Tanzania - Sixth Power Project

Document of The WorldBank FOR OFFICIAL USEONLY Report No: 26745 IMPLEMENTATION COMPLETION REPORT (IDA-24890) ON A CREDIT INTHE AMOUNT OFUS$200MILLIONEQUIVALENT TO THE UNITED REPUBLIC OF TANZANIA FORTANZANIA POWERVI PROJECT June 30,2003 Energy Team Africa Region This document has a restricteddistributionandmay be usedby recipientsonly inthe performance oftheir official duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective June 12,2003) CurrencyUnit = TanzanianShilling 1041.50Tsh = US$ 1.00 US$ 1.00 = SDR 1.41 FISCAL YEAR TANESCO: January 1to December 31 Government: July 1to June 30 ABBREVIATIONS AND ACRONYMS AIC Average IncrementalCost DfID Departmentfor Intemational Development EA EnvironmentalAssessment EIB EuropeanInvestmentBank ESMAP Joint UNDPNorldBankEnergy Sector Management Assistance Program JICA JapanIntemational CooperationAgency Kfw Kreditanstadt fiir Wiederaufbau LRMC Long RunMarginal Cost MTNRE Ministry of Tourism, Natural Resources and Environment MWEM Ministry of Water, Energy andMinerals NORAD NorwegianAgency for Development Cooperation NUWA NationalUrbanWater Authority ODA Overseas DevelopmentAdministration PIP Productivity Improvement Program PPF Project PreparationFacility SADCC SouthernAfrican DevelopmentCoordination Conference STAMICO State MiningCorporation TAC Tanzania Audit Corporation TANESCO Tanzania Electric Supply Company Ltd. TIPER Tanzanian andItalianPetroleumRefinery Company TIRDO Tanzania Industrial Research and Development Corporation TPDC TanzaniaPetroleumDevelopmentCorporation TTI Technical Training Institute ZSFPC Zanzibar State Fuel and Power Corporation Vice President: Callisto E. Madavo Country Director for Tanzania: Judy M.O'Connor Sector Director: Prahl C. Pate1 Task TeamLeader: Alfred B. Gulstone  TANZANIA POWERVI CONTENTS Page No. 1. Project Data 1 2. Principal PerformanceRatings 1 3. Assessment of DevelopmentObjective andDesign, and of Quality at Entry 2 4. Achievement of Objectiveand Outputs 14 5. Major FactorsAffecting Implementationand Outcome 29 6. Sustainability 32 7. Bank and Borrower Performance 34 8. LessonsLearned 37 9. Partner Comments 40 10. Additional Information 41 Annex 1. Key Performance IndicatorsLog FrameMatrix 42 Annex 2. Project Costs and Financing 45 Annex 3. EconomicCosts and Benefits 48 Annex 4. Bank Inputs 51 Annex 5. Ratings for Achievementof ObjectivedOutputsof Components 53 Annex 6. Ratings of Bank andBorrower Performance 54 Annex 7. List of SupportingDocuments 55 Annex 8. Borrower's Comments 58 IBRDMAP#22162- Tanzania Power VI Project   Project ID: PO02756 Project Name: POWERVI Team Leader: Alfred B. Gulstone TL Unit: AFTEG ICR Type: Core ICR Report Date: June 30, 2003 1. Project Data Name: POWER VI L/C/TF Number: IDA-24890 Countiy/Department: TANZANIA Region: Africa RegionalOffice Sector/subsector: Power(91%); Oil & gas (7%); Central governmentadministration (2%) Theme: Otherurbandevelopment(P) KEY DATES Original Revised/Actual PCD: 03/30/1990 Effective: 1212711993 12/27/1993 Appraisal: 0611511992 MTR: 03/10/1999 03/10/1999 Approval: 05/06/1993 Closing: 06/30/2000 06/30/2001 Borrower/ImplementingAgency: MINISTRY OF ENERGYEANESCO Other Partners: NORAD, SIDA, KfW, EIB, NDF, DfID STAFF Current At Appraisal VicePresident: CallistoE. Madavo EdwardV. K.Jaycox Country Director: Judy M.O'Connor FrancisColaco Sector Director: PrahlC. Pate1 Stephen Weissman Team Leader at ICR: Alfred B. Gulstone AsafMalik ICR Primaly Author: EugeneMcCarthy 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=HighlyLikely, L=Likely, UN=Unlikely, HuN=Highly Unlikely, HU=Highly Unsatisfactory, H=High,SU=Substantial, M=Modest, N=Negligible) Outcome:U Sustainability: UN Institutional Development Impact: M Bank Performance: U Borrower Performance: U QAG (ifavailable) ICR Quality at Entry: S Project at Risk at Any Time: Yes  3. Assessment of Development Objectiveand Design, and of Quality at Entry 3.I Original Objective: The project's objectives, as statedinthe Staff Appraisal Report (SAR) were: (i) Meetingthe growing demand for electricity at least cost through the construction ofthe Lower Kihansihydroelectric scheme; (ii) Helpingthe Government restructure the power sectorto promote efficiency andprivateinvestment; (iii) Continuing the work already started on improving energy efficiency by reducing systemlosses, improving service quality, and supporting demand-sidemanagement initiatives; (iv) Providing training andtechnology to improve skills andmanagement effectiveness o f staff insector institutions; and (v) Promotingthe development andoperation o f gas-fueled generation by private investors. 3.2 Revised Objective: The original project's objectives for meetingpower demand at least cost were focused onthe Lower KihansiPower Plant, which was expectedon streamin 1998.However, due to severe drought in 1994, the Bank revisedits objectives to support the emergency needs o f the power systembeginningin 1995, by financing Tanesco's Emergency Power Program (EPP). To finance this program, the Bank andthe Borrower agreedto divert resources from distribution investments to more urgent generation investments. This reallocationessentially limitedthe project's energy efficiency objective to demand-sidework - preparing audits o f selectedlarge-scale industries. 3.3 Original Components: Table 3.1 shows the project's original components by project objective supported, category and implementing agency. There were three implementingagenciesfor the project: Tanzania Electric Supply Company Ltd. (Tanesco), Zanzibar StateFuelandPower Corporation (ZSFPC), andthe Ministryof Water, EnergyandMinerals(MWEM). Tanesco was to implement components that accounted for 94 percent o fthe project's total baseline costs. These included the project's main investment components -the 180 MW Lower Kihansi Hydroelectric Plant, the rehabilitation o f the Kidatu Hydroelectric Plant and distribution system investments - as well as technical assistanceand studies for improved systemplanning, fmancial performance, and demand side management. ZSFPC was responsible for: managinga study to define feasible options for its future structure; installing anew accounting system; hiringa commercial manager to oversee its commercial operations untilthe restructuring o f the company; and installing prepayment meters and associatedmaterials to help improve collections. MWEMwas mainly responsible for studies to advance restructuring andprivate sector development inthe electricity and gas sectors. For Implementation by TANESCO construction o fthe 180 MW KihansiHydroelectric Plant expansion, reinforcement and loss-reduction inthe distribution system provision o fvehicles, tools andmeters to improve distribution and commercial operations completion o f the rehabilitation o f the Kidatu Hydroelectric Plant management support and training provision o f computerized management information systems (MIS) and services to support TANESCO's decentralized operations studies includingtariff, assets valuation, power systemmaster plan, hydroelectric plant feasibility, and distribution standards demand side management activities including audits and advertising - 2 -  0 upgradingo f the dispatch center equipment and communicationsystems 0 provision o f workshop equipment For Implementation by ZSFPC 0 a study o f the operation o f ZSFPC to define feasible options for its future structure 0 provision o f a commercial manager for ZSFPC to oversee commercial operations untilthe utility is restructured 0 provision o fprepayment meters andassociatedmaterials to help improve collections For Implementation by MWEM 0 a study o f the structure o f the power sector andits associatedregulatory framework inTanzania to define options for restructuringto improve efficiency, andto explore ways of introducingprivate sector financing and management; 0 provision o f consulting services to helppromoteprivate sector financing and operations o f thermal generation using gas from Songo Songo; 0 provision o f equipmentto help develop generation from usingthe Mnazi Bay gas field inajoint arrangement with the private sector; 0 training and office technology for energy staff o f the ministry. Table 3.1 Summaryof ProjectC mponentsby ProjectObjectives ComponentsandImplementingAgency ProjectObjective InvestmentsinEquipment,TechnicalAssistance, Studies and Training Meeting Demand at 80 MW first stage of the Lower KihansiHydro Plant (T) Least Cost Completion o f the Kidatu Hydro plant's rehabilitation (T) Expert Project Manager (T) Panel of Expertsto review technical matters, safety andconstruction problems (T) Power Sector Master Plan (T) Hydro Plant Feasibility(T) Helping the Government Iffice technology to support energy planning work of the Ministryo f restructure the sector lnergy, Water and Mines (M) 'raining o f energy staff (M) :onsulting services for promotiono fprivate sector financing and operation 'fthermalgeneration usinggas from Songo Songo (M) 'ower Sector Structure Study (M) Continuingpower lquipment for expansion, reinforcement and loss reduction o f distribution - 3 -  system efjciency systems of major load centers (T) improvement Upgrading o f dispatch and communications systems. (T) Provisiono fpre-payment meters and other equipment to improve collections (Z) Management support and training in distribution system operation and maintenance. (T) Demand side management study (T) Tariff Study (T) Asset Valuation Study (T) Institutional Structure and Development (Z) Materials Management System (T) Providing Trainingandcomputerized managementinformation systems and services to support Technology Tanesco's decentralized operations and training inall aspects o fpower system operation (T) Commercial Manager to oversee ZSFPC's operations (Z) Promoting the Equipmentto develop pilot generation at Mnazi Bay gas field, jointly with development and the private sector (M) operation ofprivate Consultant assistance for promotion o f Songo Songo gas development by gas generation private investors (M) Consultant assistancefor the promotion o f Mnazi Bay gas development by private investors (M) Note: M=MinistryofWater, EnergyandMines T = Tanesco Z =Zanzibar State Fuel and Power Corporation 3.4 Revised Components: The Bank andthe Borrower reallocated project funds inline with the revisedobjective o f supporting Tanesco's EPP (see para 3.2 revised objectives). Insupport o f this programthe Bank financed 70 MW o f gas turbine capacity, that was criticalto deal with the capacity constraints; the cost o f this added capacity was US$44 million. Inorder to fund this additional capacity, the Bank had to reduce project components for distribution strengthening, systemloss reduction, and uncommitted funds for the Mnazi Bay gas-fired power plant components. Table 3.2 shows the reallocated amounts by component. The largest reduction was inthe component for distribution strengtheningand rehabilitation, which declinedfrom US$ 18.5 million to US$ 1.7 million. Essentiallythe restructuring o f the project's components shiftedthe project's priority towards ensuringadequate generation capability under unexpected emergency conditions that threatenedmajor load shedding with a potentially disastrous impact on the emerging market economy. Project Component Estimated Cost at Amount Reallocated Remaining  Appraisal (US$ to Support theEPP Amount ofthe million) (US$ million) OriginalCredit Components Affected fUS%million) Mnazi Bay Gas 16.7 13.5 3.2 Comnonent Distribution 20.2 18.5 1.7 Strengthening and Rehabilitation Loss Reduction 20.9 12.0 8.9 Total 57.8 44.0 13.8 At the time o fproject restructuring, the Bankreviewedthe progress the Borrower was makinginproject implementation andinmeeting the project's development objectives. The preparatory work for the Lower KihansiHydroPlant hadbegun. The bids for the main civil works contract were underevaluation. Other work at the site, including the gathering o f baseline environmental data, was on schedule. The Bank also found that the Borrower and Tanesco were making acceptable progress toward institutional development andfinancial performance, as notedinTable 3.3. Table 3.3 Reviewof ProjectProgressDuringIts Restructuring(1995) Institutional Development Adoption o f a decentralized organizational plan for the seven distribution zones and a systemo f accountability. Installationo f managementinformation systems inprogress. * Introduction o f a modernized billing systemto help reduce commercial lossesthrough inadequatebilling o f electricity consumed. Planned installation o f the new billing and accounting systems inJanuary 1996 and reported progress o f Tanesco inclearing the accounting backlog. Financial Performance An increase inTanesco's tariffs to an average ofUS$.09 per kWh, the estimated long-run marginal cost o f power. . Completion of a tariff study that concludedthat Tanesco's financial position was weak but improving. It also confirmedthat the average tariff o f US$.09 per kWhwas adequatebut recommended annual increasesinline with the level o f international inflation. Restructuringand Privatization Acceptable progress inarranging the proposed, private sector financed, Songo Songo Gas Development and Power Generation Project andthe Mnazi Bay gas-fired power generation comDonent o f Power VI. - 5 -  Compliance with Key Covenants . Ingeneral, the BorrowerandTanescohadcompliedwith their obligations underthe project except for delays insubmittingTanesco's annual audit report. However, Tanesco's ability to close its books on time dependedon the completion o fthe accounting systemwhich was not scheduledfor completionuntil1996. 3.5 Quality at Entry: There was no quality rating at appraisal. The ICRhas ratedthe quality of entry as satisfactory, given sector priorities and the rigorous preparation work for the project's main components. Consistency of Concept,ObjectivesandDesignwith GovernmentPriorities andthe Bank's Assistance Strategy CountryAssistance Strategyand Government Priorities. The Bank's Country Assistance Strategy for Tanzania included support for the development o fpower supply at least cost, along with capable energy planningand sound financialmanagement.A key factor inmeetingthese objectives was the initiationof structural reformthat would increaseefficiency through competition brought by private sector participation. Inline with this strategy, the Government's priorities were the least-cost development o fthe country's hydro andgas resources to bothimprove security o f supply and minimize the impact o f imported fuel price fluctuations. Key Concepts.Two key concepts served as the basis for the project's objectives. The first was that increased generating capability and improvedreliability were priorities for economic development andthe general well beingo f the country. The secondwas that fundamental reforms were necessaryto increase Tanesco's autonomy inorder to achieve greater efficiency andproductivity (SAR, Tanzania: Power VI Project, para. 4.13). The Bank and the Borrowerprepared the project during a period o f transition in Tanzania to a market-oriented economy after a long period o f central planning. Itwas also the beginningo f a transition for the Bank. Duringthe final stages o f the project's preparation for the Board, the Bank established a set o f guidelines for power sector lendingthat requiredevidence o f borrower commitment to sector reformto achieve greater efficiency. This reformrequireda commitment to involve the private sector inthe process. Relevanceof Objectives. The least-cost expansion o fthe power systemwas a priority objective for both the Bank andthe Government as well as animportant element inthe Bank's assistance strategy. Assistance to the Government insector restructuring supported the Government's objective o f ensuring reliability and security o f supply as well as the Bank's strategy o f supporting structural reform, resource development, and end-use efficiency. The provision oftraining andtechnology links directly to the Government's objective of human resource development and the Bank's strategy for capable energy planningand sound management.Finally the promotion o f gas-fueled generation through private investment was inline with the Government's objective to develop hydro and gas resources at least cost andthe Bank strategy for efficient resource development. Expansion and rehabilitation o f the systemwas critical because o f electricity supply constraints resulting from hydrological factors and the poor condition o f a numbero fplants. At the time o f project appraisal, the total installedcapacity o f the systemwas 474 MW o f which hydropower accounted for 326 MW or 69% o f - 6 -  the total. Two major hydroelectric stations, located southwest of Dar es Salaam, were supplyingthe bulk of power to the system: the Kidatu station, with an installed capacity o f 204 MW, and the Mtera station, with a total installed capacity o f 80 MW. The output o f the Kidatu station had declined to only 153 MW in 1989 due to the failure of one unit and had experienced a fUrther decline to 95 MW because of low reservoir levels resultingfrom drought. SIDA financed the repair o fthe unitthat had failed. The project included additional work to improve the reliability o f the Kidatu station. The smaller stations inthe PanganiRiver basin had a total capacity o f 42 MW. Thermal generation capacity included 10diesel poweredgenerating stations, invarying stages o f availability, that provided an altemative source o f energy during low river flow periods and equipment failures. A second-hand gas turbine station o f 13.5 MW, installedat Ubungo, had beenout o f commission for several years. Inaddition to the interconnected system, Tanesco was operating about 20 small diesel generating systems supplying areas too remote to receive power from the interconnected grid. Tanesco's interconnected systemhadbeenpracticing severe peak load shedding due to drought. Lower than average water inflows in 1991 and 1992 causedthe water levels inthe two main hydro basins to decline significantly. This resulted ina major reduction o f available capacity. Peak load shedding at times had been as highas 100 MW or more though Tanesco triedto reduce the shortfall as muchas possible. Due to the lack o f financing for the rehabilitation o f all o f its diesel units, the system's capacity was severely constrained. Furthermore, to avoidmore extensive load shedding, Tanesco hadbeen operating the hydro plant at very highplant factors. This operating regimeledto the low reservoir levels. The base case demand forecast indicatedthe need for substantial new generation capacity duringthe 1990s andthe Lower Kihansi scheme was to meet this need. Rehabilitated diesel units and the redevelopment o f the Pangani Falls station were to provide additional capacity. But evenunder the low forecast o f demand growth, the need for some new short-term generating capacity was likely. On the technical side o f its operations, Tanesco neededto address two main problems: the deterioration o f the distribution network, partly due to overloading and to substandardwork; and the low availability o fthe diesel stations due to inadequatemaintenance. Tanesco staffwere receiving training on maintaining the diesel plantsthat Tanesco used. However, long term training at the technician level was neededand was to take place the Technical Training Institute at Kidatu. The project was to finance: a specialist, for three years, to manage this program; andthe foreign exchange costs o fmodemequipment neededfor workshops, laboratories and classrooms for the Institute. Managementand CommercialOperations. The project was to make a substantial contribution to increasing the capability o f Tanesco staff through studies, technical assistance, new technology and improved staffing. The Government had adopted a ParastatalReform Programto improve the operational efficiency o f parastatal enterprises, reduce the burdeno f loss-making enterprises on the Government; expand the role o f the private sector inthe economy and prepare key enterprises for privatization. Inline with these objectives, the project provided several institutional strengtheningmeasuresto improve Tanesco's operational efficiency andfinancial performance. The SAR noted that Tanescoplannedto focus its institutional development efforts on four key areas: corporate planning; management; manpower development; and the Productivity Improvement Program (PIP). Part of the project's design was to have the company prepare an annual corporate plan as the principal instrument for the ongoingreview o f Tanesco's operations andinstitutional development. The planwas to include a detailed annual budgetwith a discussion o f assumptions and strategies for improving performance inkey areas such as collections, disconnections, write-offs, administrative costs, staffing and performance evaluations; and manpower training. The plan also was to include information on and - 7 -  rationale for any changes inthe agreed investment program. The project included a Planning Manager for three years, to establish a PlanningDivision for preparing and implementing the corporate plan. Staffing and manpower development were major problems at the time o fproject appraisal. Although as a whole the company was overstaffed, it still didnot have sufficiently skilled staff. Low salaries were a contributing factor. For example, the SAR noted that the average salary level dropped from about US$220 equivalent per month in 1970 to around USS50 per month at the time o f project appraisal. At that level, many people could not afford to support their families and were forced to take a second or even a thirdjob ( SAR, para. 2.8, p.15). The determinationofthe size anddistribution of staffwas an ongoing process which was to dependon the requirements o f the utility's annual corporate plans.The project's design requiredthe hiringof an external manpower development expert for six months andTanesco agreedto implement staffingrecommendations early inthe project (1994). To address skill deficiencies inthe company, the project included an extensive training component. Inthe areas o f finance and accounting, Tanesco was to expand the curriculum o f its training programwith more emphasis on corporate finance, management information systems andnew accounting procedures. Tanesco also requiredmanagement systems andprocedures to accurately delineate responsibilities for committing the organization's resources.To promote modemmanagementtools, the project's designcalled for the hiringofa SystemsManager early inthe implementationofthe project andthe establishment ofa management information system. Under