Sierra Leone - King Tom Power Station and Distribution Program Project

RESTRICTED FILE COPY Report No. P-393 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTON AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SIERRA LEONE ELECTRICITY CORPORATION OF SIERRA LEONE July 22, 1964  REPORT AND RECONNENDATIONS OF THE PRESIDE1T TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TEE SIERRA LEGNE ELECTRICITY CORPORLTION OF SIERRA LEONE 1. I submit the following report and recomm,endations on a proposed loan of $3.6 million to the Sierra Leone Electricity Corporation for the con- struction of a diesel generating station and expansion of distribution facil- ities in Sierra Leone. PART I - HISTORTCAL 2. Sierra Leone, formerly a British colony, became an independent member of the Commonwealth on April 27, 1961 and joined the Bank in September 1962. Earlier, the Government had asked the Bank to consider lending for a thermal power station to be built on King Tom point in Freetown, and a Bank economic mission, including a power engineer, had visited the country in July 1962. While beginning construction of the King Tom power station the Government also began preparations for establishing a public statutory au- thority to take over from the Government's Electricity Division of the Public WJorks Department of the Ministry of W4orks responsibility for the supply of electricity. This involved the valuation of the assets of the Electricity Division and the establishment of the Sierra Leone Electricity Corpo;-ation. In February 1964, when preparations for the transfer of as- sets and of authority had proceeded sufficiently to allow a technical ap- praisal, a Bank mission visited Sierra Leone to appraise the project and to bring up to date the information necessary for an economic report. Nle- gotiations for the proposed loan began in Washinaton on July 1 and have now been com.pleted. PART II - DESCRIPTICO OF THE LOAN 3. Borrower: Sierra Leone Electricity Corporation. Guarantor: Sierra Leone. Amount: The equivalent in various currencies of $3.8 million. PuMose: To meet the foreign exchange cost of a diesel generating station and dis- tribution facilities. Amortization: In 36 semiarmual instalments begin- ning Play 15, 1967 and ending November 15, 198h. Each payment of interest and principal taken together would be approximately equal. Interest rate: 5-1/2 percent. Commitmnient charrZe: 3/8 of 1 percent.  PART III - ?PPRAISAL OF THE LOAN The Project h. A report on the project 'Appraisal of IKing Tom Power Station and Distribution Program - Sierra Leone" (TO-423a) is attachied (No. 1). 5. The project is the construction of a generating station equipped with two 6.6 iNB^J slow speed diesel engines coupled to generators, associated switchgear, storage tanks, ancillary works and expansion of distribution facilities. The building and foundations of the generating station will allow for the installation of a third unit. Following international bid- ding construction of the station began early in 1963 and it is expected to be operating in March 1965. Planning and design were carried out by consultants who are also supervising construction. Consultants will as- sist with the design and construction of the distribution expansion. Total cost of the project is estimated at $5.07 million equivalent. The proposed loan of $3.8 million would cover most of the foreign exchange cost. 6. Growth of demand for power in the area of Freetown, the capital, averaged 16% a year during the Live-year period to 1963 and it is expected to continue to grow annually by 20% in 1963 and 1964 and by at least 13% thereafter. The King Tom station will provide the additional capacity re- quired by 1965. A 2.4 NiJ hydroelectric plant to be built at G'I-na Valley, a few miles from Freetown, will be in operation in 1967. A third unit at King Tom may be necessary in 1968. Ultimately, a steam generating plant of 10 ihW is planned for construction at King Tom and the present project is being laid out writh this in view so that certain of the project's facil- ities could be used by the steam plant. The Borrowjer 7. The Sierra Leone Electricity Corporation wars established by Act of Parliament on Nay 29, 1964. The Corporation consists of a Chairman and either six or seven other members. The members are appointed by the Min- ister responsible for electricity or, in one case, by the Mlinister of Fi- nance. The General Yianager, who is appointed by the Corporation as chief executive officer, is a member of the Corporation ex officio. On "Vesting Day" which is expected to be August 4, 196h, all electrical installations operated by the Governnent for the supply of energy will be transferred to the Corporation which wTill issue stock to the Government as compensation. The valuation of the assets to be transferred and the organization of ac- counting systems and other procedures for the Corporation have been carried out by engineering and accounting consultants. Consultants will be employed to assist the staff of the Corporation in its early years with system plan- ning and the preparation of annual capital budgets. 