Uganda - Petroleum Exploration Promotion Project

Document of The World Bank FOR OMIcAL USE ONLY - ~~CJ2 /6W-/- v Rqog No. P-3919- REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMEN ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT IN AN AMOUNT OF SDR 5.2 MILLION TO THE REPUBLIC OF TUGANDA FOR A PETROLEUM EXPLORATION PROMOTION PROJECT February 28, 1985 This domment bas resticted distibutin and msy be used by recipients oly in the performance of their ocia duteL Its contents may no otherwise be disclosed withou World Bank authofnzion.  CURRENCY EQUIVALENTS (January 1985) Currency Unit - Uganda shilling (USh) USh 1.00 = USS0.002 USS 1.00 - USh 550 1/ USS 1.00 = SDR 1.026 ABBREVIATIONS AND ACRONYMS CFTC Commonwealth Fund for Technical Assistance EAC East African Community ESMAP Energy Sector Management Assistance Program (of United Nations Development ProgrammejiWorld Bank) GDP Gross Domestic Product GNP Gross National Product GSHD Geological Survey and Mines Department in the Ministry of Lands, Mineral and Water Resources ICA International Coffee Agreement ICB International Competitive Bidding IFC International Finance Corporation DIF International Monetary Fund LCB Local Competitive Bidding LIT Limited International Tendering MI4MWR Ministry of Lands, Mineral and Water Resources MPED Ministry of Planning and Economic Development MPPT Ministry of Power, Posts and Telecommunications OPEC Organization of Petroleum Exporting Countries PU Petroleum Unit UNDP United Nations Development Program USAID United States Agency for International Development FISCAL YEAR July 1 - June 30 /1 The exchange rate of US$1 = USh 395, which was in force during appraisal in August 1984, has been used in the calculations for the proposed project.  UGANDA FtOI OFCIAL USE ONLY PZTROLEUK EXPLORATION PROMOTION PROJECT Credit and Project Suoary Borrower: The Republic of Uganda Beneficiary: Ministry of Lands, Mineral .nd Water Resources * )~~O~ Amount: SDR 5.2 million (US$5.1 million equivalent) Terms: Standard Project Description: The project would support the Government's efforts to attract oil companies to explore for hydrocarbons. 't also would strengthen the capability of the Geological Survey and Mines Department (GSND) in the MI[MR to administer and supervise exploration promotion, exploration, and development of petroleum resources. The project includes two main components. The technical assistance component would support: (a) petroleum exploration consultants who would provide a wide range of services; (b) a report/ meeting to promote prospective acreage to oil companies; (c) rehabilitatio2 of the GSMD; (d) project administration, including auditing of project accounts and travel related to petroleum exploration promotion; and (e) training abroad of Ugandan staff in petroleum geology and interpretation of geophysical surveys. The survey component would include: (a) geophysical surveys; (b) geologic field work, as appropriate, as well as geochemical studies; and (c) photogeologic studies. Project Benefits: The project would assist Ugand" in attracting oil companies to take exploration permits in an area where there has been little exploration activity. If the search for hydrocarbons is successful, the project would contribute to meeting part of Uganda's petroleum needs from domestic sources and could generate export earnings. Risks: The main risk is that the surveys might not attract widespread oil company interest. Given the favorable geological interpretations and the positive industry reactivuis at the first promotion meeting in November 1984, this risk is reasonable. In addition, there are risks that relations with neighboring c&untries could decline, thereby reducing the attractiveness of promoted border areas, and that secu-ity in the Thi document has a restrctd distribution and may be used by reipients only in the performance of their official duties. Its contents may n othewise be disclosed without World Bank authorzation.  -i - project areas could deteriorate. Considering the present collaboration between Uganda and its neighbors and the improvements in security in the cxntry, these risks also are reasonable. Estlated Project Costs: Com onent Local Foreign Total - (USS mIllion)- Technical assistance Exploration consultants .18 .89 1.07 Promotion report/meeting .03 .30 .33 Rehabilitation of GS1D .0, .40 .48 Project administration .27 .12 .39 Training .03 .30 .33 Subtotal .59 2.01 2.60 Surveys Geophysical survey .10 .50 .60 Geological data gathering .10 .10 .20 Photogeology .02 .10 .12 Subtotal .22 .70 .92 Base Cost .81 2.71 3.52 Contingencies Physical .11 .4J .51 Price 1.18 .89 2.07 Total 2.10 4.00 6.10 /a Financing Plan: Source Local Foreign Total - s(US$ minlion) IDA 1.10 4.00 5.10 Government 1.00 - 1.00 Total 2.10 4.00 6.10 - -~~~~~~~ Estimated Disbursements: IDA FY86 FY87 FY88 FY89 FY90 FY91 (USS$ million) Annual 1.00 1.20 1.20 1.00 .50 .20 Cumulative 1.00 2.20 3.40 4.40 4.90 5.10 Rate of Return: Not applicable. Staff Appraisal Report: None. Mp: IBRD 18617. /a The project would be exempt from duties and taxes.  REPORT AND 11flCOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF UGANDA FOR A PETROLEUM EXPLORATION PROMOTION PROJECT 1. *I submit the following report and recovmendation .-n a proposed development credit to the Republic of Uganda for SDR 5.2 million (US$S5.1 million equivalent) on standard IDA terms to help finance a petroleum exploration promotion project. PART I - THE ECONOMY 11 2. An economic mission visited Uganda in May-June 1983 and its report, entitled -Uganda - Country Economic Memorandum- (Report No. 4733-UG dated December 9, 1983), has been distributed to the Executive Directors. A summary of social and economic data is given in Annex I. Background 3. Uganda achieved independence in 1962 with a number of important advantages: Ca) a favorable climate, fertile soils, and rich mineral base for economic development; (b) an established indigenous smallholder sector providing a widening range of export crops and an ample domestic food supply; Cc) a small but rapidly growing industrial sector, contributing exports of copper and textiles; Cd) a well-developed transport system, including facilities shared with Kenya and Tanzania under the East African Community (EAC); (e) an exportable surplus of hydroelectricity, with substantial scope for further development on the Victoria Nile; and (f) one of the most advanced education systems in Eastern Africa. The initial years after independence clearly demonstrated the economic potential of the country. Real Gross Domestic Product (GDP) grew by 4.8% per annum from 1963 to 1970, implying an increase in per capita terms of at least 2% per annum. The country also was able to maintain a reasonable savings rate (averaging 13%), which permitted implementation of an ambitious investment program without undue pressure on domestic prices or the balance of payments. Although Uganda's export volumes grew slowly, export earnings were more than adequate to cover import requirements and the country maintained a current account surplus in most years. The J Part I is essentially the same as the one included in the President's Report for the Agricultural Development Project (P-3912-UG) of December 11, 1984.  -2- Goverument's budgetary position also was sound. Revenue increased faster than recurrent expenditure during the latter half of the 1960. and, together with non-bank domestic borrowing, helped finance a significant proportion of development outlays. 4. However, after the coup in 1971, the situation quickly deterio- rated. Under the military regime, many skilled personnel left the country, the parastatal sector became bloated with the addition of many abandoned or confiscated industries, and professional standards within the administra- tion eroded. Cn top of these largely self-imposed problems, the Ugandan econom was shaken by a series of external shocks: the sharp rise in petroleum prices after 1973, the breakup of the EAC in 1977, and the damage and looting which occurred during the 1978-79 war. As a result of these developments, real GDP stagnated through 1977 and then fell over the next three years. Import levels had to be cut by 501 from 1970 to 1979 due to lower export volumes, worsening terms of trade (except during the coffee boom years of 1977-79), and dwindling aid receipts. The Goverment-s budgetaxy position also became increasingly untenable as the revenue base was umdermined and expenditure control collapsed. The resultant deficit was financed increasingly by bank borrowing, leading to monetary expansion and price inflation (averaging 74% per annum from 1977 to 1979). Not surprisingly, critical shortages developed and a large share of economic activity was diverted to the pervasive parallel market system called magendo . Recent Developments 5. By April 1979, when the military regime was overthrown, the Ugandan economy was in ruins. Initial efforts to promote recovery were constrained by an unstable political situation, administrative weaknesses, and a severe shortage of foreign exchange. As a result, many of the adverse trends evident during the 1970s continued through 1980. In partic- ular, real GDP continued to decline while the inflation rate rose above 100l per annum. Then, in mid-1981, the Government made a dramatic break with the past by announcing a major devaluation of the Uganda shilling and related price adjustments. Through a series of financial programs, sup- ported by assistance from the International Monetary Fund (IMF) and other donors, further policy reforms have been introduced over the past three years (see paragraphs 7-9). As a result, economic performance has shown a marked improvement, despite the negative impact of internal security problems and adverse world economic conditions. The difficult security situation is explained by the disintegration of law and order during the 1970s and the need to discipline the security forces after the 1978-79 war. Although most of the country is now at peace, periodic incidents continue to occur, especially around Kampala, disrupting production and transport activities and diverting budgetary resources to security-related activities. As regards the world economy, although Uganda-s terms of trade improved after 1981, the index remains at less than half the peaks achieved during the-coffee boom years of 1977-79 and only 657 of the level in 1970. Equally important, Uganda-s export earnings are constrained by quotas on coffee sales imposed under the International Coffee Agreement (ICA). Uganda-s coffee production substantially exceeds its quota limit, and stocks equivalent to 70 of quota exports have currently accumulated. The  -3- combination of economic recession and tighter fiscal policies in developed countries also has affected the availability of external assistance. For Uganda, aid mobilization has been made particularly difficult by the legacy of international i3olation Imposed during the 1970s and continuing concern overseas about the security situation. 