the Power System Rehabilitation Project ( CR. 1687-TA), IDA andTanesco had agreed on the need for a comprehensive program for modernizing Tanesco's data processing system. IDA financed the services o f a senior financial advisor and a systems analyst to implement the program. However, Tanesco's difficulties in attracting andretaining competent advisors delayed the implementation o f a &lly functional MIS. The existing system deteriorated to the point where it became necessaryto hire a group o f experts to prevent its collapse inthe short term and, inthe long term, to assist the company inacquiring modern computerized billing and accounting systems. The Power VI project was to finance these new systems. Tanesco establisheda productivity improvement program to reward employees for achievingperformance targets. The company designed an MIS to monitor performance vs. targets. Itbegan about a year before project appraisal. The program's original target was the reduction o f the workforce from 6500 to 4500 over a three year period, about 10percent a year. Inthe first six months, the reduction o f 500 employees exceededthat rate. It took place through a severancepackage andwas consistent with the goal o f a smaller workforce with higherproductivity and better pay. Inthese first six months, there were significant increases inproductivity as well as reductions inbothaccountsreceivable and operating costs. At the same time, employee compensation nearly doubled. However, this initial success didnot last andmanagement commitment to achieving the productivity targets weakened. To ensurethe continuedimplementationo f this program the project included the financing o f the services o f an internationally recruited expert for a period o f three years. Also, as indicatedinTable 3.4, prior to the project, the Government developed a general policy framework for the privatization o fparastatal companies and Tanesco began some reorganizationin anticipation o f eventual privatization. The actions to be taken duringthe project focused on studies, technical assistanceand investments to buildon these initial actions, strengthening Tanesco as a commercial entity and establishing the framework for sector restructuring and privatization. - a -  Table 3.4 Summary ofActions TowardRestructuringTaken Prior to Appraisal and Planned duringthe Project's Implementation GOVERNMENT OF TANZANIA Actions Taken Prior to ProjectAppraisal Policy Framework. Statement on ParastatalReform as part o f a development strategy focused on creating an efficient, well functioning and rapidly growing economy and a set o f reform objectives Institutional Framework. Establishment of a ParastatalSector Reform Commission Actions to be Taken Duringthe Project Power Sector Restructuring. Completion o f a study on restructuringoptions and implementation o f the study's recommendations Privatization Promotion. Testing o fthe gas well at Mnazi Bay to provide information for potential investors and financing o fpreparatory work for the Songo Songo private gas development project Measures to Support the Commercial Operation of Tanesco. Inthe project's legal agreements the Government agreedto several key measures for the viable operation o f the power systemprior to sector restructuring: Reductiono f Government arrears inpayment to Tanesco to a specified acceptable level *Authorization for Tanesco to disconnect large governmental customers for nonpayment. *Agreement to compensateTanesco for any required service connection for rural areas which may be desirable from a social perspective but not financially viable. *Compensation to Tanesco for electricity used, but not paidby ZSFPC. TANESCO Actions Taken Prior to ProjectAppraisal Internal Reorganization to Facilitate Divestiture. Decentralizationo f distribution operations and upgrading o fmanagement in seven distribution zones. Measuresfor Improved OperationalPerformance. Establishment o f an effective Productivity ImprovementProgram to improve motivation and efficiency o f operations. Actions to be Taken Duringthe Project Divestiture of Non-Core Business. Sale o f the company's distribution constructionbusiness to private investors. Institutional Strengtheningfor Improved Commercial Operation. The project included a multifacetedprogram o f investment, studies, technical assistance andtraining components to ensure Tanesco's commercial operation prior to privatization. This program included: .Distributioninvestmentsto improvereliability andreduce commercial losses Equipmentto complete the upgradingand decentralization ofthe company's billing and accounting systems .Rationalization ofTanesco's staffing by filling key vacant positions, providing short term expertise for the implementationo fkey programs, but at the same time improving productivity and reducingoverall staff - 9 -  Studies on revaluation o f assets, staffing and compensation. Extensive training at all levels of the company -10-  Quality of Project Design. Strategic Choices. The Bank and the Borrower hadtwo main strategic choices inthe design o f the project. The first was a technical choice --the selection o f a hydro project over a gas generation project. The secondwas an institutional choice -- thestrengthening of Tanesco prior to restructuring, either by: (a) buildingupthe capability ofthe utilitythrough anintegrated programo fupgradedmanagement technology, expert assistance and training or (b) contracting the management o f the utilityto a foreign firm with a proven track record o f efficient technical and financial performance inpower company management. The SAR noted that boththe Lower Kihansi Hydro plant anda plant operating on natural gas from the Songo Songo gas field would have a similar economic rate o freturn. As a result, focus then centered on the sequencing o fthese two investment options. The advantage o f gas firedgeneration was the possibility o f adding units in small increments to meet demand. Also, the gas turbines could have backed up the hydro system which was frequently capacity constrained. Furthermore, domestic gas development for power also offered the possibility o f saving petroleumproducts andforeign exchange not only ingeneration but in substitution for fuel oil and diesel oil usedinindustry. However, considerable uncertainty surrounded the gas option because Tanzania didnot have the experience or the resources for gas development and would have required foreign participation. Also, at the time, the investment climate inTanzania was not attractive enough to bringinthe foreign capital required to develop gas resources. Incontrast to the gas option, Tanescohadconsiderable experienceimplementinghydropower projects. With hindsight, the choice ofthe Kihansihydroplant allowed Tanesco to develop muchneededcapacity sooner. The Bank beganpreparing the Songo Songo power project around the same time Power VI went to the Board. However, becauseof complex institutional arrangementsrelated to the private sector participation, the Songo Songo Project receivedBoard approval around the time the Lower Kihansi plant came on stream. On the institutional side, at the time, there were not many examples o f successful management contracts with developing country power companies. The Government had already taken a number o f steps toward sector restructuringandthe reorganization o f Tanesco, demonstrating a commitment to reform, e.g. the legal framework inTanzania allowed for private generation, as shown inTable 3.4. Thus at the time o f appraisal it made sense to go with the strengthening o f the utilityto prepare it for privatization. Technical Aspects. The design of the project's main physical components -the 180 MW Lower Kihansi Plant and distribution infrastructure -- had a considerable amount o f preparation. The Japan International Cooperation Agency (JICA) financed a detailed feasibility study o fthe Lower Kihansihydro site and prepared a report dated September 1990.Also in 1990, ESMAP helpedTanesco prepare the distribution component o f the project. Duringthe preappraisal o f the project inJanuaryFebruary 1991, the Government and Tanesco requestedIDA to finance, through a technical assistancecredit, the detailed design and preparation of bid documents for the Lower Kihansi Hydroelectric scheme. One of the conditions for presentingthe project to the Board was satisfactory completion by Tanesco's consultants o f a draft inception report on the detailed design andlatest cost estimates o f the scheme, to ensure its economic viability. The draft inception report reconfirmed the overall attractiveness o f the Lower Kihansisite interms o fprecedingthe competing Songo Songo gas development project. As an additional security measure, Tanesco employed a Panel o f Expertsto conduct an independent review o fthe Lower Kihansi hydro project's design. -11 -  At the time o fproject appraisal, the Bank hadrecently completed the Power Engineeringand Technical Assistance Credit, which the Board had approved in 1992. The mainpurpose o f this project was the preparationo f Power VI. Inaddition to the design work for Power VI, this project was financing consultants to assist Tanesco inimplementinga new billingsystem as well as identifyingunauthorized connections. Furthermore, the ESMAP Loss ReductionandDistribution Expansion Study had identified measuresto reduce bothtechnical and non-technical losses. The efforts o f the task force Tanesco had created to implement ESMAP recommendations already hadhelpedto increase sales revenues. InstitutionalAspects. The SAR notedthat two major objectives ofthe project were the improvement o f Tanesco's performance and the company's partial privatization. It also emphasized the importance o f the institutional component. Inthis regardthe project's design includednumerous covenants focused on: (a) strengthening the management and operations o f Tanescoby hiringthe following staff PlanningManager; Systems Manager; Management Training andPersonnel Expert; Director and HeadInstructor o f the Morogoro Training Institute; Training Expert for the KidatuTechnical Training Institute; Training Expert inDistributionPlanning; and Productivity ImprovementExpert; (b) establishing financial performance indicators duringthe project's implementation -- the twokey financial indicators were receivables no more than 75 days o f sales and a cash contribution to investment rising from 15 percent inthe first year to 30 percent for most o fthe project's implementation; and (c) ensuring that the Government would allow a strengthenedTanesco to operate as a commercially viable company --the most important o f these indicators was the Government's agreementto: compensate Tanesco for the bills o fnon-paying consumers who cannot be disconnected for humanitarian or other reasons; pay for any shortfall inthe payments o f ZSFPC to Tanesco; and reimburse Tanesco for the costs o frural electrification that may be socially important but financial not viable. EnvironmentalImpactAssessment (EM).The Bank ratedthe project as Category A, requiringa full environmentalimpact assessment (EIA). Tanesco contracted with consultants to prepare the assessment, which was based on studies carried out duringthe period 1989-92. The studies found the Lower Kihansi hydro site preferable to other potential sites becauseo f the smaller size o f the reservoir, meaning that the project would disturb less land area. As a result o f the small size o f the reservoir inundation, the usual impacts o f dam projects, such as populationresettlement, were expected to be minor. There was virtually no population resettlement-only compensation was for two hutsremoved that were usedby villagers when fishing. The other impacts identifiedwere: (a) land loss o f 30 hafor the reservoir; (b) 15-50 ha for the access road andcamp; and (c) a wildlife habitat reduction o f 15-20 ha. The affected land area was isolated and there was no downstream agriculture. The Bank, inits review o f the EIA, recommendedtwo activities to bringit more inline with Bank guidelines: a terrestrial survey to gather more information on flora and fauna and consultation with local communities botho f which were done. At the time o f approval, the Boardnoted that the environmental assessment didnot have a mitigation plan. Project staff indicatedthat such a plan would be prepared early intheprojectbeforemajorinvestmentstookplace. Theprojectincludedacovenant whichrequiredthe preparation o f a mitigationplanby end o f June 1994. Earlyinthe project's implementationandbefore the finalization of an environmentalmitigationplan, two non-governmental environmental organizations expressed concem that the Bank's original environmental assessmenthad not fully taken into account o fthe ecological impact o f the project. Both organizations made specific comments about the apparent lack o f attentiongiven to the biodiversity o f the area. A German environmental organization stated the following: ". ..theproject will have dramatic effects on the ecosystem o fthe KihansiGorge. Insidethe gorge there is an intact forest vegetation which probably relies on the water provided by the Kihansi Falls for its -12-  existence. The mistproducedby the Kihansi Falls andthe micro climate so createdwill be lost as a result o f the project. This will also meanthe irretrievable loss o f the habitat o f wild animals and plants that depend on these conditions for survival. Experts suspect there i s a concentration o f highly adapted endemic species inthe Kihansi gorge which might be found only here. Inorder to establish the actual degree o f endemism, it would be necessaryto study comparable areas inthe vicinity. So far, however, not even an inventory o f species has beenset up for the gorge itself." Memorandumfrom Urgewald, June 1995. A Norwegianorganization expressedsimilar concems about thepotentialloss ofbiodiversity. However, it is not clear from the files when andhow these organizations obtained the data on the ecosystem while the project's terrestrial survey of the project's EIA didnot report similar findings.However, it is important to note that the Kihansi Spray Toad, considered a "marker" for the ecology o f the spray system ecology, reportedly is about the size o f an adult thumbnail and according to research reports, has a tendency to hide inthe rocks; it is therefore conceivable that a fieldteammightmiss the Spray Toad, depending onthe season andthe amount o f time spent inthe field. The full environmental assessment for the project didin fact make a reference to an endemic species o f toad inTanzania ingeneral but stated that it was not known ifitexistedinthe projectarea. The EIAstatesthat " ...Less is knownabout the amphibians andreptilesin the project area. They havenot beenstudiedindetailand it was not possible to make a comprehensive survey during the EA. Endemic species are known to exist inthe Uzungwas Forests, such as a frog a). (Phlvctimantis keithae), anunnamedtree-frog (Hvperolius sp.) and a new species o f toad INectroDhrvoides, Whether these species occur inthe Kihansiarea is unknown." At the time ofproject appraisal, Bankenvironmental guidelines allowed flexibility inthe breadth anddepth o f the assessment basedon the expected impacts. Inthe case o f the Power VI project, the expected impact was low, given: the remoteness and inaccessibility o f the location; the negligible impact on human activities; and a loss o f wildlife habitat that was considered acceptable. Inresponseto the comments o f non-governmental environmental organizations, Bank environmental staff acknowledged that the loss o f some wildlife habitat may be a cost o f the project, which the original EIA hadnoted; it should be noted, however, that at this time the presence o f unique, endangeredspecies was not apparent inthe project area. Nevertheless, the project took the concems o f the non-governmental agencies into account through the environmental monitoring component and carried out a numbero f relatedfield studies. The field discovery o f an endangeredecosystem at Kihansi resulted from the diligentwork of Tanesco's environmentalconsultants during the project's construction phase. The confirmation o f this discovery, by anindependent group in 1998, ledto a modifiedmitigation plan, with donor funding, for saving the ecosystem. Involvement of Stakeholders in the ProjectDesign. The key stakeholders involvedinthe preparation o f the project were: Tanesco, ZSFPC, and the Ministry ofEnergy. The project also consulted with possible co-financiers and with villagers near the project area. Accuracy inEvaluatingthe Project's Key Risks.The project identifiedthree key risks to the project's implementation. First, given the large number o f donors projected, the Bank notedthe risk that, because o f shifiing donor priorities, there might not be enough funds for the project's major component -the Lower KihansiHydro plant. Recognizingthis possibility, the Bank was preparedto reallocate funds from the distribution or institutional strengthening components. As a safeguard, the Bank made the finalization o f satisfactory co-financing a condition o f effectiveness. The secondmajor risk evaluated was that the difficult terrain o f the project site mighthave ledto commissioning delays, despite sufficient investigations o f consultants. As a result, the Bank determinedthat - 13-  ifproblemsturnedout to beseriousenoughto affect the criticalpathoftheproject anda delay became inevitable, Tanesco would be able to respond by increasing the capacity o f short-delivery gas turbines it plannedto install before the commissioning o f Kihansi(SAR: Tanzania, Power VI Project, para.4.65, page 53), thus mitigating against large shortfalls in supply. Third, the Bank mitigated against risks that could result from any restructuring done underthe project, notingthat careful planningo f the transition with the use o f competent consultants would reduce such a risk. Since the project didnot infact involve the actual restructuring o f the sector, this risk was not an issue. The SAR did not discuss, under the risk section, the fact that Tanesco's transformation to a viable commercial entity dependedheavily on government compliance with covenants that would be pivotal to Tanesco's financial performance. This was an important consideration because, inthe past, parastatal companies accounted for about 30 percent o f Tanesco's accounts receivable. As it turnedout, during project implementation, the arrears ofparastatal companies remained an issue continuously with Government making only intermittentpayments when pressedby the Bankand, at one point, only under the threat o f disbursement suspension. Capacityofthe ImplementingAgencies. Tanesco, the main implementingagency, was responsible for implementing a complex project with many components. However, at the time o f appraisal, Tanesco already had a history o fworking with the Bank and had developed an expertise inimplementing power projects. Onthe fmancial side, the company had difficulties due to low tariffs and inadequate billing and collections performance. Inlarge measure, the company's financial problems were linked to the Government's drain on the company's finances through highlevels o f arrears from government clients, though weak fmancial management capacity and the absence o f a commercial culture within Tanesco were other factors. The technology, technical assistanceand training that the project provided were sufficient to support Tanesco's implementationcapacity ifthe Government had adhered to project covenants. The components for the other two implementing agencies were fairly straightforward andwithin their capability to monitor. Integrationof LessonsLearnedfromPastProjects. The project's SAR made a concerted effort to integrate the lessons learned from past projects inthe design o f Power VI. It included a separatebox outlining lessons learned andactions taken to incorporate them into the design o f the project (SAR Ibid., Box 1.1, page 6). These lessons covered technical design, cost estimation, financing arrangements, bidding and contracting, financial objectives, training and environmental considerations. The project incorporated all ofthe lessonsto some degree but two lessons inparticular had an important bearing on the project. The first was to maintain close coordinationwith donors involvedwith the project to minimize the possible disruption due to lack o f funds. Inline with this objective, the Bank anddonors met semi-annually and producedjoint progressreports on the project. The second lesson was the importance o f monitoring the ecological aspects o fthe project. Inkeeping with this lesson, the environmental monitoringcomponent financed byNORAD found an endangeredecosystem that dependedon the spray from the Lower Kihansi Falls. This discovery ledto the initiationo fmitigationactivities inMarch 2000 that were designedto reduce risks to the Kihansi gorge ecosystem. 