Tanzania - Fourth Power (Mtera Hydroelectric) Project

Document of The World Bank - FOR OFFICIAL USE ONLY Report No. 4050-TA STAFF APPRAISAL REPORT TANZANIA FOURTH POWER PROJECT June 29, 1983 -~~~~~~Z Energy Division Eastern Africa Regional Office 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.  CURRENCY EQUIVALENTS 1 Tanzania Shilling (TSh) = US$0.082 US$1 = TSh 12.2 1 TSh = 100 T cents WEIGHTS AND MEASURES I liter = 1.057 quarts 1 meter (m) = 3.28 feet 1 kilometer (km) = 0.621 miles 1 square kilometer (km2) = 0.386 square miles 1 kilovolt (kV) = 1,000 volts 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts 1 megawatt hour (MWh) = 1,000 kilowatt hours 1 megavolt ampere (MVA) = 1,000 kilovolt ampere (kVA) 1 gigawatt hour (GWh) = 1 million kilowatt hours 1 kilo calorie (kcal) = 3.97 British thermal units (Btu) 1 ton of coal equivalent (tce) = 7,000,000 kilocalories 1 ton of oil equivalent (toe) = 10,500,000 kilocalories (kcal) ABBREVIATIONS AND ACRONYMS Acres = Acres International Limited AATP = Arusha Appropriate Technology Project BADEA = Arab Bank for Economic Development in Africa CIDA = Canadian International Development Agency EAPL = East African Power and Lighting Company Limited KfW = Kreditanstalt fur Wiederaufbau MWE = Ministry of Water and Energy NORAD = Norwegian Agency for Development OPEC = Organization of Petroleum Exporting Countries RUBADA = Rufiji Basin Development Authority SIDA = Swedish International Development Authority SIDO = Small Industries Development Organization SWECO = Swedish Consulting Group TANESCO = Tanzania Electric Supply Company Limited TARECO = Tanzania Rural Electrification Corporation TTI = Technical Training Institute TANESCO's Financial Year (FY) Calendar This report was prepared by Messrs. J. Besant-Jones (Economist), V. Mastilovic (Engineer) and R. Mitchell (Financial Analyst) and is based on the findings of the appraisal mission which visited Tanzania in December 1981. Mission members included Ihsan Tuncay (Mission Leader), David Hutchins (Consultant) and Gerd Steinke.  FOR OICIAL USE ONLY TANZANIA STAFF APPRAISAL REPORT FOURTH POWER PROJECT Table of Contents Page No. I. THE ENERGY AND POWER SECTOR Energy Resources and Planning ...... . ......................... 1 Renewable Energy Resources . ............... . 1 1980 Energy Balance . .................................. * ..... 2 Energy Prices ........................... 0.... 3 Power Sector ................................................ 4 Existing TANESCO Facilities . ...... .... ....... ..... .. ...... .. 5 Access to Service and Electrification of Rural Areas .... .... 6 Role of IDA/Bank ........ 0...................... 6 Government Strategy in the Power Sector ..................... 7 II. THE BORROWER, BENEFICIARY AND EXECUTING AGENCY The Borrower .................................. 8 The Beneficiary and Executing Agency ........................ 8 Accounting and Auditing ..................................... 8 Billing and Collection ....................................... o ............. 9 Personnel and Training ..................................... 9 Insurance ............ ....................................... 10 III. DEVELOPMENT PROGRAM AND THE PROJECT Demand and Market ..... ........ ................. 10 Development Program ................... . .................11 Project Objectives ...... .. ........... 13 Project Description ................... 13 Cost Estimates ............................................ 14 Project Financing ........................................ 16 Engineering Consultants' Services and Project Implementation ............... . ................... 17 Procurement ........................................ 17 Disbursement . ........................................ 18 Project Monitoring and Evaluation ........................... 18 Environmental Aspects . . ...................................... 18 IV. FINANCIAL ASPECTS TANESCO's Past Financial Performance .... . ......... 19 TANESCO Cs 1980 Financial Position ........................... 20 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.  - ii - Page No. Tariff Levels and Rate of Return ........................... 21 TANESCO's Financing Plan ...... .............................. 23 Future Operations and Financial Performance ................ 25 V. ECONOMIC ANALYSIS Need for the Project ....................................... 26 Least Cost Solution ...... ................................. 26 Power System Costs ...................................... ... 27 Economic Rate of Return ...... .............................. 29 Tariffs .................................................... 29 Risks ...................................................... 30 VI. AGREEMENTS REACHED AND RECOMMENDATIONS ................. ... 31 LIST OF ANNEXES 1. TANESCO - Existing Power Facilities 2. Statistical Data on TANESCO's Power System 3. TANESCO - Organizational Structure 4. TANESCO - Future Sales and Maximum Demand 5. Project Description 6. Project Cost Estimates 7. Implementation Schedule 8. Disbursement Schedule 9. Project Monitoring Guidelines 10. TANESCO - Income Statements, 1978-1990 11. TANESCO - Balance Sheets, 1978-1990 12. TANESCO - Cash Flow Projections, 1981-1990 13. Notes and Assumptions for Financial Projections 14. Economic Analysis - Least Cost Solution 15. Economic Rate of Return 16. Selected Documents and Data Available in the Project File MAP IBRD 16231 TANESCO's Principal Power Facilities and the Proposed Project  I. THE ENERGY AND POWER SECTOR Energy Resources and Planning 1.01 Tanzania's energy resources are large and diverse but have not yet been exploited systematically. In addition to forestry resources, the country has coal deposits in the south-western area estimated at about 300 million tons of proven reserves. Despite their remoteness from the main population centers and harbors, exploitation on a sizeable scale appears feasible and is being examined under a recently approved I.D.A. assisted coal engineering project. Tanzania has si nificant natural gas deposits on Songo-Songo island (about 800 billion ftf proven) and possible additional reserves at Kimbiji and Mnazi Bay where exploration is continuing. The potential for oil is being investigated although no significant discovery has yet been made. 1/ Tanzania also has a significant hydro power potential mostly sited in the basins of various rivers which drain into the Indian Ocean. The country's geothermal and uranium potential is unexplored. Tanzania has a general energy policy for the development of various energy forms, giving priority to renewable energy resources. However, a systematic approach to the development of existing resources, supply of fuel and its transportation, maintenance of equipment and training has yet to be established. A UNDP-Bank joint energy assessment mission is visiting Tanzania in mid 1983. Renewable Energy Resources 1.02 Tanzania has so far concentrated its efforts on six types of renewable energy resources for development, i.e. biomass, hydro power, animal power, wind, solar and geothermal. At present, Tanzania depends mostly on biomass sources in the form of firewood for heating, cooking and some industrial processes, and on hydro power for electric energy. 