Afghanistan - First Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3496 PROJECT PERFORMANCE AUDIT REPORT AFGHANISTAN: FIRST POWER PROJECT (CREDIT 627-AF) June 12, 1981 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT AFGHANISTAN: FIRST POWER PROJECT (CREDIT 627-AF) TABLE OF CONTENTS Page No. Preface ...................................i Project Performance Audit Basic Data Sheet ........................ ii Highlights .............................................. ........ iii PROJECT PERFORMANCE AUDIT MEMORANDUM I. Project Summary ................................1..... II. Main Issues .......................................... 2 DABM's Charter ...............................2...... 2 Financial and Institutional Performance ............... 3 III. Conclusions ...........5............................. 5 ATTACHMENT: PROJECT COMPLETION REPORT I. Introduction .......6................................ 6 II. Project Identification, Preparation and Appraisal ....... 7 III. Implementation ....................................... 10 IV. Operating.Performance ................................. 13 V. Financial Performance ................................... 14 VI. Institutional Performance ............................... 16 VII. Economic Re-Evaluation .................................. 18 VIII. Association's Performance ............................. 19 IX. Conclusions ................................. ......... 20 Annexes: 1. Main Covenants of Credit Documents 22 2. Project Cost Estimates 25 3. Schedule of Disbursements 26 4. Sales of Electricity 27 5. DABM's Tariffs Prior to January 1977 28 6. Electricity Tariff (effective January 21, 1977) 29 7. Five Year Electrical Energy Loss Reduction Program 30 8. Income Statements for the Years Ended March 20, 1976-1980 32 9. Calculation of Return on Investment 33 ap This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 1 - PROJECT PERFORMANCE AUDIT REPORT AFGHANISTAN: FIRST POWER PROJECT (CREDIT 627-AF) PREFACE This report presents the results of a performance audit of a power project financed by the Bank Group in Afghanistan, for which Credit 627-AF was approved in May 1976 in the sum of US$10.0 million. The credit was fully disbursed in June 1979. The Project Performance Audit Report consists of a Project Perfor- mance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Europe, Middle East and North Africa (EMENA) Regional Office. No field visit was undertaken by OED staff, but a combined supervision/completion mission was carried out by the Region in June 1979. -OED has reviewed the PCR, the Appraisal and President's Reports, the credit documents and the minutes of the Board discussions. Correspondence with the Borrower and internal Bank Group memoranda on the project's issues, as contained in relevant Bank Group files, have also been consulted and discussions with IDA staff associated with the project have been held. Views were obtained from the Canadian International Development Association (CIDA) on the technical assistance program associated with the project. In view of the unsettled conditions in the country, a copy of the draft PPAM was not sent to Afghanistan for comments. On the basis of the above review, OED is in agreement with the principal analysis and conclusions in the PCR. However, in addition to summarizing the main concept, history and results of the project, the PPAM comments further on the issue of revising the charter of Da Afghanistan Breshna Moassessa (DABM) and on the achievements under CIDA's technical assistance program. u - ii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET AFGHANISTAN: FIRST POWER PROJECT (CREDIT 627-AF) KEY PROJECT DATA Appraisal Item Estimate Actual Total Project Cost (US$ million) 11.0 13.9 Overrun (%) - 26.7 Credit Amount (US$ million) - 10.0 Disbursed ) - 10.0 Cancelled ) December 31,1980 - - Repaid to - - Co-financing (US$ million) 1.1 1.1 Date for Completion of Physical Components 11/77 10/78 Proportion Completed by Appraisal Target - (1st unit, 95%; Date (%) 2nd unit, 90%) Proportion of Time Overrun (%) - 30% Incremental Financial Rate of Return (%) 7.1 negative/a Financial Performance - Reached expectations in 1978/79. Institutional Performance - Mixed; progress good in some respects and less so in others. Cumulative and Actual Disbursements (US$ million) June 30, 1977 June 30, 1978 June 30, 1979 (i) Appraisal Estimate 5.500 10.000 10.000 (ii) Actual 1.160 9.951 10.000/b (ii) as % of (i) 21.1 99.5 100.0 OTHER PROJECT DATA Original Plan Revisions Actual First Mention in Files or Timetable 04/71 - 04/71 Government's Application - - 02/731 Negotiations 10/15/74 04/08/75 02/23/76 Board Approval 11/15/74 05/27/75 05/04/76 Credit Agreement Date - - 05/17/76 Effective Date 08/16/76 - 11/10/76 Closing Date 06/30/78 - 06/30/79 Borrower Republic of Afghanistan Executing Agency National Power Authority (DABM) Fiscal Year of Borrower March 21 - March 20 Co-financier Canadian International Development Agency (CIDA) Follow-on Project Name None MISSION DATA Month/ No. of No. of Man- Date of Item Year Weeks Persons weeks Report Preappraisal 02/75 3 1 3 02/75 Appraisal 06/75 4 3 12 04/76 Total 7 4 15 Supervision I 08/76 1 1 1 09/76 Supervision II 06/77 3 2 6 06/77 Supervision III 11/77 1 1 1 12/77 Supervision IV 09/78 1 2 2 10/78 Supervision V 06/79 2 3 6 06/79 (also for initiating preparation of PCR) Total 8 9 16 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Afghani (Af) Year: Appraisal Year Average Exchange Rate: US$1 = Afs 56.86 Intervening Years Average: 1977 US$1 = Afs 47.5 1978 US$1 = Afs 39 Completion Year Average US$1 = Afs 47.G/d /a See PCR para. 7.1. /b Fully disbursed in June 1979. /c This was for assistance in the sector. /d As of September 1979. s 4 - iii - PROJECT PERFORMANCE AUDIT REPORT AFGHANISTAN: FIRST POWER PROJECT (CREDIT 627-AF) HIGHLIGHTS The credit of US$10 million provided funds for the erection of a gas turbine station with two 20-MW units. In addition, a technical assistance program, financed by the Canadian International Development Agency (CIDA) in close coordination with the Bank Group, provided utility experts to help improve the operation of Da Afghanistan Breshna Moassessa (DABM), the national power authority responsible for executing the project. Physical achievements under the project were close to expectations, albeit with a cost overrun and time delay. Energy losses were reduced signif- icantly due to the successful implementation of a detailed loss detection and survey program. Financial improvements were made. However, institutional objectives fell short of expectations. The following points are of special interest: - reasons for the success in reducing energy losses (PCR paras. 5.2.1 - 5.2.3, 9.2.1b and PPAM para. 4 and Annex 7); - the issue of revising DABM's charter (PPAM paras. 4, 7-11); - a tariff increase accompanied by changes in the tariff structure led to a change in the consumption pattern, and hence to a lower- than-expected increase in average revenues (PPAM paras. 4 and 15, and PCR paras. 5.1.1-5.1.2); - the beneficial effects of the reduction in energy losses on DABM's financial situation demonstrate the potential for cost-reducing policies to complement if not replace tariff increases (PCR paras. 5.24 and 9.2.1a).  - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM AFGHANISTAN: FIRST POWER PROJECT (CREDIT 627-AF) I. PROJECT SUMMARY 1. Credit 627-AF, the only lending operation so far to the power sector of Afghanistan, helped finance two combustion turbine units of 20 MW each to alleviate energy shortages in the Kabul area during dry periods (PCR paras. 2.2.1 - 2.3.2). Equally important objectives were to help Da Afghanistan Breshna Moassessa (DABM): (i) improve its organization; (ii) revise its charter; (iii) secure urgently needed improvements in the financial area; (iv) develop its long-range planning; (v) reduce system losses; and (vi) improve its management and accounting systems (PPAM para. 14). 2. The physical part of the project was implemented as planned but took about eleven months longer to complete than originally envisaged (PCR paras. 3.2.1 - 3.2.3.). This did not affect the supply of power (PPAM para. 5). Delay in the preparation of bid specifications and unfamiliarity with the type of civil work involved in the project contributed to the time overrun. The actual cost of the project, in US dollars, was about 21% higher than estimated at appraisal and was almost entirely due to depreciation of the US$ relative to the currency of the supplier of the combustion turbines (PCR para. 3.3.1 and Attachment 2). 3. Since the commissioning of the combustion turbines, in October 1978, it has been noted that the fuel transfer pump has a design fault which pre- vents using the full quantity of fuel stored in the tanks. During the last supervision mission, in mid-1979, the consulting engineers were asked to look into the matter. 4. Institutional achievements fell short of expectations (PCR para. 6.1.1 - 6.1.6). DABM's charter was never changed to reflect the principles agreed with IDA at the time of negotiations (PCR paras. 6.1.2 and 8.1.2(b) and PPAM paras. 7-11). DABM has continued to operate with no delegation of authority and most decision-making is confined to the highest levels of government. On the positive side, according to the PCR, DABM was successful in reducing its energy losses from about 43.1% in 1975/76 to about 24.8% in 1978/79 (PCR paras. 