Sierra Leone - Power Sector Rehabilitation Project

C-l .2 S; SG - S44- Document of The World Bank FOR OFFICIAL USE ONLY mICROFICHE COPY Repott No. 8572-SL Report NO. 8b72-SL Type: (SAR) BOROUMAN, / X3498? / J-4054/ AF41E STAFF APPRAISAL REPORT SIERRA LEONE POWER SECTOR REHABILITATION PROJECT MARCH 31, 1992 Industry and Energy Division Western Africa Department fTis document has a reskted dltbmeu ad may be used by nodpleat sxy in the pedonfmue of their offical dudies. Its contents way not otewise be disclsd whout World Bank aulhoizeilon.  CURRENCYAEUNVLENTS (November 1991) Currency Unit = Leone US$1 = Le420 Lel = US$0.002 WEIGHTS AND MEASURES KilowattkW) = 1,000 watts Megawatt (MW) = 1,000 kilowatt OW) Kilowatt hour kWh) = 1,000 watt hour Gigawatt hour (GWh) = 1 million kilowatt hour (kWh) Kilometer (km) = 1,000 m or 0.62 miles Kilovolt kV) = 1,000 volt Kilovolt ampere (kVA) = 1,000 volt ampere Megavolt ampere (MVA) = 1,000 kilovolt ampere (kVA) One barrel (bbl) = 0.16 cubic meters One ton of oil equiv. (TOE) = About 7.5 bbl of crude oil One imperial gallon (IG) = 1.2 U.S. gallons ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank DANIDA - Danish International Development Agency EdFI - Electricite de France International EC - Commission of the European Communities EIB - European Investment Bank GSL - Government of Sierra Leone GTZ - German Technical Cooperation Agency MLEP - Ministry of Labor, Energy and Power MOF - Ministry of Finance NP - National Petroleum Company Limited NPA - National Power Authority SLEC - Sierra Leone Electricity Company SLPRC - Sierra Leone Petroleum Refining Company Limited UNDP - United Nations Development Program NPA's FISCAL YEAR April 1 - March 31  FOR OFmFCLL USE ONLY POWnERS5ECTOR REHABNTLrTO ChQPR Ea=e No. CREDrT AND PROJECT SUMMARY ........................... iv .. ENERGYSECTOR .......................................... .1 A. Energy Resources and Consumption .1 B. Sector Isitutions and Policies ... 1 C. WoodfileX . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...,..... C. Woodfuels.......... 2 D. Petoleum .......... 3 H. TZE LEii 1U.IOR......... 4 A. Orgaization .......... 4 B. Generation Facilies .......... 5 C. Distrbution Facilties .......... 8 D. Eectricity Consumption and Demand Forecast. 8 E. Sector Development. 9 1. Rehabilitadon of Edsting Facilities. 9 2. Dumbuna Hydro Schem .10 F. Bank Group Role in the Power Subse..tor. 12 1. PastLending .12 2. Objectives, Strategy and Radonale for Involvement .13 m. NPA - THE IMPLEMENTING AGENCY .14 A. Orgnizadon and Management ..14 1. Revision of NPA Act .14 2. Management Contract .14 B. Provinces ..16 C. Personnel Maagement and Trainig .. 16 D. Fuel Procurement .17 E. Metering, Biing and Colection ..18 F. Accounti, Audit and Isurance ..19 rThis 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. . 44.,...44.:._': . .. .  Pa. IV. THE BQl3 I .......................... 20 A. Project Objectives ........................ 20 B. Project Description ........................ 20 C. Project Cost .... 24 D. Project Fiancing Plan .... 25 E. Procuremnent .......................... 26 F. Disbursements ... 29 G. Project Implementadon and SuperAion ..30 H. Monitoring and Reporti Reqirement ..31 I. Environmental Aspects .31 V. NPA'S FINANCIAL PERFORMANCE AND PROSPECTS .32 A. Past inrancial Performance ..... 32 B. Electridty Tariffs. 33 C. Financial Position .34 D. Capital Restrcturing .34 E. Fnancial Objectives .35 F. Tariff Action .36 G. Fiancing Plan ..37 H. Future Finances .38 VI. PROJECT USTIRCAT I 0N BENE s.ANDRISKS 39 A. Justification .39 B. Economic Rate of Retur .40 C. Risks ..40 VM. AGREEMENTSRE&CM AM REC0MATION 41  - iii - 1-1 Terms of Reference for a Study to Consolidate Energy Sector Activities 1-2 Petroleum Products Consmption 2-1 The Emergency Rehabilitation Program 2-2 Provincial Systems Isalled Capacity 2-3 Western Area System Energy and Power Balance 2-4 Western Area System Load Dispatch and Fuel Consupon 2-5 NPA's Investment Program 2-6 Te'ms of Reference for Power Sector Master Plan Study 3-1 Amendments to the NPA Act of 1982 3-2 Terms of Reference for Preparation of Bid Documents for Management Contract 3-3 Management Contract and Training 4-1 Detailed Project Scope 4-2 Project Cost 4-3 ProjeCt Fmancing Plan 4-4 Procurement Thuetable for IDA Component 4-5 Estimated Credit Disbursement 4-6 Project Implementation Schedule 4-7 Terms of Reference for Engineering Services 4-8 Supervision Plan and Key Performance Indicators 4-9 A erms of Reference for Envronmental Study of Bumbuna Hydro Scheme 5-1 NPA - Income Statements 5-2 NPA - Balance Sheets 5-3 NPA - Funds Flow Statements 5-4 Assumptions for Funancial Statements 5-5 Electricity Tariff Schedule 5-6 Generation and Sales for FY8SO-FY96 6-1 Economic Analysis 6-2 Documents in the Project File MAP IBRD No. 22273  - lv - WI= LSBHMMMEOXE llor-rowe: Republic of Sierra Leone Benef idary: National Power Authority (NPA) AMmint SDR 15.3 million (US$21 million equivalent) Terns: Standard IDA, with 40 year maturity ReleBjng Tenm: InThe Credit would be relent