Tanzania - Power Engineering and Technical Assistance Project

Docet of The World Bank FOR OMCIAL USE ONLY Report No. P-5611-TA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 7.5 MILLION EQUIVALENT TO THE UNITED REPUBLIC OF TANZANIA FOR A POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT DECEMBER 24, 1991 Industry and Energy Operations Division Southern Africa Department This documet has a restricted distribution and may be used by recipients only i the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALINT Currency Unit = Tanzanian Shilling TSh 1.0 = US$ 0.004 US$ 1.0 = TSh 230 (as of July 1991) GLOSSARY OF ABBREVIATIONS EPDC - Electric Power Development Company Ltd. ICB = International Competitive Bidding IDA - International Development Association ISD = Information System Department LCB = Local Competitive Bidding MWEM = Ministry of Water, Energy and Minerals POE = Panel of Experts PPF u Project Preparation Facility TANESCO = Tanzania Electric SuppLy Company Ltd. TTI = TANESCO Technical Institute FISCAL YEAR Government: July 1 to June 30 TANESCO: January 1 to December 31 This Memorandum and Recommendation of the President (MOP) was prepared on the basis of an appraisal mission which visited Tanzania in May 1991. The appraisal mission consisted of Ms. Elisabeth Bundi (mission leaaer/Sr. Financial Analyst) and Mr. Barry Trembath (Sr. Power Engineer). The Division Chief is Mr. David Cook and the Director of the Department is Mr. Stephen Denning. The lead adviser is Mr. Bocar Thiam (AFTIE). The report was reviewed by Mr. Alfred Gulstone (peer-reviewer, AFTIE). Comments have also been received from Mr. Agustin Litvak (AFRVP) and Mr. Robert Tillman (AFTEN) and have been fully taken into account in this document. FOR OFFICIAL USE ON'Y POER ENGIMBERING AND TECHUICAL ASSISTANCE PROJECT CREDIT AND PROJECT SUMMARY Borrower Government of Tanzania Beneficiary: Tanzania Electricity Supply Company Ltd. (TANESCO). Credit Amount: SDR 7.5 million (US$10 million equivalent). Terms: Standard IDA terms with a 40 year maturity, including 10 years of grace. Onlending Terms: Relent to TANESCO for 18 years, including three years of grace, with interest at 7.73%. TANESCO will take the foreign exchange risk. Financing Plan: IDA US$10.0 million TANESCO US$ 1.6 million Total US$11.6 million Economic Rate of Return: Not applicable. Staff Appraisal Report: None. This document has a restricted distribution and may be used by recipients only ir elrmance of their offcial duties. Its contents may not otherwise be disclosed without World Bank athorization. MMORANDUN4 AND RECOMENDATION OF THE PRESIDENT OF ThE IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO TANZANIA FOR A POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT 1. I submit for your approval the following memorandum and recommendation on a development credit to the Government of Tanzania for SDR7.5 million, the equivalent of US$10 million, on standard IDA terms with a maturity of 40 years to help finance a project for power engineering and technical assistance. The proceeds of the credit will be relent to the Tanzania Electric Supply Company Ltd. (TANESCO) for 18 years, including three years of grace, with interest at 7.73% per annum. 2. BackZ_rorAd. Tanzania's consumption of energy is low but growing rapidly. Total energy use was about 0.4 tons of oil equivalent (toe) per capita in 1989 compared to 0.6 toe per capita in neighboring Zambia and Zimbabwe. Woodfuels account for 92% of energy consumed, petroleum for 7% and electricity for 1%. The low level and pattern of energy consumption reflects Tanzania's modest stage of economic development. Consumption of commercial fuels is relatively low, but plays a vitally important role in the economy. Electricity, which is mostly produced from low-cost indigenous hydro resources, is used for irrigation, industrial and commercial purposes and by better-off households (thereby reducing demand in the major towns for increasingly scarce woodfuels). 3. After a decade of economic stagnation and declining agricultural and industrial production, a significant improvement in the performance of the Tanzanian economy has taken place since 1986 following the launching of the Economic Recovery Program. Over the past five years Tanzania has achieved an economic growth averaging about 4% per year. As a means of providing an appropriate environment for achieving sustainable economic growth, the Government has focussed its effort, with the support of the donor community, on a far-reaching liberalization and policy reform program, supporting this through rehabilitating and expanding the country's infrastructure including the power sector. 