Rwanda - Power Project

Document of The World Bank 7. FOR OFFICIAL USE ONLY Report No. P-3822-RW REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO US$9.O MILLION TO THE RWANDESE REPUBLIC FOR A POWER PROJECT May 23, 1984 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 (Since September 1983) US$1.00 = Rwandese franc (RwF) 97.00 RwF 100 = US$1.03 FISCAL YEAR Government: January 1 - I)ecember 31 Electrogaz: January 1 - I)ecember 31 GLOSSARY OF ABBREVIATIONS AfDB - African Development Bank BUNEP - Bureau National d'Etudes de ProJets (National Studies Bureau, Rwanda) CCCE - Caisse Centrale de Coopgration Economique (French Aid Agency) Electrogaz - Etablissement Public de Production, de Transport et de Distribution d'Eau, d'Electricit6 et de Gaz (Public Company for Production and Distribution of Electricity, Water and Gas, Rwanda) FAC - Fonds d'Aide et de Coopgration (French Aid Agency) Government - Government of Rwanda KfW - Kreditanstalt fUr Wiederaufbau (Aid Agency, Federal Republic of Germany) MIRENA - Ministry of Natural Resources, Rwanda MPWE - Ministry of Public Works and Energy, Rwanda ONATOUR - Office National de la Tourbe (National Peat Office, Rwanda) PW - Price Waterhouse SAUR Societe d'Amenagement Urbain et Rural (French Water Utility) UNDP - United Nations Development Program MEASUREMENT EQUIVALENTS GWh gigawatt hour - 1,000,000 kilowatt hours kcal kilocalorie - 3.97 British thermal units kgoe kilograms of oil equivalent kV kilovolt - 1,000 volts kVA kilovolt ampere - 1,000 volt amperes kW kilowatt - 1,000 watts kWh kilowatt hours - 1,000 watt hours IWh megawatt hour - 1,000 kilowatt hours MW megawatt - 1,000 kilowatts toe ton of oil equivalent - 10,500,000 kilocalories ton metric ton - 1.1 US tons  FOR OFFICIAL USE ONLY RWANDA POWER PROJECT Credit and Project Summary Borrower: Rwandese Republic Beneficiary: Electrogaz Amount: SDRs 8.5 million (US$9.0 million equivalent) Terms: Standard Relending Terms: Government would onlend the entire amount of the IDA credit to Electrogaz for a period of twenty years, including five years of grace, and with an interest rate equal to that in effect for Bank loans on the date of project approval by the Board. Electrogaz would assume the foreign exchange risk. Co-lenders: Caisse Centrale de Coop6ration Economique (CCCE) has expressed the intention of contributing the equivalent of US$9.2 million to the project. Project (i) Objectives and Benefits: The project would com- Description: plement the recently approved Ruzizi II regional hydroelectric project by enabling Rwanda to take maximum advantage of the increased output from the new facilities. Specifically, the Project would: (a) provide improved reliability of pro- duction, transmission and distribution of elec- trical energy; (b) serve additional domestic consumers; (c) help sustain the economic growth of the industrial and commercial sectors; and (d) strengthen Electrogaz in planning, personnel management, and its operation and maintenance functions. (ii) Components: The project would provide for: (a) the rehabilitation of the Ntaruka generating station and of the transmission network; (b) the extension of the transmission network; and (c) technical assistance to Electrogaz; training; and consulting engineering services. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  (ii) (iii) Risks: The physical risk associated with the rehabilitation components of the project would be small because there wouild be little civil work. The main risk would be institutional, as Electro- gaz is a weak organiza1tion and may have difficulty in administering the proposed project. However, this risk would be minimized by use of competent consultants to assist Electrogaz in managing the project. Estimated Costs 1/: Local Foreign Total (US$ millions equivalent) Electricity Ntaruka Powerhouse 0.2 2.0 2.2 Rehabilitation of Trans- mission System 0.5 5.0 5.5 New Transmission Lines 0.2 0.9 1.1 Maintenance & Spare Parts 0.1 2.0 2.1 Vehicles - 0.8 0.8 Technical Assistance 0.2 1.0 1.2 Consulting Engineering 0.2 1.2 1.4 2/ Base Cost (Dec. 31,'83) 1.4 12.9 14.3 Contingencies Physical 0.3 1.7 2.0 Price 0.4 2.6 3.0 Total Project Cost 2.1 17.2 19.3 Interest During Construction (IDC) 4.2 - 4.2 Total Financing Required 6.3 17.2 23.5 Financing Plan: IDA 9.0 9.0 CCCE 1.0 8.2 9.2 Electrogaz 1.1 - 1.1 Government (IDC) 4.2 _ 4.2 Total 6.3 17.2 23.5 I/ Duties and taxes would not be levied on the project. 2/ Includes US$1,000,000 from the Prclject Preparation Facility to finance engineering studies.  (iii) Estimated Disbursements: IDA Fiscal Year (US$ millions equivalent) 1985 1986 1987 1988 Annual: 2.0 4.0 2.0 1.0 Cumulative: 2.0 6.0 8.0 9.0 Appraisal Report: No. 4961-RW of May 3, 1984. Economic Rate of Return: The overall rate of return is 16 percent. Map: IBRD 17959.  I  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE RWANDESE REPUBLIC FOR A POWER PROJECT 1. I submit the following report and recommeindation on a proposed development credit to the Rwandese Republic for the equivalent of SDRs 8.5 million (US$9.0 million) on standard IDA terms, to help finance a Power Project. Government would onlend the IDA credit to '.lectrogaz for a period of twenty years, including five years of grace, and with an interest rate equal to that in effect for Bank users on the date of Board approval of the proposed project. Co-financing for the project in the amount of US$9.2 million equivalent would be provided by the Caisse Centrale de Cooperation Economique (CCCE) of France. The CCCE loan would be for fifteen years with a five year grace period, and would bear an interest rate of 5 percent. PART I - THE ECONOMY 2. A Country Economic Memorandum (Report No. 4059-RW) was distributed to the Executive Directors on May 20, 1983 which discussed economic deve- lopments in Rwanda until that date. These developments, updated when possible, are summarized below. Country data are provided in Annex I. 3. Rwanda is a small landlocked country, surrounded by Uganda, Tanzania Burundi and Zaire. It has the third highest population density of low income countries, at 210 persons/km2 (following Bangladesh and Sri Lanka), and its GNP per capita is among the lowest in the world, estimated at about US$240 in 1982. Rwanda's population of 5.5 million in 1982 is predominantly rural (with only 4.5 percent in urban areas), and lives in small individual farms scattered over hilly terrain. The balance between food production and population is precarious, as potentially arable land is scarce, yields of most foodcrops have been stagnant, and population is expanding at an estimated 3.6 percent annually. Twice recently (1974 and 1980), Rwanda had to resort to emergency food imports. Agriculture (coffee, tea, pyrethrum, cinchona) provides most of the country's foreign exchange earnings from merchandise exports. Coffee is by far the most important source (56 percent) followed by mining products (16 percent), A mainly cassiterite and wolfram. Rwanda's manufacturing base is narrow, and growth of modern manufacturing is limited by the small size of the market and by the lack of raw materials, marketing facilities, entrepreneurial * skills and skilled manpower. The country, consequently, imports capital goods, steel, petroleum products, cement and other construction materials, and virtually every modern consumer product. Its merchandise trade is hampered by high transportation costs and dependence on neighboring countries for access to the seaports at Mombasa and Dar es Salaam. 