6. Economic recovery is evident in a number of indicators: (a) Since 1980, GDP has grown on average 1- 6% per annum. Recovery was initially concentrated in subsistence agriculture, but growth has subsequently been particularly strong in monetary agriculture (12% average annual growth 1982-84). Industry has been slower to recover. (b) Export volumes have risen by an estimated 41% from 1980 to 1983, and would have recovered even more without the coffee quDta constraint. This export growth, together with better utilization of aid, has helped to finance a much-needed expansion of import volumes since 1981. Cc) Significant budgetary improvements, including the establishment by FY 1982/83 of a healthy recurrent surplus, a major reduction in the dependence of budgetary financing on bank borrowing, and no less than a fiftyfold increase in recurrent revenues since FY 1980/81. These improvements have been absolutely central to bringing down the rate of inflation from over 100% in 1981 to about 30% in 1983. Recent developments indicate, however, some acceleration of inflation due to weakening of fiscal and monetary discipline. Despite this progress, overall levels of economic activity and trade remain substantially below peak levels achieved in the early 1970s. As a result, per capita Gross National Product (GNP) still is only two-thirds of the 1970 level. * The Government-s Policies and Programs 7. The Government-s primary goal is to restore law and order, a - basic prerequisite for future economic progress. Second to this is the goal of rehabilitating the productive sectors. The first step toward rehabilitation was the introduction of the financial program for FY 1981/82, which has been followed by similar programs for FY 1982/83 and FY 1983/84. These programs have been supported by three stand-by arrangements with ;he IMF (for a total of SDR 320 million), drawings from the First and Second Reconstruction Credits (providing US$145 million after June 1981) made available by the Association, and assistance from other donors. Major actions taken by the Government are summarized below: (a) The official exchange rate was devalued from under USh 8 to USh 78 per US dollar in June 1981, and subsequently steadily depreciated to about USh 500 per US dollar in November 1984. In August 1982, the Government opened a second window  4 where foreign exchange was more freely traded in an auction system. After the introduction of this dual exchange rate system, the two rates steadily depreciated (although the Window II rate appreciated for a while) and the differential between them narrowed. These adjustments led to a substantial reduction in the premium and importance of the unofficial market for foreign exchange. In June 1984, the two windows were merged. Foreign exchange now is made available through a weekly auction, with the rate determined by the marginal bid. (b) The initial devaluation in June 1981 was accompanied by the removal of most price controls. The major exceptions were for producer prices of traditional export crops, retail prices of petroleum products, and utility tariffs. For these controlled items, significant price increases were introduced. Petroleum prices were increased by more than twentyfold after December 1980 to reflect fully the impact of window-one exchange rate changes. Producer price adjustments were more moderate, with increases of about tenfold for most major export crops. However, these increases are still higher than general inflation and net returns from the production of all major export crops are now posJtiv2. Producer prices are adjusted on a regular basis to ensure that net returns to the farmer remain positive. (c) Various measures have been introduced to improve monetary and fiscal discipline. To help control the demand for money and to allocate credit, most interest rates were nearly doubled over the past two years (although they remain negative in real terms). As part of its obligations under the IMF stand-by arrangements, the Government agreed to and met ceilings oa tbs growth of net domestic credit and net credit to the Government. On the fiscal side, a number of measures were taken in mid-1981 to streamline and improve the elasticity of the taxation strtcture. Strict control also has been mwintained over cash releases to ministries, although this has sometimes been at the cost of underfunding critical functions and accumulating domestic arrears. 8. The Government's original Recovery Programme, which included proposals for policy and institutional reform as well as a project-specific investment plan for FY 1982/83 and FY 1983/84, was presented to the meeting of the Consultative Group in May 1982. All participants at the meeting commended the Government's commitment, as reflected in the lecm-ery Programme, to prioritize rehabilitation activities and to restrict overall resource allocations to realistic levels. Following a progress review, the Government published a Revised Recovery Programme in October 1983. This updared document takes account of resource constraints and implementation problems encountered over FY 1983/84 and incorporates FY 1984/85 fully into the investment plan. However, the broad objectives and strategy remain the same, focusing on short-term revival of the productive sectors. Priority  -5- in all sectors is given to rehabilitation and improved utilization of existing capacity. Although provision has now been made for preparatory work on a number of new projects, most projects do not involve large expenditures through FY 1984/85 and are essential to maintain momentum in later years. The Revised Recovery Programme also includes a number of innovations and changes designed to make It more effective for decision making and to facilitate project implementation. This Programme was discussed at a further meeting of the Consultative Group in January 1984, at which participants again welcomed the strategy and priorities as well as the implied level and composition of Uganda's aid requirements for 1984 and 1985 (see paragraph 16). I. A decisive start in the ptocess of economic recovery has now been made. The basic priority for further action is to strengt'hen the adminis- trative framework for implementing the Government's programs, for carrying them forward, and for making them more effective. In some cases, strengthening means rebuilding what already existed in the early 1970s; in others, it means developing new institutions and policies relevant to today's realities. The administrative weaknesses faced by Uganda (and many other Sub-Saharan African countries) are inherently difficult to tackle and progress will be slow. However, the magnitude of the task ahead should not be allowed to undermine the commitment to much-needed economic reforms. The Government has already initiated action in this area. The Report of the Public Service Salaries Review Commission, which covers many issues relating to the organization and operation of the civil service besides salaries, was presented in November 1982 and is still under Government review. The FY 1984/85 budget introduced a quantum increase in civil service salaries, although there are indications that the Government is having to borrow excessively from the banking system to finance this salary increase. If inflation is to be kept under control, this borrowing will have to be restrained. 'o facilitate recovery in the industrial sector, the Government pas3ed the Expropriated Properties Act in February 1983 to provide a legal basis for resolving ownership issues, and initiated a serins of financial and accouitting studies on major parastatal organizations. Various measures were introduced over the past two years to improve foreign exchange budgeting and import licensing procedures. Finally, the Agricultural Policy Committee has been established to advise the Government on prices. marketing, and resource allocations for the agricultural sector. The Secretariat of the Committee undertakes on a regular basis an analysis of the production costs of the major export crops, and makes recommendations to the Government on appropriate adjustments to producer pri-es. Not surprisingly, given the severe erosion of the country's productive base and infrastructure during the 1970s, much remains to be done before Uganda's recovery can be considered complete. However, the Government's Revised Recovery Programme and evolving policies are headed in the right direction and merit support from the international community. Sectoral Priorities 10. Economic revival will depend on increasing production levels, especially of exports. This entails the highest priority initially being given to production of export crops, to rehabilitation of supporting  - 6 transport and communications Infrastructure, and to production of basic consumer goods, building materials, and agricultural inputs by the industrial sector. Other sectors, especially the social sectors, also require urgent rehabilitation. But in the near future, rehabilitation of these sectors must be limited to the extent of their potential contribution to recovery. Improvements in medical services, repair of classrooms, and rehabilitation of urban water systems, for example, may be expected to provide an important, if unquantifiable, incentive to producers. 11. Agriculture dominates the Ugandan economy, providing the livelihood for about 90S of the population and supplying almost all Ugandas exports in recent years. Ugandan agriculture depends largely on small- and medium-scale peasant farms. No attempt was ever made to encourage expatriate settlements. Even today, large-scale estates are only significant in tea and sugar production. With its favorable natural conditions, Uganda produces an overall food surplus in most years, although areas like Karamoja in the northeast, which are vulnerable to drought and depend on traditional trade of cattle for grain, have suffered periodic food shortages as a result of lvw rainfall and insecurity. Rehabilitation of agriculture is the top priority for Uganda's economic recovery. Coffee, cotton, tea, and tobacco exports could all continue to grow rapidly over the next three years (although the previous peak levels are not likely to be reached until later in the 1980s and coffee exports will probably remain subject to ICA qwta constraints). In addition, scope exists for expanding non-traditional exports (e.g., hides and skins, foodstuffs, and fertilizers) to neighboring countries. Revival of cotton and other agricultural production would also supply some domestic industrial needs. During the rehabilitation phase, the Government has given top priority to improving incentives, partly through adjustments in producer prices. Closely related is the supply of inputs, implements, spares for processing and transport, and consumer goods to stimulate the production of surpluses. Over the longer term, agricultural services, including research and extension, also will need more attention. 