4. The Government's policy objectives for the power sector, which IDA supports, are to: (i) ensure that demand for electricity is met in a least- cost manner; (ii) price electricity at full economic and financial cost; and (iii) maintain the financial viability of the sector. Electricity is produced, transmitted and distributed by a public power utility, the Tanzania Electric Supply Company Ltd. (TANESCO). Sales of electricity have been growing rapidly over the past five years by about 8% per annum stimulated by the beginnings of the economic recovery. The presently available capacity of the interconnected system is barely adequate to meet the peak demand of 280MW. Assuming that the current thrust of policy towards a more liberal, market-determined economic system is sustained, demand is forecast to continue rising but at a somewhat lower rate averaging about 6% per year through the 1990s. This will require further expansion of power generation, transmission and distribution capacity in line with the forecast demand growth. -2- 5. Based on studies prepared with the assistance of consultants (TANESCO Masterplan of July 1989 and Gas Addendum of October 1990 prepared by Acres Ltd. of Canada), and subject to the costs remaining close to the estimate, the Lower Kihansi Hydroelectric Scheme has been identified as the next step in the least-cost expansion program to meet the demand for electricity in 1997 and beyond. The Scheme, with an installed capacity of 165MW, is estimated to cost about US$220 million in current price levels. A gas development scheme is being considered but is too small, based on present knowledge of the reserves, to substitute for the hydro scheme. A feasibility study on the Lover Kihansi was prepared by EPDC of Japan which confirmed the technical, economic and financial viability of the Scheme. Environmental studies carried out with respect to the Lower Kihansi Hydroelectric Scheme have concluded that it will not have significant adverse environmental and social impacts. The construct.on of the Lower Kihansi HydroelectrLc Scheme needs to be started early 1993 if the scheme is to be ready for operation in 1997, consequently the various tender documents have to be prepared during 1992. The construction of the Lower Kihansi Hydroelectric Scheme is provisionally included as a major component under the proposed Power VI Project scheduled for appraisal early next year (FY93-L). 6. TAIESCO has over the past three years implemented successfully a financial restructuring program including, inter alia, semiannual tariff increases of 15%. A detailed review of the company's finances indicates the need to continue implementing semiannual tariff increases of not less than 15% over the coming year. In addition to providing for the 1992 increases through this credit, an appropriate cost recovery covenant would be agreed for subsequent years inder the proposed Power VI Project. 7. TANESCO is experiencing a number of institutional problems. Accurate and timely billing has been a chronic problem in the company for some time, partly stemming from an outdated computerized billing system and frequent computer breakdowns. The latter together with outdated accounting procedures involving too many manual-transactions and insufficient internal control, and a shortage of competent staff are causing delays in finalizing TANESCO's accounts. Those for 1989 have only recently been completed and the audited accounts were submitted to IDA in November 1991. The audited accounts for 1990 are six months overdue. Technical assistance, training and equipment to upgrade the accounting and billing systems are urgently needed and have been included for finance by this credit. 8. Lessons Learned from Previous BakfIDA EMperience. There have been no prior power engineering credits implemented in Tanzania. The design is therefore based on regional and Bank-wide experience. By and large, implementation of engineering credits has been successfully accomplished. Experience has shown that the tasks of consultants, the primary components under engineering projects, are usually discrete and well defined, facilitating effective execution. 9. Experience with the Kidatu (Ln. 1306-T-TA) and Mtera (Cr. 1405-TA) Hydroelecric Projects emphasizes the importance for large hydroelectric projects of preparing the detailed design and receiving bids before finalizing the financing plan, and starting construction. This credit will - 3 - ensure that all necessary preparatory works are completed before finalizing the financing plan for Power VI Project. 10. Project Objectives. The principal objectives of the credit are to assist TANESCO to comaplete the design work for the least-cost generation project and to upgrade the accounting and financial capabilities in TANESCO. 11. Proiect Description and Financin . The project will comprise the following: (i) detailed design including site investigations, and preparation of bid documents for the Lower Kihansi Hydroelectric Scheme; (ii) installation of new billing and accounting procedures and procurement of computer hard/software, equipment and vehicles; (iii) construction of a training center, and training of TANESCO staff in computers and accounting; (iv) expert services in accounting/finance; and (v) update of environmental work. Total cost is estimated at US$11.6 million, of which the foreign cost is US$10.0 million and local cost US$1.6 million. The total foreign cost will be financed by the credit and the local cost will be financed from TANESCO's internally generated funds. The <.redit will be lent to the Government of Tanzania on standard IDA terms and relent to TANESCO, the implementing agency, for 18 years, including three years of grace, with interest at 7.73%. The Technical Annex describes the project and cost in detail. 