5.2.1 - 5.2.3), a very creditable performance. A power sector development plan was prepared, although with some delay (PCR, para. 6.1.1 and PPAM, para. 17) and training was provided to both lower level and higher level staff, particularly in the field of accounting (PCR, para. 6.1.4). Progress was achieved in improving DABM's financial performance. A new accounting system was installed with the help of consultants financed under the CIDA technical assistance program (PCR paras. 5.3.1 and 6.1.3), but there is still room for improvement, particularly in the area of customer and stores accounting (PCR paras. 5.2.5 - 5.2.6, 6.1.3 - 6.1.6 and PPAM para. 16). - 2 - A tariff increase was implemented in January 1977, together with a change in the tariff structure which benefits the smaller consumer and charges progres- sively more for higher levels of consumption (PPAM para. 15 and PCR para. 5.1.2). Following the tariff increase, the financial results were somewhat better than the interim objectives agreed with IDA, but without further tariff increases it is doubtful that DABM will achieve a minimum return of 8% (after taxes) on the average value of its net fixed assets in 1980/81 as stipulated in the project agreement (PPAM para. 15). 5. Actual sales of energy were close to the appraisal estimates. The delay in commissioning the two generating units did not adversely affect the power supply in the Kabul area as the hydrological conditions during 1977/78 were exceptionally favorable and DABM was also able to meet about 70% of its growing electricity sales through a significant reduction of energy losses (PCR para. 4.1.2 and Annex 4). At appraisal, power generation in the Kabul area was based mainly on hydroelectric stations. Thus, the two oil fired turbine units were intended for peaking purposes and to help alleviate the energy shortage during dry periods, and represented the only feasible option within the available time frame. The incremental financial rate of return (IFRR) on the investment was estimated at 7.1% at appraisal using incremental revenues as an approximation for benefits. Due to the disturbed conditions in the country since 1979 and the disrupted supply from the existing hydro plants which has ensued, the two units have been operating close to maximum capacity since the latter part of 1979 (PCR para. 4.1.3). The IFRR on the investment is now estimated to be negative, due mainly to the fact that the cost of fuel has increased by 100% over the figure assumed at appraisal, while the corre- sponding increase in the average tariff has been about 31% (PCR para. 7.1 and Annex 9). 6. A discussion of selected main issues is in Section II, and general conclusions from the experience of Credit 627-AF are in Section III. II. MAIN ISSUES DABM's Charter 7. At the time of appraisal, DABM was the national power authority of Afghanistan and operated as a separate entity within the Water and Power Authority (WAPA), a government department created in April 1975 to merge the country's power and water resource development functions. WAPA was headed by a General President of ministerial rank working directly under the Deputy Prime Minister. DABM, though enjoying separate corporate status under a charter, functioned in reality as a government department and had only a limited area of responsibility. It could not set its personnel policies nor establish its salary scales. The General President was responsible for preparing and submitting financial statements and annual budgets to the Minister of Mines and Industries but not for setting or preparing tariffs. Furthermore, the General President could only appoint staff in the lowest grades. - 3 - 8. The charter under which DABM operated did not clearly distinguish between policy making and management since many management functions were vested in the Minister. Furthermore, it did not establish financial objec- tives as guidelines for financial management. 9. During the preparation of this project one of the major objectives of IDA was to have DABM's charter revised so that it could operate as a semi-autonomous enterprise with clear financial objectives under the admini- strative control of the General President of WAPA and under the direction of a Board of Directors which could formulate its policies and supervise its management and operations. Furthermore, the revised charter was to provide for DABM having control of all its activities including the power to hire all staff on salary and wage levels which would ensure the appointment and re- tention of competent personnel; only policy matters, such as investment plans, the budget and tariffs were to be subject to the approval of government. Implementation of the new charter was to take place by June 30, 1976. 10. Prior to negotiating the credit in early 1976, the question arose within the Bank Group as to whether or not the revision of DABM's charter was sufficiently important to justify making it a condition of credit effec- tiveness. While revision of the charter was judged to be important with regard to the technical assistance element of the project and to the longer- run improvement in DABM's performance, it was not considered material to the physical execution of the project. Moreover, in IDA's view, to make the revision of the charter a condition of credit effectiveness might hold up the award of the main contract for which bidding documents were being prepared. However, the consultants for the technical assistance program had clearly indicated to IDA in 1975 that they did not wish to become involved in a com- mitment unless there was a reasonable chance of making a significant impact on the efficiency and capability of DABM, which would be facilitated if DABM were granted reasonable autonomy. 11. Although IDA pursued the issue regularly through correspondence and bi-yearly supervision missions, the Government never established a revised charter on the basis of principles agreed with IDA (PCR paras. 6.12 and 8.1.2b). Nevertheless, CIDA proceeded with its technical assistance program but on the basis of a contract which was renewable from year to year. In the event, the technical assistance program was reasonably successful so that, by the time the conditions in the country worsened (the fall of 1979), only work in the area of customer and store accounting remained to be done. While it is clear that it would have been desirable to have DABM's charter changed (PCR para. 9.1.1 and PPAM para. 15), the failure to do so does not appear to have prevented achieving the major objectives of the technical assistance program. However, the failure to revise the charter has prevented the implementation of a proper organizational framework to facilitate further institutional improvements. Financial and Institutional Performance 12. At the time of appraisal, DABM did not have the financial and accounting systems and procedures normally associated with a public utility and no financial information was available on which to base management deci- sions. The calibre of its staff was low, DABM had problems with billing and collection, its system losses were high, and its tariffs needed revision (PCR para. 1.1.3). Having no financial objectives in its charter, DABM had not sought to achieve any and had incurred heavy losses every year since it was established in 1966/67. 13. The long-term institutional and financial improvements necessary in DABM had engaged the Bank Group's attention since 1972 following a Bank sector mission. Following a request by the Government of Afghanistan, at the Bank Group's suggestion, CIDA agreed in December 1975 to provide technical assis- tance to DABM initially for a period of one year. The technical assistance program, financed by CIDA, was based on terms of reference prepared by consul- tants and financed by UNDP (PCR para. 2.1.1). 14. The technical assistance program aimed at helping DABM: (i) to secure urgently needed improvements in the financial area through experts working as advisors; (ii) to organize itself for operating on a sound basis with appropriate policies; and (iii) to coordinate long-range planning and implementation of power projects through the assistance of advisors to senior engineering staff. The main financial and institutional objectives were embodied in the credit documents, including the requirement to achieve an annual rate of return of at least 8% beginning with 1980/81. In addition, interim objectives were agreed upon for the rate of return. A combination of measures, including an average tariff increase of 20% so as to enable DABM to obtain 20% more revenues in 1976/77, was made a condition of credit effective- ness (PCR paras. 2.4.2 - 2.4.3). 15. A tariff increase based on a new tariff structure was implemented in January 1977, about two months after the credit was made effective, but resulted in a lower - than - expected increase in average revenues due partly to a change in consumption patterns. However, the new tariff structure does benefit the smaller consumer and charges progressively more for higher levels of consumption (PCR paras. 5.1.1 - 5.1.2). Furthermore, DABM was able to increase its energy sales by about 62% with only a 19% increase in its genera- tion (PCR paras. 5.2.1 - 5.2.4) due to its success in reducing its energy losses over the 1974/75 - 1978/79 period. As a result, DABM was able to earn a surplus for the first time in many years and achieved a rate of return on net fixed assets of 3.7% for 1978/79 compared to the 3% interim objective agreed with IDA. However, accounts receivable have -emained high and some customers who traditionally received a free power supply are still unmetered (PCR paras. 