Tunisia - Power Project

Document of FIECOPY The World Bank FOR OFFICIAL USE ONLY Report No. 25 21 PROJECT PERFORMANCE AUDIT REPORT TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) May 24, 1979 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) Table of Contents Page No. Preface (i) Project Performance Audit Basic Data Sheet (ii) Highlights (iii) PROJECT PERFORMANCE AUDIT MEMORANDUM I. Project Summary 1 II. Supplementary Comments 3 Preferential Duties 3 Rate of Return Calculation 4 III. Conclusions 5 Table: Ex-Ante Calculation of Return on Investment Attachment: PROJECT COMPLETION REPORT I. Introduction 7 II. Project Preparation and Appraisal 7 III. Implementation 10 IV. Operating Performance 14 V. Financial Performance 15 VI. Consulting Services 21 VII. Project Justification 23 VIII. Conclusions 24 Annex Map This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  (i) PROJECT PERFORMANCE AUDIT REPORT TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) PREFACE This report presents the results of a performance audit of the First Power Project in Tunisia, for which a loan of US$12 million (Loan 815-TUN) was made to the Societi Tunisienne d'Electricite et du Gaz (STEG) in 1972. The Loan was signed in April 1972, became effective in August 1972 and was closed in March 1977. The Project Performance Audit Report consists of a Memorandum, prepared by the Operations Evaluation Department (OED), and a Project Completion Report (PCR), prepared by the Europe, Middle East and North Africa Regional Office. OED has reviewed the PCR against the Appraisal Report and other documents and discussed the project with Bank staff. The Audit Memorandum concurs with the findings of the PCR; however, in addition to providing a brief summary of the project experience, the Memorandum offers supplementary comments on two specific points of interest, namely, preferential duties and the rate of return calculation. Following normal procedures, a copy of this Project Performance Audit Report was sent to the Government and the Borrower for comments. However, none were received.  (ii) PROJECT PERFORMANCE AUDIT BASIC DATA SHEET TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) KEY PADJECT DATA ItemAppraisal Actual or ItemExpectation Current Estimate Total Project Cost (US$ million) 16.7 17.1L' Overrun () 2.4 Loan Amount (US$ million) 12.0 12.0 Disbursed 12.0 Cani to l January 31, 1979 - - Outstanding to ) l0.6 Date for Completion of Physical Components December 19714 June 19751/ Incremental Financial Rate of Return )24 44 Financial Performance Similar to appraisal expectatiQcs Institutional Performance Similar to appraisal expectations DISBURS EME NT OF BANK LOAN CUMULATIVE Cus$ miliTue) FY72 FY73 FY74 FY75', FY76 FY77' (i) Scheduled: 0 6.3 10.6 12.0 12.0 12.0 (ii) Actual: 0.4 7.3 8.9 11.2 11.5 12.0 (ii) as percent of (i) - 115 83 93 95 100 OTHER PROJECT DATA Original Actual or Item Plan Revisions Current Estimate First Mention in Files or Timetable -- 10/30/68 Governmnt's Application - - 10/30/68 Negotiations 2/72 - 2/72 Board Approval 3/19/72 - 14/4/72 Loan Agreement Date 4/20/72 - 4/20/72 Effectiveness Date 7/21/72 - 8/0o4/72 Closing Date 7/31/75 12/31/75, 12/31/76 3/31/76 Borrower Societe' Tunisienne d'Electricitf et du Gaz (STEG) Executing Agency 11 111 '1 1 1 Fiscal Year of Borrower January 1 - December 31 Follow-on Project Name Second Power Project Loan Number 1355-TUN Amount (US$ million) 14.5 Loan Agreement te January 12, 1977 MISSION DATA Month, No. of No. of Date of Item Year Weeks Persons Manweeks Report Preappraisal 3/71 1 2 2 4/71 Appraisal 10/71 3 3 9 3/72 Total N4 11 Supervision I 4/72 0.5 2 1 Supervision 11 10/72 1 2 2 Supervision 111 12/73 1 2 2 1/114/74 Supervision IV 9/74 2 2 14 10/14/74 Supervision V 4/75 1 3 3 5/19/75 Supervision VI 12/75 1 2 2 1/09/76 Supervision VII 7/76 0.7 2 1.4 8/214/76 Completion 7/78 0.8 2 1.6 8/18/78 Total 8.0 17.0 COLUTRY ECHANGE BATES Name of Currency (Abbreviation) Tunisian Dinar (To) Year: Appraisal Year Average Exchange Nate: US$1 = 0.48 TD Intervening Years Average us$1 = 0.43 TO Completion Year Average us$1 = .416 TO /1 Increase in scope. /2 Physical components were completed later than expected at the time of appraisal, mainly because of the extension of the 150/90-kV substation at Tajerouine, which was included in the Project in 1976. The auto-transformer not originally part of the Project and financed by unexpected balance of the loan proceeds was completed in 1978.  (iii) PROJECT PERFORMANCE AUDIT REPORT TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) HIGHLIGHTS Loan 815-TUN, for the First Power Project in Tunisia, was made in April 1972 and closed in March 1977. The project is helping to meet the increase in sales of energy which grew at a faster rate than forecast at appraisal. The various components of the project were completed bet- ween two and six months behind the appraisal schedule. The cost exceeded the original estimate by about 2% if the increase in distribution and transmission equipment not originally part of the project is included. The incremental financial rate of return is estimated to be about 44% compared to 24% calculated at appraisal. The financial performance of the Borrower was satisfactory and most of the covenants were met. However, assets have not been revalued and accounts receivable, although improved, remain a problem. In making the loan, the Bank's objectives were also to help to improve the Borrower's institutional performance and establish a new tariff structure based on marginal costs. Progress towards meeting these objec- tives was satisfactory and the Bank contributed significantly to the for- mulation of the new tariff structure which was implemented in 1975. Points of special interest are: - role of the gas turbines as base-load capacity (PPAM para. 5 and PCR paras. 4.2 and 8.5); - bids on the gas turbines invited prior to Bank approval of the loan (PPAM para. 4); - the effect of preferential duties on bid evaluation (PPAM para. 9); - the effect on the project of over-estimating the gas availa- bility at appraisal, resulting in import of Algerian gas (PPAM para. 5 and PCR paras. 4.3, 7.1 and 8.4); - incremental financial rate of return methodology (PPAM paras. 10-13); - successful implementation of a new tariff structure based on marginal cost (PPAM para. 7 and PCR paras. 6.5 and 8.6); - use of gross assets as basis in rate of return covenant (PPAM para. 8). PROJECT PERFORMANCE AUDIT MEMORANDUM TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) I. PROJECT SUMMARY 1. The Bank has provided financial assistance to Societe Tunisienne d'Electricite et du Gaz (STEG) since 1971 through three loans (one gas pipeline project and two power projects) for a total amount of US$34 million. STEG, a government-owned corporation, was created in 1962 upon the nationalization of seven foreign utilities. It is responsible for the production, transmission and distribution of electricity and gas for public consumption for the entire country. 2. Loan 815-TUN, which forms the subject of this audit, covered the foreign exchange component (US$12 million) of the First Power Project. At appraisal, the total project cost was estimated at about US$16.7 mil- lion and the local component was expected to be financed by STEG. The project consisted mainly of: installation of two 20MW gas turbines; construction of two transmission lines, including substations; general distribution expansion; and consulting services (PCR paras. 2.8-2.9). 3. About 93% of the loan was disbursed by July 1975, the expected closing date (PCR para. 3.6). At that time, the physical components of the project were completed (PCR paras. 3.1-3.4) and only the consulting services for some of the studies were still being implemented. In 1976, about US$500,000 of the loan proceeds had not been disbursed, and the Bank agreed to this balance being used for financing a 225/150 KV trans- former not originally included in the project. 4. A special feature of this project is that bids for the gas turbines had been invited prior to Bank approval of the loan (Section II). The reason for early bidding was that it was considered important to commission the gas turbines at the earliest possible date in order fully to utilize the available gas from El Borma, some of which at the time was being flared. The early bidding does not appear to have affected STEG adversely, and, in fact, the company may have gained as is evidenced by the low unit cost of the gas turbines, i.e. US$107 per KW installed. The actual cost of the project was about US$17.1 million compared to US$16.7 million envisaged at appraisal. Although the actual cost of the gas turbines was lower than the appraisal estimate, the difference was used to finance additional distribution and transmission equipment. The in- crease in distribution and transmission work was apparently needed as the demand for energy grew more rapidly than foreseen at appraisal. The entire local cost of US$5.1 million equivalent was financed by STEG (PCR paras. 