12. Rationale for IDA Involvement. The credit will support IDA's country assistance strategy by: (i) strengthening TANESCO's institutional capability; and (ii) assisting Tanzania to implement least-cost investment programs to meet the demand for electricity. The Government and TANESCO have requested IDA to finance the final project preparation activities required before the construction of the Lower Kihansi Hydroelectric Scheme can commence. IDA, Italy, Norway, Sweden and the Republic of Germany have been the principal donors assisting the power sector in Tanzania. However, no donors other than IDA have expressed interest in financing this work. IDA's involvement would help ensure that policies and subsequent investments proposed for the power sector would be implemented efficiently, and contribute to enhancing donor confidence, which would be needed to attract cofinancing for the Lower Kihansi Project. 13. Issues and Actions Agreed On. During negotiations of the proposed Credit, agreements were reached that an average tariff increase of not less than 15% will be implemented with effect from January 1992 and July 19)2, respectively and that TANESCO will have its accounts audited, including the Special Accounts, by qualified auditors and sent to IDA within fourteen months after the end of the 1990 financial year, within ten months after the end of the 1991 f iancial year and within six months for the following years. IDA has received TANESCO's 1989 audited accounts, including Special Accounts under Credits 1405/1687-TA, which comprised the condition of Board presentation as agreed at negotiations. The execution of a subsidiary loan agreement on behalf of the Government and TANESCO is a condition of credit effectiveness. 14. Justification and Risks. The credit will: (i) enable TANESCO to achieve a major strengthening of its accounting and billing systems; and (ii) ensure that detailed design for the Lower Kihansi Scheme is completed rapidly and efficiently, thereby reducing the risks of implementation delays and cost overruns. The principal risks for the project relate to: (i) possible delays in project execution due to slow procurement of consultants and expatriate services; and (ii) insufficient institution building because of inadequate arrangements for counterpart staff. Steps have been taken in project preparation and design to minimize these risks. 15. Enviroment. Environmental assessments, which have been completed, have concluded that the implementation of the Lower Kihansi Hydroelectric Scheme will not cause significant adverse environmental or social impacts. Thus the proposed Iroject has been placed in environmental Category B. Because of the particular topography of the site, the absence of settlements in the area, and lack of noteworthy flora and fauna, it is expected that the project for the construction of Kihansi will also be rated as Category B. 16. Recommendation. I am satisfied that the proposed credit will comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Lewis T. Preston President Attachments Washington D.C. January 14, 1992 Schedule A TANZANIA POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT ESTIMATED COSTS AND FINANCING PLAN A. Estimated Costs Loggl Foreign Tots (US$ Man) Training 0.00 0.15 0.15 Construction of Training Center 1.00 0.15 1.15 Equipment & Vehicles 0.10 1.90 2.00 Consultancy Services Detailed Design & Preparation of Bid Documents 1/ 0.25 , 4.30 4.55 Billing & Accounting 0.08 1.25 1.33 Finance 0.00 1.20 1.20 Environmental Update 0.00 0.05 0.05 Base Cost 1.43 9.00 10.43 Contingencies Physical 0.13 0.60 0.73 Price 0.06 0.40 0.46 Total Project Costs 1.62 10.00 11.62 B. Financing Plan: Local Foregn Total (US$ mln.) TANESCO 1.62 0.00 1.62 IDA 0.00 10.00 10.00 Total 1.62 10.00 11.62 1/ Does not include down-payment of about US$400,000 which will be financed from PPF of Power VI Project (page 16, para. 18). -6- Schedule B Page 1 of 2 TAZNI MOWER ENGIWEERING AND TECHNICAL ASSISTANCE PROJECT PROCUSEMENT METHOD AND DISBURSEMENTS A. Procurement Project Categories Procurement Method 1/ Total LCB Other Cost 2/ --(US$W1n.) Training 0.15 0.15 (0.15) (0.15) Construction of Training Center 1.14 0.18 1.32 (0.18) 3/ (0.18) Equipment & Vehicles 2.29 2.29 (2.17) 3/ (2.17) Consultancy Services 4/ Detailed Design & Prep. of Bid Doc. 5.08 5.08 (4.80) (4.80) Technical Assistance 1.43 1.43 (1.35) (1.35) Expert Services 1.30 1.30 (1.30) (1.30) Environmental Update 0.05 0.05 (0.05) (0.05) Total 1.14 10.48 11.62 (10.00) (10.00) 1/ IDA contribution shown in parentheses. 2/ Figures have been rounded. 3/ To be procured through international shopping based on comparison of price quotations obtained from at least three suppliers from not less than two countries. 