1.03 Firewood and charcoal, which provide about 86% of Tanzania's total energy consumption, are the traditional sources of energy particularly in the rural areas. About 90% of the population lives in the villages and depends almost exclusively on firewood. Current consumption is estimated at about 35 million m3 (about 2.1 m3 per capita per annum); and the annual average growth of consumption is about 1.7%. The household use of firewood as well as by industrial processes (such as tobacco curing, tea drying, fish smoking, heating, brewing, brick-making and pottery) are causing sources to be fast depleted. The Government has formulated strategies to avoid deforestation by introducing simple technologies such as condensing wood residues into readily transportable briquettes and pellets, improving the design of wood stoves, and by reforesting and controlling wood harvesting. Tanzania has also made efforts to develop biogas and gasification by particle combustion projects in recent years. The Small Industries Development Organization (SIDO) and the Arusha 1/ The Bank financed an exploration project in 1980 to assess petroleum at Songo-Songo (IDA Credit 27-TA for US$30 million, June 30, 1980) and oil-gas exploration project for US$20 million (IDA Credit 1199-TA, January 13, 1982).  -2- Appropriate Technology Project (AATP), both government organizations, have about 16 planned projects (comprising the construction of gas tanks with a total capacity of about 240 m3, at a cost of about US$30,000). 1.04 So far more than 70 potential sites for hydro power and irrigation have been identified in Tanzania, mostly by the UN Food and Agricultural Organization. The total hydroelectric potential has been estimated to be about 19,000 GWh per year production capability, with about 3,800 MW capacity, 2/ of which 247 MW 3/ has been developed. In addition to the large hydroelectric power potential, there are also a number of sites suitable for mini hydro stations mostly in rural areas far from the main power grid and the major population centers. About 20 mini hydro stations operate in Tanzania with a total capacity of 0.9 MW. The Norwegian Agency for Development (NORAD), Swedish International Development Authority (SIDA) and the Federal Republic of Germany - Kreditanstalt fur Wiederaufbau (KfW) are investigating about 30 sites with a total capacity of about 50 MW in the northern and southern parts of the country. 1.05 There are various geothermal areas mostly located in the north- east and south-west of the country in the Great Rift Valley. Investigations are continuing through SIDA and initial indications are promising. 1980 Energy Balance 1.06 The Ministry of Water and Energy (MWE) estimates Tanzania's total gross energy usage in 1980 to be about 5,000 thousand toe. No energy has been exported (except for sales to ships of about 50,000 tons of refined oil products from the Dar es Salaam refinery (TIPER) in 1980). About 87% of all energy consumed was provided locally (mainly firewood). Coal is predominantly used in industry and transportation. About 13% of all energy used in 1980 was imported, almost entirely in the form of crude and refined oil products from the Middle East and North Africa. Details of energy consumption in 1980 are shown follow: 2/ Estimated hydro power potential of major rivers is: Kagera River 280 MW (Rusomo-Kishanda projects); Mara River 89 MW, Wami River 120 MW, Rufiji River 2,100 MW (Stiegler's Gorge project); Kilombero River 550 MW (Kingenenas/Shuguri Falls projects); Great Ruaha River 280 MW (Kidatu and Mtera projects); Nkiwe, Rumbila and Rumakali Rivers 160 MW; Songwe River 50 MW; Ntembwe, Kalumbo Rivers 60 MW; and Malagarasi River 100 MW. 3/ Wami/Pangani Rivers (Hale station 20 MW, Pangani station 17 MW, Nyumba Ya Mungu station 8 MW); Great Ruaha River (Kidatu station 200 MW); Little Ruaha River (Iringa 1 MW); and Songwe River (Mbeya 1 MW).  - 3 - Tanzania's Energy Consumption (1980) Local toe (thousand) c/ % Firewood 4,300 86 Coal 5 - Electricity a/ 55 1 Subtotal 4,360 87 Imported b/ Liquid petroleum gas 6 Motor fuel (premium and regular) 110 2 Kerosene 73 1 Gas oil 249 5 Industrial diesel 55 1 Fuel oil 126 3 Jet oil 67 1 Subtotal 686 13 Total Consumption 5,040 100 Source: Ministry of Water and Energy a/ Production from hydro stations. Production from diesel stations is included in the "Imported". Kilombero sugar estates and other captive plants produce some power from bagasse (about 10 GWh per annum), which is included in electricity. b/ In 1980 616,904 tons of crude oil and 255,203 tons (872 thousand toe) of refined products were imported. c/ toe 1.0 = tce 1.5; toe 1.0 = 4,038 kWh 1.07 The Tanzanian Government has made substantial efforts to reduce oil usage in the country since the 1973/74 worldwide energy crisis. Total imports of crude oil and refined products in 1980 were about 872,000 tons. Some refined products were also exported to neighboring countries directly by the petroleum companies (i.e. Shell, BP and AGIP). The present level of net imports is approximately the same as it was in 1974/75, so that Tanzania has achieved about a zero growth rate in oil consumption (as against a GNP growth of 0.8% p.a., and a population growth rate of 3.4% p.a.) over the past six or seven years through conservation measures such as restriction on weekend travel by car and gas oil rationing. Crude oil is being refined at the TIPER refinery with a current production rate of about 500,000 tons per annum. Energy Prices 1.08 The prices of oil products and other types of energy are controlled by the Government.  -4- Electricity is used mainly in industry and commerce, but it is also used for lighting water heating and air conditioning (to a small extent). Other fuels are used for cooking and water heating. The effect of different pricing policies on energy consumption and the possible need to change the tariff structure to a more economic basis will be subject of the electricity tariff study (paras. 