Tunisia - Fourth Power Project

Document of 'IThe World Bank FOR OFFICIAL IJSE ONLY g i,2 S A- 7c'2 Report No. 4817-TUN STAFF APPRAISAL REPORT TUNISIA FOURTH POWER PROJECT June 4, 1984 Projects DepartTmnt Europe, Middle East and North Africa RrJional Office |This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Tunisian Dinar (TD) Tunisian Millimes 1,000 = TD 1.000 US$1.49 = TD 1.000 US$1.00 T TD 0.67 WEIGHT' AND MEASURES 1 cubic meter (m3) = 35.315 cubic foot (cu ft) 1 kilogram - 2.206 pound (lb) 1 hectoliter (hl) = 100 liters (1) 1 metric ton (t) (1,000 kg) = 1.10 short ton (sh ton) 0.985 long ton (Ig ton) I kilowatt (kW) = 1,000 watts 1 Megawatt (MW) 1,000 KW 1 Megavoltampere (MVA) = 1,000 kilovoltampere (KVA) 1 kilowatthour (kWh) = 1,000 watthours I.Gigawatthour (GWh) I million kWh 1 kilovolt ('KV) = 1,000 volts 1 kcal (kilocalorie) = 3.968 Btu (British thermal unit) 1 toe = 1 ton of oil equivalent (10.200 x 103 kcal) = 1,053 m3 of El Borma Gas = 1,150 m3 of Algerian (Royalty) Gas GLOSSARY OF ABBREVIATIONS BAD - African Development Bank CT - CombustionI Turbine ICB - International Competitive Bidding ETAP - Entreprise Tunisienne d'Activites Petrolieres LCB - Local Competitive Bidding LIT - Limited International Bidding LRMC - Long Run Marginal Cost NASA - National Aeronautics and Space Administration NESDP - National Economic and Social Development Plan PGM - President General Manager SOTEMI - Societe Tunisienne d'Expansion Mini'ere SOTUVER - Societe Tunisienne de Verrerie SNDP - Societe Nationale de Distribution de Petrole STEG - Societe Tunisienne de l'Electricite et du Gaz STIR - Societe Tunisienne des Industries de Raffinage UTB - Union Tunisienne des Banques Soci,ete Tunisienne de 1'ElectricitA et du Gaz Fiscal Year January 1 to December 31  - i - FOR OFFICIAL USE ONLY TUNI SIA POWER IV PROJECT Table of Contents Page No. I. ENERGY SECTOR ................... 6 ................ 1 A. Energy Resources . ....... .. . ............. 1 Oil . .......................... .....*...... 1 Oil ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1. G a s .........l... ..... Hydropower ...... . ........ *..... 0. 2 Coal and Geothermal ** .. . 2 Renewable Energy Resources . ......... 2 B. Sectoral Organization. . .. ... 3 C. Energy Demand and Supply .............. 3 Energy Balance . ..... . .............. 3 Energy Planning and Conservation . . 5 Trends in the Production and Consumption of Electrical Energy ......... 5 D. Energy Pricing . ... *..... . .... 6 Petroleum Products ..6 Electricity Pricing . .......... 7 E. The Beneficiary: STEG ...................... 8 Existing Facilities and Equipment 8 Development Program .......... 8 Manpower and Training .O10 F. 'The Past and Future Involvement of the Bank in the Energy Sector .......... 10 II. THE PROJECT . .......... . .. .... 11. The Setting ...11 Objectives.......... 12 Project Description, Scope, Beneficiaries and Location . . .12 Project Cost Estimates. . . .... 13 The report was prepared bv C. Christofides (Engineer), L. Meek Foote (Financial Analyst), and E. Baranslhamaje (Economist), based on an appraisal mission in July 1983. This document has a restricted distribution and may be used by recipients only in the performance of i their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Table of Contents (Cont'd) Page,No. II. THE PROJECT (cont'd) Project Financing ..* ................. . 15 Status of Project Preparation . ............ 15 Engineering ......9... ..... ........... , 16 Project Implementation .. ............. .. . . 16 Construction Supervision ..................... 16 Procurement .... .. . .. *. .. ,.. 16 Disbursement ..... . . ............ 18 RetroacLive Financing and Advanced Contracting 19 Environmental Aspects ...... 19 Risks . ... 9.. 99.9..........19 II,FINA',,,E ,................... . .. . .. . 19 A. Overview .. 19 B. Recent Performance ....... *.......... 20 Return on Assets and Electricity Pricing.. 20 Financing Strategy and Debt Service Coverage .*999*9*9 ~99*9999.9.* * , , ,, , 20 Working Capital and Receivables Collection. 22 Other Business Activities. 24 C. Audit, Accounting Procedures, and Management Information Systems... ..........*9.... 24 Audit and Accounting Procedures..... 9..... , 24 Insurance......... ,., 25 Taxes.. .........- ,25 Management Information Sys temst........ 25 D. Future Performance and Financing Plan......n. 26 Financial Position in 1984................. 27 l985 and Afterwards.......................9 . 27 IV. PROJECT JUSTIFICATION , , .. . 30 A. Background .......... . . . . 30 B. Least Cost Alternative . 31 C. Return on Investment . 32 V. ECOMMENDATIONS ...33  - iii - lable of Contents (cont'd) ANNEXES 1.1 Energy Balance; 1976-1990 1.2 Forecast Suipply of Gas to STEG: 1982-1990 1.3 STEG's Installed Generating Capacity; 1977-1988 (MW) 1.4 STEG's Available Generating Capacity; 1977-1988 (MW) 1.5 S'fEG's Available Net Generation and Energy Delivered for Distribution: 1977-1988 (GWh) 1.6 Historical National Electrical Energy Balance: 1977-1982 1.7 STEG's Transmission & Distribution Sy,tems. 1977-1988 1.8 STEG's Original and Revised Load Forecast: 1981-1991 1.9 Petroleum Products Prices in Tunisia in Local Currency: 1980-1982 1.10 Domestic Prices of Petroleum Products in Tunisia Compared with CIF Prices of Imported Products in 1982. 1.11 STEG's 1983 Elecricity Tariffs 1.12 Long Run Marginal Cost (LRMC) of Electricity Supply 1.13 STEG - Organization Chart 1.14 STEG's Administrative Regionalization of Tunisia 1.15 Organization of a >'strict Office of STEG 1.16 Schedule for Improving STEG's Operations and Monitoring Indicators 1.17 Renewable Energy Resources 2.1 Rural Electrification Component - List of Equi,.iment and Materials 2.2 Urban Rehabilitation - List of Equipment and Materials 2.3 Summary of Project Cost Estimates (TD Million and US$ Million) 2.4 Yearly Project Cost Estimates (TD thousands) 2.5 Yearly Project Cost Estimates (USg Million) 2.6 Estimated Implementation Schedule 2.7 Estimated Disbursement Schedule (US$ Million) 2.4 Disbursement Profiles s 3.1 STEG-Historical Pattern of Financing of Capital ;;penditures 3.2 STEG-Summary of Performance Indicators: 1981-1988 3.3 STEG-Income Statement; 1981-1988 3.4 STEG-Balance Sheet: 1981-1988 3.5 STEG-Sources and Application of Funds: 1981-1988 3.6 Notes and Assumptions for Financial Forecasts 4.1 Assumptions Used for Project Least Cost Analysis 4.2 Least Cost Analysis for STEG' s Investment Program 4.3 Assumptions Used for the Calculation of the Economic Rate of Return or the Rural Electrification Component 4.4 Calculation of Economic Rate of Return of the Rural Electrification Component 4.5 The Economic Rate of Return of STEG's Overall Investment Program 5.1 Selected Documents Available in the Project File MAP IBRD 17421  I. THE ENERGY SECTOR A. Energy Resources 1.01 Tunisia's presently known indigenous energy resources consist principally of oil arnd associated and non-associated gas, in addition to some lignitc, 65 MW of hydropower and about 250 MW of pumped storage potential. Regarding renewable energy, Tunisia has a good solar regime and winds of fair veloaity sweep the coastal areas for a considerable part of the year. In addition, geotherimal springs and underground hot water resources are known to exist in various locations. 