12. Although Uganda's industrial sector has always been relatively small, it did in the past make a valuable contribution towards supplying the domestic market with basic goods and, in some instances (e.g., textiles I and copper), produced a surplus for export. However, the sector largely collapsed during the 1970s. Although industrial production began a modest recovery during 1982 and 1983, indications are that this recovery may have halted in 1984, with many enterprises still closed and average capacity utilization of only about 30Z. Recovery in the industrial sector has been hampered by a number of constraints. The bulk of the sector has not yet made the investments necessary to put their equipment in working order, due primarily to the shortage of working capital to purchase spare parts and equipment, foreign exchange for imported inputs, and locally-available materials. Other constraints, such as unresolved ownership questions, creditworthiness problems of firms, unreliable infrastructure, and poor management also deter recovery in the sector. The Government has declared its intention to follow a -mixed economy' strategy, with only essential public services reserved exclusively for the public sector. In other areas, domestic and foreign private enterprise is encouraged, either wholly owned or in joint ventures with the Government. The Government expects to  -7- close or sell a number of existing industrial enterprises, while the financial viability of the remaining parastatals is to be restored through increased tariffs, asset revaluation, and injections of new capital. Actions initiated by the Government in this area, including the Expropriated Properties Act and a program of financial and accounting studies, were noted in paragraph 9. However, the modalities for restructuring the parastatal sector are still to be worked out fully. 13. Ugandass transport system, formerly one of Africa's best, deteri- orated rapidly during the 1970s for the same general reasons outlined ear- lier: departure of skilled personnel, political interference, and in- adequate provision of resources for essential functions like maintenance. In addition, the breakup of the EAC in 1977 had a serious effect, especially on Uganda's access to international trade routes. As a result, Uganda lost virtually all railway rolling stock and aircraft and her part-ownership of railways and port facilities in Kenya and Tanzania. This necessitated heavy new investments by Uganda and seriously disrupted iaternational traffic movements while increasing their cost. Transport was, moreover, the sector possibly most seriously affected by the war and the widespread subsequent looting. The vehicle fleet, in particular, was decimated. Rehabilitation of the transport system and sector institutions thus becomes a key requirement for economic recovery. 14. The Bank Group recently updated its earlier assessment of Uganda-s energy sector. Energy use is primarily based on fuelwood, electricity, and petroleum. Fuelwood is estimated to account for about 91% of total energy and 482 of commercial energy consumption in Uganda. Concern is, therefore, mounting that uncontrolled cutting will eventually deplete the most accessible forest resources and lead to further soil erosion. Preparation to undertake a forest inventory is underway, as a precursor to rehabilitating the depleted forests. At present, Uganda's electric generating capacity is underutilized. However, the surplus could be quickly absorbed as the economy recovers, as substitution is made for more expensive fuels (such as petroleum products), and as long-term export agreements are concluded with neighboring countries. As regards petroleum, the Government has succeeded in reducing the cost of imports in recent * years through the impact of higher retail prices on domestic consumption and smuggling as well as the improvement in supply arrangements. Promotion efforts for the exploration of petroleum resources in the Albert Rift are underway, although local oil production remains a longer-term and uncertain prospect. 15. The Government endorses the goals of the International Drinking, Water Supply and Sanitation Decade and is giving high priority to the water and sewerage sector. The main objective for this sector is to restore basic services through rehabilitation of existing water supply and sewerage facilities. In addition, with the assistance of the United Nations Development Programme (UNDP) and the Bank Group, an updated water sector study/action plan is underway using various studies previously prepared by the World Health Organization, Swedish International Development Association, and United Nations. This study will help to improve the Government's planning capacity in the water sector.  -8- Aid and Debt 16. Under the base-case scenario presented in the last Country Economic Memorandum, Ugandas8 GDP is projected to grow by 4.7% per annum through 1985 and 3.6t per annum over the subsequent five years. These projections assume a steady improvement in the internal security situation and continued progress on economic reforms. The viability of this scenario i3 also critically dependent on the availability of foreign exchange to finance recurrent imports and priority rehabilitation projects. The recent g recovezy in export perforuance is expected to continue. However, an important factor in this assumption is that Uganda's coffee quota will be increased from 2.3 million bags in 1983 to 2.5 million bags in 1985. Although Uganda's case for a higher quota is strong and a small increase was granted recently, a further increase is not assured. The current account deficit, in real terms, is projected to rise in 1984 and then steadily decline over the remainder of the decade. This has major implications for external financing requirements: (a) Commitment levels are required to increase by an average of 5% during 1984 and 1985 to US$444 million in 1985 and then to continue rising by about 4% per annum (below the projected rate of international inflation). (b) The composition of commitments is as important as the levels themselves. Under Ugandan conditions, balance of payments support will continue to be essential for at least the next two to three years. However, project aid will become increasingly important during the second half of the decade and even has a role to play in the short term, provided it is consistent with the rehabilitation priorities in the Revised Recovery Programme. Technical assistance, while not as large in dollar terms, is important to improve public administration and to make other aid effective. (c) The net benefit to Uganda of higher commitments could soon be eroded if they are not provided on concessional terms. This does not preclude the possibility of utilizing some commercial bank loans or suppliers' credits in association with concessional assistance, but only for selected projects that generate additional net foreign exchange earnings to cover fully the related debt obligations. However, arrangements which involve prior claims on foreign exchange, such as coffee barter deals, should be avoided. 17. On the Ugandan side, every effort must be made to strengthen aid coordination and administration. To this end, the Government has now reaffirmed that formal responsibility for aid management, including signing agreements and approving disbursements, lies with the Ministry of Finance. To facilitate this function, an aid coordinator has been appointed at the Permanent Secretary level and he is to be assisted by a staff of twelve. In addition, the Ministry of Planning and Economic Development (MPED) has a vital role to play in assuring that aid mobilized is in line with the priorities of the Revised Recovery Program and in monitoring aid  -9- utilization and project Implementation. Therefore, appropriate staff, facilities, and technical assistance should also be allocated to the MPED so that these functions can be performed effectively and working level contacts between MPED and the Ministry of Finance can be strengthened. 18. Uganda-s external debt outstanding and disb--sed had reached an estimted US$661 million by the end of 1983. Of this amount, 3.5% was due to the Bank/Association (for Uganda:s notional share of EAC loans) and 13.5% to the Association alone. Fortunately for Uganda, the terms of new aid commitments since 1979 have been highly concessionwl, with about half being grants and the balance being loans with a grant element of 60%. However, other debt obligations, such as war-related assistance and IMF purchases, have helped to ralse the overall debt service ratio to around 50% during 1981-83. Under the base-case scenario in the Coumtry Economic Ilmorandun, the debt service ratio is projected to fall back to 46X in 1984 and 31% by 1990. This, however, is still cause for concern. The down-side risks are very real. Ugandars export structure still depends heavily on coffee earnings, which could be constrained by further quota restrictions and unfavorable price movements. Also, the Government may find reduction in import requirements for security-related activities difficult. Finally, adequate amounts of assistance on concessional terms may not be forthcoming to support recovexy. This outlook reinforces the importance of external debt management. Progress has been made over the past year in Improving debt recording and an External Debt Management Office has been established. The real priority now is to develop an appropriate borrowing program for Uganda. PART II - BANK GROUP OPERAIIONS2/ 19. Uganda joined the Bank, the Association, and the International Finance Corporation (IFC) in 1963. Between 1967 and 1971, the Association provided seven credits to the country totalling US$48.0 million for projects in education, roads, and agriculture (tea, tobacco, and beef ranching). In addition, Uganda benefitted from 10 loans amounting to US$244.8 millon for the development of comnm services of the East African Community and for the East African Development Bank. IFC-s first investment in Uganda, in a textile company, was sold to the Government in 1970. The second, to help finance two lodges in the national parks, was cancelled in 1972 before construction began. IFC approved new investments in the Sugar Corporation of Uganda and in the Toro and Mityana Tea Company in FY84 and in the Development Finance Company of Uganda in FY85. Annex II gives further details about IFC investments in the country. 20. Operations of the Association in Uganda were interrupted because of the military regime from June 1971 until February 1980 (paragraphs 4 and 5). Since February 1980, the Association has provided 13 credits to Uganda 2/ Part II is essentially the same as the one included in the President-s Report for the Agricultural Development Project (P-3912-UG) of December 11, 1984.  - 10 - totaUling US$473.5 million. The credits were based on a lending strategy consistent with priorities identified in the Government's Recovery Program and were designed to help restore the economy to a fully functioning level through: rebabilitation of basic infrastructure and productive capacity; strengthening of administrative, institutional, and technical capacity; and implementation of appropriate sector policies. 