4. A quantitative assessment of Rwanda's economic performance can only be tentative, as the national accounts estimates are based upon data of  -2- dubious reliability. These estimates suggest that during the period 1977- 82 the rate of growth of real GDP averaged about 5 percent per annum, on the strength of reasonably good performance boy most sectors, except those engaged in production for export. The recent growth of the agricultural sector can be explained, to a significant extent, by good weather condi- tions, increased world coffee prices in the late 1970s, improvement of the road network, and the rapid growth of urban and project-induced demand. Official production data indicate that foodcrop output (36 percent of GDP) increased at an average annual rate of about 4 percent in the period 1977- 82, but this estimate may prove to be overstated. In any event, it is the judgment of informed observers that: the balance between food production and population remains precarious, as food production is vulnerable to weather conditions and population is increasing rapidly. With the exception of tea, the production of export crops was disappointing during 1978-82. Largely influenced by weather, and in spite of substantial increases in 1978 and 1981, coffee production tended to stagnate. Absolute declines were recorded for the country's two other export crops, pyrethrum and cinchona. After having expanded at an average rate of 11 percent per annum, tea production also declined in 1982, and the industry has exper- ienced difficulties in obtaining sufficient quantities of green leaves to process for export (due to competition from other crops and lack of fertilizers). 5. Mining production also declined during 1977-82, at an average annual rate of 4 percent. This poor performance has been a consequence of various factors, among them management problems at SOMIRWA (the mining company), equipment obsolescence, and substantial increases in production costs (mainly the wage bill) while world market. prices have fallen and the Rwandese franc (linked until September 1983 to the United States dollar) had appreciated vis-a-vis the country's maLjor trading partners (para. 11). 6. Manufacturing growth was, on average, 5 percent during 1977-82, largely reflecting agricultural performance as an estimated three-quarters of manufacturing output consists of the transformation of agricultural pro- ducts, mainly banana and sorghum, into beer, aLnd agro-industries (coffee, tea, sugar). Modern manufacturing has been limited to import substitution industries such as shoes, textiles, soap, plastic utensils, corrugated iron sheets, all of which rely on imported raw materials. A cement plant located in Cyangugu (southwest Rwanda) is due to start operations in the next year and is expected to make Rwanda self-sufficient in cement. 7. Tertiary sector activities experienced a fairly rapid expansion during 1977-82. Commerce and transportation increased at an average annual rate of 6 percent reflecting increases in marketed foodcrop production, manufacturing output, and imports (especia!lly of consumer and intermediate goods). Traffic on Rwandese roads is estimated to have expanded at about 7 percent per annum, the fleet of pick-ups doubled during 1979-82, and imports of transport equipment increased at: nearly 9 percent in real terms, albeit all from a very small base. 8. TraditLonally, the Government has pursued prudent fiscal policies. A principal indicator of this was the budget surpluses incurred during 1977-81 (on average, 2.5 percent of GDP). The Government's ability to  -3- sustain these surpluses was aided by favorable terms of trade, which served to raise export duties (particularly in 1977-79, following the rise in coffee prices) and import duties (insofar as Rwanda's exports financed a relatively large volume of imports, upon which the revenue structure is highly depe'-ent). Also, substantial capital inflows facilitated the growth in imports, thereby adding to government revenues. In 1977-81, nearly 50 percent of central government revenues (which averaged 10 percent of GDP) came from import and export taxes, with coffee exports alone contributing 'l percent; taxes on beverages, and on income and property accounted for most of the remainder. Expenditures were distributed mainly among administrative services (25 percent), education (26 percent), and defense (20 percent). Expenditures on agriculture and public works have expanded faster than total expenditures in recent years. 9. The fiscal situation, however, has deteriorated since 1981. In contrast to the preceding years, increases in revenue have fallen short of increases in expenditure. Budgetary receipts from coffee export duties have stagnated at lower levels than those of previous years as a result of declining coffee prices and in spite of higher export volumes. At the same time, there has been a significant expansion in government expenditures reflecting, inter alia, the impact of the general wage increase granted in September 1980, the addition of a new Ministry of Higher Education, and implementation of the education reform. In an effort to expand the revenue base and increase revenue, the Government introduced a new business tax in 1981 which, however, has not yielded sufficient revenues to compensate for the decline in revenue from coffee. As a result of these developments, the overall budgetary balance has shifted from a surplus of RwF 1.0 billion in 1980 (equivalent to 1 percent of GDP) to deficits of RwF 2.2 billion and RwF 3.0 billion in 1981 and 1982, respectively. In an attempt to arrest the fiscal deterioration, the Government increased import tariffs in January 1982 and taxes on beer and cigarettes, in January 1983. 