1.02 Oil: The proven recoverable oil regerves, located principally onshore, are presently estimated to be about 70 miilion tons, out of total proven and probable rceerves of about 80 million tons. Output from the existing two major jil fields (El Borma and Ashtart) is expected to decline, but development of some small new fields is expected to increase total. output from 5.0 million tons in 1982 to about 5.6 million tons in 1990. However, the decline in production from El Borma and Ashtart conbined with the rapid growth in internal energy demand could render Tunisia a net oil importer by the end of the decade (Annex 1.1).i/ 1.03 Gas: Tunisia's total associated and non-associated gas reserves (proven, probable and possible) are estimated at about 93 billion cubic meters 2' (80.5 million toe). In 1982, domestic production of associated gas was about 0.49 million toe of which El Borma, exploited since the 1970's, contributed about 80%. However, the gas from El Borma will be declining after 1984 and is expected to cease by the early l990s (Annex 1.2). The two main proven offshore gas fields (Miskar and Jugurtha), which are presently undeveloped, could yield 1.5 miltion toe per year once brought on stream. There are other small offshore discoveries which require further drilling before their reserves can be assessed. Onshore prospects have been identified and their intensive exploration is underway. The timing of the development of other gas fields is of critical importance and would have an important bearing on the future energy balance of Tunisia (para. 1.15).!' 1.04 Starting in 1984 Tunisia will also have ar annual supply of natural gas (about 0.2 million toe increasing to 0.4 million toe Dy 1987) received free as a transit fee for Algerian gas transported to Italy, through the 1/ For more details on oil and gas resources, see Report No. 4137-TUN "Tunisia Review of the VIth Development Plan", Vol. II, dated JuLne 29, 1983. 2/ Proven and probable reserves amount to about 77 billion cubic meters, and possible reserves an additional 16 billion cubic me-ers.  transcontinental pipeline.-I In addition, in early 1984, STEG signed a three-year contract with Algeria to purchase additional gas. 2 1.05 Hydropower: Tunisia's hydropower potential amounting to only 65 MW has already been exploited (Annex 1.3). The contribution of these plants to the overall future demand for energy will amount to less than 1%. In addition, a pumped storage plant of up to 250 MW could be developed in conjunction with the Kasseb reservoir. Presently, however, this scheme is not economically viable. 1.06 Coal and Geothermal: Small deposits of poor quality lignite are known to exist at Cap Bon, in the northeastern part of Tunisia. Exploitation of these deposits is presently under study. In addition, lignite deposits (1.5 m thick) have been recently discovered at Sabria about 140 km southwest oF the city of Gabes but presently no plans exist regarding the delineation of these deposits. Hot water springs and underground hot water resources exist at several locatiors in Tunisia but the extent of the geothermal potential has not yet been determined. Tunisia is, however, considering initiating a study for the preparation of a map and the ranking of its geothermal resources. 1.07 Renewable Energy Resources: Tunisia has a good solar regime, with insolation varying between 2,800 and 3,600 hours per year. To date, two demonstration projects for the exploitation of solar energy have been completed. Although all the systems of both projects operate satisfactorily, the cost per kWh generated is about three times the economic cost of energy produced by alternati-'e conventional. generating plants. Urtil the cost for installing and operating such systems drops considerably, such projects will not be economically viable for replication in Tunisia, except in very remote and isolated areas where the subtransmission custs are forbiddingly high (Annex 1.17). By contrast, the economic viability of solar water heaters has already been established. STEG has estimated that by 1986, about 10,000 units (manufactured locally) could be installed, provided a public information and education campaign is undertaken, possibly accompanied by a credit scheme to encourage purchasers. 1.08 Presently no data are available regarding the prospects of using eolian energy in Tunisia. It is known, however, that winds of fair velocity (about 30 km per hour) sweep the coastal areas for a considerable part of the year. To assist Tunisia in collecting data regarding the eolian and solar regimes of the country, the Technical Assistance Project (Loan 2197-TUN) includes a component which would finance 20 wind and solar measuring stations. In addition, a wind-driven pumping station financed by bilateral 1/ Tunisia has the option of receiving this gas in kind, or selling it to Italy at a price equal to that of the Algerian gas. 2/ From April to September, 1984, 100 million m3; from October 1984 tM September 1985, 250 million m3; and from October 1985 to September 1986, a quantity to be determined.  aid has been installed at Hammam Biadha. Since the prospects for the use of eolian energy seem to be good, a partly Government-owned enterprise, the Societe d'Exploitation et de Recherche Petroliere Tunisienne (SEREPT), began in mid-1983 developing a prototype multi-blade wind mill, and production would start once the prototype has been successfully tested (Annex l.i7). B. Sectoral Organization 1.09 Tunisia's energy sector is mana-ed by the Ministry of National Economy through five directorates under the leadership of a Director General, an energy planning unit, and a number of state-owned enterprises. In the oil subsector, ETAP (Entreprise Tunisienne d'Activit6s P6troli6res), a Government-owned enterprise, coordinates oil imports, oil exploration and production activities; STIR (Societe Tunisienne des TndUstries de Raffinage), also a Government-owned enterprise, operates the refinery, while SNDP (Soci6t6 Nationale de Distribution de Petrole), supplements the private firms in the distribution of refined petroleum products with a market share of about 40%. 1.10 The Societe Tunisienne de l'Electricite et du Gaz (STEG) is responsible for the public supply of power, gathering, transporting and distributing associated and non-associated gas, and manufacturing and distributing town gas in the city of Tunis (para. 1.24). In addition to STEG, several industries generate their own electricity and sell any surplus to STEG. C. Energy-Demand and Supply Energy Balance 1.11 Historical Trends: Tunisia is almost totally dependent on hydrocarbons for meeting its commercial energy requirements (Annex 1.1). In 1982, oil comprised about 80% of the commercial energy consumed!'; natural and manufactured gas comprised another 16%, and the remaining 4% was met by hydro and imported hard coal and coke. In the period 1976-1982, when the average real rate of growth of GDP was 5.3% per year, the growth of energy consumption averaged 8.3% per year. This high rate of growth of energy consumption, which is expected to continue through the decade, was primarily due to: the low domestic prices of energy, the accelerated growth of the industrial sector, especially such energy-intensive industries as building materials, chemicals and refineries, and the low energy consumption per capita (470 kgoe/capita compared to 1,130 kgoe/capita for Portugal). 1/ The petroleum products consumed had the following mix: LPG 5%; gasoline 7%; jet fuel 6%; kerosene 5%; gas oil (diesel) 39%; and fuel oil 38%.  - 4 - 1.12 Production of crude oil and gas increased from about 4.8 million toe in 1976 to 5.5 million toe in 1982, while hydropower production averaged 12 thousand toe. Up to the pcesent time Tunisia remains a net exporter of crude oil (2.7 million tons in 1982) and the Government continues to depend on the foreign exchange provided by these exports to sustain the growth of the economy. However, because of the limited local refinery throughput (1.5 million tons per year) and the growth in demand, Tunisia has continued to import oil products. 1.13 Future Development: The forecast of energy balances to year 1990 (Annex 1.1) is based on the following assumptions: (i) CDP would increase at an average of about 4.5% a year over 1984-1986 and 5.0% a year over 1987-1990, a lower rate than the 5.3% annual growth experienced in 1976-1982; (ii) gas would increasingly displace cil. mainly because the known domestic oil reserves are insufficient to maintain the present level of production beyond the early 199C's; (iii) the effect of the implementation of measures to ensure conservation, substLtution and utilization of renewable encrgy resources would take a while to materialize; and (iv) extension of electricity service to about 71% of the popuLaition by 1988.'` Based on the above assumptions, gross consumption of energy in the period 1982-1990 is forecast to increase at an average annual growth rate of 9.2% (from 3 million toe to 6 million toe). 1.14 Natural gas is expected to play a major role in meeting Tunisia's future energy requirements. In addition to the gas received sS a transit fee, the Government has several options for meeting tie future energy demand of the country. These options include the development of the proven potential gas fields (e.g., E1 Franig, Miskar, Jugurtha) which would require heavy capital investment, and the purchase of gas from Algeria by tapping the tianscontinental pipeline (para. I.04). Presently tlhe Government is examining the available options, and is expected to make a decision by late 1984. 1.15 In the absence of a decision to develop new gas fields, Tunisia's domestic energy balance is expected to deteriorate, with the export surplus declining from about 2.6 million toe in 1982 to about 0.1 million toe in 1990. 1/ In 1977 electricity service was provided to about 40% of the population (Annex 1.7).  - 5 Energy Planning and Conservation 1.16 The Government's energy pricing policy, including reduction of petroleum product and electricity subsidies (pares. 1.21-1.24), is expected to influence energy demand and lead to energy conservationi. In addition, with bilateral assistance from USALD the Government has undertaken energy conservdtion and data coll.ection stuidies. A number of independent studies focusing on the six major energy consuming sectors of the eccaumy (industry, agriculture, transportation, households, commerce .-nd public services) are underway. These studies aim at identifying opportunities for energy conservation, and would be used to outline several scenarios for developing and managin'3 the energy sector. The Government is expected to review its energy policy in the light of the results of theae studies. Trends in the Production and Consumption of Electrical Energy 1.17 Historical Trends: Since its incorporation (1962) STEG was faced with a high growth rate of demand which in some years (1978 and 1979) reached as high as 17% per year. Between 1962 and 1981 demand grew at an average rate of about 12% per year. To meet the demand, STEG, starting in 1970, embarked ora a systematic expansion of the newly integrated national system, and by 1981, its installed generacing capacity was increased about eight-fold (from 116 to 900 MW), the production of electricity nine-fold (from 288 to 3,125 GWh) and the number of customers four-fold (frum 200,000 to 758,000), while distribution lossee where reduced from 18% to 14% (Annexes 1.3 to 1.7). , 1.8 STCEG prepares its least cost expansion program subject to a capital constraint. Consequently, STEG's investment decisions were, and continue to be, dictated by its ability to finance this program. Because of the Government's reluctance to increase electricity tariffs significantly in real termaJ/, STEG was led to make investment decisions, which at times, deviated from the least cost expansion path that STEG would have followed in the absence of a capital constraint. Thus, in the period 1977-1978, STEG installed an additional capacity of 150 MW combustion turbines (CT) deferring until 1980 the construction of a steam power plant, although construction of such a steam power plant woiuld have been justified on technical and economic grounds five to seven years earlier, had the financial resources been available. STEG is presently implementing a least cost investment program. 1.19 In 1982, GD? grew by about 1% compared to the historic rate of about 5.3%, reflecting the international recession as well as poor agricultural output. Consequently, peak demand and net generation grew by only 7% and 4% respectively, largely reflecting a drop irn the growth of demand from major high voltage consumers. Other factors which also contributed to the unusual decline in the growth of demand were the unexpected plant breakdown and advancement of waintenance programs in some large energy intensive industrial complexes (steel p!.ant, phosphate mines and cement plants). During the same 1/ Between 1970-1981 electricity tariffs were increased on the average by L.7% per year in real terms.  yea-, medium and high-voltage consumers accounted for 72% (2,014 GWh) of STEG's total sales, while low-voltage consumers accounted for the balance of 28% (790 GWh). Of the 820,000 low-voltage consumers, about 80% were domestic 1/, 18% small commercial, industrial and public lighting, and the remaining 2% irrigation pumping. Of the domestic consumers, 84% lived in urbani areas, and the remaining 16% in rural conglomerations and rural dispersed areas. 1.20 Future Development: Within the context of the five-year (1982-1986) Sixth National Economic and Social Development Plan (NESDP) and considering the slowdown L2 economic growth experieniced in 1982, STEG adjusted the 1983 demnand projections to accoullt for the unprecedented industrial plant breakdown, and revised downwards its 1984-1991 load forecast (Annex 1.8). STEG forecasts that in 1983 peak demand would grow by about 17%, net generation and sales by about 12%, and the number of customers by about 8%. For the remaining part of the Sixth NESDP (1984-1986), STEG projects that demand would continue to grow at a somewhat lower than the historic rate (11% compared to 12%), while demand is expected to slow down to an average rate of about 9% for the Seventh NESDP (1987-1991). STEG -- being aware of the inherent uncertanties involved in demand forecasting -- plans its generation expansion program in sequential phases and revises its load forecast at least once a year. Thus, if STEG's 1984 review of the load forecast indicates that demand would not grow as currently forecast, investment in excess generating capacity could be avoided by postponing construction of the Rades (B) power plant by one year (para. 1.30). Tunisia's projected GDP growth for the Sixth and Seventh NESDP, and STEG's load forecast were reviewed by the Bank and were found acceptable. D. Energy Pricing 1.21 Petroleum Products: Up until 1980, domestic prices of petroleum products were either maintained unchanged or increased at a lower rate than the price surge which occurred in the international market. The pricing policy followed prior to 1980 had the effect of encouraging the creation of energy intensive industries, and made investment in energy conservation schemes unattractive. Starting in 1981, the Government, realizing that this pricing policy could no longer be sustained, introduced successive and at times drastic increases in the prices of petroleum products (Annex 1.9), and started investigating the potential for energy conservation (para. 1.16). Under Loans 1864-TUN and 2003-TUN the Government agreed to raise prices of petroleum products to international levels by end-1986. This covenant is slightly modified in the proposed loan to reflect the fact that domestic consumer prices for some petroleum products, such as gasoline, already exceed international levels. The increases introduced to date are in line with this timetable. While in 1980 the overall subsidies (net of taxes) on petroleum products amounted to about US$127 million, in 1982 the net amount of subsidies 1/ Including water heaters (metered separately) which account for about 5%.  - 7 - on retail petroleum produc:ts had been reduced to about US$64 million.-/ Domestic retail prices of LP(, Kerosene, gas oil and fuel oil. ranged from 6W to 95% of border prices in 1983, while gasoline was priced at about 180% of the border price. On a weiglhted averaige basLs, domeiestc consumer prices for petroleum products are about 90% of internatLollal prLces (Annex 1.10). 1.22 Electricity PrLcing: For Iiigh anct medium voltage customers, rates are based on time of day (peak/off peak). For low voltage customers, seven different classes of rates are applicable: domestic, space heating, small industrial users, and grain mills, each having a flat rate; agriculture water pumping and water heating, each having an off-peak rate: atud public lighting, which lhas a declining block tariff (Anrnex 1.11). At present STEG's average electricity rate is only slightly below (92%) the reLated economic cost of supply (Annex 1.12). Subsidies remain significant for hiigh voltage consumers only, for which tariffs are estimated to be about 74% of the long runl marginal coBt (LRMC).2/ Industries, which accounted for about 67% of electricity sales in 1982, have previously not been encouraged to make efficient use of energy nor to invest in energy conservation. Electricity subsidies were made possible in part, by STEG benefitting from relatively low fuel prices and the supply of El Borma gas almost free to be used for power generation. The Govern-w-nt, however, is moving awa;- from its past policy of promoting industrLal and commercial development through cheap energy. 1.23 Consistent with this new pricing policy, STEG and thie Government reached an understanding with the Bank during negotiations .hat the structure of electricity rates would increasingly reflect the economic cost of supp: of differenit voltage levels. The following calendar, or such other dates acceptable to '.he Bank, would be followed. By November 30, 1984, STEG and the Bank would agree on a methodology for calculating LRMC, and determine the terms of reference for a study which would: (a) compare actual rates with the LRMC and (b) analyze the impact of bringing rates in line with the LRMC. The study, including conclusions arid recommendations, would be furnished to the Bank by April 30, 1985, for review and comment. STEG, the Government, and the Bank would agree by September 30, 1985 on an iction plan implementing the recommeendattons of the study, which the Government and STEG would subsequently follow. 1.24 The Government's intention to remove the subsidies on petroleur; products (para. 1.21), combined with the foreseen depletion of the El Borrna gas and STEG's expansion program, will result in an increased need to substantially raise STEG's tariffs in the years to come (paras 3.25-3.27). This might be mitigated by the possible substitution of less costly fuels such as coal for fuel oil, and gas for diesel oil, to enable STEG to reduce its operating costs. In order to assist Tunisia in achieving the substitution of gas for diesel oil, the Bank under Loan L864-TUN has financed the construction of gas pipelines. The option of substituting coal for fuel oil is currently under study, but is not expected to be implemented before the 1990's at the earliest. 1/ The estimate of subsidies on petroleum products in 1980 is based on FOB prices, whereas the estimate for 1982 is calculated on the basis of CIF port of Tunis prices. 2/ In 1983, low and medium-voltage tariffs were about 102% and 93%, of their corresponding LRMC.  - 8 - E. The Beneficiary: STEG 1.25 STEG is a public enterprise incorporated in 1962. Its organization chart is given in Annex 1.13. Operations are managed from "he Head Office in Tunis. For administrative and operational purposes, the country is divided into 27 Districts with their managers reporting to six regional managers who in turn report to the Deputy General Manager (Annexes 1.14 and 1.15). The head of'ice staff provides technical support to the districts, and supervises and coordinates their activities. The districts are responsible for: operation, maintenance and rehabilitation of the system in their jurisdiction, customer relations, warehousing, transport, surveys and preparation of detailed engineering of new distribution projects, supervision of contractors, and data collection and planning for future expansion of their local systems. 1.26 Although STEG's present organization is adequate for the fulfillment of its tasks, further decentralization appears to be necessary. However, more training of the regional administrative and accounting staff would be needed in order to render such further decentralization effective. STEG is aware of this need and is beginning to take satisfactory steps in training the required staff. Existing Facilities and Equipment 1.27 STEG currently operates four steam power plants (548 MW), five hydro plants (65 MW), nine simple cycle combustion turbine plants (489 MW) and some small diesel plants amounting to a total of 4 MW. Most of this capacity has been added since 1970, when STEG launched an ambitious expansion of the interconnected system. Except for some of the diesel stations located in isolated areas, the generating stations are interconnected (see Annex 1,3 and IBRD Map No. 17421). 1.28 The main transmission system operates at 225-kV, with a 225-kV ring around Tunis, and 150-kV and 90-kV lines to serve the rest of the system. The total length of this system is about 2,370 km. The length of medium-voltage lines (10, 15 and 30 kV) is about 13,800 km, and low voltage lines and cables (220-V and l00-V) are about 16,600 km long (see Annex 1.7 and IBRD Map No. 17421). Development Piogram 1.29 To meet the forecast demand for electricity, STEG has formulated an ambitious investment program for 1983-1988, estimated to cost about US$930 million in current prices, or US$540 million in 1983 prices. Although this program is 35% larger in constant dollar terms than the investment program which STEG achieved in 1976-1982, it is considered to be within STEG's technical implementation capacity. The 1983-1988 investment program is summarized below. 