Liberia - Second Power Project

RESTRICTED Report No. P-965 This report is for official use only by the Bank Group and specitically authorizcd organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or complctcness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PUBLIC UTILITIES AUTHORITY OF LIBERIA FOR A SECOND POWER PROJECT WITH THE GUARANTEE OF THE REPUBLIC OF LIBERIA June 10, 1971  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND REOOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PUBLIC UTILITIES AUTHORITY WAITH THE GUARANTEE OF THE REPUBLIC OF LIBERIA FOR A SECOND POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Liberian Public Utilities Authority (PUA) with the guarantee of the Republic of Liberia for the equivalent of US$4.7 million to help finance generation, transmission and distribution facilities. The loan would be for a term of 19 years, including a h-year period of grace. Interest would be 7-1 L percent per annum. PART I - HISTORICAL 2. In June 1970, the Bank made a first loan to PUA for the expan- sion of its generating facilities (Loan No. 684-LBR). One of the items financed by that loan was a consultants' study of PUA's power transmis- sion and distribution requirements. The study was completed in January 1971. The proposed loan will help finance transmission and distribu- tion facilities, on the basis of the study's recommendations, as well as further generating facilities. An appraisal mission visited Liberia in February 1971. Negotiations were held in iWashington on May 25-27, 1971. The delegation from the Government of Liberia and PUA was led by the Honorable E. Taylor Major, Secretary of Public Utilities. 3. The proposed loan would be the fourth for Liberia. A road project financed under the first loan of $)4.25 million (Loan No. 368-LBR) has been completed and the loan fully disbursed. A second loan for $3.6 million was made in June 1969 (Loan No. 617-LBR) for the Monrovia Port Project. Progress has been generally satisfactory, although there has been some delay in revising port tariffs and strengthening the port organization. The $7.4 million loan of June 1970 to PUA covered the first phase of PUA's power generation program. This project is now proceeding satisfactorily, after initial delays in procurement. All tender documents have been issued and bids for most items have been re- ceived. IFC has made one equity investment in Liberia of $248,950 in the Liberian Bank for Industrial Development and Investment. 4. In the past, Bank lending has concentrated on infrastructure investment. Future lending will focus rather on projects that will pro- mote rural development and participation by Liberians in economically productive activities. An education project was recently appraised and should be ready for presentation towards the end of this year. This  project would be a first step in improving the quality and organization of Liberian education. In agriculture, the Bank has experienced great difficulty in identifying suitable projects. In 1968, the Bank made a technical assistance grant to Liberia to undertake a feasibility study for a palm oil project. However, in the light of price expectations and the conditions of production, it was felt that Liberia would be taking excessive risks in proceeding with the project. In 1970, the Bank financed a feasibility study for a rubber project. In view of the striking growth rate of the Liberian-owned rubber industry, this seered to be the most prorfsing area for investment. However, the appraisal of the project in June/July 1970 revealed consi.derable uncertainties concerning its econo- mic and financial juztification, The practicability of a small pilot project with a strong element of teclhical assistz:n^co is currently under consideration. There are no other agricultural pzrojects prepared and, despite ongoing a3sistance from the UNDP for the :evelopment of rice cultivation, no alternative projects are likely to be ready for some time. PART II - THE ECONOMY 5. The recelnt economic report on Liberia (Report No. AW-2h, "The Current Economic Position and Prospects of Liberia", dated June 1, 1971) described the Liberian economy as a dualistic one, with a prosperous enclave sector composed of iron ore, rubber and forestry, and a large under-developed sector consisting primarily of subsistence agriculture. Tne enclave sector contributes about 38 percent of monetary GDP at factor cost, and 90 percent of gross merchandise exports. Per capita GDP is about $273; but with large factor payments abroad - some $90 million in 1970 - GNP per capita amounts to $213. This is relatively high by African standards, but it obscures a highly uneven distribution of income. 6. In the past two years, the economy has grown at an average annual rate of h percent in real terms. Most of this growth originated in the enclave sectors, particularly iron ore and logging. Outside these sectors, growth and development continued at a slow pace, due to the lack of defined programs and projects. The Government is concerned about this slow development and is in the process of defining its development ob- jectives and priorities, a step which will be followed by the formulation of a development program. 