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• A region rich in natural resources, but unevenly distributed: The Middle East and North Africa (MENA) region has about 57% of the world’s proven oil reserves and 41% of proven natural gas resources. However, great gaps exist between countries rich in natural resources and countries dependent on such resources;
• Near-universal electricity access with some unserved areas: With an average electrification rate of about 90% and many countries performing close to 100%, overall access to electricity is good, but an estimated 28 million people still lack access to electricity, especially in rural areas, and about 8 million people rely on biomass for all their energy needs;
• Little efficiency and environment friendliness: In many countries, petroleum prices are distorted, cost recovery in electricity is low, efficiency of supply leaves a lot to be desired and energy intensity is relatively high. Carbon intensity is, on average, higher than in Organization for Economic Co- operation and Development ( OECD) countries, and the potential for renewable energy is under-explored;
• Growing macro-economic cost: The burden of the electricity and petroleum product sectors on government finances is still increasing in many countries and is becoming unsustainable;
• Lack of private investment: The region is lagging behind in implementing reforms in the electricity sector;
• Growing demand: Population growth, rapid urbanization and economic growth are putting pressure on existing infrastructure and relatively high demand for new investments. Over the next 30 years, the total investment needs in energy in the region are estimated at over US$ 30 billion a year, or about 3% of the region’s total projected GDP over the period (which is three times higher than the world’s average);
• World oil prices that remain very high: The continued high prices of fuels are straining the finances of many net importing countries, both at the government and the utility level, and increasing the opportunity costs of subsidized energy at home for the oil exporters.

Key Issues in the Sector:
There are considerable differences in the situation of the energy sector in the MENA region and solutions will have to be tailored to each individual country and situation. There are, however, a number of common issues:

• In most countries where oil and gas resources are large, but per capita incomes have been falling, price distortions are considerable and cost recovery in electricity is low. In many countries this has led to inefficient use of supply, high energy intensity in energy use, increasing environmental problems, and a rapidly increasing burden on government finances;
• In countries which are net importers of fossil fuels, price distortions are less and cost recovery in the electricity sector has been somewhat better. However, the challenges they face on how to cope with high oil prices while financing the rapidly growing demand for energy in general, and electricity in particular, remain;
• Overall in the region, there is much scope for reducing the cost of supply of electricity, improving the efficiency of supply and energy conservation, as well as the development of renewable energy resources.
  World Bank Recommendations
  To respond to the many regional challenges, the World Bank’s efforts to further increase access to energy services and promote the use of renewable energy per se are complemented by the tackling of additional important social, economic and environmental issues in the energy sector, such as:
• Reducing the burden of the energy sector as a whole on government finances, a key pre-requisite for fiscal stability in MENA countries;
• Ensuring the delivery of energy services in line with economic growth in a financially sustainable manner, and increasing access to energy services;
• Safeguarding the environment and its key natural resources by improving the efficiency of resources management, especially fuel resources, and increasing the role of renewable energy in the region.
  More specifically, through its energy strategy in MENA, the Bank seeks to:
• Promote the efficient and sustainable use of energy resources through: (i) introduction of appropriate pricing policies in the oil, gas and electricity sectors which provide incentives for increasing efficiency; (ii) adjust prices in a phased manner that ensures cost recovery and creditworthiness of enterprises in the sector to enable them to access domestic and foreign capital markets to finance their expansion, while protecting vulnerable groups through lifeline rates and/or well targeted subsidies; and (iii) where relevant, revenue management.
• Help to improve the overall investment climate to enable the private sector to invest in the energy sector and to help improve the management and efficiency of supply. Private sector participation could, apart from sale of assets or shares in existing companies, include various forms of concessions and management contracts, private independent power and water producers, contracting out operation and maintenance, billing, metering and bill collection and other services, as well as other forms of public-private partnerships. Participation by the local and regional private sector should be encouraged and attention should be given to the development of domestic capital market instruments.
• Assist with implementing legal and regulatory reforms , which separate policy making, regulation and operations, and emphasize the need for providing energy at the lowest possible cost while taking into account the need for sustainable use of natural resources, as well as opening up the sector for private sector participation and the introduction of competition. Where feasible, this would include the promotion of increased use of natural gas for power generation, development of renewable energy resources; better integration of electricity and water production (desalination) and promotion of regional trade in electricity and natural gas.
• Assist with the restructuring of the electricity sector which, depending on the situation in the country and size of the power system, could include the unbundling of the integrated utilities in separate companies for generation, transmission and distribution; and the establishment of an independent systems operator. Even when privatization is not immediately anticipated this would enable transparency to increase and the introduction of benchmark competition.
• Assist in improving energy efficiency and reduction of energy intensity. Apart from the introduction of appropriate pricing policies and other incentives, include: (i) facilitating the introduction of energy efficient equipment and standards; (ii) the establishment of energy services companies and development of appropriate financing mechanisms; (iii) the introduction of stricter building codes and load management devices for large domestic consumers and industrial and commercial establishments; and (iv) help with the reduction of gas flaring.
• Promote the use of renewable energy resources. Although many of the energy resource poor countries have started to promote renewable energy resources such as wind, solar power, and large or small scale hydropower, there remains considerable scope for further development, especially in the light of the current high oil prices.
• Assist in tackling the potential for carbon finance in the region.
   