1.30 Expaxision of the generating facilities involves: (a) installation of 5x32 MW of simple cycle CTs commissioned in 1983 at a cost of  - 9 - US$60 million1'; and (b) erection in two phases (A and B) of a 4x160-MW steam power plant at Rades (boilers suitable for firing with fuel oil, gas or coal). Phase (A) of the Rades plant (2x160-MW) is to be comwissioned in 1985, and phase (B), consisting of the remaining units (2x160-MW), is currently scheduled for commissioning in 1988/89. All except one of the 5x32-MW CTs would be fired with gas ("royalty gas" received from the intercontinental gas pipeline), and in 1984 would displace the old CTs operating on diesel oil. They would also assist in xieeting the demand after the old units of Goulette I are retired and until the first unit of Rades (A) is commissioned. Thereafter, they would replace some of the older CTs that would be retired. 1.31 Extension and reinforcement of the transmissiot system consists of; (a) construction of 5 km of 150-kV line, reinforcement of a 30-kV line, and erection of a 225/30-kV substation, to be completed in late 1983; (b) construction of 2 double-circuit 225-kV lines to complete the 225-kV loop around Tunis, and connection of the island of Kerkennah to the national grid through two submarine cables, to be completed by 1985; and (c) construction of a dispatching center, reinforcement of existing 90/30-kV transformer stations, and the construction of new 225/30-kV and 150/30-kV transformer stations by 1988. With the exception of the d5spatching center, the scope of the last two projects is not yet well defined. 1.32 Extension and reinforcement of the distribution system consists of: (a) rural electrification; (b) rehabilitation and extension of the urban distribution systems; and (c) extension of medium voltage system to supply new industries. The 1983-1988 rural electrification program aims at the reduction of migration of rural inhabitants to urban areas by creating jobs, stimulating small industry and electric water pumping, and improving living conditions in rural areas. The objective is to increase the level of access to electricity service in rural agglomerations2' from 37% in 1982 to 67% by 1988 (Annex 1.7). The Government, realizing the financial burden imposed on STEG by the electrification of many villages within a short period, has agreed to contribute about 60% of the total cost associated with the electrification of rural Tunisia. The rehabilitation of the urban networks constitutes a necessary measure that STEG has to take in order to improve the quality of service it provides, and its revenues by reducing in stages the present distribution losses-', and to reach 100% electrification level in urban areas. 1/ This estimate includes substations associated with the plants, spares for at least 3 yea2s of operation, and training of 5 engineers and 15 technicians. 2/ An agglomeration is defined b) the Tunisian Government as a cluster of not less than 10 solid wall (brick) houses with a maximum distance of 100 meters between any two adjacent structures. 3/ First stage started under Loan 2003-TtN. The second stage aims at reducing losses from 14.2% to 13.2% by 1988.  - 10 - Manpower and Training 1.33 Manpower: At the end of 1982 STEG's total number of regular staff was 6,689 of which 1,118 were professional, 4,059 skilled technical and administrative, and 1,512 unskilled. This staff is considered adequate and capable of conducting STEG's current activities. STEG's progress in developing adequate technical staff is illustrated by the growing practice of lending STEG staff to utilities in Arab and French-speaking African countries. Presently 320 STEG staff are on secondment, primarily in Libya and Saudi Arabia. Reabsorption of these individuals when they return to STEC might create overstaffing problems. To avoid such an eventuality, STEG will need to control recruitment of new employees and plan well in advance the use of returning seconded staff. Productivity of STEG's staff has been improving. In 1982, the ratio of energy sold per employee was 356 MWh/employee, 11.3% up front the 1979 level of 320 MWh/employee. 1.34 Training: At present the output of the National Polytechnic Institute (Ecole Nationale d'Ingenieurs) is adequate to cover STEG's needs in engineers and those of the rest of the economy. In addition, the corporation constructed in 1976 a training center staffed with 70 instructors of which 30 are permanent training staff. The center offers basic training courses to middle level technical and administrative personnel, and seminars and upgrading courses. STEG's 1983-1988 development program includes a training component which consists of: (a) extension of the training center by const.ucting 3 new dormitories and the allied classrooms and other facilities; (b) construction of a laboratory for tests and measurements; and (c) erection of a full size medium voltage network for training of personnel on live lines. Some equipment and tools used in the training center and training of staff abroad is being financed under Loan 2003-TUN. The proposed Project also contains a training component (para. 2.04). F. The Past and Future Involvement of the Bank in the Energy Sector 1.35 The Bank's involvement in the sector started in 1971, with a loan to STEG of US$7.5 million (Loan 724-TUN) to finance the El Borma gas pipeline. The Project was successfully completed and met both its technical and institutional objectives. A second loan of US$12 million (Loan 815-TUN) was made to STEG in 1972 to finance 2x20-MW CTs, transmission and distribution system expansion, and consutlting services for future plant and institutional development. A Project Performance Audit Report written in 1979, concluded that the Project assisted STEG in building its technical experience, and led to the introduction of a more rational tariff structure. One of the lessons learned was the importance of the Bank reviewing more carefully the assumptions for demand forecasts (demand at the time of the first power project was underestimated). A third loan of US$14.5 million (Loan 1355-TUN) was made to STEG in 1977 to finance the installation of 7x21-MW CTs. The Project Completion Report dated April 22, 1983, concluded that greater  - 11 - provision for spare parts should have been made given the severe dispatching schedule under which the units would be operating. A fourth loan of US$37.0 million (Loan 1864-TUN) was made to STEG in 1980 to finance the first phase of a gas pipeline for the distribution of royalty gas from the intercontinental pipeline to the major consumption centers in Tunisia. The next Bank loan of US$41.5 million (Loan 2003-TUN) was made to STEG in 1981 to finance the first three years (1982-1984) of STEG's five-year (1982-1986) distribution program. Although disbursements under this Project were delayed due to the need to revise the procurement documents in accordance with Bank guidelines, the Project is currently being implemented satisfactorily and is not facing any particular problems. Finally a loan of US$4.5 million (Loan 2197-TUN) was made to the Government in 1982 for Technical Assistance, including a number of activities in the energy sector (energy audits of wajor industries; assessment of geothermal resources; planning for handling petroleum products; power system planning; and assessment of wind and solar energy potential). Implementation of the energy component of this loan has proceeded slowly. However, institutional issues which hindered progress have been resolved and satisfactory progress for this component is anticipated in the near future. 