10. The Government has been traditionally conservative in its monetary and credit policies. Inflationary pressures have arisen mainly from supply shortages caused by frequent disruptions of supply routes through neigh- boring countries, increased international transport costs, and increased prices of imports and domestic foodstuffs. Inflation averaged 10.6 percent per annum during 1977-82; it peaked at 15.8 percent in 1979, primarily as a result of the closing of the Uganda border, but also reflecting higher transport costs following the 1979-80 oil price rise. In 1983, inflation 4 was down to 6.5 percent, as trade flows through Uganda were normal and the rate of increase of import prices decelerated. 11. Rwanda's increased export earnings (until 1980) and large inflows of foreign grants and loans enabled the country, during 1977-81, to in- crease imports substantially and to build up international reserves. In real terms, imports of goods and non-factor services expanded at an average annual rate of 5 percent and averaged 27 percent of GDP. At the same time, Rwanda's gross international reserves reached, at end-1981, an amount equivalent to nearly seven months of estimated 1982 imports of goods and non-factor services. Since 1982, however, Rwanda has been suffering reserve losses as coffee export receipts have remained at about the same  - 4 - (depressed) levels of 1980-81, foreign grants and loans have declined, while imports have continued to expand rapidly. In an attempt to arrest the deterioration of the balance of payments and minimize the future impact of exchange rate variability among the major currencies on the external current account, the Government delinked the Rwandese franc from the United States dollar in September, 1983 and pegged it instead to the SDR, at the rate of RwF 102.71 = 1 SDR. This was equivalent to a devaluation of the Rwandese franc vis-a-vis the United States dollar of 5-6 percent. Such a measure should contribute to stemming the loss in reserves which by October, 1983, were down to the equivalent of four months of projected 1984 imports of goods and non-factor services. 12. Rwanda's Third Development Plan, like its predecessor, remains essentially a qualitative document: which prcvides a broad statement of national development priorities 1/ but lacks a. multi-year sectoral invest- ment program, key input and output targets (in physical as well as finan- cial terms), and an agenda of policy and institutional reforms for imple- menting the overall strategy. Other important weaknesses of the planning process are: the absence of a mechanism for periodically assessing the changing outlook regarding resource avai:Labilities and the feasibility of the projected levels of investment and the weak linkage between the planning and budgetary processes. In consequence of these deficiencies, Rwanda's plans have not served as effective instruments of economic manage- ment. Nevertheless, the Government has made serious efforts to pursue the Plan's objectives. The limited success of these efforts has been largely due to the country's structural constraints (among them the critical popu- lation problem), institutional weaknesses (stemming largely from lack of skilled personnel), and insufficienczy of domestic financial resources. At the same time, the lack of skilled personnel, fragmentation of institu- tional responsibilities, and poor coordination among concerned agencies have limited the country's capacity to absorb external resources. 13. The Government has taken steps to address these problems. Of par- ticular importance have been actions concerned with the extremely rapid population growth, and the lack of education and training. In 1980 it established the National Population Office (ONAPO) to plan, coordinate, and monitor all population activities. ONAT'O has started to sensitize the population about the implications of excessive demographic pressure on the country's limited resources, a few pilot family planning programs have been set up, and a nationwide fertility survey, now completed, is expected to provide valuable information on the potential demand for family planning. Obviously, the impact of these measures will only be felt in the long-run. Meanwhile, the population, growing at 3.6 percent annually, is expected to double by the year 2000. To address the problem of lack of education and trainiing, the Government introduced an educaition reform in 1979 whose objectives are appropriate to the country's needs, but whose implementation 1/ As in the Second Plan, five of the six main goals of the Third Plan relate to the satisfaction of basic needs: (i) food self-sufficiency; (ii) job creation, to ensure an adequate famlly income; (iii) education and training; (iv) improvement of basic health services; and (v) provision of minimum standard housing.  has been hampered by financial constraints and the lack of teachers. In order to facilitate more coherent economic management, the Government was reorganized on January 6, 1984. The reorganization included combining the Ministry of the Economy and Commerce with the Ministry of Finance. 14. As mentioned earlier, external aid (of US$25-30 per capita) was an important catalyst to the country's favorable economic performance during 1977-81. This aid has been mainly for infrastructure and technical assistance, most of which (58 percent) has benefitted agriculture, educa- tion, and health care. These three sectors, together with transport and communications, received nearly 65 percent of the aid extended to Rwanda in 1982, an emphasis which is in line with the country's objectives and prio- rities. The principal sources of foreign assistance and their average share during 1977-82 were Belgium (27 percent), the European Development Fund (14 percent), the Federal Republic of Germany (8 percent), IDA (7 per- cent), and France (6 percent). Rwanda has carried out Article IV consulta- tions with the IMF regularly, but it has not requested IMF financial assistance. 