Malawi - Power Project

CONFIDENTIAL y CIRCULATING COPY Report No.64! TO BE RETURNED TO REPORTS DESK INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PERFORMANCE AUDIT REPORT on MALAWI: TEDZANI STAGE I HYDROELECTRIC PROJECT (Cr. 178-MAI) February 28 1975 Oper-stions E, tvalt io r. L£ -lep.~jJar+,*,,,--,,*, 阅 TABLE OF CONTENTS I A -- A,-, A XT TnX PROJECT PERFO-rkMA11UL AUVII Mr rlvr-uNvurl Introduction Project Implementation 2 Financial Performance 5 Economic Justification 6 The Bank's Performance 6 Conclusions 8 Attachment PROJECT COMPLETION REPORT Project Description (Original) I Objective and Justification of the Project 1 Construction Schedule and Problems Encountered 1 Cost of Project 4 Consultants 4 Organization and Management 5 Financing 5 Summary Financial Results 6 Covenants 7 Auditors 7 Useful Lessons Arising from the Project 8 Currency_Equivalents (Malawi Pounds and Kwachas). 1968-1970: ME 1.00 = US$ 2.40 1971-1973: NK 1.00 = US$ 1.22 (average) At the time of the initial chanRe from Pounds to Kwachas, 1 ME 2 MK. Fiscal Year: January 1 - December 31. e PROJECT PERFORMANCE AUDIT MEMORANDUM MALAWI: TEDZANI STAGE I HYDROELECTRIC PROJECT (Cr. 178-MAI) This memorandum represents a performance audit of the achievements and shortfalls of the Tedzani Stage lEydroelectric Project and Associated Development in Malawi (IDA Credit 178-MAI). It is based primarily on the attached Project Completion Report (PCR) as prepared by che Bank's Eastern Africa Regional Office and on other documents available in the Bank. The accuracy and comprehensiveness of the former have been checked by cross- reference to the relevant material in the Bank files and by subsequent dis- cussions and correspondence with the borrower, members of Le Bank staff and others who have been involved with the project. This material includes the original and related Appraisal Reports, the Project and Development Credit Agreements, Supervision and Progress Reports, the statements of the external auditors, and all related correspondence between the Bank and the Borrower. Introduction The project itself consisted of two parts. The first entailed a HU. 5-2; millin-n crpdit cinnlied h TA for the constrcio4n aF 1A MJ hydroelectric station at Tedzani Falls on the Shire River, the purchase of n I MIJ dliel u -Iin i t aqt Ti nwea tor hndele the poIn Wer shor-tag rgnlypo jected prior to the commissioning of Tedzani, and the financing of the foreign excha nge costs relte to- the-1 trang prora 4-f1theborwnetiy(h Electricity Supply Commission of Malawi, hereafter referred to as ESCOM). The second part of the pro4 ec was fiane by a Loan of TT(Q1 0 l p the African Development Bank (ADB) to be relent to ESCOM for the latter's general dvylopment L ait eALensiuLb dnd improVemtLs to mainS and SUb- stations), as well as for the construction of about 200 miles of 66 KV LLe Tedani scheme was Lirt serLUUSly eeCLLaiUG 1 1i 0 wrhen i became apparent that the recently completed 24 MW Nkula Falls station 4.5 mies upsUream would be insufficient to meet the demand torecasted for 1971/72, particularly in the rapidly growing southern region of Malawi. IDA was approached for funding and a feasibility report was submitted in Novem- ber 1967. A formal request for assistance was made by the Government of Malawi on February 1, 1968. However, there were questions within the Bank as to whether the Tedzani Project would be the least cost alternative. He;nce, it was not until the Bank received the supplementary information it requested of the consultants that the way was cleared for an appraisal mission. The outcome of the mission sent in May-June 1968 was a recommendation for a US$ 7 million IDA credit to fund the foreign exchange costs of the Tedzani Project (US$ 4.1 million) and of ESCOM's three-year (1969-71) development program (US$2.9 million). The project was postponed once again, however, due to the Bank's concern over the Malawi Government's economic policies. - 2 - Negotiations were renewed after the Government of Malawi inquired in April 1969 about the possibility of IDA participation in a proposed ADB consortium for the project. An economic mission sent in July 1969 reported sufficient improvement of the financial situation to justify renewed lending to Malawi. This was followed by a favorable appraisal mission in August. The credit agreement was signed February 11, 1970, and became effective April 20. Final disbursements occurred in May 1973, about a year before the originally established closing date for the credit. Project Implementation Considering the problems encountered in the construction of the Civil Works and the delays in the delivery of certain materials and contracted equipment, the project proceeded relatively smoothly. Besides the delays encountered due to poor rock conditions and strikes at some of the manufac- turers' plants, there was also a delay implicit in the acceptance of lower bids with lonver construction nariods Th.e dplavq wrp ocrinally dppmtd acceptable since it was felt the Lilongwe diesel could take up the projected qbnrffAll At Wk1lA The ori-innl n1n c Pnllrl f-r thp Pnmmico4n-nincy nf h first 8 MW unit at Tedzani in December 1972, to be followed by the second one the next month. Thp nrnipnt waq pupntiia1iv divayd hV annrnimatelY four months, the station beginning commercial operation in May 1973. This would not have presented any difficulties of note if the MW Ti1ngwe di el and interconnecting transmission system, which were scheduled for commission- ing hv arly 1977 to navid a power shortage, had been ompleten on t4me As it was, erection of the diesel took nearly a year and was not completed iinfil qntpn,hn- 1Q79 This was_q due_ mainly to- fhI-- -m4nf-th- manufacturer's erection staff (Ruston Paxman Diesels Ltd of the U.K.). This factor, combined with the late delivery anLd poor qulit of the switchagear for the Lilongwe station (supplied by the Indian Consortium for Power Projects a s tme, whgendemad ley pde thL forEcasus. EUWL LLU Lw Uth LoLLrU U tUL a short time when demand exceeded the forecasts which had originally prompted the inclusion- ofC the_ /jULWe_ (sson eo) - 3 - Electricity Sales: Southern Province and Lilongwe (in millions of kwh) Appraisal Estimate Actual and Revised Figures November 1969) (June 1973) % Annual % Annual kwh Increase kwh Increase 1967 77 - 77 - 1968 93 21. 