5.14 - 5.15). The following table compares 1981 average energy prices (all prices as sold in Dar es Salaam): Retail Retail US$ per (including (including Million taxes) Tax taxes) Kcal -------TSh-------- --------US$-------- Firewood a/ (tonne) 150 - 18 12 Coal (tonne) 480 - 57 10 Electricity (MWh) 650 - 77 90 Liquid petroleum gas (cu ft) 5,265 360 627 60 Motor fuel (premium) (thousand liters) 9,350 1,432 1,113 107 Motor fuel (regular) 7,250 1,432 863 82 Kerosene (regular) 3,350 184 399 38 Industrial diesel 2,405 - 286 27 Gas oil 3,900 694 464 44 Fuel oil 2,134 - 254 24 Jet oil 3,849 160 458 44 a/ Firewood is practically "free in the rural areas. Oil prices are based on the imported cost of crude oil and refined products plus transportation and tax. There are also subsidies and cross subsidies (e.g. between kerosene, industrial diesel and fuel oil). Price and taxation will be fully reviewed during the proposed energy assessment sector work (para. 1.01). Power Sector 1.09 The total electrical energy consumption of the country in 1980 was about 880 GWh, which corresponds to a per capita energy use of about 44 kWh/year, and is among the low levels of electricity use in the Eastern Africa Region, reflecting the moderate level of industrial activity. Annual electricity consumption per capita in other East African countries is approximately as follows: Kenya 90 kWh, Mauritius 573 kWh, Madagascar 41 kWh, Ethiopia 22 kWh, Botswana 450 kWh. 1.10 The Tanzania Electricity Supply Company Ltd (TANESCO) is the country's main power producer, but a small amount of electrical energy (about 2%) is also generated by parastatals and private organizations which have captive power plants on sugar, tea and coffee estates, the oil refinery, textile factories and large farms. These power plants operate under license from TANESCO, which has so far issued about 95 licenses for diesel, steam and small hydro plants, corresponding to a total capacity of about 7.5 MW and producing about 20 GWh per annum.  -5- 1.11 Another public organization, the Rufiji Basin Development Authority (RUBADA), established under MWE in 1975 to harness the multi-purpose potential of the Rufiji River, also has authority (by its Act) to plan, construct and generate power facilities in the Basin and to sell electric energy. This situation of confused responsibilities creates considerable difficulties and overlap in the planning of power sector activities. RUBADA has been concentrating on the preparation of hydro power projects at Stiegler's Gorge, Kingenenas and Shuguri Falls, rather than on projects for agricultural, industrial and social development of the Rufiji Basin. The result has been costly duplication in power sector planning by TANESCO and RUBADA, a situation which Tanzania, with its constraints in skilled manpower and finance, can ill afford and which has delayed identification and preparation of the proposed project. Furthermore, the Government is planning a new organization, also accountable to MWE, to be responsible for rural electrification, the Tanzania Rural Electrification Corporation (TARECO), whose prime objective would be the provision of relatively inexpensive power to rural communities throughout the country through renewable resources of energy such as mini-hydro plants (para. 1.16). The Government has already employed a CIDA-financed energy specialist for the establishment of an energy planning unit in the Ministry of Water and Energy. In order to clarify the responsibilities and duties of each organization in the power sector, during negotiations the Government has agreed to employ consultants whose qualifications, experience and terms of reference shall be satisfactory to IDA to prepare a power sector organization study by December 31, 1984, and, after taking into account comments of IDA, to implement by December 31, 1985 all appropriate actions, based on recommendations of that study. Similarly, TANESCO has agreed to employ consultants with qualifications, experience and terms of reference satisfactory to IDA to prepare, by December 31, 1984, a long-range power sector development study for the timely identification of the least cost development alternatives for the country. Existing TANESCO Facilities 1.12 TANESCO has an extensive grid system in the eastern part of the country which serves the coastal strip including the Dar es Salaam, Morogoro, Tanga, Arusha, Moshi regions and, through submarine cable, Zanzibar. TANESCO also has 15 isolated service areas scattered throughout the country, but mostly located in the northwestern, southwestern and southeastern zones of Tanzania. The total installed capacity of TANESCO's power plants is about 380 MW, of which 247 MW is hydro (interconnected system only) and 133 MW is diesel (mostly isolated systems). TANESCO has about 4,840 km of powerlines of various voltages and cables throughout the country. 1.13 TANESCO is organized into the coastal grid system (para. 1.12) and into zones: the Northwest (NW) zone comprises the towns of Dodoma, Singida, Iringa, Shinyanga, Musoma, Mwanza, Sumbawanga, Tabora, Bukoba and Kigoma; the Southwest (SW) zone, Iringa, Mbeya, Songea and Tukuyu; the Southeast (SE) zone, Mtwara, Lindi and Nachingwea. Detailed information regarding TANESCO's existing facilities is given in Annex 1 and shown on  -6 - the map (IBRD 16231). The total system losses are about 13%, including distribution system losses and station use, which appears to be reasonable when the scattered power plant locations and long distances of power transportation are taken into account (Annex 2). TANESCO routinely conducts studies to identify further economic reductions of system loss. 1.14 The following table shows TANESCO's installed and available capacity of power plants, lengths of powerlines, number of consumers and peak demands in various zones of the country in 1981: Installed Available Length of Capacity Capacity Powerlines (km) Number of Peak Zones MW MW and Voltages Connections Demand (MW) Grid 313.0 260.4 3,961 (220, 132, 66, 81,556 122.0 33, 11-kV) North-West 44.1 28.0 551 (33, 11-kV) 19,261 20.0 South-West 7.1 6.0 163 (33, 11-kV) 6,634 5.7 South-East 5.5 2.0 165 (33, 11-kV) 3,472 2.0 Total 369.7 296.4 a/ 4,840 110,923 149.7 a/ The difference between installed and available capacities is mainly due to derating diesel stations (para. 3.08) Access to Service and Electrification of Rural Areas 1.15 The Government has given high priority to industrial and urban electrification for many years. Only about 1.2 million (less than 7% of total population) have access to electricity. This is in the high range for East African countries. Comparative percentages of population supplied with electricity are: Kenya 6%; Lesotho 3.5%; Malawi 2%; Sudan 8.5%. 1.16 The Government's program for the electrification of rural areas covers the electrification of villages and small towns. TANESCO has so far electrified a few villages and small towns through government grants and soft loans through bilateral assistance. Since this operation is generally expected to be unprofitable, the Government has decided, on the basis of a MWE study, to establish a rural electrification corporation in order to accelerate development of village electrification. Where possible this will be by renewable resources - for example, small hydro schemes in the Kigoma, Rukwa and Ruvuma regions. Role of IDA/Bank 1.17 This would be the Bank Group's fourth lending operation in Tanzania's power sector. The first was Loan 518-TA for US$5.2 million to cover part of TANESCO's development program for the years 1967 through  1970; the second was Loan 715-TA for US$30 million and a supplementary loan for US$5 million to cover part of construction of the First Stage of the Kidatu Hydroelectric Scheme which was completed in 1975 (Project Performance Audit Report, December 19, 1979); and the third was for the Second Stage of the Kidatu Hydroelectric Project with Loan 306-T-TA for US$30 million and a Supplementary Special Action Credit of US$7.0 million, which was completed in 1981 and for which the project completion report has already been issued. 