1.36 The Bank's continued involvement in the power subsector has contributed in strengthening several aspects of STEG's operations and management. STEG's technical capabilities and practices have reached levels that are almost comparable to those of similar institutions in developed countries. In addition, STEG has been able to achieve a high level of self-financing, and a satisfactory financial position until the last two years (1981 and 1982). STEG's financial performance could be weakened, however, if the Government does not assist STEG with taking steps covenanted under existing loans. The continuation of the Bank's involvement in the energy sector by lending for oil, gas and electricity would strengthen the existing institution building efforts, improve technical standards and achieve overall coordination of energy pricing. It would also provide the opportunity for the Bank to participate in guiding the growth of the energy sector along a least-cost investment path, in assisting Tunisia in the transition to become a net energy importer, while working with the Tunisian Government to postpone this transition through improved energy conservation measures. II. THE PROJECT 2.01 The Setting: In 1982 Tunisia's population was 6.7 million (1,204,000 families) of which 55% lived in urban areas, 21 in rural agglomerations and the remaining 24% in dispersed rural areas. Between 1977 and 1982, STEG's low voltage consuners increased an average of 65,000 annually of which, about 87% were domestic. Thus, by the end of 1982, the level of publically supplied electricity service was: urban 94%; rural agglomerations 37%; rural dispersed 16%; and country as a whole 60%. The Government's objective is to increase, by 1988, the level of electricity service to rural agglomerations to 67% and to extend electricity service to almost all inhabitants living in large urban centers.  - 12 - 2.02 Between 1977 and 1982, urban population increased by 6.22 per year and associated consumption of low voltage consumers by an average of 12% per year. This high rate of population and consumption growth exceeded STEG's forecast, and consequently funds allocated in its budget for the reinforcement and extension of the distribution network were inadequate to provide the required equipment and materials needed to ensure reasonable quality of service. This shortfall, coupled with the higher priority given to generation and transmission, has rendered the urban distribution system inadequate to cope with the demand. On average, the voltage drop in the urban areas is double the maximum acceptable level (20% as compared to 10%), and in certain lines it reaches as high as 40%. Rehabilitation of the distribution system is expected to progressively reduce distribution losses by about 40 (from 14% in 1982 to 8%) over a period of about 15 years. In addition, power failures in most urban load centers are the rule rather than the exception. This low quality of service and the substantial energy losses incurred by STEG have forced the corporation to give top priority to a rehabilitation program of the urban distribution systems. 2.03 Objectives: The Project is a continuation of the Third Power Project (Loan 2003-TUN) and when completed would extend electricity service to the beneficiaries at least cost by implementing a three-year time slice (1985-1987) of the long-term prc,,ram for rural electrification, reducing system losses in urban areas, improving operating efficiency of the system, and continuing the Bank's efforts in assisting STEG to expand its training program. In addition, the proposed Project would follow up on the efforts started under previous Bank loans (1864-TUN and 2003-TUN) in rationalizing energy pricing. To achieve operating efficiency improvements and system loss reduction, STEG agreed to undertake a set of actions and monitor progress achieved through a list of key performance indicators. In addition, STEG agreed to furnish to the Bank for review by March 31 of each year a report, including the agreed monitoring indicators (Annex 1.16). 2.04 Project Description, Scope, Beneficiaries and Location: The Project consists of three components: (a) rural electrification; (b) urban rehabilitation; and (c) the provision of equipment, tools, and training. The rural electrification component would affect 15 Governorates by extending electricity service to about 35,000 new domestic customers -', 1,500 pumping stations 2i, and 50 commercial and small industrial consumers 3'. It 1/ The 1979-1980 survey indicated 27,900 existing customers. Assuming that the historic growth rate would be maintained, the number of customers would grow to about 35,000 by 1985. 2/ The 1979-1980 survey indicated that there were 1,400 pumping stations. By 1985 these stations are expected to increase to about 1,500. 3/ Of the 18 Governorates, the Governorates of Gafsa, Gabes and Medenine are not included in the proposed Project, because their electrification is implemented under a loan secured from the Banque Africaine de Developpement (BAD).  - 13 - involves the supply, construction and erection of about: 1,400 km of medium voltage lines; 1,600 km of low voltage lines; and 25 MVA of distribution transformer capacity (Annex 2.1). The cost of material and installation of public (street) lighting is borne by the budget of the Governorates and is therefore excluded from the Project. The urban rehabilitation component would encompass the entire country, and would improve the quality of service to more than 130,000 existing customers b, rehabilitating the distribution systems of about 60 cities and large towns. It involves the supply, construction and erection of about: 1,100 km of medium voltage lines; 1,000 km of low voltage lines; and 400 distribution transformers with an estimated total capacity of about 40 MVA (Annex 2.2). The third component would provide the necessary construction and erection equipment, and vehicles for the realization of the second component, testing equipment, tools and training (about 70 persons for a total of about 120 man-months, estimated at a cost of $3,500/man-month) which would assist STEG in improving its technical capabilities. STEG agreed to furnish to the Bank for its review by November 30 of each year an outline of the following year's training program in such detail as the Bank shall reasonably request. 2.05 Project Cost Estimates: The estimated cost of the Project is set out in Annexes 2.3, 2.4, and 2.5 and summarized in Table 2.1. The Project base cost estimates are expressed in terms of anticipated end-1983 prices. These estimates were prepared by STEG and reviewed by the Bank and found reasonable.  - 14 - Table 2.1 Sumnary of Project Cost TD Million US$ Million 2 Local Foreign Total Local Foreign Total Rural Electrification 8.55 5.64 14.19 12.76 8.42 21.18 26 Urban Rehabilitation 9.64 6.36 16.00 14.39 9.50 23.89 29 Other Equipment, Tools, Training 2.08 7.46 9.54 3.12 11.13 14.25 17 Base Cost (12/83 prices) 20.27 19.46 39.73 30.27 29.05 59.32 72 Physical contingencies 3.64 2.40 6.04 5.43 3.58 9.01 11 Price contingencies 5.77 4.03 9.80 8.60 6.01 14.61 17 Total Project Cost 29.68 25.89 55.57 44.30 38.64 82.94 100 Front-end fee on Bank loan - 0.07 0.07 - .lO .10 - Total Financing required 29.68 25.96 55.64 44.30 38.74 83.04 100 % Local and Foreign 53% 47% 100% 53% 47% 1002 Note: 1. Total physical contingencies of 20% of base cost are considered appropriate due to the dispersion of the Project area. ]No physical contingencies vere estimated for the third component of the Project (other equipment, tools aad training). 