4. Achievement of Objective and Outputs 4.I Outconte/achievement of objective: Despite the highly satisfactory physical implementation o f the project, which resulted ina major hydroelectric scheme being commissioned withinbudget and only 6 months behindthe original schedule, the ICRhas ratedthe project overall as Unsatisfactory. The main consideration for this rating was the lack -14-  o f significant progress made, by the time the project closed inJune 2001, inimprovingthe operational efficiency o f the power sector and the operational performance o f the principal sector institution, Tanesco, a key development objective o f the original project. Indeed, by early 2001, the cost o f electricity was one o f the highest inthe Africa region, there was anoverwhelmingbusinessdissatisfaction with the cost, reliability and quality o f electricity, and Tanesco itself over-staffed, poorly managed, and financially very weak. The lack o f tangibleprogress made inimproving the efficiency o f the power sector and the management o f Tanesco as well as the slow progress made towards privatization, should not detract from a number o f positive initiatives taken during the implementation o f the project. First, the response o f the Bank to the emergency drought situation in 1994 showed flexibility andhelpedavert major loadshedding. Second, the commitment made by the government inlate 2000 to recruit a new management team for Tanesco-and which came on board inFebruary2002-is now improvingthe managerial performance o f Tanesco inthe transition period to privatization. Finally, the responseo f the Bank inAugust 2000 to growing concerns in regardto the conservation o fthe ecosystemofthe Kihansi gorge will help ensure that a critically needed investment inhydropower i s also environmentally sustainable. The discussion that follows focuses on the achievement o fthe differentproject objectives described inthe original SAR o f May 1993 i.e. tariff policy, physical, institutional, financial, andprivatization objectives. A discussion ofthe overall environmental impact ofthe project investment is also included. TariffPolicyObjectives Tanzania's energy policy, as publishedby the Government in 1992, states that Tanesco should act as a commercial enterprise but at the same time meet a number o f social objectives. However, Tanesco's statement ofpolicy i s more commercially-oriented thanthat o f the Government. Itprovides that tariffs be set to allow Tanesco to earn a 10percent rate of return on fixed assets in operation. The Government policy didnot clarify the definition o f the social objectives, their cost, or who will pay for them. The project therefore included a tariff study to help clarify this policy and a covenant that the Government would reimburseTanesco for any electrification projectthat might be socially desirable butnot financially viable. Tanesco's consultants completed the tariff study inNovember 1993 (London Economics Ltd, Kennedy and Donkin, Ltd. And LEEnergy, Electricity Tariff Study, Final Reuort. Volume I,Executive Summary). An update took place in 1996. The structure recommended by the study took into account the findings o f the assets valuation study financed under the project, along with LRMC tariffs, Tanesco's financial requirements, and the government's social objectives, specifically the maintenance o f a lifelinepolicy for the residential sector, and a rural development policy. The study recommended a simplifiedtariff structure, reducing the number o f tariff categories from nine to seven. The recommended structure consists o f a single residential category with a three part risingblock tariff, light industrial and light commercial categories, a category for low-voltage supply with a maximumdemand charge, single categories for medium-voltage and high-voltage supply, and a separate category for public lighting. The Government increasedthe average tariffto US$0.09 perkWh duringthe project's implementation period, inline with the project covenants. However, Tanesco could not hlly implement the cost-based tariffstructure that the study recommended since it was unableto secure government approval. Large industrial consumers continue to pay highrates to cross-subsidize small, residential consumers. The financial performance study in2000 noted that industrial customers complained about tariff levels and indicatedthat, inthe absence o f measuresto address cross-subsidization, Tanesco risks losing industrial -15-  consumers to self-generation. Also, the study notedthat unless the Government and Tanesco were to address end-user tariff issues, privatization would be difficult, since the end-user tariff structure should fully recover costs. Overall, the Government's achievement of tariff policy objectives was modest. Physical Objectives The main physical objective was to meet growing power demand, at least cost, through the construction of the 180MW KihansiHydroelectric Plant. The Bankfinanced this plantjointly with NORAD, SIDA, the European Investment Bank (EIB), and KfW. Its original completion date, at the time o f the SAR was 58 months after letting the preliminary works contract. The first unitwas commissioned only six months late despite encountering serious geological problems. The commissioning o f the plant's three 60-MW units took place as follows: the first inDecember 1999; the secondinMarch 2000; and the thirdinMay 2000. Supervision reports indicate that beginningin 2000 the electricity output o f this plant was substantial -- about 26 percent o f the energy generatedby Tanesco's interconnected system(Aide Memoire, Joint Donor Supervision Mission, October 2000). However, at the endof 2000, Tanesco again was faced with severe generation shortage that requiredextensive load shedding. The generation shortage resulted from Tanesco not having the funds to purchase enough fuel to operate the hydro-thermal system optimally andthereby have enough water inthe reservoir for meeting power demand inthe dry season. Inaddition to the constructionand operation ofthe KihansiHydroplant, the projectincreased the generating capacity o f the systemthrough the EPP. The project also rehabilitatedthe KidatuHydroelectric Plant, with financing from SIDA, andNORAD. The original completion date for this component was February 1997. However, due to the constraints on systemcapacity, Tanesco hadto rehabilitate one unit at a time, and Tanesco completedthe rehabilitation by 2001. The EPP installed 70 MW of gas turbine capacity which came on stream only six months after the contract was signed, in 1995.Without this plant, Tanesco, may have been forced to cut power to almost half o f its system, dependingon hydrological conditions. Figure 1 shows Tanesco's generation for 1990-2001. Without thermal power, most of which came from new plants fmanced by the project under the EPP, Tanesco's generation would have declined steadily from 1995 to 1997,reaching a level lower than in 1990, causing major load shedding. In 1998 and 1999,hydrology improved and there was only a small amount o f thermal generation. Between 1998 and 2001 sales rose steadily compared to relative stagnation during 1990-97.And with the Lower Kihansiplant fully on stream in2000, Tanesco was able to meet rising demand with hydropower and reduce the amount o f thermal plant use. Inthe years 1997 and 2000, there was considerable load shedding because Tanesco, due to government non payment, didnot have the funds to purchase the fuel required for increased generation from the EPP units. Since 2000, the Lower Kihansi Plant has been supplying about one quarter o f electricity consumption. -16-  Figure 1: Impactof the EPP and the Lower KihansiPlantto MeetingPowerDemand Generation Balance 3,000 2,500 2,000 G W h 1,500 1,000 Lower Kihansi 500 I I / I 19 19 19 19 19 19 19 19 19 19 20 20 90 91 92 93 94 95 96 97 98 99 00 01 Year Source: Tanesco andBankstaff estimates. Dueto the highprioritythe projectassignedto helpingTanesco copewith an emergencysituation and the valueto the economyofpreventingwidespread loadshedding, the ICR hasratedthe overall achievementof physicalobjectivesas "high." InstitutionalDevelopmentObjectives The project's institutional objectives were focused mainly on Tanesco, which was responsible for the implementationo f the project's physical components, that accounted for 94 percent o f the project's total base costs. The objectives for Tanesco were twofold: (a) preparethe company for privatization through divestitureofnon-core businesses anda restructuring and privatizationstudy; and (b) provide technology andtraining to improve the managementeffectiveness. The S A R notedthat the implementationo fTanesco's institutional components was extremely important (SAR: Tanzania Power VI Project, para. 4.68, p. 54). Despite the utility's many difficulties, Tanesco did make some progress towards attaining three o f the four indicators o f institutional improvementnoted inthe aforementioned paragraph o fthe SAR. First, the company increased andmaintainedthe average tariff level throughout most o f the project's implementation. Second, it divesteditselfo f a non-core business. Third, it hireda manpower development expert andput a freeze onnew hiringpendingthe results o fthe staffing assessment. The reason for rationalizing the staffing o f the institution was the finding at appraisal that Tanesco's customerlemployee ratio -a key indicator o f management effectiveness -was way out o f line with that of similar utilities inthe region. At the time of appraisal it was 26 customers per employee. Duringproject implementationit increasedto 59 customers per employee in1998, exceeding the target rate o f 41 customers per employee. -17-  At the same time, Tanesco'shighlevel ofaccountsreceivable remained anunresolved problemthroughout the project and the commitment to reduce overall staffingto commercially acceptable standardswas not fulfilled.By project completion, Tanescoremained, inessence, an overstaffed andpoorly managedutility that despite a strong technical capacity was lacking a basic commercial culture. ImpactofInstitutionalComponents on Tanesco. The project had severalcomponents designedto meet the general objective o f improving Tanesco's operating and management effectiveness. These components included: the introduction o fprepayment metering; the upgrading o fthe conventional billing and accounting systems; an improvedmaterials management system; training inoptimizing the hydroherma1balance o f the systemand several technical studies. Theprepayment metering system was new for Tanzania and its introduction was originally to take place on a pilot basis. However, becauseof its success-despite some configuration complications- Tanesco and the Bank decided to expand coverage. Tanesco's interconnected system has about 400,000 customers. To improve collection performance the strategy o f Tanesco andthe Bank was to assign about 10percent o f the customers-mainly large consumers--to prepayment meteringand upgrade the conventionalbilling system. The planis to eventually place most o f the system on prepayment metering. Since a pilot testing of about 2,000 prepayment meters, Tanesco has installed around 42,000 meters with IDA financing; a few thousandwith its own financing; andabout 2,000 usingKfW financing, which itwill install ingovemment agencieswhich have been delinquentinpayment. Initially the systemwas not able to incorporate the step tariff structure accurately inthe dispensing o f electricity units and some customers were overcharged. The pre-payment meters installed by the manufacturer were designed for a flat tariff with a systemwhere the computation was done centrally. However, inlate 1996, Tanesco introduced a complex averaging systemto correct the problem and ensure customers are charged fairly. Tanesco also has taken actions against tampering andcollusion and a recent software upgrade apparently rectified problems with "double dispensing" o f electricity. The improvements to the conventional billing system concemed the replacement o f an obsolete, centralized Wang system with a decentralized systemcovering Tanesco's 23 branches. The advantageso f the decentralized new systemover the Wang systemare: closer proximity to the customer; the reduction o fthe lagtime between meter reading andbilling; andthe capability o fmonitoring a customer's consumption. Tanesco has made strenuous efforts to rectify and update customer records and reducedthe time between meterreading andbillingfrom 3 months to 1month. A preliminaryanalysis of the prepayment meteringsystem andthe new conventional "Custima" billing system indicates the systemhas a financial advantage and also has had some demandimpact. With a collection rate o f about 74 percent inthe Dar es Salaam area, the prepayment system has a 8-10 Tsh/kWh advantage, amounting to Tsh 1.7 billion per year. The payback periodfor the investment is about 3 years. A comparison o fthe two systems indicates the prepayment systemhas somewhat dampened demandwith average sales at 59-61Tsh for the prepayment customer base compared to 69 TshkWh for the conventional system customer base. The new computerized accounting system financedbythe project (SCALA) has replacedTanesco's former paper-basedsystem. Tanesco purchased four modules: purchases, sales, payroll and general ledger. Project files indicate that much more work was required to clean up the paper- based database than originally envisaged. Also the consultant for the systemwas stronger inaccounting system design and organization than the technology side and computers purchased to runthe software apparently were not -18-  powerful enough to handle all the operations expected from the systemefficiently. For example, initially the consolidation o f accounts took about 72 hours. However, since April 2000 the systemhas beenupgraded. Tanesco reportedly has retained 10 percent o f the purchaseprice as a systemperformance guarantee. Tanesco has installed a computerized systemfor improved materials management. It i s expected to considerably improvematerials managementby solving the following problems: (i) lack o f timely and reliable information across Tanesco; (ii) purchasing materials with an emphasis on compliance rather than value for money; (iii)simplification o f purchasing procedures; (iv) under utilizationo f space at central stores; and ( iv) highlevels o f obsolete stocks. When fully implemented,the systemwill be able to track inventory for the whole company, including the movement o f itemsbetween stores and the costing/ valuation o f materials. Insupport ofprovidingbetter incentives for managementeffectiveness, theproject helpedfill a number of important vacant managementpositions; conducted a salary study; and reviewed the company's productivity improvement program. Although Tanesco reportedly raised some salaries during the project's implementation period, those o f senior staff are still below market levels while those o f positions with less corporate responsibility, such as drivers, are considerably higher.Ingeneral, Tanesco still needed to give greater attention to performance enhancement. Part of the motivationproblemwithin Tanesco was the company's uncertain status. It was technically in receivership pending the ParastatalSector Reform Commission's decisions on restructuring. Also, under the Public Utilities Act of 1992,management was subject to severe penalties for takingany actions that might endanger Tanesco's assets. The uncertainly about the company's future had anegative impact on staff morale as notedby Deloitte, Touche, Thomatsu in its report, Tanesco-Review o f Financial Management, July, 2000. This report identifiedthe main management shortcomings inTanesco, namely focusing too much on controlling" andnot enough on "managing." A particular example mentionedinthe " report was the following: instead o f focusing on the difficult issue o f managingthe major cost drivers, the management focuses on easier "controllables", such as expenses on travel andprinting/stationery. ImpactofinstitutionalComponents on ZSFPC andMEM.The project has installeda newbilling system for ZSFPC, which has significantly improved the quality o f information available to management. As a result, they are able to monitor performance on a weekly basis and sometimes even daily. The system generatesdata on: daily collections; the number o f customers disconnected or reconnected; the number o f illegal connections; data on monthlybills producedvs. paid, etc., allowing the company to analyze statistics daily andtake timely management actions. The project installedabout 8,000 o f the 10,000 prepayment meters plannedfor the system. These account for about 24 percent o f the customer base. While project funds were not available to finance the remaining 2,000 meters, given the success of the program, the company has installedadditional prepayment meters with its own funds. Prior to the installation o f the meters, ZSFPC dida survey that allowed the company to identify illegal connections and regularize them inthe billing system. Given the difficulties Tanesco had experienced with the contractor for prepayment metering, the Bank insisted that the meters for ZSFPC be designed with a distributivecomputing algorithm to facilitate the accurateimplementation of a step tariff. A private sector company is now managing the system andreportedly it is working very well. The other key institutional improvement inZSFPC was the installation o f a computerized accounting system. MEMalsoreceivedtechnical assistanceand sometechnology. This includedoffice equipment such as a telephone system and computers, vehicles and management training. Its impact was modest, however, in improvingthe skills and administrative efficiency o f MEM. - 19-  Overall, the ICR rates the achievement of the project's institutionalobjectives as `modest'. This rating i s predicated on the commitment made by the government at the level o f the President o f the - country-during the final months o f the project to start a process o frecruitment o f a new management team for Tanesco from the outside; this team subsequentlytook over the management o f the utility inFebruary, 2002. Despite the very weak financial position o f Tanesco throughout the project, the decision o f the government to take steps immediately to recruit a new managementteam was a positive step forward in turning around the past institutional performance ofthe utility.There were also some other gains made in strengtheninginstitutionalperformance. The developments achieved inthe management and operations of ZSFPC were noteworthy andbenefitedfrom the work done with Tanesco. The assistanceto Tanesco also included large amount o f studies, technical assistance and computerized management tools, which made a substantial contribution to Tanesco's operational capability. Inparticular, the development o f a regionalized, computerized billing systemwas a considerable accomplishment since it should facilitate the plannedunbundlingand privatization o f the company. Furthermore, the expansion o f the prepayment meteringsystemfrom the original pilot provideda technical solutionto ensure collection from about 14 percent o f the company's customer base. Financial Objectives The project's statement of development objectives containsno explicit financial objectives. However, the project did include a number o f covenants which aimed at improvements inTanesco's financial management effectiveness: the amount o f funds for capital expenditures generated from internal resources; rules governing capital expenditures outside the agreedpower sector investment program; tariff increasesto offset inflation; limits on the numbero f days o f receivables and acceptable debt levels. Tanesco was to achieve internal cash generation as a share o f capital expenses as follows, by fiscal year: 25 % for 1994; 20 % for 1995; and 30 Yo for 1996-98. Supervision reports indicate that Tanesco made only limited progress towards reaching and maintainingthese targets. Both a Deloitte, Touche, andTohmatsu report anda Bank power sectorperformance missioninAugust, 2000, documented indetailthemajor financial shortcomings o f Tanesco. For this reason, the ICR has rated the achievement of the financial objectives as `negligible'. Duringthe project period, Tanesco entered into a contractual arrangementfor purchasing power (upto 1OOMW) from an independent power producer, IPTL, basedon hugely overstated investment costs and costly and outdated technology. The agreement was fully endorsedby Tanesco's Board which was, intum, controlledby the government, Tanesco's sole shareholder; the Bank, however, was not informed o f this decision. When the Bank eventually became aware o fthis arrangement and realized that Tanesco's financial viability could be threatenedby the terms o f the agreement, it advised the government to take actionto maintain the financial viability o f the sector. The Government andTanesco eventually sought legal assistance (financed under the Power VI project), went to international arbitration, and came to a settlement with IPTL. Tanesco was to not incur any debt unless a reasonable forecast o f revenues and expenditures showed that net revenuesfor each fiscal year would be at least 1.3 times the debt service requirements. Tanesco remained within its debt service requirement. Tanesco's receivables, according to the legal agreements, were not to increasebeyondthe level o f 75 days o f sales revenues. Tanesco didnot reduce its receivables to the level inthe agreementthough it didreduce them incomparison to the level at appraisal: from the equivalent o f around 200 days o f sales to about 90-120 days of sales. Concerning tariffs, Tanesco completed a tariff study and raised the averagetariff to meet the LRMC of supply. - 20 -  The Government also was to take measuresto improve Tanesco's revenues, mainly ensuringcompensation for: shortfalls inpayments from the ZSFPC; lack o fpayment from consumers that could not be disconnected for humanitarianreasons; and any investment considered socially desirable from the Government's point of view but not economically viable. Though the Government intermittently made payments to reduce outstanding amounts owed and its performance improvedtowards the end o f the project's implementation, overall the Government's compliance with financial covenantswas `unsatisfactory'. The Government didnot fulfill this obligation during the project's execution. Overall, the project didnot meet its main financial indicators. However, the reason for this was due mainly to factors outside the control o f Tanesco: periods o f drought that increased system costs; delays inthe completion of the accounting andbilling systems due inpart to consultant performance; andlack o f sufficient support from the Government to allow the company to operate independently. Towards the end of the project the original financial indicators becameless meaningfulwith the realizationthat finances were not likely to improvewithout sector restructuring and privatization. According to a financial management analysis o f Tanesco's collectionsproblem, about 75 percent o fthe problem i s political requiringdirect intervention of the Government given Tanesco's limitedability to disconnect customers for non-payment. Another 20-22 percent i s a normal collection problem which Tanesco should be able to fully manage. The remaining 3 percent i s likelynon-collectable due to non-performance or demise o fthe debtor enterprise. In the last year o f the project, the Government managed to clear its arrears with Tanesco andgranted the company the authority to disconnect Government agencies for non-payment. Finally, Tanesco did fulfill the project's tariff covenant by raising the average tariff. However, it didnot fully implement the tariff study's recommendations, notably those concerning the cross-subsidization of residential consumers by industry, largely due to factors outside the company's control. Privatization Objectives The project was cautious inits design ofthe restructuring andprivatization components, calling for the completion o f a study andthe development o f a planbased on its findings but with no dated privatization covenant. A set date would have beenpremature giventhat the process was new for boththe Bank and the Borrower. The project completedthe restructuring study but found it inadequate