1.18 The most important lesson related to previous Bank operations in Tanzania is related to project cost overrun. In order to prepare realistic cost estimates and a corresponding financing plan, cost estimates should be reviewed by an independent cost consultant as early as possible in the preparation of the project, preferably before the appraisal of the project. This is now a standard recommendation for any project with substantial civil works. The Bank's requirement of a panel of experts in dam construction has been particularly valued by TANESCO. Retention of full-time advisors for construction supervision has also been a positive feature of previous projects. The Bank's concern for the environment has resulted in detailed studies on various aspects, and TANESCO has satisfactorily implemented recommendations directly related to the project, though implementation of certain recommendations will be long term. The Bank has systematically guided and encouraged TANESCO's comprehensive training program, and the program's successful achievement of objectives shows the effects of cooperation between the implementation agency and the Bank. The Bank has played and continues to play a constructive and catalytic role in the preparation of projects and in coordinating cofinanciers' efforts. 1.19 The Bank's intentions for future lending for the power sector will be formulated on the basis of the long-range power development study (paras. 1.11 and 3.11). To ensure that proper consideration can be given in the study to the major options for power development in Tanzania, the Bank is also financing studies into energy natural resources in Tanzania that will provide major inputs to the long-range power development study. These studies cover natural gas exploration and utilization and preliminary studies for hydroelectric resources (IDA Credit 1060-TA, August 8, 1980). Development of coal is presently under investigation (para. 1.01). The Bank has also recommended study of the feasibility of installing thermal generation capacity (para. 3.07) that would consider the potential for the use of domestic natural gas resources for power generation. Government Strategy in the Power Sector 1.20 The Government continues to give high priority to the development of the power sector in view of its importance for the overall economic development of the country, emphasizing its essential role in industrialization. With bilateral aid the Government hopes to pursue a rural electrification program (para. 1.16). Recognizing the need to  - 8 - formulate a comprehensive national energy development plan, the Government intends to set up an energy planning unit in the Ministry of Water and Energy (para. 1.11). II. THE BORROWER, BENEFICIARY AND EXECUTING AGENCY The Borrower 2.01 The Government of Tanzania would be the borrower. The proceeds of the proposed IDA credit would be onlent to TANESCO. The Beneficiary and Executing Agency 2.02 The beneficiary and executing agency would be TANESCO, a parastatal limited liability company accountable to the MWE, and responsible for public power supplies throughout mainland Tanzania. TANESCO supplies about 130,000 consumers (connections) or about 4% of the total population. It was established in 1931 as a private company and in 1964 the Government bought all the issued shares not already owned, from the East African Power and Lighting Company, Limited (EAPL). Under TANESCO's license, 4/ which expires in 2012, TANESCO has the right to first refusal of any additional areas of public supply of electricity in Tanzania, and is required to operate in accordance with sound commercial principles, which it does. TANESCO's board of directors is appointed by the Government and the managing director is a presidential appointee. The present incumbent is a professional power specialist who was appointed in 1980 from within the ranks of the organization. TANESCO's organizational structure is shown in Annex 3. Further improvements are needed in TANESCO's organization and management practices in order to improve the quality of services and company efficiency. Therefore, TANESCO has agreed (i) to employ consultants with qualifications and terms of reference satisfactory to IDA to prepare TANESCO's management study by June 30, 1985; and (ii) after taking into account IDA's comments to implement agreed recommendations of the study by January 1, 1986. Accounting and Auditing 2.03 TANESCO's accounting staff are competent and procedures are good, so that information has been readily available and financial control reasonably effective. TANESCO has in the past maintained adequate records and submitted audited accounts regularly. However, since 1980 the computer which TANESCO uses to maintain its records has been operating only intermittently. As a result, TANESCO's audited accounts for 1980 were submitted to the Bank later than required under the existing project agreement. Billing and other accounting procedures are also severely affected and the accounts for 1981 have only recently been finalized. TANESCO has purchased a new computer, which is being tested. When in full operation, it will enable audited accounts to be presented regularly in the future, and will also help TANESCO to bill promptly, control overdue 4/ Issued in 1957 under Electricity Ordinance No. 3 of 1957.  -9- accounts more effectively (para. 4.03), and generally bring accounting records up to date. 2.04 The government-owned Tanzania Audit Corporation (TAC) has been auditing TANESCO's accounts since 1971. The audit covenant under Loan 1306-TA requires TANESCO to have its financial statements audited by independent auditors acceptable to the Bank and to submit its audited financial statements to the Bank within five months after the close of the fiscal year has been substantially met, except in FY80 and FY81 when the audited statements were received by the Bank as much as one year late. It is anticipated that in the future with the new computer operative, TANESCO will be able to have its accounts ready for audit on a more timely basis. The performance of the auditors has been satisfactory. The convenant has been repeated in the proposed Credit Agreement. Billing and Collection 2.05 Meters are read monthly and the readings are sent to Dar es Salaam from the branch offices for processing on the computer, which prepares the bills. These are then distributed to the consumers by the respective branch offices. Computer breakdowns have disrupted this process so that outstanding accounts are excessive. The steps proposed to remedy this situation are described in para. 4.03. Personnel and Training 2.06 The Bank Group has a long-standing involvement in TANESCO's training program and manpower development. Dating from the appraisal of the first power project in 1967, TANESCO's progress in manpower development gives cause for satisfaction. TANESCO