15. Economic management in recent years has been prudent, as evidenced by relatively low inflation rates, low debt service ratio, and avoidance of projects of dubious economic justification. This was undoubtedly faci- litated by substantial aid inflows and favorable terms of trade in the early part of the period. The terms of trade have deteriorated since 1980 and are projected to continue to deteriorate during the '80s. It is thus evident that the country's need for external assistance will increase sub- stantially. Its external debt is still manageable. At end-1982, the medium- and long-term external debt outstanding (disbursed only) amounted to US$189.3 million equivalent, or 13 percent of GDP, and the debt service ratio was equivalent to only 2.8 percent of exports of goods and non-factor services. Hence, there remains scope for further borrowing. However, given the poverty of the country, its overwhelming constraints and vulnera- bility, and its unfavorable medium-term prospects, external funds should continue to be provided in the form of grants or loans at highly conces- sionary terms, and include a high proportion of local cost financing and non-project assistance. PART II - BANK GROUP OPERATIONS IN RWANDA e 16. Bank Group assistance started in 1970 and initially focused on the improvement of the road network and the strengthening of agriculture production. Rwanda has received twenty IDA credits totalling US$208 million, of which five (totalling US$69.0 million) were for roads, seven (US$80.6 million) for agriculture, three (US$16.2 million) for DFC pro- jects, two (US$18.0 million reduced to US$16.4 million) for education, one (US$7.5 million) for telecommunications, one (US$5.0 million) for technical assistance, and one (US$13.0 million) for water supply. There have been no Bank loans. An IFC loan of US$535,000 for a tea factory was signed in 1976; a second IFC loan of US$226,000 and contingent equity commitment of up to US$60,000 to expand the tea factory were signed in September 1980.  -6- Annex II contains a summary statement of IDA credits and IFC investments as of March 31, 1984. 17. A US$13.0 million credit for a Water Supply Project (1345-RW) for Electrogaz fpara. 30) became effective February 14, 1984. The project is on schedule and bidding activities have proceeded smoothly. A US$15.0 million credit, which represents Rwanda's share of the Ruzizi II regional hydroelectric project benefitting Burundi, Rwanda and Zaire, was signed on April 4, 1984. 18. In fiscal years 1981-83, disbursements for Rwanda totalled US$3207 million compared to new commitments of US$107.2 million. In the same period, the average annual disbursement rate (ratio of change in dis- bursements to undisbursed balanee) was 20 percent; this is about average for countries of the Eastern Africa Region. While disbursement performance in general is satisfactory, notable difficulties have arisen in the case of the First Education Project. The lack of acceptable record keeping caused significant delays in the processing of disbursement requests. However, fol'Lowing a UNESCO-assisted final inspection and evaluation mission for the workshops financed under the project, disbursements resumed. 19. One of the major constrainits to Rwanda's development is the shortage of technical/managerial capacLty. This affects all sectors and inhibits project preparation and implementation. Intensive technical assistance and on-the-job training of- Rwandese staff are therefore a salient feature of the Bank's program ior Rwanda, either under individual projects in the various sectors or through the Technical Assistance Project (Credit 1214-RW declared effective November 22, 1982) which is promoting inter-ministerial coordination in project preparation and monitoring, and aims at strengthening the Ministry cf Planning. A second technical assistance project is envisaged to promote better coordination in economic policy-making and to help strengthen in particular the recently reorganized Ministry of Finance and Economy. 20. The primary emphasis of Bank operations will remain on rural development, the main objective being to increase food production as well as export crops, while maintaining soil fertility. A major emphasis will also be placed on the development of human resources, focusing on popula- tion planning and support to basic education and skills training to improve agricultural productivity, provide skilled manpower, and influence atti- tudes on the population issue. Further investment is also justified for infrastructure and, in particular, for roads to reduce the country's isolation and provide incentives to furlher intensification of agriculture as well as increased specialization and diversification through better marketing. Another area requiring our special attention is energy to lessen the demand for fuel imports and mitigate their impact on the balance of payments (see para. 34).  - 7 - PART III - THE ENERGY SECTOR Background 21. Of Rwanda's 26,300 km2 of land area, about 6 percent is covered by trees, two-thirds of which are natural forests. These forests are Rwanda's principal energy resource, but they are being depleted for fire- & wood and its product, charcoal, at the rate of 2,000 hectares a year. Peat is available in some areas, and experiments in production continue, but peat is unlikely to become a major fuel even in the medium term. The potential for development of hydroelectric power exists but development is costly due to sites having low capacity and being widely scattered. Future least cost development could be related to the Rusumo Falls site in the Kagera Basin and sites on the Ruzizi River on scales that would require regional cooperation (for which the precedent is the Ruzizi II project-- para. 17). There is no evidence of the presence of oil or coal in Rwanda, but there is a unique potential source of methane gas in the deep waters of Lake Kivu estimated to amount to about 60 million toe. A study of the feasibility of doubling the current gas production of 6,000 m3 of gas with an 80 percent methane content has been completed by Rwanda's power, gas and water utility, Electrogaz. While the potential gas resources are huge relative to any conceivable gas demands in the region, little is known about the rate at which the gas could be safely extracted at reasonable cost without posing unacceptable environmental and safety risks. Geo- thermal potential has been established around Lake Kivu but pending results of ongoing studies, Rwanda's other energy resources seem more promising. Sector Issues 22. In June, 1981, a UNDP/World Bank Energy Assessment mission 2/ identified Rwanda's most pressing energy problems to be: (i) the rapTd depletion of forestry resources and the fact that reforestation efforts compete for land with food and export crop production; (ii) the high cost of oil imports, given Rwanda's land-locked position, and the lack of security of supply; and (iii) institutional weaknesses in the electric power subsector, the need to develop overall sector planning, and elec- tricity tariffs. The Rwandese Bureau National d'Etudes de Projets (BUNEP) and the Ecole Polytechnique Federale de Lausanne (EPFL) made a complete study of electricity supply in Rwanda, published in May 1983, which included an overview of the energy sector. The study's findings coincide with those of the UNDP/World Bank assessment report in most areas. Key recommendations made by the UNDP/World Bank assessment to alleviate these problems were: (i) to increase and reorient forestry extension work to assist the rural population in woodlot preparation and in fuel conserva- tion; (ii) to reduce woodfuel demand by introducing more efficient cook- stoves and charcoal kilns; (iii) to evaluate the prospects for increased 2/ Rwanda: Issues and Options in the Energy Sector, June 1982. Report of the Joint UNDP/World Bank Energy Assessment Program.  - 8 - peat production; (iv) to modify oil import arrangements by purchasing oil on international markets and bringing it in across Tanzania once the Rusumo-Isaka road was paved (para. 27); (v) to establish a strong planning unit within Electrogaz; and (vi) to develop the Lake Kivu methane resource in stages, and to monitor the present operations with a view to obtaining an appropriate data base for the design of possible future projects. Energy Consumption 23. Traditional sources of energy ('iomass fuels--wood, charcoal, l crop and animal residues and, to a minor extent, peat) provide about 94 percent of the total energy consumed in the country. Petroleum products account for about 4.5 percent and electricity about 1.5 percent. Total consumption of wood fuel in rural areas is estimated at 5 million m3 annually. About 108,000 m3 of wood per annum in the form of charcoal are used as the principal cooking fuel in Kigali, and about 29,000 i3 are used as firewood. Prices of charcoal and firewoodl have increased significantly in the last few years due to transportation, as trees are cut further and further from population centers. Traditional Energy 24. The depletion of forestry resources and the accompanying high prices of charcoal are critical issues which the Government and aid agencies are making efforts to address. The Directorate of Waters and Forests under the Ministry of Agriculture and Livestock is responsible for the forestry sector in Rwanda and is taking steps to establish a Forestry Code and a National Forestry Fund to finance small scale afforestation programs country-wide and to improve existing plantations. Various countries and organizations are providing assistance in the forestry sector, including Belgium, Germany, Switzerland, the African Development Bank (AfDB), Fonds Europeen de Developpement (FED) and UNDP. IDA included reforestation of about 500 ha in the Bugesera/Gisaka/Migongo and Mutara rural development projects; one of the components in the Integrated Forestry and Livestock Development Project (Credit 1039-RW) is the planting of about 5,000 ha around Kigali and 3,000 ha Qear Butare with trees to be used principally for fuelwood. 25. Significant savings in fuelwood and charcoal could be made if the efficiency of household cooking and charcoal production could be improved. Progress in introducing more efficient cookstoves has been slow especially in rural areas where cooking on open fires is the common practice. Urban charcoal stove programs have been relatively more successful in such countries as Kenya and Upper Volta, and funds have now been made available from the UNDP/Bank Energy Management Assistance Programme for preliminary studies to prepare a charcoal stove program for Kigali, as well as a pro- gram for improving the efficiency of charcoal production. The Integrated Forestry and Livestock Development Project includes a component for experi- mental work on improved woodstoves and charcoa:L development in rural areas (para. 34).  -9- Commercial Energy 26. Petroleum. Gross Thmestfc consumption vf commercial energy (mostly petroleum products) rose at an average annual rate of 9 percent from 36,391 toe in 1979 to an estimated 47,580 toe in 1982, iJhile the oil import bill for 1982 rose to US$49 million, an increase of 2C percent from US$23 million in 1979. Per capita consumption is still quite low in relation to other countries in the region, about 13 kgoe annually, and its 4 use is largely for motor vehicles. Nevertheless, Rwanda's import of petroleum products in 1981 amounted to about 10 percent of its imports and absorbed about 21 percent of its export earnings. To protect its economy against interruptions in the trainsportacior. o: oil, t;wanda Las installed additional oil storage tanks sufficient to store about 10 million liters, or about two months' supply. A loan is currently being negotiated with Caisse Centrale de Cooperation Economique (CCCE) for building facilities to hold a further 11 million liters in Kigali and 4 million in Butare. 27. Rwanda is entirely dependent on foreign sources for its supply of petroleum products, which are imported by seven companies including Petrorwanda, a mixed enterprise under Government control. Since 1981, all of the oil imported to Rwanda has been refined in Mombasa, transported by pipeline to Nairobi, and loaded into tank trucks for a 1,500 kilometer journey via Uganda with a resulting exorbitant cost of about US$100 per barrel, including about US$37 for freight. The feasibility of purchasing oil on international markets and bringing it across Tanzania which, according to the UNDP/World Bank report (para. 22), could save up to 20 percent on present costs, will be studied when the paving of the road linking Rwanda with Tanzania, Rusomo-Isaka, is completed. 28. The Power Sector. Although electricity currently provides only about 25 percent of the commercial energy in Rwanda, the development of hydroelectric-based electricity supply is potentially an important alter- native to the use of high cost petroleum products, whether for power generation or for final consumers. At present, only about 2 percent of Rwanda's population has access to electricity which is supplied by the Ntaruka (11.25 MW), Mukungwa (12 MW) and Gisenyi (1.12 MW) hydrostations, and by Zaire's Ruzizi I hydrostation (28.2 MW). At present total installed generating capacity in Rwanda is 27.4 MW of which 24.5 MW is hydropower and the remainder diesel. Most of the equipment is old, failures are frequent, * and losses are high. The Ruzizi II (26 MW) hydrostation (jointly owned and operated by Rwanda, Burundi and Zaire and scheduled for 1988 commissioning) will provide an annual potential supply of 50 GWh to Rwanda in the first 5 years, increasing to 65 GWh thereafter. Typically, missions and tea fac- tories have diesel generating units operating intermittently, with ranges of 3 kW to 16 kW. Transmission lines total about 250 kin, ranging from 110 kV to 6.6 kV. The inadequate coverage and unreliability of the transmis- sion network are at present among the main constraints on the development of the power sector. New transmission lines are under construction from Ruhengeri to Gisenyi, financed by the Federal Republic of Germany, and along Lake Kivu, financed by the Government of Switzerland. 