I I I I I I IIPresentElectricityLawforreviewbyNationalAssembly -| -| | | r T I | -

Electricity Law passed and enacted |Interim tariff increase implementedSecond tarff increaseNational Electricity Regulatory Agency established | -|

Distribution andgenerationlicenses approved

Start contracting NEPAs billing/collection to private management l IRestructuring & corporatisation advisors start work | | i I I|UnbundlingofNEPAcompleted - - I - - - - - - - - - - - - - e 2003First stage upgrade of transco communicabtons complete end2003New power trading arrangements go 'live' - I Z I f I g . .Sustainable nnancial package approved by )-UN 1Special purpose entity establishedTwo NEPA power stations under ROT concessions - - - - - - - - - - - - - -1 -1Two more NEPA powerstations under ROT concessions… I | -| I I I I -I -T - - IPrivatization and transaction advisors start work - - - - - - - - - - - -I - -

Privatzation strategy approvedSaleoflstgroupofdistributionJSCscompleted -I I i I I I I - - -1 1 1 1 -1 1 ' I - -

Sale of 2nd group of distribution JSCs completed |-- | | | -| - I | | | -| | | | | - end-2004

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