5.2.5 - 5.2.6). IDA has stressed the need for further tariff increases or fuel adjustment chargesl/ in order to meet the 8% rate of return covenant for 1980/81. The extreme reluctance of the government to raise tariffs reflects political considerations and was possibly aggrevated by DABM's dependence on government funds. Under such circumstances, the govern- ment does not have much commitment to the principle of DABM earning surpluses for expansion. 1/ Depending on the extent to which the combustion turbines are being operated. - 5 - 16. With regard to helping DABM operate on a sound basis, improvements were to be made specifically in tne fields of organization, personnel, train- ing and accounting. It is not clear whether any substantial improvements in organization and personnel matters were implemented. Training was provided to DABM-s accounting staff (PCR para. 6.1.4) while in-service training of engi- neering and operations staff appears to have received less attention than envisaged at appraisal. A basic accounting system was installed and plant values and inventory balances were determined, on the basis of which the first accounts of DABM were prepared for 1977/78 after a gap of seven years. How- ever, further improvement is needed in the customer and stores accounting areas. By the end of 1979, DABM's financial statements for 1977/78 and 1978/79 were still to be audited (PCR para. 6.1.3). 17. In connection with long-range planning and the implementation of power projects, a power sector development plan was to be formulated by March 20, 1977 under the CIDA technical assistance program. This formed one of the covenants under the credit agreement. A study was completed only towards the end of 1979 due to delays in agreeing upon terms of reference and on selecting the consultants (PCR para. 1.6.1). Following the events of December 1979, it is difficult to assess the effect which the delay in imple- menting the study will have on DABM's ability to meet the future power requirements of Afghanistan. III. CONCLUSIONS 18. By the time the credit was fully disbursed, the physical objectives had largely been met, albeit with delays and cost overruns. Progress was made towards achieving the institutional and financial objectives of the project, which were an important justification for lending to the power sector in Afghanistan, e.g. energy losses were reduced, a basic accounting system was installed, training was provided, particularly in the field of accounting, tariffs were increased and financial results improved. The failure to estab- lish a revised charter was partly due to the political difficulties facing DABM during the project period and has prevented the implementation of a proper organizational framework to facilitate further institutional improve- ments. The effect which the delay in completing the power sector development study will have in meeting future power requirements is difficult to assess in view of the present political disturbances in Afghanistan. - 6 - ATTACHMENT AFGHANISTAN: FIRST POWER PROJECT (Credit 627-AF) 1/ PROJECT COMPLETION REPORT I. INTRODUCTION Organization of the Electric Power Sector 1.1.1 The power sector in Afghanistan remained fragmented, with separate private companies operating isolated systems throughout the country, until 1966/67 when Da Afghanistan Breshna Moassessa (DABM) was formed as a Government enterprise under a special charter for construction and operation of generation, transmission and distribution facilities. In April 1975, Government set up a new department called the Water and Power Authority (WAPA), merging the country's water-resources development and power function under a general president with the rank of a minister and working directly under the Deputy Prime Minister. 1.1.2 At appraisal in June 1975, the installed generating capacity in the public sector was 267 MW, of which 207 MW was operated by WAPA. The total was made up of 218 MW of hydro stations, 39 MW in coal-fired steam plants and 10 MW in diesel stations. Almost 70% of installed capacity in the public sector was concentrated in the Kabul area and formed a separate system. The rest was, and is still dispersed in over 20 isolated centers. P6wer generation in Kabul area was based on three hydroelectric stations, totalling 178 MW and interconnected through 110-kV transmission lines. Their output is highly dependent on water conditions in the Kabul basin since there is no significant water storage capacity at any of the hydro plants and no upstream storage reservoir. At appraisal, it was determined that power supply in Kabul was critical in dry years because the generating facilities, though adequate in normal years to meet demand through 1980, would produce only about half the energy requirements in a dry year. The Project, consisting of a combustion turbine station with two units of 20 MW, was proposed to help alleviate the problem of energy shortage in the Kabul areaa It was the only feasible option within the available time frame. 1.1.3 DABM, the Project entity, was beset by a host of problems since its establishment in 1966/67. Most: decision-making was confined to the highest levels of Government and DABM enjoyed very little authority. Its staff was of low calibre. It did not have the financial and accounting systems and procedures associated with a utility. Its accounts, such as they were, had been compiled only through 1968/69. Its energy losses, about half of which were estimated to be due to thefts and unmetered and unbilled consumption, were 45% or more in the four years from 1970/71. Its tariffs set about two decades earlier were so low that it had suffered operating losses ever since its creation. Without up-to-date financial data or tariff policies and having no long range power development planning, DABM had been only muddling through during all its life. 1/ The Beneficiary has submitted a completion report which provided essential data to prepare this report. - 7 - 1.1.4 The Bank Group had not extended any financial support to the Afghanistan power sector before this Project. II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL Project Origin, Preparation and Field Appraisal 2.1.1 The Project had its origin in a request from the Afghanistan Government in February 1973 for help from IDA for power development in the country on a systematic basis. Based on this request, a consulting firm commenced a UNDP- financed power planning study for US$175,000 in June 1974 with the Bank as the executing agency, aimed at determining the next stage of generation/transmission/ distribution required for the Kabul system and preparing terms of reference for a two to three year comprehensive technical assistance program for DABM to be financed by the Canadian International Development Agency (CIDA). Power supply in Kabul had become critical by the mid-seventies because the existing generating facilities, though adequate in normal years to meet the demand through 1980, would produce only about half the requirements in a dry year. The UNDP study identified 40 MW of combustion turbine capacity as thermal complementaty generation to be the immediate generation requirement to firm up the limited energy capabilities of the Kabul river in dry years. 2.1.2 Actually there was about a year's delay in preparation of the Project on account of the July 1973 change of Government in Afghanistan as shown by the following list of significant dates: October 1972 - Power sector mission February 1973 - Government request for Bank Group assistance April 1973 - Bank request to UNDP for study financing May 1973 - Draft Project document for UNDP-financed study sent to Government May 1973 - Bank asked CIDA to finance a technical assistance program July 1973 - Government changed March 1974 - Project document signed March 1974 - Contract for feasibility study signed with consultants March 1975 - Feasibility study completed and technical assistance started - 8 - 2.1.3 A preappraisal mission visited Kabul in February 1975 to review the main sectoral and institutional problems and to identify the sectoral and insti- tutional improvements which the Association should seek to achieve before making a power loan to Afghanistan. CIDA staff visited the Bank in February 1975 for discussions with a view to laying the groundwork for CIDA's program of technical assistance to DABM. Representatives of CIDA and of the Canadian experts appointed by CIDA for the purpose also visited Kabul in April 1975 for determining more precisely the basis of a long-term program of technical assistance to DABM. An appraisal mission visited Kabul in June 1975. No major problems delayed loan processing except for negotiations which lasted four weeks in February-March 1976 and which were deadlocked over the issue of tariff increases. Ultimately, a compromise was reached on a schedule for tariff increases, as described in para 2.4.2. The Association's Board of Directors approved the Credit on May 4, 1976 and the Credit documents were signed on May 17, 1976. Project Description 2.2.1 The Project comprised the following: A. The acquisition and installation of a combustion turbine power station in Kabul comprising two units of the package type, of about 20 MW each, for dual oil/gas firing, fitted initially for oil firing with diesel and/or crude oil, with provision for later conversion to a combined cycle plant, including the con- struction and equipping of fuel treatment and storage facilities for crude oil (main fuel) and diesel oil (unit cleanser). B. 1. Consultants" services for engineering and supervision during the construction and commissioning of the power station. 