2. Price contingencies for the local cost components have been calculated at 9% in 1984, and 8% p.a. for 1985-1988. Price contingencies for the foreign cost components have been calculated at 7.5% for 1984, 7.0% for 1985, and 6.0% for 1986-1988. Thus, local price contingencies are about 24%, and foreign price contingencies are about 182 of the respective base costs plus physical contingencies. 3. Identifiable taxes and duties are about TD 4.4 million (US$6.5 million equivalent) and the total project cost, net of taxes, is TD 51.2 million (US$76.5 million equivalent). 4. Bank loan assumed US038.7 million (including capitalized front-end fee).  - 15 - 2.06 Project Financing: The proposed loan of US$38.7 million would finence 46% of the total Project cost (L00% of the foreign exchange cost, incLuding front-end fee). Local costs would be met by customers' contributions, STEG's internal cash generation, and Government's contribution towards the cost of rural electrification. The proposed financing plan of the project is summarized in Table 2.2. Table 2.2 Project Financing Plan US$ million equivalent X Local Foreign Total Proposed IBRD Loan -- 38.7 38.7 46 Customers' Contribution 1.7 -1 .7 2 STEG's Internal Cash Generation 24.0 -- 24.0 29 Government's Contribution 18.6 -- 18.6 23 Total 44.3 38.7 83.0 100 2.07 Status of Project Preparation: During 1979-1960 and in anticipation of the Sixth NESDP, STEG through its district offices, surveyed more than 2,000 villages and compiled information pertinent to the electrification of each of those villages. On the basis of this information and following the methodology used by TECSULT rnternational Limited (Canadian consultants) who prepared a rural electrification study for the Fifth NESDP, and suggestions made by the Bank, STEG has prepared a program for the development of the rural distribution system. This program is updated on an annual basis and revised whenever deemed necessary"'. The methodology used for the formulation of the program has been reviewed by the Bank and found satisfactory. The resulting rural electrification program represents the least-cost scheme for expanding the distribution system simultaneously in all Governorates and provide electricity service to the beneficiaries. The Third Power Project and the proposed Project have been derived from this program. 2.08 Since the Government is financing about 60% of the rural electrification component of the proposed Project, it has insisted that STEG include a certain number of villages (33 out of a total of 704) in the proposed Project which although not justified on purely economic basis (para. 4.04), would be included because they have been deemed pockets of poverty hitherto deprived of social services and infrastructure. However, in order to maintain the viability of the Project, the number of economically unjustifiable villages was restricted by setting an upper limit to the average cost per connection, in each Governorate, of 700 TD (US$1,045) in end-1983 prices. 1/ For the preparation of the proposed project, the program was revised on the basis of updated data and prices prevailing in July 1982.  - 16 - 2.09 The physical quantities of equipmellt and materials required (Annex 2.1) and the costs associated with the implementation of the rural electrification component of the Project, were derived from the information collected by STEG (para. 2.07). In the case of the urban rehabilitation component, a representative sample of 10 lines situated in each District was selected. Measurements were performed on the sample lines and their average values were used to estimate the physical quantities of materials (Annex 2.2) and associated costs for implementing the rehabilitation component. Finally, on the basis of the available stock and the volume of works inivolved in the second component of the Project, the necessary construction and erection equipment, vehicles and tools were determined by STEG. The figures were reviewed by the Bank and found reasonable. 2.10 Engineering: The distribution equipment and materials used by STEG, as well as typical construction designs of distribution facilities are standardized. Consequently, technical specifications for the equipment and materials needed to implement the Project are already available. The basic bidding documents for the supply of materials and equipment were reviewed by the Bank under Loan 2003-TUN. The documents to be used for goods procured under the proposed loan would be ready by July 1984. STEG's District offices, supported by the Head Office, have already started detailed Project design including topographic sursey. In view of the volume of works involved, this task would continue to end-1986 (see I.mplementation Schedule, Annex 2.6). The detailed design relating to the portion of the Project to be implemented in 1985, would be completed by July 1984. 2.11 Project Implementation: Implementation of the Project would occur over four and one-half years (1984 to mid-1988), including the preparation in 1984 of detailed design and tender documents for the procurement of goods and works required during the first year of construction. Installation and erection of Project facilities would start in January 1985, and are expected to be completed by June 1988. Although STEG is able to implement the proposed project in parallel with the extension of the urban distribution system, in order to ensure timely implementation, STXiG agreed to submit by November 30 of each year for Bank approval the list of villages to be supplied with electricity service during the following year. Upon commissioning, all facilities would be owned, operated and maintained by STEG. 2.12 Construction Supervision: STEG would be responsible for the execution of the entire Project. To that end it would prepare detailed Project implementation schedules, supervise installation and erection of Project facilities and handling of equipment and materials, and monitor implementation progress. In addition, STEG agreed to prepare and submit to the Bank quarterly progress reports and a Project Completion Report. 2.13 Procurement: Contracts financed under the proposed loan for the supply of equipment and materials, construction and erection equipment, testing eq-uipment, and tools, grouped to the extent possible, would be awarded through international competitive bidding (ICB) (para. 2.15). Local manufacturers are expected to bid for about 40% of the distribution equipment  - 17 - and materials. For purposes of bid comparison, a preference limited to 15% of the CIF price of imported goods, or the customs duty, whichever La lower, would be extended to responsive local manufacturers. Standard distribution equipment and materials, testing equipment, and tools, also financed under the proposed loan, not exceeding US$200,000 per contract and in the aggregate not exceeding the equivalent of US$700,000, would be procured in accordance with limited international tendering (LIT) by inviting quotations from at least three suppliers from eligible countries. STEG will. make procurements through ICB and LIT in accordance with the current Guidelines for Procurement under World Bank loans. The tendering documents for the supply of goods exceeding in value the equivalent of US$500,000 to be financed by the Bank would be approved by the Bank before tenders are issued. 