29. Power Demand. Since 1975 the number of consumers of low voltage electricity, principally domestic, grew at an average annual rate of 13  - 10 - percent, with consumption growing from 12.4 Glh to 28.0 GWh in 1982. Over the same period, the demand for high voltage energy (industrial) rose at an average annual rate of 9 percent, from 24.9 GWh to 45.5 GWh. The number of high voltage consumers rose from 79 to 113, an average annual rate of 5 percent. The total demand for electricity during the past seven years thus grew at an average annual rate of about 10 percent, while the number of new consumers grew at about 12 percent. A review of the historical demand for electrical energy together with a study of the potential growth in the variLous sectors of the economy, has led the Association to estimate that the demand for electrical energy will increase at an average annual rate of about 8 percent over the period 1983 to 1991. This is a conservative estLmate as it is lower than the rate projected by BUNEP (para. 22), as wel! as by consultants Tractionel (Belgium) and Ecole Polytechnique de Lausanne (Switzerland) who have forecast an average annual growth in demand of at least 11 percent. Electrogaz 30. Electrogaz, a parastatal commercial organization wholly owned by the Government of Rwanda and reporting to the Ministry of Public Works and Energy (MPWE), is responsible for the generation, transmission and distri- bution of electricity and gas throughout the country and for the treatment and distribution of water in urban areas. Electrogaz is governed by a Board, nominated by the President, of five Directors including a Chairman. The Board delegates its supervisory powers to a Manager appointed by the President. Theoretically the Manager's power is considerable but, partly becauise of Electrogaz's weaknesses, his practical authority is limited by MPWE which intervenes not only in such areas as electricity planning, but also in personnel management. Training of staff is urgently needed in such areas as maintenance which is now being carried out by foreign contractors employing foreign workers. Electrogaz's administrative and financial performance needs considerable improvement. The rate of return on non- revalued assets was only 2.5 percent in 1982. The accounting records are in poor condition; cost data for works in progress are incomplete and the recording of long term debt has been irregular. Systematic annual auditing was started only recently (para. 50). 31. In view of the planning, administrative, financial and technical deficiencies in the operation of Electrogaz, a management study funded by CCCE was carried out by consultants from the third largest French water utility, Societe d'amenagement urbain et rural (SAUR), and their report dated May 1982 recommended various reforms of policies, programs and pro- cedures for the improvement of all areas of management. Under terms of reference approved by the Association in the context of a Water Supply Project (Cr. 1345-RW of July 7, 1983), and again funded by CCCE, SAUR began, in January 1984, a two-year assignment with a team of five specia- lists, each of whom has a Rwandese counterpart, to provide management assistance to implement these reforms, in particular in the areas of tariffs, accounting, financie.L management, procurement, inventory control, as well as other administrative matters. Among benefits anticipated are the establishment of a more relevant Imanageraent information system and the production of more comprehensive and reliable accounts. Technical assist- ance to be provided under the proposed project with funds from CCCE would  - 11 - complement SAUR's on-going program, and is refected in an Action Plan agreed during negotiations. Programs to meet critical training needs initiated with the Water Supply Project would also be amplified under the proposed project (para. 40). The Government's Role in the Energy Sector 32. As has been noted (para. 24), the Government receives technical assistance in the energy sector from various aid agencies and voluntary organizations. Until very recently this assistance to the energy sector was not well-coordinated by the Government. The recent merging of the 4 MMinstry of Energy with the Ministrv of Public Works should improve the possibility of coordination. The new Ministry has formed an energy unit and has produced its first energy policy paper. Recently the Government approached the Swiss Government for aid in overall energy sector planning. The Government pursues a strategy of regional cooperation through the Communaute Economique des Pays des Grands Lacs (CEPGL) and its specialized agency, l'Energie des Pays des Grands Lacs (EGL) formed by Burundi, Rwanda, and Zaire; through the Organization for the Management and Development of the Kagera River Basin (KBO) made up of Burundi, Rwanda, Uganda and Tanzania; and through SINELAC under the Ruzizi II Project (paras. 17 and 34). 33. Although there is no formal power development program for the country, the Government has taken reasonable steps to ensure a long-term, less costly alternative to imported fuel oil by giving high priority to the development of hydropower. Current demand projections for the inter- connected grid of the Great Lakes Region (which serves Rwanda, Burundi and Eastern Zaire) indicate that after the Ruzizi II project is commissioned no new generating station will be needed until after 1993. The Government recognizes that the next major tasks to be addressed with great urgency are to increase the currently very low reliability of service of the existing transmission and distribution system and to extend its coverage to new consumers. The funds provided under the proposed project would be utilized to address both of these objectives. The Association's Role in the Energy Sector 34. The Association's strategy in the energy sector is to help deve- lop a balanced program of energy development focussing on more efficient * utilization of traditional sources as well as better exploitation of the considerable hydropower potential in the region; an important objective is also to improve the planning, as well as the financial and operational * performance of sector institutions. Woodfuel production is to be increased by the Integrated Forestry and Livestock Development Project (Cr. 1039-RW) which is also providing for experimental work on improved woodstoves in rural areas and a study of the transformation