2. Training of local personnel in operation and maintenance of Project facilities. Scope of Project 2.3.1 The consultants had recommended that Government evaluate in the light of availability of funds and other non-technical factors, conversion of the combustion turbine to combined cycle operation (for utilizing the exhaust heat by the installa- tion of a heat recovery boiler to supply a steam turbine and generator of 20 MW, thus involving only additional capital costs and no additional fuel costs). Although Government initially desired that both the combustion turbine (2x20 MW) and the combined cycle plant (20 MW) be installed immediately, during appraisal it agreed with IDA that pending the economic analysis and finalization of an overall plan for the development of the power sector, bids be invited only for the combustion turbines with provision for exercising a 12-month option to purchase the combined cycle steam plant, if it was determined to be part of a least-cost program. During negotiations, the Afghans again requested that the Association consider financing a combined cycle component to be added to the Project. However, the Association informed the Afghans that the combined cycle component would require further justification and that the Government could make a further proposal when the national power development plan was finalized. In the event, the option in the contract for obtaining a combined cycle plant component was not exercised by the Afghans within the prescribed period of 12 months. The Afghans had also raised another issue during the field appraisal and negotiations, and even later in mid-1976, and that was the issue of relocating one of the 20-MW combustion turbine units in the north. The Association could not agree to this also because: (i) the two units were needed in Kabul,considering the load condition; (ii) no proper feasibility study existed to support the change; and (iii) it involved expensive duplication of oil treatment and storage facilities. 2.3.2 During negotiations, it also emerged that oil had recently been dis- covered in Afghanistan and that the Afghans planned to use the country's own crude oil as fuel for the Project combustion turbines, although the bid documents had assumed that either gas (by future pipeline) or diesel oil(from USSR) would be used. The Association accepted the change since the use of crude oil would substantially reduce DABM's fuel costs and would help improve the country's balance of payments. The Project scope was therefore changed with provision for using crude oil, resulting in an increase of US$1.0 million in the foreign exchange cost of the Project through the addition of oil treatment and heating equipment. Negotiations and Approval 2.4.1 Based on a preliminary estimate, the Credit amount was initially proposed to be US$8 million. However, on the basis of revised judgments by the consultant the cost estimate was revised to reflect the personnel training costs and to take account of the problem of transportation of the equipment, raising the total foreign exchange cost to US$9 million. Since no co-financier was available and the Government expected outside financing for the full estimated foreign exchange cost, the IDA Credit was proposed to be US$9 million. During negotiations, the amount of the Credit was again raised to US$10 million for fuel treatment considerations (para 2.3.2). 2.4.2 The negotiations lasted four weeks and were deadlocked over the issue of tariff increases. At negotiations, the Association had proposed a tariff increase of an average of 30% as a condition of effectiveness. However, the Afghans rejected such an increase as an inappropriate requirement on account of the following: (a) A 30% tariff increase would be premature since the consultants would be working on proposals to reduce energy losses which would result in much better operating results in 1976/77 than was expected earlier; and (b) a flexible approach was necessary to achieve the objective of increasing DABM's revenues since such an increase could be obtained from a combination of measures, one of which would be an appropriate tariff increase. - 10 - 2.4.3 In the event, the Association agreed to a 20% increase in revenues in 1976/77 through a combination of measures, one of which would be a minimum tariff increase of 20%, the others being compensation for supply to preferred customers, levy of connection charges on new customers and reduction of energy losses. Completion of the action to increase the revenues as stipulated was a condition of Credit effectiveness. It was then envisaged that before the Credit could be made effective an IDA mission would conduct an on-the-spot study to determine the expected increase in DABMl's revenues in 1976/77. 2.4.4 Annex 1 sets forth the major covenants of the Credit and Project Agreements. Except in regard to the establishment of a power sector development plan and of a revised charter for DABM, compliance with the covenants was satis- factory (see paras 6.1.1 and 6.1.2 respectively for a discussion, of the extent of compliance with these two major covenants). III. IMPLEMENTATION 3.1.1 Instead of the agreed minimum tariff increase of 20% in 1976/77, Government agreed to raise tariffs by an average of at least 30% by March 21, 1977 and also to establish by the end of 1977 in consultation with the Associa- tion interim yearly financial targets in order to achieve an 8% rate of return for the year ended March 20, 1981 as stipulated in the loan documents. IDA accepted this agreement of Government as meeting the condition of Credit effec- tiveness and the Credit was made effective on November 10, 1976. The slight delay in Credit effectiveness did not have any adverse impact on Project implemen- tation. The Afghans also continued until June 1976 to press the Association for changing the contract documents to provide for relocation of one of the 20-MW combustion turbines in the north but did not pursue the matter further after the Association's view (para 2.3.1) was again explained to them. Project Execution 3.2.1 There was an initial delay of about three months in the preparation of bid specifications. Subsequently the progress was also slow because of the unfamiliarity of the construction unit of WAPA with the type of civil work involved in the Project. However, with guidance from the engineering consultant, the progress of works picked up and the two turbine units were ready for performance tests in May 1978. Performance tests were conducted on the units and trial runs were made during the period May-October 1978 and the units were finally -11 - accepted by DABM from the supplier in October 1978, about 11 months late according to the original implementation schedule. This delay has, however, not affected the power supply in the Kabul area (para 4.1.2). The actual implementation schedule is compared below with the implementation schedule agreed with the Association under the Credit Agreement: Agreed Under Credit Agreement Actual Issue Bidding Documents March 31, 1976 May 1976 Bid Closing June 2, 1976 July 28, 1976 Consultant's Bid Evaluation Report July 9, 1976 Sept. 27, 1976 Issue Letter of Intent August 3, 1976 January 4, 1977 Commission No. 1 Unit September 15, 1977 April 11, 1978 Commission No. 2 Unit October 15, 1977 May 1978 Efficiency Test on Both Units November 15, 1977 May 1978 End of One Year Operation and Maintenance Period October 15, 1978 May 1979 3.2.2 Originally, the contract for installation engineering provided 50 man- months. Because of the delays, another six man-months were added in March 1978 to complete the Project. 3.2.3 The Operator training program included in the Project comprised a three-month training for three Operators in the supplier's factory. An additional five persons were trained at the site in three training sessions a week over a period of three months. DABM is of the view that no further operator training is required considering that the supplier's services include supervision of operation after commissioning of the combustion turbines consisting of: - 16 man-months of supplier engineer(s)'s services to be available upon request by the Ministry of Water and Power till end 1980; and - 16 man-round trips from factory of supplier to Afghanistan. Project Costs 3.3.1 The final cost of the Project including contingencies was US$13.9 million equivalent as against the original estimate of US$11.0 million equivalent. An item-wise comparison of these costs is given in Annex 2. As against the original estimated foreign cost of US$10.0 million, which was expected to be covered entirely by the IDA Credit, the actual foreign cost amounted to US$13.0 million equivalent, a 30% increase due almost wholly to the depreciation of the US$ vis-a-vis the currency in the supplier's country during 1977-1979. The extra foreign expenditure was met by Government from its own resources. The retention money (10% of the order) was also paid to the supplier in June 1979. - 12 - Disbursements 3.4.1 The original estimates of disbursements and the actual disbursements are given in Annex 3. Cumulative disbursements were below appraisal estimates during the first year of implementation due to start-up delays (para 3.2.1). Actual disbursements were faster for the quarters ended September 30, 1977, December 31, 1977 and March 31, 1978 because of the increased foreign cost of the Project (para 3.3.1). Procurement 3.4.2 The contracts for (i) the supply of the combustion turbines and of the fuel handling and storage facilities,and (ii) for engineering were awarded as follows: Amount Item Contractor (US$ Million) (a) Combustion turbines and Expatriate Firm 12.307 fuel handling and storage 'A' facilities (b) Engineering Expatriate Firm 0.157 'B' (c) Civil Works Construction Unit 0.451 of WAPA 1/ Performance of Consultants, Contractors and Suppliers 3.5.1 The performance of the consultant who evaluated the bids, of the supplier who supplied the plant and equipment, and of the firm which supervised the erection was satisfactory. Environmental Impact 3.6.1 In view of its location outside the residential area of Kabul in a zone assigned to future industrial expansion and the provision of silencers to limit noise to acceptable levels, the plant does not have any adverse impact on the environment. 