21. To wLet urgent rehabilitation needs, the Association has been providing funds under three reconstruction credits. The first Reconstruction Program (Credit No. 983-UG of 1980 for US$72.5 million) included a participation of US$17.5 million by the Government of the Netherlands (Credit No. 983-1-UG). It also was complemented by a European Economic Community Special Action Credit (54-UG for US$20.0 million). In addition, the Government of Canada provided a grant of CanS3.0 million and the Organization of Petroleum Exporting Countries (OPEC) Fund made available a program loan of US$5.0 million. Although the Reconstruction Program originally experienced implementation delays and slow disbursements, it now is fully disbursed. A Program Performance Audit Report is under preparation. The Second Reconstruction Program (Credit No. 1252-UG of 1982 for US$70.0 million) is under implementation. The Governments of Canada and the Netherlands made grants in the amounts of Can$5.0 million and DFL 15.0 mLllion, respectively, in supplementary financing for the Second Program. The Third Reconstruction Program (Credit No. 1474-UG of 1984 for US$50.0 million) became effective in November 1984. An amount of DFL 20.0 million is being provided as supplementary financing by ,he Government of the Netherlands. 22. The Association also has been supporting technical assistance to key Institutions through the First Technical Assistance Project (Credit No. 1077-UG of 1981 for US$8.0 million) and the Second Technical Assistance Project (Credit No. 1434-UG of 1984 for US$15.0 million). Disbursements are nearly completed for the First Project. Conmmitments are being made more quickly for the Second Project. Although small in financial terms, technical assistance represents an essential component of the Association's lending strategy, both to strengthen the Government's administrative/institutional capacity as well as to facilitate project preparation and implementation. It also serves the vital objective of assisting training, both directly and through upgrading of facilities. 23. In addition, the Association has been providing rehabilitation credits, which total US$268.0 million, for engineering related to water supply and phosphate exploitation operations and for agricultural, education, highway, industry, telecommunications, and water supply and sanitation projects. These projects also include technical assistance components. Annex II gives further details about the projects. Implementation has been somewhat slower than expected, largely due to the shortage of Government counterpart funds (paragraph 25). 24. For the immediate future, operations of the Association will remain focussed on rehabilitation projects, including the proposed Second Power Project to be presented to the Executive Directors in FY85. In addition, this Petroleum Exploration Promotion Project is designed to help  - 11 - relieve expected bottlenecks in energy supply in support of economic recovery as well as to provide a potential for foreign exchange earnings. Operations of the Association are expected to shift gradually into traditional projects in the agricultural, energy, industry, and transport sectors. This shift will help support the continued recovery of the economy and its further development. The Association intends to coatinue to provide technical assistance in these sectoral projects. 25. Disburse_ents from the Association to Uganda grew from US$1.2 million in FY80 to US$41.2 million in FY84. A comparison with other portfolios in the Eastern Africa Region indicates that the disbursement rate for Uganda was higher than the average for the Region, ranging as a proportion of outstanding commitments from 44.4% in FY80 to 30.3% in FY83 (compared with 20.4% and 27.2% in the same years for the Region as a whole). In FY84, the disbursement rate for Uganda declined to 17.7Z, mostly because of lack of local funds to be provided by the Government, while that of the Region declined to 23.1%. 26. In addition to its own lending portfolio, the Bank Group is administering for the International Fund for Agricultural Development an Agriculture Reconstruction Program (Loan No. 80-UG for US$17.6 million and Grant No. 85-UG for US$0.94 million of 1982) and an Agricultural Development Project (Loan No. 159-UG for US$14.5 million of 1984; for the UNDP an Assistance in Economic Planning Project (No. UGA 79/011 of 1981 for US$3.3 million) and a Line of Credit to Assist the Uganda Development Bank (No. UGA 80/017 of 1983 for US$2.0 million) and for the OPEC Fund an Industrial Loan to the Uganda Development Bank (Loan No. 301-PG of 1983 for US$15.0 million). PART III - THE ENERGY SECTOR The Energy Sector A. Resources 27. Uganda has sufficient water and forestry resources for develop- ment as energy resources. No petroleum or gas has been discovered, but the Government is supporting the identification of prospective areas and promotion to oil companies for exploration. While no coal exists in the country, peat is available although not in sufficient quantity to justify exploitation. Geothermal sources and uranium prospects have been identified. Development of geothermal sources is considered a low priority in view of other less expensive energy sources, such as the considerable hydroelectric potential. Assessment of uranium prospects is currently underway. 28. Fuelwood. In Uganda, as in many African countries, fuelvood constitutes the main source of energy for the population. Forests and woodlands are estimated to cover 2.76 million ha, or 12% of the country's total area. Preliminary estimates indicate that the sustainable annual yield of fuelvood of about 10.9 million tons was exceeded in 1983 by consumption of 13.6 million tons (excluding non-energy sources). This represents a consumption increase of 4% over 1982, which is explained by  - 12 - the increasing conversion to fuelwood by households because of the high prices of kerosene as well as of electrical cookers and their spares. As a result, a serious shortage of fuelvood is developing particularly in urban areas. 29. Rydroelectric Power. Uganda is well-endowed with hydroelectric potential. The country-s main potential is concentrated on the Albert Nile with its unlimited storage provided by Lake Victoria. The Albert Nile falls into three sections in Uganda, namely Lake Victoria to Lake Kyoga, Lake Kyoga to Lake Albert, and Lake Albert to the Sudanese border. The last section is remote from the load centers and has the least power potential. The difference in elevation between Lakes Victoria and Albert is abi.at 516 a, of which 103 m lie between Lakes Victoria and Kyoga, and 413 m between Lakes Kyoga and Albert. The available head is concentrated in seven locations, with a total potential capacity of about 1,745 NW and an annual firm generation capability of about 10,200 GWh. Although the hydroelectric potential is substantial and relatively low-cost by world standards, the potential can be developed only in increments that are large relative to the size of the Ugandan demand. Therefore, the potential for substantial exports to neighboring countries is a significant factor in determining the economics of development. 30. Petroleum. Uganda imports all of its petroleum requirements in the form of finished products because the country has no refinery. Some products are imported directly from the Middle East and some after refining at the Nombasa, Kenya refinexy. Petroleum products are transported from Nombasa to Nairobi by pipeline and on to Kampala by rail or road (more than 90% were transported by road in 1982 compared to only 20Z in the early 1970s). The six oil companies operating in Uganda (paragraph 44) maintain their own storage facilities as well as retail outlets. In line with the pattern of econaoic activity, distribution and consumption of petroleum products is concentrated around Kampala (which accounts for 60Z of all gasoline and auto diesel sales) and Jinja (which accounts for 80% of fuel oil sales). In 1983, the transport sector accounted for about 74% of consumption of petroleum products while the industrial and domestic sectors consumed 1S and Ilt, respectively. B. Energy Consumption 31. Per capita energy consumption in Uganda is estimated to have been 0.35 toe in 1980, of which only 0.06 toe was commercial energy, i.e. marketed fuelwood exclusive of fuelwood gathered as a free good, electricity, and petroleum products. This level of commercial energy consumption, while exceptionally low by world standards, is comparable to estimates for some other low-income countries in Sub-Saharan Africa. In Uganda, the low level of commercial energy consumption reflects not only the country s low per capita income but also the dominance of the subsistence sector and the significant decline in the industrial and transport sectors during the 1970s. For the same reasons, energy consumption is concentrated in the household sector and supplied primarily from fuelvood. In 1980, non-commercial usage represented 82% and commercial usage 18% of total energy consumption. Of the energy consumed, 90.7t was fuelvood, 4.O0 charcoal, 4.8% petroleum, and 0.5% electricity.  - 13 - 32. Since 1980, the level of consumption of commercial energy has remained low due to continued low levels of capacity utilization in the industrial sector. The trend of commercial energy consumption, which was declining during the 1970s, is now reversing. Statistics show that sales of petroleum products increased by 15% between 1981 and 1983. In addition, domestic power consumption (billings) increased by 52 between 1980 and 1983. C. Main Issues 33. The UNDP/World Bank Energy Sector Assessment Program completed a report entitled Uganda: Issues and Options in the Energy Sector (No. 4453-UG) in July 1983. This Energy Sector Assessment identified the following main sectoral issues: (a) high cost of petroleum imports; (b) distortions in retail prices of petroleum products and shortcomings in the retail pricing formula; (c) relatively low efficiency in the use of petroleum products and fuelvoods; (d) insufficient supply of fuelvood, especiaUy in the Kampala/Entebbe area; (e) inadequate level of stunpage fees; (f) unreliability of power supply and high power system losses; (g) shortfall in power generation capacity to meet forecast demand beyond the mid-1980s; (h) low level of power tariffs and inappropriate tariff structure; and (i) lack of sectorwide coordination and planning. 34. The Government has taken important initiatives to address these issues, as discussed in the Uganda Energy Assessment Status Report (No. 020/84) prepared by the UNDPIWorld Bank Energy Sector Management Assistance Program (ESMAP) in August 1984. In the case of petroleum, the Government bas diversified supply sources, confirmed the viability of a supplementary supply route through Tanzania, begun to switch to the railway as a less expensive means to transport petroleum products, and introduced a new pricing formula in an effort to reflect the economic costs of premium and regular gasoline, kerosene, and diesel. For these petroleum products, retail prices were adjusted several times to keep them close to world market levels (paragraph 38). With respect to energy efficiency, the Government has initiated studies to introduce efficiency measures in a number of industries and initiated efforts in the transport sector, such as road rehabilitation and railway track repair and regrading, which would yield a reduction in fuel consumption. 