Zambia - Ideni Refinery Modification Engineering Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Rq.w&Nw. P-3187-ZA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ZAMBIA INDUSTRIAL AND MINING CORPORATION LIMITED WITH THE GUARANTEE OF THE REPUBLIC OF ZAMBIA FOR THE -INDENI REFINERY MODIFICATION ENGINEERING PROJECT April 23, 1982 This doeusent has a restdie distrrJbutin and, may be used by rdcipien* only- iw w ped_sp wf their oflll dutIes. Its. contems may n oterwise be disclose"idithst War ak uthbod6alo.E  CURRENCY EQUIVALENT Currency unit = Kwacha K.1.OO = US$1.20 US$1.0 = K. 0.83 FISCAL YEAR Government: January 1 - December 31 ZIMCO: April 1 - March 31 ABBREVIATIONS AGIP - Agencia Generale Italiana Petroli bpsd - Barrels per stream day CIF - Cost, Insurance and Freight EFF - Extended Fund Facility FOB - Free on Board GDP - Gross Domestic Product IFC - International Finance Corporation IMF - International Monetary Fund MOA - Ministry of Agriculture MOM - Ministry of Mines MPTC - Ministry of Power, Transport and Communications MW - Megawatt (1,000 kilowatts) NCCM - Nchanga Consolidated Copper Mines Limited NCDP - National Commission for Development Planning NEC - National Energy Commission tpy - Tons per Year toe - Tons of Oil Equivalent UDI - Unilateral Declaration of Independence UNDP - United Nations Development Program ZESCO - Zambia Electricity Service Corporation ZIMCO - Zambia Industrial and Mining Corporation Limited ZNEL - Zambia National Energy Limited  FOR OFFICIAL USE ONLY REPUBLIC OF ZAMBIA INDENI REFINERY MODIFICATION ENGINEERING PROJECT LOAN AND PROJECT SUMMARY t Borrower: Zambia Industrial and Mining Corporation Limited (ZIMCO) Amount: US$5.1 million, including a capitalized front-end fee Terms: Repayable in 20 years, including 5 years of grace, at standard IBRD interest rate Guarantor: Republic of Zambia Project Description: The objective of the Project is to carry out a detailed techno-economic study and prepare a possible investment project for the optimum modifications required for the INDENI Petroleum Refinery, within the context of Zambia's national energy conservation and inter-fuel substitution program and the potential for petroleum fuels export from Zambia to similarly land- locked neighboring countries with no operating ref iner- ies. The study would include: (a) projections of petroleum fuels requirements to year 2000; (b) determination of an appropriate pricing structure for refined petroleum fuels in the context of the country s overall energy pricing polic.y; (c) determination of the extent and optimum process modification.required by the refinery to meet the petroleum fuels projections; and (d) preparation of a detailed feasibility report and basic engineering on the refinery modifica- tion option selected for implementation. The Project would be carried out in two phases, with Phase I covering items (a) to (c) above, an Phase II, to be initiated after review and approval of Phase I work, covering item (d) above. Special Risks: No special risks are foreseen. 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.  - ii - Estimated Project Cost Foreign Local Total (in US 000s) Phase 1 A. Demand/Supply of Petroleum Products 196 10 206 B. Marketing and Distribution of Petroleum Products 54 5 59 C. Refined Product Pricing Systems 27 2 29 D. Evaluation of Existing Refinery 78 5 83 E. Evaluation of Modification Options 370 1 371 Sub-Total - Phase 1 725 23 748 Phase 2 A. Development of Project and Basic Engineering 1,590 30 1,620 Design Package B. Project Implementation Arrangements and Schedule 940 25 965 C. Capital and Operating Cost Estimates 384 - 384 D. Financing Plan Proposals 136 - 136 E. Financial and Economic Analysis 242 242 Sub-Total - Phase 2 3,292 55 3,347 Project Unit Cost 60 483 543 Base Cost Estimate 4,077 561 4,638 Physical Contingencies (15 percent of 612 84 696 BCE) Price Contingencies 335 55 390 TOTAL PROJECT COST* 5,024 700 5,724 IBRD Front-End Fee 76 - 76 Total Financing Required 5,100 700 5,800 Financing Plan (in US$ millions) IBRD 5.1 - 5.1 ZIMCO - 0.7 0.7 5.1 0.7 5.8 Estimated Disbursement of Bank Loan(IBRD FY) FY83 FY84 FY85 Annual 0.6 2.5 2.0 Cummulative 0.6 3.1 5.1 Rate of Return: Not Applicable Staff Appraisal Report: None Map: IBRD 16275 *Net of taxes from which the project is exempt.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ZAMBIA INDUSTRIAL AND MINING CORPORATION LIMITED * FOR THE INDENI REFINERY-MODIFICATION ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Zambia Industrial and Mining Corporation Limited (ZIMCO), with guarantee of the Republic of Zambia, for the equivalent of US$5.1 million, including a capitalized front-end fee of 1.5 percent, to help finance the INDENI Refinery Modification Engineering Project. The loan would have a term of 20 years, including 5 years of grace, at an interest rate of 11.6 percent. ZIMCO would bear the foreign exchange risk. PART I - THE ECONOMY 2. A Country Economic Memorandum on Zambia (Report No. 3007-ZA) was distributed to the Executive Directors on March 17, 1981. This part is based on the report's findings and on those of more recent economic missions to Zambia. Country data sheets are attached as Annex I. 3. With its mineral resources and plentiful land area suitable for crops and livestock, Zambia, though landlocked, has the potential for rapid and sustained development. Economic and social goals since independence in 1964 have been security of transport routes to the sea, reduction of dependency on copper through agricultural and industrial development, more equitable distribution of income, and expanded educational and training opportunities. Progress toward achieving these goals has been below potential due to structural imbalances in the econouv , prolonged turmoil within the region and since 1975, a severe economic depression. Increased educational opportunities and construction of the TAZARA Railway through Tanzania to Dar-es-Salaam are the main areas in which substantial progress * has been made. 4. The economy is heavily dependent on external trade and on government activity. Imports and exports range between 40 and 45 percent of GDP. Government expenditures have amounted to about 35 percent of GDP in recent years and the Government owns a majority share of mining and most manufacturing enterprises. Much economic activity is dependent on expatriate technical, managerial and administrative skills. Despite high rates of savings and investment, real growth has been disappointing, averaging only about 2.8 percent a year before the onset of the economic depression in 1975.  -2- 5. Diversification efforts have lagged; mining still provides over 90 percent of foreign exchange earnings and 30 percent of gross value added.1 Agriculture accounts for about 10 to 12 percent of GDP, compared with 14 percent at independence. Manufacturing grew quickly through 1975, but has since stagnated, due to foreign exchange scarcity and a heavy dependence on imported inputs. Services also grew quickly, to about 35 percent of GDP, due to Zambia's success in expanding education and to increased government acti- vity. However, income is concentrated in urban areas as a result of high S wages throughout the modern sector and a progressive deterioration in the rural-urban terms of trade. These factors have caused major rural-to-urban migration (about 40 percent of the population is urban) and unemployment in urban areas. The Current Economic Crisis 6. Zambia continues to experience an economic and financial crisis initiated by a 40 percent decline in copper prices in 1975. Unremunerative producer policies, difficulties in transporting goods to and from the sea and a recent decline in copper production have exacerbated the situation. Real GDP stagnated between 1974 and 1978, and declined by 8 percent in 1979, with mining down 19 percent and agriculture down 10 percent. There was little, if any, growth during the past two years, although agriculture has recovered following two years of poor weather. Real GNP per capita (US$556 in 1980) is 25 percent below that in 1974. 7. The balance of payments has been in chronic disequilibrium since 1975, with current account deficits averaging 8 to 10 percent of GDP. In spite of heavy external borrowing, a build-up in arrears on import payments and a draw down on reserves, foreign exchange has been insufficient to main- tain the real value of imports, currently about one-half its level in 1975. As a result, there persists an economy-wide problem of underutilization of capacity. This has seriously affected production and investment especially in the crucial mining sector which has accumulated a large backlog of mainte- nance and rehabilitation requirements contributing directly to recent declines in copper production and exports. 8. The decline in copper prices severely affected Zambia's fiscal and monetary positions. Historically mineral taxes provided a large share of government revenue, but they have been negligible since 1976. This contri- buted to large fiscal deficits, which required domestic bank borrowing averaging 13 percent of GDP in 1975-77 and 5 percent in 1978-80. At first, the shortfall in mineral revenue was preceived to be temporary and expendi- ture grew rapidly, in part carried by the momentum of large capital projects already underway. Subsequently, a successful effort was made to raise 1 In constant prices. In current prices, however, the contribution of mining has fallen to about 18 percent of GDP in recent years, due to low copper prices.  non-mineral revenues, but these efforts were offset by large increases in expenditure on defense and subsidies, mostly for maize imports resultingfrom poor harvests in 1979 and 1980. Deficit financing has absorbed 88 percent of net domestic credit creation between 1975 and 1980, and contributed to a sharp rise in domestic prices, averging 18 percent per annum during 1976-78 and 11 percent per annum in 1979-80. 9. In April, 1978 the Government signed a two-year Standby Agreement of SDR 250 million with the International Monetary Fund (IMF). In the event, the Government's recurrent account was balanced in 1978, and the balance of payments recorded a small surplus on current account in 1979. However, once the Standby Agreement expired, the accounts returned to their previous imbal- ances with increased severity, partly as a result of pent-up demand for imports and postponed expenditures. A three-year Extended Fund Facility (EFF) of SDR 800 million was approved in May 1981. It aims at a more gradual but longer-lasting adjustment process and at balancing the government and external accounts by 1983. Under the EFF, the Government is committed to eliminate the maize subsidy and reduce the fertilizer subsidy by the end of 1983; to increase sorely needed recurrent expenditure for operations and maintenance in the productive sectors; to implement economic pricing for products subject to price control; to raise agricultural producer prices towards world price equivalents; to provide a larger share of domestic credit to the private sector; and to allocate sufficient foreign exchange to repay most of the external arrears. Implementation of the EFF has been difficult; drawings were delayed in 1981 and a program for 1982 has yet to be agreed. 10. Although Zambia's financial circumstances will remain tight for the immediate future due to the continued low price of copper, its long-term development prospects have recently improved a significant and long-overdue change in government policy towards agriculture appears to have occurred. Producer prices have steadily increased over the past few years and special tax incentives have been approved, including a radical reduction in the tax rate on agricultural income. Recent capital budgets have allocated a higher percentage of expenditure to the agriculture sector and included a number of projects aimed at increasing smallholder productivity. These measures represent a necessary beginning towards exploitation of Zambia's considerable agricultural potential; constant attention to maintaining and improving these incentives will be required, however, to bring about sustained agricultural growth. In particular, a long-term strategy for the development of agricultural and agro-based industrial exports needs to be drawn up. Creditworthiness 11. Zambia's creditworthiness is inextricably linked to the production and price of copper. Estimates of economically recoverable ore reserves indicate that copper production can be maintained at present levels through the mid-1990s, but that depletion of reserves is expected to cause production to fall off sharply thereafter. Thus, Zambia's long-term creditworthiness  -4- requires strong measures to develop a viable source of non-mineral exports. The recent policy measures in agriculture represent an important initial step towards increasing production and investment in this sector and should improve Zambia's creditworthiness to the extent that the export potential is developed. 12. Prior to 1975, Zambia's external public debt was relatively small, and the debt service ratio was less than 10 percent of exports. Since then, outstanding debt has risen sharply, to an estimated US$1,970 million by end of 1981, and the debt service ratio to about 22 percent of exports. In addi- tion, external payment arrears on non-public debt stood at about US$490 million at the end of 1981, and net drawings from the IMF at about US$720 million. The IBRD and the People's Republic of China are Zambia's largest official creditors, each with about 17 percent of contractual debt outstand- ing and disbursed. 13. Increased debt service payments and low copper prices during 1981 acted to push Zambia's debt service ratio higher than expected. Service on external public debt will remain high for the next few years as Zambia pays off earlier commercial borrowings, which it has been replacing with more concessional funds. In the medium-term, copper prices are projected to rise, and debt service could be kept under 20 percent of exports through 1990 with careful debt management. The Government is aware of the magnitude of the problem and is taking steps to improve its debt management systems. It has also made some progress in reducing external payment arrears by about $60 million during 1981, the first year of the EFF management. Given the Govern- ment's commitment to implement an EFF program and its actions to improve the incentives for agricultural productions, Zambia continues to be creditworthy for IBRD lending. PART II - BANK GROUP OPERATIONS IN ZAMBIA 14. Since 1956, the Bank Group has made 27 loans and 5 credits to Zambia, totalling about US$609.1 million (net of cancellations). Twelve loans and two credits have financed power, transportation and communication projects. Four loans for education have helped expand Zambia's secondary and higher education systems, teacher training, and commercial, agricultural and technical education systems. Two program loans have helped Zambia maintain its development program in periods of severe economic dislocation. In agriculture and forestry, six loans and two credits have been for industrial forest plantations, livestock, commercial crops, integrated family farming, coffee production and smallholder dairy development. An agricultural project in the Eastern Province is assisting smallholder farmers. Other loans have assisted Zambia's urban development program and, through the Development Bank of Zambia, its manufacturing, agricultural and industrial sectors. A techni- cal assistance credit is helping the Government improve its planning and project preparation. 