4/ Includes three major consultancies for: (i) detailed design and preparation of bid documents for the Lower Kihansi Hydroelectric Scheme; (ii) implementation of modern billing and accounting procedures; and (iii) expert services in the areas of accounting and finance. -7- Schedule B Page 2 of 2 TANZANIA POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT B. Disbursements CateRory Amount of Credit Percent of Exnditures (US$ million) to be financed Training 0.14 100% of foreign expenditures Equipment for Training Center 0.16 100% of foreign expenditures Equipment & Vehicles 1.97 100% of foreign expenditures Consultancy Services 6.73 100% of foreign expenditures Unallocated 1.00 Total Credit Amount 10.00 Estimated IDA disbursements IDA Fiscal Year 92 93 94 95 (US$ al.) Annual 3.50 4.90 1.30 0.30 Cumulative 3.50 8.40 9.70 10.00 Schedule C POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT TINETABLE OF KEY LOAN PROCESSING EVETS Time taken to prepare: Three months Prepared by: TANESCO and IDA First IDA mission (for Power VI project): January/February 1991 Appraisal Mission Departure: May 1991 Date of Negotiationst September 1991 Planned Date of Effectiveness: January 1992 List of relevant PCRs: Kidatu Hydroelectric Project (Ln.1306-T-TA), Project Completion Report No. 4622. -9- Schedule D Page 1 of 3 TANZANIA POWER ENGINEERING .ND TECHNICLAL ASSISTANCE PROJECT STATUS OF IFC INVESTMENTS (as of June 30; 1991) Investment FY Obligor Type of Loan Equity Total Number Business _(US$ Mli.) 774-TA 1985 Amboni Ltd. General 5.4 0.0 5.4 Mfg 410-TA 1978 Highland Soap Soap , 1.4 0.4 1.8 & Allied Prod. Ltd. 25-TA 1960/64 Kilombero Food/ 4.0 0.7 4.7 Sugar Co. Ltd. Food Proc. 460-TA 1979 Metal Household 1.3 0.2 1.5 Products Ltd. utensils 1159-TA 1990 TASCO Sisal Agribus. 2.0 0.0 2.0 2148-TA 1991 Mufindi Tea Food/ 2.8 0.0 2.8 Co. Ltd. Food Proc. 2722-TA 1991 Tourism Promotion Hotel LZ 0g 1 (Zanzibar) Ltd.% Total Oross Commitments 18.1 . 1.5 19.6 Less: Cancellations, terminations exchange adj., repaymeats, write-offs and sales 12 M Tatel commitments now held by IFC 7.5 . 0.0 7.5 Tota ncommitteld investmets 1.2 0.2 1.4 Total udisbursed 4.8 0.0 4.8 * Approved but not yet effective -10 - TANZANIA Pap 3t3 POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT SUMMARY STATEMENT OF LOANS AND IDA CREDITS (as of July 30, 1991) Ammot im USS mitt4ion (Less carcettations) Loa2n or Ffacal urdis- Closing Credit No. Year Borrower Purpose Bank IDA bursed cate ..........~~~~.. .. . . ... . ...... . .. . . . Credits 60 Credits(s) closed 814.27 C10150TAN 1960 TANZANIA GRAIN STORAGE & MILL 43.00 10.34 12/31/91(a) C10560-TAN 1981 TANZANIA EDUCATION VII 25.00 1.05 12/31/90(R) C12290-TAN 1962 TANZANIA FORESTRY II 12.00 3.47 12/31/90(R) C13700*TAN 1983 TANZANIA JFINDI PULP&PAPER 18.00 .25 06/30/92(R) C14050-TAN 1964 TANZANIA PJER IV 35.00 .77 12/31/91(K) C15360-TAN 1965 TANZANIA PORTS REHAB. 27.00 2.35 06/30/92(n) C16040*TAN 1985 TANZANIA PETRO.SECTOR.T.A 8.00 3.58 10/31/91o) C16870-TAN 1986 TANZANIA POWER RSHKAB./fNERGY 40.00 1.77 12/31/91(R) C16880*TAN 1986 TANZANIA ROADS REA. 50.00 25.23 06/30/92 C18100TAM 1987 TANZANIA TELEC.II 23.00 3.76 06/30/92(R) C18910*TAN 1988 TANZANIA AGa.EXPORTS REM. 1 30.00 25.05 06/30/9 C19690-TANCS) 1989 TANZANIA IND.&TRADE ADJUS.CR. 135.00 35.30 12/31/91CR) C19700*TAN 1989 TANZANIA NATL.AG.& LIV.RES. 8.30 7.29 03/31/97 C19940-TAN 1969 TANZANIA AGRIC. EXT. 18.40 13.45 03/31/97 C20500*TAU 1989 TANZANIA TREE CROPS 1^.10 - 21.78 06/30/% C20950*TAX 1990 TANZANIA PORTS MODERNIZATIOt 3..00 36.94 06/30/97 C20980TAN 1990 TANZANIA HEALTH & WTRITIOI 47.60 44.48 06/30/96 C21160*TAM(S) 1990 TANZANIA AGRIC. ADJUSTMENT 200.00 105.04 96/30/92 C21370-TAN 1990 TANZANIA EDUC PLANNING & RENA 38.30 37.25 12/31/96 C21490-TAN 1990 TANZANIA RADs 1 180.40 173.31 06/30/98 C22020*TAN 1991 TANZANIA PETROL REHAB 4.00 ".95 12/31/97 c22670-TAx 1991 TANZANIA RAILWAYS RESTRUCTURI 76.00 74.82 12/31/99 C22910-TAN 1992 TANZANIA URBAN SECTOR ENG. 11.20 11.47 42/31/9 TOTAL Maer Credi to a 23 1,132.30 685.69 Loons 19 Lons(s) closed 313.06 ALL c1Qsed for TANZANIA TOTAL muber Los * 0 TOTAL 313.06 1,946.57 of tich repaid 183.22 41.61 TOTAL held by ft & 1DA 129.84 1,904.96 Amot sold .09 of mdich repaid .09 TML olared 685.79 Notes: * Not yet effective * Not yet sipwd *** Total Approved, Repswamts, ad Ottaidirg betance represent both activo. id inactive Lons ad Credits. (R) Indicates formOtty revised Ctoerg Date. (S) indicates SAL/SECAL Lons ad Credits. The Net Approved aid Bait Reponits are historical vatue, all others are market value. The Signing, Effective, ard Closing dotes ore based %po the Loan Depant officel data ard ore not taken from the Task Sudget file. - 11. - DAZNTASchedueh POWER ENGINEERING AND T HNIA Pa*3 o _TECHNICAL-ASSISTAC PROJECT P831 STATUS Of BANK GROUP OPERATIONS LIST OF CLOSED SALs AND SECALS (as of July 30, 1991) AM*at i n USS aMiktti OM (tess cancettations) Loan or Fiscal Urstis* Closing Credit No. Year Barroe"r Purpose Bank IDA bursed Date .......... ...... ........ ....... ....* ... ...... ....... Cii33o-Am 198t TANZANIA EXPORT REMAB. 40.00 .00 03/31/83(R) CAO240-TAN 1987 TANZANIA MULTI*SEC.RH 1 46.20 .00 12/31/88 C17410-TAH 1987 TANZANIA KJLTI*SEC.RN 1 50.00 .00 12/31/88 CAQ241-TAN 1988 TANZANIA MULTI*SEC.RN 1 26.00 .00 12/31/88 C17411-TAN 1988 TANZANIA 9tJLTI-SEC.RH t 30.00 .0 12/31/89(R) C19691*TAN 1989 TANZANIA INO.&TRADE ADJUS.CR. 12.50 .00 04/10/90 C19692-TAM 1990 TANZANIA INO.