for deciding on how to restructure the power sector inTanzania andprivatize Tanesco. There were two reasons for this. First, the justification for recommendations was weak andthere was no realistic strategy for attracting private sector investment. Second, it didnot evaluatethe option of separating Tanesco's generation function from its transmission and distribution fictions, allowing it to compete with the IndependentPower Producers for generation contracts with the transmission and distribution companies. -21 -  Afier reviewing the study, the Bank and Borrower agreedon a new plan o f action for evaluating alternatives -conducting a study tour of successfully privatized utilities and examining their restructuring programs. Followingthe study tour, a workshop took place during March 1998, inTanzania. Itreviewed developing country experience and presentedthe case o f Bolivia, which restructured and privatized its electric power industryinabout three years. This case study included: the needfor and outcome o f structural reform; the creation o f the necessarylegal and regulatory framework; and current regulation in the Bolivianpower sector. Other topics included: unbundling ofapower utility;organization ofthe government for handlingprivatization tasks; privatization objectives and methods o f sale; andselection o f advisory services. As a result o f the study tour and workshop, the Government opted for private sector generating companies competingfor contracts andthe use o f a single transmission company, with open access, which would inturn sell power to regional distribution companies. Following the workshop, the Government formulated a set o f sector objectives and strategies, which the Cabinet approved in 1999. The policy work and decisions on a sector structure inthe context o f the Power VI project providedpreparatory work for the energy sector inthe Bankfinanced privatizationproject for government entities andparastatal companies inTanzania. Some reorganization o f Tanesco, inpreparation for privatization, already began underthe project. The company divesteditselfo f is non-core pole construction business andinstalleda decentralized, computer systemby distribution zone. Inaddition to privatizationofthe power sector, the project supportedprivatizationinthe gas sector. The promotion o f private gas development for electricity generation was important for enhancing the security o f electricity supply by diversifying the hydro-based system andproviding a low-cost thermal generation altemative to oil-fired power plants. The Ministryalso financed technical and legal services for gas resource development inthe Songo Songo andMnaziBay areas. It financed US$14.8 million o f legal and technical services for the preparation o f the Songo Songo project, including approximately US$8.0 million for well testing. The component to support Mnazi Bay development was reducedbecause o f preliminary findings that indicatedthe well mightnot be economic to develop. However, project studies increasedthe knowledge o fthe well, which helpedmake the decision not to develop it. Overall, the ICR has rated the achievement of the private sector development objectives as 'modest' The project led to: formal government adoption o f a privatization plan for the power sector; partial divestitureo fTanesco's non-core activities; increased knowledge ofthe gas resource base for private sector development promotion which, intum, ledto the preparation o f the Songo Songo Gas Development and Electricity Generation Project. However, any privatization o f Tanesco remains at least two years inthe future. The present, constrained external investment climate makes this objective, at best, uncertain. Environmental Aspects Regardingthe application o fthe Bank'ssafeguardsto this project, the ICRtakes into account guidelines in effect at the time o fproject appraisal. According to those guidelines (OP 4.01, October 1991), the project requireda full environmental impact assessment (EM).The objective ofthis assessment was to improve decision making and ensure that the project options considered were environmentally sound and sustainable. Itwas to identifymeasuresfor improvingprojects environmentally by preventing, minimizing, mitigating, or compensating for adverse impacts. The guidelines also state that these measures are "generally inthe form o f an environmental mitigation plan." The guidelines also state that the detail and sophistication o f the analysis should be commensurate with the expected impacts. Inthe case ofthe Power VIproject, the EL4 which coveredthe usual range ofimpacts--flora, fauna, -- humansettlement activity- determinedthat the overall environmentalimpact ofthe project wouldbe - 22 -  relatively minor comparedto most dam projects and that a key factor in selecting the site was that it was preferable to others inthe same area, on an environmental basis. Becauseo fthe expected low level o f impact, it didnot prepare a mitigation plan; nor didit look at any impact on vegetation downstream o fthe planned dam which would comprise an integral part o f an EIA carried out under current Bank guidelines. Nevertheless, the Bank'sBoard acceptedthis approach inapproving the project. However, it was recommended that Tanesco develop an environmental monitoring capability. Such a capability would evaluate any unforeseen impacts that developed duringproject implementation andwas inline with lessons learned from past projects that continuous environmental monitoring was important. The project also included a covenant to produce an environmental mitigation planduringproject implementation (1994). Tanesco's mitigationplan took the form o f a continuous environmental monitoring project managed by consultants. On September 17, 1996, Tanesco andNorplan, its consultant, signedthe "Agreement for Consultancy Services for Environmental Issues FinancedbyNORAD." This monitoring work includedthe funding o f an environmentalprogram consisting o f three projects fundedby NORAD: (i) the MUAJAKI Public Health Project; (ii) the Preparation o f a Catchment Management PlanProject; and (iii) Long-term Monitoring o f the Natural Environment (Kihansi Gorge) Project. Inaddition, the Swedish International Development Agency (SIDA) fundeda socioeconomic follow-up project while the World Bank, inJuly 2001, provided financing for the LKHPEnvironmental Management Project. Long-TermEnvironmentalMonitoring. The objectives ofthis project were the following: Data Collection and Assessment 0 Evaluate biodiversity values o f the Kihansi Gorge andnearby areas; 0 Determine the absolute impact o fthe project on localbiota; 0 Provide initial data requiredto determine presence of the project inthe Kihansi Gorge ecosystemand the impact o f its long-term operation; 0 Develop data and recommendations for determination o f bypass flows; and 0 Evaluate relative changes inthe ecosystem o f the KihansiandUdagaji Gorges. Environmental Planning and Management Provide guidance on the use o f the project area by the local population, through the development o f a project arearesource use management plan; Contribute to the increased environmental awarenesso f Tanesco; Enhance the ability of the National Environmental Management Council (NEMC) andthe Rufiji Basin Water Office to determine permittingcriteria for water managementprojects; Contribute to increased environmental awarenessby Tanesco; and Determine the impact o f project activities on the presence ofmalaria vectors and associatedhuman health consequencesinthe upper project area and the Udzunwa Plateau, and develop appropriate mitigation recommendations - 23 -  Throughout project implementation there were three key issues inenvironmental planning andmanagement. The first was the need for measures to save the Kihansi Spray Toad after it was discovered inthe gorge in late 1996 as well as preserve its ecosystem from extinction, due to the project's diversion o f water from the KihansiFalls to runningthepower plant's turbines. There were three main activitiesto conserve the toad, which project donors financed: (i) rehabilitating the habitat through the installationo f a pilot spray system to re-create adequate moisture conditions created by the natural spray from the falls prior to the operation o f the power plant; (ii)conducting searches for similar habitats in Tanzania and translocating the toad; and (iii)breedingthe toads incaptivity as an emergency measureto preserve the species while the other two investigations were inprogress. The second issue concerned the water rights for the project, namely, the allocation o f water resources between the Lower KihansiPower project's generation needs and the ecosystem whose conservation was dependent on spray generatedby the waterfall inthe KihansiGorge. Because o f the limited capacity o f Tanzania's water authority, it was the practice inthe country to obtain a provisional water right to begin construction, leaving the final determination until a later time. However, this practice resultedina major dilemma during project implementation once the Kihansi Spray Toad was discovered, which inturngave rise to discussions addressing the appropriate energy/environmental trade-off inthe use o f the water. In January 1996, Tanesco received the provisional rightto dam the river and extract 41.5 cubic meters per second from the KihansiFalls for power productionbut it was required to maintain a bypass flow o f 7.7 cubic meters per second on a daily basis. Tanesco contested this bypass flow andapplied for a minimum bypass flow o f 1.5 cubic meters per second, as recommended by its consultants, to ensure that the power plant would meet the physical objectives o fthe project. However, the Office o f the Vice President also advised Tanesco o f the needto maintain this flow givenconcerns about the Kihansiecosystem and Tanzania's obligations under the InternationalConvention on Biodiversity.The issue o f the level o f the minimumbypass flow was not resolved. Meanwhile, construction ofthe damcontinued until commissioninginJune, 2000. InMay, 2000, the ManagingDirector ofTanesco wrote a letter which statedthat "...considering the fact that the Government has already investedheavily inthis project and further that the power supply situation inthe country is not goodbecause ofwater shortage inour existingpower reservoirs, it wouldnot bewithin thenational interest to divert 7.7 cumecs (cubic meters per second) from the generation ofelectricity. Itis worth to note that the flow at Kihansi i s normally between 7 and 12 cumecs during sevenmonths o f the year and one turbine o f 60 MW needs 8.3 cumecs to fully operate. Therefore, the release o f 7.7 cumecs for environmentalpurposes would be tantamount to closure o f the power station for a considerable portion o f the year." Since the commissioning o fthe first 60 MW unit at Kihansi inJune 2000, Tanesco has been maintainingthe bypass flow at nearly 2 cubic meters per second and has been investigating a variety o f measures, including the full time operation o f artificial sprinklingsystems, to preserve the Kihansi ecosystem. At the time o fproject closing, TANESCO's final water right was still pendingandthe amount o f bypass flow necessaryfor the Kihansi Spray Toad to survive hadnot been determined. The unresolved issue called attention to the needfor more effective coordinationinGovernment decision-making on national resource issues. The provisional water right, requiringa minimumbypass flow o f 2 cubic meters per second, was recently extendedto October 2003 while flow tests at the sites continue. A review ofthe project's environmental impactby the Bank andindependent consultants- Lower Kihansi Hydropower Project Environmental Review, Final Report. August 17,2000- considered a variety o f options. They evaluated the environmental/energy trade-offs o f water flows to the plant and to the ecosystem o f the Kihansi Spray Toad. The recommended option was to keep the bypass flow between 1.51 and 1.89 cumecs combined with aprogram of ecologicalmanagement, which would have a cost of -24-  US$5.76 million over a five-year period. Initially, the reviewnotedthat even with this option there was still some threat o f extinction. At the time, the captive breedingprogram was experiencing difficulty and the effectiveness of the spray systemwas uncertain. Inthe interveningperiodto late 2002, the population o f the toads- bothinthe breedingprogram and especially inthe gorge- has increasedconsiderably. The third issue concerned the encroachment on the forest resources inthe project area due to increaseinthe population duringthe construction periodandcontinuing through the operational phase. To reduce the potential impact, Tanesco arrangedto house the project workforce at a town 30 kmaway from the project site andbringthem to work by bus each day. However, the reports o f Tanesco's consultant, Norplan, have continuously notedthe needto improve the patrolling and protection activities o f Tanesco, noting increased resource extraction, notably wood cutting and hunting. MUAJAKIPublicHealthProject. The objectives o fthis project were to: 0 Avoid increases in:the rate o ftransmission o f sexually transmitted diseases; malaria morbidity and mortality; unsanitary disposal o f humanexcreta andrefuse; maternaland childhood healthproblems; health problems associatedwith alcohol and drug abuse; andtraffic and constructionrelatedaccidents; 0 Monitor progress o f the various activities described inthe contract; and 0 Provide recommendations on the extension of the objectives into the operational phase o f the Lower Kihansi Hydropower Project. This program took place over a five-year period, --from September 1996 to September 2001-- focusing on health improvement and disease preventionmeasuresfor 18 villages inthe project area. A combination o fmeasuresfor malaria prevention, increasedHIV/AIDSawareness and condom sales, improved sanitation facilities, and occupational safety precautions have improved the overall health indicators o fthe villages covered by the program relative to those o f other villages monitored. Both the death rate and the birthrate inthe regionhave fallen below the average for Tanzania. Preparationof a CatchmentManagementPlan. The objectives o fthis project were to: 0 Prepare a Catchment Management Plan consisting o f a monitoringsystem and a broad, participatory planning process; and 0 Prepare a project proposal for an implementation o f the management plan. The project usedremote sensing techniques to establish baseline data for activities to prevent soil erosion. The localpopulationbenefited from extension activitiesto use agricultural practices that minimize soil erosion and received assistance ina large-scale tree planting exercise. Farmers receivedboth fruit tree seedlings from cash crops and pine seedlings to produce construction timber and firewood. The project used fast-growing seedlings to produce quick results. The program i s nearly self-sufficient and requires relatively modest inputs for fast gains. Socioeconomic Follow-upProject.The objectives ofthis project were to: 0 Enhance the capacity o f local communities and individuals to adapt to socioeconomic changes; 0 Report on direct and indirect socio economic impacts o fthe project; 0 Recommend mitigation activities for impacts; and 0 Proposals for donor funding o f mitigationefforts for local implementation by local government, non-governmental organizations, communities and other agencies. -25-  This program has focused on safeguarding the welfare o fpeople inthe communities in the area around the power plant -mainly six villages inthe direct impact zone o f the plant. Ithas bothmonitoring and mitigation components. The monitoring component has documented not only the socioeconomic and cultural changes due to the sudden influx o fpeople andresourcesinto the areabut also i s doing follow-up work on what happens when the construction boom inthe area comes to an end. The mitigation component encompassespromoting and sustaining access to health services, schools and water supply. It also has provided a micro credit facility to promote small business activities, particularly among women and youth. The program, thoughrelatively small, was very successfulinmobilizing local resourcesand commitment. Overall EnvironmentalImpact. Duringprojectimplementation, the Bankreceivedcriticism from external environmental organizations for not stopping constructiono fthe project untilthe new impacts identified duringproject implementationwere resolved. Initially, the Bankwas very slow to react to the growing environmentalconcerns raisedby these organizations; nor didthe supervision reports provide much indication o f the potential risk for the Bank o f these concerns. While both the Borrower and the Bank sharedthese concerns inregardto the Kihansi spray ecosystem, they didnot agreethat construction should be halted, given Tanzania's urgent needfor power andthe fact that both the Bankand the Borrower, at the time o fappraisal, hadaccepted the possibility o f some habitat loss initially. Moreover, the needfor additionalpower capacity became increasingly more urgent as Tanzania faced a severe drought with the likelihood o f extreme load shedding. Also, the lack o f any baseline data to indicate just how much water the ecosystemneeded to survive was a further complication indetermining the appropriate bypass flows. As shown inTable 4.1, duringthe construction period ofthe Lower Kihansipower plant, the Bank andthe Borrower, with bilateral donor funds under the project, were examining, testing, and evaluating ways to preserve the ecosystem. Tanesco, with bilateral donor assistance, spent about US$4 million on monitoring andmitigation activities. The project files contain detailed studies, includinganalyses o fthe size o f droplets inthe artificial spray system. Inthe end, however, as outside concern continuedto grow amongstthe international environmental community, the Bank approved an Environmental Management Project inJuly, 2001 to help ensure the sustainability o f the gorge's ecosystem. Initially, there were reports that a large percentage o f the spray ecosystem hadbeen lost ina short period o f time, evidence o f the system's extreme fragility. Furthermore, early reports on captive breeding had indicatedthat a parasitic infection had seriously threatened the survival o f toads incaptivity. However, in April 2002, the Bank's InternalAdvisory Panel (IAP) for the Lower KihansiEnvironmentalManagement Project (LKEMP) met to review the status o f this project. The IAP reported that overall the results o f captive breedingwere satisfactory,-despite some initial difficulties. The panel reported site visits had found that the vegetation inthe wetlandwas once again green andthat Kihansi Spray Toads were visible inthe uppergorge. Table 4.1 ChronologyofEnvironmentalWork onthe Lower KihansiHydro Site andPlantConstruction Year KihansiConstruction 1992-93 Environmental Assessment completed synthesizing the work o fEkono IIEnvironmentalWork Panel o f Experts for dam construction meets in 1992 and -26-  makes the first field visit in 1993. 1994-95 'wo environmental organizations express concem about an ecosystem medevelopment of ependent on the spray from the KihansiFalls. Project consultants respond lam infrastructure y conducting baseline studies. Tanesco expresses concern to the Bank about ieginsin 1994. :tters received from environmental organizations requesting deferral o f roject construction. Baseline studies arrive at findings similar to the earlier nvironmental assessment. Bank environmental staffnote concem but also oint out that the Bank andthe Borrower had accepted some loss o fhabitat s a consequence o f the project, pointing out that all construction projects ave some environmental costs. 1996 /larch: Tanzania ratifies the InternationalConvention on Biodiversity. Thir Ianuary: onvention obligates the country to take all measureswithin reasonto ranesco receives reserve unique species. However, it also notes the needto balance this with he rights to dam manneeds. he river wgust: Tanesco contracts with Norplan for a continuous environmental naintaining a ionitoring project. iypass flow o f 7 Iecember: investigations near the project site discover what appears to be a :ubic meters per nique spray-dependentwetland. second, the iistorical ninimumfor the Falls. 1997 York on the design o f a systemto re-create the spray to support the Excavation for the cosystem begins. Lower Kihansi Dam Jovember: scientists make further field visits to learnmore about the spray 3egins. .ependentecosystem. September: Bank Zives its "no ~bjection"for 3eginning the civil works for Kihansi. Vote: In 1997 $ere i s severe load-shedding, :nhancing the importance o f Zompleting the :onstruction o f the ?ewer plant, which was xiginally planned for 1998. 1998 rebruary: Norplan's environmental monitoringreport makes reference to SII pparently unique species o f toad discovered in the project area. une: Tanesco andNorplanbegininvestigations ofways to conserve the pray toad - artificial irrigation, translocation, captive breeding, etc. ictober: Scientist search for other areas where the toad may exist. 1999 :arly 1999 (or late 1998). Scientist announce, inan academic journal 3ates and bypass of rticle, a critically endangeredspecies o f toad inthe Kihansi area. ;hedam commissioned. -27-  lugust.Norplan's environmental monitoring report discussesoptions that Firstturbine for the wouldbalance the needfor water to runthe power plant with the needs o f the power plant ;pray dependent ecosystem. commissioned and Yovember. WorldBank receives a letter from anenvironmental spray system installed ,I-ganization expressingconcern about the endangeredecosystemand the to compensate for :onstruction o fthe project. diversion o fwater for lecember.Bankmanagementsendsholding letter to permittime for power production. ;takeholder consultations. End 1999.Tanesco instructs Norplanto study the impact ofthe reduced flow )nthe ecosystem. However, itturned out that an accuratestudywas only iossible after the commissioningo f the first turbine. 2000 March. The Bank formally respondsto the environmental organization's July. The last ofthe Zoncerns and agrees to conduct a formal review o f the project's three 60-MW turbines :nvironmental aspects. An Internal Advisory Panel (IAP) i s establishedto installed and the Presidenl ?rovideadvice to supervision team and monitor progress. o f Tanzania inaugurates April. Missionvisits Tanzania to conduct the EnvironmentalReview. the power station. 