3.5-3.6). - 2 - 5. The appraisal report showed that the installation of the two gas turbines was the least-cost solution for meeting energy requirements after 1975, based on an annual average growth rate of 8.3%. In addition, by installing the gas turbines by mid-1973 and thereby utilizing the available gas from El Borma, the consumption of imported fuel during the 1973-75 period was expected to be reduced, with a corresponding cost saving of about US$3.8 million to STEG during that period (Section II). An incremental financial rate of return (IFRR) was calculated as 24% at appraisal. However, the calculation uses some questionable assumptions, and if a more appropriate methodology had been used, the IFRR would pro- bably have been about 32% (Section II). In fact, actual sales of energy grew at an average rate of 11.9% per year during the 1971-76 period, well above the appraisal estimate. The gas turbines have therefore been ope- - rating to meet the incremental growth of energy sales (PCR paras. 4.1-4.2). The IFRR on the investment is now calculated at 44%, even though the availability of gas from El Borma is apparently lower than expected at appraisal partly due to water injection used to increase oil production. In retrospect, it may have been wise to initiate earlier discussions with Algeria on the purchase of the Algerian El Borma (flared) gas. In any event, STEG has now arranged to purchase Algerian gas at nominal cost (PCR paras. 4.2 and 7.1). However, these unfavorable events are more than offset by the slightly lower capital cost of the project and, more importantly, the gas turbines have been operating to meet the higher- than-expected increase in sales of energy during the 1973-1975 period, rather than merely reducing system operating costs as expected at apprai- sal (Table 1 and PCR Annex, page 2). In retrospect, the gas turbines were needed to meet the increase in energy sales, and it is doubtful that a steam unit could have been installed in time to meet the system energy requirement. However, the assumptions made at appraisal with regard to the operation of the gas turbines at an average plant factor of about 62% per year proved to be optimistic because of the technical difficulties. Not only is the availability of El Borma gas lower than expected at appraisal, but it is doubtful whether the gas turbines could actually be operated at such a high annual plant factor (PCR paras. 3.3, 4.2 and 8.5). 6. The transmission lines were needed to connect the Ghannouch generating plants to the load centers and to reinforce the 150-KV main transmission grid. The distribution work, which almost quadrupled com- pared to the appraisal estimate, was needed to connect new customers and to meet the increasing demand. STEG appears to have lowered system losses from 17% in 1971 to about 16% in 1977. However, a larger reduction in losses could have been expected since, with the completion of this proj- ect, the transmission ring receives power from two major sources, thereby reducing transmission distances between power sources and load centers. The audit has not been able to establish whether most of the losses are occuring at the generating plants or in the distribution network. Never- theless, one of the main objectives of STEG's distribution program for - 3 - 1977-1981 is to reduce system losses further. A second important objec- tive of the program is to increase the number of electrified households in towns and villages by about 9% and 21% per year, respectively. 7. A major Bank objective during the preparation and appraisal of the project was to improve STEG's institutional performance and to estab- lish a new tariff -structure based on marginal costs. For this reason, the Bank included in the project financing of consultant services, for example, to improve STEG's accounting system, and to reorganize and improve computer procedures. The consultant services had positive results (PCR paras. 6.1-6.7). The Bank contributed significantly to the new tariff structure which was implemented, together with a rate adjustment, in April 1975. The activity with regard to electricity tariffs is being continued under the Second Power Project (PCR para. 6.5). 8. At the time of appraisal, STEG's financial performance was generally satisfactory and has remained so during the 1972-76 period (PCR paras. 5.1-5.6). However, at appraisal the Bank was concerned in particular about STEG's high accounts receivable and the figure it was using for depreciation charges. Since the accuracy of the valuation of pre-1969 assets was uncertain, STEG's depreciation charges were also uncertain which made questionable the use of the rate of return on net fixed assets as an objective measure of financial performance. The Bank tackled the problem by including in the loan documents a rate of return covenant defined as "operating surplus before depreciation" as a percent- age of "average gross fixed assets less average customers' contributions." The use of gross fixed assets eliminated the effects of STEG's questionable depreciation charges. STEG adhered well to this covenant during the 1972-76 period. With the help of consultants, STEG has identified all its assets and determined their value, including the pre-1969 assets. During the preparation of the Second Power Project (Loan 1355-TUN), the rate of return covenant was therefore changed to the use of "average net fixed assets" and "operating surplus after depreciation." Although assurances were made during negotiations that outstanding electricity bills would be settled, the accounts receivable are still at a high level, equivalent to 160 days' revenue at the end of 1977 (PCR paras. 2.4C and 5.1B). While representing an improvement from 1972 (270 days), the Bank is focussing on reducing further the level of accounts receivable in connection with the implementation of the Second Power Project. II. SUPPLEMENTARY COMMENTS Preferential Duties 9. Because of the urgency to install the gas turbines at the earliest date, bids for the generating plant had already been invited in January 1972, i.e., about three months prior to Bank approval of the loan. How- ever, STEG's procedures for evaluating bids caused the Bank some concern as EEC member countries enjoy preferential duties when bidding on Tunisian contracts. While normal customs duty applicable to general imports in Tunisia was 6.35% at the time, preferential duty to EEC countries was 2.54%. It was feared that the application of preferences in favor of developed countries would penalize suppliers from developing countries and, in some instances, might entail increased foreign cost for the project. Under the first Bank loan to STEG, the Government had exempted STEG from custom duties principally because of the Company's strained cash position, thus avoiding the issue of tariff preferences. However, as STEG's cash position had materially improved since then, a favorable outcome on duty exemption for this project, which STEG had applied for, was uncertain. As inclusion of preferential duties in evaluating bids adhered to the Bank's existing procurement policies, the loan was pro- cessed without delay. Since the Bank considers that it is not in a position to harmonize the internal practices of all its member countries concerning international tariff agreements, Bank financing is an issue only in the most exceptional circumstances when the effect of preferential tariffs alone would result in excessive price distortions.l/ As it turned out, the two lowest bids on the gas turbines were both from EEC member countries. The matter of customs duty preference did not, therefore, arise and consequently was not included in the bid comparison. Rate of Return Calculation 10. At appraisal, an incremental rate of return on the project was calculated at 24%. However, the calculation did not include any cost for the gas, which was assumed to be free. It is not clear from the Appraisal Report on what basis this assumption was reached. The pipeline from El Borma was constructed for the purpose of transporting gas to the power station at Ghannouch as well as to some other industries there. A more proper assumption would have been to assign to the gas a price which would at least cover the capital and operating costs of the pipeline and a return on the capital of about 10-12%. 