15. The International Finance Corporation (IFC) has invested about US$70 million in eight projects in Zambia since 1972. Two investments were in shoe manufacturing, two in a packaging materials plant, and one each in  - 5 - the Development Bank of Zambia, cobalt production and textiles. The latest IFC investment was approved by the Executive Directors on December 3, 1981 this investment (US$30 million equivalent) is helping to finance a copper leaching project of the Nchanga Consolidated Copper Mines Limited (NCCM), a major company in the Zambian copper sector. The IFC has also appraised a project for the production of ethanol from biomass (for blending into gasoline). Summary statements of Bank Group loans, credits and investments and notes on the execution of ongoing projects are in Annex II. 16. Until recently, except in the agricultural sector, implementation of Bank-assisted projects in Zambia has proceeded reasonably well. Currently, however, serious delays are being experienced in the execution of a number of projects -- particularly in agriculture -- due to ineffective coordination among government agencies, but more importantly because of the tight budgetary situation and the Government's limited ability to mobilize local resources for its contribution to project financing and for prefinancing local expenditures which are subsequently reimbursed by the Bank/IDA. 17. The deterioration in project implementation has, expectedly, substantially reduced the rate of disbursements on Bank Group loans and credits. During the first four of the last five years (FY77-81), the disbursement rate averaged slightly over 25 percent per annum, higher than the Bankwide average of 21.2 percent, 21.5 percent for the Eastern Africa Region, 22.2 percent for Tanzania, 23.4 percent for Senegal and 20.2 percent for Bolivia. In FY81, however, the rate dropped to just over 16 percent, compared with 20 percent Bankwide, 16.5 percent for Eastern Africa, 22.2 percent for Tanzania, 20.8 percent for Senegal and 21.2 percent for Bolivia. This problem is being addressed through provision of technical assistance in projects to strengthen implementing agencies; more frequent supervision missions; and increased use of the Resident Mission in monitoring project execution. In addition, consideration is being given to the establishment of special project accounts under ongoing projects which should substantially accelerate disbursements while easing the Government's financial burden. 18. The Bank Group expects to continue supporting government programs to reduce dependence on copper, improve the efficiency of the copper sector, reduce the energy import bill, narrow the urban-rural income gap and develop local managerial and technical skills. Anticipated lending reflects the Government's emphasis on directly productive sectors, particularly agriculture-related activities, and on reducing the burden of imported energy on the country's foreign exchange earnings. Continued assistance to education, transportation and industry is also contemplated. The proposed project is a significant step in assisting Zambia reduce the burden of imported petroleum fuels on the country's foreign exchange earnings, and is the Bank's first operation, outside of electric power, in the energy sector.  -6- PART III - ENERGY AND PETROLEUM SECTORS A. Energy Sector Energy Base 19. Zambia is fortunate to be well-endowed with diverse energy resources; however, detailed assessment of the full potential and a strategy for its exploitation to meet the country's development goals are yet to be carried out. The country-s energy resource base consists of hydroelectricity, coal, renewable energy resources (such as fuelwood, bagasse and molasses for ethanol), and uranium. Favorable geophysical indications of hydrocarbons also exist. Fuelwood is considered to be the largest of the domestic energy resources, supplying the cooking, heating and lighting needs of about 85 percent of the country's population. The potential for hydroelectric energy, of which Zambia is already a net exporter, is also substantial. Existing installed capacity of 1,652 megawatts (MW) generates annually about 2.185 million tons of oil equivalent (toe) of electric power to meet national requirements and for export to Zimbabwe and Zaire; known potential for further development is available on the Zambezi, Kafue, Luanga, Lurisenfua, Chambesi and Luapula river systems . Known coal reserves, located in the southeastern section of the country, are estimated at about 70 million tons, or the equivalent of 30 years supply at the current rate of consumption. Additional deposits in other parts of the country have been identified but further exploration is required to determine their quantities and qualities, aad whether they can be mined commercially. The Zambi a Sugar Corporation (ZSC) uses the residue bagasse it produces as an energy source for the firm-s sugar milling operations. ZSC also produces molasses as residue from its sugar milling. The Bank, under the ongoing Technical Assistance Credit (873-ZA), financed a feasibility study for a project designed to use ZSC's residual molasses to produce ethanol for blending into gasoline. The IFC has already appraised the project (para 15). 20. In addition to these active domestic energy sources, the Bank is planning to assist a project prepared by the Government designed to carry out detailed aeromagnetic and gravity surveys to provide data to attract exploration of hydrocarbons by foreign oil companies; this project is expected to be presented to the Executive Directors later in the year. Existing geophysical data suggest that certain parts of the country, in particular the Barotseland basin in the west, have geophysical structures favoring petroleum and/or natural gas. Reasonably large uranium deposits have also been found in several parts of country, particularly around the Copper Belt region and in the rift zone in the south of the country. Estimates of the deposits range between 10,000 to 100,000 metric tons. Agencia Generale Italiana Petroli (AGIP) of Italy and other foreign firms have been carrying out detailed exploration of these deposits. Zambia also has over 130 hot springs, some already identified under a UNDP project as having over 70 degrees centigrade water temperatures, but detailed  geochemical investigations would need to be carried out to establish their energy potential. Development and Organization of the Energy Sector 21. Organization of Zambia's energy sector has evolved rapidly over the last decade and a half largely in response to the effects of the Unilateral Declaration of Independence (UDI) in 1965 in neighboring Zimbabwe, then Rhodesia. Prior to that period nearly all of Zambia's commercial energy supplies originated from or were imported through Zimbabwe. Petroleum products were shipped by rail from the Feruka Refinery near Umtali in Zimbabwe; coal for both industrial use and power generation came from the Wankie coalfields, also in Zimbabwe; and hydroelectricity was supplied by the Kariba South Power Station, which although jointly owned by both countries had its generating facilities and the control centers of the interconnected systems located within Rhodesia. In early 1966, as a result of events subsequent to the UDI by Rhodesia, Zambia found itself unable to rely on these arrangements to meet its commercial energy requirements; it therefore became necessary to set up institutions to develop domestic energy to reduce dependence on external energy supply sources. 22. One of the first institutions established was the Zambia Electri- city Supply Corporation (ZESCO) with responsibility for the development of hydroelectric energy. The Bank provided assistance in setting up ZESCO, and has since made two loans (Loans 701-ZA and 919-ZA) for the development of Kariba North and Kafue hydroelectric projects, the two main sources of hydro- electric energy supply in Zambia. Other institutions established for the development of other parts of the energy sector were Maamba Colliery for mining of domestic coal, the TAZAMA Pipelines for transfer of crude petroleum from Dar-es-Salaam, Tanzania to Ndola, Zambia, and the INDENI Petroleum Refinery for the refining of the imported crude. All these operating compan- ies are subsidiaries of the state-owned nolding company, the Zambia Industrial and Mining Corporation Limited (ZIMCO). 23. Authority for the development of the country s energy resources is fragmented among the above institutions on the one hand, and, the Ministry of Power, Transport and Communications (NPTC), which is charged with coordina- ting government policy on energy, the Ministry of Mines (MOM), which has responsibility for geothermal and hydrocarbons development, and the Ministry of Agriculture (MOA), which oversees biomass energy resources. While the development of the individual domestic energy sources has been reasonable, there has been a lack of an integrated strategy for the development of the energy resources resulting in less than optimum use of the resources in some areas. Coupled with this is a paucity of reliable and systematic data on the sector s resource potential and lack of managerial and technical skills to initiate the required assessment for policy considerations and optimization of the energy supplies.  -8- 24. The need for an integrated energy development strategy and stream- lining of the authority for the future development of the sector was discussed with Government officials during the appraisal of this Project. The Government has since requested the Bank to assist it in carrying out an assessment of the country's energy resources and in preparing a strategy for their development within the framework of the country's long-term development goals. In response to this request an energy assessment was carried out and its report is under preparation. The report is expected to provide important inputs on macro aspects of the energy sector (e.g. overall energy demand/ supply perspectives, and desired pricing policies) for the detailed techno-economic studies to be carried out under this Project. The final report of this mission will be available before the consultants to be engaged under the Project initiate the detailed studies. 25. As a first step in initiating coordinated planning for the sector, the Government, in April, 1981, established the National Energy Council (NEC) with responsibility for integrating the plans of the various sectoral insti- tutions. To strengthen this new agency s capacity to carry out its responsibility, the Government proposed that it act as the counterpart agency for the Bank energy assessment work. Energy Consumption 26. There is no overall tabulation of the various forms of commercial energy being used in the country. However records of commercial energy consumption are maintained separately by the commercial institutions operat- ing within the sector and by companies in the mining sector which have some captive energy sources. Reliable data on renewable energy consumption in Zambia are almost non-existent. One of the priorities of the sector, which the Bank energy assessment mission will assist in meeting, is improvement of the data base on energy supplies and consumption. 27. The estimates of commercial energy consumption shown below are based on information collected from various sources, and are considered a rough but reasonably reliable breakdown on the various forms of commercial energy currently being consumed in Zambia. Commercial energy consumption in Zambia consists of coal, coke, hydroelectricity and petroleum fuels; some consumption based on waste heat recovery in mineral processing also takes place, but this reportedly is insignificant at the moment. Commercial energy consumption in 1981 is estimated at about 2.58 million toe as follows:  - 9 - Estimated Commercial Energy Consumption in 1981 Quantity (in metric tons Energy Source of oil equivalent) X Share Coal 274,000 10.6 Coke 68,000 2.6 Hydroelectricity 1,485,000a/ 57.7 Petroleum Fuel 748,000 29.1 TOTAL 2,575,000 100.0 a/ Including transmission losses Sources: INDENI Refinery, ZNEL and NCDP. About 67 percent of the commercial energy requirements in 1981 was met from indigenous production of hydroelectricity and coal. The balance, including mainly coke, small quantities of high-grade coal and all petroleum fuels, was imported. Accurate data on the sectoral breakdown of energy consumption are not available. Most commercial energy usage is, however, limited to the mining, industrial and transportation sectors. In 1981, it is estimated that the mining sector used over 85 percent of the domestic electricity consumption, 100 percent of the coke imported, more than one-half of all the coal consumed and about 40 percent of the petroleum imports; the industrial sector consumed about 20% of the petroleum products; while transportation and residential sectors consumed 33 percent and 7 percent, respectively. B. The Petroleum and Refining Sector The Petroleum Situation 28. On a per capita basis, Zambia is not a petroleum intensive economy by international standards. Per capita petroleum consumption of around 133 kilograms (kg) is lower than most middle-income countries with about the same per capita income levels (e.g., Honduras - 181 kg and Bolivia - 199 kg). However, because Zambia is landlocked2 and its economy is heavily dependent on copper mining which, since 1975, has been experiencing severe declines in * production and exports with corresponding increases in unit production costs, the country, which imports all its petroleum requirements,has become much more vulnerable to increases in petroleum prices, to disruption in supplies and, in recent years, to the technical constraints of the country's petroleum refinery. These constaints limit the refinery's ability to adjust to the changing patterns of energy demand and to the types of crude oils easily 2 Its nearest access to a seaport, Dar-es-Salaam, is about 2,000 kms by rail.  - 10 - available to Zambia. One measure of this vulnerability is the increasing claim that the petroleum bill has been making on (declining) export earnings even as the country is reducing petroleum fuels consumption. Importing about 762,700 metric tons of petroleum in 1977, the import bill amounted to 11 percent of merchandise export earnings; in 1980 with a petroleum import level of about 683,000 metric tons, about 11.7 percent less than in 1977, the import bill amounted to US$191 million, the equivalent of 14 percent of the export earnings. The import bill for the 748,000 metric tons of requirements in 1981 is estimated by the IMF at US$240 million, equivalent to 23 percent of the estimated export earnings for the year. The Petroleum Consumption Profile 29. Zambia-s petroleum consumption profile, like those of most other developing countries, is dominated by the middle distillates (kerosene and diesel oil). Currently, the proportion of middle distillates to total petro- leum fuels consumption is about 54 percent, while that of the light ends -- liquefied petroleum gas (LPG) and premium and regular gasoline -- which are used for cooking and transportation by the higher income urban population, is about 17.6 percent. The heavy ends (fuel oil and bitumen) make up about 28.2 percent of consumption. 