Uganda - Third Power Project

Docmet of The World Bank FOR OmCAL USE OnLY - ;; 6 - Z- Reot No. P-5433-UG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 86.9 MILLION TO THE REPUBLIC OF UGANDA FOR THE THIRD POWER PROJECT MAY 29, 1991 This documeut has a restricted distribution and may be used by recipients only in the performance of their offical duies. Its contens may not otherwie be diselosd- without World Bank authrodzation.  CURRENCY EQUIVALENT Currency Unit = Shilling US$1.0 = USh 670 (as at May 1, 1991) WEIGHTS ANI) MEASURES 1 kilometer (kIn) = 0.621 miles 1 square kilometer (kni) = 0.386 square miles 1 kilovolt (cV) = 1,000 volts (1,000 V) 1 megawatt (MW) = 1,000 kilowatts (1,000 kW) 1 megavolt ampere (MVA) = 1,000 kilovolt amperes (1,000 kVA) 1 gigawatt hour (GWh) = 1 million kilowatt hours (1,000,000 kWh) I ton of oil equivalent (toe) = 10,500,000 kilocalories ABBREVIATIONS AND ACRONYMS AfDB African Development Bank Fund BITS Swedish Agency for International Technical and Economic Cooperation CDC Commonwealth Development Corporation CIDA Canadian International Development Association EEC European Economic Community EIB European Investment Bank ESMAP Energy Sector Management Assistance Program GSMD Geological Survey and Mines Department GTZ Gesellschaft fuer Technische Zusammenarbeit ISDB Islamnic Development Bank ICB International Competitive Bidding IRR Internal Rate of Return JICA Japan International Cooperation Agency KfW Kreditanstalt fuir Wiederaufbau KP&L Kenya Power and Lighting Company, Limited LRMC Long-run Marginal Cost MPED Ministry of Planning and Economic Development NORAD Norwegian Agency for Development Assistance ODA Overseas Development Administration (UK) OECF Overseas Economic Corporation Fund OPEC Organization of Petroleum Exporting Countries SCADA System Control and Data Acquisition Fund SIDA Swedish International Development Association UNDP United Nations Development Programme UEB Uganda Electricity Board UEB's Financial Year = Calendar Year  UQAM& FOR OFFIC USK ONLY Credit and Project SUM=g :OM r 7UTe Republic of Uganda _ : Uganda city Bonrd (UEB) Am:W SDR 86.9 million (US$125 million equivalent) m: Standard IDA tms, with 40 years mawity OWenl3ding Temns: For that portion of the credit to be on-lent to UEB, 20 years, at 7- /2% annual interest including a five-year grace period with the foreign exchange risk to be borne by UEB. OMWN and mFU ft: Ereign LlTalr - ---($ milhion )- UEB - 34.8 34.8 IDA 125.0 - 125.0 Idendfied financing 104.6 - 104.6 Funding Gap 70.7 - 70.7 Tota 300.3 34.8 335.1 EconomicRa of Reurn: 16.5S Scdf ADO RZort No.: 915S3-UG Map: IBRD 22738 This document has a restricted distribution and may be used by recipients only in th. perforr.ance of their official duties. Its contents may not otherwise be disclosed without World Bent, P-"4,rlzation.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDrT TO THE REPUBLC OF UGANDA FOR THE THIRD PE PROJECT 1. The following report on a proposed development credit to Uganda for SDR 86.9 million (US$125 million equivalent) to help finance the Third Power project is submitted for approval. The proposed credit would be on standard IDA terms with a maturity of 40 years. SDR 20.8 million of the credit will be provided to Uganda Electricity Board (UEB) as equity, and SDR 65.6 million would be onlent to UEB at 7-1/2% interest rate. The credit would help to procure equipment, materials and technical assistance. UEB would bear the foreign exchange risk. SDR 0.5 million of the credit would be used to finance technical assistance to strengthen the Ministry of Energy. The project could be cofinanced by AtDB with US$45 million, Islamic Development Bank (ISDB) US$20 million, BITS (Sweden) US$10 million, SlDA (Sweden) US$5 million, and Norway US$24.6 million, and the Government of Uganda is seeking firther sources of financing to bridge a funding gap of US$71 million equivalent. The Government expects that if the IDA C2redit is approved this will encourage other donors to assist it in this endeavor. 