7. In the next several years, public investment in Liberia is estimated at an average of $17 million a year. Domestic sources are projected to contribute $4-6 million a year. This leaves an average of $11-13 million a year to be provided from external sources, including the Bank Group and the U.S., which has been the major external donor to Liberia.  - 3 - 8. The improved fiscal and balance of payments position has strengthened Liberia's creditworthiness. But continued caution must be exercised in contracting new external debt on conventional terms. Assuming a limited amount of new indebtedness, debt service in the period 1971-1976 is expected to absorb about 12 percent of net export earnings, i.e. net of factor payments abroad. In view of the country's substantial exports, and since Liberia uses the U.S. dollar as its cur- rency, there is no transfer problem as such; the real constraint is rather the financial situation of the public sector. Debt service pay- ments accounted for about 25-30 percent of public revenues in the past five years and are expected to absorb 25 percent of prospective revenues in the period 1971-1976. On the basis of present projections and even assuming that the Government succeeds in increasing public savings over current levels, Liberia therefore needs to obtain the bulk of its ex- ternal financing requirements on concessionary terms, though there is some margin for contracting conventional debt, expecially for revenue earning projects. The proposed project, which will impose no strain on the budget, is suitable for financing on conventional terms. PART III - THE PROJECT 9. In 1970, private sources of power, notably the mining companies, generated 61 percent (463 Gigawatt hours - Gwh) of the total power con- sumed in the country. PUA Drovided the remaining 39 percent (292 Gwh). Most of PUA's power (277 Gwh) was generated by its Monrovia system, i.e. the system serving a narrow coastal area from Robertsport to Buchanan. PUA also generates and distributes electricity as agent of, and with funds provided by, the Government in six secondary centers, which are regional administrative headquarters of counties or districts. 10. The Borrower, PUA, controlled by a 10-member Board of Directors appointed by the President of Liberia, is a statutory corporation, es- tablished in 1962, and charged with responsibility for the generation and distribution of power. PUA was subsequently made responsible also for operating the water and sewer departments, previously part of the Public Works Department. The power division accounts for about 70 percent of PUA's assets and 85 percent of its revenues. Separate accounts are kept for the Monrovia power system, secondary power cen- ters, water and sewer operations. 11. The proposed project, together with the project financed by Loan No. 684-LBR, would enable PUA to meet power demand to the end of 1974. It would consist of procurement, installation and commissioning of the fourth hydrogenerating unit at Mount Coffee (for which the civil works were included in the project financed under the earlier loan); and the improvement and expansion of the transmission and distribution system in the Monrovia area. The total cost of the project is estimated to be $6.4 million, of which the proposed Bank loan would finance the external costs of $4.7 million, or 73 percent of project cost.  12. PUA's power t .-ansmission and distribution network is unsatis- factory. It is ovezCloaded, requires excessive maintenance, and gives rise to high losses and frequent failures. The proposed project should remedy these shortcomings, increase supply reliability, place greater emphasis on system planning and establish a sound base for future growth. Power demand grew at an annual rate of 22 percent during 1964-1970 and growth during the next seven years is estimated at 13 percent per annum. The improved reliabil-ity of service will be of particular importance to PUA since it should provide industrial consumers writh an added induce- ment to purchase power from PUA rather than install their own plant. 13. The most economic way for PUA to meet its generating needs over the next several years is by a combination of expanding its hydro- generating plant at Mqount Coffee and installing gas turbine units at Bushrod to firm up hydro power during the three-month dry season of each year. The optimum timing for the introduction of further hydro- generating units is a function of the growth of PUA#s demand and the relative cost of operating the gas turbines. The fourth hydrogenerat- ing unit at Mount Coffee is now scheduled to be commissioned in mid- 1974, a year earlier than was envisaged when Loan No. 684-LBR was signed in 1970. The schedule has been advanced because energy sales are now expected to develop more rapidly, following the signing of a sales contract with the Bong Mining Company, and because of an increase in the cost of fuel for the gas turbine units. 14. The project financed by Loan No. 684-LBR included the civil works for the third and fourth hydro units at Mount Coffee, and pro- curement and installation of the third unit. Although the fourth unit was not included in that project, the tender documents for the third unit included the fourth unit as an option. Bidding for the two units, which was carried out on an international basis, has boen c,'ipleted and no further bidding should be necessary for the procarenc