4.2 Outputs by components: Since the project's appraisal prepared an SAR rather than a Project Appraisal Document (PAD), the discussion in Section 4.1 focuses on the achievement o fproject objectives, rather than on specific outcomes or outputs, in accordancewith the following categories: tariff policy, physical ,institutional ,financial and privatization. Includedin Section 4.1 i s a discussion of the impact o fparticular components that were part of the original project description. 4.3 Net Present Value/Economic rate of return: The project's SAR calculated an economic internal rate o freturn (EIRR) on Tanesco's investmentprogram since most of the project funds financed a time slice o f Tanesco's power systeminvestment program. The SAR projected an EIRRo f 15 percent on the base case investmentprogram. It also calculated a low-case demandscenario which resultedinan EIRRo f 12.9 percent as well as scenariosfor delays inKihansi construction and increasedinvestment costs, which resultedin EIRRs o f 12.5-14.4 percent. - 28 -  The ICR's re-estimate ofthe EIRR is 10.6 percent. The rate is lower thanthat inthe appraisal report due to sales that were about 14percent lower than the low-case inthe SAR, the reduced output o f the Kihansi plant due to the needto increaseby-pass flows, andthe inclusion ofunforeseenenvironmental work financed under the Bank's Lower Kihansi Environmental Mitigation Project. 4.4 Financial rate of return: Not Applicable 4.5 Institutional development impact: The achievement o fthe institutional development objectives are discussedindetailas part of section 4.1. The institutional development impact has beenratedoverall as `modest', essentially because o f the decision by the government inthe finalmonths ofthe project to initiate the recruitment o f an outside management team for Tanesco. Despite the very weak financial position o f Tanescoby project completion, this decision representedan important step forward inturning around the institutional performance o f the utility.In support o f thisjudgment, a new managementteam took over Tanesco inFebruary 2002 and has ledto immediate improvement inthe utility'soperational andfinancial performance. Other institutional impacts should be mentioned. The project provided Tanesco with the tools to improve its technical and commercial operations. Inaddition, the project helpeddefine options for power sector restructuring and based on a review of these options the government has decided on a basic structure. This structure is inline with the Bank's principles for power sector lending. The Cabinet has approved restructuring along those lines. However, the Government didnot provide, untillate inthe project, the support andcommitment that was critical to making Tanesco a commercially viable company duringthe transition to the new sector structure and privatization o f the utility. Itneeds also to be recognized that Tanesco'smanagement also didnot do all inits power to improve performance o f the utility. Indeed, it was this fact that ledsupervision missions to recommendacceleration ofthe sectorrestructuring and privatization efforts and Bank country management to press for a new management team to be recruited for Tanesco duringa transition period en route to privatization. 5. Major FactorsAffectingImplementationand Outcome 5.1 Factors outside the control of government or implementing agency: There were two major developments during project implementationthat had an important bearing on implementationandproject outcome: the severe drought during 199415 and the discovery inthe gorge o f an endangeredspecies, the Kihansi spray toad, in 1996. 1.UnexpectedSevere DroughtConditions. At the time ofproject appraisal, Tanesco's capacity balance -the marginbetween available capacity andmaximumdemand-was negative andwas projectedto remain so with slightly positive capacity during 1994 and 1995. (Staff Appraisal Report, Tanzania Power VI project, para. 3.17.) This situation resulted from two factors: reduced hydro capacity due to drought conditions and the delay inrehabilitating some o f the diesel units inthe system. Tanesco was lookingat identifyingoptions to reduce demand, suchas voluntary load sheddingand encouraging some industriesto use their own generation. Also a demand management study by the Energy Sector Management Assistance Program (ESMAP) was to assist Tanesco inmanagingpeak loads and energy consumption efficiently. The capacity balance analysis showed that there would bejust a slight margino f capacity beginningin 1994 until 1998,when the Lower Kihansi hydro plantwas to come on stream. The analysis suggestedthat dependingon options for reducingpeak load, additional thermal capacity mightbe necessary, especially if there were a delay inthe commissioning o fthe Lower Kihansi hydro plant. -29-  About a year or so after the project's appraisal, unusually poor rainfall ledto severe drought conditions, not foreseen at project appraisal. These conditions-- combined with higher demandgrowth due to faster economic recovery than anticipated -- resulted inwidespread outages. This loss o f capacity was costing the country the equivalent o f about US$ 170million ineconomic losses annually, close to 8 percent o f the country's GDP. Therefore, the Bank agreedwith the government's requestto fund the Emergency Power Program (EPP) to provide critical thermal back-up capacity. This action was inline with the overall project objective o f meetingpower needs at least cost. An important consequenceo f this decision, however, was to reduce significantly fimding available for distribution strengthening and rehabilitation. 2. Discovery of an Endangered Ecosystemat the Kihansi Falls. The legal documents o f the Credit Agreement requiredthat anEnvironmental Management Plan (EMP) be preparedby June 30, 1994. As part o f the preparation o f the EMP, a number o fbaseline studies were undertaken by Tanesco's consultants as well as a more detailedEL4 o f the project, focusing inparticular on the downstream impacts that some NGOs incofinancing countries had felt were not adequately addressedinthe original EIA (Section 3.5 Quality at entry, Environmental Impact Assessment). By late 1995, following conclusion o fthese studies, it had become clear that diversion o f water for the hydroelectric scheme would also have an impact on vegetation downstream o fthe dam. Subsequentto completion o f baseline studies, a team o f scientists, financed under the project, visitedthe site and discovered not only a specialized spray wetland but also a new species o f dwarf toad, Nectophrynoides Asperginis, which became known as the Kihansi spray toad. Because o f the impendingalteration o fthe local microclimate as a result o f the dam construction, it was recommended that the Kihansitoad be classifiedas a 'critically endangeredspecies'. Itwas not untilJune 1998, however, that Tanesco was officially informedthat the discovery of the Kihansi Spray Toad was uniqueto the project area andwas considered anendangeredspecies. The discovery o fthe KihansiSpray Toad and an endemic plant ecosystem, together with the concems expressedto the Bank ina letter by a non-governmental environmental organization inNovember 1999, ledto a reassessmento f the project's environmental impact. With the main dam construction now well advanced, attention turned to identifying urgentmeasuresto help ensure the long-term survival ofthis speciesinthe Kihansigorge. These measures subsequentlyformed the basis of anemergency mitigationplan which the Bankhelped finance ina separate lendingoperation that was approved inJuly 2001,just after the closing date for Power VI. The main mitigatingactivities identifiedwere: re-creation o f the spray with an artificial sprinkler system; a search for the same species o f toad inother areas o f Tanzania; a captive breedingprogram for the Kihansi spray toad; and the determination o fminimumenvironmental flows through the gorge. There were also a few additional factors that affectedaspects o fproject implementation andproject outcome. a. Changes inthe Kihansi Hydroplant Design. Some delay inconstruction o f the Lower Kihansi Hydroelectric Plant resultedfrom unexpectedly low rock stresses inthe plannedlocation o f the underground power house. Tanesco responded quickly to address the problem andchanged the project's design, making effective use o f the advice from the project's Independent Panel o f Experts. The solution was to place the powerhouse about 700 meters from its original plannedlocation underground. There were also some problems with the contractor's performance, which led to the hiringo f a new site manager. The delay inthe construction due to these problems was about six months. The consultants, managing the project for Tanesco, had anticipated possible constructionproblems because o f difficulties encountered during site exploration andpreemptedhighcost overruns for shiftingthe cavern byusingan innovative flexible contracting approach. b. Inadequacy of the Restructuring and Privatization Study. Because the restructuring study was inadequate the Bank and the Borrower had to prepare other activities to help meet the project's restructuringobjectives. The solution they came up with was a study tour o f selected countries which had success with power sector restructuring an privatization and a workshop to analyze the results. This - 30 -  required seeking donor funding anddelayed progress inrestructuring, but was successful inhelpingthe government decide on the most viable power sector restructuring option for Tanzania and inpreparinga plan for restructuring prior to the closing o f the project. c. ConfigurationProblemswith the PrepaymentMeteringSystem Project supervisionreports indicate that there was a configuration problem with the prepayment metering system, such that it didnot take into account the structure of step tariffs as was specified inthe contract documents. The contractor had assured Tanesco and the consultant for the systemthat the supplied systemmetthe specifications fully. However, during supervision, the Bankreviewedthe operation ofthe system anddeterminedthat itwas defective. The BankprovidedTanescowith areport onthematter andaskedthe company to formally requestthe contractor to resolve the problem since it was causing some o f Tanesco's customers to be overcharged. d. DelaysinOperatingthe New AccountingandBillingSystems. In 1996,the new accounting system beganoperating inthe headquarterso fall ofTanesco's zone offices. The original planwas to decentralize the system over a period o f six months with completion around June 1997. However, more work on the systemwas required than anticipated originally and the consultant didnot have an adequate grasp on the information technology aspects. As a result, billing systemdelays occurred due to the larger than expected amount o f work requiredto re-establish the customer database as well as the fact that the program purchasedwas not very user friendly. 5.2 Factors generally subject to government control: Government Commitmentto Sector Reform. The Government showed its commitment to reformby completing the restructuring study underthe project as well as the related study tour o f senior managers and workshop. Subsequently, the Cabinet approved the restructuringo f the sector in 1999 and Parliament then passedthe Energy and Water Utilities Act inApril 2001 establishing the multi-sector regulatory agency. LackofDemonstratedCommitmentto SupportTanesco's CommercialViability. The Government was requiredto play apivotalrole inmakingTanesco financially viable prior to sector restructuring. In order for the investment, technical assistanceand training inoperational improvements to be effective, Tanesco requiredGovernment actions to ensure payments by govemment entities for electricity usedas well as compensation for socially important but financially unviable rural electrificationprograms that the Government directed the company to implement.For most of the periodofproject implementation, the Government didnot take such steps. However, the Government didprovide intermittent compensation when pressedby Bank, especially when the Bank gave an official warning that it would suspenddisbursementsif the Government didnot comply with related covenants. Adherenceto the Conventionon Biodiversity.In 1996,the Government of Tanzania signedan international convention on biodiversity. This convention requires a signatory to make every effort, within reason, to preservethe biodiversity o f its resources. The signing o f this convention became an important issue when the discovery o f an endangered Kihansi toad was made and the urgent preparation o f an environmental managementproject mentionedin section 5.1 above. The Government andTanesco have since committedthemselves to a program that balances the country's needfor power with programs to protect the habitat of the Kihansi Spray Toad and rare varieties o f plant life dependent on the spray from the Kihansi Falls. 5.3 Factors generally subject to implementing agency control: Contractingfor ThermalPower from ITPL. Duringthe project's implementation, the Government o f Tanzania entered into an agreement for Tanesco to purchasepower from an independent power producer, - 31 -  IndependentPower Tanzania Limited (IPTL). The agreement reached financial closure inJune 1997. The Bank was not aware o f this contract untilafter the fact. The Bank's supervision mission o f October 1997 notes that studies o f the project had indicated it would provide 100 MW o f surplus power andwas not part o f the least-cost expansion program. The Government gave a presentation on the project in October 1997 stating that the addition of 100 MW wouldbeprudentto prevent power shortages. The Bank requested the Government to show that the introduction o fthe project into the sector to be economically, financially and technically sound andthat its introduction would not threaten the financial viability o f the power sector nor its further development at least cost. The Bank notifiedthe Government that the IPTL project posed a serious threat to the objectives o f Power VI and, underthreat o f Bank suspensiono f disbursements on Power VI, the Government sought arbitration on the agreement, a process that lasted several years. While Tanesco purchased no power from IPTL during the project period, following the outcome o f arbitration it now has a contractual obligation to purchaseminimumquantities o f power from IPTL, on a take-or-pay basis, that will have repercussions on its future financial position and the cost o f electricity for Tanzanian consumers. Delaysinthe Submissionof Audit Reports. Duringmost ofthe project's implementation, supervision documents reported the project audit reports as late. The lack o fregular audit reportingmade it difficult to monitor Tanesco's financial situation consistently. However, part o fthe problem was attributable to the fact that systems to improve performance inaudit reporting were being installedunder the project; until these systems were functioning properly, limitedprogress in the audit reporting was possible. Water Rightsfor the Lower KihansiPlant Operation. Inearly 1996, Tanesco received aprovisional water rightthat required a bypass flow inthe gorge o f 7 cubic meters per second. This figure was stipulated on the basis of historical low flow levels. Tanesco was able to comply with this rightuntilthe commissioning o f the Lower KihansiPlant inDecember 1999. Inorder to operate the plant to meet the project's objectives, Tanesco could only release about 1.5-1.8 cubic meters per secondwithout seriously compromisingthe ability o f the plant to meet power demand. Tanesco applied for a right to the reduced flow but didnot receive it during the project implementationperioddue to ongoing water rights discussions andthe needto determine the minimumenvironmental flows requiredto preservethe ecosystemthat had beendependenton the spray from the Kihansi Falls. This issue o fTanesco's water rights has yet to be resolved. The provisional water right for a flow o f 2 cubic meters per secondwas recently extended until October 2003 while flow tests continue at the site. 5.4 Costs andfinancing: In1993,IDA approved a credit of SDR144.2 million, the equivalent ofUS$200.0 million. The project's total cost was estimated at USD383.7 million and other financiers were NORAD, Sida, NDF, DfID,EIB andKfW. InApril, 1995, the Government o fTanzania requested an amendment to re-focus part o fthe project activities to help TANESCO forestall serious and widespread power outages in 1995 and afterwards. Approximately US42.0 million o f the credit was requiredto purchase 70 MW o f gas turbine capacity. The financing o f three components was reduced (Distribution Strengthening and Loss Reduction, Distribution Rehabilitation andMnazi Bay) and reallocated to finance the EPP. The final cost o f the project was approximately US$391.8 million. 6. Sustainability 6.1 Rationalefor sustainability rating: A key element affecting the sustainability ofthe original project objectives, specifically the institutional - 32 -  development objective, is reasonable assurance that Tanesco will be able to operate on a commercial basis, generate sufficient funds to maintain its physical investments, and makeeffective use o f the management tools the company acquired under the project. This didnot take place duringthe implementationo f the project and for this reasonthe sustainability o f the institutional development objectives has beenrated `Unlikely'. 6.2 Transition arrangement to regular operations: A key factor inthe transitiono fthe project to regular operation is a changeinthe relationshipbetweenthe Government and Tanesco, inparticular the needfor the Government to pay its electricity bills andallow Tanesco to disconnect non-paying customers. The restructuringo f the power sector began under the project with the Government's adoption, inOctober 1999, o f a power sector reformprogram. This program calls for the unbundlingo f Tanesco, both vertically andhorizontally, into generation, transmission, and distribution businesses. Its objective is to introduce private investors into the sector and separate any noncommercial rural electrification programs from Tanesco's regular operations. The Bank i s supporting the implementation o f the reformplanthrough the Private Sector Development Project (Credit 3304-TA). The completion o f Tanesco's divestiture is expected by the endo f2005. Prior to restructuring, the Government has either taken or has agreed to take a number o fmeasuresto improve Tanesco's operations and financial performance, making the company more attractive to potential private investors. Inearly 2000, the Government began a program o fpayments to eliminate its arrears with Tanesco and by early 2001 had reconciledall outstanding electricity bills. This reconciliation includes offsetting Tanesco's outstanding debt service payments owed to the Government. InMay 2000, the Government commissioned Deloitte, Touche Thomatsu to assess Tanesco's financial management performance. The company's report highlighted a number o f shortcomings inperformance and a follow-up Bankmission, inAugust 2001, confirmed the study's findings. The mainareas for improvement that the study identifiedare: financial controls and accountability, expenditure control and the needto rebalance the structure o f electricity tariffs, removing heavy subsidies that industrial customers are paying to offset low tariffs to some residential consumers. The Government and Tanesco planto implement recommendations in these areas to increase the value o f the utilityin preparation for privatization inthe next few years. The Government already has taken several steps to mitigate against adversefinancial consequences of large-scale Government non-payment o f its electricity bills. InJuly 2000, the Government made its agencies and parastatalsresponsible for their own electricity bills.Furthermore, Tanesco has received authority to disconnect non-paying Government customers except for five "sensitive" agencies. The Government has also made significant changes to Tanesco's BoardofDirectors; these changes indicate a commitment to commercial operation. In August 2001, the Government replaced Tanesco's Chairman and Board o f Directors. O fthe nine new Boardmembers, two thirds are from the private sector. As noted above, inFebruary 2002, aprivate firmwas engaged on aperformance-based contract to manage Tanesco. The s u m of the actions already taken by the Government, combined with the management contract andthe implementationo fthe recommendations o f the financial management study, should help ensure that the systemsprovided under the project are effectively usedto sustain its objectives. Given continued commitment o f the government as well as adequate financial resources, Tanesco now has a reasonableprospect o f meetingincreaseddemand at least cost and achieve the financial goals that it could not meet duringthe project implementationperiod. - 33 -  7. Bankand BorrowerPerformance Bank 7.I Lending: The technical aspectsofthe project were very well prepared andreceived considerable study prior to appraisal. The project's designincorporated lessons from past projects conceming the importance o f having an independent review o f technical design andperiodic reviews by an independentpanel o f experts. The SAR correctly evaluated the technical risks and, as anticipated, hadto make some adjustments inthe designof the powerhouse due to geological findings. The project also benefitedfrom an engineering credit for the project's generation component andESMAP studies supporting the distribution component and demandmanagement. On the institutional side, the project included a multifaceted institutional strengthening program with detailed monitoringindicators anda large numbero f covenants. However, inexamining different options for the restructuring and privatization, and beginningthe divestiture o f Tanesco, there was an implicit acknowledgement that the existing institutional framework for Tanesco's operations was unsatisfactory and that there was a fundamental needto find a better framework that would allow Tanesco to operate on a commercialbasis. 