93 21 1969 106 14 106 14 1970 117 10 122 15 1971 130 11 132 8 1972 143 10 158 20 1973 156 10 179a/ 13 1974 176 11 202a 13 a/ Estimates. Furthermore, the fact that 1972 demand was 10.5% greater than previously envisioned necessitated the postponement of the ma jor overhauls planned for the existing Lilonge thermal units. The delays noted above were minor problems in comparison with the cost overruns. One can identify three broad stages in the escalation of costs related to this project. OrLigial EstimLates an[d FLinal Cos of roject (US$ thousands) First Second Revised Appraisl~4 Appraisal, Estimat~es F.inlL CoUst Sept.1968 Jan. 1970 July 1970 June 1974 Power Station Civil Works 2,345 3,541 4,509 5,765 Eiectrical ana Mecnanical Works 2,615a/ 2,590 2,730 2,893 Engineering and Other Services 514 878 960 1,083 Contiugencies 636 480 431 57 Training 120 96 96 97 Lilongwe Diesel - 444 392 461 Total (IDA portion) 6,230 8,029 9,117 10,356 Total Project Cost 10,259 12,372 n.a. 14,779 a/ Excluding the 66 KV line to Chikwawa and the 33 KV lines to Balaka and Salima which were subsequently omitted from this project. -4- First, there were increases in the consultants' estimates between the first appraisal report and the second; the estimated cost of ute total project rose 21%, due primarily to a 51% jump in the estimated costs of the Civil Works, partly resulting from application to Tedzani of the expetbiee then coming in from the new Nkula plant with regard to the serious silt problem. The second set of increases occurred in 1970 with the opening of the tendered bids. Again much of the increase occurred in the main civil engineering works, with bids 27% higher than the second set or estimates. Analysis of the bids later indicated that a larger sum than expected had been allotted for establishment costs, especially for the insurance to cover work performed outside of Europe.!/ Inflation does not seem to have been a major factor in these cost increases. The third major group of increases involved overruns during con- struction (see the attached PCR, section 20). For the most part, these increases (amounting to about US$ 900,000) occurred in the Civil Works con- tract due to unfavorable rock conditions, not in the main tunnels but in the headrace conduit and desiltation chamber. The remaining increases were pri- marily accounted for by the effects of the devaluation of the US dollar in 1971 (roughly US$ 250,000) and the adjustment of supply requirements which were 2/ underestimated in the original Bill of Quantities (by approximately US$ 100,000)- * Because of IDA's inability to grant the additional credits to cover the higher than expected initial costs and the subsequent overruns, funds amounting to US$ 2.4 million were supplied by the Commonwealth Development Corporation (approximately US$ 1.5 million), the Industrial Development Bank of Malawi (US$ 0.5 million) and ESCOM's internally-generated cash flow.3/ Of note is the fact that although the total overrun for the whole project represented only a 19% increase over the January 1970 estimates, the bulk of it occurred in the main Civil Works (see the attached PCR, Section 20). Net non-civil works costs rose only US$ 0.1 million, or 2.3% above the original estimates. Other than the problems encountered with costs and timing mentioned Ihrnri there were nn Q11hq-.ant-ia1 difficrlt-q Pncoiintered in Droiect imDle- mentation. Moreover the Tedzani station has a higher capacity than envisaged in the original anpraial rePnort, 10 MW ini t- Pvrpntuiallv hPing chnsen in 01_ace of 8 MW ones, with related adjustment of the civil works, such that either in Civil Works contracts for IBRD power projects in Zambia and Tanzania. 2/ This includes importing some steel and cement at higher prices than origin- ally planned due to shOtIrgtbs an it e thr ILeat ol ShIUrare- at traditoa sources of supply. 3/ See the attached PCR, Sec. 15, for the terms of these supplemental loans. unit (but not both together) can be run at full rated capacity under Stage I. SM.ur perfoLrIed well an1 all LUaL1 cove11aHLs have Ueen fuily cUomplieu WiLt1, including the completion and implementation of a water resource-use study of the Lake Malawi and upper shire River area (section 4.U of the Develop- ment Credit Agreement).1 The other important substantive covenants,cover- ing-t[e development of an ESCON training program and the entity's attain- ment of a certain level of financial performance, have also been satis- factorily met. Financial Performance The entity's financial pertormance has generally been better than expected. Over the period 1969-72, gross revenues were 3% higher than fore- casted. However, a sharp rise in extraordinary operating costs in 1972 raised expenses and lowered net operating income. One-half of this rise was caused by an increase over the estimated fuel budget which was, in turn, necessitated by the delays in completing the Lilongwe transmission lines and the subsequent need to import more fuel to meet the demand with thermal power. At any rate, due to the higher than projected demand for electricity, the average return on net Tixed assets in operation still improved, rising from 13.8% in 1971 to 14.2% in 1972. As expected, it fell to 10.3% in 1973, but remained ab ve the 9% floor set by the Project Agreement for 1974, (Sec- tion 2.07 (c)).