35. In the case of fuelwood, the Government was able to attract assistance from a number of international donors for rural social forestry projects to expand plantations on the basis of supply and demand. The Government is considering an increase in the stumpage fee in order to reflect economic costs more closely (paragraph 36). In addition, the Bank's proposed Second Power Project (paragraph 24) would finance a forestry and plantation inventory in main population and industrial areas together with fuel marketing and household energy surveys in major towns. The Government also has proposed a Forestry Project, emphasizing fuelwood, to the Bank. As far as power is concerned, the Government has obtained assistance from the Overseas Development Administration (United Kingdom) for a Power Development Study, which is intended to prepare the least cost  - 14 - development plan for the subsector. The proposed Second Power Project will support, inter alia, rehabilitation of Owen Falls Power Station and of transmission and distribution networks, and a study of the tariff structure and level. While the Government has increased tariffs, further increases are needed to bring rates more into line with economic costs. Finally, with respect to institutional arrangements in the energy sector, the Government has decided to establish an Energy Department within the Ministry of Power, Posts and Telecommunications (MPPT) to facilitate energy policy coordination and integrated sector planning. Upon the Government's request, technical assistance was provided under ESMAP to design an investment and technical assistance package for the establishment of the Department (paragraph 39). A provision for this package is included in the proposed Second Power Project. D. Energy Pricing 36. Fuelvood. In the fuelwood subsector, the high level of retail prices of fuelwood for households, especially in Kampala, is a matter of concern to the Government. The most effective way to reduce retail prices for fuelwood would be to improve supply, and efforts are underway in this regard (paragraph 28). To allow fuelwood prices to reflect the economic value of wood as a fuel, the Government has been taking first stee s and is considering a proposal to raise the stumpage fee from a USh 200/m3 to USh 500/m3. 37. Electricity. Until mid-1984, tariffs were among the lowest in the world and far below the long run marginal costs of supply despite three increases each of 50% since early 1982. The average sales to resident consumers in 1983 was equivalent to USh 1.0/kWH (USS.03/kWh). On August 1, 1984, tariffs were increased to a level sufficient to meet operating costs and to service debts. The tariff rate still remains low by world standards, yielding an average revenue from residential consumers of about USh 8.0/kWh (US$.02/kWh) in late 1984. Preliminary estimates of the long-run marginal cost amount to roughly US$.05lkWh. A firm estimate of the long-run marginal cost will be made under the Power Development Study (paragraph 35) and a tariff study to be included in the proposed Second Power Project. The bulk tariffs for exports to Kenya are also far below the economic costs of supply. However, the Government intends to renegotiate the existing export contract. 38. Petroleum Products. Retail prices for all energy sources in Uganda declined in real terms during the 1970s. This decline contributed to a general deterioration of efficiency in the energy sector, and escalated the smuggling of petroleum products to neighboring countries. The Government, which sets the prices of the four major petroleum products, has increased petroleum product prices to reflect their economic value since 1982, and has succeeded in keeping retail prices in line with economic costs, despite the high devaluation of the exchange rate during the period. As of December 1984, prices for gasoline were set slightly above their respective economic costs while prices for kerosene and automotive diesel were set marginally below, as shown in the following table which also includes Bahrain spot market prices:  - 15 - Uganda Bahrain Petroleum Product Retail Economic Cost Spot Market _ ~~~(US$Jliter)- Premium gasoline .53 .47 .23 Regular gasoline .49 .46 .23 Kerosene .44 .46 .22 Diesel .44 .45 .21 Source: Bank of Uganda and World Bank. E. Institutions 39. Many Government institutions are involved in the energy sector. Among the sectoral ministries, the MPPT has been given the lead coordinating role for energy matters. To facilitate energy policy coordination and integrated sector planning, the Government decided to establish an Energy Department in the MPPT and this has been reflected in the Revised Recovery Programme. Sufficient staff positions to allow the start of operations have been approved, and recruitment of staff has been initiated. In the interim, energy policy is being coordinated by a nucleus staff within M4PPT, the MPED, and the subsector institutions. To assist in putting the Department on a sound footing, the Government requested technical assistance from ESMAP for an Energy Sector Institutional Review focussing primarily on the formation and operation of the Department. An ESMAP mission visited Uganda in June 1984 and prepared a report outlining the technical assistance required, which is to be provided under the proposed Second Power Project. Other ministries have substantial and well established interests in particular aspects of the energy sector, either operationally as in the case of the Forestry Department under the Ministry of Agriculture and Forestry or representing major consumer interests such as Housing, Industry, and Transport. 40. In addition to the sectoral ministries, the Ministries of Finance and of Regional Cooperation include the energy sector under their purview;. In particular, the Ministry of Finance determines the prices and taxes for petroleum products imported and marketed by oil companies. Closely associated with the ministries is the Bank of Uganda, which, in addition to its general monetary responsibilities, has a Petroleum Desk that plays a special role in energy matters through its control of the foreign exchange required for imported fuel. The Ministry of Foreign Affairs plays an important role where energy matters involve interaction with other countries, e.g., the export of power or import of petroleum products. The Geological Survey and Mines Department (GSMD) in the Ministry of Lands, Mineral, and Water Resources (MLMWR) is charged with setting up and implementing policies for exploration and development of petroleum and geothermal resources. Finally, the Uganda Electricity Board is responsible for power generation and transmission.  - 16 - F. Government Strategy for the Sector 41. The Government's Recovery Programme, which was prepared in 1982 and updated in 1983, presents a coherent strategy for the rehabilitation of the economy and embraces macroeconomic and sectoral policies as well as individual projects. The basic objective of the program is to revive the productive sectors through rehabilitation and improved utilization of existing capaclty. The total cost of the program was US$1,722 million, of which US$70.7 million was for the energy sector. Energy projects include: uprating of Owen Falls Power Station (US$24.0 million); rural power distribution (US$17.5 million); geophysical surveys and petroleum exploration (US$16.2 million); power line rehabilitation (US$9.0 million); and power demand and expansion studies (US$4.0 million). To reduce Government expenditures for the geophysical surveys and petroleum exploration, the Bank Group suggested that an seromagnetic (airmag) survey should be carried out jointly with neighboring countries and efforts made to attract oil companies for exploration. 42. The main objective of the Government is to increase the supply of energy to help sustain economic recovery. Another objective is to curb excessive demands on scarce foreign exchange resources for energy purchases. This strategy dictates the following policies, which are specified in the Revised Recovery Programme: (a) control of fuel consumption through the price mechanism; (b) promotion of the conversion of industry to electricity and discouragement of the use of oil; (c) transfer of the bulk of freight transport to rail; (d) connection of remote areas served by diesel stations to the national electricit) grid; (e) development of additional hydroelectric capacity; (f) implementation of fuelwood management measures; and (g) initiation of the development of new and renewable sources of energy. The Government is addressing these issues, as discussed in paragraphs 34-35. 43. The basic challenge facing the Government in the energy sector today is to ensure adequate supply and to meet future increases in demand required to sustain the country's economic recovery. The Government intends to use Uganda-s abundant hydroelectric potential to continue to export electricity to neighboring countries, notably Kenya, and possibly to Tanzania, thereby earning foreign exchange. It also is dealing with the heavy burden of the oil import bill through pricing, energy conservation and, with a long term view, promotion of prospective acreage for exploration. The Petroleum Subsector A. Organization 44. The organization of the petroleum subsector is geared to the marketing of imported products because Uganda has no oil production and no refinery. Six oil companies are operating in Uganda. They are (with their respective market shares): Shell (30%), Total (18%), Caltex (15%), Esso (15%), Agip (14%), and Mobil (8%). Since 1970, the Uganda Government has had a 51% share in the capital of Shell, Total, and Agip.  - 17 - B. Institutions 45. The MLMWR is responsible for supervising exploration and development of petroleum resources (paragraph 40). The Permanent Secretary of the MLMWR oversees the GSMD, which is charged with regulating petroleum exploration and development. The GSMD is headed by a Commissioner and his Deputy. The department has two sections, one headed by the Assistant Commissioner Geology and one by the Chief Inspector of Mines. The GSMD has about 40 professionals, including geologists, geophysicists, chemists, and mining engineers, as well as about 50 support staff, such as typists, drivers, and mechanics. The staff is well motivated, but the turmoil of the 1970s made it difficult for the professionals to keep in touch with developments in science and technology worldwide. In addition, much of the physical infrastructure, including vehicles, laboratory, and office equipment, was destroyed. The Association has provided some emergency assistance to restore GSMD's infrastructure (paragraph 62). The proposed Petroleum Exploration Promotion Project would focus on the strengthening of the GSMD through its new Petroleum Unit (PU), which was established by Presidential Decree on October 26, 1984 (paragraph 68). This would enable the Government to deal competently with oil companies that are being attracted to investing risk capital into petroleum exploration. C. Imports 46. In volume terms, Uganda's imports of petroleum products peaked at about 450,000 tons in 1970 and declined during the 1970s until they reached 189,600 in 1983. However, in value terms increasing oil prices pushed the country's oil import bill up by 680% from US$14.3 million in 1970 to US$97.2 million in 1983, while exports of goods and services grew by about 40% from US$261.6 million in 1970 to US$367.6 million in 1983. Therefore, petroleum imports have absorbed an increasing share of export revenues, growing from about 5% in 1970 to about 26% in 1983. 