11. In addition, the cost of transmitting and distributing the energy attributable to the gas turbines was omitted. A more appropriate approach would have been to include in the cost-stream an estimate of the incremental transmission and distribution costs associated with the sale of the project's output. 12. The installation of the gas turbines was mainly justified by their fuel savings for the period 1973-75 and their contribution to meeting the expected increase in sales of energy after 1975. The gas turbines were, therefore, to be used for base-load operation, at an average annual plant factor of about 62% during the 1973-1984 period. The rate of return 1/ Sec. M 1-394, April 3, 1956. - 5 - calculated at appraisal included fuel savings in the benefit stream over the whole life of the project and only about 27% of the energy output was credited to incremental revenues. A more appropriate approach would have been to credit the project with fuel savings for the 1973-75 period, and after 1975 the full energy output of the project should have been included in the revenue stream, reflecting incremental sales of energy at the 1972 tariff level of TD 0.0167 per Kwh. 13. The effect of these changes on the recalculation is that the incremental financial rate of return (IFRR) at appraisal would increase from 24% to about 32%.l/ The IFRR can be expected to be high because tariffs are almost always set on the basis of a utility's overall average financial requirement whereas the operating cost of the gas turbines at Channouch is relatively low, even though the assigned cost for gas in the recalculated IFRR recovers the capital and operating costs of the gas pipeline. However, the economic cost of the gas is even higher, and an appropriate pricing policy for electricity should reflect the economic value of gas. In fact, the Government of Tunisia is at present under- taking a study to determine a system of prices for the various sources of energy which reflects the economic cost of supply to the users. In this connection, STEG is studying a method to bring its calculation of the level and structure of tariffs systematically up-to-date on the basis of marginal cost. III. CONCLUSIONS 14. The project was carried out successfully and the major object- ives were met. The gas turbines are now operating satisfactorily and are helping to meet the increasing sales of electricity. The operation of the gas turbines as base-load proved to be optimistic, but their instal- lation remains justified not only because of the high return on the invest- ment but more importantly because the increase in the price of oil after 1972 makes the cost advantage of gas even higher than at the time the project was approved. 15. The consultants' services financed under this project were effective and contributed toward making STEG a well-organized and effi- cient utility. The financial objectives were largely met, although the accounts receivable remain at an excessively high level. 16. The Bank contributed positively towards the implementation of this project, in particular by helping STEG to establish a new tariff structure based on marginal cost. The Bank is continuing its assistance with tariffs under the Second Power Project. 1/ Although the IFRR has little significance for the justification of the project, it does give an indication about the adequacy or inade- quacy of the level of tariffs, since the principal quantitative benefits are the incremental revenues attributable to the two gas turbines. - 6 - Table TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) Ex-Ante Calculation of Return on Investment (TD millions) 1/ Project Fuel Capital Operation Cost of Transmission & Year Output 2/ Savings 3/ Sales 4/ Cost 5/ & Mainten- Gas 6/ Distribution (Gwh) ance Costs Cost 7/ 1973 150 0.3975 - 3.6000 0.0400 0.0705 - 1974 300 0.7950 - 3.1500 0.0600 0.1410 - 1975 300 0.7950 - .2500 0.0600 0.0823 - 1976 175 - 2.8525 - 0.0823 0.3500 1977 285 - 4.6455 - 0.1340 0.5700 1978 300 - 4.8900 - 0.0823 0.6000 1979 105 - 1,7115 -' 0.0494 0.2100 1980 225 - 3,6675 -' 0.1058 0.4500 1981 300 - 4,8900 - 0.1410 0.6000 1982 110 - 1,7930 -' 0.0517 0.2200 1983 290 - 4,7270 - 0.1363 0.5800 1984 100 - 1,6300 - 0.0600 0.0470 0.2000 Rate of Return = 32% 1/ 1972 price level 2/ Appraisal report Annex 10, page 3 3/ TD 0.00265/Kwh.based on Appraisal report para. 5.07 and Annex 10, page 3. 41 Average revenue - TD 0.0163 per Kwh. 5/ The estimated cost of the gas turbine at TD 3.6 million is shown as occurring in a single year (1973) for simplicity instead of over 18 months. The estimated capital expenditures occurring in 1974 and 1975 are for associated transmission and distribu- tion work (Appraisal Report Annex 11). 6/ TD 470/Gwh, based on investment and operating costs related to the pipeline. 7/ Average incremental cost of transmission and distribution estimated at TD 0.002/Kwh. -7- Attachment TUNISIA: FIRST POWER PROJECT (LOAN 815-TUN) PROJECT COMPLETION REPORT I. Introduction 1.1 STEG, a government-owned corporation created in 1962 to take over the operations of seven private utility companies upon their nationalization, has been responsible for the production, transmission and distribution of electricity and gas for public consumption for the entire country. After physically integrating the seven separate systems, STEG started on a system- atic expansion of the integrated system and also turned its attention to matters of organization, management and finance. In 1971, the Bank and the Kuwait Fund for Arab Economic Development jointly made a loan of US$10 mil- lion to STEG (Bank Loan 724-TUN of US$7.5 million equivalent) to help finance a gas pipeline project for the purpose of transporting natural gas from the oil fields at El Borma to a steam power plant which has been constructed at Ghannouch near Gabes and to supply also other industrial consumers in the area. The second Bank loan (815-TUN) to STEG (Power Project) of US$12 mil- lion equivalent was made in 1972 to finance a project consisting of two 22-MW combustion turbines, located also at Ghannouch, transmission and distribution system expansion and consulting services for future plant and institutional development. This project was a logical follow-up to the gas pipeline project since it permitted the utilization for productive purposes of the remaining oil-associated gas from El Borma, which otherwise would have been lost, and helped STEG to continue the progress achieved under the pipeline project in institutional and organizational matters. A third Bank loan (1355-TUN) to STEG (Second Power Project) of US$14.5 million equivalent was made in 1977 to help finance a project now in progress comprising 150 MW of combustion turbine capacity in seven units of equal size to be installed in different locations. This loan helps finance a major part of STEG's development program for power generation, and gives the Bank the opportunity to continue its institution- building effort which started under the two previous loans. II. Project Preparation and Appraisal 2.1 In 1969 STEG investigated the possibility of utilizing the oil- associated gas at El Borma as a fuel for power production. This gas had been flared since 1966 when oil production started at El Borma. Following a series of studies STEG decided to construct the 300 km gas pipeline from El Borma to Ghannouch, where the Government was building a new port and industrial center - 8 - as part of its plan to promote the economic development of southern Tunisia. The gas pipeline was to supply fuel to a chemical industry, a brick factory and a 60-MW steam power plant, which were all operational by the end of 1972. As visualized when the gas pipeline loan (724-TUN) was made, about 5% of the gas would be used for the industrial requirement at Ghannouch and 95% would be available to operate the steam power plant and about 40 MW of new combus- tion turbine capacity. 2.2 At the beginning of 1971 STEG requested a Bank loan to finance the foreign exchange component of the next stage of its power system expan- sion, namely, the proposed combustion turbines at Ghannouch and the related extension of the transmission system. 