2. Black.gund. Under Uganda's Economic Recovery Program, there has been an impressive increase, since 1987, in GDP of between 6 and 7 percent per year. Sustained real GDP growth of at least 5 percent per year seems attainable if economic stability is achieved and the constraints on growth of the productive sectors can be alleviated. The severe deterioration of the power infrastructure has been a serious obstac !.e the revival of the commodity-producing sectors. Through the ongoing Second Power project support is being provided to relieve immediate electrical energy constrains caused by the ill-maintained 30-year old generators at the 150 MW Owen Falls hydroelectric power station, where most (96%) of Uganda's electricity is generated, and by the inadequacies of a long-neglected, out-of-date transmission and distribution system. However, in order to meet the medium to long-erm electrical energy demands of a growing economy (current Uganda demand and export commitment to Kenya already exceed the power station's capacity), it wil be essential to exploit firter Uganda's considerable hydroelectric power potential, which is the cheapest source of electrical enemr in the region, and to strengthen and extend the country's transmission and distribution facilities. 3. Government strategy in the sector is effected through the Ministry of Energy, which formulates, periodically updates and follows an economic least-cost energy plan aimed at meeting the energy demand of Uganda's recovery program as well as its long-term requirements. The strategy is to rehabilitate existing facilities, construct new ones, support the objective of strengthening the electricity utility, UEB, set fuel prices, expand electricity exports, and monitor and control imported petroleum products and their prices. Government is seeking, where possible to replace the use of petroleum imports by hydro electricity. Government plans to accelerate the program for rural and urban electrification; to accelerate the development and use of alternative new and renewable sources of energy; and to encourage research and studies towards efficient use of woodfuel and overall energy conservation. The Bank's lending strategy for Uganda has been to concentrate on rehabilitation needs in the short term, to finance immediate import requirements and to support the Government's efforts to reform economic policies and instiutions, and to focus this assistance increasingly on projects designed to restore the country's productive capacity, its basic infrastructure and institutions. Energy is one of the main targets of the Bank's sectoral coverage. 4. Ptoiect .b . IlThe proposed project will continue and build upon the rehabilitation work under the ongoing Second Power project to prevent bottlenecks that would otherwise hinder economic development by providing urgently needed least-cost capacity additions to Uganda's power generation,  -2 - transmission and distribution facilities to satisfy the requirements of all the productive sectors of the economy. The project embraces the major priority components of UEB's five year power development program and will also help to enhance the utility's operating and management capability and improve its financial performance through policy reforms and institutional strengthening. Among other things, this will include the establishment of realistic tariffs, agreement on a least-cost sector investment program, and a link with a utility of another country. Tbis latter component would give UEB access to tehncal and practical on-site and overseas training and experience in modem practices in routine and preventative plant maintenance and operation, load forecasting and planning, accounting and computer procedures, and managerial skills. 5. Proijet Deiption. Tle project consists of (a) measures to strengthen the 35-year old Owen Falls dam; (b) additional spillway capacity and the expansion by 102 MW of the hydroelectric plant at Owen Falls to a total of 282 MW, and expansion of the transmission and distribution systms; (c) support to the Ministry of Energy for studies of alternative sources of energy, environmental aspects of sector planning; and (d) the appointment by UEB of a panel of dam experts. Ihe total cost of the project is estimated at US$335 million equivalent, with a foreign exchange component of US$300 million. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations are given in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report, No. 9153-UG, dated May 23, 1991, is also ataced. 6. Rationale for IDA Involvement. The project, besides helping to safegard the existing Owen Falls dam, supports the expansion of the least cost investment in Uganda's electrical energy needs and helps to define pricing and investment options in a sector which, becase of its capital-intensive nature, is a drain on Uganda's foreign resources. It is evident from the success of the ongoing Second Power project that the Bank has a valuable role to play in promoting policy and institutional refrs in the power sector to guide its development in support of the overall economic recovery program. The Government's priorities include the restoration to full utilization of existg productive cqapcity and rapid expansion of agriculture and industrial sectors. The power secor directly supports other productive sectors and is a source for resource mobilization, including foreign exchange. The Ban's involvement in the current phase of power sector development in Uganda is necessary to strengthen its maagement, improve its training procedures, and advise on the protection of its current and future asses and the expansion of the system. The proposed operation is an important element in the Bank's country assistance strategy; it will help ensure that power system development is based on the least cost oons, without adverse environmental effects, assist Uganda in exploiting its comparative advnage in developing hydroelectric resources for power expors in the region, and attract other mitional and bilateral financiug for the development of the sector. Through the use of intional competitive bidding procedures for procurement, UEB will benefit from lower construction and equipment prices. 7. A,ereed Actions. At negotiations agreement was reached as follows: (a) as conditions of crd effectivenes, UEB's tarif&t will be increased to the equivalent of US cents 4.8/kWh, UEB's net fixed assets will be revalued and appropriate adjustments to reflect the revaluation reflected in UEB's accounting prcedures, and UEB will convene a panel of experts in dam maintenance to give its opinion on consultant's recommendatins to strengthen the dam; (b) as a condion of disbursement for the civil works conutact the resetlement plan will be fully implemented and the borrower/UEB has obtained financing for the project to close the fumding gap. Conants cover: a review of UEB staff and mainenance of competiive compenuation, maintenance of a rate of return of 8% on net revalued assets; and Government ensure Ihat Ministries and parastatals pay promptly their dues to UEB.  -3 - 8. Ressetlement and Environmental Impact and Riparian Ins,ues The prject involves the resettlement of about fifty families in the area where the canallspillway is to be excavatd for the Owen Falls extension. A plan, acceptable to IDA, to resetlle them to arby plots and to recompeme them suitably has been prepared by Government and reviewed by the Bank. A condition of first disbument for the civil works under the credit will be the fbll implementation of the plan. The main componem of the project, the extension of the existing plant at the Owen Falls dam, will utilize the excess water which has flowed unharnessed through the dam sluices to the river since the existing station was built 30 years ago. Thus, it will have minimal environmental impact. No effects on flora or fiau are expWecte. Studies on the 132 kV transmission corridor to the west indicate minimal environtal effets. l. flow of Lake Victoria into the Nile is regulated by an arrangement among the riparians, which requires Uganda to operate the Owen Falls power plant and sluices as if there were no manmade stnuct and the river was flowing in its natural form. To maximize the beneft from the exist plant ad the proposed extension, the lake could be treated as a reservoir by reulating the flow of water more evenly, but maintaining the total flow at historic levels. Nevertheless, the project is fully justfied and economically viable based on the water flow resulting from the opeaing arrangement. Uganas operation of the lake as a reservoir in the future would be contingent on the riparians reahing a comensus on the matter. 