established a training school and training program in the mid-sixties and later with the help of the SIDA and the Bank, TANESCO has developed a long-term and sound training program with appropriate objectives for manpower development. TANESCO has an active manpower development and training unit and the Technical Institute (TTI) at Kidatu, where at technician level, electricians, general mechanics and diesel mechanics are being trained. The TTI workshops and laboratories are reasonably equipped and include a hydro power plant control board simulator. Expatriate trainers on 3-year contracts, equipment and teaching materials were provided by SIDA on a grant basis at the time of the establishment of the TTI (1974). At present, almost all trainers are Tanzanians, who are supported by TANESCO's operational staff for specific technical courses. Through comprehensive management training programs, which were components of previous Bank power projects, since 1975 TANESCO has reduced expatriate staff at headquarters and major power plants from 50 to 6. At present, all managerial positions are capably held by Tanzanians and this is a remarkable achievement. The expatriates are specialists and advisors employed mainly in the planning, design and construction departments and for the overhaul of special equipment such as large diesel engines and hydroelectric units. The ratio of 18 consumers per employee is reasonable due to the scattered power facilities covering the entire country. TANESCO has a total staff of about 6,300.  - 10 - 2.07 TANESCO's demand for engineers and technicians is growing as its power facilities expand. Although the TTI and Bank/SIDA training programs have met the requirements for technicians and administrative personnel, there is a shortage of engineers and some management staff. The project therefore includes a training component, consisting of the training of four engineers to be employed in the operation of the proposed Mtera power plant. The project also includes provision for a continuation of the power management training program included under Loan 1306-T-TA to upgrade middle and top management staff, particularly for planning, construction and system control activities. Combined with the ongoing training programs, TANESCO will be able to train about 125 individuals between 1982 and 1986, to meet TANESCO's manpower needs, which is adequate. 2.08 TANESCO is expected to prepare its next training program in 1983 and to implement it in the period 1984-87. About 75 people of various categories would be involved in the project's related training program. Insurance 2.09 Insurance of TANESCO's major assets is considered adequate. It is effected through the National Insurance Corporation, the sole government-owned insurance company, which in turn re-insures through the European insurance market for plant and equipment, including thermal power sets. III. DEVELOPMENT PROGRAM AND THE PROJECT Demand and Market 3.01 TANESCO's electricity sales growth has been rapid during the last two decades. From 1962 to 1980 annual sales increased from 159 GWh to 738 GWh, with an average annual growth of about 8%. This growth rate was reduced to about 5% per annum between 1973 and 1977 due mainly to the restraint on growth imposed by the high cost of oil, but recovered with an average annual rate of about 9% between 1977 and 1980. 3.02 A comprehensive load forecast study covering the period 1981-2000 was carried out in 1981 for the interconnected system, for each TANESCO region and for the various zones of the country by Acres International Limited of Canada (Acres). It was based mainly on historical growth trends for domestic and small consumers and on projected individual growth for industrial and other major consumers. The proposed expansion of the grid to the isolated systems in the NW and SW zones and expectations of economic growth over the next two decades have been taken into consideration. The load forecast was revised and updated by TANESCO during the appraisal to incorporate the revised construction programs of planned future industrial consumers (Annex 4). 3.03 The revised load forecast estimates an average yearly growth from 1981 to 1990 at about 6.6% for the interconnected system, including Zanzibar but excluding NW, SW, and SE expansions. Including the expansion,  - I1 - the growth is expected to be about 9%. This is lower than the historical growth rate due to expectations of slower economic growth. Since Tanzania's independence in 1968, TANESCO has been expanding its grid to service areas as far as economic constraints have permitted. It is envisaged that TANESCO will connect the SW zone (Iringa, Mufindi and Mbeya) to the grid in 1983 and the NW zone from 1984-1986 (Dodoma in 1984, Shinyanga in 1985 in 1985, Tabora, Mwanza and Musoma in 1986). Some connecting power lines between the grid and the SW and NW zones are under construction, and are being financed by the Canadian International Development Agency (CIDA) and the Italian Government, including for the connection of the proposed Mtera power station to the grid via Iringa and Dodoma. 3.04 Electricity sales and average yearly growth rates by TANESCO consumer groups summarized below: Sales Sales Average Annual ---- GWh---- in Total (%) Growth Rate (%) Consumer Groups 1975 1980 (average 1975 - 1980 1975-1980) Domestic 86.1 155.9 20.7 12.6 Commercial 56.5 87.5 10.5 9.1 Industrial 339.6 482.4 68.2 7.3 Public lighting 4.9 6.2 0.6 4.7 Total 487.1 732.0 100.0 8.5 Expansion of the interconnected system will enable reduction in the operation of the diesel stations in the isolated systems, including the second largest system (Mwanza) and therefore will provide savings from fuel imports (about 50,000 toe in 1988). 3.05 The industry is by far the largest consumer group, and it is expected that it will remain so for the foreseeable future. The national load forecast for 1982-1990 (Annex 4) shows total electricity consumption increasing at a growth rate of 8.9% per annum. Development Program 3.06 The proposed project is part of TANESCO's development program (1983-1988), which will meet the growth in demand in the expanded grid. This program also includes some small diesel stations to meet demand in isolated areas and expansion of transmission/distribution system. By 1988 TANESCO's total firm capacity (including the proposed project) will increase to about 335 MW, which will be sufficient to meet the expected system maximum demand of about 300 MW in 1990 with adequate system reserves. This is the least-cost development program for construction of generating and transmission additions needed to supply future loads. The costs of the program are summarized below:  - 12 - Cost of TANESCO's Development Program a/ (1984 - 1988) TSh US$ % ---millions---- 1. Proposed project 2,862.1 234.7 48 2. 220-kV and 132-kV grid extensions (including thermal generation & system compensation equip.) 