30. As the claims of imported fuel on the declining export earnings increased, the Government, starting in 1976, began using administrative (rationing) and pricing measures to reduce consumption levels. As shown below these measures, along with the decline in economic activity, resulted in an average annual fall of 4.4 percent in the overall consumption level from 1976 to 1980: Historical Demand for Petroleum Products (in metric tons) Annual Growth Rate (%) 1976 1977 1978 1979 1980 1976-80 LPG 8,140 9,553 5,979 2,309 2,362 -26.6 Gasoline-premium 145,333 92,029 75,046 61,382 73,646 -30.0 Gasoline-regular 40,930 68,233 72,639 45,084 44,418 42.1 Kerosene-aviation 52,527 58,686 54,745 67,249 64,981 45.5 Kerosene-Illum. 24,087 24,111 26,929 29,064 29,608 45.3 Diesel Oil 360,701 310,099 284,640 220,873 239,942 -9.7 Low Sulphur Diesel Oil 1,951 6,953 18,488 36,353 35,280 4106.2 Low. Vis. Fuel Oil 857 3,732 5,657 11,376 11,909 493.1 High Vis. Fuel Oil 174,238 181,616 162,086 177,515 172,298 -0.2 Bitumen 9,200 7,695 5,561 8,495 8,528 -1.8 TOTAL 817,964 762,707 711,770 659,700 682,972 -4.4 Source: Zambia National Energy Limited.  - 11 - However, as evidenced in the trends during 1979-80, which continued into 1981, most of the products had reached their lowest demand levels by 1979, and the potential for further reductions through rationing and pricing measures without seriously affecting vital services appear to be very limited. Recognition of the limitations of this method of reducing consump- tion has led to the initiation of programs designed to reduce petroleum demand by substitution with domestically-produced energy supplies. These programs include ethanol produced from biomass (para 17) for use as a blend with gasoline to reduce the gasoline demand, and increased supplies of indigenously-produced hydroelectricity and coal to replace fuel oil used in the mining sector. In addition, a study financed under the ongoing Third Railway Project (Loan 1790-ZA) is examining the feasibility of electrifying the railway system to reduce consumption of diesel. 31. The molasses-based ethanol production appears to be economically sound and would reduce the gasoline component of energy conservation by about 10 percent by 1983-84. The fuel oil used in the mining sector is primarily for steam and as direct heat in mineral processing operations. The use of fuel oil by the mining sector for these applications started in 1973 (when the INDENI Petroleum Refinery came into operation) as a means of establishing a market for the refinery's fuel oil output which, because of Zambia's land- locked location, could not be disposed of economically in any other manner. Prior to commissioning of the refinery, the mining sector used coal for its steam generation and direct heat requirements; the existing facilities, which were converted from coal use to fuel oil use, can be modified to re-use coal with relatively minor investments. It is the consensus of the mining and petroleum refining companies that the use of fuel oil in these applications can be sharply reduced or even eliminated throughsubstitution with indigenous hydroelectricity and/or coal both of which appear competititve. The electri- fication of the railway system, while important, if determined to be feasible, is however unlikely to significantly affect the diesel consumption in the medium term. 32. The overall effect of these energy sector initiatives would be to further reinforce the dominance of the middle distillate products in the total petroleum demand. Projections based on assumptions consistent with the Government's energy goals; (i) 10 percent replacement of gasoline by ethanol by 1983-84; (ii) otto-engine fuel (gasoline blended with ethanol) growth of 1 percent p.a.; (iii) reduction of fuel oil uses through substitution with indigenous hydroelectricity and coal at an annual rate of 10 percent to a minimum level of 50,000 metric tons (which represents annual reductions ranging from 18,000 metric tons in 1982 to 5,000 metric tons in 1991); and (iv) 3 percent p.a. growth in middle distillates use (a growth rate of less than the 4.6 percent experienced in 1979-80 and which is expected to be maintained despite improvements in economic activity) show the middle distillate component of petroleum fuels demand increasing from the current 54 percent to 62 percent by 1985 and 69 percent by 1990. This demand can be met by the refinery sub-sector only through major modifications at INDENI Refinery (para 42-43).  - 12 - Refined Products Pricing 33. Refined product prices, both ex-refinery and at the consumer level, are set by the Government. The ex-refinery price is determined by the pro- curement, pumping, processing and storage costs, plus expected tax revenues based on existing excise and sales tax provisions. While the general policy ensures that the full economic cost to the country is recovered, in practice, the prices of premium and regular gasoline and aviation kerosene have tended to be disproportionately higher in order to subsidize fuel oil. Ex-refinery prices prevailing in January 1982, excluding taxes and duties, are shown below in comparison with international prices of the same period: Prices for Selected Petroleum Products January 1982 Product Zambia Ex-Refinery Rotterdam Zambia as US$/metric ton US$/ton of Rotterdam Premium gasoline 989 346-352 283 Regular gasoline 915 329-339 274 Kerosene (illuminating) 428 349-351 122 Kerosene (aviation) 612 350-352 175 Diesel 428 319-325 133 1Ieavy Fuel Oil 145 166 87 Sources: ZNEL, Platts Oilgram. The above comparison shows that ex-refinery prices for petroleum products in Zambia were higher than spot prices quoted at Rotterdam in January 1982, with the notable exception of heavy fuel oil. Landlocked and without domestic petroleum resources, Zambia's petroleum prices may be expected to be high by international comparison, since sea freight, handling and pipeline transportation bring the c.i.f. cost per barrel of crude to about US$40. The ex-refinery prices for illuminating kerosene and diesel are considered close to their incurred economic cost; gasoline and aviation kerosene, on the other hand, appear to be priced well above their economic cost, while heavy fuel oil is clearly subsidized. The subsidy on heavy fuel oil is necessary to make it competitive with hydroelectricity and coal due to the design of the refinery which results in a high percentage of heavy fuel oil for which a local market has to be found since export possibilities are uneconomic. Consumer prices of the products sold through the pump (regular and premium gasoline, kerosene and diesel oil) are determined on the basis of the ex-refinery prices plus excise and sales taxes, distribution charges and dealer's margins; these have generally been among the highest in the world, even after considering the high transport cost of importing crude into Zambia. Recent retail prices for these products compared with those of selected countries are shown below:  - 13 - Retail Prices for Selected Petroleum Products (US$ equivalent per liter at the Pump) (January, 1982) Premium Regular Gasoline Gasoline Kerosene Diesel Zambia: Financial 1.18 1.10 0.47 0.70 Economica/ 0.91 0.85 0.36 0.54 Italy 0.78 0.75 N/A 0.34 France 0.73 0.69 N/A 0.54 U.S.A 0.38 0.35 N/A 0.35 India N/A 0.73 0.21 0.36 a/ Shadow-priced at 30 percent less than the official exchange rate. Source: ZNEL, Platts Oilgram and IBRD 34. While the existing pricing policy is considered reasonable to ensure recovery of the full economic cost of petroleum fuels, earn tax reve- nues for the Government and promote energy conservation, there is a need to rationalize the petroleum pricing and tax structure to ensure optimum consumption patterns consistent with the country's energy conservation goals and energy supply potential and to ensure a more equitable distribution of the tax burden on all products. These aspects of the pricing structure have been discussed with ZIMCO and the Government, and it was agreed that under the Project, the existing pricing and taxation structure on petroleum products would be reviewed with the objective of developing recommendations for changes that would induce optimum demand patterns while yielding appro- ximately the same amount of tax revenue to the Government as at present. The Government has agreed to consult with the Bank and ZIMCO on these recommenda- tions and on a mechanism and timetable for implementing any agreed changes reached in these consultations (Section 3.02 of draft Guarantee Agreement). Petroleum Sector Organization 35. Zambia has no known indigenous hydrocarbons. As stated in para- graph 20, the Bank expects to support a project designed to carry out detailed aeromagnetic and gravity surveys to provide the required data to attract exploration by oil companies. This activity is being handled by the Geological Surveys Department of the Ministry of Mines. 36. Activities related to imported petroleum are divided into five areas of operations: (i) procurement of crude and refined products; (ii) pipeline transfer of petroleum; (iii) petroleum refining; (iv) storage and distribution and (v) retail marketing. Procurement of crude and refined  - 14 - products is handled by the Zambia National Energy Limited (ZNEL), a wholly- owned subsidiary of ZIMCO. Crude petroleum is procured from Middle East sources while the refined products are obtained from international markets on spot basis. The refined products - naphtha, kerosene and diesel oil, known as spikes - are mixed with the crude petroleum before shipment to Dar-es-Salaam in order to minimize handling and shipping costs. Currently, about 44 percent of all the petroleum fuels purchased by Zambia to meet its requirements are refined products. The large proportion of refined products required is due to the fact that the petroleum product consumption profile is not in balance with the refinery's production capability. Consequently, if whole crude of the same quantity as the spiked crude were imported for processing, the refinery, given its existing process configuration, would produce large surpluses of products not required by the country and not economically exportable (fuel oils), while there would be correspondingly large deficits in the predominant forms of petroleum fuels required by Zambia (kerosene and diesel). ZNEL-s operations, which are limited to procurement and shipment of the spiked crude to Dar-es-Salaam and sale of the refined products ex-refinery, have been carried out reasonably efficiently with a small staff which includes expatriate professional personnel with experience in petroleum procurement. 37. The transfer of the crude feed, once delivered at the port of Dar-es-Salaam, is the responsibility of Tazama Pipelines Limited, a joint venture company owned 67 percent by the Government of Zambia and 33 percent by the Government of Tanzania. Tazama's facilities consist of a 243,000 cubic (cu.) meter crude storage tank farm at the Dar-es-Salaam port, 1705 km of 8-inch pipeline linking the crude storage farm with the INDENI Petroleum Refinery at Ndola in Zambia, 770 km of 12-inch loops to the 8-inch pipeline to boost pumping operations, and seven diesel-powered pump stations along the route. The pipeline was originally constructed to transport "white" refined products (gasoline, kerosene and diesel); and was converted to carry crude when the refinery came on stream in April 1973. The design capacity of the pipeline is 160 cu. meters/hour, equivalent to 1.1 million metric tons per annum at 90 percent operating factor. Tazama has operated successfully since commissioning of its facilities in 1968; its throughput charges are determined taking into account debt amortization, maintenance, insurance, operating expenses and profit requirements. The throughput charge per ton of crude feed in 1981 was US$23.00 equivalent. 38. Refining of the imported petroleum is carried out by the INDENI Petroleum Refinery Company Limited; the facilities, operations and performance of this entity are discussed in paragraphs 40 to 46. 39. Except for fuel oil and bitumen which are lifted directly from the refinery by the main users, storage of refined products (gasoline, diesel, kerosene and aviation fuel) is handled by the Ndola Oil Storage Company (NOSCO), a joint-venture operation of the retail distributors (50 percent) and ZIMCO (50 percent). Distribution and retail operations are handled by Shell, BP, AGIP, Mobil, Caltex and Total. For management purposes, Shell and  - 15 - BP are a joint company in Zambia known as Shell-BP (Zambia) Limited; 50 percent of its equity is owned by ZIMCO, which also owns 50 percent of AGIP's retail operations. The remaining distributors are locally-incorporated wholly-owned subsidiaries of their multinational parents. Distribution of petroleum products is working well and the government pricing policies permit the distributors and retailers to make reasonable profits. Petroleum Refining Sub-Sector 40. The INDENI Petroleum Refinery Company Limited is a subsidiary of ZIMCO; its shares are owned 50 percent by ZIMCO and 50 percent by AGIP. Operating management of the refinery is the responsibility of AGIP under a separate management contract. The refinery employs about 380 persons, about 24 of whom are expatriates assigned by AGIP under its management contract. Its operations are well managed. A review of the operating records by the mission showed that the refinery has been operating without unscheduled stop- pages between turn-arounds, indicating good housekeeping, operating and safety practices. Management information appears to be adequate and well documented; and operating costs are within acceptable limits for the facilities as existing and the type of crude feed processed. 41. The refinery is located at Ndola in the center-west section of the country, about 600 kms from the border with Tanzania. It came on stream in April 1973 and has a capacity of 25,000 barrels per stream day (bpsd) or about 1.1 million metric tons per annum. The main process units are: (i) a crude unit; (ii) a distillate hydro-treater; (iii) a product fraction- ator; (iv) a catalytic naphtha reformer; and (v) an asphalt unit. 42. The refinery is designed to process Arabian Light crude oil with the flexibility of spiking the crude feed with naphtha, kerosene and diesel oil up to 25 percent of the feed to match changes in market requirements. Its processing capabilities, which are limited to fractionation of the crude oil by boiling range into LPG, gasoline, kerosene, diesel oil and fuel oil are relatively inflexible compared to current refinery technology standards; i.e., there are no secondary conversion process units which would permit the product yield pattern to be changed to meet variations in the market demand profile or to process crudes other than the design basis crude if deemed economically advantageous. The only means the refinery has of changing the yield pattern is by increasing the quantity of refined products that are mixed (spiked) with the crude oil feed up to the quantities that would be deficit if only whole crude of the design basis were processed. As shown in the following comparative table, had the refinery processed only the design basis whole Arabian Light crude during 1980 instead of the spiked crude feed, Zambia would have had to separately import about 44 percent of its petroleum fuels requirements in refined form at a substantial overland freight and handling cost:  - 16 - Refinery Yields vs. Market Demand for 1980 (Yields Based on Whole Arabian Light Crude Feed) Refinery Yields Market from Requirements Arabian Light Deficits (in metic tons) Gasoline 118,064 49,883 (68,181) Kerosene, Diesel Oil 369,811 140,105 (229,706) Fuel Oil 184,207 184,207 - Bitumen 8,528 8,528 - Ref. Fuel Gas - 21,180 - Ref. Fuel Oil 19,194 - Slops - 4,924 - 682,972 430,383 (297,887) Source: INDENI Refinery. 