47. The availability of foreign exchange to pay for imported petroleum products is ensured through an agreement between the Government and the oil companies. According to this Agreement, the Government commits itself to making available foreign exchange as required to meet the cost of importation of bulk liquid products and other petroleum related commodities, oil company services in lTganda, and repatriation of dividends. D. Legislation 48. In 1982, the Commonwealth Fund for Technical Assistance (CFTC) agreed to the Government of Uganda's request for assistance in drafting petroleum legislation and model exploration/production agreements. The Government published a Petroleum (Exp'oration and Production) Bill in 1984, which would govern petroleum activities under a specific framework separate from the Mining Act. The Association reviewed the draft of the Bill and recommended that, before enactment, the Government invite comments from oil companies interested in explor'-%t .a in Uganda. However, oil companies did not express any objections ab.LJ the Bill, which they consider clears the way toward concluding exploration agreements. The National Assembly passed the Bill in mid-January 1985.  - 18 - 49. The Bill vests the property of petroleum in its natural condition in the state and provides general guidelines and principles to follow in contracting petrolcum operations with oil companies. Exploration periods will be four years, with two possible extensions of two years each, and production contracts will cover 25 years. Contractors will be subject to annual rental charges and royalty payments in case of production. The rest of the terms and conditions and contractor obligations will be negotiated with the companies by the Minister of the MLMWR, on the basis of a model Petroleum Agreement which is being prepared by CFTC for the Government. Although the Bill provides for a possible natinnal oil company, the Government has confirmed its intention to exEL.LJse a policy determination and supervisory function and to promote acreage for exploration by private oil companies interested in investing risk capital. The Government has the option to participate in the development of a commercial discovery. E. Geology and Exploration 50. The most promising areas in Uganda from the viewpoint of petro- leum exploration are located in the Western Rift Valley, which includes Lake Albert, Lake Edward, and the Rhino Camp area (Map IBRD 18617). Around Lake Albert, a sedimentary section, including oil shales and several oil seeps, has been identified. Adjacent to Lake Albert are the sedimentary basins of Lake Edward to the south and Rhino Camp to the north, altogether forming the Albert Rift. Lake Victoria is an area of modest interest for petroleum exploration. The rest of the country appears to have no oil potential. Uganda's petroleum geology is explained in Annex IV. 51. Oil seeps identified in the 1920s led to the drilling of about 30 exploratory wells near Lake Albert with an average depth of approximately 350 ft, although one well reached 4,043 ft. One of the shallower wells had oil shows, while the deep well had oil sands and numerous black shales. Thereafter, interest in petroleum exploration in Uganda was minimal until the oil discovery in Southern Sudan in 1979 sparked interest in exploring adjacent areas.3/ When the liberation war ended in 1979, stability began to return, and a constitutional Government took office, Uganda became a better country risk. F. Government Strategy for Petroleum Exploration Promotion 52. Although keen to attract oil companies into exploration, the Government of Uganda was uncertain about how to pursue the matter in view of its lack of exposure to the oil industry, of man-power trained and experienced in petroleum geology and exploration, and of petroleum legislation. The Government, therefore, established that a high priority was to obtain technical assistance for the identification and promotion of prospective areas. This was confirmed in the Recovery Programme. The 3/ The sedimentary basins of Sudan and Uganda are adjacent, although they are separated by a major geological fault (the Aswa Shear Zone). The possibility that the formations in both basins may be related has enhanced the attractiveness of Uganda's Albert Rift basin.  - 19 - Government further decided that a definition of the legal frasework would assist in the execution of exploration agreements, and it obtained the necessary support from CFTC (paragraph 48). During preparation of the Energy Sector Assessment, the Government and the Bank concluded that specific promotion efforts were justified to attract major oil companies, none of which had by then shown interest. In 1982, the Government asked the Bank for assistance in the promotion efforts. 53. Efforts to promote prospective acreage for exploration by oil companies were to include technical assistance and additional geophysical work to enhance Uganda's prospectiveness. At the reqluest of the Government, the Bank briefed local representatives of oil companies on the objectives and &cope of the planned promotion efforts. Because prospective areas extend beyoad Uganda's borders, the Government decided, on the advice of the Bank, to promote these areas in cooperation with its neighbors. Therefore, Uganda invited Kenya, Tanzania, and Zaire to participate in an airmag (aeromagnetic) survey over the Albert Rift and Lake Victoria. Uganda's share in the cost was financed as part of the UganLda Technical Assistance Project (Credit No. 1077-UG of 1981 for US$8.0 million)4/. The regional airmag survey was completed in November 1983. It identified thickness and structure of sedimentary basins as indicators of oil prospectiveness. Preliminary interpretations were reviewed in August 1984. Thereafter, the Governments of Uganda, Tanzania, and Zaire decided to promote jointly the areas surveyed, except Lake Victoria. 54. During mobilization of the airmag survey, two major oil companies, followed soon by others, had indicated interest in the Albert Rift area. Because draft petroleum legislation was not yet available and because open promotion seemed likely to improve competition and be more efficient politically, the Government of Uganda suggested that the three countries should invite oil companies to participate in a promotion round. On November 29 1984, the countries sponsored a meeting in London to offer promotion reports for sale and acreage for exploration to interested oil companies. Response from the oil industry was quite good-23 oil companies attended the meeting. Interested companies have until April 15, 1985 to submit bids for the acreage offered. 55. Over Lake Victoria, the regional airmag survey had included only some reconnaissance lines to test the possible presence of sediments under the lake. The reconnaissance survey was successful in detecting sediments of 1,500 m thickness, apparently getting deeper toward the areas not covered by the airmag survey. The airmag review meeting in August 1984 (paragraph 53), therefore, concluded that additional geophysical work would be justified and necessary to promote Lake Victoria. 4/ The shares of the other countries were financed under the Kenya Petroleum Exploration Promotion Project (Credit No. 2065-KE of 1982 fcr US$4.0 million); the Tanzania Second Technical Assistance Project (Credit No. 1060-TA of 1980 for US$11.0 million); and the Zaire Petroleum Sector Technical Assistance Project (Credit No. 1409-ZR of 1983 for US$4.5 million).  - 20 - 56. This work on Lake Victoria could be coordinated with Project Probe, which In a seismic survey over Lakes Malawi, Tanganylka, Turkana, and Victoria sponsored by a dozen oil companies and the Bank Group and carried out by Duke Unlversity of Durham, North Carolina. Project Probe is planning a few reconnalsance seismic lines over Lake Victoria In 1985, which should expand on the preliminary results of the airmag survey and confirm the presence or absence of a relatively thick sedimentary section. If these reconnaisance lines are promising, the Governments of Kenya, Tanzania, and Uganda consider that Project Probe should carry out a seismic survey. This survey would cover about 5,000 line-kms at a cost of about US$1.3 million. The cost would be shared in proportions of about 45% each for Uganda and Tanzania and about 1OZ for Kenya. Because the oil companies have not manifested any direct interest in Lake Victoria, Duke University is polling the Project Probe sponsors to maximize private sector participation in the possible extension of the survey over Lake Victoria. Contingent upon encouraging results from the reconnaisance, a decision is expected to be taken by May 1985 as to whether the Lake Victoria survey would be financed by the original Project Probe sponsors alone and/or the Governments (paragraph 72). Bank Group Support for the Energy Sector 57. The Bank initiated its support for the energy sector through the Energy Sector Assessment Mission of October/November 1982 (paragraph 33). A subsequent mission of June 1984 reviewed the progress being made by the Government in addressing the energy sector issues. The Bank is currently assisting the energy sector through project lending and through technical assistance under ESMAP. With respect to project lending, the overall upgrading of the country's infrastructure, including airfields and roads, through the Second Reconstruction Program (Credit No. 1252-UG of 1982 for US$70 million), the Third Reconstruction Program (Credit No. 1474-UG of 1984 for US$50 million), and the Third Highway Project (Credit No. 1445-UG of 1984 for US$58 million), will facilitate petroleum exploration. The proposed Second Power Project (paragraph 24) will assist the electric power and forestry subsectors. Other support to rehabilitate Uganda's power generation and distribution system and to increase the supply of fuelwood through production incentives is under consideration. 58. As a follow-up to the Energy Sector Assessment, ESMAP completed an Energy Assessment Status Report and prepared a proposal for strengthening the country's energy sector focussing on the establishment of the Energy Department. ESMAP is also proiriding technical assistance for improving energy efficiency in selected rural industries, for a preliminary industrial energy audit, and for a power loss reduction study. In addition, the Government is considering ESMAP support for the preparation of a forestry/fuelvood project (paragraph 35). 