1/ In view of the limited amount of work involved, the capability of the Construc- tion Unit of WAPA which had been long established as part of the former irriga- tion department of the Ministry of Agriculture and the fact that the work would be executed in the vicinity of energized equipment, the use of force account services was appropriate. I - 13 - IV. OPERATING PERFORMANCE 4.1.2 Although the power plant was to be commissioned by November 15, 1977, the delay of 11 months in commissioning did not adversely affect the power supply in the Kabul area, due to exceptionally favorable water conditions during 1977/78 and 1978/79 and to the ability of DABM to meet the growth in electricity sales in these years through a significant reduction of energy losses. In fact, the total electricity generation from the plant since May 1978 through June 1979 had been only 2.54 GWh. Even in 1979/80, the plant factor was estimated to be only 2%. However, since another generating source is not likely to be added until at least 1984/85, the average annual load factor is expected to increase to about 20% in 1982/83, 31% in 1983/84 and some 60% in 1984/85, (with a risk of load cuts 5% of the time). Thereafter, new sources would become necessary according to the present forecast of consumption and the combustion turbines would continue to be operated as peaking and complementary generating capacity. The original and present estimated operation of the plant is compared below: Year Plant Factor GWh Original Present Original Present (%) 1977/78 1 (not commissioned) 3.5 (not commissioned) 1978/79 3 0.6 10.5 2.3 1979/80 7 2 24.5 7.0 1980/81 10 2 35.0 7.0 1981/82 5 3 17.5 10.0 1982/83 5 20 17.5 70.0 1983/84 5 31 17.5 118.0 1984/85 - 60 - 220.0 Thereafter - 2 - 7.0 4.1.3 While the above pattern of operation of the plant was estimated in mid-1979, it has been unofficially reported that owing to disruption of supplies from the hydroelectric power stations and to the disturbed conditions in the countryside, the combustion turbine station has been operating at very close to maximum capacity. 4.1.4 DABM's forecast and actual sales during 1974/75-1978/79 are given in Annex 4. The forecast and actual sales were fairly close in 1977/78 and 1978/79. It is difficult to separate actual sales growth in respect of existing and new customers from sales which previously represented losses and which are now formalised as sales. Supply of Crude Oil 4.2.1 DABM's intention has always been to use crude oil as the main fuel for the combustion turbines and use diesel oil for unit cleansing and standby purposes. - 14 - Assuming the generation level mentioned in para 4.1.2, the estimated requirement of fuel oil was about 2,600 tons in 1979/80 rising to about 26,000 in 1982/83. The supply in 1979/80, 1980/81 and 1981/82 was assured at the time of the IDA mission's visit in 1979 but not that in 1982/83. The logistics involved in the 1982/83 supply would be formidable as it would involve the arrival every day of an average of 11 seven-ton capacity trucks carrying crude oil irrespective of weather conditions. Although the task is formidable, DABM expects that Government would make these arrangements on time. 4.2.2 The draft report on the least cost development program prepared by a firm financed by CIDA indicated that additional generation could be obtained from the Naghlu Hydro Project by a change in the operating regime. If this is accomplished, it would be possible to defer base load operation of the combustion turbines by one or two years depending on water availability. V. FINANCIAL PERFORMANCE Tariffs 5.1.1 It was agreed under the Credit Agreement that through actions such as tariff increase with a minimum of an average 20%, compensation for supply to preferred customers, levy of connection charges on new customers and reduction of energy losses, DABM shall earn at least 20% more revenues in 1976/77 (ending March 20, 1977) than it would have obtained without such action. However, instead of the agreed tariff increase of 20% in 1976/77, Government agreed to raise tariffs by an average of at least 30% by March 21, 1977 and also to establish by the end of 1977 interim yearly financial targets in order to achieve the agreed 8% rate of return for the year ending March 20, 1981. 5.1.2 Based on a study of tariffs by Canadian experts financed by CIDA, taking into account demand and energy characteristics and the rate of return and financing requirements of DABM, Government raised hydro tariffs, applicable to close to 90% of DABM's total sales, effective January 21, 1977. A distinctive feature of the new tariffs was the reduction in the tariffs for "lifeline" consumption in the range of 51-400 kWh (bimonthly), an increase in the tariffs for consumption exceeding 600 kWh and increasing rates for higher consumption. The old and new tariffs are given in Annexes 5 and 6. It was estimated at the time of the tariff increase that the average increase would amount to about 30%. However, the effect of this increase was to raise DABM's total revenues an average of only about 20% because of changes in the consumption pattern of customers resulting from changes in the tariffs. About 55% of non-industrial customers in the Kabul area have consumption of up to 400 kWh in the billing period (2 months) and have therefore had their tariffs reduced, 15% have been unaffected and only the remaining 30% have had their tariffs raised. - 15 - Energy Losses 5.2.1 Under the Credit Agreement, DABM was required to implement a program for progressively reducing, over a 5-year period, energy losses to not more than 20% of generation. According to DABM's program sent to the Association in November 1977 (Annex 7), the losses are to be reduced to 20% of generation by July 1981. In order to reduce energy losses to the minimum, Government and DABM initiated vigorous measures which included the following: (a) Intensified inspection of consumers' premises; (b) disconnecting illegal consumers; (c) disconnecting non-paying customers; (d) discharging or relocation of staff to disrupt vested interest; (e) increased meter testing; (f) increasing meter reading staff and tighter control of meter reading; (g) faster issuance of bills; and (h) prosecution of consumers found guilty of stealing power. 5.2.2 These efforts coupled to some extent with the reinforcement and exten- sion of the Kabul city network undertaken by the German Agency for Technical Cooperation resulted in significant reduction of energy losses as seen from the following figures: Year Energy Losses (%) 1974/75 44.9 1975/76 43.1 1976/77 35.5 1977/78 25.8 1978/79 24.8 1979/80 (estimated) 22.0 5.2.3 It is not possible to determine precisely the technical losses included in the above figure of energy losses. DABM's estimate is that transmission and distribution losses of a technical nature are in the range of 19%-20% generation. - 16 - 5.2.4 During the period 1974/75-1978/79, DABM was able to increase its sales by about 62% with only a 19% increase in its generation, thanks to the successful implementation of the program of reducing energy losses. 5.2.5 As part of the effort to improve DABM's operations, it had agreed with the Association that it would develop and implement a program for the reduction of its receivables for electricity supply to appropriate levels. Despite reducing energy losses by half (from 44.9% in 1974/75 to about 22% in 1979/80), DABM still has a collection problem inasmuch as its receivables as of mid-1979 amounted to about 15 months' revenues. Since the receivables mostly relate to Government agencies, inter-ministerial discussions are being held to find a solution to the problem. 