9 Befits. Justificadon. and Project Risks. The project will help safeguard the dam, and wfll have benefits from electricity generation which will be felt throughout private buiness, in te commerci and industrial sectors, by Government and by the domestic market. For busins as well as for the Govermment, adequate and reliable power supply will mean enhanced management efficiency, improved coordination of economic activities and will likely lead to increased productvity and growth. Improved power supplies would also support the extension and enhancement of hedth, education, govement administtion services and water to rural areas. 'he economic rate of retur of a dme-slice of UEBs total system development program including the proposed expansio of t trsmibson and dismbution system and the extension of Owen Falls is 16.5%, based on an analyis of coss and benefits to the economy. The design and size of the extension is based on depndable records of river flows which have persisted since 1960. The risk tat the hydrology could revert to a condition descrbed by the pre- 1960 data is estimated by the consultants to be less than 1%, which is judged to be an acceptable ri; Other project risks are insutial and financial becse the rnimpove to UEB's poor operating and financial performance andlor inadequ management controls are still precaiou. The proposed financial and tariff covenants, organization and managem en m res and techna assita component, and UEB's stated intention to review frequently with IDA the performance monitorig targets should minimize these risks. Benefits wil be fast accruing becuse of the caurent imbalnce betweon supply and demand as well as projected growth in demand. 10. Remmedaio. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Atachments Washington, D.C. May 29, 1991  4- 3cheSe A UGAIDA Estimated Co and Fiancino Plan Estima tedPrject Cost Foreign Local Total --USS million)- Q=Fallsh Civil works including spillway 117.2 12.2 129.4 Dam strengtbening 23.0 2.0 25.0 Electrical & mechanical equipment 60.4 4.5 64.8 Owners cost (site housing, etc) 1.9 7.8 9.7 Engineering supervsion 18.4 1.0 19.4 Technical assistance to UEB and Minnergy 7.7 0 7.7 Transmission and Distnbution 6.5 0.1 6.6 Next major site study 2.9 0.1 3.0 R(payment of project preparation advance 0.8 0 0.8 Base Cost 238.8 27.6 266.4 Physical Contingencies 29.0 3.4 32.4 Price Contingencies 32.5 3.8 36.3 Total Financing required 300.3 34.8 335.1 i1 Base cos at end-I990 levels. Financing Plan: EPwgu LOW l -(--$--(US$ mllion)- UEB - 34.8 34.8 IDA 125.0 - 125.0 ADB 45.0 - 45.0 BITS/SIDA 15.0 - 15.0 ISDB 20.0 20.0 Norway 24.6 - 24.6 Unidenified 70.7 - 70.7 Total 300.3 34.8 335.1  ' ' ' ~~~~Lost TOI ohi* ICB @hs NMA o con cog - U S S m~~~~tilLieul 1. 9gd 1.1 C hi voln 149.6hi 15. 1703 (45.2) (65.2) 1.2 Inaallds of detla 11.2 1.4 12.6 and uwlmlm ga 1.3 Dom monsom4 *27.8 2.4 30.2 (278) (27.8) 2. h (uwy and 2.1 8que 13.5 Of 14.0 be, 0- 2.2 Tueam 21.0f 1.1 22.1 23 Swirsand Usa- &6 15 10.1 ndsdon ham 2.4 Genaot 20.4 1.1 215 2.5 Gasarto numms 1.6 1.6 2.6 0i. an didon .9 Q1 7.9 (7.9) (7.9) 2.7 owns. oost 2.4 9.6 12.0 3. 3.1 EuGwbg & 22.8a 1.2 24.0 wupagvls (228) (28) 3.2 Tocbna as.sL to U1BB 0OSg 8.7 93 & a "fost to Min. of Ray. (0.5) (0.5) 3.3 Hydroudy 3.6 I 3.6 4. Mbokw 4.1 Repsymit of PPP 0.3 0.8 (0.8) (0.8) 185.3 23.3 91.8 345 335.0 (100.9) (23.3) (0.8) (125.0) &i Piguta in pWAenhes ishow Veepvessv eluonts to be financed by MDA. hi To be proud i accordan w ih Bank's Guenas for Ptourmet an prpose to be ooflnW by AIDS nd 1 DB. gI Scni and TA wM be prowd in acoordum with BDan 'sGuldf on he Use of Consu_ms' August 1981. dl To be aeod by Nowy. I To be hood by door co yet Ideaied.  -6- Page 2 of 2 Amount of die Percentsge of Credit Aoca xpeditu Cste M~~~~~~~~~tSS mika to be, FapS Civi work and 101 100% of forelgn elecical and expenditures hnical equipment Consultants services 23 100% of foreign expendiues Technical ass8itance 1 100% of foreip expenditur Emated 1isbu of IDA Credit EY92 EX23 EY29 EX29 FY22 Annual 5.9 23.8 42.4 37.7 12.7 2.5 Cumulative 5.9 29.7 72.1 109.8 122.5 125.0 Includes refinancing of PPF advance.  -7- Scbedule C U-GANDA THIRD POWVE (a) Time taken to prepare 30 monthis (b) Prepared by Uganda Electricity Board, wit assistance from JIDA and consultants (c) FirstI]DA mission October 1988 (d) Appraisal miission departure June 26, 1990 (,e) Negotiations February, 1991 (f) Board consideration June 18, 1991 (g^) Planned date of effeetiveness November, 1991 (h) Relevant PCR lhere are no relevant PCRs. The First Power project loan closed before IBRD required PCRs.  - 8- STATUS OF BUAK CROUP OPERATIONS li UGANDA Schedule 0 .................... ........... Page of 2 A. STATEMENT Of SAMK LOANS AND IDA CREDITS (as of March 30, 1991) ---b-- US$ Nillion ..... Amount(Less Cancellations) Loan Of Fiscal Undis- Credit No. Year Sorrower Purpose Bank IDA bursed ................ ....... ............ ...... ........... ......... ... .... ...... One (1) loan and eighteen (18) fully disbursed, 8.40 369.1S Of which SECALs, SALs and Program Loans/Credits a/ Cr. 03400 1988 Uganda Economic Recovery Credit/SAF 24.00 0.03 Cr. 18411 1989 Uganda Economic Recovery Credit 0.00 1.70 Cr. 12520 1982 Uganda Reconstruction Credit 11 0.00 70.00 Cr. 14740 1984 Uganda Reconstruction III 0.00 50.00 Cr.12480 1982 Uganda IDf I 35.00 2.95 Cr.13280 1983 Uganda Agricultural Rehabilitation 70.00 8.50 Cr. 14340 1984 Uganda Second technical Assistance 13.00 0.55 Cr.1t450 1984 Uganda Third Nighway 58.00 15.93 Cr.15390 198S Uganda Agricultural Developtmnt 10.00 6.23 Cr.15600 1985 Uganda Second Power 28.80 17.41 Cr.15610 1985 Uganda Petrolewi Exploration Prom 5.10 5.08 Cr.1800 1987 ugada Fourth Highway 18.00 3.91 Cr.18240 1988 Uganda Forestry Rehabilitation 13.00 6.97 Cr.18440 b/ 1988 Uganda Economic Recovery Credit/SAF 65.00 1.86 Cr.18690 1988 Uganda South west Ag. Rehab. 10.00 9.03 Cr.18930 1988 Uganda Sugar Rehabilitation 24.90 18.87 Cr.19340 1988 Uganda Health Roc. 42.50 33.19 Cr.18442 b/ 1989 Uganda Econ. Recovery Credit 25.00 1.14 Cr.19510 1988 Uanda Tech. Asst. 1II 18.00 14.22 Cr.19620 1989 Ugand Public Enterprises 1S.00 10.10 Cr.19650 1989 Uganda Education IV 22.00 8.49 Cr.1986W 1989 Uganda Railways I 7.00 6.12 Cr.19910 1989 Ugana Telecom II 52.30 37.03 Cr.03410 b/ 1990 Ugnda Ecenomle Recovery Credit 12.80 0.60 Cr.184W3 b/ 1990 Uganda Economic Recovery Credit 1.50 0.20 Cr.20870 b/ 1990 Uganda Eeonmic Recovery Credit 125.00 22.93 Cr.20880 1990 Uganda Poverty & Sos. Costs 28.00 26.57 Cr.21240 c/ 1990 Ugd Water S&pply 11 60.00 60.97 Cr.29871 b/ 1991 Uganda Economic Recovery II 2.00 2.03 Cr.21?60 c/ 1991 Ugada Livestock 21.00 21.77 Cr.21900 bc 1991 Uganda Ag. Sector Adj. Credit 100.00 78.84 Cr.22060 1991 Uganda Urban 1 28.70 27.96 Total 8.40 1282.75 449.47 of which repaid 8.40 25.74 total held by Bank & IOA 0.00 1257.01 TOTAL Undlsburee 449.47 ............................... ............................................... */ Approved after FB80 bJ SAL. SECAL or Program Loan/Credit d/ Not yet effective usledl.wkl 04-20-91  -9- Scehdule D Page 2 of 2 S. STATEMENT OF IFC INVESTMENTS IN UGANDA (as of Deceober 30, 1990) Aowunt in USS #illion Fiscal .... Year Obligor Type of Business Loan Equity Total ,........ ....... . ............ .... ..... ....... .... .... 1985 DFCU Spiming Veaving & Finishing 0.00 0.38 0.38 1965 WILCO Food Beverages, Tobacco, Weaving 4.32 0.71 5.02 1984 TAITECO rood Products 1.62 0.00 1.62 1972 TPS Tourism Services 1.11 0.00 1.11 1984 Uganda Sugar Cocoa Chocolates, Sugar 6.00 0.00 8.00 1985 Uganda Tea Food Products NEC 2.81 0.00 2.81 of Uganda ---- . Total gross comaittmnts 17.86 1.09 18.94 Less: RepaVments, cantoelations, exchange adjustments, terminations and sales 8.28 0.71 S.99 ..... . ..... .......... Total Comitaments noi held by IFC: 9.58 0.38 9.f9 Total undisbursed 0.00 0.00 0.00 Total Outstanding IFC 9.58 0.38 9.96 0ug2ed .9i 04-20-91  l / S / Dr