59. In the petroleum subsector, the Bank identified the Petroleum Exploration Promotion Project in August/September 1982. Since then, the Bank has been providing a wide range of assistance, in particular to encourage the Government to limit public sector investments in high risk activities. During preparation of the Petroleum Exploration Promotion  - 21 - Project, the Bank encouraged the Government to scale down the geophysical surveys, to maximize the role of the private sector, and to collaborate with Kenya, Tanzania, and Zaire in the preparation and implementation of the regional airmag survey. The Bank's main contribution was to assist in bringing together the Governments of the four countries, in preparation of specifications, and in procurement of consultant and contractor services. This opened better possibilities for geologic interpretation and exploration promotion because structural features may extend across political boundaries. The Bank also assisted in the preparation and organization of the promotion meeting of November 1984. According to various oil company representatives, the strength of their response was partly due to the involvement of the Bank. The companies see the Bank as instrumental in enhancing the attractiveness of areas shared among several countries, which would present difficult issues of unitization if commercial discoveries were made that straddle borders. 60. Because the most prospective sedimentary basins in Uganda (Lakes Edward and Albert) are relatively narrow (about 40 km across) and are shared with Zaire, the Bank assisted in the promotion of communications between the two countries. These communications included, in particular, exchange of information and views on the prospects of the shared area as well as consultation on the coordination of promotion efforts and on terms proposed for exploration concessions. As a result, iegular consultations are being held now between the two countries with a view to interesting oil companies to apply for licenses in adjoining areas on both sides of the border. Continued assistance in this respect would be given by consultants under the proposed project (paragraph 68). 61. The Bank's efforts to assist in the promotion of areas on a coordinated regional basis have been generally appreciated by the oil industry because, otherwise, only very narrow strips of acreage would have been offered separately by each country. The companies also have been impressed that the entire promotion effort came to fruition in only about 18 months and with rather different countries. Several companies indicated that they would not have responded to promotion efforts if just one of the involved countries had presented its share of the basins. They also suggested that the Bank should continue to work jointly with the participating countries to address the problems inherent to exploration in and across border zones and particularly the potentially serious issues that could arise in the case of a commercial discovery straddling boundary lines. These issues were addressed at the airmag review meeting in August 1984. The consulting services included in the proposed project (paragraph 69) also would cover these issues. PART IV - THE PROJECT Background 62. This proposed project, which is intended to promote Uganda for exploration by oil companies, was identified by the Energy Sector Assessment (paragraph 33). To help finance the cost of initiating  - 22 - petroleum exploration promotion, including the airmag survey (paragraph 53) and equipment for GSMD (paragraph 45), the Association agreed to the Government's request to provide US$385,000 in 1983 under the First Technical Assistance Project (Credit 1077-UG of 1981 for US$8.0 million). The Association also agreed to provide a further US$141,000 under the Second Technical Assistance Project (Credit 1434-UG of 1984 for US$15.0 million) to finance continued efforts. These efforts include the Government's cost of the promotion meeting and consultants' services for evaluation of bids, preparation of a strategy proposal and position papers in preparation for discussions with oil companies, until the present project becomes effective in mid-1985. Consultants were appointed in December 1984. 63. The GSMD prepared this proposed project, with the assistance of consultants and in consultation with the Association. Appraisal took place in August 1984. Negotiations were held in London from February 7 to 8, 1985. The Government of Uganda was represented by a delegation led by His Excellency E.R. Kamuntu, Ambassador Extraordinary and Plenipotentiary. A Credit and Project Summary is at the beginning of this Report, and a Supplementary Project Data Sheet is attached as Annex III. Rationale for the Involvement of the Association in the Project 64. The Association's support for this project is in the context of its broader support for exploration promotion in the East African Rift System,5/ through wl.ich oil companies have already concluded exploration agreenents with Burundi and Kenya. For an area like the East African Rift System, which is landlocked, logistically difficult, and spread over many countries, an international organization like the Bank Group can play an important role in facilitating promotion programs in individual countries which in turn coordinate their mutual efforts. 65. This project, in particular, would allow the Association to continue its support for the Government of Uganda's efforts to promote prospective areas for exploration by oil companies as the followup to an airmag survey. The importance of developing new energy sources in the country was identified by the Energy Sector Assessment and confirmed in the Revised Recovery Programme (paragraph 42). The support from the Association would assist the Government in building up its capabilities for the promotion of virgin areas with hydrocarbon potential and in continuing its cooperation with neighboring countries in exploration and development of prospective areas. Project Objectives 66. The project would continue promotion efforts to attract oil companies which have appropriate technology and sufficient capital to carry 5/ Includes the following countries: Burundi, Ethiopia, Kenya, Somalia, Tanzania, Uganda, Zaire, and Zambia.  - 23 - out bydrocarbon exploration in Uganda. It also would strengthen the capability of tne GSHD (the project ixplementation agency) in the administration and supervision of exploration promotion, exploration, and deve.opment of petroleum resources. Description of Components A. Technical Assistance 67. This component would comprise: (a) consulting services by a petroleum exploration consulting firm (64 man-months); (b) a second promotion meeting, as appropriate, upon completion of the geophysical survey to promote prospective acreage to oil companies; 5c) rehabilitation of the GSHD; Cd) proJect administration; and Ce) training abroad. 68. The petroleum exploration consulting firm would assist in coordinating the implementation of the project components. It also would assist in the setting up and strengthening of the new PU in the GSHD (paragraph 45), including the design and implementation of a training program- This program would be submitted to the Association for review by September 30, 1985 (Schedule 4 of the draft Development Credit Agreement). The consulting firm also would assist the PU in all matters of procurement related to the project. In addition, it would assist and advise the PU on the design, implementation, and interpretation of geophysical surveys and other data gathering to be conducted (paragraph 71). Moreover, the firas would advise the Government on the preparation of a promotion strategy report on Uganda's geological prospects, assist in the preparation of a second promotion meeting (September 1986), as appropriate, and advise on petroleum exploration matters, in particular exploration agreements with oil companies. If this second promotion meeting is required, the Government's cost of the meeting would be financed under the project. Finally, the firm would review progress reports from companies exploring for oil in Uganda; monitor exploration activities in the region; liaise with neighboring countries, in particular Zaire, for coordination and execution of exploration programs; and maintain contact with the oil industry. 69. The consulting firm would provide for a team leader (about 28 man-months) and specialized services (another 36 man-months). The team leader would spend about 6 months each at both the beginning of the project (to assist the PU, advise the Government on preparing a promotion strategy, and agree on arrangements with neighboring countries to assist in exploration efforts across national boundaries) and toward the end of the  project (to assist the Government in interpretation and evaluation of exploration results, drafting a further promotion strategy). In between, the team leader wou'aI pend about four months per year in Uganda on the balance of the projecc related activities. The 36 man-months for specialized services would be for geophysicists, other geoscientists, and petroleum accountants, and for assistance in design and coord nation of exploration in areas of interest, especially near national boundaries. 70. Rehabilitation .-: the GSMD would include restoration of physical infrastructure (transpol t vehicles and office and laboratory equipment) to enable the Department to provide necessary support tu exploration companies and to carry on its own work. Projv:t administration would comprise consulting services to audit ':he project accounts (six man-months) and related overseas travel for Government officials in relation to petroleum promotion. Training abroad would cover approximately two staff years for key local staff in petroleum related matters, including petroleum geology and interpretation of geophysical surveys,through attendance at seminars and special training with petroleum engineering or exploration firms. B. Surveys 71. To facilitate the gathering of additional information on prospective areas, this component would provide for: (a) geophysical surveys: (b) geologic field work, as appropriate, as wele as geochemical studies; and (c) photogeologic studies. 72. The compor_nt would be targeted at areas identified in the airmag survey as sufficiently prospective to justify further work in order to attract oil companies' investment in exploration activities. The focus of the component would be on the Ugandan part of lake Victoria, where an offshore seismic reflection survey of about 2,000 line-km would be carried out by September 1985 if the Project Probe sponsors decide not to pursue a larger seismic survey (paragraph 56). There is the possibility that the focus of the survey component could be shifted to the Albert Rift area, which was the subject of a promotion meeting in November 1984. This would happen only if oil companies do not target blocks by the bidding deadline of April 15, 1985. In this case, the component would be adjusted accordingly i.e., th- geophysical survey would consist of a gravity survey. Depending on the availability of financial resources, the Lake Victoria survey would then be reduced in size or postponed until alternative financing could be obtained from other (private) sources. In addition to the geophysical survey, detailed field work and geochemical studies would be carried out at the same time as photogeologic studies. Costs and Financing 73. The total project cost, net of duties and taxes (from which the project would be exempt), is estimated at about-US;6.1 million equivalent  - 25 - (see Credit and Project Summary). The cost estimate for the consulting services reflects the recently signed contract between Uganda and the exploration consultants, while the costs of the remaining project elements are based on data obtained from recent similar projects. Physical contingencies total about US$0.5 million, which is about 15% of the base cost. Price contingencies amount to about US$2.1 million, or about 59% of the base cost. This assumes price escalation of 3.5% for 1984, 8% for 1985, 9% for 1986-88, and 7.5Z thereafter for foreign expenditures and 35% for 1984, 40% for 1985, 30% for 1986, 20% for 1987, 15Z for 1988, and 10% for 1989 and 1990 for local expenditures. Cost estimates are expressed in US$ of September 1984. 