43. An alternative solution to the "spiking" of crude would have been to import whole crude in sufficient quantities that would have allowed the refinery yields to meet the deficit products; this would, however, have resulted in large surpluses on the other products which could not have been economically disposed of. Thus, the decision was made to process a limited quantity of whole crude spiked with refined products up to the levels required to meet the deficits. Spiking is generally resorted to in the refinery industry as a stop-gap measure to avoid investment which is required to correct a processing inadequacy and has maximum economic benefits at levels of 8-12 percent. When the level of spiking exceeds this range, as in the case of INDENI Refinery, the benefits deteriorate rapidly and the effects of double processing costs become more pronounced making a process modification an economic necessity. Besides the higher cost of having to mix refined products with crude oil to permit the refinery yield to meet market requirements, there are operational penalties associated with spike levels in the crude feed exceeding the design limits. At the INDENI refinery at spike levels beyond the 25 percent design limits, the throughput of the refinery has to be reduced in order to operate the crude unit satisfactorily;this, however, affects the efficiency of the auxiliary equipment such as pumps and heat exchangers making operations extremely difficult with the risk of a major damage to the crude unit and associated equipment. Further, the existing process configuration of the INDENI refinery has an upper limit of 55 percent spiking. As the spiking levels have exceeded the 25 percent design basis and creep closer to the upper limit, the product fractionator operations have become unstable, resulting in poor product separation; the overhead fractionator condenser and crude unit have also begun showing signs of poor condensation and fractionation, respectively, because of vapor  - 17- overloading as a result of the higher levels of spiking. In any event, even if the operating capability for the reduced capacity utilization of the critical pieces of the equipment would permit it, which is not the case, an analysis carried out during appraisal indicated that the 55 percent upper limit for spiking is likely to be reached by 1985-86 with no more than 1.2 percent p.a. increase in the overall petroleum consumption. Beyond this period, further investments in refinery capacity would be necessary. Effects of Changing Types of Crude Oils 44. In addition to the technological limitation and the increasing imbalance between the refinery yields and the consumption profile discussed above, an additional factor which Zambia needs to take into account is the changing profiles of the crude oil types now being produced. In recent years, the relative availability of lighter crude oils which yield higher percentages of desired distillates (gasoline, kerosene and diesel oil) has been declining in favor of heavier crude types which yield less of the desired products. Major oil producers, particularly in the Middle East, have recently been mandating that purchasers lift their heavier crudes in the same proportion as their overall crude oil production. The implication of this is that in the future there is likely to be less Light Arabian crude available to Zambia than at present, tending to exacerbate the imbalance in the refinery yield. A recent study of world refinery industry and crude oil types commissioned by the Bank concluded that due to the shift towards heavier crude types, over the next 10-15 years the average crude oil can be expected to yield about 3-5 percent less kerosene and diesel oil with a corresponding increase in the heavy ends, which generally have less economic value. The increasing demand for middle distillates and the constraints placed on existing refinery processes by heavier crudes has led the refinery industry world-wide to begin modifying their facilities to include secondary conversion units that can process the heavier ends into more valuable distil- lates. Capacity Utilization 45. On completion in 1973, the refinery was expected to provide the petroleum fuels requirements of Zambia as well as to meet substantial portions of the requirements of neighboring Botswana, Malawi and eastern Zaire, at least during the initial years of its operation when the design capacity would have exceeded the Zambia market. Up to 1976 the refinery was able to meet Zambia-s own needs and the requirements of the neighboring countries, reaching a capacity utilization of 80 percent of design. Since 1977, however, with sharp increases in petroleum prices leading to conserva- tion policies in Zambia as well as in the neighboring countries, which have resulted in the consumption profiles being out of balance with the refinery's yield patterns, exports to the neighboring countries have been sharply reduced, resulting in reduced capacity utilization. Operation levels between 1977-80 have ranged between 66-70 percent. The potential for petroleum fuels export from Zambia to the neighboring countries still exists but can only be  - 18 - exploited if the refinery's process technology is modified to enable substan- tially higher percentages of whole crude to be processed. INDENI's Financial Performance 46. The INDENI Petroleum Refinery's financial performance is satisfac- tory. Its debt:equity ratio which stood at 47:53 in 1979 had been improved to 13:87 by the end of its 1981 fiscal year (March 31), and its return after taxes on shareholders' funds (equity plus reserves) during the last three years has averaged about 18.3 percent. Dividend payout to ZIMCO and AGIP over the 1979-81 period has amounted to the equivalent of US$2.6 million at current exchange rates. Under the existing non-integrated structure of the sector, the refinery's only source of revenue is the fee charged for proces- sing of the crude feed delivered at refinery gate. The fee is determined on the basis of fixed charges, including the cost of AGIP's management opera- tions contract, depreciation, maintenance and insurance, and the volume of crude feed processed, plus other variable expenses. Audited financial state- ments and annual reports of the Company for the past three years are avail- able in Project Files. PART IV - THE PROJECT Background 47. The Project was identified in June, 1981 during a Bank sector reconnaissance mission to Zambia. Subsequently, the Government formally requested Bank assistance to carry it out and indicated that it attaches very high priority to it. The Project was appraised in September, 1981 and negotiated in Washington, D.C. in April, 1982. The Zambian delegation was led by Mr. M.V. Muhsin, Financial Director, Zambia Industrial and Mining Corporation Limited. Project Objectives and Justification: 48. As discussed in Part III, the INDENI refinery's existing process configuration is inconsistent with the demand profile of petroleum fuels in Zambia, creating a product imbalance, which is being corrected as a short- term solution, by mixing (spiking) expensive refined products (naphtha, kerosene and diesel) in the crude feed. The spiking is now beyond the refin- ery design basis and approaching technically unacceptable levels, raising the economic cost of petroleum products to the country. The objective of this Project is to determine the most appropriate modification to the refinery to ensure a yield pattern consistent with the changing demand profile. The Project will also take into account Zambia's potential for using excess capa- city in the refinery to meet the requirements of neighboring landlocked countries which have no operating refineries (Zimbabwe, Malawi, and Botswana). There are several options for modifying the refinery process. An analysis of two of the possible options -- (i) a hydrocracker only, and (ii) a hydrocracker with a residuum desulfurizer and a residuum deasphalter -- carried out by Bank staff has indicated that modification of the refinery  - 19 - based on either of the two options will result in substantial economic savings. A detailed study is however required to identify all the possible options and determine the optimum configuration offering the most flexibility to meet the changing market requirements in the light of the energy conservation and inter-fuel substitution efforts of the country, the export potential and the changing crude oil types likely to be easily available to Zambia. The objective of this Project is to examine all the alternative options for modification and prepare a detailed feasibility study and basic engineering on the option selected as optimum. Project Description 49. The Project would consist of a detailed techno-economic study to be carried out with the assistance of specialized consultants. The scope of the study would cover: (a) establishing Zambia's petroleum fuel requirements to the year 2000 taking into account the availability of indigenous hydroelectricity, coal and ethanol from molasses which can replace current petroleum fuel uses. The projections would be made under two scenarios: (i) using existing policies of taxation and pricing of petroleum products and (ii) using assumptions which eliminate price distortions among products caused by the tax and cross-subsidy policies; (b) determining the export potential of refined petroleum fuels to neighboring countries (Zimbabwe, Malawi, Botswana, and eastern Zaire); (c) determining an appropriate pricing structure for refined petroleum products that will ensure recovery of their true economic cost to the country and a more rational taxation structure for these products; (d) identifying all the options for modifying the refinery and determining the extent to which the existing refinery facility could be modified to meet the petroleum fuel projections in (a) and (b) above. The determination will include comparative economic analysis of various options; (e) recommending improvements in plant operations by streamlin- ing the maintenance system, expanding the training program, debottlenecking existing units, adopting better operating practices and modernization of instrumentation to detect and help reduce energy and material losses and improve process control and product quality;  - 20 - (f) providing a comprehensive and documented compilation of all the facts regarding the recommended option and any modifica- tions required, including the capital and operating costs, and identifying sources of financing and terms; (g) identifying the optimum refinery modification based on the foregoing analysis and reaching agreement among all parties before proceeding; (h) preparing basic engineering, and presenting an expeditious and economical plan for implementation including project management, procurement, construction and supervision, cost control, project scheduling, plant start-up, etc; and (i) preparing invitation-to-bid documents. 50. Detailed Terms of Reference (TOR) along the above lines have been agreed on with the Government and are presented as Annex IV. The work to be carried out is divided into two phases. Phase I covers (a) establishing Zambia's refined petroleum product market to year 2000; (b) determining the export potential; (c) recommending an appropriate pricing and taxation structure for petroleum products; and (d) identifying and analyzing all the options for modification of the refinery and recommending the optimal confi- guration for execution. Phase 2 covers detailed feasibility and basic engineering of the modification option selected as optimal, and would commence only after review of the Phase I work and approval of the recommend- ed option by the Government, ZIMCO and the Bank (Schedule 1, para 3 and, Section 3.05(b)(ii) of the draft Loan Agreement). 51. The Project would require an estimated 310 man-months to execute, including 160 man-months of specialized consultant services to be contracted from abroad. The average man-month rate of the foreign consultant services, including fees and reimbursable expenses such as travel, living expenses and computer programming, is estimated at about US$15,200 which is considered reasonable by industry standards; the local man-month rate is estimated at about US$3,740. Project Cost and Financing 52. Details of the Project cost and financing are presented in the Loan and Project Summary on page ii. The total cost of the Project, net of taxes (from which the Project would be exempt) and including the IBRD front-end fee, is estimated at about US$5.8 million, including US$5.1 million in foreign exchange. The foreign exchange cost includes an estimated lump sum amount of US$1.6 million to cover development of the project specification package, including piping and instrument diagrams, which are likely to involve proprietary technology. This lump sum estimate is based on the  - 21 - option likely to require the most extensive process modification considered in the Phase 1 work and could be reduced substantially should only minimal modification prove necessary. The cost estimates are based on first quarter 1982 prices and include physical contingencies of 15 percent. Price contingencies are based on escalation rates, in US$ terms, of 8.5 percent in 1982 and 7.5 percent in 1983 and 1984. The Bank loan of US$5.1 million is proposed to cover the total foreign exchange cost, or about 88 percent of total financing required for the project. Local cost financing of US$0.7 million equivalent will be provided by ZIMCO from its internal cash generation. 