Uganda - Electricity Board Project

RESTRICTED FILE COPY Report No. P-245 This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UGANDA PROTECTORATE March 21, 1961 REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UGANDA PROTECTORATE 1. I submit the following report and recommendations on a proposed loan of 88.4 million to the Uganda Protectorate for an expansion of elec- tric power facilities of the Uganda Electricity Board. PART I - HISTORICAL 2. The Bank was approached in July 1958 by the United Kingdom Govern- ment and the Goverment of Uganda for its assistance to the Uganda Elec- tricity Board in financing an extension of its transmission and distribu- tion systems, based on the existing Owen Falls hydroelectric power station, and for construction of small generating units to serve some outlying areas. 3. Preliminary discussions were held in the course of 1959 in Entebbe and London with representatives of the Uganda Government and of the Uganda Electricity Board about the project and, in particulars on the Uganda Electricity Board's financial position and prospects. The Board has been in a difficult financial position. A mission from the Bank visited Uganda in April, 1960 to examine the economy and the proposed project. The mis- sion's findings confirmed the need to out the Board's finances on a sounder basis and the resulting negotiations for a loan, which took place in Washington in January and February, 1961, were largely directed to that end. h. So far, the Bank has made no loans exclusively to Uganda. A Bank loan of 24 million equivalent was made in 1955 to the East Africa High Commission for the development of railways and harbors in Kenya, Uganda and Tanganyika. This loan was guaranteed by the United Kingdom and by the three territories concerned. As of February 28, 1961, after repayments and sales without the Bank's guarantee, about y8.7 million equivalent was held by the Bank. 5. The Bank has already made the following loans with the guarantee of the United Kingdom: Amount as of February 28, 1961 Year Borrower Purpose (expressed in $ million) 1952 Colony of Southern Rhodesia Power 28.0 1953 Territory of Northern Rhodesia Railways 16.O 1955 East Africa High Com- mission Railways & Harbors 2L.0 1956 Federal Power Board (Federation of Rhodesia and Nyasaland) Power 80.0 -2- 1958 Nigeria Railways 28.0 1958 Federation of Rhodesia and Nyasaland Railways 19.0 1960 Federation of Rhodesia and Nyasaland African Agriculture 5.6 1960 Kenya African Agriculture and Roads 5.6 Total 20h.2 Of which has been repaid 13.0 Total now outstanding 191.2 Amount sold 6h.9 Of which has been repaid 12.7 52.2 Net amount held by the Bank 139.0 The total loans outstanding include 1.6 million not disbursed as of February 28, 1961. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The main characteristics of the proposed loan would be as follows: Borrower: Uganda Protectorate. Guarantor: United Kingdom. Amount: The equivalent in various currencies of $8.h million. Amortization: In 35 semi-annual installments, beginning on June 1, 196L and ending June 1, 1981. Interest rate: 5 3/1%, including 1% commission. Commitment charge: 3/4 of 1%. Purpose: Extension of the Uganda Electricity Board's existing transmission and dis- tribution systems and construction of small generating stations to serve out- lying areas. PART III - LEGAL INSTRUMENTS AND AUTHORITY 7. Attached are drafts of the Loan Agreement between the Uganda Pro- tectorate and the Bank (No.1), the Project Agreement between the Bank and the Uganda Electricity Board (No.2) and the Guarantee Agreement between the United Kingdom and the Bank (No.3). -3- 8. Under the draft Loan Agreement the Uganda Protectorate undertakes to relend the proceeds of the proposed loan to the Uganda Electricity Board on terms and conditions satisfactory to the Bank (Sectirn 5.01(a)). The draft Loan Agreement follows the usual form of the Bank's loan agree- ments for lending for electric power undertakings and contains covenants as to limitations on the Board's incurring of new debt (Section 5.04) and as to its rates (Section 5.05). The covenant on rates will be amplified in a side letter (No. 4). Section 5.03 (the negative pledge clause) of the draft Loan Agreement has been modified to avoid constitutional prob- lems arising from its application to political subdivisions and their agenc.es. If the Government of Uganda, for constitutional reasons, is unable to make the negative pledge effective with respect to these polit- ical subdivisions and their agencies, it will grant to the Bank an equiv- alent lien satisfactory to the Bank. The draft Loan Agreement requires, as a condition of effectiveness, that action be taken, satisfactory to the Bank, to establish a sound financial position for the Board (Section 7.02(b)). The action contemolated will be specified in a side letter (No. 5). An amendment, satisfactory to the Bank, of the Uganda Electric- ity Board Ordinan-ce will also be a condition of effectiveness (Section 7.02(e)). The draft Project Agreement repeats relevant covenants of the draft Loan Agreement as direct obligations of the Board to the Bank. 9. The draft Guarantee Agreement is in form similar to the Bank's previous guarantee agreements with the United Kingdom. It is proposed that an understanding between the Bank and the United Kingdom as to the interpretation of Section 2.02 of the draft Guarantee Agreement in the circumstances of this loan be in the form of the draft attached (No. 6). 