2.3 After discussions with the Bank's preappraisal mission in March 1971, STEG submitted a comprehensive feasibility report which contained detailed information mainly with regard to: - the decree law of April 3, 1962 creating STEG; - STEG's organization and facilities; - the power market review and forecast; - annual and daily load curves of the system and the role of the different generating units; - the proposed program to meet forecast system demand through 1980 with the comparison of solutions; - the project description for the proposed combustion turbine installation and cost estimate; - the progress made on the electricity tariff; - STEG's organization chart by departments and sections; - proposed consulting services for accounting, billing, budget and inventory control and system to computerize basic data; - financial aspects and forecast. The feasibility report, which was entirely undertaken by STEG's staff, proved to be a valuable element in the preparation of the Bank's appraisal report. Additionally, the Bank engaged Gibbs and Hill, U.S.A. as consultants to review the use of the proposed combustion turbines for base-load operation. They confirmed that the El Borma gas is an ideal fuel since it is free of elements which would be harmful to combustion turbines. - 9 - 2.4 The appraisal of the Project was completed in March 1972. The issues raised during negotiations concerned: (a) Amount of the Loan The Tunisian delegation requested that the amount of the loan should be increased from $11.5 million to $12 million. About $100,000 of this addition was proposed to be used to finance rural electrification studies, originally not included in the Project and $400,000 to finance any possible cost increase resulting from the currency realignments after the return of the appraisal mission. The Tunisian request was accepted by the Bank. (b) Rate Covenant The Tunisian delegation requested that the proposed annual surplus, before charging depreciation or interest, of 9% on STEG's average fixed assets in operation less average accumulated customers' contributions should be reduced to 8%. In support of their re- quest, the Tunisian delegation argued that the Bank's forecast increases in STEG's distribution system were possibly on the low side and that STEG had planned to increase its investments in rural electrification, the rate of return on which is typi- cally well below the average return on other investments. In view of these arguments, a return of a minimum 8.5% was agreed during negotiations. (c) STEG's Accounts Receivable The Government agreed to ensure that future bills would be settled as they became due and that a means would be found to settle arrears. This was agreed to in general terms in Section 3.04 of the Guarantee Agreement and was detailed in a side letter. 2.5 During the previous three years, STEG, with the advice and assistance of consultants, had restructured and decentralized the organization, improved the accounting system, billing and collections, introduced budgetary controls and an internal audit, and had started to review the tariff structure. It was hoped that in addition to its contribution to the expansion of STEG's generat- ing facilities, this power project would help STEG to effect further institu- tional and managerial improvements. 2.6 In retrospect the preparation of the Project appears to have been expediently carried out. The appraisal identified the right issues and the whole process till approval of the loan took place without noticeable delays. The Project 2.7 The physical part of the Project comprised the principal facilities under STEG's 6-year expansion program covering the period 1971-76 to be - 10 - constructed during 1972-74. At the time of the appraisal the 6-year expan- sion program was estimated at some TD65.5 million (US$125 million) in current prices, of which about TD47.5 million (US$90.4 million) was for generation, transmission and distribution of electricity. Actual cost of the 6-year program for generation, transmission and distribution of electricity totalled TD80.3 million (US$186.6 million). The actual expenditures in TD for this part of the program were about 69% higher and their US$ equivalent about 100% higher than the estimated cost at the time of the appraisal. One of the causes of the increase in capital expenditures was a higher growth rate of electricity sales than expected (see para 4.1). This had a significant impact especially on expenditures for distribution facilities which almost doubled during the period. A higher rate of inflation than assumed at the time of the appraisal also contributed to the increased expenditures, but its impact cannot be precisely determined. 2.8 The physical part of the Project (see Map IBRD 12451R1(PCR)R) comprised two 22-MW gas turbines at Ghannouch and the related transmission facilities including the extension of the existing substations at Sfax (150/30 kV), Menzel Bourguiba (90/30 kV), Tunis West (90/10 kV), Tunis South (90/10 kV), a new substation at Robbana, the lines Ghannouch-Robbana (150 kV) and Ghannouch-Maknassy (225 kV) as well as equipment for general distribution expansion. For the Ghannouch-Maknassy transmission line an alternative solu- tion (Ghannouch-Sfax) has been mentioned in the appraisal report; the first solution was finally adopted mid-1972 with the agreement of the Bank on the basis of system stability studies prepared by STEG. In 1976, STEG proposed and the Bank agreed that part of the unexpended balance of the loan should be used for the purchase of one of the 225/150 kV transformers which were necessary for the 225-kV transmission line included in the Project. 2.9 The Project also included consulting services for: (i) system stability and power plant site studies; (ii) organization and improvement of management information and implementation of improved computer procedures; (iii) reorganization of the accounting system; (iv) transmission and distribution system inventory; (v) tariffs, with a view to introducing a more rational tariff structure; and (vi) a rural electrification study. III. Implementation 3.1 The loan became effective August 4, 1972, only two weeks later than planned. There were no major changes in the Project scope and design after loan effectiveness. - 11 - Project Execution 3.2 The engineering for the Project has been done by STEG's staff which proved to be competent and well-organized. The power plant was installed by the supplier (Alsthom - France) under a supply and erect contract. The trans- mission and distribution facilities were executed partly under supply and erect contracts and partly by STEG's own work force. These arrangements were as foreseen at the time of appraisal. 3.3 Installation of the combustion turbines was delayed by about two months for the first unit and three months for the second unit, due to delays in supplying the equipment. Blade damage due to dirt and rust particles in the El- Borma gas pipeline caused a delay of about five months in the official take- over by STEG of the two units and necessitated the installation in 1975 of multi-cyclone filters, a situation not foreseen by the consultants (para 2.3). 3.4 The transmission facilities included in the Project were erected without notable incidents, with the exception of the 150/30-kV substation at Robbana, where one of the two 15 MVA transformers was damaged causing a delay of about six months in the completion of the Robbana substation. Project Costs and Disbursement 3.5 The allocation of the loan was modified during Project execution to reflect contract values and expenditures. The following shows the esti- mated and actual costs of the Project in US$ equivalent as related to the Bank loan categories: - 12 - ---------------US$ (000 ---- /1 Appraisal Cost Estimate Actual Costs Local Foreign Total Local Foreign Total I. Gas turbines, elec- 1,809 5,086 6,895 300 4,424 4,724 trical and mechanical equipment, machinery, material and instal- lation costs II. Transmission line 2,066 2,943 5,009 2,567 3,478 6,045 and substation equipment, mate- rial and instal- lation costs III. Distribution equip- 477 1,000 1,477 2,200 3,356 5,556 ment and materials IV. Consulting Services 25 1,200 1,225 61 742 803 V. Unallocated 286 1,771 2,057 __ - Total 4,663 12,000 16,663 5,128 12,000 17,128 /1 The following rates of exchange (TD/US$) which prevailed in each year were applied: 0.48 in 1972, 0.42 in 1973, 0.44 in 1974 and 1975, 0.43 in 1976, 0.42 in 1977. The actual cost of the two combustion turbines and the related equipment, which were procured under a fixed price contract, was about 13% lower (US$ equivalent) than the appraisal estimate. The difference as well as the unallocated part of the loan were used to increase the allocation for distri- bution and transmission equipment included in the Project. This was in line with the increased growth of electricity consumption and the consequent higher capital expenditure for power. 