South Africa - Fourth Electricity Supply Commission (ESCOM) Power Project

R E S T R I C T E D Report No TO- 550a 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 The report may not be published nor may it be quoted as representing their views.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 RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ELECTRICITY SUPPLY COMMISSION (ESCOM) POWER EXPANSION PROGRAM SOUTH AFRICA July 18, 1966 Projects Department  CURRENCY EQUIVALENTS US $1 = Rand 0. 714 Rand1 = US $1. 40 Rand 1, 000, 000 = US $1, 400, 000  POWER EXPANSION PROGRAM ELECTRICITY SUPPLY COIIISSION (ESCOM) - SOUTH AFRICA TABLE OF CCNTENTS Page No. SUMMARY i - ii I. INTRCDUCTION 1 II. THE BORROWER 1 III. THE POWER IMARKET 3 IV. THE POvER EXPANSICN PRCGRAM 1966-70 AND 1971-1975 7 V. THE PROJECT 8 VI. FINANCIAL ASPECTS 10 Electric Power Legislation 10 Present Financial Position 11 Past Earnings 15 Future Earnings 17 Financing Plan 18 Future Financial Position 20 CONCLUSIONS 21 ANNEXES 1. ESCOM's Capacity - December 31, 1965 2. Energy Sold by the Varicus Undertakings During 1965 Znergy Sold by the Interconnected System 3. Generation and Sales of Electricity - ESCOM and Total South Africa 8. Percent of Total Sales For Each Class of Consumer 5. ESCOM Sales to Various Classes of Consumers 6. Forecast of Sales and Peak Loads 7. The Expansion Program 1966-1970 B. Peak Loads, System Capabilities and Annual Expansion of the Interconnected Power Stations of the Rand and Orange Free State and the i:'astern Transvaal Undertakings 9, Camden Power Station 10. Firms Invited to Tender on Camden Power Station - Boilers and Turbines 11. Construction Schedule 1966-1970 12. Actual and Estimated Balance Sheets as of December 31, 1961-1970 13. Actual and Estimated Income Statenents, Years Ending December 31, 1961-1970 14. Statement of Sources and Application of Funds, 1961-1970 IAP This appraisal report is based on information obtained by a Bank mission consisting of A.D. opottswood and A.A. hiaizen which visited South Africa from April 27 to ilay 12, 1966.  POWER EXPAINSION PROGRAM ELECTRICITY SUPPLY COi,ISSION (ESCOM) - SOUTH AFRICA SU1SRY i. This report covers the appraisal of a thermal power project now under construction in South Africa about 160 miles east of Johannesburg. The sta- tion, known as Camden, when completed will have an installed capacity of 1,600 I4W consisting of eight 200 M4 generating units and eight boilers. It is estimated to cost $176.4 million of which $40.6 million would be in foreign exchange. The first 200 1SW unit is scheduled to be completed and tested in October 1966. The others are scheduled to follow at intervals ranging from 3 to 8 months and the final unit is expected to be in operation in October 1969. Contracts for all of the main items of equipment have been placed after international competitive bidding. ii. The borrower would be the Electricity Supply Commission, an autonomous statutory corporation of the Government of South Africa which was established in 1922. Its management is well qualified, experienced and competent. It supplies electricity to most of the cities in the country for distribution in their areas and it supplies directly mines, large industries and the railroads. The power plants operated by Escom had an installed capacity at the end of 1965 of 4597.4 194. During the period 1966-1970 it plans to add 3,310 lid of generating capacity, including the Camden Station, and 3,200 miles of high voltage transmission lines to its system. This program is estimated to cost $785 million. Escom's sales, which totalled 23,143 million kilowatt hours in 1965, have increased at an average annual rate of 8.2 percent for the past decade and are estimated to increase at about this rate during the next 5 years. iii. The Bank has made three loans to Escom. The first (41 SA) made in January 1951 was for $30 million; the second (78 SA) in August 1953 was for $30 million and the third (305 SA) in December 1961 was for $14 million. The term of the first loan was for 20 years and the term of the other two were for 10 years. All work envisioned under the loans was satisfactorily completed. iv. The project, which was designed by Escom's technical staff, is technically sound and its cost of $110 per kw compares favorably with the cost of large scale thermal plants built in Europe or the US. v. The generating capacity which the project would provide would assist in meeting the growing demand for power in South Africa and its addition to Escom's systen at a source of cheap ($1.68 per ton) coal would be the most economical means of providing this amount of capacity. High voltage transmission lines would send some of the energy generated at the station to areas where fuel costs are high.  - ii - vi. The financial record of Escom is good and its present position is satisfactory. Under its statutes Escom is required to operate at no profit and no loss and its accounting procedures are fashioned to comply with the limitations of the statutes. However, a conventional accounting analysis reveals that the return on Escom's net fixed assets in operation for the past five years has been about 7 percent and the return for the next five years is estimated to be about 8 percent. Projec- tions of Escom's total borrowings to finance its large 1966-1970 expansion program indicate that it would be prudent for Escom to obtain more of its funds from internal cash generation. Escom is aware of this situa- tion and during negotiations Escom provided assurances that it intended to increase its internal cash generation. The Government has also given assurances that if necessary it will provide Escom with all funds needed to complete the project. vii. The project would be suitable for a Bank loan of $20 million equivalent for a period of 10 years with a grace period of 18 months.  APPRAISAL REPORT POWER EXPANSION PROGRAM ELECTRICITY SUPPLY CO1*q;SSION (ESCOM) - SOUTH AFRICA I. INTRODUCTION 1. The Government of South Africa has asked the Bank to consider a loan of $20 million equivalent to assist in financing a part of the foreign exchange requirements of a new 1,600 iM thermal power station now under construction by the Electricity Supply Commission (Escom). This station is included in Escom's power expansion program planned for the period 1966 - 1970 which is estimated to cost R561 million ($785 million). When completed, the program will add 3,310 MWJ of generating capacity and about 3,200 miles of high voltage transmission lines to Escom's extensive generating and transmission systems which supply electricity to most of the country. 2. The Bank has made three loans to Escom to assist in financing the expansion of its power facilities. The dates, the amounts and maturities of the loans were: January 1951 - (41 SA) $30 million 20 years August 1953 - (78 SA) $30 million 10 years December 1901 - (305 SA) $14 million 10 years All three loans have been fully disbursed and all of the work envisioned has been satisfactorily completed. Loan 78 SA was repaid in 1963. Loan 41 SA is scheduled to be repaid in 1970 and 305 SA in 1971. 3. This appraisal report is based on information obtained by a Bank mission consisting of A.D. Spottswood and A.A. Raizen wlhich visited South Africa from April 27 to May 12, 1966. II. TIE BORRUIER 4. The Electricity Supply Commission was established by the 1922 Electricity Act of South Africa. It consists of seven members appointed by the State President. Its principal function is to establish, maintain and operate Undertakings for the efficient supply of electricity to Government departments, the South African Railways and Harbours Administra- tion, local authorities, companies and other persons carrying on industrial undertakings, and general consumers. It is a body corporate capable of suing and being sued, and is empowered with adequate authority for the carrying out of its functions in the power field. 5. Escom has authority, under its basic Act, to borrow by issuing securities either in South Africa or elsewhere, after obtaining the approval of the State President. An amending Act to the basic Act, passed in 1952, enables Escom to borrow from the Bank and authorizes the Minister of Finance to guarantee, on behalf of the Government, any loan obtained from the Bank.  - 2 - 6. In 1958 an Electricity Act was passed consolidating the existing laws relating to the control of the supply of electricity, but effecting no changes of substance. Amendments since then have been minor. 7. The present Chairman of Escomr, a professional mechanical engineer, is a full-time official of the Commission. The principal executive officer is the General M4anager who is also a Commissioner. He is assisted by an adequate technical, administrative and financial staff in the supervision of the seven "Undertakings" operated by Escom and in the control of all major construction work. Each of the seven Undertakings licensed to generate and sell electricity is treated as a separate, self-supporting, commercial entity. The Undertakings are: (1) Rand and Orange Free State; (2) Eastern Transvaal; (3) zCape Western; (4) Natal; (5) Border; (6) Cape Northern, and (7) Cape Eastern. In the near future it is Escom's intentbn to establish a new Undertaking, to be known as the Orange River Undertaking to supply electricity in the area where the main dams on the Orange River are to be built. The first dams propoaed is now under construction. (For details see paragraph 30). The area served by each Undertaking is shown on the attached map. All of Escom's plants at present are coal-fired thermal plants except one, which is a small hydro station with a capacity of 1.35 SW. 8. 