53. The Bank loan would be made to ZIMCO, with Government guarantee, on standard country terms (20 years maturity, including 5 years of grace). ZIMCO will bear the foreign exchange risk. ZIMCO is considered a satisfactory borrower for the proposed loan. With net assets of about US$592 million as of March 31, 1981, ZIMCO is a state-owned holding company with subsidiaries operating in the mining, industrial, agricultural, trading, hotels, transport, energy and financial services areas. Many of its subsidiaries, like INDENI Petroleum Refinery, are owned in joint-venture partnership with foreign operating companies. Net income after taxes on operations during the last three fiscal years were US$24 million equivalent in fiscal 1981, US$ 135 million equivalent in fiscal 1980 and US$33 million equivalent in fiscal 1979. Audited financial statements of the company for the past three fiscal years are available in Project Files. ZIMCO and AGIP, as co-shareholders in the INDENI Refinery Company, have agreed to exchange views on the recommendations and conclusions of Phase I of the study and, before proceeding with Phase II, jointly determine a program of action necessary to give effect to the selected option in consultation with the Government of the Republic of Zambia and the Bank. Project Execution 54. The Project would be executed over a period of 15 months beginning from the effective date of award of contract to the consultants, which is expected by July 31, 1982. The Project will be executed by a specially created Project Unit set up within ZIMCO, with necessary technical assistance from specialized foreign experts. The Project Unit will be headed by a senior ZIMCO staff member, who is the Executive Director, Transport and Energy (ZIMCO) as well as the Board Chairman of INDENI. Other staff in the unit will include two economists, a financial analyst, a coal expert and an energy specialist. Staff of the Project Unit will be drawn from INDENI, ZIMCO, the joint technical directorate of the two major mining companies, ZNEL, and the National Commission for Development Planning (NCDP) to ensure that it has within it expertise from the various energy subsectors and the mining sector. This composition is considered appropriate in view of the implications of the national energy program affecting the refinery. The Government and ZIMCO have agreed to this arrangement (Section 3.02(a), draft Loan Agreement) and have confirmed to the Bank the creation of the Project Unit and the appointment of competent staff to fill the positions mentioned above. ZIMCO has further agreed to maintain and keep the Project Unit adequately staffed with competent, experienced professionals throughout the implementation of the Project (Section 3.02(a) of the draft Loan Agreement).  - 22 - Selection of Consultants 55. The qualifications, experience, selection and terms and conditions of employment of the specialized consultants will be satisfactory to the Bank (Section 3.02(b) of draft Loan Agreement). A short list of five consultants from whom ZIMCO invited proposals in February 1982 was reviewed by the Bank; their qualifications and experience are satisfactory. The Bank and ZIMCO have agreed on criteria for the selection of the consultants and a draft contract for the assignment. The selection criteria, which take into account experience of the firm, the qualifications and experience of professional personnel proposed for assignment to the study and the quality of the proposal to be offered, are satisfactory. Proposals from the consultants were received in late April and are under evaluation. The successful consulting firm is expected to be selected in June 1982, with a proposed contract effective date of end-July, 1982. Disbursements 56. Disbursements will be fully documented. The Bank loan will finance 100 percent of foreign expenditures for the specialized consultancy services, for the engineering package including proprietary technology associated with the technology selected as optimum, and for the professional staff on the Project Unit with respect to visits to the consultant services firm's home office for supervision of the study. To ensure that the objectives of the Project are being met, ZIMCO has agreed that disbursement for Phase 2 of the Project will be subject to review of the Phase 1 work and agreement between the Government, ZIMCO and the Bank on the option selected as optimum (Schedule 1, para. 3, draft Loan Agreement). The loan is expected to disburse over a 3-year period (see page (ii)); the disbursement profile is based on Industry Department's experience with engineering loans, the specific characteristics of this Project and assessment of the Project Unit's capability to oversee the Project's implementation. Benefits and Risks 57. The detailed feasibility study to be carried out under the Pzoject is expected to result in a full-scale modification project which would sub- stantially reduce Zambia's petroleum import bill and is expected to yield a very high economic rate of return. Preliminary analysis of two of the likely modification options indicate an economic rate of return in the range of 25-35 percent. The modification project is expected to include secondary processing units that would permit the refinery to process residual fuel oil into premium value distillates. Specific expected benefits from the full- scale modification would include (i) elimination of the much more expensive spikes in the crude feed; (ii) flexibility to reduce/eliminate the refinery's production of fuel oil corresponding to the rate of substitution of fuel oil with coal and/or indigenous hydroelectric energy; and (iii) flexibility to process a wider range of whole crudes. The Project would also provide data  - 23 - and analysis for restructuring the petroleum product pricing and taxation systems to induce and maintain optimum demand patterns consistent with the energ' conservation goals of the country. The Project would be carried out by a specially-created Project Unit of competent professional staff drawn from the energy sector's major operating companies and users with assistance from specialized consultants. No undue risks in implementation are foreseen. PART V - LEGAL INSTRUMENTS AND AUTHORITY 58. The draft Loan Agreement between the Zambia Industrial and Mining Corporation Limited and the Bank, the draft Guarantee Agreement between the Bank and the Republic of Zambia and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank will be distributed separately to the Executive Directors. Special conditions of the project are listed in Section III of Annex III. PART VI - RECOMMENDATION 59. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President b1= Ernest Stern Attachments Washington, D. C. April 23, 1982  - 24 - ANNEX I TABLE 3A Page 1 of 5 ZAMBIA - SUCIAL INDICATORS DATA SHEET ZAMbIA REFERENCE GROUPS (WEIGHTED AVES$ACES LAtL AREA jTIiIUSAli SU). hM.) - MOST RECENT ESTIATU)t IUlAL 752.6 MUST RECENT MIDDLE INCOME MIDDLE INCOME ALICGULruRAL 3iO.6 196U lb 1970 /b ESIIMATE b AFRICA SOUTH OF SAHARA LATIN AMERICA & CARIBBEAN LNP PER CAPLIA (U16) 2UU.0 34U.0 500.0 * 794.2 1616.2 LNLERY CONSUMPTION PEK LAPIIA (RIMORA1LS Ut CUAL EQUIVALENT) .. 723.7 856.2 707.5 1324.1 YOPLLAIIUN AliU VIIAL SIATISTILS PUPULAITON, t1D-YLAR (IHUUSANDS) 3207.U 4242.0 55B0.0 * UDtRAIM iUPULAIIUN (PERCENT UP TOTAL) 23.1 3U.O 37.2 27.7 64.2 PUtLLATI1N PROJ ECT IONS PUPULAILUN IN ISLAR 2000 (MILLIUNS) 11.0 SIATIUNAKY PUPJLATIDU (UIILLIUNS) 31.0 YLAR LTATIUNARI PUPULATION 1S REACHED 2125 PU1ULAIlUN DiUSliY PER Sq. N11. 4.3 5.6 7.4 55.0 34.3 PLK Sq. Ktl. AGKICULTURAL LAND 9.2 [2.1 15.4 130.7 94.5 PuPOULATINu AGE STRUCTURE (PERCENT) U-14 YKS. 45.U 46.1 47.1 46.0 40.7 15-64 YKS. 52.5 51.4 50.3 51.2 55.3 b) YIS. AND AbOVE 2.5 2.5 2.6 2.8 4.0 eUYPULAIlON GtRUWTI KAIL (PERLENT) IOTAL 2.4 2.8 3.0 2.8 2.4 URBAN 5.3 5.4 5.5 5.1 3.7 LRUDE SUlIKH KATL (PEK THOUSAND) 5U.5 49.6 49.1 46.9 31.4 CRUDL DEAIH KAI. (PRK THUUSAND) 24.2 19.9 [6.6 15.8 8.4 GRUSbS REPRUDUCIION KATE 3.4 3.4 3.4 3.2 2.3 tA111LY PLANNING ALCEPIOKS, ANNUAL (THIUSANDS) .. UbSiE (PEKELNI UF HARRIED WUMEN) .. .. lUU AND NUTIKTlUN lDULX UF PUD PRJODUCTION ELI GAP1IA (1959-71-1OD) 99.0 95.0 92.0 89.9 108.3 PEK CAP1IA SUPPLY UF CALORIES (PERKENI OF KEUq01ELENIS) 79.1! 84.0 87.0 92.3 107.6 LPRVElINS (CRGAS PER DAY) 54.u 56.0 56.0 52.8 65.8 uF WHICH ANDILAL AND PULSE 13.0 16.0 14.0 16.1 34.0 LHILU (AGES 1-4) M4ORTALITY RATE 36.1 28.4 21.9 20.2 7.6 UBALTSi LLEL EXPELIANCY AT AIRKTl (YEARS) 40.0 44.9 49.3 50.8 64.1 1,iPANI MUhRALITY RATE (PER TUOISANU) .. 144.0 .. 70.9 ALLESS TO SAFE WAILT (PERCENT UF UUPULAIlUN) TOTAL .. 37.U 42.0 27.4 65.7 URbAN .. 7U.0 86.0 74.3 79.7 RUKAL ,. 22.0 16.0 12.6 43.9 ACCESS TO EXLRETA DISPUSAL (PERCENT oF POtULAIILN) TOTAL .. 16.0 42.0 .. 59.9 UKRAN .. 12.0 87.0 .. 75.7 RURAL 18.0 16.0 .. 30.4 POPULATION PEh PAYSICIAN 9544.6 b288.4 10191.0 13844.1 1728.2 PUPULATILN PER NURSIRi. PLESUN 9915.0/c 2479.0 1931.0 2898.6 1288.2 PoUULAIIUNi PRK HRSPlIAL AED TUIAL 343.ULc 311.3 269.6 1028.4 471.2 UIBAN 181.0/c ,. 332.8 423.0 558.0 RUKAL 468.0/c .. 258.3 3543.2 ADUIIbIOUNS PER HOSPITAL BEU .. .. 31.0 HoUUSING AVERALE SIZE UF HOUSEHOLD IOTAL .. 4.4 URBAN .. .. RURAL .. .. 4.6 AVERAGE NSMBER UF PERSUNS PER ROROP TUOAL .. 2.6 URBAN .. 2.6 RUKAL 2.6 ACCEbS TO LLtCIKTGLIY (PERCENT uF DWELLINGS) IUIAL .. .. URBAN 27.5 .. RUEAL .. ..  - 25 - ANNEX I Page 2 of 5 TABLE 3A ZAMBIA - SOCIAL INDICATORS DATA SHEET ZAMBIA REFERENCE GROUPS (WEIGHTED AVE5AGES - HOST RECENT ESTIMATE>- MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b AFRICA SOUTH OF SAHARA LATIN AMERICA & CARIBBEAN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 42.0 91.0 95.0 73.7 101.7 MALE 51.0 101.0 106.0 96.8 103.0 FEMALE 34.0 80.0 89.0 79.0 101.5 SECONDARY: TOTAL 2.0 13.0 16.0 16.2 35.3 MALE 3.0 18.0 21.0 25.3 34.9 FEMALE 1.0 8.0 11.0 14.8 35.6 VOCATIONAL ENROL. (Z OF SECONDARY) 28.0 3.0 3.0 5.3 30.1 PUPIL-TEACHER RATIO PRIMARY 50.0 47.0 48.0 36.2 29.6 SECONDARY 14.0 21.0 22.0 23.6 15.7 ADULT LITERACY RATE (PERCENT) 28.5/c 47.3 39.0 .. 80.0 CONSUMPTION PASSENGER CARS PER ThOUSAND POPULATION 11.0 14.3 18.5 32.3 42.6 RADIO RECEIVERS PER THOUSAND POPULATION 5.0 17.7 22.0 69.0 215.0 TV RECEIVERS PER THOUSAND POPULATION *- 4.0 4.9 8.0 89.0 NEWSPAPER ("DAILY GENERAL INTEREST') CIRCULATION PER THOUSAND POPULATION 7.0 13.4 19.9 20.2 62.8 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 0.7 3.2 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 1322.1 1653.4 2043.6 . F>EMALE (PERCENT) 33.2 32.6 32.0 36.7 22.6 AGRICULTURE (PERCENT) 79.0 73.0 67.7 56.6 35.0 INDUSTRY (PERCENT) 7.0 9.0 10.8 17.5 23.2 PARTICIPATION RATE (PERCENT) TOTAL 41.2 39.0 36.6 37.2 31.8 MALE 55.3 52.9 50.1 47.1 49.0 FEMALE 27.3 25.2 23.3 27.5 14.6 ECONOMIC DEPENDENCY RATIO 1.2 1.2 1.4 1.3 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 33.7 .. 23.0 HIGHEST 20 PERCENT OF HOUSEHOLDS 58.2 .. 63.0 LOWEST 20 PERCENT OF HOUSEHOLDS 5.4 .. 3.8 LOWEST 40 PERCENT OF HOUSEHOLDS 13.0 .. 10.1 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 247.0 381.2 RURAL .. .. 168.0 156.2 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 126.0 334.3 513.9 RURAL .. .. 85.0 137.6 362.2 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 25.0 RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1963. * The updated 1980 GNP per capita and population estimates which is shown in the 1982 World Bank Atlas are $560 (at 1978-80 prices) and 5766 thousand. April 1982  - 26 - ANNEX I DEFINITIONS OF SOCIAL INDICATORS Pagye 3 onf 5 Notes: Aithoogh the data aF dr,.- frce soa-o generlly judged the nos authoritati- and Fellable, it should also be nosd that ehey soy no baitte- oanioaellyampstshle hetause ad oha look of ts-ds-dtaed deinition an...d r....ept used hy different nore ia coil-telg the date. The dues see tone- thebe..... usful to d-ccibe adera of magotiode, indiutenronda, sod ch.aeateiaeas-sin major diffenece be t.e... otre The rofe ..o g...p. ar. .1) the coma coatiy groop of the s.bject contc sd (2) -cyt group aith saebthge aeaetcm hac then coty group ofthe sbject anaryjtp in"aIta Surplus Oil E.Pr--re gRou here"tiddl boom North dfria sod PiddleEs"i h.s.t becus oF strogr caoity fthe itst sin a group bus data foeta eictr,i th the ta iroge f dau trisamong th ndcatn d.ep.... s hv n aelaiay ch at aseInicn ae tme~ag hecontryan rfrete groophs.1a TLlnD ditEd ( thouan -qb.) It. Popultiatt pee Hc-Pital ted - atto, uthan, andt.rl-oyoit(oa, Tote - Ttal uefce aea tmpetingland anca and inten saoc ra,sdrrl iiedbytiersctoeolrofp hoytI IO Agri-alt.r1 - Es1timt of ugiuerlae sdtmaalyo emnnl v Ial npbi o rct eeo nd -yaiaiad osItlindre foe nears, pastures, earlee sad hltchen guadeec or to lie fullaw; 1978 dtata. hbailitttia en eta. Hapinals are astablih..meu P. peeantysufe l-l.t.d by P- -P't- -t --1 -1kat ptby a lese ae phsicin. Etshiahmrnns Providing principalycota letPECyio)1 --i-Ptrc -hF tim eatialc at. Alrr.. muktpete c il -afe -f not Included. Rore1 hoepitls,tase,beld hat nolated bysums otaven too methd as OarldNook atlas(1977-79 bests); li,and meIcal lantee no prtanentoY atoffed by epyeie (bcEh 1970, sand 1979 dot..sdtlassot oe,mdie n. ouh"of"etopt lent1 accohl - ENERGY CONSUITTIO PER CAPITA - A .. 1 c--pti.n ~fd.'tio and Proide a imited rage of medical facilitite.Fostt- end lignite. eroem,utsrlgasa.nd hydrt-., ntenn etemlslv n ua optllae rrr bsies50 eia nttr't trloltyl it kiogeams of coa equivalent pe ta pita;196b, 1970, and 1979 teo--s Sipeialised hospitam at included only coder tonal. dana. bdsiasioes pee gaseitul Ned - Steal somber of adeisaican near diucheeges-Pt.1 ad Intl -b.l d...J- di--ge POPULIbTION ANDfITAL10 STATISTICSdiddbyh.-blIbe. Tanel Papalanios, aid-Te(tosn) A. bof July 1; 1960, 1970, sod 1909 iHOUSING data-i-- b. .tt1 ...i. boceage licen ofH haueld (Persons ear houeod oa,ubn e od diffeemne, deinitions ofabnaoemyafotaprbln fdn n hi anmasMare rldenhmapdo may bot h t-ldd in_ asagautie; 91,191,ad 90 at. heiooebY far statstial ueph. Pagulatiam Prajscnicns Auseafenombee of pertoes petf roam- ea-bilitrhaf,dand rurali- Paaa inaI yea 2000 - Cartoon population proetin aebae o 98,ero, proey eetesi all .nbe., o'.alb, nd naalocupe cAuvena total PoPulattan by age end saod their cta y an etlt ees wl _ns sye isy wlinealdneprannsenu n plevel,an fealelft epcsopaailca a.01per.Th.aa fontinetoal nelils wthandeniln in . liin --antroa the birthrats is eue no th dealtes sa -elsa tb -gsiutur..ee- en l-eet of al age an.. abs-peier level 'us petete ofd re.peani- sals cnseut Ths i ahieed sl siar enilly ece daltn a prmar saaa-sg paalniae; orall leloeeyhil tn sed -1 of-omtre plts. tel.a.ny Theigyatiaery populaias dc.as..o...nie mit as" esa edtattayn i otliest ayense 11 percent estimate as thebasis ofthe prae ansiP chrateit pire of nb oulto slet coman --rI areI belli nBsav n-eoficil cholyge inh n -eyea 210,an then . nutsd of delieoffrtltyne to rp.lete- Stuaosba-anl aeedfeae-Cmue s bv;scsdn se:nt ftlevel eduaatiarfquin.aejleasefour.y.es.of appoved prmaryEtesrCttiOn ele as been reache. usPasli1ydj of EP12 ato R17ier fae;trepnanetusssa eee PuoutenioJ.letsitt enal_oded, Path.h.agiuta lu CmuedP sabv fa -hnio Run t ind essly e sdprmaso eadr ........u.i_ant. only;1960t190 and1979dana PYrl-nsebc ra,tio-enmry r feoaedayh - Toed_ stu set senodled11 Paplo-tiasbe iseuthuesb.