3.6 All local costs have been borne by STEG out of its own resources. The loan of US$12 million covered the entire foreign exchange component of the Project. Actual disbursements as compared to the appraisal estimates are shown in the following: - 13 - Appraisal Estimate Actual Accumulated Accumulated Disbursements Disbursements IBRD Fiscal Year US$'000 Disbursed US$'000 Disbursed and Quarter Equivalent % Equivalent % 1972 4th 0 0 412 3 1973 1st 400 3 2,072 17 2nd 2,200 18 4,127 34 3rd 4,300 36 6,517 54 4th 6,300 53 7,332 61 1974 1st 8,200 68 8,072 67 2nd 9,900 83 8,504 71 3rd 10,300 86 8,799 73 4th 10,600 88 8,915 74 1975 1st 10,700 89 9,308 78 2nd 11,900 99 10,130 84 3rd 11,900 99 10,689 89 4th 12,000 100 11,225 93 1976 1st 11,236 94 2nd 11,237 94 3rd 11,465 95 4th 11,540 96 1977 1st 12,000 100 In the period through FY73 disbursements were faster because contracts were awarded sooner than expected. The loan was totally disbursed one year later than initially expected due to the 225/150-kV auto-transformer which was con- tracted in 1976 (see para 2.8). - 14 - IV. Operating Performance Market 4.1 The forecast of electricity sales for 1972-76 made by STEG and adopted in the appraisal report was based for low voltage consumers on extra- polation of past trends, and for medium voltage consumers on an individual review of industrial customers. The growth rates mentioned in the appraisal report were 8% for low voltage, 10% for medium voltage and 8.8% the average for total electricity consumption. The consumption figures shown in the appraisal report correspond however to different growth rates: 9.5% for low voltage, 7.8% for medium voltage and an average of 8.3% for total electricity consumption. Actual growth rates for 1971-76 were 14% for low voltage, 10.8% for medium voltage and 11.9% average for total consumption. Actual sales as compared to appraisal forecast are shown below: Growth Sales of Rate Electricity 1971-76 (GWh) 1971 1972 1973 1974 1975 1976 % Forecast Medium Voltage 445 480 520 555 600 645 7.8 Low Voltage 200 220 240 265 290 315 9.5 Total 645 700 760 820 890 960 8.3 Actual Medium Voltage 445 515 568 616 669 742 10.8 Low voltage 200 221 253 287 341 387 14.0 Total 645 736 821 903 1,010 1,129 11.9 The increased growth rate of electricity consumption was mainly the result of the Government's policy to speed up industrial development and to promote rural electrification, which could not have been foreseen during appraisal. Project's Role 4.2 The two combustion turbines were supposed to be operated as base- load capacities to utilize the remaining available gas from El Borma which otherwise would have been flared. Therefore, although the firm capacity of the system would have been sufficient to meet the demand in 1973, the combus- tion turbines had to be installed at the earliest possible date. Consequent- ly, their commissioning was planned for mid-1973. In the appraisal report it was assumed that the combustion turbines would be operated at high plant factors averaging 62% in 1973-1984 and reaching 85% during half of this period. The combustion turbines were ready for commercial operation only in February 1974 due to the technical incidents mentioned in para. 3.3. They have generated 750 GWh during 1974-1977, corresponding to an average plant factor of about - 15 - 50% due to technical problems (including a broken rotor shaft), as com- pared to the 1060 GWh assumed in the appraisal report for the same period which corresponds to an average load factor of 69%. Nevertheless, it can be estimated that the actual savings in system fuel costs for 1973-1975 due to the utilization of El Borma gas have not been lower than the TD 2 mil- lion assumed in the appraisal report because of an increased production of the Gannouch steam power plant which is also burning El Borma gas. 4.3 The associated gas reserves at El Borma have not proven to be as large as expected at the time the pipeline was constructed, partly because water injection used to increase oil production has lowered the gas/oil ratio. However, technical problems (para. 4.2) have also reduced gas turbine availability, so power output may not have been seriously affected by the gas supply reductions. In retrospect, it might have been wise for STEG to have initiated discussions with the Government on purchasing some of the Algerian El Borma gas as soon as the reduced gas reserve situation was apparent. In any event, to meet the increased demand in the Gabes region, STEG has obtained the right to use the Algerian share of the El Borma gas for which a nominal low price has been agreed upon. Under the contract signed in April 197 , the Algerian gas supply from El Borma would start with some 50 million m in 1980. After 1981 the import of Algerian gas from El Borma would gradually decrease till the depletion of the reserve. Even with the Algerian gas from El Borma, total demand in the Gabes area cannot be entirely covered from 1979 on. To meet this situation, STEG is considering the con- version of the 60-MW steam power plant at Ghannouch from gas to oil operation. The preliminary study undertaken by STEG showed that this would be more economical than the conversion of the combustion turbines from gas to oil operation in view of the longer life of the steam plant and the possibility of using residual oil for its operation. Due to the decrease in El Borma gas supply and the additional consumption of liquid fuel for power generation, it is estimated that an increase of 7-8% in electricity rates at the beginning of 1979 would be required to achieve the covenanted 8% rate of return (para. 5.2). The combustion turbines at Ghannouch would be operated tilt1982/83 with El Borma gas under load factors of 25-40%. After 1982, when the 300-MW steam power plant at Sousse, which is under construction, will be completed, the combustion turbines at Ghannouch will have the role of peak-load and stand-by capacities. V. Financial Performance Financial Covenants 5.1 Principal financial covenants incorporated in the loan documents were: A. Loan Agreement Section 5.02 - Accounts should be audited by independent auditors, acceptable to the Bank and sent to the Bank annually by April 30 - commencing in 1973. The accounts have been audited by the Middle East firm of Chartered Accountants (England) of Nawar and Co., which is acceptable to the Bank. These have, however, invariably been sent to the Bank late - generally in July of each year. STEG seems to be unable to advance this date and it is probably unrealistic to expect them by April 30. - 16 - Section 5.03 - Not later than January 1, 1973, STEG's electricity tariffs and other charges shall be comprehensive and reasonably related to the costs of providing its services and facilities. On the basis of the tariff study undertaken by STEG (para 6.4) a new marginal cost based tariff system was implemented together with a tariff adjustment in April 1975. Electricity rates were further increased effective June 1977, following an increase in fuel prices. Section 5.04 - Under Loan 815-TUN, effective January 1, 1973, STEG was required to earn a rate of return of 8-1/2% using average gross fixed assets as revalued from time to time, less average customers' contributions as the denominator and operating surplus before depreciation as the numerator. Effective January 1, 1977 (Loan 1355-TUN) a rate of return of riot less than 8% was required, using average net fixed assets, as revalued from time to time, less average customers' contributions as the denominator and net operat- ing income after depreciation as the numerator. STEG's performance under the rate of return covenants was satis- factory; in 1977 there was however a shortfall of one half of one percentage point in the required rate - this represented a revenue shortage of TD 1.2 million. There had, in fact, been a tariff increase in 1977, but as it was not introduced until June, STEG did not benefit from it for the full year. Had it been introduced effective January 1, 1977, the covenant would have been met. Section 5.05 - STEG shall not borrow long term unless its debt/ equity ratio is 45/55 or better. STEG's debt/equity ratio has varied from 32/68 in 1971 to 40/60 in 1977, and so has not had to request Bank permission for additional borrowing. Section 5.07 - STEG shall consult with the Bank prior to making any substantial investment in other than electricity and gas operations. No such investment has been made. B. Guarantee Agreement Section 3.04 and Supplemental Letter No. 2 - The Government under- took to take all appropriate measures to ensure that its agencies, depart- ments, local authorities and Government-controlled enterprises shall settle their electricity bills substantially as they become due. There has been an improvement in the situation since December 31, 1972, when an average 270 days bills were outstanding (160 days as at December 31, 1977). There is still room for