1,717.7 140.9 29 3. Rural electrification b/ 728.4 59.7 12 4. Other c/ 684.7 56.1 11 Total 5,992.9 491.4 100 a/ Including interest during construction. See Annex 12 for details. b/ Includes electrification of 20 townships and construction of mini- hydro stations. c/ Includes some capacitor banks, feasibility studies and system reinforcement, and a new technical school. 3.07 According to simulation studies performed by the consulting firm that carried out the feasibility study for the project, the Swedish Consulting Group (SWECO), a protracted dry period of at least 3 years, as occurred in 1975-1977, would result in the occurrence of power shortages during the peak demand period (around December) from 1985 onwards. The consultants give a probability of 1 in 10 for the occurrence of a 3-year dry period. To avoid drastic load shedding under such circumstances, TANESCO would need to anticipate such an occurrence by conserving stored water for hydro power generation and by introducing load management measures. TANESCO will explicitly conduct an investigation into the adequacy of such measures, the potential dislocation to users and the means of minimizing economic costs. The investigation will consider the justification for installing thermal generation capacity in 1985 or later as back-up capacity to the hydro-based power system. 3.08 SWECO have also carried out studies to evaluate the future performance of TANESCO's 220, 132-kV and lower voltage transmission systems and rehabilitation of the Ubungo diesel station, which had been derated due to problems with the quality of the cooling water, an inefficient cooling system and excessive vibrations. Three small hydropower plants and the power distribution network in the capital area require major overhauls and rehabilitation after many years of intensive utilization. Maintenance and operation of power facilities have been satisfactory; but there have been problems in supplying spare parts and consumables. Furthermore SWECO recommended that various power system compensation equipment should be installed, to obtain better voltage conditions and lower system losses. A system control center, to be constructed in Dar es Salaam, has also been recommended because the existing control center is very small (part of the Ubungo substation), old and is not equipped to control the proposed extended system. As recommended by the consultants, construction of a suitable control center is included in the project.  - 13 - 3.09 The consultants' recommendations on transmission and distribution expansion have been included in TANESCO's long-term generation/transmission distribution construction program. A transmission line (220-kV) from the Mtera switchyard to Iringa, not a part of the project, is required to convey project output to the interconnected power system. Government and TANESCO have agreed to complete the construction of Mtera-Iringa line by January 1, 1987 to provide adequate transmission capacity for the power generated under the project. Project Objectives 3.10 The main project objective is to increase the electricity generating capacity to meet the growth in power demand through 1990. The project will develop indigenous renewable energy resources thus saving on foreign exchange expenditures by substituting less expensive hydropower energy and imported oil. Further benefits would be increased job opportunities and additional emploment possibilities during the construction period. The project will also help lay the basis for improved power sector institutions and for TANESCO's tariff policy, power system control and load dispatching practices. The proposed project will supply power to the isolated areas through the expanded interconnected system and will replace power production from diesel sets and thus provide substantial fuel cost savings (NW, SW and SE zones, Annex 1). Additional objectives of the project are to maintain and further improve TANESCO's operations through continuing their training program and assisting TANESCO in planning system development through a study of long term power development. Project Description 3.11 The project is an integral part of the Great Ruaha River generation complex comprising both Kidatu and Mtera, which would be operated and regulated as a cascade system. The description of the proposed project is as follows: (a) construction of a water intake at the existing Mtera reservoir on the Great Ruaha River; a headrace tunnel and a vertical penstock system leading to an underground powerhouse with two 40-MW hydroelectric units; from thence a tailrace tunnel (about 10.5 km long) to the Great Ruaha River; construction of a switchyard and administration buildings, a storehouse, a workshop and TANESCO staff houses at Mtera; (b) construction of a system control center at Dar es Salaam; (c) rehabilitation of the existing Ubungo diesel station and other power system facilities (para. 3.08); (d) training of TANESCO's engineers and managerial staff to improve TANESCO's operations and its system control and load dispatching practices; and  - 14 - (e) consultancy services for construction supervision and for carrying out studies of: (i) structure of power tariffs; (ii) long range power development; (iii) organization of the power sector; (iv) management system of TANESCO; and (v) rehabilitation of existing power generation and distribution facilities. 3.12 The proposed Mtera hydroelectric power plant will be located underground near to the existing Mtera dam which was completed in late 1980 as part of the Kidatu Hydroelectric Project Stage II (LN 715-TA). The Mtera power plant will comprise an inlet channel and an intake with trash racks in the existing Mtera reservoir, a short headrace tunnel, two penstocks with intake gates, an underground powerhouse with control block and a tailrace tunnel of 10.5 km length with galleries. An administration building with relay room, transformer cells and a switchyard will be situated in the open above the power station. The proposed powerhouse will have two units (40 MW each, when using the available maximum gross head of about 105 meters). 3.13 The Mtera site already has some essential facilities for construction activities (such as access roads, air strip, contractors camps, etc.) which were built during the construction of the Mtera dam and can be further utilized for the construction of the power plant. TANESCO and its consultant have the necessary knowledge and experience of the site and surrounding area regarding the availability and properties of local materials, such as rock, sand, etc., which would enable a quick start to the project. 