74. The IDA credit would finance the foreign exchange component of the project, which is USS4.0 million equivalent, and US$1.1 million of tie local cost component, or 84% of the total cost. The Government would cover the US$1.0 million balance of the local costs. Project Implementation 75. The project would be implemented over about five years by the PU in the GSMD. The PU would be maintained at least until completion of the project, and would be headed by the Commissioner of Geological Surveys and Mines. He would be assisted by a Project Coordinator, geophysicists, geologists, an accountant, and an administrative officer whose qualifications and experience would be satisfactory to the Association and with an adequate number of support staff (Schedule 4 of the draft Development Credit Agreement). The GSMD would employ consultants and survey contractors, who would report to the project coordinator. 76. Implementation of the technical assistance component of the project is tailored to overlap the first 4-years of an exploration license under agreements expected to be signed in 1985. The assistance would be provided under a 2.5 year contract renewable for another period. It would help the Government evaluate the results of the exploration program and help plan the next phase of exploration promotion. Because there are no oil production activities going on, full-time assistance may not be * required once the PU is operating and exploration activities are underway. Therefore, it is considered more efficient and cost-effective that the exploration consultant (assisted by experts in other fields as required) would not be a full-time resident adviser. 77. The GSMD is expected to sell some of the reports or inf:irmation produced or obtained during the project, including the results of the geophysical surveys, to interested oil companies. A separate account for all proceeds from the sales would be maintained. The proceeds would be made available for further studies, surveys, or petroleum exploration promotion in Uganda or for strengthening the GSMD up to an amount at least equivalent to the aggregate sale proceeds (Section 4.02 (a) and (b) of the draft Development Credit Agreement).  - 26 - Procurement and Disbursement 78. Procurement arrangements are summarized in the table below: Procurement Method International Local Competitive Competitive Project Element Bidding (ICB) Bidding (LCDB) Consultants Total (US$ million) Exploration consultants - - 1.9 1.9 Rehabilitation of GSK, - .9 - .9 Project administration - - .7 .7 Training - - .5 .5 Geophysical survey 1.1 - - 1.1 Geological data gathering - - .3 .3 Photogeology - .2 .2 Promotion - . .5 .5 Total 1.1 .9 4.1 6.1 Of which Association financed (1.1) (.9) (3.1) (5.1) 79. Goods under the project would be procured through local competitive bidding (LCB) procedures acceptable to the Association because they are estimated to cost less than US$100,000 equivalent and are not attractive for ICB, even after bulking of orders. The geophysical survey would be procured under ICB.6/ Consultants would be selected in accordance with the guidelines of the Association. All bidding packages 6/ If, however, a seismic survey is carried out over Lake Victoria (paragraph 72), the survey would be carried out by Project Probe without bidding as the crew is on site and its costs have proved very competitive.  - 27 - goods and services estimated to cost over US$100,000 equivalent would be subject to the Bank's prior review of procurement documentation, resulting in a coverage of about 80% of the total estimated value of contracts for goods and services. 80. Disbursements (Annex VI) for consultants' services and for geophysical surveys would be made against 1002 of expenditures. For goods, disbursements would be made against 100% of foreign expenditures, 100% of local expenditures (ex-factory cost), and SOZ of local expenditures for other Items procured locally. Disbursements for training and project administration would cover OOZ of foreign expenditures. To expedite the flow of funds for disbursements, a Special Account would be established In the Bank of Uganda. The total value of the Account would be US$310,000 equivalent. Expenditures under all categories would be eligible for disbursement from the Special Account. However, the ceiling on contract value to be financed under the Special A'ccunt would be US$150,000. Accounting, Auditing, and Reporting 81. The GSMD would keep separate project accounts. These accounts would be audited by external auditors acceptable to the Government and the Association. The GSMD would submit audited accounts to the Association within five months after the end of each financial year, beginning with 1985. It also would submit quarterly and annual reports on project implementation in a format acceptable to the Association. Environmental Impact 82. Although an exploration promotion project as such has no measurable environmental impact, successful promotion would lead to exploration and possibly to developmental activities potentially disruptive to the environment. However, satisfactory environmental safeguards are included in the Petroleum Bill (paragraphs 48 and 49) and would be enforced by the PU assisted by consultants. Project Benefits and Risks 83. The main benefit of the project would be to attract oil companies to invest risk capital for exploration in the areas surveyed. In case of successful exploration, the project would have helped to initiate hydrocarbon production domestically, to replace expensive imports, and/or to generate new export revenues. 84. The main risk associated with the project is that the results of the surveys might be insufficiently attractive to spur widespread industry interest. Uganda is addressing this risk by (a) moving in steps that incur expenditures only after a previous step is successfully completed, and (b) maximizing the involvement of the private sector and minimizing cash outlays on behalf of the Government. While promotion, and not cost recovery, is the main project objective, the sale of airmag reports (totalling US$120,000 as of February 8, 1985 for Uganda alone) would help recoup part or all of the survey cost. In addition, local expenditures by oil companies during exploration would offset some of the project cost.  - 28 - 85. Some political risks could be involved In the project. First, relations with neighboring countries, which are very good, could change thereby diminishing, although by no means eliminating, the attraction of promoted border areas. The countries are collaborating at present and recognize the mutual benefits from continuing such collaboration. Second, security in some parts of Uganda is still an issue. However, the acreage promoted is free of banditry, although isolated incidents have been reported in the nearby towns of Hoima and Manindi. Local representatives of oil companies have been closely following the situation, and they do not feel that security is an impediment to exploration activities. PART V - LEGAL INSTRUMENTS AND AUTHORITY 86. The draft Development Credit Agreement between The Republic of Uganda and the Association and the Report of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 87. Special conditions of the project are listed in Section III of Annex III to this report. 88. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECONMENDATION 89. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President By Ernest Stern Attachments Washington, D.C. February 28, 1985  - 29 - ANNEX I Page I of 5 Um - SOCIL INDICATORS A sR UGANDA REPERENGE GROUPS WEIlHTED AVERAGRSI la MOST (MOST USER ESTIMATE) /b RECK f LOW INCOME ARICA MIDDIE ICOME 1960/b 19701b UTMTEI SOUTH OP SAHARA AICA S. OF SARA ADJUSTED EDROLINuE RATIOS PRIMAR: TOTAL 49.0 39.0 54.0 69.2 91.0 HAE 65.0 48.0 62.0 78.8 90.5 FEUALE 32.0 31.0 46. 57.6 73.6 SECOMARY: TOTAL 3.0 6.0 5.6 13.1 17.4 MALE 4.a 6.0 7.0 17.6 23.7 FEMALE 1.a 2.0 3.0 8.3 14.8 VOCATIONAL (C OF SECoSN) 11.6 7.4 3.7 7.Z 5.3 PUPIL-TEACEIE RATIO PRDItAR 31.0 34.0 34.0 66.1 38.6 SECONDAR 18.0 20.0 21.0 /L 25.9 24.3 ADULT LrERACr RATE tS) 2S.1 /f .. 52.3 44.3 35.6 PASSENCER CARSITHOUSAND POP 3.5 3.0 .. 3.8 20.7 RADIO RECEIVERS/THOUSAND POP 12.4 23.6 21.8 41. 100.8 TV RECZIVERS/THDUSAND POP 0.1 1.4 5.8 'A 2.0 18.5 NEWSPAPER (MILY GENEAL IND rES ) cuWATIN PER THOUSAND POPULATION 7.3 8.5 1.6 /1, 5.4 17.2 CINDIA ANNUAL ATTENDANCE/CAPITA 0.3 .. 0.1 jd 1.4 0.3 LAM FORCE: TOTAL LABOR FORCE (TROUS) 3Z55.0 4187.0 5427.0 PEAE (PERCENT) 35.1 34.6 33.6 36.5 33.8 AGRICULTURE (PERCENT) 89.0 86.0 83.0 77.4 57.1 INDUSERY (PERCENT) 4.0 5.0 6.0 9.8 17.4 PARCIPATION RATE (PERCENT) TOTAL 44.7 42.9 40.3 41.0 36.3 NUUI 58.8 56.8 54.1 52.1 47.6 EKALIE 31.0 29.3 26.9 30.2 25.1 ECOER[I}C DEPENDENCr RATID - 1.0 1.1 1.2 1.2 1.4 PERCET OF PRIVATE DIUN RECEIVED B HIGHS 5E OF IIWSEDOLDS . 20.0 /h HIGHESr 20X OF WOUSEDOLDS ,, 46,6 lb .. LOWEST 202 OF NHOSEHOLDS ,, 6.2 /h LoEsr 40Z OF HOUSEWLDS .. 16.6 Ii . -OE TAXCET UCUS ESTIMATED ABSOLJTE POVERTf DCME LEVEL C$SS PER CAPITA) URBAN .. .. ,. 168.3 525.3 RURAL .. .. .. 90.5 249.0 ESTIMATED RELATIVE POVERTY INCOKE IEVEL (USS PER CAPITA) URBAN ,. ,, .. 107.7 477.4 RURAL .. .. 87.0 /d 65.0 186.0 ESTMAUED POP. BELOU ABSOLUTE POTErY XINCOE LEVEL (I) URBAN . .. .. 34.7 RURAL _. .. .. 65.4 NOT AVAILABLE NOT APPLICABLE N 0 t E S la The group averages for each Inditcaor are population-weghted arithmetic means. Coverage of countrics among the indieators depends on availability of data and is not unifors. /b Unless otherwise noted. "Data for 1960" refer to any year between 1959 and 1961; "Date for 1970U between 1969 nd 1971; and data for Nbst Recent Estimate" between 1979 and 1981. Ic 1975; /d 1977; Le RegiStered, not all practicing in the country; /f Ages 16 and over; I& 1979; th African population only. JUNE. 198  -30 AN= I Page 2 of 5 IOISA - SOCIAL TIWICAOSC STA sun3 wr:(usu ET m Gc TDmRnUs) lb- Ricca INcer AnreO " 1960/b 1970/b LSTZIAZEb SOSII OF 5A363A eisa . wr SANARA am (soul q Ma) TOTAL 236.0 236.0 236.0 AGRICULTURAL 893 99.8 107.6 cp m cam (ONS) 100.0 160.0 230.0 249.1 1112.9 (EILGCAIS OF OIL rUIYAIE) 27.0 58.0 23.0 62.8 529.0 U S TAL STATIfusT POPULATn.o 1o-1A (TnOUsmn) 7286.0 9758.0 13651.0 MUN POPULATION CZ OF TOTAL) 5.2 8.0 8.7 19.2 29.7 POPULATIS0 PrOJEONS POPULATIN I TER 20W WILL) .. .. 24.7 STATIOlARY POPUlATION (HILL) .. .. 8S.5 POPULATION HWWW .. .. 2.0 POPUTAT1 DENsITY PRt SQ. 34. 30.9 41.3 5j.2 32.5 55.S Pu SQ. 31. AG