- Debt service coverage also exceeded expectations,ri§ing from 1.65 in 1971 to 1.86 in 1973 (against a 1.7 appraisal estimate).'/ Combined,with an encouraging, albeit slow, improvement in the debt/equity ratio, .' one must conclude that ESCOM's financial performance has been more than satisfactory. 1/ Agreement was reached in 1973 during the negotiations for Credit 426-MAI -- Tedzani Stage II (US$ 7.5 million for the additional two generators and a barrage to increase Tedzani's output by 24 MW) -- authorizing ESCOM to divert a minimum of 4,400 cusecs of Shire River water for 50 years beginning in 1977. Water for other uses (e.g., irrigation) has been allocated as required. 2/ This condition was raised to 10% during the negotiations for the Second Power Project in order to insure internal cash generation sufficient to provide 25% of the funds for ESCOM's capital development program. Recent projections for FY 74 found a 10.4% return expected. 3/ The Project Agreement (Sec. 2.10) stipulated a floor of 1.5 on the allow- able debt service ratio unless further debt was SDecificallv annrpOVd hv T)A 4/ Debt/Eauitv Ratio 1970 1971 1972 1973 1974 1975 ---Forecast--- 84/16 83/17 81/19 79/21 78/22 77/23 -6- Economic justification The overall objective of this project has been to increase the generating capacity of Malawi's power utility. Without such action, projections indicated a widening gap between energy demanded and firm capacity for the early 1970s. Although one of the poorest countries in the world (US$ 90 average GNP/capita in 1973), Malawi's economy has been growing at a steady pace of about 6% per annum since the country achieved independence in 1964. This has been reflected in the sale of power, which has been ,rowing at an average rate of over 19% per annum between 1964 an 1972.' Hence, although there has been a slowdown in recent years,- it was evident by the mid-1960s that ESCOM's existing generating capacity of 36 MW (in southern region and Lilongwe) would soon be overloaded. Industry, especially, was growing at a rapid rate of over 15% yearly, and this sector accounts for more than 60% of ESCOM's kwh sales. Although it was estimated that the incremental rate of return for the project would decrease from about 11% to 9.7% as a result of the increase in capital costs, the project has subsequently proven more remuner- ative, in part because of the higher than originally planned capability of the station. Allowing for the 15% tariff increase the entity has requested for 1975, the internal financial rate of return on the completed project has now been estimated by the Bank's Eastern Africa Regional Office to be 11.5%. There is no question 7'ut that the increased capacity was necessary. And given the recent trend in fuel prices it is certain that the Tedzani Stage I Project, even at an actual cost of US$ 440 per kw (on an 18 MW basis) compared with originally appraised cost of US$ 360 per kw (for a 16 MW station), both figures excluding transmission and engineering, was the least cost alternative. Furthermore, the 66 KV transmission line scheme financed under the ADB loan has proven invaluable for meeting the new capital's growing demand for power and enhancing the flexibility of the interconnected system, although it is worth recording that Malawi Government officials now think it mipht have been better to install it on locally produced wooden poles rather than the imported The Bank' s contributions to this project werer ofmxed a (IOn the one hand, the Bank provided a major impetus for the positive institution- funds for the overseas training of ESCOM personnel (US$ 48,000). Although ULL.i U wa aLL AUi U U S)LI .~JA EL L L . ~L.i L i LLie al.locatL~ ions occasioned by the rise in costs, the Bank's efforts in this direction were successful. 1L ra Liig pOrgriCemUidil COLULaDU UJr LLe DaLHr-, kLUJCL L tietiteLLL 1/ This figure is for the southern region and Lilongwe, which together account for over 90% of the kwh sold. 2! The years immediately following independence witnessed a rapid influx of foreign capital which eventually led to increased power usage. Between 1969 and 1972, sales growth averaged 14% annually. - 7 - qc,r H nn 9-1 1) Tae ciihmi -t-od ncz -armi rprqr nQ xja P LI I1mthilcht nut-. Another major contribution on the Bank's part has been the initiation of the Shire River ter-us stud"4 ton Ilatf--ie the Most eco01nnMicq1 allocationn of Watekr to its various applications. This is a very significant endeavour in view oi f LL t- n 1" CfL f-i +.1- IsJ t al JiortLaint consJ tr .ait in both the. ag ic lt 1a and industrial sectors. On the other hand, it now appears with hindsight that the original one-year pustponement by Le Bank on muacoeCOuIL grouinu ImIy LCVZ unwarranted, as well as being costly. The Bank seems to have taken a some- what short-sighted viewpoint in objecting to Malawi's plans to rove its capital from Zomba to Lilongwe, a measure aimed at promoting the closer unification of the country and stemming the internal migration or InnaO- ants from the neglected North and central regions to the already overcrowded Southern province."i Tne Blantyre/Nacala Railway link, also questioned by the Bank, is an important