8. Financially, the Corporation is expected to earn a rate of re- turn of at least 8 percent on net fixed assets in operation. In the past  - 3 - the Electrici-ty Division has operated at a loss, so far as its true finan- cial position can be ascertained. The loss has been partly due to unprofit- able small provincial undertakings outside the larger centers of Freetonm and Bo and while the Government has agreed that the Corporation should work towards making these self-supporting, it is recognized that they wiLl oper- ate at a loss for some years, The Government has undertaken to make an an- nual contribution to the Corporation to offset losses on these provincial undertakings. The Corporation is to raise tariffs so as to increase rev- enues by at least ten percent. It is estimated that during the period to March 31, 1966 the Corporation would meet 28 percent of its capital expendi- tures out of internal cash generation (excluding the Government's contribu- tion for the provincial undertakings). The unreliability of past data and the uncertainties of long-range planning for the future make the estimates unusually tentative; however, within these limitations it is forecast that over the three years following March 31, 1966 the proportion of capital ex- penditures met by internal cash generation would be 65 percent and the av- erage over the whole period 48 percent. PART IV - LEGAL INSTRUNSTTS AND AUTHORITY 9. Attached are drafts of the following documents which w,-ill give effect to the proposed loan: a. Loan Agreement between the Bank and the Sierra Leone Elec- tricity Corporation (No. 2). b. Guarantee Agreement between Sierra Leone and the Bank (No. 3). 10. The Loan Agreement conforms in general to the pattern for loans to public utilities. It provides, in addition to the usual provisions: (a) that the qualifications and experience of the General lIanager shall be acceptable to the Bank (Section 5.0h(a)); (b) that the Borrower shall appoint a Financial Controller and Commercial Engineer after consultation with the Bank (Sec- tion 5.04(b)); (c) that the Borrower shall not incur any debt prior to Jan- uary 1, 1966 except as agreed with the Bank and thereafter only upon satisfying a minimum debt service coverage for- mula (Section 5.09); and (d) that the Borrower shall not before July 1, 1969 pay in- terest on the stock issued to the Government as compensa- tion for transferred assets and shall pay interest there- after only if payment does not materially and adversely affect the financial condition of the Borrower (Section 5.12). Additional conditions of effectiveness are that satisfactory arrangements shall have been made for the transfer of assets to the Borrower; and that arrangements shall lhave been made for establishment of satisfactory powver rates (Section 7.01 (a) and (b)).  - 24 - 11. The Guarantee Agreement conforms substantially to the pattern of recent guarantee agreements. It provides, in addition to the usual provisions, that the Guarantor shall make an annual contribution to the Borrower to offset losses on the provincial undertakings and shall pro- vide funds in the form of a grant for construction or expansian of elec- tricity facilities outside Freetown (Section 3.06). 12. Also attached is the Report of the Conrffttee provided for in Article III, Section 4 (iii), of the Articles of Agreement of the Bank (N o. 4). PART V - TIE ECCJQIh,Y 13. A report entitled "The Economy of Sierra leone'l (AF-20a) was circulated to Executive Directors on Afipril 29, 19624 (R 64-46). 124. As in most African countries, the people of Sierra Leone are mainly engaged in agriculture, producing such crops as rice, palm prod- ucts, cassava, cocoa, coffee, tobacco, ginger, groundnuts and kola nuts. The main agricultural exports are palm kernels, coffee, cocoa and piascaxra. There are also imrportant exoorts of diarmionds (the largest single export) and iron ore. Production of bauxite has begun recently and rutile, a ti- tanium-bearing rmineral, is to be mined by an American-British company in the near future. With the prospect of falling di,amond production the out- look is for a fairly steady level of exports as a whole during the next six to ten years. 15, Public revenues have increased greatly since 1950, fromn