7.2 Supervision: The Bank supervised the project on average about twice a year. Supervision missions were generally staffed by an engineer, an economist, and a financial analyst; though a Bank environmentalist didjoin supervision missions on one or two occasions, the monitoring o f environmental issues andthe preparation o f the EMP was entrusted to consultants financedbyNORAD. The reports o f the supervisionmissions were strategically focused to deal with particular problems, mainly inthe technical and financial areas, whichactually resulted from overall managementproblems. Ingeneral, supervision staff faced a difficult operating framework: ahydro/thermal systemthat involved operating under a strict regimedesigned to prevent power shortfalls indrought periods; outdated business management systems; an unreliable information baseunder reconstruction; and low revenues due to a combination o f inadequatebilling and collections systems and the Government's non-payment o f electricity bills. The Bankproject team showed a considerable amount of flexibility inquickly restructuringthe project early inits implementation(1995) to meet emergency power needs prior to the completion o f Kihansi Plant. This involveda reassessment inpriorities resultinginthe deletion o f some o f the project's distribution work. The swift turnaround time inprocessing the restructuringrequest and installing the back-up thermal units in about six months, preventedmajor disruption o f the economy through massive load shedding. Dueto delays inimprovements to the billing systemand frequent problems with arrears ingovernment payments, the Bankproposed a technical solution -new to the Africa Region -- toprovide Tanesco with cash. The decision was to install prepayment meters for about 10percent o f Tanesco's clients, especially largegovernment consumersthat had a tendency not to pay for electricity. Although this technical solution was not sufficient to turn around the condition o f the utility,it didprovide a regular stream o f cash from some o fthe larger customers inthe system. At one point, the Bank threatenedto suspenddisbursementson the project due to the Government's non-compliance with covenants to allow Tanesco to operate as a commercial utility. The Government complied with covenants to ensure IDA payments but only intermittently. - 34 -  Towards the end o fthe project's implementationperiod, the Bank sent specialists to evaluate the management Performance of Tanesco andrecommend specific, short-term interventions inTanesco to help bringabout rapid improvements inits deteriorating operational and financial performance. This power sector performance missionrecommendedimmediate changes inthe senior management o f the utility through recruitment o f a new managementteam. As a result, this solutionbecame part o f the restructuring component linkedto the follow-up project to Power VI -the Songo Songo Gas Development Project. Also, a financial review o f Tanesco by an independentconsultant came to a similar conclusionand found that there was a lack o f initiative within Tanesco, given the pending restructuring o f the sector anduncertain future o f the staff. Tanesco's consultants hadprimaryresponsibility for monitoring environmental conditions inthe Kihansi Gorge. In 1998, they determinedthe endangeredstatus o f the uniqueKihansi ecosystem. The problemwas complex and unprecedented. Moreover, the expected cost o f the neededmitigation work -- especiallythe efforts at captive breedingo f the Kihansi Spray Toad -- was likely to exceedavailable donor resources. Giventhe growing urgency of concerns inregardto the preservation ofthe gorge's ecosystem, the Bank sent an environmentalreview missioninAugust 2000 to come up with a revisedmitigationplan for the fragile ecosystem. The mission proposed an energy/environmental option that would attempt as much as possible to preserve the Kihansi Spray Toad and the rest o f the ecosysteminthe KihansiGorge while runningthe hydro power plant as planned. The proposed solution thus balanced internationalconcern for thebiodiversity o f the areawith arecognitiono fthe importance ofthe power plantthat wouldbe supplying more than a quarter o f Tanzania's power. Despite the contribution made by the environmentalreview mission, Bank supervision teams didnot fully appreciate the urgency o fpreparing a mitigationplanand the highrisks involvedinany delays. Banksupervision staffwere particularly effective with donor coordination, andreflectedthe lesson learned inthe SAR about ensuringmechanismsthat wouldprevent the disruptionoftheproject dueto shortfalls in financing. For example, when the results o f the sector restructuring study turned out to be unsatisfactory the Bank coordinated with donors to come upwith hding for a study tour and a workshop to help the Government decide on restructuring and privatization options. Giventhe complexity ofthe project, its status reports and aide memoires would have benefitedfrom the logframematrix which the Bank now uses inits appraisal and supervision work. Unfortunately, the logframe approach didnot exist at the time o f appraisal. This is especially true for the institutional development o f Tanesco. Since the strategic choice was to improve management effectiveness from within, Tanesco receiveda strong injection o fmanagement tools, technical assistanceand studies but there was no framework o f inputs andoutputs pullingit all together. Nevertheless, the project's SAR didprovide detailed performance indicators to be monitoredthroughout the project though the project's supervision reports didnot consistently monitor those indicators ( See Annex 1). The supervision reports usually contained a table o f objectives, with components and a descriptive comment on their status. The reports also noted some o f the performance indicators mentioned inthe SAR. Inthis regard, it shouldbe noted that supervision teams had difficulty inreviewing the monitoring indicators inthe SAR due to the fact that much o f the data to be filled inwas either unreliable or not available. One o f the reasons for this was the delay inthe implementation of the new management systems to monitor this information. 7.3 Overall Bank performance: The overall rating of the Bank performance is unsatisfactory. While there are several positive aspects of the Bank's performance (see below) these are, on balance, offset by the following considerations: (i) -35-  extensive delays intalung action, untillate 2000, to redress a deteriorating financial, management, and institutional performance o f TANESCO, including breacheso f specific covenants; (ii) inthe Bank delays following up on the lack o f govemment action to ensure payments to TANESCO by other government entities as well as to reimburse TANESCO for social investmentsit was requiredto undertake; (iii) extreme tardiness inreporting the potentially adverse environmental consequenceso f the project for the Bank and the Borrower; and (iv) extensive delaysinthe development of an environmental mitigationplanwhich only narrowly averted the extinction o f a species o f toad uniqueto the Kihansi gorge. At the same time, some ofthepositive contributions ofthe Bankduringthe project shouldalso be noted: (i) the detailedpreparation work for the project andthe responsivenesso fthe project's design to the country's needs; (ii) flexibility o f the Bank inresponding to the emergency drought situation in 1994; (iii) the the highquality ofthe Banktechnical inputandthe effective useofan independent Panel ofExpertsin providing advice on the unexpectedrock stress problems that developed inthe originally plannedlocation of the undergroundpowerhouse; (iv) the initiative shown by the Bank inAugust 2000 to send a team to recommend short term interventions to turn around the deteriorating operational and financial performance o f Tanesco; and, finally, (v) the decision o f the Bank to send a review mission to prepare an environmental management project to help finance urgent mitigation activities, once the downstream conservation concerns inthe Kihansi gorge became apparent. Borrower 7.4 Preparation: The performanceofthe Borrower inthe preparationwork for the projectwas satisfactory.The technical components for the dam and the power plant were subject to rigorous study and evaluation. Tanesco's consultants prepared an inception report on the detailed design and cost estimates. Tanesco employed a Panel o f Experts to obtain an independentreview o f the design. Onthe institutional side, the Government issued apolicy statement on parastatal reformas part o f its development strategy and established a Public Sector Reform Commission. Also, Tanesco beganinternal restructuring by decentralizing its billing operations and upgradingmanagement inthe seven distribution zones. 7.5 Government implementation performance: As notedearlier inSection 5.2, the Government maintainedits commitment to the restructuring and privatization objectives by completing a private sector restructuringstudy followed by a Cabinet decision that authorized the restructuring andprivatization o f Tanesco. However, during most o f the project's implementationperiod, the Government didnot fulfill important covenants designed to allow Tanesco to realize the financial benefits associatedwith institutional improvements under the project. Specifically, the Government didnot take steps to ensure that Tanesco's finances would not be adversely affectedby (i) the non-payment o f electricity bills by govemment agencies and ZSFPC, and (ii) implementation o frural the electrificationprograms that were socially desirable but not economically viable. Giventhe leadtime requiredto implementthe structuring and privatizationprogram, Government fulfillmento fits commitments in these areas was critical not only to prepare Tanesco for privatization by increasing its value as a company, but also to ensure proper operation o f the power system. Therefore the ICR rates the Government's overall implementationperformance as unsatisfactory. 7.6 Implementing Agency: Tanesco's implementationofthe project's main components -the dam and powerplant at - 36 -  Kihansi-was highly satisfactory. Its responsivenessto environmental concerns that developed duringthe project was also highly satisfactory. The implementation o f the institutional components was on balance satisfactory; delays inthe installation of the new accounting andbilling systemswere due more to the enormity o fthe task and shortcomings inthe work o f some consultants. Tanesco complied with most o f its non-financial components and its non-compliance with financial covenants was due mainly to factors beyondthe company's control. However, on the commercial side, Tanesco's performance was unsatisfactory due to serious management weaknesses, especially financial management, and its inability to follow-up effectively on important problems, such as theft inthe prepayment meteringsystem. Also, Tanesco operated at a loss during most o f the project's implementationperiod. The performance o f the Ministry o f Energy inthe implementation o f restructuring studies andpreparation work for private sector gas development was satisfactory. The performance of ZFSPC inthe implementationo f components for prepayment meteringandcommercial operations improvement was satisfactory. However, ZSFPC didnot pay Tanesco regularly for electricity received throughout the project implementationperiod. 7.7 Overall Borrowerperformance: Overall, the Government made some progress toward restructuring while Tanesco fulfilled most o fthe project covenants that didnot depend on Government actions. However, the Government's unsatisfactory performance in demonstrating its commitment to Tanesco's commercial viability outweighed satisfactory progress elsewhere and was the major factor preventingTanesco from benefitting from the project's institutional development components duringthe project implementationperiod. As a result, the ICR has rated the Borrower's overall performance as unsatisfactory. 8. Lessons Learned Several important lessonsemergedduringthe 8-year implementation periodwhich are discussedbelow in three broad categories: A. Technical; B. Institutional; and C. Environmental. A. Technical Lessons 1. SelectionofPower Generation Sources. Giventwo generation options with nearlyequal economic benefits, the operating experience o f the implementingagency should be given considerable weight relativeto other factors indeciding on the most viable generation option. Duringproject preparation, both the gas option and the hydro option for generation had about the same projected economic rate o freturn. Within the Bank, the Project files indicated that opinion was dividedabout which option to choose. While a clear advantage of the gas option was reduced reliance on difficult and uncertain hydrology, it also would have beena new area o f generation experience for Tanesco. More importantly, it would have requirednew contractual arrangements for gas development up front with private investors that, at the time, were not clearly forthcoming. With hindsight, the Bank was realistic inits approach, recognizingthe critical timing for new generation capacity and supporting the preference o f Tanesco for the hydro option, deferring the gas option, pendingthe restructuringo f the power sector andclear commitments from private investors for the development o f the gas. The record o fproject development supports this decision. As it tumedout, while the preparation for the private gas development and electricity project beganaroundthe same time as the Bank approved the Power VI Project, it took about seven years before the Songo Songo Gas Developmentand Electricity Generation Projectreached the stageo f Board approval andthe gas itselfis scheduledto come onstream in2005. - 37 -  2. Use of PrepaymentMetering. Prepayment meteringcan be an effective technical solution to power company billingand collection problems but configuration in line with the tariff structure and loopholes for fraud shouldbe givenpriority attention inthe design o f the system. The pilot prepayment metering system tested inTanzania was an innovation for utilities inAfrica. The independent financial performance study outside the project has pointed out the success o fthe prepayment metering system and has prepared an initial financial analysis supporting the system's further expansion. However, it pointed out that configurationproblems andfraud can detract significantly from the benefits. Inthe case o f Tanesco, it is clear that despitethe adverse impact o f these problems duringproject implementation which ultimately were resolved -- Tanzania's -- difficult financial condition, especially inyears o fpoor hydrology, would have been even worse without the system. Moreover, the systeminstalled inZanzibar incorporated the lessonslearned inthe mainland systemandit was very successful. B. InstitutionalDevelopmentandPrivatizationLessons 1.InterimManagementofaPublicUtilityDestinedfor Privatization.The form o finstitutional development assistanceina power project should dependon the individualcountry situation as well as a realistic assessment o fwhat canbe achieved duringthe project's implementationperiod. Inevaluatingthe management o f a public company destined for privatization, it i s not reasonableto expect optimal performance giventhat the decision to privatize i s an acknowledgement that the utility cannot operate effectively as a public utility subject to government influence. And while the technology and other institutional development support may be necessary conditions for commercial operation, they are not sufficient. Optimal commercial performance is likely to require a commercial culture that i s difficult to develop while the company is in a transition status, still subject to some government intervention, and managed by technically competent engineers who see their main responsibility to ensure reliable electricity supply almost irrespective of cost. Forthis reason, for any institutional development support to be effective duringa transitionperiodto privatization itprobably needsto be accompanied by new management recruited from outside. 2. ChoiceofInvestmentLoansfor Privatization. Ingeneral, standard investment loans are not appropriate lendingvehicles to pursueprivatization objectives, especially the construction o f a large hydropower plant. While the present investment loan had only `partial privatization' as a goal andwas flexible on the timing o fprivatization, there are inbuilt constraints ininvestment lendingthat make it difficult to monitor effectively progress towards a sector policy goal. For this consideration, privatization objectives should be normally pursuedthrough adjustment lendingsupported by a TA loan. 3. Flexibilityinthe Timing ofPrivatization.Power VI was one o fthe first projectsunder the new Bank guidelines for power lending,emphasizing private sector development. Experience inanumberof Bank projects shows that the Bank has been overly optimistic about the time requiredfor restructuring and privatization. Incontrast, the Power VI project was more realistic by not imposing a timeframe at appraisal but insteadfocusing on assistanceto help the Government decide on arestructuringoption and an implementationplan. Given that Tanzania was in transition from a socialist to a market economy and desperatelyneededthe project to avoid the potentially disastrous impact o f load shedding on the economy, itwas not realistic to expect restructuring ofthe power sector beforeBoardApproval. The experience in Tanzania and elsewhere inAfrica is that privatizationrequires time as well as political and social buy-inif it is going to be successful. A flexible approach to privatization, where progress andcommitment continue to be monitored, is therefore more likely to result ina successful outcome. 4. Importanceof a CommercialCulture. Taking into account the country situation and the needs o fthe power sector, the choice o f tryingto improve Tanesco from within while working towards sector - 38 -  restructuringwas not an unreasonable one. However, the absence o f a commercialmanagement culture in Tanesco undermined the effectiveness o f different management tools financed under the project. When the operational and financial performance o f Tanesco reached a crisis inthe final year o f the project, the Bank intervened andrecommended the recruitment of a new management team from outside Tanesco. Without some semblance also o f a commercial culture ina utility, any operational management tools developed are unlikely to bebeneficial. C.EnvironmentalLessons All hydropower projects with dams, by their very nature, are boundto have a deleterious impact on the environment insomeway and assessments should reflect a consensusofBankand Borrowerpolicies on the amount of damagethat is acceptableto meet humanneeds for electric power. However, given the possibility o f unexpected impacts andchanges inpolicy, ecological monitoring should continue during project implementation. Non-governmental organizations specializing inglobal environmentalmonitoring can play an important role inthis process. Also it is important to make sure that the allocation o f water rightstakes place as early as possible inthe project cycle andbefore a final decision to proceedis made. 1.Scope ofEnvironmentalAssessment (EA). The original EA,undertaken in 1991prior to appraisal, was approved by regional management and subsequentlyby the Bank's board. Since that time the scope and rigor o f EAshave evolved so there i s little doubt that an EA carried out today for a similar type o f dam construction (Le. run-of-the-river scheme that includes a diversion dam with a small reservoir, resultinginvirtually no resettlement, with a steep drop that generateslarge volumes o fyear-around spray) would have beenundertaken with particular attention to downstream environmental impacts; these would needto have beenevaluated prior to any decision to appraise. Inthe case of Power VI, the basic due diligence to assess the natural habitats was not undertaken untilafter Boardapproval when construction was already underway. The lack, therefore, o f a more comprehensive EA before appraisal meantthat key decisions affecting dam construction design, for example, on the size o fthe by pass flow-could not be taken as part o f a comprehensive plan. This would have allowed appropriate weight to be given to environmental conservation concerns before construction started. 2. Multidisciplinaryteams. Inretrospect, the supervision o f the Power VI project suffered from the lack of a Bank environmental specialist as apermanent member ofthe supervision team. While the decision to ask Norplan, a competent consultinggroup from a cofinancing country, to undertake the preparation o f the EMP was reasonable, there was also a needfor active engagement o f Bank environmental staff inthe early formulation o f the EMP and especially once the Kihansitoad hadbeen discovered inlate 1996. While the Bank didrespond in2000 with financial assistancefor mitigation activities, its initial responsewas slow and ran the risk o fendangering M e r the ecosystem o f the Kihansi gorge. A clear lesson i s that a Bank environmental specialist should be an integralmember o f the supervision team for all Category A projects. At the same time, the budgetenvironment inthe Bank does not always encourage interdisciplinary teams. A related lesson, therefore, is that the Bank's intemal environment needs to provide the requisite incentives-and resources- to encourage such teams, especially for Category A projects. 3. Adjudication of Water Rights. The failure to define water rights at an earlier stage o f project construction, ideally before construction began, left unresolvedthe differingwater requirements o f energy generation for the dam and conservation requirements inthe downstream area o f the Kihansigorge. This ledto delays infinalizing the environmental mitigation plan, which intumplaced injeopardy the effectiveness ofthis planinpreservingthe ecosystem o f the gorge. The presence o f multidisciplinary Bank supervision team, working together to advise the govemment how to reconcile the energy/environmental - 39 -  water requirements, might have facilitated an earlier definition o f Tanesco's water rights. An important lesson i s that water rights should be adjudicated at a much earlier stage and certainly prior to dam commissioning. This hasnot beenthe experienceto date with hydro-schemes inTanzania. 