alternative to the only other outlet to the sea, the Beira line, which sometimes becomes unserviceable due to floods. The Bank later reassessed its original position and it, too, found this rail- way link to be a worthwhile, albeit long-term, investment. As regards the concern expressed by the Bank about Malawi's financial situation, it is noteworthy that when the credit was eventually granted, there had actually been an increase in the total debt contracted by the Government. Further- more, IDA had provided Malawi a total of US$ 21.2 million for three projects only several months earlier, in February 1968;2/ and the Tedzani credit was the next logical extension in Malawi's development program. As a direct result of thTs delay, Malawi had to spend US$ 461,000 to erect the 3 MW Lilongwe diesel (US$ 96,000 in local costs without the aid of a "soft" loan). Although this diesel will serve some useful purpose as a standby in case of transmission line failure, this additional investment would not have been necessary had the Bank not delayed more than a year in financing the Tedzani project. In addition higher costs for the extra fuel imported to meet demand before the project was completed may also be attri- buted in part to this delay. As regards the very large cost overrun, it is easy to say in re- trospect that the Bank should have included larger contingencies (only 6% contingencies were included in the appraisal estimate for the IDA-assisted part of the project, whereas 37% would have been required, to meet costs as they actually eventuated), but it is not clear that much could have been 1/ According to the 1966 census, the population density was 65 persons per square km in the South, compared to 19 persons per square km in the North. 2/ IDA Credits 112-114 were signed February 5, 1968, for the Lilongwe and Shire Valley Aericultural Development 9cheme and the contrurtionn of a highway. -8- Uune Lu avoid tne proulem. ESUM' s civil engineering consultants ktne same firm now as for Tedzani and for its predecessor, Nkula Falls) were HighLy experienced in the region and they still consider that it would not clearly have been in their client's interest to undertake further geological investigations before going out to tender; instead they re- designed and adjusted the project in light of accumulating knowledge, first of the serious silt problems and then, when construction started, of the unexpectedly poor quality of rock in some parts of the project area, and it was a significant achievement by ESCOM, the main contractor and. themselves to keep the project so close to schedule under these difficult circumstances. The Bank was apparently always doubtful about the cost- effectiveness of the consultants' Desiltation Chamber solution to the silt problem, it expressed its concern to ESCOM, and the device has proven fairly expensive (nearly US$ 400,000 equivalent) and not very effective, but the Bank was never in a position to suggest any positive alternative solution to what was generally recognized to be a particularly difficult problem. The PCR makes the important point that the Bank's reporting re- quirements could have been better adapted to ESCOM's normal administration and reporting procedures, and that this has been done with the second pro-, ject (Tedzani Stage II) for which an IDA Credit was approved in September 1973. While this would probably not have eliminated the need for ESCOM to hire a Project Accountant specially for the IDA project (it has not now), it does raise a question whether, with less reporting load to Washington, the Project Accountant might not have been able to do more to compensate for the one weakness which ESCOM has specifically criticized in its consult- ants - failure to undertake revised cost measurements and cost forecasts as early and as often as would bave Ieen necessary to keep the company suffi- ciently well informed about its forthcoming resource needs. Conclusions Desoite a slight delay in the comoletion date. the nrnipt wn_q effectively executed, although at considerably higher cost than originally expected. due mainly to undereqtimatcp nf the cvil works items whLichap, mainly to have been hard to avoid. The project's major objectives were met. the hvdrnp Prfcrin q'chpTnp winq rl1opn-.lvx? trrmnAic a-ndr thek interna -fi- cial rate of return to the project will probably be higher than originally nrnted Alhouh te Bnk' deaybetween- the first and second apprai.- sal missions was of questionable merit and quite costly to Malawi, its sub- sequmi t effr ts, hn~i r1iyrin,cr nnr n-Ft-cer CrA i --'f-4ations w-ee~ - - -1 - - 111 - _- _ -- - 6 - - W U. 4L CJF.'IU priate (there were five supervision missions at timely intervals) and involved the Shire River water-use study. PRATR?.T r.OMPT.FTTnN RRPnRT MAT.AWT CRHnTT N 178-MAT TPHd7emni q+..qcyj T yd ol +i P-rnicnt. nnrl Amoi T ) =vPlnmTnnt 1. Borrower - Government of Malawi 9- enfi riy - W1-+'4 i +ir qinn1ir rmm-sion of MaIawi (iiSlOM) 3. Amount of Credit - US$5,250,000 L4. P"_L ~l A-;+ 11 1070A.A S4 O..4 * 5. Effective Date - April 20, 1970 ("I - - - W+~ - 'fl '1071, _V - UL. _1 , / I54. 7. Period of Grace - 10 years 8. Te O-F' r'eit= 5Ayar 9. Interest Rate - None LierJ~vic~e ChC-Lg - )/4 L I 'A) 11. Fiscal Year - Ends December 31 1'1) Z1-1- I4 0 - Al I TTC'd e n I C_. L6&t O.1iCLLg Rate vi I U'J.pl C. C 13. Appraisal Report No. Cnu lae - C4a - UWnuZary 7, i7u 14. Amortization - of 1% paid semi-annually commencing May 15, * ~n4 1' 4 non S -i1e _ you and ending November ip, IuY7 anu i-2/ yclu semi-annually thereafter to November 15, 2019. 