&TRADO ADJUS.CR. 10.30 .00 11/06/90 C21161*TAN 1991 TANZANIA AGRIC. ADJUSTMENT 16.10 .00 12/19/91 Totak TANZANIA 241.10 .00 - 12 - TECHNICAL ANNEES TO THE EHORANDUM AND RECOMMENDATION OF THE PRESIDENT FOR A POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT SECTION A: Detailed Project Description 1. Backaround. TANESCO is the sole utility that generates, transmits and distributes electricity to the Tanzanian public. It started operations in 1931 as a private company and was bought by the Government in 1964 when it was established as a state owned corporation (parastatal) under the Electricity Act of the same year. The Ministry of Water, Energy and Minerals (MWEM), in consultation with TANESCO, exercises control on electricity produced by others (small captive plants for self consumption) through a licensing mechanism. It is estimated that TANESCO presently supplies some 95% of the power consumed in the country with the balance self-gener.ted by parastatals and private organizations. 2. The Bank Group has since 1969 actively supported past expansion of the power sector mainly by financing generating plants, transmission lines and rehabilitation of existing facilities. Huge investments are required during the 1992-1997 period in capital assets to meet the growing demand for electricity. Technical assistance and institutional development including training are also required to ensure investments in the power sector are sustainable. While the investment program for the 1992-1997 period in the power sector is scheduled for appraisal in late FY92 (proposed Power VI Project, FY93 L), some components are urgent and others need extensive preparation before being implemented and will therefore best be addressed under a power engineering and technical assistance credit. These components are the following: (a) Detailed design including site investigations, and preparation of bid documents for the Lower Kihansi Hydroelectric Scheme; (b) Installation of new billing and accounting procedures and procurement of computer hard/soft-ware, equipment and vehicles; (c) Construction of training center; (d) Training; (e) Expert services in accounting/finance; and (f) Update of environmental work. 3. Detailed Desin and Preparation of Bid Documents. The construction of the Lower Kihansi Hydroelectric Scheme with an installed capacity of about 165MW has been identified as the next step in the least-cost expansicn program to meet the demand for electricity in 1997 and beyond (TANESQO Masterplan of July 1989 and Gas Addendum of October 1990, both prepared by Acres Ltd. of Canada). Generation of electricity from gas was also analyzed but the presently proven reserves were found too small to substitute for the hydro scheme. Consequently, a feasibility study on the Lower Kihansi - 13 - Hydroelectric Scheme was carried out by Electric Power Development Co. Ltd. (Japan) and financed by a grant from the Government of Japan. Thi3 report confirmed the least-cost justification of the scheme estimated at a cost of about US$220 million at current price levels. After preappraising the scheme (for the proposed Power VI Project) in February 1991, it was found prudent to constitute a Panel of Experts (POE) to review the design and advise on further investigations/studies required before proceeding to the detailed design stage. The POE visited Tanzania in May 1991 and concurred with the selection of dam type and the location of the dam and tailrace outlet but concluded that adjustments to the power tunnel/powerhouse configuration will be necessary to provide acceptable hydraulic conditions and that further geological site investigations will be required prior to embarking on the construction. It was further concluded that the above adjustments and site investigations shall be carried out during the detailed design stage. However, adverse findings of the geological investigations can lead to considerable cost increases. Therefore, TANESCO will be asked to submit to the Bank a revised cost estimate based on the results of the site investigations, and a discussion of the implications of any changes in cost and/or schedule on the least-cost generation sequence, before completing the detailed designs and bid documents. Selection of consultants according to the Bank's guidelines has been concluded for carrying out the detailed design and preparation of bid documents. It is of utmost importance that the site investigations and detailed design proceed without further delays so that construction can commence and the demand for electricity can be met by 1997 in a least-cost manner (see Schedule 1 for key project activities). 4. Billing and Accountinag Procedures. Accurate and timely billing has been a chronic problem in TANESCO for some time. It partly stems from errors in meter reading, meters not being read, tampering with the computerized billing program and other irregularities which led to dismissal of several employees in late 1989. The meter function has now been strengthened in that more capable and better paid employees have been assigned the tasks, the readers' routes have been changed more often, the inspection crew has been strengthened and the whole process is being monitored by senior management on a weekly basis. The present mainframe computer was installed in the early 1970s and the computerized billing system and the partly-computerized accounting system were programmed at the same time. These hard/software are time consuming to operate which TANESCO has had difficulties in doing partly because of lack of experienced staff and frequent breakdown of the mainframe computer. TANESCO is presently about three months behind in issuing electricity bills, which are often disputed by consumers for being inaccurate. The largest consumers are now being billed manually. 