4. Importance of EnvironmentalMonitoring.Despite the original assessment o f minimal environmentalimpact, Power VI also took note o f a lesson leamed at appraisal that continued ecological monitoring during project implementationwas important. Thus the project had a donor-funded environmental monitoringproject throughout the course o f its implementationandthis monitoringwork discovered that the drying o f the Kihansi Gorge was a potential fire hazard and that there was a unique species o f toad as well as some rare plant life dependenton the spray from the Kihansi Falls. Several non-governmental environmental organizations were instrumental inbringingthe needto monitor the ecology o f the gorge early inthe project's implementation. Tanesco's environmental monitoringgroup responded to the concems o fthese agencies andpreparedfurther studies. The endangerednature o f the species dependingon the spray inthe KihansiGorge was not confirmeduntillate 1998. However, by this time, Tanesco's environmentalmonitoring group already had begunmitigation programs andtoward the end o f the project, the Bankhad ensured the sustainability of this work by financing an environmental management project that continues the monitoring and mitigation measures inthe gorge. 9. PartnerComments (a) Borrowerhmplementing agency: The following are TANESCO comments on the report dated May 31,2003: 1. Generally the report adequately addresses andcovers achievements reached as far as project objectives andoutputs are concerned. 2. Power systemexpansion planning, DemandSide Management anddistribution system planning are mentioned inthe passing. It was to be expected that more details would be given on their objectives and achievements. 3. On training it is noteworthy that although the tariff study was completed successfully, technology transfer to enable TANESCO to update the study was not satisfactory. 4. The report adequately addresses the issue o f distribution systemstrengthening and rehabilitation. Indeeddue to diversion o fthe funds the distribution system performance is still erratic and requires substantial investments today. -40-  TANESCO JUNE 2003. (b) CoJinanciers: (c) Otherpartners (NGOs/privatesector). 10. AdditionalInformation 10.1 Whenthe initial Environmental Assessment was done for the Power VI Project, it was not possible to do a comprehensive exploration under the falls because o f extremely rough and remote terrain. However, a decision was made that further work would be done under the project construction phase. The Environmental Assessment determinedthat there would be a very limitedarea covered by the reservoir and that there was no resettlement involved. It acknowledged however, that because o f change inflow at the water fall there was likely to be a loss o f some biodiversity. 10.2 Duringthe construction, concernsarose about possible dryingout ofthe gorge (water fall) andthe potential for increase fires inthe dry season. This concern triggeredstudies on ways o fproducingthe spray which was causedby the water fall inits natural state, but usingless water. The techniques included the use o f highlevel nozzles, low level spray systems and a skijump. The sprinkler systemconstructed as a result o f these studies was later instrumental inpreserving the IGhansi spray toad. 10.3 The continuing environmental researchdiscovered a species oftoad that hadnot been seen elsewhere. The studies were expanded andresulted incaptive breedingo f the toad, translocation and a search insimilar gorges to determine whether the species existed there. 10.4 Supervision o f the Project was sharedandNORAD took the lead on the environmentalmatters. -41 -  Annex 1.Key Performance IndicatordLog Frame Matrix 1 in the 'aisalR port 1992 1994 1995 1996 1997 1998 (1) Projected 2,066 2,191 2,3 16 2441 2,570 2,686 Actual __ -_1,937 1720 1795 1942 1878 2.196 Sales (Gwh) NA 1,425 ,553 ,663 ,777 ,90 1 !.041 :.I86 ,337 Projected 1,304 I,614 I,443 ,453 ',482 ,631 ',829 ',701 ,718 Actual No. of Connections (000) Projected 187 193 199 205 211 217 223 Actual 1175 __ -- -- -- -- -- 373 . . NA 6.4 7.5 7.0 6.0 5.5 5.O 5.5 5.5 Projected 6.7 -- __ __ __ __ 7.1 Actual Connections per employee Projected 26 28 25 21 33 37 42 43 41 Actual __ __ -- -- -- -- 52 Accounts Receivable (indaysofsales) NA 133 144 108 60 60 60 60 '0 Projected 213 255 __ __ 111 '02 '8 Actual Operating Ratio ("h) NA 75 68 68 68 13 70 72 72 Projected 15 __ 63 65 76 62 82 Actual Debt Service Coverage NA 0.2 1.2 1.5 I.7 1.4 1.5 1.6 1.8 Projected 1.o __ -- __ 3.08 2.86 1.89 ~~Source: Project files, Deloitte Touche Thomatsu, and PAD for the Songo Songo Gas Development Project. -42-  p) Annex 1: Key Performance Indicators (Continued) Key Project Peflormance Indicatorsfor Interim Review Indicator Actual Achievement ~ ~~ Increase o f average tariff and its maintenance at levels Tariff was increased to meet the long run marginal cost o f stipulated incovenants supply (LRMC) and maintained at an acceptable level throughout the project. Reduction o f Accounts Receivables to equivalent o f about This was not achieved. Available information for accounts 75 days o f revenue receivable-- expressed as number o f days o f revenue-- is as follows: 1997: 102 1998: 111 1999: 97 The achievement o f the planned level was outside Tanesco's control because Government agencies and parastatal companies accounted for the majority o f arrears and Tanesco was not allowed to disconnect them for non-payment. Implementation o f Agreed Staffing Proposals ~~~ a -7,500 employees Staffing at 7,124 in 1998 and 6,943 in 1999 a employeehstomer ratio inline with similar Customer to employee ratio found to be respectable, at 57 per utilities inthe region employee, compared to an average o f 43 for 12 countries in Africa, and the best performance o f 69 per employee. (2) a Freeze new appointments pending the result o f According to Project staff, this freeze took place as planned. staffing assessments Offer o f TANESCO's construction business for sale According to project staff this was done sometime during the project butthe actual date is uncertain. Discussion o f the findings andrecommendationso f There was extensive review and discussion o f the study and its consultants for restructuring findings were rejected. Instead the Bank and the Borrower agreed on a study tour o f utilities that had study had experienced successful restructuring and privatization and a workshop to discuss the results and applicability to Tanzania's power sector. This took place in 1998 and ledto the adoption by the Tanzanian Parliament, in October 1999, o f a restructuring - andprivatization plan. ToucheThomatsu,July 2000. (2) Based on survey information for the following African countries: Angola, Botswana, Egypt, Kenya, Malawi, Mozambique, Namibia, South Africa, Swaziland, Tanzania, and Zambia from the Deloitte Touche Study o f July 2000. -43-  Annex 1: Key PerformanceIndicators(Continued) 7) ImplementationProgram in Schedule 2 of the Development CreditAgreen CATEGORYIACTION Project Management Undated A. The PMUwas Establishmentof aProjectManagementUnit established. CorporateManagement Continueto fillpositionsof ManagingDirectorandDeputyManagingDirectorswith qualified andexperiencedstaff. I Survev of salaries uaidby other commercialorganizationsinTanzania .~ - Undated Ihmnleted. Establishacompetitivecompensationstructurefor all levelsof employeesbasedonthe results 111194 IEstablished. ofthe survey Appoint the following staffwithqualificationsandterms acceptableto IDA 111194 Completed. PlanningManager Systems Manager ManagementTraining andPersonnelExpert DirectorandHeadInstructorfor the MorogoroTrainingInstitute TrainingExpertfor the KidatuTechnical TrainingInstitute TrainingExpertin DistributionPlanning Product&& Improvement Expen Cany out a study of manpower requirements with the assistanceof an externallyrecruited Undated Completed. manpowerexpert Reviewthe results ofthe manpowerstudy with IDA Implementthemanpowerstudy's recommendations Maintainafreeze onemploymentexcept for key vacanciesor special needs. Preparea corporatemanagementplan Financial Cany out Asset ValuationStudy Furnishrecommendations ofthe ValuationStudy to IDA andfinalize recommendationstaking Undated IDA comments intoaccount Implementthe recommendationsofthe study withinsix monthsofthe Asset Valuation Study's 12130194 completion. Carry out the Tariff Study inPartHof the Project 6130194 Completedin 11/93 andupdatedin 1996. Furnishresults ofthe Tariff Studyto IDA andtake IDA's comments into account inthe final Undated recommendations Implementthe recommendationsofthe Tariff Studywithinsixmonths ofitscompletion I2130194 Completed Enforce adetailedplanof actionfor the recoveryofoverdueaccountsfromthe Borrower's Undated Done duringtoward agenciesandparastatalcompaniesaswell as the policyofdisconnectingdelinquent customers. the endofthe moiect. Preparereports every three months, for IDA's review, onoutstandingconsumeraccounts Undated I Reduceaccountsreceivableto less than 75 days of sales andmaintainthem at less thanthat 12131I94 Not achieved. levelthereafter Environmental ImplementandEnvironmentalMitigationPlan, satisfactoryto IDA, for the Lower Kihansi Scheme and the transmissionlinesfromLowerKihansito IringaandfromLowerKihansito Kidatu. safe@ Ensurethe continuedsafety ofthe Kihansidam andassociatedstructures andprovideIDA planned. with details of arrangementsfor inspection of dam andstructures constructionat ource: StaffAppraisalReport,LegalAgreements, and SupervisionMission Aide Memoires (3) Freeze maintainedand overall staffing decreased during the project period. -44-  Annex 2. ProjectCosts and Financing ProjectCost by Component(in US$ millionequivalent) IIAppraisal ActuallLatest I Percentageof I Estimate II Estimate Appraisal Tanesco Components Lower Kihansi 260.9 270.2 103.6 Distribution Improvement 50.1 15.0 29.9 Generation Rehabilitation 16.4 16.4 100.0 Equipmentand Vehicles 7.5 5.0 66.7 Institutional Reformand Studies 25.7 24.3 94.6 Emergency PowerPlant (EPP) 0.oq 41.q -- ZSFPC ComDonent 2.d 2.51 125.0 I MWEMComponents Power Sector Study 1.o 0.5 50.0 Legal Services for Songo Songo 1.o 6.1 610 Gas FieldDevelopment 18.C 9.0 50 Technical Assistance 1.1 0.9 81.8 Total Project Costs I 383.70 391.8 Source: SAR, ProjectFiles and Tanesco. - 4 5 -  Annex 2 Summary of ProcurementArrangements - (US$ million) ICB Other NFB Total TANESCO Components Resettlement 2.2 2.2 Preparatory & Civil Works 99.9 99.9 (81.O) (81.O) Electromechanical 92.7 92.7 Transmission & Substations 41.3 41.3 Distribution Materials 50.1 50.1 (45.9) (45.9) Vehicles & Tools 1.8 2.4 (1.8) (2.4) MIS & System Control 2.6 1.9 4.9 (2.6) (3) Workshops 5.7 5.7 Demand Side Management 1.8 0.5 2.3 (1-6) (0.4) (2.0) Generation Rehabilitation 15.3 15.3 (13.6) ( I3.6) Consulting services 33.2 7.6 40.8 (29.1) (29.1) Training 2.7 0.1 2.8 (2.7) (2.7) Property Software & equipment 0.3 0.3 (0.3) (0.3) ZSFPC Components Consultancy Services 0.8 (0.8) Meters 8, assoc. Materials I.2 (1.2) MWEM Components Gasfield Equipment 16.6 16.6 (13.6) (13.6) Consultancy Services 3.3 (3.3) Training 0.8 (0.8) Office Materials 0.3 0.3 (0.3) (0.3) Total 189.6 42.6 151.5 383.7 (161.6) (38.4) (200.0) (a) Amounts in brackets are IDA financed (b) Consulting services, technical assistance, Limited International Bidding, direct procurement, and administrative overheads (c) Not financed by IDA -46-  ProcurementArrangements (ActuaVLatestEstimates) $Usmillionequivalent - ICB NCB Other NBF Total Cost Works 138.40 0.00 0.00 159.56 297.96 (130.20) (0.00) (0.00) (0.00) (130.20) Goods 21.40 0.00 2.56 0.00 23.96 (10.66) (0.00) (2.56) (0.00) (13.22) Services 0.00 0.00 64.08 5.80 69.88 (0.00) (0.00) (52.14) (0.00) (52.14) Total 159.80 0.00 66.64 165.36 391.80 (140.85) (0.00) (54.70) (0.00) (195.55) ProjectFinancingby Component $Usmillionequivalent - Appraisal Actual FUNDING IDA Govt. CoF. IDA Govt CoF Lower Kihansi 110.10 18.20 143.80 99.87 9.40 159.56 Distribution Improvement 45.90 4.20 0.00 9.04 5.96 0.00 Generation Rehabilitation 13.60 2.70 0.00 5.60 1.60 10.46 Equipment and Vehicles 5.90 0.00 1.90 5.00 0.00 0.00 Institutional Reform and Studies 8.00 4.10 5.80 15.84 2.66 5.8 Emergency Power Plant 0.00 0.00 0.00 41.93 0.00 0.00 ZSFPC Component 0.80 0.00 0.00 1.69 0.81 0.00 Power Sector Study 1.oo 0.00 0.00 0.57 0.00 0.00 Legal Services for Songo Songo 0.00 0.00 0.00 6.11 0.00 0.00 Gas Field Development 13.60 3.00 0.00 9.00 0.00 0.00 Technical Assistance 1.10 0.00 0.00 0.90 0.00 0.00 Total 200.00 32.20 151.50 195.55 20.43 175.82 Source: SAR, ProjectFiles, and Tanesco -47-  Annex 3. EconomicCosts andBenefits Table 3.1 Recalculation ofEIRR- cost andbenefit flows l n c r e m e n t a l l n c r e m e n t a l R e l i a b i l i t y I n v e s t m e n t l n c r e m e n t a l O & M l n c r e m e n t a l T o t a l N e t Y e a r E n e r g y Sales E n e r g y B e n e f i t s B e n e f i t s c o s t s a n d C o n s u m e r C o s t s F u e l Costs c o s t s B e n e f i t s (GWh) (Tsh, M i l l i o n ) (Tsh, M i l l i o n ) (Tsh, M i l l i o n ) (Tsh, M i l l i o n ) (Tsh, M i l l i o n ) (Tsh, M i l l i o n ) (Tsh, M i l l i o n ) 1 9 9 2 0 0 0 25,812 0 0 25,812 ( 2 5 , 8 1 2 : 1 9 9 3 0 0 0 28,514 0 0 28,514 (28,514: 1 9 9 4 9 5 4 , 3 2 1 0 31,331 2 , 1 6 9 5,143 38,644 (34,322: 1 9 9 5 196 15,596 0 27,899 2 , 1 0 1 5,602 35,602 (20,005: 1 9 9 6 3 6 6 3 0 , O l I 0 24,451 1,668 4,311 3 0 , 4 3 1 ( 4 2 0 1 9 9 7 2 6 0 3 8 , 7 8 6 0 11,635 1,749 10,479 23,863 14,923 1 9 9 8 2 2 1 10,044 0 15,979 1,628 26 17,633 (7,589' 1 9 9 9 3 1 4 14,271 0 22,408 3 , 4 3 4 1,697 27,539 ( 1 3,268 2 0 0 0 508 53,294 0 11,322 5 , 2 6 5 6,297 22,885 3 0 , 4 0 8 2 0 0 1 7 0 9 32,224 0 11,338 5 , 8 8 0 1,278 18,497 13,727 2 0 0 2 685 31,119 0 11,601 5 , 8 8 0 1,305 18,786 12,334 2 0 0 3 685 31,119 0 503 5,880 2,3 19 8,703 22,417 2 0 0 4 685 31,119 0 298 5,880 2 , 3 1 9 8,497 22,622 2 0 0 5 685 31,119 0 138 5,880 2,319 8,338 2 2 , 7 8 1 2 0 0 6 685 3 1 , 1 1 9 0 2 1 6 5,880 2,319 8,416 22,703 2 0 0 7 685 31,119 0 0 5,880 2 , 3 1 9 8,200 22,919 2 0 0 8 685 31,119 0 0 5,880 2 , 3 1 9 8,200 22,919 2 0 0 9 685 31,119 0 0 5,880 2,319 8,200 22,919 2 0 1 0 685 31,119 0 0 5,880 2,319 8,200 22,919 2 0 1 I 685 31,119 0 0 5 , 8 8 0 2,319 8,200 22,920 2 0 1 2 685 31,119 0 0 5 , 8 8 0 2,319 8,199 2 2 , 9 2 0 2 0 1 3 685 31,119 0 7,961 5 , 8 8 0 2,3 18 16,160 1 4 , 9 5 9 2 0 1 4 685 31,119 0 3,139 5,880 2 , 3 1 8 11,337 19,782 2 0 1 5 685 31,119 0 0 5 , 8 8 0 2 , 3 1 8 8,198 22,921 2 0 1 6 685 31,119 0 0 5,880 2,318 8,198 22,921 2 0 1 7 685 31,119 0 1,133 5,880 2,3 18 9,331 2 1 , 7 8 8 2 0 1 8 685 31,119 0 3 , 0 5 6 5,880 2,3 18 11,254 19,865 2 0 1 9 685 31,119 0 1,422 5 , 8 8 0 2,3 1 8 9,620 2 1,499 2 0 2 0 685 31,119 0 1,694 5 , 8 8 0 2,318 9,893 21,226 2 0 2 I 685 31,119 0 159 5 , 8 8 0 2 , 3 1 8 8,358 22,762 2 0 2 2 685 31,119 0 8 1 2 5 , 8 8 0 2,318 9,Ol I 2 2 , 1 0 9 2 0 2 3 685 31,119 0 2,159 5 , 8 8 0 2,318 10,358 20,762 2 0 2 4 685 31,119 0 3 , 3 1 7 5,880 2,318 11,516 1 9 , 6 0 4 2 0 2 5 685 31,119 0 3,102 5,880 2,318 11,300 19,819 2 0 2 6 685 31,119 0 2,954 5,880 2,3 18 11,152 19,967 2 0 2 7 685 31,119 0 2,954 5,880 2,318 11,152 19,967 2 0 2 8 685 31,119 0 0 5,880 2,318 8,198 2 2 , 9 2 1 2 0 2 9 685 31,119 0 0 5,880 2,318 8,198 2 2 , 9 2 1 2 0 3 0 685 31,119 0 0 5 , 8 8 0 2,318 8,198 22,921 203 I 685 31,119 0 ( 3 8 , 4 6 4 ) 5 , 8 8 0 2,318 ( 3 0,266) 61,385 N P V @ 1 2 % : -14,010 Tsh m i l l i o n The EIRR o f 10.6 percent i s lower than the original estimate o f 15 percent inthe SAR due to several factors: (i) later commissioning o f the KihansiPlant than originally planned; (ii) energy sales than lower anticipated; (iii) inclusion o f environmental mitigation costs resulting from the discovery o f an the endangered ecosystem affected by the project; (iv) no reliability benefits because planneddistribution investments were not undertaken; and (iv) actual Kihansi output i s lower than the design output because o f the needto maintain a minimumby-pass flow o f 2 m3/second(estimated requirement) due to the preservationo f the endangered ecosystem. -48-  Assumptions: The economic analysis defines the component's benefits interms of the incremental demandthat is met under the "with the project" caserelative to the much lower level o f demandthat could be servedifno new supply capacity was addedto the system. Since the project was an integralpart o f Tanesco's 1992-02 Investment Program, the economic analysis calculated the incremental demand and project costs relative to the demand and system costs in 1991, andnot on the Kihansi Plant alone, inline with the S A R methodology. The ICR valued the economic benefits at Tsh 45.5 per kWh (in 1992 prices), the averagevalue inthe SAR. The S A R basedthis value on two components: (i) the saving inresource cost from serving demandinthe "without the project" case (kerosene lightingand private diesel generators); and (ii) the value of the incremental gridelectricity demand served inthe "with the project" case over the 1991 level o f demand served inthe "without the project" case. Incrementalenergy benefits, inthe form of increased sales, increasethrough the 1990sas demandincreases and reach a plateau in2002 when the combined incrementalcapability o f the investments has been reached. In 1995, 1996, 1997, and 2000, the analysis increasedthe value ofthe economic benefits to TSh 261 per kWh (US cents 90 per kWhin 1992 prices) for the portion o f the demandthat was met by Emergency (EPP) gas turbines because these reduced load sheddingduringperiods o f drought. Unlike the SAR, the ICR didnot include reliability benefits as the project didnot invest as much as expected indistribution rehabilitation. The ICR also did not include benefitsfrom improved health, better education facilities, and other public services that the project contributed to inthe project area. Project costs include: (i) power systeminvestment costs during the period 1992-2002; (ii) of costs environmentalmitigation in2001-2006, about US$6 million; and (iv) requiredreinvestments inEPP gas turbines and T&D network to sustain supply at 2002 leveluntilthe endo f the evaluation period. Kihansiupgrade for future development (civil works for two additional generating plants that have not yet beeninstalled) is deducted from investment cost (about US$9million ofUS$206 million in 1992 prices) as per SAR. All costs are in 1992 prices without taxes. Crude oil price in 1992 US dollars: US$22.7/bbl as per the Bank's forecast. Specific fuel consumption o f GTs: 266 gkWh; other older thermal plants: 288 g/kWh. Sales, investments, andO&M from TANESCO's audited accounts and statistics, except for 2001 and2002, which are estimates. The analysis left the IPTL plant out o f the calculation becauseit was not part o f the least cost plan for system expansion. Its contribution to meeting the demand in2002 was marginalbut it will have a damaging impact on the viability o f the sector. Cases Consideredat Appraisaland ICR Re-Estimate EIRR YO IEYear Delav inLower Kihansi Plant Comdetion Case DemandForecast 12.9 IOne II 14.5 II One Year Delay inLower Kihansi Plant Completion and 20 Percent Increase in I I InvestmentCosts 12.5 ICR Re-Estimate of the EIRR 10.6 -49-  RiskAnalysis To deal with the uncertainty inthe level of hture hydrological flows, and thus plant output, during the lifetime o f project investments, the ICR simulated the operation of the power system from 2003 onwards usinga "Monte Carlo" simulation process. The analysis useda simplistic system operation model, because historic hydrologic flow data was not available for the ICR. Inthis model, the hydro plants meet the base loaddemand, while thermal plants supply any deficit between generation requirement (sales plus losses) and hydro plant output. The analysis assumedthat the annual output from the hydroplants varies from one year to another as a result o fvariations inthe level ofriver flows. The analysis hrther assumedthat the annual output from the "older" hydroplants, excludingKihansi,varies between their minimumfmlevel (1,650 GWWyr), the average (1,900 GWWyr), and the maximum (2,150 GWh). For Kihansi, the analysis assumedthat its output varies between the estimated minimum (670 GWh), average (800 GWh), and estimated maximum(930 GWh). The average is with a 2 m3/secondby-pass flow, while the minimumi s with an additional reduction of 2 m'lsecond flow available for power generation. The shape of the probability distributions i s triangular. Finally, the analysis assigns a 0.9 correlation between the Kihansi output and the output of other hydro plants and a weak - 0.3 - correlationbetweenthe plants' outputs from one year to another to indicate possible cyclical variations. Chart 3.1 Frequency distributionofthe re-estimate ofthe EIRR Frequency distribution of re-calculated 140 , EIRR I 100 ........ . .... ............. ........ ~ 9.5% 9.9% 10.2% 10.6% 10.9% EIRR% The above graph illustrates the distribution o fthe EIRRfrom the simulation. The expected EIRRis 10.4 percent. This i s a little lower than the point estimate o f 10.6 percent. - 50 -  Annex 4. BankInputs a) Missions: Stageof ProjectCycle No. o fPersonsand Specialty PerformanceRating (e.g. 2 konomists, 1 FMS, etc.) mplementation Development MonthNear Count Specialty Progress Objective [dentificationmreparation July 1990 I ENV October 1990 I FA April 1991 2 EC, ENG May 1991 2 ENG, FA AppraisalINegotiation June 1992 I FA Supervision December 1994 1 ENG S HS October 1995 2 ENGENV S H S May 1996 I ENG S S March 1997 I ENG S S June 1997 I FA U U September 1997 2 ENG, FA U U March 1998 2 ENG, FA U U June 1998 2 ENG, FA U U October 1998 2 ENG, FA U S March 1999 2 ENG, FA S S September 1999 2 ENG, FA S S March 2000 3 ENG, FA, ENV S S October 2000 2 ENG, FA(1) S S ICR Source: Project Files and Bank Staff Estimates * For most of the missions, project status reports were separate from the aide memoires that recordthe mission dates. Ina number of cases, the mission dates were not necessarily coordinated with project status report dates and inthose cases the ICR has usedthe date of the PSR rating closest to that of the mission. (1) Joint Donor mission including representativesfrom Norway, Sweden, andthe European Investment Bank. Specialty Code: EC = Economist ENG= Engineer ENV = Environmental Specialist FA = FinancialAnalyst ML = Mission Leader -51 -  Stage ofProject Cycle ActuaVLatestEstimate No. Staffweeks US$ (l000) IdentificatiodPreparation 115.9 256.6 AppraisaVNegotiation 87.4 195.2 Supervision 168.25 581.8 ICR 6.7 23.2 Total 378.25 1056.8 - 52 -  Annex 5. Ratingsfor Achievement of Objectives/Outputsof Components (H=High, SU=Substantial, M=Modest,N=Negligible, NA=Not Applicable) Rating Macropolicies O H O S U O M O N @NA 0SectorPolicies OH O S U @ M O N ONA 0Physical @ H O S U O M O N ONA 0Financial OH ORJOM @ N ONA 0InstitutionalDevelopment O H 0su.M O N ONA Environmental OH O S U O M O N @NA Social 0Poverty Reduction OH OSUOM O N @NA Gender OH O S U O M O N @NA Other (Please specifyl OH O S U O M O N @NA Private sector development O H 0su.M O N ONA Public sector management OH 0SU.M 0Other (Pleasespecfi) O N O N A OH O S U O M O N @NA - 53 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.I Bankperformance 0Supervision Lending 0Overall 6.2 Borrower performance 0Preparation Q Governmentimplementationperjiormance 0Implementationagencyperformance 0Overall - 54 -  Annex 7. List of Supporting Documents Relevant WorldBank Appraisal Documents 1. StaffAppraisal Report, Tanzania: Power VI Project 2. Project Appraisal Document, Tanzania, Songo Songo Gas Development and Power Generation Project Report No. 21316-TA, August 21,200 1. 