10. The report of the Committee provided for in Article III, Section h(iii) of the Articles of Agreement is attached (No. 7). PART IV - THE PROJECT 11. An appraisal of the proposed project is given in the attached technical report No. TO 253-b (No. 8). 12. The Uganda Electricity Board is a statutory corporation establish- ed in 1948 with the sole right to generate, distribute, and licence gener- ation or transmission of electric power in Uganda. It is well managed, has competent officers and a sound organization. 13. The Board's current development nrogram, covering the period 1959 through 1963, is designed mainly to extend its service area and thus to build up the load on the Owen Falls station by improving and expanding the existing transmission and distribution systems. It involves a total expenditure of about "16.1 million equivalent. The project which it is proposed the Bank help to finance requires a total expenditure of about $1L million equivalent. About 95% of this would be for expansion and improvement of transmission and distribution systems to a number of town- ships and to the copper mining center at Kilembe. Some orovision is also made for small generating stations to serve outlying areas which could not be economically supplied from the main generating station. 1L. Roughly 60% or 28.L million equivalent of the proposed expenditure under the project would be for imported goods and services. The Bank would disburse funds at a rate of 60% of the total expenditure on the project. 15. A detailed review of the Board's financial position and prospects was made during the negotiations and a financial plan has been evolved to improve gradually the Board's difficult financial position, arising partly from the "bunching" of maturities of its long-term debt. 16. To ease the financial burden, the Government has agreed that the Board's redemption obligations should be rescheduled so as to fall more evenly over the period 1967-1981. Steps are being taken to this end. (See paragraph 42 of Technical Report). The Board's future borrowing will be subject to limits as set by an interest coverage covenant in the pro- posed Loan Agreement. 17. The Board's tariffs for a bulk supply to Kenya and for its sales of power to certain large industrial consumers are set under long-term contracts which cannot be altered unilaterally. The Board plans to raise its standard tariffs by 18% before July 1, 1961 to help meet its heavy cash requirements. This should increase total revenue by about 13%. Under a rate covenant in the proposed Loan Agreement, the Board will be required to adjust its rates from time to time to produce revenues sufficient to earn a reasonable return on net investment after meeting operating ex- penses and to cover all cash obligations including debt service. 18. It is expected that by 1963, when the proposed project is com- pleted, there will have been a growth in sales leading to a steady im- provement in the Board's earnings. By 1967, the Board should achieve a return of about 7-1/2% on its net investment, and the return should be much higher in subsequent years. This should enable the Board to make some provision from internal sources for its further growth. Moreover the Board should no longer need short-term Government advances and Government funds should be released for investment in other productive sectors of the economy. 19. The works under the proposed project have been,and will be, exe- cuted partly by the Board's own organisation and partly by contractors selected on the basis of competitive bidding. Direct purchases by the Board will be made through local importers or from abroad; the larger and more specialized items of equipment are morerlikely to be purchased abroad. A tender system is used for all purchasing; both domestic and foreign suppliers may tender. There are no preferential tariffs in Uganda. PART V - ECON0MIC BACKGROUND Uganda 20. A report No. EA 113-b on the economy of Uganda is attached (No. 9). -5- 21. Uganda's economy is based on agriculture, predominantly of the subsistence type. African peasant farners on small plots grow food crops for their own consumption and cotton and coffee (mainly Robusta) for market- ing. These two crops account for about b0% of Uganda's domestic cash income and more than 80% of its export earnings. Land titles cannot be granted to non-Africans, and, except in sugar and tea growing, plantation farming is virtually non-existent. Since 1956, cooper is mined in Western Uganda; present production is about 12,000 tons of blister a year. 22. High export prices for Uganda's main exports made possible a rapid economic growth in the first post-war decade. Since 1955, prices have fal- len and, despite larger output, growth in the gross domestic product has only roughly matched the growth of population. Per capita gross domestic product now amounts to only about $64 equivalent. 