15. Parallel Financing - African Development Bank (aD3) loan of US 3 million to Borrower for onlending to the Bene- ficiary and subsequent loans of HK 1.2 million from the Commonwealth Development Corporation (CDC) and MK 0.4 million from the industrial Development Bank of Malawi (INDE3ANK). Terms are: ADB - 7% interest and 3/4 of 1% commitment charge, 5 year grace period and repayments extending over 15 years after grace period. CDC - 8- > interest - repayment in 16 equal annual installments of capital from March 31, 1976 with interest on reducing balance. INDEBANK - 8- % interest repayable in 8 annual installments of capital from December 31, 1974 and interest half yearly, June and December, with first payment December 31, 1973. - 2- 16. Project Description (Original) The Project comprises the major nrt of ESCOM's development program for the three-year period 1970 through 1972. The principal features of the program and the project are: (a) construction of Tedzani St,qe T bvdroelectric develon- ment (16 MW) with related substations; (b) addition of a 3 MW diesel unit at Lilongve which was reaulred by the eni of 1971 tn avoid a nfer short.ae in 1972 prior to commissioning Tedzani Stage I hydro- (c sstmnt rol eelnert+* atye Wd traning of F.M(W pe-rsonnel]; Nkula Falls, 28 miles from Ted7ani to Elantyre and 165 MA I~ LLP- -I~ - (f) extens.ions- ndr i mn-preme nts t main a znd_ ubttin;A special transport equipment, office machines, etc., 1-,hich are requircad for general development and. have to be imported. The IDA Credit was to cover the foreign exchange cost of the first four 4 4. A T-M T ~ -" last - -I - - 1 _LL-1ms an -11 -1)~ ULcu ii uh t ul Lae la5,three. P rojec D'e cipt~ion (AIctual) ie project was carried out broadly in accordapne Tith the original project description. 18. Objective and Justification of the Project Additional generating capacity was needed to meet the rrpidly aeveloping load in the Southern Region and ESCOM's consultants demonstrated that the Tedzani Stage I hydroelectric development with an initil capacity of 16 MW was the least cost method of meeting this requirement. The Lilonge transmission line was required to meet the growing demand for power in the Central Region and the 3 MW diesel generating unit was needed to meet this demand until Tedzani Stage I and the transmission line could be commissioned. These objectives have been achieved. 19. Construction Schedule and Problems Encountered The main civil works contractor was W & C French (Overseas) of the United Kingdom. Notwithstanding faults in rock formation which vere encoun- tered during construction, requiring continuous review and adaptation of designs by the civil consultant, and fear of a cement shortage, ,-hich resulted during one period in the need to buy 1,000 tons from the United Kingdom, the main n~tatrperforMe A e-ll nA n h hyrolcti poie station i.ent into commerical operation in May 1973, only three months behind the original scheduled oimle+ion d+ The ~ ~ P cotrctr,fr .h T-rbine (Voes+ ofP A-4--;,) Alterntor (Elia Union of Austria) and the Transmission Line (BICC of United Kingdom) als prf-e bu may prolm wereII enco ~IunW tred onl some of. Ile smaller contracts. The more important of these are described below: (a) Lilongwe Diesel (Ruston Paxman of England) Teething troubles experienced with this unit were more numerous than average and resulted in a great deal of outage time during the first few months after commis- sioning. Excessive vibration which resulted in the disintegration of the alternator fan was due to bad erection, and cracks in the Injection nozzles which resulted in numerous outages were due to faulty design. (b) 11 kV Switchgear, Transformer Control Kiosks and Reactor (ICPP 0±L -fndia) Equipment was badly finished and not in accordance with the specifications. Later modifications, due to bad design, were necessary. (c) Control Center Equipment (Serck Controls of England) The system was non-operative at the time of the Completion Inspection, and the manufacturer was at that time examin- ing the design to determine where modifications were necessary. (d) Building for Diesel Unit (M Construction of Malali) The completed building was to a very poor standard. The contract for the Switchgear (Hawker Siddeley of South Africa) was placed through a Japanese Agency and this gave rise to communication prob- lems and delays in delivery which were in some measure responsible for the delay in commissioning the Project. At the time of the Completion Inspection (September 1973) the following work was still outstanding: (a) minor finishing works at the Power Station and the supply of spares; (b) desiltation chamber scour valve not fitted, due to its late arrival. This must now await the first shut down of Tedzani before installation can be effected; (c) minor modifications to intake gates and screens - retention (d) i relaeent of fpf4-~ -n + - + p cf'n-T r- on-n.-r r- retention payments being withheld; (e) replacement of faulty equipment - Switchgear Contract - kl)) rep3cernet f m- U1 Iu1t01Lu,je VC Piv I_LO -LI ±ui ,O_ U11-LU, a.i- kg) Oystue-11 "lIullu'- 1V11-UJU1c1UL±Vt: - I_LcL pC.~Y1=11U0 1-'LU1Lm " pending rectification by manufacturer's erector. 