Sierra Leone - Second Power Project

RESTRICTED FILE COPY Report No. P rE 2 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 The report may not be published nor may it be quoted as representing their views.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 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SIERRA LEONE ELECTRICITY CORPORATION FOR A SECONDSPOWER PROJECT July 17, 1968  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMIENT REPORT AND RECO!MENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SIERRA LEONE ELECTRICITY CORPORATION FOR A SECOND PJKER PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $3.9 million to the Sierra Leone Electricity Corporation (SLEC). PART I - HISTORICAL 2. This would be the Bank's second loan in Sierra Leone and to SLEC. The first loan, made in 1964, was for the construction of the King Tom power station in Freetown, the installation of two generating units, and the expansion of the distribution system in Freetown. This project has been completed and is operating satisfactorily. 3. In February 1967, SLEC requested the Bank's assistance in financing a part of their development program for the years 1968-71. An appraisal mission visited Sierra Leone in September 1967 and recommended that the proposed project would be suitable for a Bank loan. Negotiations were concluded in Washington in March 1968. The Sierra Leone delegation was headed by His Excellency Adesanya K. Hyde, the Sierra Leone Ambassador to the United States, and included among others Mkr. A.P. Bruno-Gaston, General Manager of the Sierra Leone Electricity Corporation, and Mr. S,B. Daramy, Financial Secretary. After the conclusion of the negotiations, a change in government took place in Sierra Leone and the presentation of this loan to the Executive Directors had to be delayed pending the new Government's approval of the draft loan documents. 4. The following is a summary statement of the first Bank loan to SLEC, as of March 31, 1968: Amount Loan No. Year Borrower Purpose (US$ million) 388 SL 1964 Sierra Leone Pbwer Development 3,8 Electricity Corporation Total 3.8 of which has been repaid .1 Total now outstanding 3,7 Amount sold .3 of which has been repaid .1 .2 Total now held by Bank 7 of which undisbursed  -2- 5. A UNDP-financed transport survey, for which the Bank is Executing Agency, is underway and it is likely that a lending proposal in respect of one or two of the roads now being engineered will be received in late 1968. PART II - DESCRIPTION OF THE PROPOSED LQAN 6. Borrower: Sierra Leone Electricity Corporation. Guarantor: Sierra Leone. Amount: $3.9 million equivalent in various currencies. Purpose: Installation of a third 6.6 MW diesel electric generator in King Tom power station; expansion of the distribution systems in Kenema and Koidu; and the provision of consultant services. Amortization: 20 years, including 3-1/2 years grace period, in semi-annual payments beginning February 15, 1972 and ending August 15, 1988. Interest Rate: 6-1/4% per annum. Commitment Charge: 3/4 of 1%. PART III - THE PROJECT 7. An appraisal report entitled "Appraisal of Electricity Expansion in Freetown and Provinces" (TO-626a) on the proposed project is attached. 8. Electric power generating capacity totalling 23.7 MJ, with approximately 25,000 kva of distribution transformer capacity, is concen- trated mainly in Freetown, the capital. The installed capacity in the provinces is about 7,000 KU. Most of the provincial power systems operate as isolated facilities, employing old generating sets of small size and supplying minimal distribution facilities. The increase in power sales in the country during the last four years has been about 12% annually. 9. Generation and distribution of power in Sierra Leone, except for some privately owned installations which supply mining operations, is in the public sector. In May 1964, the responsibility for power passed from the Electricity Division of the Ministry of Works to SLEC, an autonomous corporation set up by act of Parliament. The Corporation is managed by a Board, appointed by the Minister of Works, which represents both Government and business interests. The chief executive is the General Manager, who is an ex-officio member of the Board. The Corporation has been run efficiently under his direction.  - 3 - 10. The proposed project is part of the overall development program of the Corporation for the fiscal years April 1, 1968 to March 31, 1971, costing $7.5 million. The Corporation proposes to finance 48% of the pro- gram from its cash generation and 52% from the Bank loan. The Bank's project, estimated to cost about $4.8 million, would consist of the installation of one 6.6 MI diesel electric generator at thw,Ring Tom power station and the expansion of the distribution system in Freetown; the installation of three 1000 KW diesel electric generators and the expansion of the distribution system in the town of Kenema; and the installation of two 1000 KW diesel electric generators and the expansion of the distribution system in the town of Koidu. The project is required to meet the industrial and commercial load growth, estimated to increase at an annual rate of 14% during the five-year period 1968-72 in Freetown, and the expected sales increase in the provincial systems. The King Tom generator should be in service in 1970, and the Freetown distribution system expansion and provincial systems should be completed in 1971. The proposed Bank loan of $3.9 million would represent 81% of the cost and would cover its foreign exchange element. The high percentage of foreign exchange cost is due mainly to the fact that all equipment and many materials must be imported. 