World Bank Lending and AAA Activities:
The Bank energy portfolio has shown substantial growth over the past year, reflecting the increasing client demand for its assistance in the sector, consistent with the Bank’s renewed emphasis on infrastructure services to alleviate poverty.

The Bank counts today seven investment projects under supervision , aggregating to about US$566.6 million [the Djibouti Power Access and Diversification project, the Egypt El-Tebbin project, the Yemen Power Sector project, the Iraq Dokan and Derbandikhan Emergency Hydropower project, the Iraq Emergency Electricity Reconstruction project, the Lebanon Emergency Power Reform and the Egypt Natural Gas Connections project], plus a Partial Risk Guarantee for the Jordan Amman East Power Plant project, a Partial Risk Guarantee for the Morocco Jorf Lasfar Energy Project, a Partial Credit Guarantee for the power sector in Lebanon, four Global Environmental Fund (GEF) operations amounting to a total of US$102.3 million (the Yemen Rural Electrification and Renewable Energy Development, the Tunisia Energy Efficiency Program project, the Morocco Integrated Solar project and the Egypt Kureimat Solar Thermal Power project) and two Development Policy Loans amounting to US$200 million for the Morocco Energy Sector and the Lebanon Reform Implementation Development Policy Loan.

With ten additional projects under preparation amounting to a total of about US$668 million, the portfolio continues to grow. Indeed, MENA counts today seven investment projects under preparation, one Energy Development Policy Loan (in Morocco) one guarantee (in Lebanon ), as well as GEF and climate change activities (estimated at over US$60 million), which address the issues of energy efficiency and renewable energy (mostly wind and solar). Furthermore, the growth is reinforced by the potential of recent developments in the carbon finance area, which have already led to the preparation of a project in Algeria on gas flaring reduction, Tunisia on cogeneration and Yemen on loss reduction, all of which have potential to be eligible as Clean Development Mechanism (CDM) activities.

In addition to its investment portfolio, the Bank is currently carrying out analytical and advisory energy work in most countries of the region, including a strategic dialogue on the sector with Djibouti, Egypt, Syria, Iran, Jordan, Saudi Arabia, Lebanon, Tunisia, Morocco, West Bank and Gaza, and Yemen . Furthermore, the Bank has launched a regional study on Energy Efficiency. Finally, the Middle-East and North Africa Energy Group is involved in a technical co-operation program with the GCC countries on a refundable basis, notably in Saudi Arabia, Bahrain and Kuwait.

While the MENA region makes good use of the large range of trust fund and grant facilities [e.g. Public-Private Infrastructure Advisory Facility ( PPIAF), Energy Sector Management Assistance Program (ESMAP), the Carbon Fund, the Gas Flaring Initiative, etc.], many of the activities above are also carried in close partnership with donors in the region (especially with Arab and Islamic Funds, GEF, Agence Française de Développement (AFD), Department for International Development (DFID), United States Agency for International Development (USAID), the European Investment Bank (EIB), the European Union (EU), the African Development Bank ( AfDB), Japan Bank for International Cooperation (JBIC) and German Agency for Technical Cooperation (GTZ).

All dollar figures are in US dollar equivalents. April 2008