3.14 Design of the Mtera project was completed in October 1981 and certain revisions to parts of this design were made during the appraisal in November/December 1981 on the basis of the recommendations of the advisory panel of TANESCO and the Bank consultant who had reviewed the design in November 1981. The bid documents have already been prepared by SWECO, and in order to meet the project timetable, bid documents for the main civil, mechanical and electrical works to be included in the project were issued in October 1982 and bids were opened in March 1983. Construction is expected to begin in late 1983 and to be completed in mid 1988. It is also expected that the construction of the control center, which would be financed by the Federal Republic of Germany (KfW), would start in April 1984 and be completed by August 1985. TANESCO would prepare an engineering report (including consultants' inputs) for the construction of the system control center by June 30, 1983. A full description of the Mtera power plant and the detailed construction schedule are given in Annexes 5 and 7. Cost Estimates 3.15 The estimated project cost, without interest during construction, is TSh 2,403.8 million (US$197.1 million) of which about 74%, amounting to TSh 1,784.8 million (US$146.4 million), is in foreign exchange. Total financing requirement, including interest during construction, is estimated to be TSh 2,862.1 million (US$234.7 million). The local costs include TSh 309.8 million (US$25.4 million), about 19% of the total base cost, for duties and taxes. The summarized cost estimates (Annex 6) follow:  - 15 - Summary of Project Cost Estimate (TSh 1.0 = US$0.082) % of Project Components Local Foreign Total Local Foreign Total Total TSh million - -US$ million--- 1. Civil works 201.0 584.4 785.4 16.5 47.9 64.4 27 2. Mechanical & Electrical Works 102.4 294.8 397.2 8.4 24.2 32.6 14 3. System Control Center 6.5 35.6 42.1 0.5 2.9 3.4 1 4. Rehabilitation of Ubungo Diesel station and other facilities 14.5 184.4 198.9 1.2 15.1 16.3 7 5. Studies 6.6 17.9 24.5 0.5 1.5 2.0 1 6. Training - 9.0 9.0 - 0.7 0.7 - 7. Engineering & Consultancy Services 68.1 117.7 185.8 5.6 9.7 15.3 7 Base Cost 399.1 1243.8 1642.9 32.7 102.0 134.7 57 Contingencies 8. Physical Contingency 23.0 179.5 202.5 1.9 14.7 16.6 7 9. Price Contingency 196.8 361.6 558.4 16.1 29.7 45.8 20 Subtotal 219.8 541.1 760.9 18.0 44.4 62.4 27 TOTAL PROJECT COST 618.9 1,784.8 2,403.8 50.7 146.4 197.1 84 1O.Interest during Construction 458.3 - 458.3 37.6 - 37.6 16 TOTAL FINANCING REQUIREMENT 1,077.2 1,784.9 2,862.1 88.3 146.4 234.7 100 3.16 The cost estimates are based on contractors' offers for recent similar civil, mechanical and electrical works mainly in Europe and also in other parts of the world. The base costs are expressed in mid 1983 prices. During the appraisal mission, the project costs were revised to take into account the major revisions to the design of the project and also recommendations made by TANESCO's cost consultant (A.A. Mathews of USA) who has prepared a report on project costs in which, among other things, local conditions were also considered. Physical contingencies for different project components, ranging from 10% to 18% on the base cost, have been added. The price contingencies are based on the constant exchange rate and price escalation shown in the following table: 1986 and 1983 1984 1985 thereafter Foreign Costs % 8.0 7.5 7.0 6.0 Local Costs % 14.0 13.0 12.0 12.0 3.17 The project cost has been compared with the prices of the opened bids for the civil works and adjusted accordingly.  - 16 - Project Financing 3.18 Project financing arrangements are well advanced. At the Government's invitation, representatives of the Federal Republic of Germany (KfW), Kuwait Fund for Arab Economic Development, NORAD, SIDA, IDA and the French and Italian Governments held two meetings (in 1982 and 1983) to review the project preparations and discuss its financing. A Memorandum of Understanding among the above parties has been prepared for the consideration and approval of all involved parties. Co-financiers have agreed to make their financing available to finance the foreign exchange cost of the project and to cooperate fully with each other on all matters relating to the execution of the project and on other matters of common interest. The amounts of financing for the project indicated by individual co-financiers are as follows: In US$ million (equivalent) France 5.0 Germany (Kfw) 20.0 Italy 19.0 Kuwait Fund 20.0 Norway (NORAD) 30.0 Sweden (SIDA) 30.0 IDA 35.0 Total 159.0 The above amounts reflect early 1983 exchange rates and are subject to possible currency exchange fluctuations. The final amounts would be adjusted to correspond to the actual project financing requirements. The Government and TANESCO will finance the balance of the project's local costs. The projects financing plan would be as follows: Local Foreign Total ---------US$ million--------- A. Project Costs (i) IDA 3.0 32.0 35.0 (ii) Co-financiers - 114.4 114.4 (iii) TANESCO 22.3 - 22.3 (iv) Government of Tanzania 25.4 - 25.4a/ Total 50.7 146.4 197.1 B. Interest During Construction TANESCO 37.6 - 37.6 Grand Total 88.3 146.4 234.7 a/ Duties and taxes  - 17 - 3.19 The proposed IDA credits of US$35 million would be made to the Government on the standard terms. Under a separate subsidiary loan agreement, the Government would onlend the IDA credit to TANESCO for a term of 20 years, with 5 years grace period and an interest rate of 11% per annum. Cost overruns and foreign exchange risks would be borne by TANESCO. Conditions of credit effectiveness shall be: (M) execution of the subsidiary loan agreement, (ii) notification by Federal Republic of Germany (KfW) and SIDA that all conditions precedent to initial disbursements of their grants have been fulfilled, (iii) signing of the Norwegian grant, and (iv) evidence satisfactory to IDA showing that the French and Italian grants have been made available for the project. Engineering Consultants' Services and Project Implementation (Annex 7) 3.20 TANESCO would be responsible for project implementation, assisted by engineering consultants (SWECO) who were responsible for preparing the feasibility study and bid documents (para. 3.07). TANESCO has signed a separate contract with these consultants for the construction supervision. TANESCO employes a part-time advisory panel, which consists of an engineering geologist and three civil engineers specializing in dam construction and underground excavation. The average manmonth cost (including about 1,600 manmonths of salary, international travel and subsistence) is estimated at about US$11,000. The above arrangements for consultants' services are acceptable. During negotiations TANESCO has agreed to employ engineering consultants and two full-time experts for the construction supervision of the project, whose qualifications, experience, and terms and conditions of employment shall be satisfactory to IDA. TANESCO has also agreed to employ the part-time advisory panel to assist in the supervision of construction and advise in the event of unforeseen problems arising during project construction. 