~ (rpit)-Cf irs(1.ess,makn-ae. pnesn sa edr lvl iiedb.abn of tachrsis eke _4yss.adrtrd 0 er dae)uspnangsoli-fd aa arsadn leel. d. ! letn,h b,190 e 1909dat, adlt itesly ave rersec -P litrat adolts )l to ea aed arise PesaiemuhPt ftet totaa- a20a00eowo naechf ttalsd-aaprcoae fCedldlt pouatio egfed 15 years andaer. yea popla;tio pnsfar i 1950-hit1900-0,.end.910-09 latins fr 190-08 190-00. .h. h.ad90-9 Y-ah..spen Cars. fret thousand raelain _- Pssae den cmpis ty poplaton 19ty 1900, ndl190 dat2 rod tst no 7g ...e plicf pger huado -- Papud tie- gstladeso- famly Fauig-a1 aan.enua thuan ds)-1h978 nuberof toetor Fleoivr fs thuadrnltand)..dl - T -1naon fotbodoat e .to1di of hinn-eu t.. device .unde Cheildatf. natia1a yasly) p.lknig-g prgns gna ubi penthosad ppuation; ...de cml. tacosed. in rthisn Fa4l als ndog-tied 6ancent of manne eaen p-.Fnteog g of mant-le pIt coutries aad ivyersela sicaino F esn fet 1911 dt,. ,~~~~~~~~~pbitnttdevtdpiaiyc eodn ggnlns.I scnIee is anti calenda Rnan hpauls. C ediiAnncaret primar good (e t.g. id-ro aud. eail uni. lts. Pt.. Lt.. ~t .l t ed. i. tee are e6uc96ded).,oggregana7 prodoani-s-of each countryItinPbused.an.L.d E5FY)tCF teiul vng tpradunar ) prc sig _ts; 91-h,1 9-1, otd 190 data. Toapao Fee(husnsp onaiai ctt eens nld per day. f b1o9a50 supplies c1pt9sd70 eicp7d9tln Cmut esOaSMTIOmpNe 90 95ed17 ae quactiheR ace in- foo-ad prosceng,al l-ebslto. O-thn-ikndo. eqins,- baiulos(pret)-lbo ocei anig foretry otn n mtes.. ace196t0 yP0bae opysoaia ,.sEr am ti fishIng us pecerg. f oa thaha farce; 1900, 1970. ad10dens. vCyD hath Rt onaideth nlag -oviAt scsdethl tePertre oy egts Indut-y (rercat)-lbrfreinsvn,cntutin em toa and ea dscniutia of opuatio, ae allalog10 prcet fa oass ataed lsntiaiy. aoer nd ga asph-ao... oftatf labr Fote; 910 household. level;.71 196-d5 190, sdR177dtai17 sad199 am neC upl fbodpela. e.spl.odod sd.i..a bon s atvty s e optda natal,sale, ten Easel esltfocea alonte o 5_ rs o atlpotu andy n 0 rm of av:Ime ead Oh I, 19 i,an 1909 dna- t. T reset buedan wh ' p ticip-if rtes yalse rotei, of sich i1 grm hudh amlpoen hs sad elc n g-s tacn ofIhe apustightnd ag Im ted:.f hidaeloe ht hs f 0 gas o tta prtiIadd rasoPfeetmae.eafa aiaen_ots atna roenaso neasfa h rd papae by -0toth Tirdl Easai eedoclai :atoo oueia ne 5so 1adae dal od uvy -A 9111y!' -65 90ad10 dana to6the1totallahdn fn79 Child (ages 1-4 Panraliry Note(par thaussad)- iAnnual death perltlucad-i Peecenaeof Pivat Incod(ahi atadbnd seodb lbe age etu 1-4yess, o chdr(P i thsag rap forl noedvlpnPoc a peIre'r, rihest 20yaacn,poaea2 ecn,no orstlec tries ata deived fov lif tables; 19f 1900 and-T1909 data, of bausebo-ld. PtAlf otut. P.CI al life lapeteentr n 9 --m f (years - veag umero perlflfenmtigTh alwa esi-ce arever. aprov lan .rdoeso. ovrylaeo at bIieirt;19d 90 nd10 data. aedd in laud hen iosrIr wih-cosde fb a otlt d ionaeityPt ae huad Annual death ofiof ants ndrav1 Te Estimatd bhiNote PoeorIcm level... i ff ato rbnad oa of age ep thouend liv little Ph'ue aet income lP"e v tha Eeticano loa- tlo hchomiia foudcato. orsadof lctdntnt hn10mtr e housefmay he personC._Al..Inoefte Atantry... Pas lfnei Bedeid - nh s thrrl ctidene111d, as . keog aittin resoa le l acIdeof ab house. faroaltratEsimte Pocatv ilth bealr ope aoeLvlfeca)-r dovt.hv. ccad ipaonint ato _thedyi tendin the.~dfld lv.J i_ fasi-y' soanen aced ilead-... .9 f..n Nubrofpoleg fiord, -ta, nn seve by ban -t disposalORas the collectIon iI- and dipoal nube-Hh- or 96ick 5u tretmnt ofd lames9adets. Tcaomt ad Scia Dta tvt cud waae-waan byeater-arns ystem an te use f pitprivis andatmi- caaaec loaysne nd dnfantidv Dapttmae P prlaca e NniaPesndoplto -Pvdn bygnambe otpeacfinin tylaefc-Psnduteurss dractias n o-unsee,,0,. .f.li  - 27 - ANNEX I Page 4 of 5 ZAMBIA ECONOMIC INDICATORS GROSS NATIONAL.PRODUCT IN 1978/79 ANNUAL AVERAGE RATE OF GROWTH 'S, constant 1970 prices) US$ Min. % 1965-1974 1974-1980 GNP at Market Prices 3,569 100.0 2.4 -1.6 Gross Domestic Investment 811 23 6.1 -18.5 Gross National Saving - 416 12 5.7 -20.2 Current Account Balance -395 -11 Exports of Goods, NFS 1,406 39 2.1 -3.4 Imports of Goods, NFS 1,512 42 3.9 -11.9 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1980 (preliminary) Value Added Labor Force 1/ V.A. Per Worker USS Min. S Mln. % USS % of Ave. Agriculture 510 14.3 0.873 52.0 584 25.5 Industry 1,428 40.1 0.252 15.0 5,667 247.0 Services 1,624 45.6 0.428 25.5 3,794 165.4 Unallocated - - 0.126 7.5 - - Total/Average . 3,562 100.0 1,679 100.0 2,294 100.0 GOVERNMENT FINANCE General Government2/ Central Government (K Mln. % of GOP ( K Min.) % of GDP 1980 1971 - 79 Current Receipts 764 25 26 Current Expenditures 1,028 34 27 Current Surplus -264 -9 -2 Capital Expenditures 87 3 6 External Assistance (net) 94 3 3 MONEY, CREDIT and PRICES 1965 1970 1972 1974 1975 1976 1977 1978 1979 1980 (Million K Outstanding End Period) Money and Quasi Money 107.6 355.6 341.0 440.7 493.0 623.0 699.0 640.0 832.0 907.0 Bank Credit to Public Sector 2/ -88.7 -163.8 147.2 78.1 373.0 571.0 791.0 1062.0 1122.0 1354.0 Bank Credit to Private Sector 42.3 136.9 165.0 335.8 393.0 399.0 470.0 462.0 483.0 505.0 (Percentage or Index Numbers) Money and Quasi Money as % of GDP 15.1 27.8 25.5 23.1 31.1 33.3 35.8 29.1 31.7 29.9 General Price Index (1963=100) 76.2 102.6 114.6 132.1 145.4 172.8 207.0 240.9 264.3 295.2 Annual percentage changes In: General Price Index 8.2 2.6 5.4 8.1 10.1 18.8 19.8 16.4 9.7 11.7 Bank Credit to Public Sector 691.4 -61.9 378.2 53.1 38.5 34.3 5.6 20.7 Bank Credit to Private Sector 3/ 21.9 -9.7 92.1 17.0 0.2 17.8 -10.2 14.5 4.6 NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. / Total laber force as of June 1978, distributed by sector according to 1974 pattern; unemployment are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first Job. 2/ Figures do not differ significantly from "Central Government". __ Includes parastatal organizations not available not applicable April 1982  - 28 - ANNEX I Page 5 of 5 ZAMB I A TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANM ! SE EXPORTS 1980 1977 1978 1979 1980 (preliminary) USS Mln. % (Millions US S) Exports of Goods, NFS 963 988 1,378 1,406 Copper 1,260 91 Imports of Goods, NFS 1,007 1,025 1,046 1,512 Cobalt 60 4 Resource Gap (deficit = -) -44 -37 332 -106 Lead and Zinc 40 3 All other dommodities 24 2 Total 1,384 100 Non-factor Services (net) -100 -140 -124 -229 Net Transfers - 84 -100 -75 -60 Balance on Current Account -228 -277 133 -395 EXTERNAL DEBT, DEC. 31,,1980 USS Mln. Direct ForeTgn Investment .. Net MLT Borrowing Public Debt, Incl. guaranteed 1,969 Disbursements 244 364 306 305 Non-Guaranteed Private Debt Amortization 120 161 350 1/ 17Q Total Outstanding & Disbursed 1,969 Subtotal 124 203 -44 135 Capital Grants . . . DEBT SERVICE.RATIO FOR 1981 4/ Other Capital (net 200 75 19 160 % Other Items n.e.i. ) -169 -90 -73 -31 Increase in Reserves (+) -74 -89 35 -131 Public Debt, Incl. guaranteed Non-Guaranteed Private Debt Gross Reserves (end year) 74 60 88 60 Total Outstanding & Disbursed 22.0 Net Reserves 2/ (end year) -227 -396 -354 -485 (est.) Imports of petroleum 84 85 121 188 IBRD/IDA LENDING, Mm-ch 31, 1982 (Mllion USS) RATES QF EXCHANQE (SDR's or USS per Kwacha) 3/ IBRD IDA US5 SDR's Before February 1973 1.40 . Outstanding & Disbursed 325.65 5.17 February 1973 - July 1976 1.55 . UndTsbursed 88.38 39.58 July 1976 - March 1978 . 1.0848 Outstanding Incl. April 1978 - December 1981 . 0.9763 Undisbursed 414.03 44.75 ANNUAL AVERAGE 1977 1.27 1.08 1978 1.23 0.98 1979 1.26 0.98 1980 1.27 0.98 1981 1.15 0.98 i/ Including US$186 million of reduction In arrears. 7/ Excluding external payment arrears. T/ The Kwacha has been pegged to the SDR since July 1976. _/ Ratio of estimated debt service, excluding arrears and IMF repayments, to exports of goods and non-factor services. not available not applicable April 1982  - 29 - ANNEX II Page 1 of 8 STATUS OF BANK GROUP OPERATIONS IN ZAMBIA A. STATEMENT OF BANK LOANS AND IDA CREDITS as of March 31, 1982 Amount in US$ Million Loan Credit (Less Cancellation) No. No. Year Borrower Purpose Bank IDA b Undisbursed 17 Loans fully disbursed 277.00 900-1 1973 Zambia Education 33.00 8.60 919 1973 Zambia Elec- Hydroelectric tricity Power 115.00 4.37 Supply Corp. 1131 1975 Posts & Tele. Telecommunications 32.00 6.68 1210 1976 Development Development Finance Bank of Zambia Company 15.00 0.65 1356 1977 Zambia Education 13.30 6.15 1424 1977 Zambia Industrial Forestry 16.80 5.55 1566 798 1978 Zambia Third Highway 11.25 11.25 22.29 863 1979 Zambia Coffee Production 6.00 3.10 873 1979 Zambia Technical Assistance 5.00 4.42 1790 973 1980 Zambia Third Railway 25.00 15.00 38.52 1923 1981 Development Second Development Bank of Zambia Finance Company 15.00 9.13 2001 a 1981 Zambia Eastern Province Agric. Development 11.00 11.00 1196 a 1982 Zambia Smallholder Dairy Dev. 7.50 7.50 Total 564.35 44.75 127.96 of which has been repaid 130.92 - - Total now outstanding 415.53 44.75 - Amounts sold 49.57 of which has been repaid 48.07 1.50 - Total now held by Bank/IDA b 414.03 44.75 - of which is undisbursed 88.38 39.58 132.01 a Not yet effective b Prior to exchange adjustment Note: The US$18.0 million Southern Province Agricultural Development Loan approved on December 15, 1981 has not yet been signed.  - 30 - ANNEX II Page 2 of 8 B. STATEMENT OF IFC INVESTMENTS as of March 31, 1982 Investment US$ Million Equivalent No. Year Type of Business Loan Equity Total 216 ZA 1972 Zambia Bata Shoe Company Limited Shoe Manufacturing 0.85 0.23 1.08 250 ZA 1973 Zambia Bata Shoe Shoe Manufacturing Company Limited and Tannery 1.20 - 1.20 307 ZA 1975 Century Packages Limited Packaging Materials 0.78 0.21 0.99 324 ZA 1976 Development Bank Development Finance of Zambia Company - 0.54 0.54 394 ZA 1978 Century Packages Limited Packaging Materials 0.10 - 0.10 483 ZA 1979 Nchanga Consoli- Copper and Cobalt dated Copper Mines Production 28.00 - 28.00 527 ZA 1980 Kafue Textiles of Zambia Limited Textiles & Fibers 7.60 - 7.60 600 ZA 1981 Nchanga Consoli- Copper Production dated Copper Mines 31.04 - 31.04 Total gross commitments 69.57 0.98 70.55 Less cancellations, terminations, repayment and sales 10.44 - 10.44 Total now held by IFC 59.13 0.98 60.11 Total undisbursed 40.75 - 40.75  - 31 - ANNEX II Page 3 of 8 C. STATUS OF PROJECTS IN EXECUTION as of March 31, 1982 Loan No. 900-ZA Third Education Project: US$33.0 million Loan of June 6, 1973; Effectiveness Date: August 9, 1973; Closing Date: March 31, 1983 The project, as originally approved (excluding certain university components and technical assistance that were deleted at Government-s re- quest), was completed in March 1980, about six months after the original completion date. The Closing Date, originally September 30, 1979, was postponed to March 31, 1983 to enable the Borrower to utilize savings to finance construction of twelve primary schools originally included under the Lusaka Squatter Upgrading and Sites and Services Project (Loan 1057-ZA) and a maintenance program for secondary schools. Five of the primary schools are under construction; tender documents for the remaining seven are almost complete. Commencement of construction of the seven schools may be delayed due to lack of counterpart funds and the need to secure new sites for three schools. The maintenance program is progressing well with most of the five experts in post. Loan No. 919-ZA Kafue Hydroelectric Project (Stage II): US$115.0 mil- lion Loan of July 16, 1973; Effectiveness Date: Jan- uary 15, 1974; Closing Date: December 31, 1982 The two 150-MW units at the Kafue Gorge power station were com- missioned in mid-1977. Construction of the main dam has been completed and the reservoir filled. The project is expected to be completed within the appraisal cost estimates. The Zambia Electricity Supply Corporation-s (ZESCO) financial performance has not been satisfactory; tariffs were how- ever increased 20 percent for domestic users and 30 percent for industrial users during 1979. Largely because of the economic recession affecting Zambia, ZESCO has been experiencing a shortage of spare parts and the de- parture of some expatriate staff. The Closing Date was extended to Decem- ber 31, 1982 to enable additional civil works on the control of artesianal pressures to be carried out. Loan No. 1131-ZA Telecommunications Project: US$32.0 million Loan of June 24, 1975; Effectiveness Date: December 10, 1975; Closing Date: December 31, 1983 About US$5.4 million of the loan still remains to be committed. Project completion is now expected by June 30, 1983, three years behind schedule, due to delays in installing and commissioning telephone exchange  - 32 - ANNEX II Page 4 of 8 equipment. Increases in tariffs (averaging 75 percent), approved in August 1979, have reduced dependence of the Posts and Telecommunications Corpora- tion (PTC) on government financing of local costs of the project. The problem of large accounts receivable by PTC from Government and its agen- cies continues. Operational difficulties with the semi-electronic main telephone exchange in Lusaka also have severely affected PTC-s revenues. The Closing Date was postponed from December 31, 1981 to December 31, 1982. Loan No. 1210-ZA Development Bank of Zambia: US$15.0 million Loan of February 18, 1976; Effectiveness Date: April 23, 1976; Closing Date: March 31, 1982 The loan has been fully committed for a number of projects in various manufacturing industries such as chemicals, textiles, packaging, food processing and in agriculture. The Closing Date was postponed from September 31, 1981 to March 31, 1982 to permit disbursements for equipment already ordered by DBZ' subborrowers. The Bank is preparing to close the loan account as soon as outstanding disbursements have been completed. Loan No. 1356-ZA Fourth Education Project: US$13.3 million Loan of January 17, 1977; Effectiveness Date: March 8, 1977; Closing Date: March 31, 1983 Civil works are complete except for minor works to the kitchen and dining room at the Evelyn Hone College and the printshop at the Nation- al Education Services Center (NESC). Seventy percent of all furniture and equipment has been delivered. The NESC and the Farmer Institutes and Training Centeres are underutilized because of recurrent budget shortages. About US$3 million of the loan allocated for technical assistance is uncom- mitted due to the Government's reluctance to hire foreign consultants on high salaries and a lack of suitable candidates for the fellowship pro- gram. The project unit is well staffed and manages implementation well. Loan No. 1424-ZA Second Industrial Forestry Project: US$16.8 million Loan of May 12, 1977; Effectiveness Date: November 15, 1977; Closing Date: December 31, 1983 Project implementation continues to be satisfactory despite staf- fing and management problems. Industrial Plantations Division's incorpora- tion has not yet been effected, due to protracted consultations between government agencies. Planting targets are being met. The audit report between January 1980 and March 1981 shows a loss of US$423,500 caused by frequent plantation fires and ineffeciencies in sawmilling and logging operations.  - 33 - ANNEX II Page 5 of 8 Loan No. 1566 Third Highway Project: US$22.5 million (US$11.25 mil- and lion Loan and US$11.25 million Credit) of June 27, Credit 798-ZA 1978; Effectiveness Date: November 26, 1979; Closing Date: June 30, 1983 Due to delays in loan and credit effectiveness and employment of technical assistance personnel, project implementation is behind schedule and completion is expected by the end of 1985, 18 months behind reappraisal (July 1979) estimates. Progress in recruiting technical assistance person- nel has improved. The Government is reviewing a report on a consultant's study of the MSD reorganization and will submit its assessment to the Bank shortly. Consultants have started carrying out feasibility studies of the Mansa-Mwense-Nchelenge road and estimate that the draft feasibility report will be completed by May 1982. The Bank is currently reassessing the proj- ect scope in light of the Government's difficulties in providing the local recurrent funds for road maintenance. Credit No. 863-ZA Coffee Production Project: US$6.0 million Credit of December 14, 1978; Effectiveness Date: July 26, 1979; Closing Date: June 30, 1984 Expatriate and counterpart staffing are satisfactory and the planting and rehabilitation program for coffee and maize, as well as dis- bursements, are ahead of schedule. Implementation under the smallholder component has been slow and haphazard and lacked adequate guidance and supervision. The coffee research component is underway. The estate compo- nent is in financial difficulties, with a shortfall of about US$5.0 mil- lion, because costs have been much higher than expected. The Government has obtained agreement in principle from KfW for additional financing to cover the cost of the coffee processing plant. Credit No. 873-ZA Technical Assistance Project: US$5.0 million Credit of December 21, 1978; Effectiveness Date: July 12, 1979; Closing Date: June 30, 1984 A planning expert and a project evaluation expert have been hired to work in the Project Preparation Unit of the National Commission for De- velopment Planning and a second project evaluation expert is being recruit- ed. Phase I of feasibility studies for a fuel alcohol project has been completed; preparation of a possible fisheries project is in progress; a request to finance Zambia's contribution to the joint operational and staf- fing study of Zambia Railways and TAZARA has been approved; and a request for financing feasibility studies for a rural electrification project is being considered.  - 34 - ANNEX II Page 6 of 8 Loan No. 1790-ZA Third Railway Project: US$25.0 million Loan and US$15 Credit No. 973-ZA million Credit of June 16, 1980; Effectiveness Date: March 31, 1981; Closing Date: September 30, 1984 The project is cofinanced by the EEC (through a Special Action credit), AfDB, Japan, OPEC Special Fund, KfW, SIDA and ODA (UK). Procure- ment is proceeding well and disbursement, which lagged due to delays in is- suing letters of credit, is expected to regain momentum. Technical assist- ance for project implementation is proceeding well and, likewise, train- ing. Due to TAZARA's limited capacity, much copper has been sent to Dar- es-Salaam by road rather than by rail, thus reducing Zambia Railways- (ZR) share. This, combined with an increase in working expenses and the lack of tariff revision, has caused financial difficulties for ZR. The Government is considering a tariff increase and the Bank is discussing its possible assistance for improving TAZARA with the Governments of Tanzania and Zambia. Loan No. 1923-ZA Second Development Bank of Zambia Project: US$15.0 million Loan of January 8, 1981; Effectiveness Date: May 1, 1981; Closing Date: June 30, 1987 The loan is almost fully committed for 17 sub-projects in manu- facturing, agriculture and transport. Loan No. 2001-ZA Eastern Province Agricultural Development Project: US$11.0 million Loan of November 23, 1981; Effective- ness Date: Scheduled for June 23, 1982; Closing Date: June 30, 1987 Implementation has been slow due to ineffective coordination among concerned ministries and agencies and the bulk of the PPF advance is unutilized. Progress in fulfilling conditions of effectiveness is slow as are construction of houses and procurement of transport equipment. Govern- ment now intends to retain a consulting firm to provide key project staff. Credit No. 1196-ZA Smallholder Dairy Development Project: US$7.5 million loan of March 24, 1982; Effectiveness Date: Scheduled for June 23, 1982; Closing Date: June 30, 1988 The project is designed to increase milk production and raise in- comes of smallholder dairy farmers in Mazabuka, Monze and Kabwe Districts by increasing use of modern farm techniques and improving marketing ser- vices. Credit will be extended to smallholders for on-farm development and animal husbandry and veterinary extension services will be provided. Con- ditions of effectiveness are expected to be met on schedule.  - 35 - ANNEX II Page 7 of 8 D. IFC PROJECTS IN EXECUTION Zambia Bata Shoe Company Ltd. (216-ZA and 250-ZA) - Shoes and Tannery IFC's investment in 1972 helped finance an expansion project to triple shoe production to 2.9 million pairs. The project also opened up the ownership of the company to local investors. In 1973 IFC's investment helped finance a tannery to process 300 hides per day to meet the company s requirement for leather. The foreign exchange situation of Zambia con- tinued to limit raw material imports by the company. However, more local materials are now used by the company, and this resulted in a 14 percent increase in production during 1980. The company has been operating profit- ably. Century Packages Ltd. (307-ZA) - Packaging Materials The plant was completed in 1977, about a year later than origin- ally anticipated, with an increase in project cost equivalent to 26 percent of total costs. Increased project cost has been met largely through provi- sion of additional financing acquired under the Project Funds Agreement. Sales during the fiscal year ended March 31, 1981 were stagnant at the pre- vious year's level. Increases in administrative expenses, especially pro- vision for doubtful debts, and interest cost contributed to the loss re- corded for the year. Development Bank of Zambia (DBZ) (324-ZA) - Development Banking DBZ- principal objective is to provide medium- and long-term loans and equity financing for productive enterprises in manufacturing, ag- riculture and tourism. Since 1979, the volume of DBZ business has been in- creasing. Loan approvals, which had stagnated around US$9.5 million per year in 1976-78, increased to about US$28 million in FY80 and US$49 million in FY81. Profitability has also improved: between FY80 and FY81, net profit rose from US$1.7 million to US$2.7 million, a roughly 60 percent in- crease. At the end of FY81, the total portfolio of DBZ was US$41 million as compared with US$28 million at the end of FY80. Nchanga Consolidated Copper Mines Ltd. (NCCM) (483-ZA) - Cobalt Production The IFC loan of US$28 million (of which US$20 milion is for IFC's account) to NCCM for a cobalt production production project was approved on September 4, 1979. The project will more than triple NCCM-s finished co- balt production to about 43,000 tpa by 1983. The project is currently under implementation, and physical completion of the project is expected by mid-1982, on time and approximately within budget.  - 36 - ANNEX II Page 8 of 8 Nchanga Consolidated Copper Mines Ltd. (NCCM) (600-ZA) - Copper Production IFC's second investment in NCCM was a loan of DM 70 million (equivalent to about US$30 million). IFC's loan which was approved on De- cember 3, 1981, will help finance a major expansion of the company's tail- ings treatment capacity. The project will produce an average of about 35,000 tpa of finished copper starting in 1984, equivalent to about nine percent of projected total company output, at a cost far below the com- pany's existing operations. Kafue Textile of Zambia Ltd. (KTZ) (527-ZA) - Textiles A loan investment of US$7.3 million and a contingent commitment of US$0.3 million were approved in 1980 to assist KTZ' US$28 million expan- sion. In the expansion, the company's production capacity will be increas- ed from 10.6 million meters of finished fabrics per year to 18.9 million meters and diversification into the production of cotton blended fabrics will be carried out. The project is still under implementation and is scheduled for completion in June 1983.  - 37 - ANNEX III Page 1 of 1 SUPPLEMENTARY PROJECT DATA SHEET I. Timetable of Key Events (a) Time taken to prepare project Approximately 8 months (From June 1981 to September 1982) (b) Project Prepared by Zambia Industrial and Mining Corporation Limited (ZIMCO) and INDENI Refinery Company Limited (c) First Presentation to the Bank : June 1981 (d) Departure of Appraisal Mission : September 1981 (e) Negotiations April 1982 (f) Planned deadline of effectiveness August 1982 II. Special Bank Implementation Action Energy Assessment Mission will supply the project consultants with necessary data by end June 1982. III. Special Conditions (a) Disbursement for Phase II work of the project will be subject to review of Phase I work and agreement between the Government, ZIMCO and the Bank on the option selected as optimum (para. 56); and (b) Borrower and Guarantor to review recommendations on petroleum fuels pricing and taxation structures and consult with the Bank on these recommendations and on a mechanism and timetable for their implementation (para. 34).  -38 - ANNEX IV Page 1 of 11 REPUBLIC OF ZAMBIA INDENI REFINERY MODIFICATION ENGINEERING PROJECT TERMS OF REFERENCE Background 1. The Republic of Zambia has a 25,000 barrels per day refinery located in Ndola. The refinery (INDENI Petroleum Refinery Company) is jointly owned by the Zambia Industrial & Mining Corporation (ZIMCO), a state-owned company and AGIP of Italy. The refinery has been designed to process Light Arabian crude spiked with naphtha, kerosene and gas oil in a 3:1 ratio by weight. The main process units at the refinery are: (i) a crude unit, (ii) distillate hydro- treater, (iii) a product fractionator, (iv) a catalytic naphtha reformer, and (v) an asphalt unit. There are no secondary processing units. Currently, the refinery has to process 43% weight-spiked Arabian Light crude to meet market demand. Consumption in recent years has been shifting to the middle distillates; the shift is believed to be influenced by widely varying tax rates among dif- ferent products and by pricing policies which tend to favour the middle distil- lates. Concerned about the increasing proportion of spikes that have to be processed, the Government of Zambia (GRZ) has proposed a detailed engineering study to determine whether changes in taxation and pricing policies, together with possible process modifications to the refinery could improve the operat- ing efficiency of the refinery and result in net economic gains to the country. The study is to be carried out within the framework of the Government's overall energy program which seeks to replace petroleum fuel uses, where feasible, with indigenous hydroelectricity, coal and ethanol produced from surplus molasses, and conserve petroleum fuel consumption through restructuring of consumer prices of refined petroleum products to reflect their true economic cost to the coun- try. A Project Unit has been established under ZIMCO which will make available basic engineering and market data. Parallel to this study, the World Bank is assisting GRZ in carrying out an assessment of its energy resources, require- ments and policies, which will also be made available to the selected consul- tants. It is essential that the proposed engineering study be closely coor- dinated with the above energy assessment study. Objectives of the Study 2. The main objectives of the study shall include: (i) Projection of petroleum fuel requirements to the year 2000, taking into account the availability of indigenous coal and hydro-electricity which could economically replace fuel oil; electrification of the railway system to eliminate/reduce diesel oil; the petroleum fuel conservation plans of GRZ and plans for production of ethanol from surplus molasses as a blend with gasoline. Projections should be made under two scenarios: (i) using existing pricing and taxation policies; and (ii) using assumptions which eliminate price distortions among petroleum products caused by existing tax and cross- subsidy pricing policies;  ANNEX IV Page 2 of 11 (ii) Determination of an appropriate pricing structure for refined petroleum products that would reflect their true economic cost to the country and a more rational structure of taxation for these products; (iii) Determination of the extent to which modifications of the existing refinery facility are required to meet projected fuel demand under each of the two scenarios in (i) above. Such a determination should include comparative economic analysis of various technological options (e.g., fluid catalytic cracker, hydrocracker or hydrocracker with a residuum desul- phurizer and residuum deasphalter) and recommendation of the most economic option under each scenario. (iv) Improvement of plant operation by streamlining the maintenance system, expanding the training program, debottlenecking existing units, adopting better operating practices, modern- ization of instrumentation to detect and help reduce energy and material losses and improving process control and product quality should be considered along with any modification option considered; (v) Preparation of a comprehensive and documented compilation of all data regarding the recommended option and any modifications required, including technical descriptions of the option, implications on offsites and utilities, the capital and operating costs to a degree of reliability of + 15%; the basis on which they have been estimated and identification of sources and terms of financing, including suppliers' credits; and (vi) Preparation of basic engineering, design and detailed plans for implementation, including project management, procurement, construction and supervision, cost control, project scheduling, plant start-up, etc.; preparation of bid documents for the selection of the engineering contractors. 3. The proposed study will be carried out in two phases. Phase 1 will cover objectives (i) to (iv). Within six months of commencement of work, the consultants will be required to submit a preliminary report on the Phase 1 work. Phase 2 (objective (v) and (vi)) will be carried out only after review by GRZ and the World Bank of the Phase 1 work, and the recommended modifications have been approved. To fully meet the objectives of the study, the selected consultant firm will be required to provide highly qualified experts with an in-depth knowledge of the structure and economics of the petroleum industry and its technologies. If the selected consultant firm is deficient in any area of the proposed study, it would be required to associate itself with a qualified specialist partner to overcome the deficiency.  - 40 - ANNEX IV Page 3 of 11 Scope of Work 4. The scope of work is divided into two phases; Phases 1 and 2 are complementary and should be considered an integral part of the study; initiation of work on Phase 2 will, however, be contingent on the emergence of a technically and economically viable refinery modification option consequent to completion of Phase 1 and acceptable to GRZ. Phase 1 Phase 1 study shall include, but not be limited to the following: A. Demand/Supply of Petroleum Products (i) Review all available information on energy consump- tion in Zambia with particular emphasis on the extent of the demand served by petroleum fuels; establish past trends and discuss the extent to which these trends have been modified or constrained by crude oil prices, interfuel substitution programs, the level and structure of taxation (customs duties, sales and excise taxes) with particular reference to individual petroleum products and cross-subsidization in the pricing of products, and economic conditions in the country; (ii) Review in detail the mining industry-s proposed plans for fuel oil substitution as well as the investment implications of such substitution for the development of indigenous sources of energy such as hydroelectric power and coal. Assess the extent to which such sub- stitution would affect future demand for petroleum fuels, in particular in the mining and railway sectors; prepare specific economic analysis of each substitution alternative available to the mines, taking into account investment requirements for the production and delivery to the mines of each particular energy source and the cost to the copper mines of switching from fuel oil to the particular energy source; by comparison with fuel oil, rank the alternative energy sources available for substitution at the economic delivered cost at mine-head." (iii) Review the impact of the proposed ethanol from molasses project at Nakambala on the future demand for gasoline; (iv) Prepare two sets of demand projections for indivi- dual petroleum fuels in Zambia to the year 2000, taking into account economic indicators, such as projected GDP growth rate, income elasticity of demand and the results of the review in (i),  - 41 - ANNEX IV Page 4 of 11 (ii) and (iii) above. The two scenarios which should be used are: (a) assuming existing poli- cies of taxation and pricing (i.e., cross-subsi- dization among products) and (ii) assuming a uniform rate of taxation for all products set a rate which would yield approximately the same amount of revenue as at present and assuming economic pricing for all products (i.e., eli- mination of cross-subsidization among products); prepare demand forecasts for individual products for Zimbabwe, Malawi, Botswana and eastern Zaire; (v) Review crude oil types and sources, examine availability of such crudes to Zambia and assess the extent to which heavier crudes like Arabian Heavy may have to be processed; (vi) Prepare a price forecast for the major types of crude oils and refined products up to the year 2000 in real terms. All assumptions should be clearly spelled out; (vii) Review the price relationship between refined pro- ducts and crude oil; (viii) Review Zambia's existing crude oil procurement practi- ces and recommend any changes likely to reduce overall procurement cost; changes recommended in this regard should be supported by clear documentation of the potential benefits; (ix) Review the operating reliability of the existing Dar-es-Salaam-Ndola crude oil pipeline and recommend any modifications that might be required; and (x) Prepare a breakdown of the cost of each type of feed per metric ton into: (a) f.o.b. cost, (b) insurance, (c) freight to Dar-es-Salaam, (d) port handling charges, (e) pipeline throughput charges, and (f) landed cost at refinery. B. Marketing and Distribution of Petroleum Products (i) Review the organizational institutional framework for marketing and distribution of petroleum products in Zambia (companies involved, ownership, size, geophysical/product coverage, etc.); (ii) Review the physical facilities used for transporta- tion, storage and distribution of petroleum products in Zambia; indicate the volumes transported by each  - 42 - ANNEX IV Page 5 of 11 transport mode, the size and locations of storage facilities, and recommend any changes necessary to improve the system; (iii) Prepare a breakdown of the retail price for each refinery product into: (a) landed crude cost, (b) refinery processing cost, (c) dealer/retail mar- gin, and (d) taxes; compare retail prices with those prevailing in neighbouring countries (Zimbabwe, Malawi, Tanzania, Zaire and South Africa); and (iv) Based on forecast of petroleum fuels for Zimbabwe, Malawi, Botswana and eastern Zaire, review the com- petitiveness of petroleum products supply from Zambia to these countries and recommend marketing strategy for Zambia, if appropriate. C. Refined Product Pricing System (i) Review the pricing structure and policy for retail prices within Zambia and identify any subsidies; and (ii) Compare ex-refinery and retail prices with interna- tional prices (f.o.b. and c.i.f.), and in the light of this comparison and conclusions in Section B(iii), recommend a mechanism for ensuring that ex-refinery prices of refined products in Zambia reflect the full economic cost to the country. D. Existing Refinery (i) Describe the INDENI Petroleum Refinery Company ownership distribution, financial statements for the last three years, auditing system, organization chart, number and type of departments, number of Zambian and expatriates in key positions, Board of Directors, frequency of Board meetings,, company by-laws, etc.; (ii) Review existing process units, utilities, storage, offsites, infrastructure, etc., including their age, and any bottlenecks to operations; (iii) Discuss past production performance (volume of operations, capacity utilization, etc.); (iv) Provide a process flow diagram showing material balances; and (v) Describe measures in place to meet environmental standards.  - 43 - ANNEX IV Page 6 of 11 E. Least Cost Analysis (i) Review the existing product specifications with respect to distillation range, flash and smoke points, cetane and reseach octane numbers and sulphur content and examine the extent to which these specifications can be changed without harm- ful effects on user equipment life, cost of operation and the environment; (ii) Based on the projected demand scenarios in Section A, the analysis in Section D, and recommended product specification changes in Section E(i) above, evaluate the options available to Zambia under each taxa- tion/pricing scenario for meeting its petroleum fuel requirements to the year 2000. Assumptions and any new facilities/units associated with each option should be clearly identified with the particular option. The options considered shall include, but not be limited to: (a) continuing to operate the existing refinery based on the existing configuration to meet the projected petroleum product demand as much as is feasible. Evaluation of this option shall include detailed review of the existing configuration and an evalua- tion of the extent to which it could meet future demand by: (1) processing other types of crude oils; (2) blending refined products to meet market demand profile; and (3) blending different crude oils to meet market demand profile; (b) Confining refinery operations and existing pipeline to process 100 per cent crude oil within the constraints set by market demand for fuel oil and supplementing market require- ments through procurement of refined products; evaluation of this option should consider all altenatives for transportation of the supple- mental refined products to Zambia, including by rail and construction of a second pipeline dedi- cated to import of necessary refined products to supplement market requirements; possible economies through completion of loops on the existing pipeline should be taken into account;  - 44 - ANNEX IV Page 7 of 11 (c) Mothballing the existing refinery and converting the existing Dar-es-Salaam-Ndola crude oil pipeline into refined product pipeline and modi- fication/expansion of tank farm and reception facilities for importing requirements in refined form. Arrangements and facilities for importing products not compatible with transporting via the pipeline should be clearly identified and detailed; (d) Evaluation of alternative processing configura- tions for integration into existing refinery based on Fluid Catalytic Cracker (FCC) designed to maximize products dominant in the projected demand profile; (e) Evaluation of various alternative processing configurations for integration into the existing refinery based on hydrocracker con- figurations; (iii) Each configuration considered should be described in sufficient detail (new facilities/units requied, size, process/technology/licenses to be used, etc.), and the technical flexibility of each unit in the con- figuration clearly established; efficiency, product quality and yields of such units should be indicated by means of comparison with more recent units else- where; (iv) Prepare capital and operating cost estimate (in ade- quate detail and broken down into local and foreign exchange cost) based on preliminary engineering design for each option; the estimate should include any addi- tional utilities, ancillary facilities infrastructure required to ensure operating viability of each option considered; (v) Provide a schedule of implementation and estimated annual disbursement for each option; and (vi) By means of comparative economic analysis using a range of opportunity cost of capital from 12% to 20%, rank the options considered starting with the option most likely to result in maximum net benefits to Zambia. Assumptions and details of the analysis should be clearly shown.  - 45 - ANNEX IV Page 8 of ll Phase 2 Phase 2 will be executed only if Phase 1 leads to the conclusion that modification of the refinery would result in substantial economic benefit, and shall include, but not be limited to, the following: A. Development of Project and Engineering Design Package (i) Provide detailed description of the scope and configuration of the option approved by GRZ including size of facilities, process/techno- logy/licenses to be used, rationale for its selection, and how new facilities are to be integrated into existing facilities; (ii) Provide detailed process design of the option selected, optimize the process configuration, determine optimum capacities adequate to provide capacity to meet projected market demand for a period of at least 15 years from plant start-up; (iii) Describe the source and type of feedstock to be utilized by the project's facilities; (iv) Describe the utility facilities (water, power, coal, steam, etc.) to be provided or expanded under the project--their size, the inputs to be used, the source of energy, reliability of external supply of utilities; (v) Describe the offsites and infrastructure facili- ties required by the project; (vi) Analyze the environmental impact of the project such as hydrogen sulphide, sulphur oxides and nitrogen oxide emissions and the devices and controls that will ensure that the project will be constructed and operated in accordance with international and local environmental standards; (vii) Determine infrastructure needs of the project such as access roads, ability of bridges to carry maximum loads, port facilities at Dar-es-Salaam, etc.; and (viii) Develop all required engineering design data adequate for the general contractor to proceed with the detailed engineering and execution of the project. Data on the process design engineer- ing package should include material and energy  - 46 - ANNEX IV Page 9 of 11 balances, estimate of utilities, process flow diagrams showing major process lines, equipment and material balances, piping and instrument diagrams showing process piping, line sizes, vessel sizes, skirt heights and instrumentation, reference drawings for each process unit with applicable standard drawings for individual pro- cess units, design specification for each piece of equipment (supported with dimensioned drawings where applicable) giving operating and design conditions, materials of construction and process conditions, plot plan layout, detailed specifica- tion of all offsites facilities including storage tanks and utility system, and process start-up and operating instructions in sufficient detail for the general contractor to prepare operating manuals. B. Project Implementation Arrangements and Schedule (i) Propose arrangements for procurement, construction, commissioning and operations, including guarantees and bonuses/penalties for process performance, schedules, feed and utilities consumption, etc.; (ii) Design suitable organizational and administrative arrangements for the efficient management and supervision of project construction and operations, including a detailed assessment of needs of foreign staff and consultants by categories and by duration; (iii) Indicate total additional staffing requirements for the new facilities as appropriate, identify sources and provide a training program which will lead to effective eventual Zambianization of the operation; (iv) Review existing refinery operations management agreement with AGIP of Italy, and in the light of the operating management requirements of the proposed modifications, recommend any changes that may be required; (v) Prepare a model operations management agreement that could be used as a basis to negotiate a new agreement; and (vi) Develop a practical economic and expedient plan for the implementation of the project, and draw up a realistic and detailed time schedule for project implementation.  - 47 - ANNEX IV Page 10 of 11 C. Capital and Operating Cost Estimate (i) Prepare detailed revised estimates of the capital cost of the project broken down into foreign exchange and local costs, with equipment, utilities, infrastructure, offsites, freight, engineering, erection, construction, pre-operating costs, customs duties, physical and price contin- gencies, interest during construction and permanent working capital shown separately; (ii) Provide an expenditure/disbursement schedule; and (iii) Prepare detailed operating cost estimates with detailed breakdown into local and foreign exchange costs, and showing specific consumption of all in- puts and utilities; assumptions used for the estimates should be clearly stated. D. Financing (i) Review possible sources of financing for the project, including internal cash generation, additional equity, loans and suppliers- credits and the terms and conditions under which each source of financing could be secured; and (ii) Prepare a financing plan for the project based on the source and contributions established in (i) above. E. Financial and Economic Analysis (i) Evaluate the financial viability of the overall project on the basis of discounted cash flow projections and internal financial rate of return calculations. The assumptions used in the finan- cial evaluation should be fully explained. The computation should include a risk analysis to evaluate the sensitivity of the project to critical factors; (ii) Evaluate the economic viability of the overall project on the basis of internal economic rate of return. For this purpose, all inputs and outputs should be evaluated at their economic opportunity cost, rather than at domestic market prices which may reflect market imperfections. For internationally tradable goods and services, CIF international prices can be used as representative of opportunity costs. Appropriate risk analyses should also be made; the assumptions used in the evaluation should be fully explained;  - 48 - ANNEX IV Page 11 of 11 (iii) Prepare projected financial statements (Balance Sheet, Income Statements and Cash Flows) for 15 years, in current prices; (iv) Evaluate the impact of the project on the region of the country in which the project is located and iden- tify direct and indirect social and economic benefits. Consider possible changes in some of the parameters of the project and its infrastructure that could have favorable impact on the region. Analyze the social and economic benefits and cost of these changes in order to permit a decision on the desirability of executing them; and (v) Prepare Invitation to Bid (ITB) documents.  IBRD 16275 -8