0f the seven Undertakings, three (Rand and Orange Free State, Eastern Transvaal and Cape Northern) are interconnected. These three supply the gold and diamond mines and the most heavily industrialized part of the country. The installed capacity in the stations of the interconnected Undertakings as at December 31, 1965 was 3,391.9 MW; the installed capacity in all of the other Undertakings was 1,205.5 IW. Thus the total capacity in all of Escom's Undertakings was 4,597.4 1W. For further details of capacities of the various stations in each Undertaking and the sales of each Undertaking in 1965 see Annexes 1 and 2. 9. The high tension (33 kV and above) transmission lines operated by Escom in 1965 totalled 11,800 route miles of which 1,280 miles were 275 kV, 3,058 miles 132 kV, 4,225 miles 88 kV, 1,199 miles 66 kV, and 2,035 miles of 42 kV and 33 kV. In addition Escom operated 14,220 miles of dis- tribution lines of 22 kV and under, most of which served residential consumers and farms. The farms served numbered about 9s500 in 1965. 10. At the end of 1965 Escom had a staff of about 17,500, consisting of 250 engineers, 1,250 technicians, 1,500 administrative personnel, 2,350 skilled and semi-skilled laborers and 12,150 unskilled laborers. Escom plane, designs and supervises the construction of its electrical and mechanical facilities with its own staff. No overseas engineering consul- tants have been employed in recent years to assist Escom's staff with this work, except to a minor extent. However, Escom, because of its work load, has employed local civil engineering consultants to assist it with civil engineering designs and drawings. Overall planning is the responsibility of an executive committee consisting of the heads of all technical and commercial departments. All of the major design work is done in the head  - 3 - office in Johannesburg by a large and competent staff of engineers under the supervision of the Chief Mecnanical, Electrical and Civil Engineers. The head office also includes a draughting section staffed by 102 draughts- men, including 13 section leaders, which is very well organized and operated and has an efficient reproduction unit. The technical staff is being constantly expanded to keep pace with the expanding work load. To obtain engineering talent Escom, in addition to recruiting abroad, gives scholarships every year to a number of engineering students and, upon completion of their studies, sends some overseas for further studies and training. In spite of these efforts, Escom is finding it difficult to fill all vacancies on its staff and may have to give more work to con- sultants in certain categories. 11. Since 1960 the technical staff of Escom has designed and super- vised the construction of thermal plants having a total capacity of 1,114 5W and 4,041 miles of high tension transmission lines. All major construction work is carried out by contract and procurement of major items of equip- ment is through international competitive bidding in accordance with the Bank's Guidelines. At present Escom has 3,710 MN> of new thermal plant and 3,750 miles of high tension transmission lines under construction. Considering these accomplishments it is evident that Escom's technical staff is fully competent to design and execute the expansion program en- visioned for 1966 - 1970 and summarized in paragraphs 26 to 30. 12. The management of Escom is well qualified and experienced. Most of the top managerial posts are occupied by men who have progressively worked their way up through the organization and there has, therefore, been good continuity. The present General Manager has been with Escom 42 years, and as General Manager for 15 years. III. THE POWER MARKET 13. Escom supplies a rather sophisticated and diversified economy which produces by far the greater part of its consumer goods and a substantial and growing range of producer goods. South Africa produces 70/ of the gold mined outside of the USSR, is the world's principal producer of gem diamonds and ranks fourth among the world producers of wool. Besides gold and diamionds, it also exports iron ore, pig iron, copper, asbestos, uranium, manganese and chromite. In addition, a rising proportion (about 15 percent) of its exports are manufactured goods, including many steel products. It has an abundance of good coal which is easy to mine and hience is cheap. The growth of the domestic economy and the great increase in power demand has required the doubling of the output of the coal mines since 1945. Planted forests provide the raw material for pulp and paper industries and about 80 percent of South Africa's requirements are iet from local produc- tion. There is an extensive chemical industry producing explosives for the mines, plastics, solvents, waxes and synthetic rubber. Steel production of over 3.2 million tons annually supplies about 90 percent of the country's steel needs.  - 4 - 14. N