5.2.6 Under the Project Agreement, DABM was required to meter power supply to consumers, who, by custom or by Government directive, receive free supply of electricity, by not later than December 31, 1977. This was intended to be part of the plan for reducing energy losses. In the Five-Year Program for reduction of energy losses, DABM's goal was to meter all such customers by the end of 1978/79, a goal that DABM could not achieve for various reasons. Efforts were under way in mid-1979 to complete this work as quickly as possible. Rate of Return 5.3.1 DABM's present income statements for 1975/76 through 1979/80 and those forecast at appraisal are given in Annex 8. As a result of the reduction of energy losses and the tariff increase from January 21, 1977, DABM was in the black for 1977/78 for the first time in many years. Its net profit after interest in 1977/78 was Af 144.6 million as against Af 47.3 million estimated at appraisal. This compares with estimated losses of Af 67.0 million in 1974/75, Af 44.5 million in 1975/76 and Af 101.6 million in 1976/77 (the figures for 1974/75-1976/77 should be considered provisional since no accounts for this period have been prepared). In 1978/79, its net profit was Af 198.7 million as against Af 60.2 million estimated at appraisal. DABM's rate of return was 2.6% in 1977/78 and 3.7% in 1978/79. The 3.7% return for 1978/79 was well above the return of 3% suggested by the Association as a target for the year. (No financial objective was suggested by IDA for 1977/78). VI. INSTITUTIONAL PERFORMANCE Power Sector Development Plan 6.1.1 Under the Credit Agreement, a power sector development plan should have been formulated by March 20, 1977, based, among other things, on a forecast of market growth and a survey of potential hydroelectric sites and thermal alternatives. In furtherance of this, Government agreed, though belatedly on account of procedural delays, to consultants being engaged by CIDA as part of its technical assistance program (para 6.1.3) for preparing a least-cost power development program for the country as a basis for sound planning in the power sector and also as a necessary pre-requisite for further IDA lending to the sector. - 17 - However, the appointment of consultants took longer than was originally expected because of delays in reaching agreement on terms of reference and on selecting the consultants. The consultants made a field visit in September 1978, submitted a Basis of Planning Report in June 1979 recommending criteria and an approach to completion of the master plan, and also reviewed the Basis of Planning Report with DABM in another field visit in June 1979. According to the earlier schedule, the consultants were expected to prepare a preliminary report on the power sector development plan a little before the end of 1979. However, following the events of December 1979, CIDA decided not to submit the final report to the Government and DABM. Clearly, supplementary field investigations will have to be carried out to provide a realistic basis for power planning in the sector when normal conditions return to the country. DABM's Charter 6.1.2 Under the Credit Agreement, Government undertook to establish a revised charter for DABM on the basis of principles agreed with IDA by not later than June 30, 1976. The principles agreed with IDA contemplate a semi-autonomous DABM. DABM prepared a draft charter within the framework of the Law of Tasadys; however, IDA found that it was not in accordance with the agreed principles, so the draft charter remained under consideration for some time. Meanwhile, following the Revolution, Government decided to revise the Law of Tasadys in a way that would serve the new national objectives and therefore, the draft charter was kept pending until finalization of the Law of Tasadys. In mid-1979, the revised charter, based on principles acceptable to IDA, was expected to be finalized by September 1979 as soon as the revised Law of Tasadys was finalized. When normalcy returns to Afghanistan, a dialogue will have to be conducted to agree on mutually acceptable institutional principles. Management Development Project 6.1.3 Since October 1975, and in close coordination with IDA as part of the institution building work under the Credit, CIDA provided technical assistance to DABM through a team of Canadian experts to help reorganize DABM and improve its financial operations. Significant progress was achieved in improving DABM's financial and accounting work with the help of CIDA's experts. A basic accounting system was installed in all offices and DABM's accounts for 1977/78 and 1978/79 were finalized and are now awaiting audit by a firm of Chartered Accountants. The overdue accounts for 1970/71 through 1976/77 would be handled separately from the current accounts. Although DABM's accounts have been prepared after a lapse of 7 years, DABM has still to go a long way before it is able to complete satisfactory accounts in a timely manner. For example, most customer accounts, in Kabul Breshna numbering over 60,000 have yet to be balanced with the result that the amounts outstanding from customers are not readily available from their ledger cards. 6.1.4 The Canadian team has provided training to DABM's counterpart staff and also to all Head Office, branch and construction accounting staff covering both lower level and higher level staff. The system has been to directly train an English-speaking core group of about 10 Afghans who train other Afghans with - 18 - the help of the team in formal training sessions and on-the-job training in Kabul and in the branches. Formal 5-9 day seminars have been held in Kabul as follows: January 1977 - First annual seminar. The new system, and general accounting (which includes plant, customer and material accounting and material administration). 40 students. November 1977 - Ministry of Finance Seminar--financial statement preparation and interpretation. 45 to 80 students. December 1977 - Basic Accounting in DABM--15 new recruits from commercial schools. April 1978 - Second Annual Seminar--30 students. April 1979 - Third Annual Seminar--30 students. In addition to training for Read Office and branch accounting personnel in Kabul, training sessions have been held at each main branch location in December 1976, from March to June 1977, September 1977, December 1977, and in all main and sub-branches from October to December 1978 and February and March 1979. In total, approximately 300 persons have been trained in seminars and on-the-job by the team and its Afghan assistants. Judging by the completion of the first set of accounts--for 1977/78 and 1978/79--and the ability of the staff to keep current accounting work reasonably up-to-date, the training effort should be considered a success. 6.1.5 DABM's procedures for system planning and load despatch, though improved since 1976, still need considerable improvement. Delays in data collection and reporting have hampered proper planning. E.1.6 It is likely that recent conditions in Afghanistan have had an impact on the institutional progress of DABM. No reliable assessment is nossible until normalcy returns and field missions are resumed. VII. ECONOMIC RE-EVALUATION 7.1 At appraisal, the return on investment for the Project was calculated for the base case (capital cost of $11.0 million) as 7.1% using incremental revenues as an approximation of benefits. For a 10% increase in capital cost (to $12.1 million), the return was estimated to be 5.7%. Due largely to the further increase in actual capital cost (to $13.9 million) and the increased fuel costs, the return is now estimated to be negative (Annex 9). However, this is not a true measure of the economic merit of the Project since the tariffs underestimate the benefits accruing to the beneficiaries (consumer surplus) and there are great operating advantages which, although not quantifiable, are important. The turn of events in the country including unforeseen activity in the Kabul - 19 - area and disrupted supply from the existing hydro plants has resulted in the power plant's operation since the latter part of 1979 as a prime source of energy instead of as a peaking station. VIII. ASSOCIATION'S PERFORMANCE 8.1.1 The Association maintained excellent relations throughout with Government and DABM. During its association with DABM and the Government in connection with this Project, IDA showed both flexibility regarding reasonable proposals and firmness againsc unreasonable ones. By standing firm against a combined cycle component, the Association prevented the Project entity from com- mitting itself to an investment which would have been of doubtful value. By reso- lutely opposing the relocation of one combustion turbine unit in the north without a proper feasibility study, the Association helped assure security of supply to Kabul as was envisaged under the Project. In declaring the Credit effective even before completing the tariff action that was a condition of Credit effec- tiveness, the Association again displayed flexibility. This trustful attitude was evidently not misplaced since the Government in the event raised tariffs two months earlier, i.e., from January 21, 1977. 8.1.2 Two objectives set at appraisal have not been reached due to circumstances outside of IDA control: (a) Despite repeated proposals that Government fix intermediate rate of return objectives of 3% in 1978/79 and 4% in 1979/80, Government did not formally establish any such objectives until the completion of the Project. However, this did not prove critical because DABM did achieve a rate of return of 3.7% in 1978/79. As advised in September 1979, Government also established a rate of return target of 4% before taxes in 1979/80; however, the actual results for the year are not known. (b) Despite constant pressure from the Association through numerous supervision missions and letters, the Government did not establish a charter on the basis of principles agreed with the Association at the time of negotiations. Therefore, DABM continued to work more or less as a Government department under the tight control of the minister. Whether the institution-building effort would have been a greater success than it actually was, if a charter had been established on the lines agreed with the Association before the Credit was made effective is doubtful since overall political developments would probably have led to a reversal towards centralized governmental control. - 20 - Supervision 8.1.3 The Association's supervision work was effective. There was continuity of Association staff from preappraisal through Project completion, and supervi- sion missions were mounted at regular intervals. II_ CONCLUSIONS Overall Achievements 9.1.1 As will be seen from the above, the main objectives of the Project by and large had been achieved by Project completion. Though completion was delayed about 11 months, the delay did not affect