20. Cost of Project Details of the original allocation of proceeds and the alloca- tion or expenditures as finally disbursed are shown in Annex 1 and the original estimate of costs compared with the final breakdown of costs are shown in Annex 2. There have been serious cost overruns on the Main Uivil Contract and the contingency allowance of between 6% and 7% was inadequate. An initial increase of about MK 1.0 million was due to bids containing a much larger sum for establishment costs than allowed by the consultants who had based their estimates on actual costs for the Nkuln hydro project *ompleted some two years earlier. Costs later escalated still further (by some MK U.6 million), principally due to unexpectedly bad rock conditions along the route of the headrace conduit and in the area of the desiltation chamber and the need to excavate deeper to suit the hydro-turbines selected. The cost of engineering and supervision is about 25% abo7e the original estimate due principally to the difficult geology encountered. The final cost of the main civil works (US$ 5.8 million) was some 615% higher than the original estimate (US$ 3.5 million) and the overall cost of the Project (US$ lb.8 million) was some 19% higher than the original es- timate of costs (US$ 12.4 million). 21. Consultants The project was jointly designed by Messrs. Watermeyer, Legge. Piesold and Uhlmann (Civil Consultants) and Kennedy and Donkin (Mechanical/ Llectrical Consultants) both of the United Kingdom. The performance of both has been generally satisfactory and their site supervision good. except that ESCOM has felt that the civil consultants could have progressed cost measure- ments more effectively and reported earlier and more freouently so as to H ve more warning of the increases in costs. It is also doubtful vhether the Desiltation Chamber. which cost some USZ 360.000 enuivalent.. was the leqst cost method to deal with the silt problem. With hindsight, in view of th, geological problems encountered and consenuent substantial -ost overrn., it may be said that more geological survey work should have been done at the feasibility stapep hut i t, i s not. (l ear that +.hi s rmil i have hpn f-rPqPn at that time; Watermeyer, Legge, Piesold and Uhlmann had long experience in +Inn ar A +Ind the I 'Po I Fal cr~c dep-iganpr 'h-% +Jipm fnhPPr Iee iif-- P.-,.fl~ IlV completed shortly before. They adapted designs and construction methods expediiul A 4 .- -- t_-4on of th T-UdMAni Project in schl a mnay as- ton keep it close to schedule despite the unexpected difficulties. 22. Organization and Management ESCOM is, generally speaking, well manpged and its operations and most professional staff are expatriates with wide experience in public utii±Utes ad.U 1:10%aurl i L jJ quLut Ue'ipau±L U] U_LUpulau .Lr ii V . r'- However, there has been a fairly rapid turnover in senior expatriate staff during the last Too or three years and ESCOM is having mur uifiulty than before in finding suitable replacement staff. At the time of the Completion inspection, there were vacancies for Progress, oysemu Control an CommuniC- tions Engineers. Additionally, the Training Manager and two local Account- ants had recently left. The problem is that, in spite of recent increases in salary scales, these are still not competitive with salaries offered by other employers for local qualified staff and are not sufficiently attractive to retain the expatriate personnel. A continuation of this trend can, in due course, adversely affect the efficiency of EbUUM, although hopelully, it should not unduly affect the operation of the project. There is no quick and easy solution to the above problem. The level of salary scales is determined by Government policy and ESCOM can only hope to be successful in recruiting suitable expatriate staff until its training program begins to pay off, and qualified local btaff can be promoted to posts presently occupied by expatriates. ESCOM has a good training program and hopes to achieve this aim by 1980. This may be a little optimistic where specialist senior staff are concerned. There is little the Bank can do at present in this matter and indeed, since the situation is not desperate, there is little the Bank need do, apart from drawing the attention of ESCOM and the Government to our concern in this matter. 23. Financing Annex 3 shows the appraisal forecast of the financing plan from FY 1970 to FY 1973 along with actual financing from FY 1970 to FY 1973. The table below is a summary of the Annex. -6- (-1 1 (3) Actual 1970-73 Appraisal Column 1 - 1970-1973 (Millions of U.S. dollars) Sources of Funds Internal Cash Generation 10.1 10.5 - 0.4 Less Debt Service 5.5 6.4 - 0.6 Net internal cash generation 4.3 4.1 + 0.2 Long-term Borrowings (including interest added to principal) Ted7ani - Stage I IDA 5.9 5.7 + 0.2 ADB 2.8 3.2 - 0.4 CDC and INDEBANK 2.2 - + 2.2 Other 1 - 1.1 10.9 10.4 + 0.5 Capital Contribution 0.? + 0.3 Total Source of Funds 15 .Ad1(_ + 1.0 Applications of Funds Construction Expenditures Tedzani Stage I 14.1 12.5 + 1.6 Others 2.7 2.0 + 0.7 16.8 140. + 2.3 Increase in Working Capital - 1.1 0.2 - 1.3 Total Application of Funds 15.7 1.7 + 1.0 The financing table indicates that the excess of actual over appraisal cost estimates is being met by loans from the Commonwealth Development Corpora- tion rind INUKANK. ESCOU has from time to time made temporary use of short-term bank rather than long-term borrowing to finance part of its actual expenditure program. -7- 24* Summary Financial Results The financial projecti ons prepared at the time of appraisal covered FY 1969 to FY 197h. Income Statements and Balance Sheets showing actual and Annexes 4 and 5. Generally speaking, as shown by the following table, the operating reslt froml FT 196 to70 FY0 i 72 hav bee cI. Ilose to0 the opJerat,ing result fore cast at appraisal. ±77 7f0 A7(z A7fe ±7(f) Expenses (Including depreciation) + 1.8 + 3.0 + 8.1 + 35.0 + 25.5 Net Operat. LLing ±incomlif- - L 7 - U.7( - 6.LI - 12 .35 -14.3 The substantial increase in expenditures during 1972 was mainly due to aduional maintenance expenditures during that year which should not recur annually. The Project Agreement includes a rate of return requirement of 9% effective FY 197, when the project facilities will be operational for a full year. Under the recent Project Agreement for the Second Power Project, the rate of return requirement has been increased to 10%. It is expected that ESCOM will meet this requirement. The rate of return on net fixed assets in operation increased from 10% in 1969 to 14.2% in 1972. 