11. Procurement would be on the basis of international competitive bidding. So far, no orders for equipment have been placed. 12. To minimize the Corporation's financial burden during its early years, Government agreed in 196L that interest on the 4-1/2% irredeemable loan stock, issued by the Corporation to compensate the Government for the assets taken over, would be wAived for five years to August 1, 1969. The Government also agreed to make an annual subsidy of up to Le 70,000 ($84,000 equivalent) to cover operating losses incurred by the Corporation in the provincial areas. Since the Corporation was set up in 196b, its earnings have been better than originally foreseen, with a rate of return averaging about 12% in 1966 and 1967, and it has thus achieved a sound financial position. The Corporation now feels able to dispense with some of the Government's assistance and plans, with the approval of the Bank, to commence interest payments on the 4-1/2% loan stock accruing from February 1968. It also plans to waive its claim upon the Government for the subsidy payments covering the three years to the end of March 1969. However, a provision for the Government to provide funds for offsetting operating losses in the provincial areas would be included in the proposed Guarantee Agreement with the Bank. 13. After the foregoing adjustments, estimated balance sheets for the period 1968 through 1971 show a continued satisfactory position with rates of return averaging about 9%. Debt service and interest on the proposed loan would be fully covered. The debt service coverage by internally generated funds would range between 4. times in 1967 and 3.0 times in 1972, and interest coverage by net operating income between 3.8 times in 1968 and 2.6 times in 1972. The Borrower would agree to take all steps required to earn a return of at least 8% on its average net fixed assets in operation. The net fixed assets would be revalued from time to time in accordance with methods acceptable to the Bank and with the assistance of the consultants.  PART IV - LEGAL INSTRUMENTS AND AUTHORITY 14. The draft Loan Agreement between the Bank and the Sierra Leone Electricity Corporation, the draft Guarantee Agreement between Sierra Leone and the Bank, a letter from the Bank of Sierra Leone by which it will accept the Negative Pledge covenant provided for in the draft guarantee Agreement, and the Report of the Committee provided for in Article III, Section V(iii) of the Articles of Agreement of the Bank are being dis- tributed to the Executive Directors separately. 15. The draft legal documents contain provisions generally used for Bank loans for power projects. In addition, the draft Loan Agreement provides that: (i) the Borrower shall not appoint a General Manager unless the qualifications and experience of the candidate are acceptable to the Bank; (ii) the Borrower shall pay interest on certain stocks issued to the Guarantor only if such payment does not materially and adversely effect the financial position of the Borrower; (iii) the Borrower shall earn a rate of return on its average net fixed assets in operation as described in Paragraph 13 of this report. 16. The Guarantor undertakes to provide funds for offsetting losses incurred by the Borrower in the operation of electricity facilities outside Freetown and Bo, and for meeting the cost of any construction or expansion of any new electricity facilities outside Freetown, other than those provided for under this Project. PART V - THE ECONOMY 17. An Economic Memorandum on Sierra Leone (AF-66a) was distributed to the Executive Directors on November 27, 1967 (R67-172). It concluded that Sierra Leone is creditworthy for additional borrowing on Bank terms. It also emphasized that the Central Government's weak fiscal performance was in the past a major impediment to a more vigorous development effort. However, over the past year an appreciable improvement in budgetary discipline took place. A stabilization program was devised and as a result inflationary pressure was reduced and a further drawdown of reserves avoided. Important decisions were taken to reorganize the Produce Marketing Board, the country's most important public corporation, and to phase out the railway, the deficit of which is a heavy burden on the budget. These combined measures improved prospects for more savings to match external assistance for development. For projects now in preparation, Sierra Leone can absorb more aid than it has received in the past. An economic mission which has just returned from Sierra Leone reports that the new Government, which assumed power in April 1968, intends to continue to pursue economic policies aimed at sound public financial performance. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 18. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  PART VII - RECOMMENDATION 19. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Sierra Leone Electricity Corporation in an amount equivalent to US $3, 900,000 to be guaranteed by Sierra Leone. RESOLVED: THAT the Bank shall grant a loan to Sierra Leone Electricity Corporation to be guaranteed by Sierra Leone, in an amount in various currencies equivalent to three million nine hundred thousand United States dollars (US $3,900,000), to mature on and prior to August 15, 1988, to bear interest at the rate of six and one-fourth per cent (6-1/4%) per annum, and to be upon such other terms and conditions as shall be sub- stantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Second Power Project) between the Bank and Sierra Leone Electricity Corporation, and the form of Guarantee Agreement (Second Power Project) between Sierra Leone and the Bank, which have been presented to this meeting. Attachment Robert S. McNamara President Washington, D. C. July 17, 1968