the power supply situation in the Kabul area mainly because of very favorable hydrological conditions in 1977/78 and 1978/79 and DABM's striking success in reducing energy losses from 43.1% in 1975/76 to 24/8% in 1978/79. With the total generation from the combustion turbines only 2.54 GWh by June 1979, the plant was serving really as an insurance against a difficult power supply situation in the event of a dry year, which is as it should be. However, the plant has reportedly been operating as a prime source of energy since the latter half of 1979 instead of as a peaking station. With an average 20% increase in tariffs from January 21, 1977 and the reduction in energy losses, DABM operated profitably in 1977/78 for the first time in several years (profit after interest of Af 144.6 million); the rate of return in the year was 2.6%. The return for 1978/79 was 3.7%. With the help of CIDA's experts financed under the technical assistance program, a new accounting system has been established and DABM's accounts for 1977778 and 1978/79 have already been completed--after a lapse of 7 years. Much remains to be done in the accounting area especially regarding customer accounting. Considerable progress has also been achieved towards establishing a power sector development plan for the country; the consultants' report was ready in early 1980 although it will need review in light of changed conditions when normalcy returns to Afghanistan. With the establishment of a national power development plan, ad hoc power development schemes could be a thing of the past if future power projects could be part of a least cost development program. However, before DABM reaches that stage, it needs to improve its system -lanning and load dispatch capabilities. One area where progress has been unavoidably stymied relates to the revision of DABM's Charter in the direction of more autonomous public utility principles. Lessons to be Drawn 9.2.1 There are two main lessons to be drawn from this lending operation: (a) Institutional objectives in the utility sector cannot be divorced from overall public administration development trends in client countries; - 21 - (b) DABM's program of reducing energy losses was an outstanding success. DABM was able to increase its sales about 62% during 1974/75-1978/79 with only a 19% increase in generation and to improve its financial position significantly with only a modest increase of 20% in tariffs in a period of five years. The immense potential that reduction of energy losses has for transforming the earnings picture of a utility has been clearly demonstrated in this case and should serve as an example to other borrowers. Europe, Middle East and North Africa Regional Office December 31, 1980 - 22 - Annex 1 Page 1 of 3 AFGHANISTAN FIRST POWER PROJECT (CR. 627-AF) Main Covenants of Loan Documents Section of D.C.A./P.A. Substance of Covenant Extent of Compliance D.C.A. 3.02 Government shall cause WAPA The consultants appointed to formulate by March 20, to prepare such a plan, 1977, or such other date as with CIDA financing, were shall be agreed with the expected to submit their Association, a power sector report by the end of 1979. development plan based, However, owing to the among other things, on a political developments forecast of market growth in the country the report and a survey of potential was not officially sub- hydroelectric sites and mitted to the Afghans. thermal alternatives. See para 6.1.1 for details. 3.03 Government shall establish Not complied with. a revised Charter for DABM See para 6.1.2 for details. on the basis of principles agreed with the Association by a date not later than June 30, 1976 or such other date as shall be agreed between Government and the Association. D.C.A. 3.04 & Government shall employ or Essentially complied with. P.A. 3.05 cause to be employed at Canadian experts, financed least until June 30, 1979 by CIDA, continued to consultants satisfactory to work with DABM through the Association for con- October 1979. ducting studies and related activities required to develop suitable programs for improving DABM's manage- ment and operations. -23- Page 2 of 3 Section of D.C.A./P.A. Substance of Covenant Extent of Compliance D.C.A. 3.05(a) Government shall, on the Essentially complied with. basis of consultants' recom- The revised tariffs imple- mendations, establish by mented on January 21, 1977 April 1, 1977 a tariff were based on the consul- structure for DABM, satis- tants' recommendations. factory to the Association, See para 5.1.2 for details. based on suitable customer classification, taking into account demand and energy characteristics and princi- ples of marginal costing. 3.05(b) Government shall take or Essentially complied with. & Supplemental Letter cause DABM to take actions Tariffs were raised an No. 7 such as adjustment of average 20% from January 21, tariffs (including an average 1977. See paras 5.1.1- tariff increase of at least 5.3.1 for details. 20%), compensation for supply to preferred customers, levy of connection charges on new customers and reduction of energy losses to enable DABM to obtain at least 20% more revenues in 1976/77 than it would have obtained without such action. Completion of the action was a condition of Credit effectiveness. 3.05(c) Government shall, not later Not complied with. The than January 1, 1978, compen- metering of preferred sate DABM semiannually for customers had not been non-billed consumption of completed by Project com- preferred customers. pletion. See para 5.2.6 for details. P.A. 3.03 DABM to meter all supply to DABM had under way a program preferred customers by not of metering all such supply later than December 31, 1977. by the end of 1978/79 but could not complete the program by Project comple- tion. See para 5.2.6 for details. -24 - Annex 1 Page 3 of 3 Section of D.C.A./P.A. Substance of Covenant Extent of Compliance P.A. 3.05(a) DAEM to furnish to the Asso- Although no formal time- ciation by September 30, based program was sub- 1976 a work program for con- mitted to the Association, tinuing or initiating studies the work program of the for improving DABM's manage- Canadian consultants was ment and operations. discussed between DABM, IDA missions and the con- sultants during all IDA missions. 3.05(b) DABM shall adopt not later Complied with. See para than July 31, 1976, and 5.2.1 for details. thereafter implement without delay, with the assistance of consultants a-program for progressively reducing over a 5-year period its energy losses to not more than 20% of generation. 4.02 DABM to submit to the The accounts for 1977/78 Association its financial and 1978/79 were supplied statements, duly audited to the Association in by independent auditors October 1979. Appointment acceptable to IDA within of Chartered Accountants six months after the end to audit these was being of each fiscal year. considered by Government in September 1979. 4.03 DABM shall take all neces- In view of the completion sary steps, including ad- of the Project by early justment of tariffs, to 1979/80 and the turn of secure a minimum 8% return events in the country, in 1980/81. the Association has not taken up with DABM the question of its rate of return in 1980/81. December 1980 AFGHANISTAN COMBUSTION TURBINE PROJECT PROJECT COST ESTIMATES (Millions of Currency Units) Original Estimate Actual Foreign Local Total Foreign Local Total (US$ Equivlent) (Afe) (US$ Equivalent) (US$ Yuivalent) (Afs) (US$ Equivalent) A. COMBUSTION TURBINES 1. Civil Works 0.30 14.21 0.55 o.451 /2 18.oo 0.831 2. Mechanical & Electrical Equipment 5.70 11.37 5.90 11.551 12.16 11.801 3. Fuel Handling & Storage Facilities 1.93 11.37 2.13 0.756 0.60 0.766 4. Engineering & Administration 0.30 11.37 0.50 0.157 0.6o 0.177 5. Contingencies 1.59 A 6.25 A 1.70 A - Total Combustion Turbines 9.82 54.57 10.78 12.915 31.26 13.575 B. TRAINING FOR OPERATION & MAINTENANCE 0.18 2.29 0.22 0.049 - 0.049 C. FUEL FOR TESTS - - - - 12.00 0.31 TOTAL PROJECT COST 10.00 56.86 11.00 12.964 43.26 13.934 Assumed actual percentage escalation for local and foreign costs: 1976 1977 1978 Equipment 10 T - Civil Works 14 12 12 /2 Fifty-five percent of local costs computed as representing foreign costs. Notes: 1. The foreign cost equivalent of the Project has been calculated by using the current rate of Sw F and DM at the time of each payment and the actual exchange rate (September 1978) of the Sw F (1.62:1) for the amount which has not yet been paid. 2. The total local cost equivalent in US$ has been calculated by converting the local cost at an average rate of exchange of the local currency of 1:57:5 for all payments made in 1977 and 1:39 for all payments made in 1978. The currency equivalent of the Af at the time of appraisal (June 1975) was 1:56:86. December 1980 -26 - Annex 3 AFGHANISTAN COMBUSTION TURBINE PROJECT Schedule of Disbursements (Millions of US$) Actual Disbursement IBRD Fiscal Appraisal Actual as % of Appraisal Year and Quarter Estimate Disbursements Estimate 1977 September 30, 1976 0.70 December 31, 1976 1.35 - - March 31, 1977 3.50 1.08 31 June 30, 1977 5.50 1.16 21 1978 September 30, 1977 7.50 8.09 108 /1 December 31, 1977 9.50 9.91 104 T March 31, 1978 9.75 9.95 102 June 30, 1978 10.00 10.00(rounded)/2 100 /1 Disbursements were faster because of the increased foreign cost equivalent of the Project (US$13.21 million as against US$10 million at appraisal). /2 Fully disbursed by June 30, 1979. December 1980 AFGHANISTAN DA AFGHANISTAN BRESHNA MOASSESSA (DABM) Sales of Electricity (GWh) 1975 1976 1977 78 1979 Year Ending March 20, Forecast Actual Forecast Actual Forecast Actual Forecas Actual Forecast Actual Generation & Purchase-GWh 484.2 516.8 490.5 545.2 587.0 535.1 658.2 552.6 683.3 613.o Losses -GWh 191.7 232.1 192.5 235.1 220.0 189.9 243.5 142.8 232.3 152.0 -4 39.6 44.9 39.2 43.1 37.5 35.