3.21 TANESCO staff have considerable experience in the construction of transmission and distribution facilities and hydroelectric power plants. TANESCO has already a well-established construction supervision department. Rehabilitation of TANESCO's generating and distribution facilities would require proper attention. Therefore TANESCO has agreed to employ consultants with qualifications, experience and terms of reference satisfactory to IDA to prepare the rehabilitation study of TANESCO's existing power facilities by June 30, 1984. Procurement 3.22 Works: Procurement for the main construction works, including the headrace and tailrace tunnels, the underground power house and the administration building, would be through international competitive bidding procedures acceptable to the joint financiers (Federal Republic of Germany (Kfw), Kuwait Fund, NORAD and SIDA) which are in accordance with Bank guideline. The remaining and minor civil construction works would be financed by Italy and TANESCO. Contracts for civil works and' goods, estimated to cost less than US$100,000 and not likely to interest foreign bidders, would be awarded on the basis of the local competitive bidding procedures which were found to be satisfactory to IDA, and in which foreign bidders also have the opportunity to participate.  - 18 - 3.23 Goods: Equipment, vehicles and furniture, would be grouped in appropriate contract packages and procured in accordance with the guidelines of the particular financing agency who would finance the component. 3.24 Contract Review: All contract packages for civil works estimated to cost over US$2.0 million equivalent and all contracts for goods estimated to cost US$250,000 or more to be financed by IDA would be subject to IDA's prior review of procurement documentation. Furthermore, all contracts related to the consultant's services, studies and training would be subject to IDA's prior review. Disbursement 3.25 IDA funds would be disbursed against: (a) 37% of foreign expenditures and 20% of local expenditures for civil works; and (b) total foreign costs of studies, training expert's services, and equipment and materials for rehabilitation of power system facilities. No withdrawals shall be made after March 31, 1984 in respect of payments for the main civil works unless IDA has been notified by the Kuwait Fund and NORAD that all conditions regarding their disbursements have been fulfilled (para. 3.19). Furthermore, no withdrawals shall be made in respect of payments for the rehabilitation of the power system facilities until IDA has received the rehabilitation study (para. 3.21) 3.26 If any of the IDA funds remain undisbursed after project completion, they would be cancelled. The proposed closing date would be June 30, 1989 to allow for payment of retention money. A disbursement schedule (Annex 8) is based on the project implementation schedule and follows in general the sector and IDA disbursement profile for East and West Africa. Project Monitoring and Evaluation 3.27 During negotiations the reports and records necessary to monitor progress of the project and its evaluation on completion have been agreed. Proposed guidelines for a project monitoring system are given in Annex 9. Environmental Aspects 3.28 The existing Mtera dam was constructed on the Great Ruaha River (completed 1981, financed under Loan 1306-T-TA) as part of the Kidatu Second Stage Hydroelectric Project. A general ecological review of the Mtera site and the reservoir had been completed in 1970, financed by SIDA. A series of detailed studies of all environmental aspects was completed between 1972 and 1978, including the expected environmental changes below the Mtera reservoir during the construction of the Kidatu dam (Loan 715-TA, completed 1971). These studies did not indicate negative effects sufficient to jeopardize the feasibility of the construction of the dam. The studies' recommendations were discussed by the Government, the Bank, SIDA, and KfW and implemented as agreed between 1978 and 1981. They included the successful relocation of about 2,000 persons to the new ujamaa  - 19 - village established by the Government and TANESCO, the establishment of health programs and a nature reserve, and a government program for tapping the potential minimum yield of 3,000 tons per year of fish from the Mtera reservoir. Implementation of the recommendations has been reviewed in the completion report on Loan 1306-T-TA. No adverse effects of the damming have been observed so far. 3.29 Construction of the proposed project will have no significant impact on the environment. There are no permanent settlements on the stretch of the river between the dam and the tailrace tunnel. Although the discharged water in the river between the dam and the tunnel outlet will be considerably reduced during the dry season of the year, the minimum flow of 1.0 m3/sec required by the Government's "Grant of Water Right Certificate No. 4187", will be fulfilled at all times. IV. FINANCIAL ASPECTS TANESCO's Past Financial Performance 4.01 Over the five years 1976-81, TANESCO's sales revenues increased by an annual average of about 21% as a result of average annual increases of 10% in GWh sales and a 42% tariff increase in December 1979, whereas operating expenditure increased at an annual rate of only about 19%, despite fuel cost increases of nearly 23% per annum. However, due to a slow down in economic activity during 1981, sales increased only 7% for the year. A summary of TANESCO's income statements (Annex 10) for 1976-81 follows: 1976 1977 1978 1979 1980 1981 GWh Sold 490 516 588 653 738 790 Average Tariff (T) cts/kWh 40.3 48.2 46.6 46.2 65.0 64.5 ---- ----- - TSh Million- ---- - -- Revenue from Sales 197.7 248.9 274.0 301.9 480.0 509.6 Less: Cost of Operations 142.0 184.3 198.1 220.1 267.0 363.6 Net Operating Revenue 55.7 64.6 75.9 81.8 213.0 146.0 Less: Interest charged to Operations 36.3 37.3 37.6 45.6 48.6 43.5 Non-Operating Gains (Losses) a/ (19.1) (4.1) (1.0) 11.0 13.8 4.2 Net Surplus 0.3 23.2 37.3 47.2 178.2 106.7 Rate of Return (Revalued Asset Base) 3.4 3.9 2.3 1.9 6.8 2.1 Operating ratios through 1979 were moderate at around 73% until 1980, when the ratio improved dramatically to 55% as a result of the tariff increase effected in in December 1979. a/ Includes compensating exchange gains and losses  - 20 - TANESCO's 1980 Financial Position 4.02 Annex 11 shows TANESCO's actual balance sheets for 1978 through 1981. TANESCO's fixed assets in operation increased by only 6% from 1978 through 1980 but by 63% in 1981, when Kidatu II came into operation. Depreciation is charged on a realistic basis and for 1981 averaged some 3.4% of average gross fixed assets in operation. The 1981 debt:equity ratio of 53:47 was conservative, with 78% of debt relating to loans for Kidatu I and Kidatu II. Bank Group lending (TSh 615 million) comprised 46% of TANESCO's debt, followed by Federal Republic of Germany (KfW) 20% and SIDA 17%. Borrowing terms were generally concessional over about 25 years (including 5 years grace) at interest rates ranging from 3-1/4 to 9%. In 1980 and 1981, however, TSh 98 million (about 7% of TANESCO's debt) was incurred through suppliers credits at 5% to 8.5% with repayment over 6 to 10 years without a grace period. A schedule of debt as of December 31, 1981 follows: Grace and Currency Repayment Interest of Origin/ Outstanding Period Rate Amount of at 12-31-81 (years) (%) Loan (TSh million) Commonwealth Dev. Corp 5-17 7.25