25. Covenants Section L.05 (a) of the Development Credit Agreement required the Government to make a study of the resources of water from Lake Malawi and Upper Shire for irrigation, power and other uses and Section L.OS (b) requires that, promptly upon the completion of the study, the Government 1rill make a decision about the allocation of water for power and communicate its decision to the Association and ESCOM. The study was completed by UNDP and the report circu- lated by mid-1973, but the Government has yet to take the required ection under Section 4.05 (b) of the Development Credit Agreement. Other particular covenants of substance, in an amended form where required, have been carried over into the Credit Agreement for the Second Power Project. 26. Auditors ESCOM's accounting records are well maintained and financial reports are prepared promptly. Its accounts are audited annually by the international accounting firm of Deloitte and Company. - 8 - 27. Useful Lessons A-riqina frnm thp Prnitpr- This q hn has be na p-rob e pT n- ipr ec fron +.le om tset. IT. as first+ a p- praised in May 1968 but construction was postponed pending a clearer picture of t.he gene-ral ecnormic nd fi nnc ia poito oN0 f' M01aw-. T was reappr; sed in August 1969 by which time the cost estimates for civil works had been in- creased by the c 1nul+. e.+ h r cA P--- TTR4 0 -1). mIll,_ +_ TTC I C I. 14 Costs of civil works again increased after the loan was appraised due partly ject against the Bank's advice to ESCOM and bad rock conditions which, in Of +~'- I- -~' --JJL -L1 .UJC -LI 4-1I~ UC -urUI'CU, 4-Ma- _ AP d. LC± iC C 4 unforeseen. With the benefit of hindsight it is, of course, always easy to crit- icize. it is probably true that a detailed analysis of the feasibility report and design specification might have resulted in savings in the cost of civil --orks. Tis, however, is a time consuming task and Bank staff has neither the time, facilities nor, frequently, the expertise, to perform this function. It is not always practicable to obtain a second opinion on all these aspects as this would mean doubling up on engineering costs, and in this case, in view of the consultant's detailed working knowledge of the area and the Nkula project, there was no apparent reason to ask for a second opinion on the geological sur- vey or the cost estimates. However, wnere doubt exists, e.g. with specifica- tions and cost estimates, a second opinion should always be obtained. Another important lesson arising from the project is the extent to hich a relatively large project can overburden the resources of a small utility such as ESCOM. Principal areas involved were: (a) Administration of the Project - A Project Liaison Engineer and Project Accountant were appointed to administer the Project. These ere necessary to relieve ESCOM's permanert staff of this additional burden; and (b) Reporting Requirements - The Bank's reporting requirements involved additional work for ESCOM as these conflicted with the Utility's procedure for administering the Project. Reporting requirements for the Second Power Project are being amended to ensure consistency with ESCOM's procedures and to avoid duplication of work. October 1973, revised January 1975 Eastern Africa Regional Office ANN aC 1 MALAWI ELETRICITY SUPPLY COMMISSION OF MALAWI POWER PROJECT - CREDIT NO. 178-MA.I Original and Final List of Goods and Services (US Dollars) Original Final AtDescrnn A tionn AllriotAn T Tydrotatin & ivil Works , 2,-il,6R 5 III 1,bs-ations 5900 - ~ - - 1/ .V Tree~.. r r%. Diese 3,.77,000r 31,7 - -- I-- I Tra.Qining h,00o nn VII Vfnallocated 331,000 - Total 5,250,000 5, 250, 000 October 1973 /t SubStaton equjin anid train were generally financed from the loans from ADB and CDC and by ESCOM. Note: An exchange adjustment of US$249,03h is also payable by the borrower. MALAWI }1EGTRI'IT SUPPIX CIMMISSICN OF MALAWI P0WE PR0:MT - CRIEDT NO. 178-MAI: OriginalEs- Imate & Fihal Cost of Project tUS$ Thouxsand s).. Foreign Currency Lcal Currle.icr Total Estimated Actual Estimated Ct Estriated Actt1 A. IDA Financed Elements 1 Power Station Civil Works 1,325 ) 3,0:14 ,855 ) 2,751 3,180 ) 5,765 2 Desilting Chamber 216) .16) 362 ) 3 Turbines, Generatpra &. Other quilpnent 1,752 1,894 34 213 1,786 2,107 h Substations 559 426 17 88 576 514 5 Controi Center '130 206 96 66 226 272 / Diesel S+tion 377 365 67 96 -4, 461. 7 Engineering & SupervIion 475 556 :175 271 650 827 8 • Training 48 49 48 48 96 97 9 ESCOII Services 36 13 :192 2L13 228 256 10 Contingencies 22 To tal . 2 6. 2, ..8191 L_028 10056 B. ADB Financed E:lements I TranmiUssion & Distributfon 3,000 2,9h2 1,3 1,W81 4,34 4,L23 GrandL To,tal ?.2.,4E?,7 LAU. -t9. 