2.14 Meters and poles will not be financed under the proposed loan, and will be purchased locally through directly negotiated contracts. The proceeds of the proposed loan will also not be used to finance installation, erection, and civil works related to the Project. In the case of the rural electrification component, these works will be procured, depending on the value of the contract, either through local competitive bidding (LCB), or direct negotiation under procedures which the Bank reviewed and found satisfactory. The installation and erection of the facilities of the urban component which involve work on live linLes would be undertaken by STEG, whtile new extensions of the urban system would be procured through LCB. Due to the geographical dispersion of the areas affected by the Project, individual construction and erection contracts would be small (not expected to exceed US$100,000) and it was therefore considered unlikely that foreign contractors would be interested in bidding for these contracts. 2.15 The allocations proposed above show that out of the total investment cost of US$82.9 million (excluding the front-end fee of US$o.1 million), procurement through ICB would account for US$49.5 million, through LIT US$70-,000, and through LCB US$12.6 million. The financing by the Bank of these procurement items would be US$37.7 million under ICB, US$500,000 under LIT, US$400,000 for training, and no Bank funds would finance LCB. The proposed procurement plans are summarized below:  - 18 - Table 2.3 Sumaary of Proposed Procurement Plans /1 (IJS$ million) Procurement Method Total Project Component ICB LIT LCB Other Cost Electrical plant materials 33.2 0.4 - 4.3 37.9 (25.2) (0.3) - - (25.5) Installation and erection - - 12.6 5.4 /2 18.0 Engineering, construction supervision - - - 10.0 /3 10.0 Equipment, tools 16.3 0.3 - 0.4 16.9 and training (l?.5) (0.2) - (0.4) (13.1) 49.5 0.7 ,? 6 20.1 82.9 (37.7) (0.5) - (0.4) (38.6) /1 Figures in parentheses are the respective amounts financed by the Bank, front-end fee excluded. /2 Force account, and negotiated contracts. /3 Force account. 2.16 In the interest of economy and efficiency, STEG procures its yearly needs of distribution equipment and materials once a year. By September of each year, bids are obtained for goods to be used during the following year. After award of contracts, and not later than December, STEG makes use of its option to revise the ordered quantities, valued at the agreed unit prices in the contract. In view of the soundness of this approach, procurement of equipment and materials for the electrical plant, and tools to be used in the Project will follow the same procedures. Materials to be used during the first year of Project implementation would be drawn from STEG's inventory and replaced by materials procured under the proposed loan. 2.17 Disbursement: Disbursements from the proceeds of the proposed Bank loan would be made for: (a) 100% of the foreign expenditures of direct imports, and 80% of local expenditures of locally manufactured or purchased equipment and materials (for the electrical plant, construction and erection equipment, testing equipment, and tools); (b) 100% of the foreign cost of training; and (c) the front-end fee on the Bank loan. The closing date would be December 31, 1988, six months after the estimated completion of the Project, to allow for payment of retention monies. The expected disbursement schedule and disbursement profiles are given in Annexes 2.7 and 2.8. Procurement of materials to be financed under the proposed Project would be undertaken on a yearly basis, and disbursement is expected to follow the trend ov the Bank-wide sector disbursement profile. If surplus Bank funds are available as a result of fluctuations in exchange rates, such amounts would be  - 19 - cancelled from the loan; if excess funds arise for any other reason, the Bank would still seek to disburse the loan fully, for example throtugh a revLsion in Project definition if appropriate. 2.18 Retroactive Financing and Advanced Contracting: No retroactive financing or advance contracting is involved in the proposed Project. 2.19 Environmental Aspeh..cs: The Project would have no adverse environmental impact. Possible adverse aesthetic effects would be kept to a minimum by suitable routing of overhead lines. 2.20 Risks: No special risks are foreseen, and no major implementatiou problems are expected. However, since 60; of the funds required to implemetLt the rural electrification component would iepend upon Government allocations, in order to avoid overstocking of Bank-fin-incad equipment and ensure that purchase of equipment and materials for the, proposed Project proceeds at a pace consistent with Government's allocations and Project implementation, STEG agreed to submit by November 30 of each year for Bank approval the financing plan associated with the implementatiou of the Rural Component of the Project during the following year. III. FINANCE A. Overview 3.01 Recently STEG's financial position has been weakened by irregularity in the timing of electricity rate (tariff) increases. No rate increase occurred between October 1982 and June 1984, notwithstanding the increase in STEG's investment program in that period. Historically however, STEG can be credited with having maintained a high level of self-financing, averaging about 40% of capital expenditures over the six years prior to 1983 (para. 3.04). While STEG's capital structure to date shows a relatively low reliance on Government-supplied equity (with capital increases financing on average less than 10% of investments), in the future STEG's inivestment program could create an increasing burden for the national budget, in the event that the Government ia reluctant to approve rate increases to compensate adequately for fuel and other cost increases. The company faces other financial and administrative problems, such as: a tight debt service situation aggravated by depreciation of the Dinar vis-a-vis the U.S. Dollar, uneven collection of receLvables from public customers, and delays in preparing annual financial statements. These issues and appropriate recommendations are discL;ssed in more detail beLow. 3.02 Separate financial data for STEG's gas and electricity operations is not presently available; therefore, financial ratios used in this analysis refer to the performance of the company in its entirety. STEG is in the process of designing a system for separating the accounts of its electricity operations from its various gas activities and expects to implement this  - 20 - system in 1985. Such a separation will be required ia order to comply with existing agreements. and eventually to monitor the performance of power operations alone. B. Recent Performance Return on Assets and Electricity Pricing 3.03 The Bank has measured the adequacy of STEG's electricity rates by monitoring the rate of return on revalued assets, in addition to applying other financial ratios and to comparing tariffs with the long run marginal cost of supply (para. 1.22). In accordance with Tunisian accounting practices, revaluation of assets has not been reflected in the official accounts of the enterprise since 1970. However, STEG has carried out such a revaluation on a pro-forma basis in accordance with procedures agreed upon with the Bank, and the calculation of the asset bds'e through the end of 1982 was confirmed during negotiations. The covenant in the Third Power Project (Loan No. 2003-TUN) establishes that at least an 8% return on revalued assets should normally be achieved, except in years in which domestic prices of fuels used for power generation by STEG increase by 20% or more, in which _Ca a r