into charcoal of the bamboo cleared from areas in the Gishwati region which are to be afforested. Under the Water Supply (Credit 1345-RW) and the proposed project, the Association seeks to create a financially sound and technically efficient power and water supply utility through the upgrading of Electrogaz's managerial, financial and technical capabilities. In addition, in 1983,  - 12 - IDA participated in the financing of the regional Ruzizi II hydro-project which will supply electricity to Rwanda, Burundi and Zaire, at lower cost than if each country were to deve!lop power generating capacity independently. Further needs to identify the potential for developing the Lake Kivu methane gas and to improve the efficiency of charcoal production and its utilization in urban areas are expected to be addressed under Technical Assistance Credit 1217-RW and the UNDP/Bank Energy Management Assistance Programme. PART IV - THE PROJECTX 35. The proposed project was prepared by Electrogaz with the assist- ance of the consultants, Fichtner (of the Federal Republic of Germany), and the Association. It was identified in October 1982, prepared in July and September 1983, and appraised in October 1983. A report entitled "Rwanda Power Project "(No. 4961-RW, dated May 17, 1984) is being distributed separately to the Executive Directors. Negotiations were held in Washington from April 25 to 27, 1984. The Rwandese delegation was led by Mr. Joseph Nzirorera, Minister, Ministry of Public Works and Energy, and included officials from Electrogaz. The main features of the Credit and Project are given in the summary at the be!ginning of this report and Annex III. Objectives of the Project 36. The main objective of the proposed project is to complement the recently approved Ruzizi II regional hydroelectric project by enabling Rwanda to take maximum advantage of the increased output from the new facilities. Specifically, the project would provide improved reliability of production, transmission and distributi'on of electrical energy, serve additional consumers, and help sustain the economic growth of the indus- trial and commercial sectors of the country. Further project objectives are to strengthen Electrogaz in planning and management, organization of its electricity department, and general operation and maintenance. Project Description 37. The main features of the project c omprise: - the rehabilitation of the Ntaruka generating station; - the rehabilitation and extension of the transmission network; - the supply of an adequate Inventory of maintenance equipment and spare parts; - the provision of vehicles; - technical assistance to Electrogaz and For training programs; and - consulting engineering services.  - 13 - The rehabilitation of the Ntaruka generating station, two 3.75 MW units built in 1958 and a third in 1976, is essential to provide a continuing source of electrical energy, and to maintain the electrical stability of the transmission system, no less so once Ruzizi II is commissioned (paras. 17, 23 and 34). In view of the age and condition of the generating sta- tion, a component of the project would be the replacement of worn and obsolete equipment such as water seals, bearings, turbine runners, and electrical controls including switching and communications equipment. Most of the transmission system is about the same age and condition as the Ntaruka generating station. Thus a component of the project would consist of the replacement of control equipment, over-loaded transformers, and worn and inoperative switching. New remote telemetering and control equipment as well as modern telephone equipment would also be provided. These improvements would significantly increase the efficiency, reliability and life of the station. 38. Two new transmission lines aggregating about 40 km are proposed to extend the transmission grid to towns beyond the existing service area. Steel towers would be used for a 30 kV line while the line operating at 15 kV would be constructed on concrete poles. 39. Many of the failures in the electrical system are due to the general lack of replacement and spare parts needed in the day-to-day opera- tion of the system. The project would, therefore, provide about three years supply of conductors, insulators, transformers, as well as smaller items such as charts for recording instruments, lamps for annunciator panels, and relays. Small tools to augment the existing equipment would also be included, as well as items of safety equipment, including hard hats, safety glasses, etc. During negotiations, agreement was reached with the Government that, in the future, foreign exchange would be provided to maintain a supply of maintenance equipment and spare parts at an adequate level for proper maintenance in compliance with the agreed inventory and procurement management guide (Section 3.04, draft Development Credit Agree- ment and Section 3.07, draft Project Agreement). Technical Assistance to Electrogaz 40. A management team of five specialists from SAUR (para. 31) pro- vided under the Water Supply Project (Cr. 1345-RW) - a mission leader, a sales expert, an accountant, a computer expert and a water supply engineer -- would be complemented under the proposed project by an adviser to the Manager and by an electrical engineer. These specialists would operate in an advisory capacity to Electrogaz's staff. The Water Project also pro- vides for water training in a center under construction. The proposed pro- ject complements this training by providing for an additional two trainers, these in protection and safety on transmission systems and maintenance of equipment. Agreement was reached during negotiations that Electrogaz would create and staff three new positions: manager of engineering, manager of training and an assistant manager of training, the latter two to coordinate and oversee the training for both the water and electrical departments of Electrogaz. In consultation with the experts, these new appointees would be responsible for preparation of (i) a draft policy paper on personnel  - 14 - policies and procedures; (ii) a five-year naster plan for investments in the electricity sector; (iii) a plan of action to reduce electricity losses; and (iv) a training plan which would include forecasting needs, design of course syllabi, lists of equipment for electrical laboratories and recruitment of local trainers. The foregoing items (i)-(iv) would be available for discussion with the Association by June 30, 1985 (Sections 2 08 and 2.09 of the draft Project: Agreement). Im_lementation 41. Electrogaz (para. 30) would be responsible for the implementation of -he project