1_-n 4 Note: Average conversion rate of US$1.22 • 1 Kwatcha wai taken for converting i Lnal costa into US Dollars June, 1974 MA LAWI ELECTRICIYf SUPPLY COMMISSION OF MALAWI aisal Estimate ard Actual Funds Statement (thousands of Kwachas) .969 1970 1971 1!17 1970-73 LM-1 Year kbdig ber 31 Estimated Actual Estimated Actual Estimated Actual Estimated Actual Estimated Actual Estimated Actual Estimated Actual (converted to U.S. dolLars at MK1 US$1.22) SOURCE OF FUNDS Internal Cash Generation Net Income before Interest 1,008 967 1,228 1,260 1,40 1,327 1,696 1,503 1,708 1,675 6,036 5,765 7,364 7,033 Depreciation 690 532 526 551 543 654 618 846 811 2 52 j98 3155 TOTAL INTEIINAL CASH GENEHATION 5 j..L57 1J8 L.786 1 0870 2,1211 2.48k 6 2 8 10.519 10. liD,MWINGS (incl. capitalized interest) Malawi Government 8 7 8 8 8 8 10 10 Tedzani Government - relendLng of IDA loan 724 250 1,66 1,86 2,310 2,196 202 549 1,692 4,1357 5,721 5,926 ADB " 1,101 20 1,158 1,286 361 594 22 427 2,648 2,327 3,230 2,839 Other loans 619 1,149 1,768 2,157 Second Power and Other Projects 1,198 0 1,198 0 1,661 0 Capital Contributions 104 141 40 164 60 71 40 75 40 90 160 400 195 88 TOTAL 10626 1605 3 2,228 162 5,089 52061 4.016 4.7Cj 7,328 U,.23 21,X39 2 APPLICATIDN OF FUNDS Construction Expenditures (exciuding capitalized interest) 2,170 1,33h 3,508 4,486 3,710 3,950 520 1,813 10,208 11,583 12,151 1L,131 Tedzani I OterExediurs 6 785 97 - - - 7U; _1.678 1. 447 1678 _2? 2.047 _2.739 Other Expendi.tures 976706 _1__ TOTAL CONSTRUCTION EXPENDITURE 762 785 t.470 1126 .86 110 2.198 3.260 828 16 Debt Service Interest 612 612 702 636 811 725 962 781 1,091 890 3,572 3,035 4,358 3 703 Amortication 216 916 100 102 110 110 430 429 418 450 1 1 19263 858 858 1.10' 1.3 LPL41 1.135 9 121 1.542 -1.31LO _&260 __4,26 6,1 _,6 Net Increase in Working Capital 618) (791) (other than cash) 110 (8) 8 _ ) ' 16 ( 0 72 88 ) 107 Total Application of Funds 1L730 :_.61 3 1,.28 06 5.671 .1.1 5 _ 1J0 210 L:1.8" Increase (Decrease) in Cash (104) 44 56 270 (114) (53P) (54) (50) 236 29 94 (283) 114 (345) Cash at Beginning 298 317 191 356 ?50 626 106 94 52 4 191 356 237 134 Cash at Da 194 356 250 696 106 94 52 4 288 73 288 73 351 89 Debt ServLce Coverage 1.8 1.7 1.6 1.7 1.6 1.65 1.7 1.75 1.7 1.86 1.6 1.7 1.6 1.7 JUNE, 1574 MAIJLWI Electrict] S .ipp Caiission of Malawi AraisaL Estimates azi Actual Income Statennts TT11ousan s of aa 1969 1570 1971 197? 5 Ue1972 1973 Year endig cember 31 Estimated Actua Estimated Act EITF Au Esmted ARUa1 - - Electricity Sales -, millions of KWH 106.8 105.7 118.2 121.9 131 132 144.2 199 158 178 Average revenue/unit in tambala 2.14 2.14 2.19 2.17 2.20 2.22 2.17 2.16 2.17 2.15 Gross Operating Revenue 2,2,12 2,270 2,612 2,646 2,906 2,939 3,154 3,468 3,154 3,622 Operating Expenses Operation and Maintenance 358 359 376 372 I02 1451 402 655 462 619 Fuel and Electricity 132 146 164 192 912 ?45 40 276 26 216 Administration and General 318 325 330 356 354 406 382 448 412 545 Depreciation 506 498 532 526 554 543 654 618 846 811 Total Operating Expenses 1134 1,328 1,404 1.46 1.52? .1,645 IL78 1,992 1.746 21 111 Net Operating Income 988 94P 1,208 1,900 1,384 1,296 1,676 1,471 1,688 1,631 Other Income (Net) 20 ?6 20 60 20 35 20 20 11 Net Income before Interest 1,008 966 1,228 1,260 1,404 1,329 1,696 1,503 1,708 1,675 Total Interest Charges 642 642 702 630 814 708 962 725 1,094 1,101 Less: Capitalized Interest - - 76 8 914 111 218 108 40 211 Interest charged to Operations 642 642 626 622 600 597 744 617 1,054 890 Net Revenue for Year -6 I L!_ 952 8?ff 6q)j 785 Average Net Fixed Assets in Operation 9,892 9,578 10,112 9,629 10,166 9,652 11,210 10,584 15,644 16,204 R eturn on Average Net Fixed Assets in Operation ge 10 10 11.9 13 23.6 13.-8 15.0 14.2 10.8 10.3 JUNE, 1974 MAIAWI Electricity Suxpl Commission of Malawi Appraisal Estimate and Actual Balance Sheets (Thousands of Kwachas) 1969 1970 1971 1972 1973 Year ending December 31 WEated=Ac Wimte-d Ltual m Estimated Actual Estiwated Actua1 ASSETS Fixed Gross Fixed Assets In Operation 13,504 13,178 14,074 13,564 14,700 13,991 17,368 16,507 25,068 25,659 Less: Accumulated Depreciation _ 3 622 4 3885,3862 44388 1 1 5,998 5 726 Net Fixed Assets in Operation 10,092 10,130 9,702 10,202 9,603 12,216 11 .6 19,070 Work in Progress -_ __3_48 _1.76 1390 52 . 6.3}2 7,92. 870 _181 Total Net Fixed Assets 10.02 9.9j> E ].02 1$274 15,6 185_48, 199>9) 21.124 Current Casn and Treasury Bills 19> 356 250 626 106 94 52 288 73 Other __.4. _4_48 _ ,8 _482 684 520 89 _7 4.ba Total Current Assets ._ 851 698 1.08L 588 572 . å2 l. 11-6 Total Assets 10.716 1 8.Q 122 1,86. 1,2 29_12.0 3.002 20,798 23(40 LIABILITIES AND EQUITY Reserves and Surplus 586 608 1,188 1,2>48 1,992 1,979 2,944 2,864 3,598 3,716 Canital Contributions _2å _ _ 28]4 .43Ik _24 561 _ 364 591 .421L TBg Fquity 830 687 1,472 1268 2.316 2,495 3.308 2.145 4.0: 'n Firät IDA PrDject ID k 724 125 2,180 2,111 4,49o h 41 ADB 1,104 10 2,262 1,307 2,626 1,901 CDC 6.19 Others 696 9 9,30_4 -9 435 _8 89 8,889 8 ,664 Total Long Term Debit 66 11.2 5 1 ?,307 .15 320 65 _7.02 Current Liabilities 190 _ 3200 .9?1 210 1,1h0 _ 32 1 242 Total Liabilities & Equity 10 12.804 2L 7 1 15,9L2 _ 20,392 20,798 17 _1. JUNE, 1974 MALAWI SECOND POWER PROJECT ELECTRICITY SUPPLY COMMISSION OF MALAWI Actual & Estimated GWh Generated and Sold, Installed & Firm Capacity System Maximum Demand & Load Factor (Southern Region & Lilongwe) Installed Firm Maximum % Capacity Capacity Demand Load Year Generated Sold Increase MW MW __1KW Factor Remarks Actual 1967 85 77 36 28 15 65 1968 103 93 21 36 28 18 65 1969 116 106 14.2 36 28 20 66 1970 133 122 15.1 36 28 23.3 65 1971 145 132 8.1 36 28 25.7 64 1972 173 158 19.7 39 31 31.6 62 1973 192 173 12.6 55 46 34.2 64 Estimated 1974 222 202 12.8 55 46 40 63 1975 262 226 11.9 67 54 46 65 1976 278 250 10.6 71 58 51 62 1977 303 275 10 91 78 55 63 1978 332 302 10 91 78 61 62 12 MW of steam and diesel 1979 365 332 10 91 78 68 61 plant to be retired in 1980 401 365 10 91 78 75 61 1979/80 and replaced with 12 MW gas turbine. June, 1974 * 2>