5. The present accounting procedures in TANESCO involve too many manual transactions and not sufficient internal control, both of which contribute to difficulties in reconciling the accounts and closing the books on time. Lack of experienced staff, the fact that the accounts are not fully computerized and problems with the mainframe computer as described above have also contributed to the delay in closing the books. TANESCO's accounts for the year ending December 31, 1989, were closed in June 1991, and the audited 1989 accounts were submitted to IDA in November 1991. As the 1990 accounts have not yet been audited, at the date of Board presentation TANESCO will not - 14 - be in compliance with the audit covenant for 1990. Measures to address this are in paragraph 6 below. 6. TANESCO had for some time sought external technical assistance but was unable to attract competent computer and financial advisors. In mid-1990 a twinning arrangement was entered into with an electric utility company abroad. One financial advisor and one computer advisor were sent from the utility to assist TANESCO in rectifying the above problems and to implement new computerized billing and accounting procedures. However, the advisors were dismissed within a year for non-compliance with their contract. Over the past 18 months, the situation has deteriorated to the point where a group of experts is now required to prevent, in the short term, the existing system from collapsing and, in the longer term, assist TANESCO in installing new computers and implementing modern billing and accounting procedures. It is estimated that it will take a group of four experts about 18 months to identify and remedy sources of error, bring processing of data up to date, assist TANESCO in implementing modern billing and accounting procedures, assist in the early operation and train TANESCO staff. Financing of the four experts, equipment, vehicles, meters and computer hard/software is provided under the proposed credit. The terms of reference for the experts have been agreed upon. 7. Training. TANESCO's Manpower Development and Training section is under the Directorate of Personnel and Administration at headquarters. It is responsible for assessing the training needs for all staff in TANESCO, for preparing staff development plans and for implementing those plans. TANESCO uses a variety of training modes in implementing staff development plans and arranges for the required training to be given through: (a) in-house training at the TANESCO Commercial School in Dar es Salaam, TANESCO Technical Institute (TTI) at Kidatu and TANESCO Live Line Facility in Morogoro; (b) established national training institutions, the University of Dar es Salaam, technical and commercial colleges and vocational schools; (c) assignments at overseas power companies; (d) on the job training under foreign contracts for major construction projects; and (e) ad-hoc courses. 8. The present training programs need to be strengthened and expanded to enable TANESCO to achieve its objectives under the recent decentralized organization and to better address and solve the problems outlined in paras. 4-5 above. There is also a need for additional investments in physical facilities as the present TANESCO Commercial School in Dar es Salaam is too limited to serve the present needs. Furthermore, future training needs would best be addressed in the various zones and at the three major power stations. It is therefore recommended that the personnel, training and administration functions at headquarters be limited to serving headquarters staff only and - 15 - that the above functions be strengthened in the zones and at the three major generating stations. 9. The areas where training needs to be prioritized, and hence are included under the training component of this project, are described below. (a) Comuter Skills. With the installation of new computers and software for billing and accounting, TANESCO staff will require training in implementing and operating the new systems. While part of the training will be on-the-lob by the suppliers of the hard/software and the computer consultants (para. 6), the Director of TANESCO's Information Systems Department (ISD) and staff from the data processing and system analysis division will be trained abroad. The Director of ISD will pursue a one year program in computer science and four of the employees in the data processing and system analysis division will attend a six month course in system analysis and data base management. Financing of such overseas training will be provided under the credit. (b) Finance & Commerce. Basic skills in accounting are taught at TANESCO Commercial School in Dar es Salaam. The physical facilities of the school are too limited even to serve the present needs. TANESCO owns land at Morogoro where a small facility for Live Line training exists. A new school will be constructed at Morogoro where, inter alia, commercial and financial training with emphasis on utility practices will take place. There is also a need to expand the curriculum with emphasis on corporate finance, management information systems and new accounting procedures. An expatriate instructor would be required for about two years to assist TANESCO in developing and implementing the training programs. The financing of the instructor would be provided under the proposed Power VI Project while the construction of the school at Morogoro, including equipment, will be financed under this credit. In the meantime, TANESCO staff plan to continue to attend accounting courses at local commercial institutes to upgrade their skills. 