-5 37.0 25.8 34.o 24.8 I Sales -GWh 292.5 284.7 298.0 310.1 367.0 345.2 414.7 409.8 451.0 461.0 Increase in Sales Over Previous Year - - 10.9 1.9 8.9 23.2 11.3 13.0 18.7 8.8 12.5 December 1980 Annex 5 -28 - AFGHANISTAN DABM's Tariffs Prior to January 1977 A. Bydro Power /1 1. Domestic - First 50 kWh in a month - 0.75 Af per kWh. Above 50 kWh - 1 Af per kWh. 2. Industries, Shops, Hotels, Hospitals & Others - 1 Af per kWh. B. Diesel Power 1. Domestic - First 50 kWh in a month - 2.5 Af per kWh. Above 50 kWh - 5 Af per kWh. 2. Industries, Shops, Hotels, Hospitals & Others - 5 Af per kWh. C. Mixed Power (Hydro & Diesel) 1. Domestic - First 50 kWh in a month - 1.5 Af per kWh. Above 50 kWh - 3 Af per kWh. 2. Industries - 1.87 Af per kWh. 3. Shops, Hotels & Others - 3 Af per kWh. D. Thermal Power (available at Mazar-i-Sharif) 1. Domestic - First 50 kwh in a month - 2 Af per kWh. Above 50 kWh - 3 Af per kWh. 2. Industries - 1.5 Af per kWh. 3. Shops, Hotels & Others - 3 Af per kWh. Load centers served by Hydro : Kabul, Pul-i-Khumri, Jalal- abad, Chari kar " " " Thermal : Mazar-i-Sharif f " " " Mixed (diesel & hydro) : Kandahar " " Diesel : Others i iydro power accounts for roughly 80% of total consumprion. Decembef 1980 Annex 6 -29 - AFGHANISTAN DA AFGHANISTAN BRESHNA MOASSESSA Electricity Tariff (Effective 21 January 1977) A. Hydro Power /1 Domestic, Commercial, Government, Others-1 Afs per kWh First 200 kWh 0.75 200-400 kWh 0.50 400-600 kWh 1.00 600-800 kWh 1.25 800-2000 kWh 1.50 Over 2000 kWh 1.75 Industrial Fixed Rate 1.20 B. Diesel Power Domestic, Commercial, Government, Others First 40 kWh for two months 1.5 Over 40 kWh 5.0 Industrial Fixed Rate 5.0 C. Thermal Power Domestic First 100 kWh for two months 2.0 Over 100 kWh 3.0 Commercial, Government, Others Fixed Rate 3.0 Industrial Fixed Rate 1.5 /1 Billing period is two months. December 1980 -0 - Annex 7 Page 1 of 2 AFGHANISTAN Da Afghanistan Breshna Moassessa Five Year Electrical Energy Loss Reduction Program The following program is designed to reduce electrical energy losses within DABM to 20% of generation by not later than July 31, 1981 Year Measures already taken by DABM at Kabul Breshna include: 1355 1. Staff re-organized to effect more positive action; (1976/77) 2. Inspection Department increased by 10 and provided with more bicycles, motor cycles and motor vehicles; 3. program implemented to replace four digit meters with six digit meters (Request already made to CIDA for supply); 4. new meter reading program designed and partially implemented. This program stressed more vigilance by readers; 5. instituted a program of radio and press publicity concerning energy use abuses. Approximate reduction from 44% to 32% = 12% Future Program 1356 1. DAB to conduct survey to determine and record the location (1977/78) of preferred customers. Installation of meters will follow, if not already metered. Goal to be established to meter all preferred customers in Kabul area by end of next year. 2. Implement training program for meter readers and other customers staff in reduction of misuse of services. 3. New meter reading program to be implemented 100% in Kabul area. Schedule of rotation of meter readers to be set up and implemented. 4. Continue and step up use of media for advising the public of policy and penalties for illegal use of electricity. 5. Commence an on-going training program for Inspection Department staff. Annex 7 - 31- Page 2 of 2 6. Order new equipment to upgrade meter testing facilities. (Request may be made to CIDA for supply). 7. Set up a statistics section to permit better monitoring of electrical usage (or misuse) and progress of energy loss reduction program. 8. Reducing the length of the low voltage feeders so that each feeders does not exceed the length of 1 km. 9. The size of the main line of a low voltage feeders shall be not less than 70 sq. mm A.C.S.R. for overhead lines and not less than 95 sq.mm for cables. Target Reduction from 32 to 28% = 4% 1357 1. New meter reading system to be implemented at all regional (1978/79) branches. 2. Set up system and schedule to test all installed meters. 3. Establish customer services offices. 4. Meter preferred customers in regional branches. 5. Continue to monitor energy reduction loss program and make adjustments to program as necessary to achieve objectives. 6. Install new meter testing facilities. 7. Continue measures recommended for previous years as applicable. Target Reduction from 28 to 25% = 3% 1358 1. Continue measures recommended for previous years as applicable. to 1360 (1979/80 to 1981/82) 2. Continue to monitor progress of energy loss reduction program and adjust where necessary to achieve objectives. 3. Institute on-going programs to promote efficiency. 4. Continue to monitor progress of energy loss reduction program. This will be an on-going activity. Target Reduction from 25 to 22% in 1358 = 3% from 22 to 20% by July 1981 = 2% December 1980 AMMAISTAN FIRST POER PROJMT (CREDIT 627-AF) Income Statements for the Yeare Ended arch 20, 1976-1980 (Millions of Af) Year Ended March 20, 1976 1977 191980 Appraisal Present Appraisal Present AppraisA Appraisp Appraisal Present .Forecast Estimate Forecast Estimate Forecast Actual Forecast Actual Forecast Estimate Generation & Purchase - GWh 490.5 545.2 587.0 535.1 658.2 552.6 683.3 613.0 697.7 Losses - GWh 192.5 235.1 220.0 189.9 243.5 142.8 232.3 152.0 153.5 - 39.2 43.1 37.5 35.5 37.0 25.8 34.o 24.8 22.0 Sales 298.0 310.1 367.0 345.2 414.7 409.8 451.0 461.0 544.2 Revenue per kWh - Af 0.99 1.02 1.13 1.07 1.19 1.30 1,19 1.34 1.34 Operating Revenues Revenue from Sale of Electricity 295.0 316.3 416.5 369.4 493.5 533.6 536.7 618.6 729.2 Connection Charges 32.2 38.9 46.6 15.0 44.8 ) 48.7 Miscellaneous 40.0 37.1 49.0 14.4 50.0 ) 20.4 53.0 ) 16.1 ) 20.0 Total Cerating Revenues 367.2 392.3 512.1 398.8 588.3 554.o 638.4 634.7 749.2 Operating Expenses Wages and salaries 87.0 89.1 93.0 116.2 99.0 115.7 103.9 120.5 127.5 Other Operations Expenses including Fuel, Administration, Service and Maintenance 78.3 78.3 77.0 165.9 87.1 67.8 91.8 61.2 123.0 Bad Debts Allowance - - - - - 5.6 - 6:3 7.5 Depreciation 259.2 259.2 325.0 201.6 3 326.0 206.5 L 350.3 215.7 232.2 Sales and other Taxes 5.9 6.3 8.3 7.4 9.9 12.6 10.7 14.3 17.4 Income Taxes -- 0:2 - 11.8 -/ 15:1 -L Total Operating Expenses 430.4 503.5 491 5338 408.2 571.8 418.0 507.6 Net Operating Income/(Loss) (63.2) (40.6) 8.6 (92.3) 54.5 145.8 66.6 216.8 241.6 Interest Charges 3.9 3.9 8.0 9.3 7.2 1.2 6.4 18.0 26.9 Net Income (67.1) (44.5) 0.6 (101.6) 47.3 144.6 60.2 198.7 229.6 Average Net Fixed Assets In Service 4,607 4,607 5,434 5,434 5,893 5,584 6,225 5,809 6,096 Rate of Return - Loss Loss Nil Loss Nil 2.6 Nil 3.7 4.0 CD 1 Assumed an average tariff increase of 20% effective August 1, 1970. Assumes that no income taxes will be payable until deficit is eliminated from balance sheet. Depreciation charges calculated at the new rates adopted by DABM. Bad Debts Allowance provided at 1% of revenues. No estimate was prepared at appraisal for 1979/80; incme statements were prepared only through 1978/79, the year immediately following the year in which the Project was expected to be completed. Note: DABM has prepared accounts only for 1977/78 and 1978/79. The figures relating to 1975/76 and 1976/77 are therefore still only estimate3. December 1980 AFGHANISTAN CREDIT 627-AF Calculation of Return on Investment (Million Af) -------- Capital Costs---------- -----------------Operating Costs ------------------/6 /7 Gas Distribu- L L D/3 t Total Project Net - Net Turbines tion Total Fuel Mtce. Staff D&M Total Costs Revenues Benefits Benefits 1976/77 62.08 - 62.08 - - - - - 62.80 - - 62.80 -77.0 1977/78 509.85 - 509.85 - - - - - 509.85 - -509.85 -601.6 1978/79 60.36 62.0 122.36 4.0 0.12 0.4 4.8 9.32 131.68 55.8 - 75.88 -86-9 1979/80 - 57.2 57.2 12.3 0.35 0.4 9.1 22.15 79.35 106.9 27.55 14.2 1980/81 - 4o.8 40.8 12.3 0.35 0.4 12.2 25.25 66.05 206.7 140.65 72.4 1981/82 - - - 35.0 1.75 o.4 12.2 49.35 49.35 231.0 181.65 ill.9 1982/83 - - - 245.0 12.25 0.4 12.2 269.85 269.85 231.0 - 38.85 -108.6 1983/84 - - - 413.0 20.65 0.4 12.2 446.25 446.25 231.0 -215.25 -285.0 1984/85 - - - 770.0 38.50 0.4 12.2 821.10 821.10 231.0 -590.10 -659.8 1985/86 - 1992/93 - - - 24.5 1.23 0.4 12.2 38.33 38.33 231.0 192.67 123.0 Pate of Return = negative 1 At 1.75 Af/kWh through 1979/50 and 3.5 Af/kAWh thereafter. At 0.050 Ar/km through 1980/81 and 0.175 Af/Wh thereafter. 3 Assuming 12 operators at 32,000 Af per man-year. At 0.10 Af/kWh. 5 At an average tariff of 1.17 Af/kWh for 1978/79 through 1979/80, 1.70 Af/kWh for 1980/81 and 1.90 Af/kWh for 1981/82 and thereafter. /6 Different price levels. /7 Constant price level (1979/80). December 1980 г IBR D - 11865 -70- 1 U. s. s. R, A , .1-2 -r - -- JABLIL-LIS-SERAJ GLILBAHAR A'FGHANISTAN Kl abffl,, rea 0 <-' kf a tRAN 31P 31- P AKISTAN / i N 0 1 A CHARIKAR 70' BAGRAM AIRPORT The boundaries shown on this map do nor imply endorwment or acceptancc by the WQrld Bank and its affiliate4 10 2P 3P 40 KILOMETERS NAGI-ILLI (90 MW) NORTH WEST SAROBI (22MW) FAST EAST KABUL, MAHIPAR (66MW) BRESHINA KOT AFGHANISTAN KABUL POWER SYSTEM 11OKV TRANSMISSION LINES GAS TLIRBINE STATION TROJECTI 44 KV TRANSMISSION LINES SLIBSTATIONS 6 KV TRANSMISSION LINES ELECTRIFIED CENTERS 15 KV TRANSMISSION LINES HYDRO POWER STATIONS STEAM POWER STATION D JESEL POWER STATION OCTOBER 1975