Zambia - Electricity Supply Corporation Limited, Power Rehabilitation Project

Report No. PID1090 Project Name Zambia-Power Rehabilitation Project (@+) Region Africa Sector Electric Power & Other Energy Adjustment Project ID ZMPA35076 Implementing Agencies Zambia Electricity Supply Corporation Limited (ZESCO) P.O Box 33304, LUSAKA 10101, ZAMBIA Contact Managing Director Tel: 260-1-228084 Fax: 260-1-222753 Ministry of Energy and Water Development (MEWD) P.O Box 50296, LUSAKA, ZAMBIA Contact Permanent Secretary Tel: 260-1-225074 Fax: 260-1-254589 Date this PID Revised October 8, 1997 Appraisal Date July 1997 Projected Board Date November 1997 Background Landlocked Zambia's 8 million people had a per capita income of about US $370 in 1995. Copper mining industry dominates the economy and accounts for 65% of domestic electricity consumption. Zambia's considerable indigenous energy resources (biomass/charcoal, coal and hydropower) satisfy 889 of the country's total energy needs with imported petroleum accounting for the remaining 12%. Most of the population depend on wood and charcoal for their energy needs - - only 10 percent have access to electricity. National wood resources are sufficient to meet overall demand, but agricultural land clearing and charcoal production to supply the heavily urbanized population have created pockets of scarcity. The power system has a nominal surplus generating and transmission capacity and presently exports about 150 MW to neighboring Zimbabwe. Investment in subtransmission and distribution, however, has failed to keep up with demand and the system has suffered from inadequate maintenance and a scarcity of skilled manpower. A series of breakdowns and supply problems have reduced the reliability of supply and curbed service expansion thus seriously constraining economic growth. A number of Studies commissioned during project preparation provided the basis for the dialogue on the details of the policy reform and project components. These included Studies in demand forecasting and least-cost system development; generation,  transmission and distribution rehabilitation; environment and safety; sector restructuring; tariffs; loss reduction and demand side management; manpower development and capacity building; accounting and financial management; Zambia-Zaire Interconnection; and the Gwembe-Tonga Study. Project Objectives The project supports the Government's policy, institutional and regulatory reforms in the power sector. These include: (i) the optimal long-term development through the establishment of an enabling institutional and regulatory environment for private sector participation in electricity supply; (ii) the short-term commercialization of the national power utility, ZESCO, through enhanced resource mobilization, corporate autonomy and management accountability; (iii) the least-cost development to meet demand, emphasizing efficiency improvements, rehabilitation, efficiency pricing and demand side management; and (iv) the improving of supply reliability and security through strengthening the interconnection with Zaire Project Description The proposed project consists of five components: (i) Sector Reform and Restructuring consisting of consultancy services and studies to assist the Government to implement sector reforms (including the institutionalization of Energy Regulatory Board) and to commercialize ZESCO; (ii) Institutional Support for capacity building, technical assistance and studies to assist ZESCO to implement the project, undertake planning studies, and improve its institutional efficiency; (iii) Efficiency Improvement to procure and install equipment, build local capacity and undertake studies to expedite loss reduction and demand side management/fuel substitution; (iv) Power Rehabilitation to rehabilitate the Kariba, Kafue Gorge and Victoria Falls hydropower stations, ZESCO's transmission system and the distribution system in Lusaka and the major Copperbelt towns. This includes the development of an action plan to assist the rural based Gwembe-Tonga affected by the Kariba Project ; and (v) Strengthening the Interconnection link between Zaire and Zambia. Project Cost and Financing The total cost of the project is estimated at US$198.37 million, excluding taxes, duties and IDC, of which about 85t is foreign exchange. IDA financing is expected to be about US$75 million. The implementing agencies would finance the local currency component. EIB, NORAD, Nordic Development Fund, SIDA, FINIDA, the Government of France, DBSA have indicated their interest in co-financing for the project. Environmental Aspects The environmental category is B. Overall, the project will have a favorable impact on the environment, primarily by facilitating the - 2-  upgrading of the existing hydroelectricity plants thus contributing to the substitution of hydro power for petroleum fuels. It does not include investment in new large-scale power generation, transmission, or distribution facilities. Implementation The Ministry of Energy and Water Development (MEWD) will implement the components related to the power sector reform program and demand side management/fuel substitution. A locally based NGO is involved in the preparation of the Gwembe-Tonga Study; its involvement in the implementation of the study recommendations is being explored. All other components will be implemented by ZESCO. Benefits and Risks The major benefits will be improved reliability of power supply to the mining, agricultural and industrial sectors, the performance of which will be critical for economic recovery, and some substitution of low cost hydro power for more expensive and imported fuels. The major risks are that: (i) because of political reasons ZESCO will not be allowed to build on the bold actions taken/planned to raise tariffs, salaries and employee productivity to achieve and sustain the needed improvements in operations and financial performance; and (ii) the benefits of expanded ZESCO staff training will be partially lost through movement of skilled manpower to the private sector. These risks would be mitigated by suitable measures which would result in ZESCO achieving complete autonomy in its operations, particularly in the areas of tariffs and employee salaries in exchange for ZESCO management being held fully responsible and accountable for the utility's agreed performance targets and results. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending October 10, 1997. - 3 -  Annex Environment The proposed Project is category B for environmental issues. A Sectoral Environmental Scoping study for Zambia's power sector, including the proposed Project, was completed in 1995. The major recommendations of the Study were to: a) establish an Environmental and Social Affairs Unit (ESU) in ZESCO; b) develop a rehabilitation plan for the Kariba Gwembe-Tonga ; c) develop a waste management plan, including for PCBs; d) undertake sub-basin-wide environmental and social assessments for upcoming hydropower projects; and e) encourage commitment to the ESU by ZESCO's Board and senior management. These recommendations will be addressed under the proposed project. The major environmental issue identified in project preparation was the treatment of wastes and harmful substances in some of the existing hydropower plants and transmission lines. An assessment of waste was included in each of the separate rehabilitation components of the Project and their management will be addressed during implementation. A study financed by CIDA will develop a comprehensive program for management/disposal of PCBs, and will be coordinated with the Environmental Council of Zambia (ECZ) and ZESCO. ZESCO has agreed to implement the study's recommendations. Strengthening the recently formed ESU in ZESCO, which is responsible for planning and implementation of environmental and socio-economic programs associated with ZESCO projects, is a key component in the Project. In addition, the ESU will initiate a monitoring and audit program, with monthly reporting requirements. The program will track project progress in relation to the implementation of environmental and socio-economic activities. Victoria Falls Hydro Station Rehabilitation Environmental Assessment (EA). The EA on Victoria Falls, a World Heritage site due to its unique geology, was completed in March 1997 in conjunction with the preparation of the rehabilitation study of the Victoria Falls hydro station. The EA found no additional impacts associated with the Project. However, the EA found that operation of the station has had negative impacts, including land degradation, PCB contamination, water management issues and associated degeneration of tourism and aesthetic loss. To address these issues, the proposed Project includes environmental component for Victoria Falls which will enhance the ecology and aesthetic value of the site. Zambia is a riparian on the Zambezi river. While the proposed Victoria Falls Rehabilitation component does not alter the flow regime of the Zambezi and does not require notification, GRZ has agreed to notify the Government of Zimbabwe at the request of EIB. -4-