10. Expert Services. TANESCO has had difficulties in attracting competent accountants due mainly to the low salaries compared to the private sector. In early 1991 TANESCO implemented an incentive program aimed at raising the productivity and efficiency at all levels in the company by rewarding groups of employees achieving certain performance targets. It is expected that it will take some time before the rewards will reach such a level to be somewhat competitive with the private sector. In the meantime, with the decentralization of the company and the large investments in the sector over the coming years, there is an urgent need to hire qualified accountants for the zones. TANESCO is presently financing the college degree of 30 students who are majoring in accounting. Until the first group graduates, TANESCO plans to hire seven accountants/finance experts for a two year period. Financing of such experts will be provided under the proposed credit. The terms of reference for the experts have been agreed upon. - 16 - 11. Bavironmental Update. An environmental study was carried out by EPDC in connection with the feasibility study on the Lower Kihansi Hydroelectric Scheme. The environmental study was reviewed by the Bank and it was found necessary to hire an environmental specialist to look more into the area of what effect the construction of Lower Kihansi would have on the fauna. This work has been completed and the conclusion has been reached that the Lower Kihansi Hydroelectric Scheme will not have significant adverse environmental and social impacts. All studies have been reviewed and approved by Africa Region Environmental Division although they have identified a need to put the two studies together in a formal environmental assessment for review with the Government and the Bank. Financing of this work is included in the proposed credit. 12. Proiect Costs. The total project cost is estimated at US$11.62 million equivalent (net of duties and taxes), with a foreign exchange component of US$10 million or nearly 90%. Base cost estimates are calculated according to June 1991 prices. Total contingencies of US$1.19 million equivalent represent about 10% of total costs. Physical contingencies of 10% have been applied to the construction of the training school at Morogoro, equipment and vehicles and five percent to technical assistance. Price contingencies have been applied to all the project components and are derived from: (i) the implementation schedule; and (ii) the expected foreign price increases of 3.5% a year during the FY1992-94 implementation period. The Government would bear the cost of any taxes and duties on imported goods and services. Detailed cost estimates are summarized in Schedule A. 13. Project Financin . TANESCO has approacded various donors for financing the project but without success as most of the donors were unable to come up with funds in such a short time period and are committed to other sectors as well as ongoing works in the power sector. The IDA credit of US$10 million will therefore finance the total foreign exchange cost of the project. The IDA credit will be lent to the Government on standard IDA terms with a 40 year maturity, including 10 years grace. The proceeds of the IDA iredit will be relent by the Government to TANESCO for 18 years, including three years of grace, with interest at 7.73%. The total local cost of the project will be financed by TANESCO's internally generated funds. The financing plan is summarized in Schedule A. SECTION B: Project Administration and Implementation 14. Aministration. The consultants to carry out the detailed design and preparation of bid documents will subcontract the task of site investigations. Office space and secretarial support to the consultants while working in Tanzania will be provided by TANESCO. It is expected that part of the work will be carried out at the consultant's home office. TANESCO staff who are e.pected to work closely with the consultants while they are in Tanzania will be appointed to IDA's satisfaction prior to the consultants' arrival (January 1992). These arrangements were confirmed during negotiations. - 17 - 15. The consultants responsible for rectifying the billing and acounting systems and implementing new procedures will work closely with the directors and staff of Information Systems and Finance, respectively, and will report directly to the Deputy Managing Director responsible for the two directorates. The consultants' work will be carried out in Tanzania both at headquarters and the zones. Office space, secretarial support and vehicles will be provided by TANESCO. The arrangements and staff to be appointed were agreed upon during negotiations. 