improvement, particularly in the case of quasi-government enterprises. Failure to receive payment of accounts has been partly responsi- ble for the cash shortage STEG has been experiencing lately (para 5.4). Financial Results 5.2 The following four tables reflect STEG's actual results compared with the estimates prepared at the time of the appraisal for the year 1971 through 1977 - no estimates had been made for 1977. TUNIS SA SOCI:T TOMIlSIENIC DE LEUMCTfRICTlaT DU CAZ (STE) L å5 . d1S-TUI - ^umiå PRRIECT ~ ,~petc lieporL 'ITU 000'.) -------------51971 ---------- ----------1972---- - - - ---- - - - - ---1 - - - - - --975--------- ----- - - - --1974-~---- - -76------ - -- -. ElC.td Actu.5 Df1 . Eiitm111-14 Aa-Si %2Diff. 1,Am actual L1ff. EaimaLed Atal IDitt. EnI74a,-d Diff. £art-.gj Ai-u-i 2IsMUf. F.LI.Ld Ac-u1a hv 445 45U I 40 55 7 520 56 9 s5 616 11 600 669 2 645 567) å5 644 L9 20i 5 2 20 221 2 2 5 265 1. _ 29j 11 ) lu TOTAL 645 645 - 700 736 5 760 821 a 820 903 10 890 1.00 13 960 ,j29 t8 1.331 A..rag Revenue l0cS/kWh 16.4 18.2 11 16.7 16.6 (1) 16.6 16.6 - 16., 16.6 t 16.2 20.1 24 16.1 21.0 30 23.5 50l9t of E1eccty 50,59 11,749 15 11.712 12,249 5 k2.585 13.617 8 13.463 15.029 12 54.422 20.318 41 45.420 23,752 54 31.29/ 51e .f G,.. - Tnt1 65 582 (6) 670 606 (9) 680 626 <8> 696 620 (15) 724 686 (5) 753 730 (3) 850 S- 87 - - 67 54 (38) 87 98 13 95 4 95 1 55 5464 Ot1b- 1,oo Jj 349 (1> L861 15670 (_) .69I 2 365 4 L.9? 2,889 65 i,0 4.072 i_H 2.014 4759 16 L6 To-ak 8...... 52.795 13,680 (7) 14,330 14.527 Å 5,045 16.662 åt 16.043 18,636 16 57.546 2.52t0 47 58.222 29.3m8 6" 38.50 Co.t of Fuel 1,45b k.87 29 5s60 2.050 31 5.065 5.364 28 869 1,450 42 720 1.366 . 90 9m, 2,k49 44 5,17 P.l-ne Expeaseo · · - 71 4 (95) 206 94 (54) 206 212 3 206 395 92 201 696 226 705 4.rIoo and Wags 3.200 3.587 (3> 3.460 3,692 9 2.560 4.391 23 3.730 4,956 33 3,910 5.43 . 42 4,100 6.960 70 9,473 Other Expen,en 2,674 129 39 2.657 3,620 31 2.712 4.288 s8 2.974 6,311 452 3,271 10.084 208 3,5*5 52.693 262 66,496 L.. h d -o a capa (1f) (2.052) It ( 2I)(2) -i 2_1797) (2.45> 4 LI) (LM) Li i (4.870 <Lmå mi (L9) (L%05 iL9 Sub1o1al 5.603 6.662 19 5.5o6 -7,22 29 5.746 7.652 33 5.887 8.751 49 6.239 11.832 90 6.825 16.348 a6 22,902 Crl, Looar.ton 7.92 7.(b (2) 8624 7.4035 (6 9,299 9.M50 <3> 0.556 9.885 (3) 10.9u 13.378 23 1.,461 13.40 14 15.84d Dep.ecSotto 4,146 4.039 <7> 4.971 4,406 (It) 5.599 5.332 (M 6.051 6,106 2 6.59 6,448 l 6.794 7,526 AI 9,082 Inventory Wrire-Off 150 () 2 20 (9-- - !_ -- oIo5.-1 4.298 4.055 (6) 5.798 4.426 (24) 5.599 5,628 l 6.001 6,j66 2 6.358 6.566 3 6,798 7,850 55 9,325 Oeratin Sorgius 2.894 2,963 2 3,026 2,979 (2> 3.200 3.362 (0) 4.155 3.719 (i) 4,549 6.82 50 4,663 5.220 å2 6,521 l15eret S.0741 1.150 7 1.302 1,455 12 5.923 5.666 () 5.00 å~ 1,720 to) A.445 5.739 (10 #.90 2,614 40 3.555 AJos.s 30 -JiÄ?2 - - 1-040 __- - -L -L <525 14> -J1 tiet Scyus1 , i23 1,2 2. k L (k> 12 LL* ."2 £IL 1 Lo lin L »å I9ove.., Iii/ 6kr'.6Mo '11 9N10 1 96601 'I6596 96 69 oLo' 6 J4o 99 NL6i 9a'39 6, 'L9 yY,' 669L 9.t- W,9L A . IVJn.L 99 96 ON0 rr aWt'7 Tó6l? 6 0 go ' 69 01 9 r L91 L 0 6 £o' L U.V6 9 £?xlo '6 9 106,9 L6 0 106« £' t 1 o t6'69 1096 L '1 9 91 90,19 9 S69 i 19 E t 0 90(9 ,19 W95la Sofnt9s 19nm, - -u--3 -t.-~n ýý w-' 7o ( 1ý-,7 1 6t£'1119L-i - %L.L 9L9,! - 'i£6 - - - cgl,a LT!,91 "9,¿ " 9'0 ' 1 6L5 6W,z0 9<99 6,iL« :%9 69L1O roo^' 900" r-4 zmo ao 166 9 at'o orIW«g LW6 166'9 1669 1 166'9 166 9 1669 166'9 1"i I l 9) (59r 9)1 t (19 , O ( 1 M 9ø 099 "9 f6 49 9L 0l.6'091 999'0«t £91'56 SW.'601 %a-O6 £9'Lø 5669 No9 gg Vg tUg 6L £"' g 90969 66L L P'I 1 59' ¿90 16't 0 ar 9-or 9-5vli- 5-5r 5611 9 E'6 U 6 UNIg 00 109 "9a 9 9 zl 9L' fft 9 t 99«zg L99'U 6Li« LL 6 I i " "'" Lpo',t 56V'641 160'. 1 i S' 15 ET £WN9 31ýI w at o 1 96'm3 65L'toT ýi'ott NEýro 904'99 "Rd I2to pisn1tnY P219I134 tenV payen II sa~ 1en0y palvely11 1enlaV pa1inensa t2n'oy pamIr2a 1e0y p01I12ns -----AT-------- ------9/6-------- ------5/AT-------- ------- L61-------- ---- 6 ----- ------,61 -------- ------1161------ (oda u ido .)3roIII na . - M 519 iQY (mi2) 7vD ni j .4 I.L.Wls.' ) i0.i.gio1Nf Ds13. VI il $0Cly*I nletrIe*5t6 kr o,'u.C t8 Eta (STEC) Iom 615-TUm - P~3E PIOJECT -- T 1972-i976------------- - 1971------ --------1972------ --------1931------ --------1974------ --------975------ -------1976------ -------1977------ --- --- *atrna cah -t G~Inerion 7,192 7.058 5.824 7.445 9.299 9.0 10.556 9.885 10,907 13.375 *5,46) 13,040 5.848 50.647 52,7*8 37 49 D 0cre~se (cae ..bUurkis C.PI-I 198 377 968 4.001 (9*> (,804) 658 1.967 134 4.480 (226) 5.341 5.13? 1.441 13.991 C~~to.r. coltribut..n 2.069 å.073 1.863 590 1.180 1.694 1,224 1.716 1,260 3,925 1.300 4,120 5,76 6.823 12.345 13 3 C.pit. l.... - - - - - - 566 - 566 - 114 - - 1.246 Surplus.. ou Capita* Tr.ansac,t - - 930 - 421 - .086> - 311 - (1,21) - (241) (-,O80gå a s ... -ithdr l - .60 - 5 - "l -LS- 9ia -k -.9 SbhL 9,459 9.987 11.655 14.39 to,38 9.464 12,034 k4,999 12,301 2&,768 125135 2.324 27,3% 58.913 83,694 5866 2.524 1.996 2.407 *,601 3,970 1.552 &.3M5 829 25 1,105 - 143 5,715 7.757 5,540 h i .1 4*195 4262 40 2.55 - 1,229 ,35 L523 2300 14.351 7 .473 , 1 2 S.hl-ll 7 .9 i L.4 L . 4.110 1.315 2,058 LM7 10A)8 112. M4.494 15.602 .96337 To~ soukEcs 0 *.2 5 . 138 *66 3206 *0 6*rLecAT*U91 d Ca.PIta , 1ye4.t.u1e. 13,903 109.92 13.86 1*5.686 11152 9.098 8.128 12.740 8.457 26,427 9,937 29,650 939 51.549 95.6* Stud5es tc. - 482 - _ .- 267 .1 - 4 - 242 *8 su6b1o41a5 13.905 11.434 13,865 16.136 11,152 9365 8,138 12.976 8.457 26.969 9,937 32,071 55149 99,942 *00 *0u A.a,4aati 51859 5.475 5.835 2,633 2.403 2.537 2.643 2,66 2.775 2.90* 2,848 2,852 3,479 12,504 13.90 Interes1 lIli w1 G 50 l L '55 j 1.666 Lm2 1.2M L& L.73 LLia 1il 3.>5 8.863 9.194 Deb8 Sarw*ca 2,897 2 625 Lin2 4088 3 j? .M i.3 LSM Lfi iå lju L13i 2LI84 s ...a.l.1C- 16.802 14.029 17.002 20,224 15,478 13.58 12.671 A7,363 *3.17 33,608 14.648 32,143 5 72.916 122,326 *ncre40a (Decrano) *a ca, ~ 568 1.641 .1.75 (222> 6 ) 1 (30k _5 ( J2) 187 f1 J.599 (5.669) 201,m AP**-*CAT*095 j1,7 15.o29 *8,212 20.002 5 , 1., 7 *3,349 57,052 1i676 1,206 *4 83 37 1,, ...... L4'.. JE5S ....1 .... . - .- Isove5sa rM ulW iflIlA SOGIt TWNISUI14E UE LIVLC-M1M1 E KT DU GAZ 11TE0G Ian 81>-tuN - Po~fER FrRJEc co..pletilon Re.prt F~nanci.1 Ratioa (TD Oo') - 19)1------ --------1972 - - - - - -19173 - - - - --1974------ ---------1975 - - - - -- 1976------ ---------1971----- Ent l.ated l fl~9j~ igl,)r Ahctual atima&,d Ac~al Estainated Act1a1 EL,a~,d A: l Em1.d ActuaI KAmated Actual .iross l'xed Aets 86,5o( 83,234 110,344 107,759 121,398 114,310 129,441 124,653 136,581 133,154 115,391 1k9,395 Lea Depreciation (28,194) (27>805) (33.165) (31,892) (38 762) (36.938) (.4,763) (42,530) (51,121) (48.680) (57.919) <55.503) ,RA me. fixe Ass 58,312 55,429 77 ,119 75,a6? 82.636 77,372 8#,678 82,123 85,460 86,476 87,472 93~ 419 0b5 cu0to0ers'09 j 69 ..Lý 11 049 8 658 12 269 10 374 13 c b9 12 62 21 22 163 Average Grose Fixed Asset. in operat1on Lese Averee-~ Cu-tom-e C .trlt.t,n 76,423 7,287 s9,48M 88,045 105,412 102,759 113,761 109,966 120,112 117,37t 126,87 126,78 h 147,016 operatio,. len, Averee6,18 7,9 021 7,7 170 7,8 419. .. 1/>1 cNusto.een contrIt,utIo,n 50,300 49,351 58,80 58,201 69,448 68,348 7L,99t 70,231 72,170 7L,762 72,2&7 74,t97 casI ceneatio 7,192 7.018 8,824 7,405 9,299 9,010 10,156 9,885 10,9x7 13,378 11,461 13,040 1i,848 Vperating seeles 2,894 2,963 3,026 2,979 3,700 3,382 4.155 3.719 4,549 6,812 4,663 5,230 6,523 la1e or kuturn 724-TuN 1/ 12.3% 12.1 11.4% 9.8% 11.3% 11. 6% 12. 0% 12.0% I2.8% 15.8% 13.1% 13.9% 11.l. 815-Tu~ 8 9.4% 9.3 9.9% 8.4 8.8% 8.8% 8.9% 9.0% 9.1% 11.4% 9.0% lo.% 10.8% 1355-umN 3' 5.8% 6.0% 5.1% 5.1 5.3% 6.9% 5.8% 5.3% 6.3% 9.9% 6.5% 7.o< 7.5g Total Equity H.Ll. 34:66 32:6b 36:64 34:66 36:64 34;66 34:66 3268 :3268 33:67 30:70 37 63 ko.60 Lene Service coerage 2.5 2.1 2.8 1.8 2.1 2.1 2.2 2.3 2.3 2.9 2.4 .4 . I ' caIh generstln/net fIxe.d aeset. a in oeratlon 2/ Cash generation/average gro,. fixed asseta In operation, len, nverage custmrs' ntribu.tions (elfective 1/1/73) V peratling *urplUe/verOae nei fed aseer In op.eration, le,, erage cutosrs' coetributIons Inffective 1/1/771 N2ved.er 118 - 21 - 5.3 After 1971 there was an increase each year in actual sales over those forecast, and in 1977 total sales were 30% above estimates. Expenses also increased due to the inflationary trends of the 1970s and tariffs were increased to keep up with increased costs, although tariff increases lagged behind cost increases. The result was that in the five years 1972-76 operating surpluses totalled TD 22.1 million compared with an estimated TD 20.1 million. This represents an increase of 10%; net fixed assets in operation are 7% higher, (TD 93.9 million compared with an estimated TD 87.5 million). 