and would be assisted by consultants for the design and supervision of the project. The project schedule is based on the comple- tion of the rehabilitation of the Ntaruka generating station and the trans- mission system by December 1987. The construction of the new transmission lines are also scheduled for completion by the end of 1987, well before the Ruzi2i II generation stat:ion is completed in mid-1988. Cost Estimates 42 The total project cost is estimated to be about US$19.3 million equivalent not including duties and taxes which the Government would not, according to its practice, levy on the project, and excluding interest during construction. The foreign exchange component is estimated to be US$17.2 million equivalent, about 89 percent of the total project cost. The project cost estimates for thie teclinical assistance, and consulting engineering components were prepared by the Association and for the remaining items were prepared by Electrogaz's consultants, Fichtner of the Federal Republic Germany, on the basis of costs as of December 31, 1983. The cost estimates were reviewed by the Association and were found to be reasonable. Physical contingencies of 20 percent were added to the cost of rehabilitation of the Ntaruka generating station and the transmission system, and of 10 percent to the remaining items. Price contingencies were added to the base cost plus physical contingencies on local costs as follows: 1984 and 1985 -- 9.5 percent; 1986 to 1988 - 9.0 percent; and on foreign costs as follows: 1984 -- 3.5 percent; 1985 -- 8.0 percent; 1986 to 1988 -- 9.0 percent. 43. A total of about 200 staffmonths of engineering services would be required for the design and supervision of construction of the project, of which approximately 115 staffmonths would be expended in Fichtner's office in Germany and 85 staffmonths in Rwanda. The cost of the engineering contract is estimated to be US$1.8 million, of which US$1.5 million would be in foreign exchange. Financing Plan 44. The proposed IDA Credit of US$9.0 million would finance 47 per- cent of the estimated project cost, and 52 percent of the estimated foreign component of the project. The borrower would be the Rwandese Republic which would onlend the funds to Electrogaz for a period of twenty years, including five years of grace, and with an interest equal to that in effect  - 15 - for Bank loans at the time of approval of the project by the Board.3/ Electrogaz would assume the foreign exchange risk. The proposed credTt would be used to finance repayment of the PPF (US$1,000,000) for preliminary engineering studies, detailed design and project management; and 100 per^ent of the foreign component of the rehabilitation of the Ntaruka generating station, the two new transmission lines, maintenance equipment and spare parts, vehicles, and consulting engineering. CCCE has indicated its willingness to cover the costs of the rehabilitation of the transmission system and technical assistance to an amount equivalent to US$9.2 million (together with the IDA Credit, this would cover 100 percent of foreign costs). The CCCE loan would be for fifteen years with a t five-year grace period, and would bear an interest rate of 5 percent. Execution of a Subsidiary Agreement between the Government and Electrogaz and the fulfillment of all conditions precedent to disbursement of CCCE funds would be conditions of effectiveness of the credit (Section 5.01 of the draft Development Credit Agreement). Electrogaz would provide internally generated funds equivalent to US$1.1 million to cover 52 percent of the local costs. Interest during construction, amounting to US$4.2 million equivalent, would be financed by the Government. Procurement and Disbursement 45. Some of the items to be purchased under the proposed IDA Credit can only be supplied by the original manufacturer. Thus, it would be necessary for Electrogaz to negotiate directly with the original manufacturer for the supply, and guarantee for any installation, of these types of equipment; the total cost of items to be purchased in this manner is forecast not to exceed US$500,000. All other items of equipment and civil works to be financed by the Association would be procured on the basis of international competitive bidding, except for items or groups of items costing less than US$250,000 which would be procured on the basis of international shopping (subject to an aggregate ceiling of US$500,000) in accordance with IDA guidelines. Contracts for the rehabilitation of the network and technical assistance would be awarded in accordance with CCCE's requirements. Consultants for project design and supervision would be selected in accordance with IDA guidelines (Section 2.02 of the draft Project Agreement). The procurement method for the various project components follows in tabular form. 3/ Inflation in Rwanda averaged about 7 percent for the period 1981-83 (6.5 percent in 1981, 10 percent in 1982, 6.5 percent in 1983) and is projected to average about 9 percent in the period 1984-86. Given this and the fact that the foreign exchange risk would be borne by Electro- gaz, the proposed on-lending rate would be positive in real terms.  - 16 - Procurement Method (US$ million) Total Project Items ICB LCB Other Estimated Methods Cost Ntaruka Powerhouse 2.9 (2.5) - 0.3 (0.3) 3.2 Transmission System - - - 7.6 - 7.6 New Transmission Lines 1.5 (1.2) - - - 1.5 Maintenance Equipment & Spare parts 2.3 (2.3) 0.1 0.2 (0.2) 2.6 Vehicles 1.0 (1.0) - - - 1.0 Technical Assistance - - - 1.6 - 1.6 Consulting Engineering - - 1.8 (1.5) 1.8 Total 7.7 (7.0) 0.1- 11.5 (2.0) 19.3 Note: Figures in parentheses are the proposed amounts to be financed by IDA. 46. The proceeds of the Credit would be disbursed over four years on the basis of 100 percent of the foreign cost of the rehabilitation of the Ntaruka generating station, the two new transmission lines, the maintenance equipment and spare parts, vehicles, and consulting engineering. The closing date for the credit would be June 30, 1988, and any savings which may accrue due to lower purchase prices or unutilized contingency funds would be cancelled. The rate of disbursement differs from the average power project because project components (i.e. rehabilitation) are not typical. Electrogaz's Finances 47. Electrogaz's financial position is weak. In 1981 it suffered a net deficit of RwF 282 million (US$3.1 million) after charging depreciation based on the historical value of the assets. After the increase of tariffs on January 1, 1982, which tripled for water (from RwF 20.3/m3 to RwF 66.1/m3) and doubled for electricity (from RwF 5.1/kWh to Rwf 10.5/kWh or US