3. Project Appraisal Document, Tanzania Privatization Project. 4. Lower Kihansi EnvironmentalMitigation Project Document. Selected Documentsfrom Project Files (1990-97) 1. Bank missionto evaluate environmental studies for the Power VI Project, August 29, 1990. 2. Letter from the Ministryo f Finance stating its preference for the Lower Kihansi project over the gas option, October 31, 1990. 3. Notes o f the consultant ecologist on field trip to the Kihansiarea, March, 1991. 4. Back to Office Report, Power VI Appraisal Mission. July 23, 1992. 5. Environmental Assessment for Power VI, June 15, 1992. 6. Panel o f Experts, Review Report No.5, Review o f the Main Civil Works Contract, September, 1994. 7. Responseto Environmental Questions at BoardPresentation, May 6, 1993. 8. Tanzania: Power VI Project (Cr. 2489-TA) Proposed Amendmentto the Development Credit Agreement, April 19, 1995. 9. Acres International, Costs o f UnsuppliedEnergy inTanzania ( Memo) February 1, 1995. 10. Letter from the World Bank to Tanzania's Secretary o f Finance on Government Electricity Billing Arrears to Tanesco, August 16, 1994. 11. Contract for Legal Consultant Services inthe Preparation o f the Songo Songo Project ,October 6, 1995. 12. Letter from Tanesco to Project Donors on Environmental Issues, October 23, 1995. 13. Letter from the Bankto the Managing Director o f Tanesco, Responding to comments from non-governmental organizations on the environmental assessment, September 18, 1995. 14. Bank comments on the draft Power Sector Restructuring Study, January 19, 1996. 15. Comments o f Legal Consultants for Songo Songo project on the draft Power Sector Restructuring Study, December 11, 1995. 16. Agreement between Tanesco and ESBI Consultants Ltd.On Institutional Strengthening Project Organization Study, February 14, 1997. 17. Review Panel ReportNo. 12, January, 1997. 18. Memo from the Country Director to the RegionalVice President: Notificationo f Intentionto SuspendDisbursementsand PotentialLoad Shedding, July 11, 1997. 19. Letter from the Country Director to the Minister o f Finance (Tanzania): Notification o f Intention to SuspendDisbursements,July 11, 1997. 20. Partner'sComments from Implementing Agency - ZanzibarState Fuel and Power Corporation RelevantDocumentsOutsidethe Project Lower Kihansi Hydropower Project (LKHP), Environmental Review insupport o f the National Environmental Council (Final Report), August 17, 2000. - 55 -  Report of the Power Sector PerformanceAssessment Mission, August 20-September 1,2000. ProjectAide Memoires 1. April 1, 1996 2. October 8, 1996 3. December, 20, 1996 4. October 6, 1997 5. March 20, 1998 6. July 2, 1998 7. March 25, 1999 8. October 7, 1999 9. October4, 1999 (Zanzibar Component) 10. April 6,2000 11. October, 2000 ( Joint Donor SupervisionMission) Tanesco Documents Quarterly Report No. 1, January to March, 1994 Quarterly Report No. 2. April to June 1994. Quarterly Report No. 3, July to September 1994. Quarterly Report No. 4, Octoberto December, 1994. Quarterly Report No. 5: January to March, 1995. Quarterly ReportNo. 6: April to June 1995. QuarterlyReport No. 7: July to September, 1995. QuarterlyReportNo. 8: October to December, 1995. Quarterly Report No. 9: January to March, 1996. QuarterlyReport No. 10: April to June, 1996. QuarterlyReport No. 11, July to September 1996. QuarterlyReportNo. 12, Octoberto December, 1996. Quarterly Report No. 13: January to March, 1997. QuarterlyReport No. 14: April to June, 1997. QuarterlyReportNo. 15: July to September, 1997. Quarterly Report No. 16: October to December, 1997 Quarterly Report No. 17: January to March, 1998. Quarterly ReportNo. 18: April to June, 1998. Quarterly Report No. 19: July to September, 1998. Quarterly Report No. 21: January to March, 1999. QuarterlyReportNo. 22: April to June, 1999. QuarterlyReport No. 23: July to September, 1999. Quarterly ReportNo. 24: October to December 1999. Quarterly ReportNo. 27: July to September, 2000. QuarterlyReport No. 28: Octoberto December, 2000. Norplan: EnvironmentalMonitoring Reports Baseline Public Health Assessment Study, February 1, 1994. - 56 -  Quarterly ReportNo. 4 (1998) October-December 1997. Quarterly ReportNo. 2 (1999) April-June , 1999. Quarterly ReportNo. 1 (2000), January -March 2000. Quarterly ReportNo. 2, (2000), April-June, 2000. Quarterly Report No. 3 (2000), July-September, 2000. Quarterly Report No. 4 (2000), October-December2000. Quarterly Report No.1 (2001), January -March 2001. Selected Consulfanf Documents Acres International, Power System Master Plan, Final Report, June 1999. ESB andPrice Waterhouse, Proposalsfor Power Sector Restructuring inTanzania. FinalReport, January, 1997. KDA,Consultancy to Zanzibar State FuelandPower Comoration, FinalReport, February, 2000, Worley International, Ltd., Upgrading of Customer Commercial Systems (IDA Cr. 2330-TA) Ouarterlv Report No. 6, October 1-December 31, 1994. LondonEconomics, Ltd., and Kennedyand DonkinPowerLtd., and LEEnergy, Electricitv Tariff Study, FinalReuort. Volume 1, Executive Summary,November 1993. ESBIConsultants, Ltd., Tanesco CorporatePlan (1997-2001), May, 1997. Miscellaneous Reference Documents World Commissionon Dams, Dams and Development,Report ofthe World Commissionon Dams, EarthscanPublications Ltd., Londonand Sterling, Virginia, November, 2000. - 57 -  AdditionalAnnex 8. BORROWER'S COMMENTS BASIC PROJECT DATA country: UnitedRepublic ofTanzania Project Title: Tanzania Power VI Project Zanzibar prepayment MeteringPilot Project LoanNumber: Cr 2489-AT Borrower: Government o fUnitedRepublic o f Tanzania Beneficiary: The Government of Zanzibar ImplementingAgency: Zanzibar State Fuel& Power Corporation ZSFPC LoanAmount (at appraisal): US$2.00 million by International Development Association IDA Project Completion Cost: US$2,456,899.84 financed by IDA Date of Appraisal: 26th o f February 1993 Date of Loan Signature: 26th of July 1993 Project CompletionDate: EndofFebruary 2000 Project Closing Date: 30th o fJuly - 58 -  INTRODUCTION Zanzibar Prepayment Metering Pilot was a component o f Power VI Project (Cr. 2489-AT), financed by International Development Association (IDA) as a creditor and Government o f Tanzania as a Borrower. The total loan o f $200 Millionwas allocated to the Power VI Project, o f which about $2 Million from the total loanwas allocated to the Zanzibar State Fuel and Power Corporation (ZSFPC) for Prepayment MeteringProject. However, because o f extension, about 2.487 millionUS$ ended to have beenused from IDA (World Bank). The aim o f the Project is to improve the ZSFPC financial capability so that it can manage to operate commercially without direct budgetary support from the Government. The loanwas intended for procurement o fproject material and consultancy services. Including a purchase o f 10000Prepaymentmeters and for the payment o f Consultancy services. While ZSFPC was supposed to contribute the operational cost. OBJECTIVE The ZSFPC part o f the Power VI project was intendedto assist ZSFPC instrengthening its financial management capability. It comprise a component to bringthe financial statement o f the utilityup-to-date, andupgrade its accounting system. A second component ofthe project was to improvethe collection by establishing a prepayment meteringsystem for apart o fthe customers population inUngujaand to update the customer database for the rest o f customers population. Zanzibar Prepayment Metering Pilot Project was put into force with SFPC during 1998, the project implementationperiod was 2 years. Itwas foundvital that the prepayment meterswas the solutionto the existing problemof improving collection and also to recover its debts from their consumers while Consultancy was supposed to clear the database o f billing system and make sure that all customers receive their bills at the same time to enable completion o f financial accounting o fZSFPC at end o fyear ready for auditing. Also to propose and to put into process tariff increase and to put effort to the success o f feasible option and to oversee the commercial operation. Prepayment meter system i s currency transfer system usingcredit transfer to the meter through an encrypted twenty-digit number printed on the paper token. Prepaymentmeter i s the most efficient methodo f revenue collection, due to non involvement o f human especially inareas o f meter reading, Billing, no disconnection program and less meter tempering. The consumer canuse electricity bybuyingas he/she buyscommodities from shop or supermarket. - 59 -  The meter also used for debts collection, where by a customer paying offaproportion ofhishers debt for eachpurchase ofelectricity whereas easingburdenof customer whilst recovering SFPC f h d andmaintain apositive customerrelationship. Whenthe said tasks is completed, SFPC will be able to settle their old and current bills to TANESCO. While before the project SFPC it couldn't settle even portion of its bill to TANESCO. IMPLEMENTATION COMPLETION Fivecompanies involvedinthe implementation ofthe project namely:- 0 Joseph W. Sloan, Pre-Consultant 0 Carl Bro International A / S o f Tanzania 0 Modern Computers Center 0 Zanzibar 0 Kennedy and DonkinAfrica (Pty) Ltd(Consultancy) 0 Nor-Ici/EML Joint Venture (Contractor) Pre-Consultant JosephW. Sloan o f 1001 WillughbyWay, Nashville, TN 37221, was awarded the contract at 14 May 1996 o f evaluating o f a Bido f consultancy andpreviewingits feasibility inabout 2 weeks. Contract price was US$21,250.00 CarlBroInternational Carl Bro International A/S o f Tanzania, on 4th September 1997, was awarded a contract to cover consulting services for consultancy assistanceto the ZSFPC to install, implement, and train inthe use o f a financial managementinformationsystembasedonNavisionFinancial package. The contract fee was US$4,300.00 ModernComputer Center Modem Computer Center o fZanzibar, on 27th October 1997, was awarded a contract to supply two computers and associated equipments to ZSFPC for the accounting section. The contract amount was US$6,140.90 Consultant: The KennedyandDonkin, their service address is, Ground Floor, DunkeldCrescent South, Albury Road, Dunkeldwest Ext., Sandlon. P.O. Box 41927 Craig hall 2024, SouthAfrica. The Kennedyand Dokin on 18thDecember 1996, awarded a two year contract for consultancy services for Zanzibar Prepayment Metering Pilot Project. At the contract cost o f US$552,800.00 which was payable by the World Bank. - 60 -  The contract has beenextendedtwo times covering eleven months input over to February 2000. The total cost o f extension was 216,905.00 payable to the World Bank. The project (the work o f the service company) has been delayed to the extent that the Installation Phase Commence inthe first quarter o f 1999 at the time the consultancy services would expire. Therefore, the extension o f Consultancy services was necessary to cover the installationperiod o f the Prepaymentmeters, initialoperatingperiodandthe preparationofthe reports ofPrepayment meteringpilot Project. Here below are the Consultancy Services obligation. e To review and set inprocess the matter o f improving the performance o f the Commercial department and customer accounting system o f SFPC providing operating procedures, tidyingup customer database and previewingthe existed tariffs. Where by duringthe contract periodthe survey o f the customer o f SFPC inbilling information systemwhich was inexistence was done, and following which all customers were allocated to their position and a new tariff was introduced. The tariffthat were inexistence during 1993-1998 are displayed at the appendix 1. Where as the new proposed tariffs are displayed inthe appendix 2 (These are the tariffs that are currently inuse). While the tariff o f TANESCO, major supplier o f electrical energy to SFPC has increased its bulk supplytariff to SFPC over the saidperiodas shown inthe appendix 3 e Had improved the performance o f the Corporate Accounting system and enable the production o f audited accounts for SFPC. Had delivered fully operational computerized accounting systemwhich had contributed and enabling preparation o f final accounts. e Following the preparation and evaluation o f the contract, the Nor-Icil/EML Joint Venture was selected. Haddeveloped a pilot project for Prepayment metering. Had supervised the contractor for the supply, installation and subsequent operation o f those meters and necessary systemto support their operation and had supervisedthe contract through its operational phase. Where by the total number o f 7780 customers were provided with prepayment meters, before the end o f February 2000. The installation work had started 23rd o f July 1999. Main Contractor The NOR-ICIL/EMLJoint Venture the corporation incorporated under the South Africa laws and having its principal place o fbusiness at 14Floor, York House, Empire way, Wembley, Middlesex, H A 9 OPA England. Nor-Icil/EML Joint Venture on 10thJuly 1998, awarded a contract o f design, manufacture, test, deliver, installation, completed, and operate for a period o ftwo years the prepayment metering and revenue collection system. The contract price was inconsideration o f performance by the contractor o f its obligation and was -61 -  inthe aggregate of US$1,574,919.88, US$140,344.03 plus4% o fthe project turnover. Out of the price, US$1,420,194.37 was payable by the World Bank and the restbyZSFPC. Duringthe implementation progress, due to the increase cost ofmaterials ithas beennotice that the contract amount was not sufficient to complete the work satisfactorily. Therefore, the contract amount has been extended (increased) by US$265,000 to a total o f 1,685,194.30 payable to the World Bank. The scope o f work include: 0 Designing and modifications to the existingproduction meter 0 Preparing the system software modification 0 Carrying out full customer site survey 0 Startingthe public awareness campaigns 0 Identifying, ordering and making delivery o f installation materials 0 Manufacturing and delivering o f meters, and 0 Ordering and delivering o f the systemhardware. The installation work commencedon 23rd July 1999, which was also the commencement time o f the operational period. The area that are covered by the prepayment meters inZanzibar Town are -Michenzani,Kilimani,andKikwajuniallthroughtoMazizini, Kiembesanmaki,weni, and Mombasa. At the final step the Stone Town was covered. The number o f meters installed per month were:- I Month I Numberof meters July 1999 716 August 1999 2403 SeDtember 1999 3038 October 1999 900 November 1999 545 December 1999 100 I January 2000 I 7 4 February 2000 4 Total 7780 The installation work completed on early February 2000, whereas the operational period ended on 23rd o f June 2001. The project comprising the following major system 0 One system Master Station and spare unit 0 Four credit dispensing Units (CDU) and one spare unit 0 7700 single phase and 400 three phase meters 0 425 single phase and 40 three phase meters - 62 -  At the project appraisal, it hasbeenestimatedto install about 10,000 prepayment meters. Butdue to increase cost o f materials the figure o fprepayment meters are down. Duringthe operation period ZSFPC has manageto finance the procurement and installation o f 1,200 prepayment meters from the fund collected by the project. Whenthe contract expiredZFPC renewthe contract for one year at the cost ofUS$235,3 14. The contract price including operational and installation o f 1,200 another additional meters. Onthe 23rd June 2002, ZSFPC will take over the project and operate itself. ZSFPC will continuously install new prepaymentmeters. The payment allocation o f IDA (World Bank) to Nor-Icil/EML joint venture, Pre Consultant, and the consultant with supply o f computer and sohare are shown inAppendix 4. The payment o f operational cost, cost o fmeters and 4% o f total revenue collection inUS$ obtained from Prepayment meters made by ZSFPC as part o f its contribution to the project i s shown inthe Appendix 5. CONCLUSION As the aim ofprepayment meteringpilot project, was to improvethe revenue collection. So that SFPC can be able to settle the old and current bill o f TANESCO. The project has been successful, since the collection o f SFPC has improved andthe payment to TANESCO i s now regularly done as shown inthe Appendix 6. The consumers seem to be interestedinthe prepayment meter systembecausethe system has enabledthe consumer to budget hishers expenditure accordingly compared to conventional system. On the other hand Prepayment meters has cut down the cost o f operation to the executing agency. Since meterreaders or Disconnector are not usedinprepayment meteringas well as paper for printingmonthly bill and disconnecting list. But, unfortunately the loanprovidedto SFPC turns out to be insufficient, to cover as many consumers as possible inthe Islands. Although Prepayment meteringhas improved the collection, there are some other shortcomings, such as tediousness inmanual tariffs adjustment and lack o f consumption statistics inkWhfor all prepayment meters which result inthe difficulties incorporate plans. Appendix 1 The ZSFPC Electricity Selling Tariffs 1993-1998 Year Block Price kWh Tshgs/kWh(1) TshgsKVA 1993 0-100 13 1,500 100-300 29 - 63 -  1.00-300 >300 - 1995 0-100 13 1,500 100-300 29 >300 37 1998 0-100 13 1,500 100-300 29 >300 37 Appendix 2 The ZSFPC Electricity SellingTariffs 1999-2002 Year Block PricekWh TshgskWh(1) TshgsKVA 1999 0-100 25 3,000 100-500 150 1 >500 72 2000 0-100 26 3,250 100-500 53 >500 76 2001 0-100 28 3,500 100-500 56 >500 I81 2002 0-100 28 3,500 100-500 56 >500 81 Appendix 3 BulkElectricityEnergySellingPrice(TANESCO to ZSFPC) in 1993-1998 Date TshgskWh TshgsIKVA AverageTshgskWh July 1993 5.70 1084 8.00 November 1995 10.00 1500 14.24 July 1998 17.00 1700 18.40 August 1998 21.50 3350 30.00 - 64 -  Appendix 4. 2489-AT Tanzania Power VI Project-ZanzibarPrepaymentmetering All values inUS$. Description Payment No Contract Value Paid Value Balance Total loanAmount 2.000.000.00 Prefeasibility. 21,250.00 Joe SloanContract drawn up 14 May 1996 Payment-approved 1 7,050.00 28 October 1996 Payment approved 2 7,299.04 28 October 1997 11I 1 Total 21,250.00 14,349.00 6,900.60 Consultant 552,800.00 Kennedy/Donkin contractdrawnup 18 December 1996 PaymentMobilizationapproved 1 110,560.00 7 Fehruarv 1997 1 PaymentProduction o f Monthly 2 55,280 .OO Operating accounts approved 11 28 July 1997 PaymentProduction of Commercial 3 55,280.00 DepartmentProceduresapproved 1December 1997 PaymentIssue Documentationto 4 82,920.00 Bidders approved 29 December 1997 PaymentMonth 16 approved 5 55,280.00 19 March 1998 PaymentMonth 16 approved 6 55,280.00 20 Julv 1998 PaymentMonth 24 approved 7 82,920.00 Julv 1999 PaymentMonth20 received 8 55,280 .OO 4 August 1999 1I 1 Total 552,820.00 552,820.00 0.00 Consultants 104,022.00 Kennedy & Donkinextensioncontract drawn UD 23 December 1998 - 65 -  Payment- 1st Half 9 62,413.00 I Extension- received 4 August 1999 Payment-2nd Half 10 35,422.00 I Total I 104,022.00 Consultants 112,883.00 ~ ~~ Kennedy & Donkin2nd Extension contract drawnup 23 July 1999 Payment 1st HalfExtensionsubmitted 4 August 1999 Payment2nd HalfExtensionsubmitted 7- 14February 2000 Total 112.883.00 67,729.80 Supply of Computers 6,140.96 Modern Computer Center approvedby World Bank 18/8/1997 Payment Completionof work 1 approved3 March 1998 Total 6,140.96 Supply ofAccounting Softwareand 4,333.00 associated Training. Carl Bro Tanzania approvedby World Bank 18Aug 97 Payment Completionof work 1 4,333.00 16 Februarv 1999 4,333.00 4,333.00 1,420,194.00 PrepaymentMeters Nor-IcilEML Contract signed 10Julv 1998 Nor-Icil/EML contractfor additional 265,000.00 finance signed26 Nov 1999 Nor-Icil/EML advance Payment 1 141,988.06 approvedby World Bank P Nor-Icil/EMLProgress Payment rec'd 2a 30,546.00 4 August 1999 -Foreign Costs Nor-Icil/EML Progress Payment rec'd 2b 5,410.00 4 August 1999-Local Costs 2,720.75 - 66 -  Nor-Icil/EML ProgressPayment rec'd 4a October 1999- Foreign Costs 261y958.49 Nor-Icil/EML ProgressPayment rec'dI 4b I II II October 1999- Local Costs 8,305.89 Nor-IciVEML ProgressPayment rec'd 5a 156,388.87 8 November 1999-Foreign Costs Nor-IciVEML ProgressPayment rec'd 5b 11,402.33 8 November 1999-Local Costs I I I I Total 1,685,194.37 713,711.31 26,826.13 Totals 2,486,623.33 2,456,899.84 33,726.73 Balance remaining of loan 27.540.10 33.726.73 - 67 -  Appendix 5 The payment made by SFPC to the Project as Cost of meters, bonus of 4% of the collection and operation cost fixed inUS$ 11999 kost of Meters IBonus of 4% IODeration Cost fixed ITotal IAurmst I I 631.OS1 15.930.221 27.63 1.OS1 September 1,924.3 1 15,930.22 28,924.3 1 October 3.741.49 15.930.22 30.741.49 November 4,014.55 15,930.22 31,101.55 December 7,02.77 4,559.89 15,930.22 27,592.88 2000 January 7,102.77 4,822.06 15,930.22 27,855.05 February 7,102.77 4,273.00 15,930.22 27,305.99 March 7,102.77 4.739.56 15.930.22 27,772.55 April 37,376.59 4,275.44 15,930.22 57,582.25 May 22,343.97 4,373.96 15,930.22 42,645.54 June 22.343.97 4.071.35 15.930.22 42,345.54 March 0 5,822.27 15,930.22 21,752.49 Avril 0 5,063.38 15,930.22 16,433.60 June 2,196.11 4,605.89 15,930.22 22,732.22 Total 256,204.99 101,419.23 366,395.06 726,215.39 - 68 -  Appendix 6 Paymentfrom ZSFPC to TANESCO Since 1997 to 2001 11997 ITshgs January 1: IFebruarv I-- March -- Auril -- June -- Julv _ _ IAurmst September I---- October _ _ INovember I-- I ~ . .~~~~ ~~ December ~50,000,000.00 11998 I January 40,000,000,00 February 21,000,000.00 March 36.000.000.00 IJune 155.OOO.OOO.OO July August _--_ SeDtember _- October -- November _- December 1999 January ----_- Februarv March _-__ April -- IMav I-- June -- Julv -- IAurmst I-- September -- - 69 -  loctober I-- I November 15,000,000.00 December 35.000.000.00 12000 January -- March 20,000,000.00 April 20,000,000.00 lMav 120.000.000.00 June 100,000,000.00 JdY 100,000,000.00 August 100.000.000.00 September 100,000,000.00 October 100,000,000.00 November 100.000.000.00 December 100,000,000.00 2001 Januarv 100.000.000.00 February 100,000,000.00 March 100,000,000.00 A~ril 100.000.000.00 May 100,000,000.00 June 100,000,000.00 Julv 100.000.000.00 August 100,000,000.00 September 120,000,000.00 October 150.000.000.00 November 150,000,000.00 December 150.000.000.00 - 70 -