5.4 Work in progress is higher due to an acceleration of the construc- tion program (particularly in generation) necessitated by the increase in sales. In the Balance Sheet, the disturbing factor is the non-payment of accounts by Government and quasi-government entities. This is a perennial problem, by no means confined to Tunisia, which was taken up with the Govern- ment. Remedial action has been slow, although some improvement has taken place. 5.5 Capital expenditure over the period 1972-76 was nearly twice as high as originally estimated, due to increased costs and a larger program (para 2.7). This inevitably had an effect on the method of financing but, in general, the result was satisfactory and similar to STEG's financing plan at the time of appraisal - 49% from internal cash generation; 1% from capital increase; 37% from loans and 13% from reduction in working capital. The rate of return, debt/equity ratio and annual debt service coverage remained in general satisfactory (para 5.1). 5.6 Assets have not been revalued during the six years; however, the significance of revaluation for the rate of return is somewhat reduced, since over 50% of the gross assets have been put into service during that period. As usual, there is a reluctance on the part of the borrower and the Govern- ment to revalue assets. There is, nevertheless, a need for revaluation in order to have a realistic charge for depreciation in the accounts, and thus to have a more realistic cash flow. The need for revaluation was discussed with the Tunisians during the negotiations for the second power loan. It would be necessary for the Bank to focus on this matter in the future with a view to reaching agreement with the Tunisians on principles and procedures for revaluation of assets. VI. Consulting Services 6.1 The consulting services included in the Project (para 2.9) had in general the expected positive results. 6.2 The system stability and power site study has been carried out by Electricite de France (EdF) with the participation of a Tunisian engineer. It permitted STEG to (a) define several possible configurations of the grid; (b) establish the best locations for the next combustion turbines; (c) deter- mine the means of compensating the reactive energy in 1973/74; (d) justify - 22 - the introduction of 225 kV on the Maknassy-Tunis line; (e) establish the con- ditions for the interconnexion with the Algerian system in 1977/78. In 1975 the study was updated for 1980/81 and 1985 by Hydro Quebec (Montreal) with the participation of another Tunisian engineer. It confirmed the results of STEG's calculations with regard to the stability of the system based on a computer model set up by the company. 6.3 Organization and improvement of management information and imple- mentation of improved computer procedures was undertaken by STEG with the assistance of SETEC (France). It resulted in (a) an annual budget integrated both in STEG's annual development plan and in its accounts; (b) a rigorous follow-up of the investments; (c) the identification of expenses for auxiliary activities; (d) the implementation of two computerized information systems for STEG's accounts and capital investments, including stocks; (e) the implementa- tion of a computer system for the management of STEG's accounts receivable, which permitted a reduction of the time needed for bill presentation to the customers from two months to one day for Tunis and two days for all other areas. The management of the accounts department through computer techniques has not been achieved. In spite of the improvements obtained, the situation is not fully satisfactory, especially with regard to STEG's accounts receiv- able (para 5.1). 6.4 The reorganization of the accounting system included (a) the estab- lishment, with the aid of an expert from EdF, of an internal audit division under the Financial Department; (b) organization of the Financial Department, with special emphasis on customer relations outside Tunis; (c) training of financial staff. In 1978 the internal audit division became an independent department under the direct authority of STEG's General Director, and is responsible for the whole internal control of the enterprise. 6.5 The tariff study was undertaken by STEG with the technical assis- tance of EdF and was based on marginal costs. It resulted in a new tariff structure which was implemented together with a rate adjustment in April 1975. The Bank had a significant contribution to this undertaking both with regard to the study itself and to its application in STEG for establishing a new tariff structure based on costs. The experience gained from this activity has been synthesized in a case study prepared under the aegis of the Bank and sponsored by its Research Committee 1/. The new tariff structure in STEG was implemented together with a rate adjustment in April 1975. The new tariff system complies with the following basic requirements: - to simplify existing tariffs for medium and low voltage consumers; - to achieve a higher internal coherence both with regard to economic rigor and equal treatment of consumers; 1/ See Raplh Turvey and Denis Anderson, "Electricity Tariffs in Tunisia" in Electricity Economics, Essays and Case studies - Chapter 4, published for the World Bank by the John Hopkins University Press. - 23 - - to affect as little as possible the production cost for those industries which are most sensitive to cost of electricity; - to limit the burden of electricity bills for low income domestic consumers The new tariff system provided the addition of high voltage tariffs to the existing tariffs for medium and low voltage consumers. The immediate effect of the new tariffs was a 11% increase in STEG's revenues. Tariffs were again raised in June 1977 following the increase in fuel prices. It resulted in an average increase of 20% in the price of electricity. The activity with regard to electricity tariffs is being continued in connection with a study which the Tunisian government has agreed to undertake under the Second Power Project (1355-TUN) with a view to determining an appropriate pricing policy for oil, gas and electricity. 6.6 Technical Audit of the Distribution System. This study was entrusted by STEG to "Research and Development" (Belgium). It permitted the detection of weaknesses of the distribution networks and resulted in (a) implementation of a program to increase the reliability and improve the quality of electri- city supply; (b) introduction of single-phase distribution in rural areas; (c) regrouping of functional activities (both technical and commercial) in the same department. 6.7 The rural electrification study which at the time of the appraisal had been included in the Project, was partly treated under the technical audit of the distribution system. The remaining items were included in a study financed by the Canadian International Development Agency. VII. Project Justification Return on Investment 7.1 The ex-post return on investment is 44%, based on benefits and costs expressed in 1972 prices (Annex 1). In the analysis, all inputs were con- verted to their equivalent 1972 values to put the ex-post rate and ex-ante rates of return in comparable basis. The return on investment has increased since the Project was appraised (the ex-post. rate of return is greater than the ex-ante rate of 24%), despite unfavorable developments that took place since 1973. These developments include decreased contribution by the Project to STEG's total output, and increased cost of gas because the Government's intentions to purchase Algerian flared gas to complement its declining supply of flared gas. 7.2 The comparison of the ex-post and ex-ante rates of return is not feasible because of the assumption used for the calculation of each. However, irrespective of the assumption used, when either the ex-ante or ex-post rates of return is compared to the opportunity cost of capital of, say, 10% or, even 15%, it is possible to conclude that, as an investment, the Project continues, - 24 - as was expected during appraisal, to yield a return greater than the cost of capital to the economy. VIII. Conclusions 8.1 The project preparation was done by STEG well in an advance and in adequate detail to allow the Bank to appraise the project and approve the loan in the shortest possible time. 8.2 All things considered, the project was carried out quite success- fully. For STEG, the Power Project is significant because it marks the first time that it undertook to review the designs and technical specifications for a power plant by its own staff, with little external help. Thus, STEG gained valuable technical and coordinating experience which proved to be beneficial for the installation and operation of the eleven combustion tur- bine units totalling some 260 MW, which were commissioned since 1974 and of which seven were included in the Second Power Project. 