23. Since there is unused land and a suitable climate, the physical potential for expanding production of major export crops and for increas- ing the production of minor exports, such as tea and livestock products, is good. Difficulty in marketing is likely to be the major limiting factor. 24. Government revenues have fallen substantially due to their dependence on export taxes. Contrasted with a surplus of about $10 million equivalent in 1951, the Government's overall budget in 1959/60 had a deficit estimated at about ;8 million equivalent. Some part of the reserve balances accumu- lated in the earlier years are still available to help cover this year's deficit, but after this year the balances will probably be exhausted. The Uganda Treasury is now seeking ways to balance its current accounts by 1965. Until that date, the United Kingdom Government has agreed to assist Uganda in meeting its deficits on current account, if necessary. 25. Private investment in industrial and agricultural ventures has been small. But the Uganda Development Corporation, the Government's main instrument for economic development, has been active in promoting both in- dustrial and agricultural investment, including direct investments in textiles, cement, metal processing, hotels and large-scale tea-growing. The infrastructure on the whole is well-developed. In recent years public investment has been heavy in fields such as health and education where the need is great but benefits tend to be long-term. 26. With good management and reasonable stability in commodity prices, Uganda can expect in the next five or six years a modest rate of growth in its gross domestic product. To accelerate its development, it will need an inflow of foreign capital, including official loans and grants. Uganda's own external public debt, all in sterling, is low: it amounts to about $56 million equivalent, incurred almost entirely for relending to the Uganda Electricity Board. Servicing of the debt represents about 2.5% of Uganda's annual external earnings and about 7% of the Government's total revenue. 27. Uganda shares with neighboring Kenya and Tanganyika a common East African mar'-et, the same currency and joint institutions. At present -0- these territories are moving towards political independence from the United Kingdom; independence may indeed be achieved within a few years, but it is likely that even when this happens close economic ties among them will continue. 28. Uganda is passing throu'.h a difficult transition from Protectorate status to full independence. For the future economic development of the territory it is important that the transition be orderly. Unlike the two other British East African territories, Uganda has no substantial European settler population. There has, however, been interracial tension between the 75,000 Asian settlers and the Africans. Among the Africans, too, there are some strong tribal or regional antagonisms, such as the separa- tist movement in Buganda, the richest province, which now constitutes a major obstacle to early independence. There has been a declaration by the Buganda legislature that Buganda should secede by the end of 1960. This was rejected by the United Kingdom on constitutional grounds. But the situation has not since deteriorated. A commission which has recently been appointed to recommend a future political structure for Uganda may succeed in devising an acceptable solution. A constitutional conference is due to convene in London, before the end of this year, to consider the future pace of progress towards self-government and eventual full independ- ence. Even assuming that the Buganda dispute will be settled soon, there are uncertainties and risks in the future; the guarantee of the United Kingdom of the proposed Bank loan is, however, an additional assurance. United Kingdom 29. The present economic situation in the United Kingdom is reviewed in the report No. EA-117a, dated February 20, 1961, which has been dis- tributed to the Executive Directors. 30. In guaranteeing the proposed loan, the United Kingdom accepts an additional contingent liability. The total amount of Bank loans made so far to dependent territories with the United Kingdom's guarantee, now amounting to ,,,191 million, is relatively small. The annual service pay- ments on the United Kingdom's external public debt, including the guaran- teed debt, amount to about 2% of the United Kingdom's gross annual re- ceipts from current external transactions. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 31. I am satisfied that the proposed loan will comply with the re- quirements of the Articles of Agreement of the Bank. PART VII - RECOMMENDATIONS 32. I recommend that the Bank at this time make a loan to the Pro- tectorate of Uganda in an amount in various currencies equivalent to $8.4 million for a total term of about 20 years, with interest (including -7- commission) at 5-3/4% per annum and on such other terms as are specified in the attached draft Loan, Project and Guarantee Agreements, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 10). Eugene R. Black President Attachments Washington D.C. March 21, 1961