16. Procurement. An international consulting firm to carry out the detailed design and preparation of bid documents for the Lower Kihansi Hydroelectric Plant has been selected according to World Bank Guidelines for Use of Consultants. To assist TANESCO in carrying out the other parts of the proposed project, consultants and consulting firms will be recruited internationally on the basis of shortlisting. Their selection, qualifications, experience and terms of employment will be subject to standard IDA review procedures as set out in the World Bank Guidelines. Most of the costs of the training center will be financed by TANESCO. Vehicles and equipment are expected to cost, in the aggregate, about US$2 million, and will be packaged and procure-! under contracts awarded on the basis of international shopping where comparison of price quotations will be obtained from at least three suppliers from not less than two countries. The method of procurement is shown in Schedule B. All terms of reference, short lists, consultants' contracts, contracts based on ICB and contracts based on other methods with a value of US$100,000 or more will be subject to prior IDA review and approval. Items not subject to prior review will be subject to selective post-review during supervision missions. Post-award procurement documentation for all contracts will be forwarded to IDA. as set out in the Guidelines, prior to disbursements. 17. Disbursements. Disbursements will be made against standard Bank documentation. The proceeds of the Credit will be disbursed against 100 percent of foreign expenditures. No proceeds of the Credit will be disbursed against local expenditures. In order to ensure the timely provision of funds available to finance the costs of services and goods to be procured under the project, TANESCO will open a Special Account in a banking institution acceptable to IDA, in the amount of US$500,000. Funds in the Special Account will be available to finance only eligible expenditures under the project. There will be no disbursements against statements of expenditures. The arrangements for establishing and operating the Special Account was agreed during negotiations. The estimated schedule of disbursements is shown in Schedule B. The project is expected to be completed by December 31, 1994, and the closing date is scheduled for June 30, 1995. 18. Advance Contracting and Retroactive Financing. The only contract signed prior to Board Approval of the credit is for the detailed design and preparation of bid documents of the Lower Kihansi Hydroelectric Scheme. The initial cost of these services will be paid out of funds advanced under the Project Preparation Facility (PPF) approved in November 1990 under the proposed Power VI Project. In the event that the Power VI credit does not become effective, the Government will be required to reimburse IDA in accordance with the PPF agreement. Retroactive financing is not anticipated under this Credit. - 18 - 19. Accountnga, Auditinz and Reporting. During negotiations agreements were reached that TANESCO will have its accounts audited, including the Special Account, by qualified auditors and sent to IDA within fourteen months after the end of the 1990 financial year, ten months after the end of the 1991 financial year and within six months after the end of tne following years. Furthermore, agreements were also reached during negotiations that TANESCO will submit to IDA unaudited accounts within twelve mnnths after the end of the 1990 financial year, within eight months after the end of the 1991 financial year and within four months after the end of the following years. In view of the present problems in closing the accounts in a timely manner (para. 5) and the assistance sought under this project to rectify the problem, the above timetable appears realistic. During negotiations agreements were reached for TANESCO to submit quarterly reports on project implementation progress, and a final evaluation report on implementation experience and project results within six months of the Credit closing. TANESCO's 1989 audited accounts, including Special Account, were received by IDA in November 1991. - 19 - Schedule 1 TANZANIA POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT RBY PROJECT ACTIVITIES major Activity Date of Completion Detailed Design & Preparation of Bid Documents Award of contract December 31, 1991 Mobilization complete January 31, 1992 Draft inception report April 30, 1992 Draft preliminary works tender documents June 30, 1992 Draft civil works prequalification document July 31, 1992 Draft project definition report September 30, 1992 Bid for engineering/supervision September 30, 1992 Evaluation of preliminary works contract October 31, 1992 Draft field investigation report November 30. 1992 Draft main civil works contract tender documents December 31, 1992 Drafts of all other tender documents March 31, 1993 Billing & Accounting Award of contract April 1992 Installation of new hard/soft ware April 1993 New procedures installed October 1993 Training: The Director of ISD in TANESCO will attend a one year course in computer science and four staff in ISD will attend a six month course in system analysis and data base management. The courses are expected to be held abroad. TANESCO's present bonding arrangements are five years for each course attended and financed by the company. This is satisfactory to IDA.