8.3 During appraisal of the Power Project, the Bank accepted the load forecasts prepared by STEG as reasonable. However, STEG's actual sales turned out to be higher than projected (para 4.1). Although there are no reasons to suppose that this could have been foreseen, the experience with this project caused the Bank to examine the load forecast for the Second Power Project more critically and to review the consumption figures, especially with regard to major industrial consumers, with the Ministry of Planning. 8.4 The availability of El Borma gas was overestimated by STEG. So far this has had no negative impact on the Project, but it can be foreseen that the period during which the combustion turbines would use low cost indigenous El Borma gas will be shorter than expected. To meet this situation, STEG would use from 1979 oil associated gas from the Algerian part of the El Borma field. The resulting slight increase in fuel costs for the gas turbines would have an insignificant impact on the economic merit of the Project. 8.5 The assumption made at appraisal with regard to the role of the combustion turbines as base-load capacities proved to be optimistic. Due to technical incidents which are not unusual for this type of generating unit, especially when no experience is available in the country, the two 22-MW units have generated during the first three years only about 65% of their assumed output. For the whole power system, this has been, however, com- pensated by a higher utilization of El Borma gas for the steam power plant at Ghannouch. 8.6 The consultants' services included in the Project were of high quality and contributed, as expected, to the institutional and managerial improvements achieved by STEG, making it a well-organized and efficient utility. Much of the credit for this goes to the very able management team STEG has had for some time. Through the medium of this Project, the Bank has also contributed significantly to this development. Its contribution - 25 - was particularly significant with regard to the tariff study and the implemen- tation of a new tariff structure. Europe, Middle East and North Africa Regional Office November 1978 - 26 - ANNEX Page 1 of 2 TUNISIA SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ (STEG) LOAN 815-TUN - POWER PROJECT POWER PROJECT Fuel Cost 1. A cost for the flared gas was derived for the ex-post analysis because the Government continues to price it without regard to the value of that resource to the economy. In the absence of market determined prices, marginal cost is the best proxy for the value of any domestic resource to the economy. The marginal cost for the Tunisian flared gas is TD 1.5/1000 Nm3 (US$3.25/1000 Nm3), expressed in 1972 prices. This cost covers capital cost of the pipeline, operation and maintenance cost and a return on capital of 10%. Furthermore, in order to meet the continued industrial demand for the declining supply of Tunisian flared gas from El Borma, the Government will purchase Algerian flared gas at TD 2.10/1000 Nm3 (US$5.00/1000 Nm3) after it completes the extension of the pipeline by 1979 to transport the Algerian gas. The cost of the Algerian gas was increased to include the pipeline extension cost, the operation and maintenance cost and a return on capital of 10%. The cost of gas to be used by the Project after 1979 is equal to the weighted costs of the Tunisian and Algerian gas. Cost of Transmission and Distribution 2. The ex-post rate of return analysis attributes a cost for trans- mission and distribution for each kWh that was and would be produced by the project. This is equal to the incremental cost of delivering an additional kWh to any of STEG's electricity consumers and is based on the utility's investment program since 1972. For the analysis, the incremental cost was adjusted downwards to compensate for the fact that the Project's cost included both a transmission and distribution components. - 27 - .ANNEX Page 2 of 2 TUNISIA SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ (STEG) LOAN 815-TUN - POWER PROJECT Completion Report Ex-post Calculation of Return on Investment Project. Total- Averae2/, 3/ Capital/ Operating- 3/,7 uel1,7,' and Output revenue Revenue Cost Cost Cost Distribution Cost (in GWh) (TD 1,000) (TD 1,000) (TD 1,000) (TD 1,000) (TD 1,000) (TD 1,000) 1972 - - - 307.2 - - 1973 36 531.0 0.01475 3,755.9 41.7 18.72 72.0 1974 224 3,082.0 0.01376 1,039.4 42.5 109.20 448.0 1975 185 2,776.0 0.01501 841.5 44.8 85.80 370.0 1976 187 2,925.0 0.01564 48.3 87.40 374.0 1977 154 2,509.0 0.01629 52.1 70.20 308.0 1978 160 2,670.0 0.01669 73.30 320.0 1979 80 1,335.0 37.40 160.0 1980 170 2,837.0 78.00 340.0 1981 120 2,003.0 60.60 240.0 1982 100 1,669.0 52.0 200.0 1983 50 834.0 26.0 100.0 1984 30 501.0 15.6 60.0 1985 30 501.0 15.6 60.0 1986 30 501.0 15.6 60.0 1987 30 501.0 15.6 60.0 1988 10 501.0 15.6 50.0 1/ 'et output by the generating plant. 2/ Average revenue defined as the ratio of total revenue and total kWh sold by the utility. 3/ All current values and races were converted to their equivalent 1972 values by using the index of the Gross Domestic Product price deflacor as follows: 1972*100, 1973-120, 1974-129.3, 1975*134.0, 1976-134.5, 1977-143.9, 1978-150.0 (forecasted). 4/ Refers to actual capital outlays for tne Project unich includes seneration, transmission and distribution components. 3/ Foreign costs component of the Project costs were converted to their equivalent values in domestic currency using the following exchange rates: 1972-0.48 TD/USS, 1973-0.42 TD/USS, 1974-0.44 TD/USS, 1975-0.44 TD/USS, 1976-0.43TD/US$, 1977-0.42 TD/USS. 6/ Foreign costs were expressed in their equivalent 1972 values using the following index: 1972-L00, 1973-111.0, 1974-122, 1975-133, 1976-144, 1977*155.0. 7/ Forecasted costs after 1978 are expressed in 1977 prices and their conversion to 1972 values is accomplished by the price index for 1977. 8/ Estimated fuel cost for 1973-1978 is based on investment and operating costs related to the pipeline and is equal to TD 1,560/106 qM3. After 1979 the plant will burn a mixture of Algerian and Tunisian flared gas which requires the extension of the pipeline in addition to the price paid to the Algerians. The cost of flared gas after 1979 is TD 1,733/106 Nm3. Both costs are expressed in terms of 1972 prices. 9/ The average incremental cost of transmission and distribution is 0.002 TD/kWh expressed in 1972 prices. November 1978 ° 10 12° TUNISIA SOCIETE TUNISIENNE DE L'ELECTRICITE Biizerte ET DU GAS (STEG) ELECTRIC POWER SYSTEM Milenzel Bourguib El Fotilbdh EXISTING 1977 Financed from Bank Loan 815-TUN: nl Maalos * Combustion Turbine Stations E Aroussi IS Goulte 150 kV Substations El Hajiar Cued Zarga - STEG Gas Pi elne * Extension of 150 kV Substations FernoKnrb ED7 Extension of 90 kiv Substations Beja Sidi Salem 225 kV Transmission lines M Nabeul 90 kV Transmission Lines Mejez Sfa C- Jendouba ~ 7_ amne Generating Stations: Souk Ahros Nebeur HSteam Turbine Stations Combustion Turbine Stations Hydro Stations M'Daourouch El KeA Diesel Stations Substations: 36 ' El Aouinet a.erutne ueslatia souss (ee 225 kV 36 - -_ _ _ detail) * 150 kV Kairouan 90 kV O M'saken Transmission Lines Moknine 225 kV 150 kV 90 kV Pipelines: A L G E R I A Kasserine -°---°- Gas Pipelines Oil Pipelines Sfax District Centers --- .International boundaries Sidi Behara UNDER CONSTRUCTION OR APPROVED Maknassy Sidi Agareb S Generating Stations: - Steam Turbine Stations 0 Combustion Turbine Stations ~ Hydro Stations Gafsa Substations: Metlaoui La Skhirro 225kV 125 kV - 90 kV -34'* Ghannouch Transmission Lines: Tozeur) B c m Gabs 225kV BoucthemmaRobbana 125 kV 90 kV -o-- - Gas Pipelines(Planned) Zrzis0 Note This mop is a reconstruction and is hosed on 1BR0-3701R,,l Morch 1972, and IBRD /245/R1, MrNh Noember 197d. I? depicts the present situation. Tunis To-Tataouine TUNIS z Noossen 0 4.0 8,0 20 Kilometers 0 40 t0 Akouda 2' 32' SP-I 32° Centrale 1 L I.BAYTA de Sousse L c B Y A MOco . øf iA Mederen Se Th,s mep has been prepared by the World Bank's staff exicusiely f, or, E SSSOV E the convenience o f the readers eR SSthe repor to which it is aiteched i i BYA REPUBLIC raken The denommatons esed and the GF mEl Borma bo-dedies shown- otis map EGYPT do not rmply, on the part ef the World Bank and its afftrates, any d eudgment onhe. eastuso 1nyto-fr nrayende,nrent MALI NIGER c SUDAN re nr an~~~~elpnne et senh brodae ...I d..OS Ci