to NPA for 20 years, including a 5-year grace period at the prevailing IBRD interest rate. NPA would bear the foreign exchange risk. ftWPr DestiodTn: Ihe project is comprised of three main components: CQ) maintenance and rehabilitation of generation facilities, and replacement of three decommissioned generators with two new units; (ii) rehabilitation and improvements in the subtransmission and distribution network; and (iii) institonal strengthening of NPA through revision of the NPA Act, contracting of a private firm to manage NPA, and training of NPA staff. Proje lfits and RIsks: The proposed project will help: (a) restore an adequate and reliable supply of electricity to meet the unserved demand in the NPA's Western Area system which serves Freetown, and (b) establish the basis for NPA to become an autonomous and commercially viable utlity. The risks to a successful implementation of the project are the NPA's lack of adequate autonomy and managerial capabilities. The NPA's management problem is addressed by involving the private sector in managing the utility. Measures already taken indicate that the Government is providing NPA with more autonomy, but adequate Government commitmer in the future to NPA's autonomy remains a risk.  E3$tinated Prmiec Cost: US S Milliol Eauivalent Component Foreign Local Total New Generation 11.7 2.6 14.3 Generation Rehabilitation 11.8 1.6 13.5 Subtransmission Rehabilitation 3.9 0.2 4.1 Distribution Rehabilitation 3.9 0.4 4.3 General Plant 1.6 0.0 1.6 Engineering and Consultancy Services 3.3 0.2 3.5 Bumbuna Supervision 0.9 0.0 0.9 Studies 0.9 0.1 1.0 Management Contract 4.1 0.5 4.5 Training 0.4 0.1 0.5 Refunding PPF 0.8 0.0 (l.8 Lubricating 0;1 0.8 0.0 0.8 Import Duties _U 10.2 .1. Base Cast 44.0 15.9 59.9 Physical Contingencies 5.4 0.7 6.2 Price Contingencies 3.4 .. Tt i est 52.8 17.1 69.9 Interest During Construction OJ0 4.6 4.6 Total Financing Required I Financing Plan Foreigo LoclI Tota -(US$ million equivalent)- NPA 0.0 17.3 17.3 IDA 18.7 2.3 21.0 Cofinanciers .1 3. Total 21.7 Estimated D:>isbursements IIA iscal Year - (US$ million equivalent)- I99 12"4 1995 199 Annual 3.3 6.6 7.4 3.7 Cumulative 3.3 9.9 17.3 21.0 EwomicBaI&oLRetiurn 28%  mEwA LI, IIXIEMIQR A. Enhrfa Resourcs Andond umDIn 1.01 Sierra Leone's main domestic energy resources are woodfuels. Fuelwood is by far the largest single source of energy and Sierra Leone's forest reserves supply about 82 percent of the country's energy needs. The remaining 18 percent is supplied by imported petroleum. Annual supply of fuelwood is estimated at around 950,000 Tons of Oil Equivalent (TOE) including about 40,000 TOE of charcoal. High forests which once covered most of Sierra Leone have been reduced to 5 percent of the land area through shifting cultivation, commercial logging and cutting for fuelwood. Most of the country is now covered with secondary forests in various stages of degradation, or derived savannah. Reforestation programs have yet to be implemented in any significant way. 1.02 Sip-ra Leone has an extensive network of rivers and tributaries which provide a large hydropower potential conservatively estimated at 1200 MW. Technically and economically the most promising site is at Bumbuna, on the Seli River, with an ultimate potential of 305 MW of installed capacity. The Government is proceeding with the development of hydro resources at Bumbuna (para 2.13-2.18). Also, about 20 mini-hydro sites have been identified, but their feasibility has yet to be filly evaluated, and the only development so far has been a mini-hydro plant of 4 MW capacity on the Goma river. There are lignite deposits near Freetown but not of sufficient quantity or adequate quality to justify construction of a thermal generating station. 1.03 In a major study of the Sierra Leone's energy sector in 1987, commonly known as the Energy Asssmn Report,JL total gross eraergy consumption is estimated at 1.16 million TOE of which 0.213 million TOE is commercial energy. Final energy consumption is dominated by the households which consume 86 percent of net domestic energy supplies, while the balance is divided up between transport (6 percent), industry (5 percent), mining (2 percent), and agriculture (1 percent). This distribution reflects the dominant role of traditional energy, mainly fuetwood, which is used almost exclusively by households for cooking and generally with very low combustion efficiency. The sectoral distribution of commercial energy presents a totally different picture. Transport is the major consumer of petroleum products, accounting for 49 percent, followed by households (24 percent), industry (15 percent), agriculture (6 percent), and mining (6 percent). B. Sector Institutions and Polides 1.04 Responsibility for energy matters is dispersed among several ministries with little or no coordination among them. Before the major Cabinet change that took place in September of 1991, the Ministry of Energy and Power (MEP) was responsible for coordinating all energy related activities. It also established and implemented policy in the power subsector, including the supervision of the National Power Authority (NPA). ITe Ministry of Industry and State I/ "Sierra Leone: Issues snd Oppdons in the Energy Sector," Report of the Joint UNDP/World Bank Energy Sector Assessment Program, October 1987.  - 2 - Enterprises was responsible for petroleum refining, while the Ministry of Trade looked after petroleum products distribution and marketing. Exploration activities for petroleum, as well as for lignite, fell within the jurisdiction of the Ministry of Mines (there is no petroleum exploration activity going on in the country). The Ministry of Finance had institutional responsibility for allocatng foreign exchange for oil imports, and set petroleum product prices in collaboration with other Ministries. The mandate for the management and development of forestry and other woodfuel resources rested with the Ministry of Agriculture, Natural Resources and Forestry. There is no ministry with the legal mandate to develop, research, and promote the use of alternative energy resources such as solar energy or agricultural wastes. 1.05 As a result of the institutional arrangements in recent years, there is no national energy planning and the country lacks a clearly defined energy policy or strategy. In September of 1991, Ministry of Industry and State Enterprises and Ministry of Trade became one ministry. Also, portfolios of Labor, and Energy and Power were merged into a single Ministry of Labor, Energy and Power (MLEP) with no clear rationale for such a combination. Although the old MEP was in theory responsible for coordinating all energy activities, its main preoccupation had been with supply and distribution of power which is also true under the new MLEP. The role of the MLEP and other institutions dealing with energy matters should be examined, and a plan should be prepared under which policy making, planning and coordination of all activities in the energy sector would be consoljiated within a single ministry. Agreement has been reached with the Government that a study for such a plan would be financed under the proposed project. A draft terms of reference for a study to consolidate energy sector activities has been received from the Government. During negotiations areement was reached that the Government wIll: (a) carry out the study according to the terms of reference attached as Annex 1-1; (b) furnish to IDA for its review and comments the results of the study; and (c) carry out the recommendations of the study in accordance with a timetable satisfactory to IDA. It is expected that the study will be completed by the end of 1994. C. Wff%aae 1.06 About 87 percent of Sierra Leone's total area of 7.2 million hectares is classified as natural forest land, but only 5 percent of it (365,000 hectares) is considered as closed high forest. The high forest is located largely in the remote eastern part of the country but with some reserves in the Western Area Peninsula near Freetown. The rest of the country is now covered by secondary forests in various stages of degradation, forest regrowth bush fallow agriculture, and savannah woodland. Aggregate wood production is well in excess of estimated fuelwood consumption for the country as a whole. As compared with an annual increment in the natural forest cover of 9-15 million cubic meters, total fuelwood consumption is around 4 million cubic meters (or 1.1 cubic meter/capita/year), indicating an apparent surplus. However, significant wood resources are concentrated far from the large consumption centers in sparsely populated areas which lack appropriate access and infrastructure to exploit the resources economically. In the case of supplies from bush fallow, economic access is often limited to 2-5 mile distances from transport routes and availability is low with existing prices and transport infrastructure. 1.07 Therefore, in spite of an apparent surplus of physical wood supplies at the national level, there are indications of severe and growing regional shortages combined with a deterioration in size and quality of forest resources. Approximately 60 percent-70 percent of woodfuels supplied to Freetown now come from outside of the Western Area. Fuelwood prices in the Freetown area have increased substantially in the past decade and woodfuel merchants can  be observed travelling more than 100 miles to Moyamba Junction and even beyond Kenema for supplies. Fuetwood shortages, in the form of active markets and rising prices, have also emerged in the tobacco growing areas (e.g. Makeni, Bo, Kenema, and Koldu) where it is used for tobacco curing. There has been a number of studies on the woodfuels situation in the past, and currently a Tropical Forestry Action Plan by the United Nation's Food and Agriculture Organization is under execution which will focus on these and other related issues. D. lPetroleum 1.08 The country's oil refinery at Kissy, commissioned in 1969, has a design capacity of 10,000 barrels/day of light crude. It is a simple crude distillation unit with LPG recovery facilities and 'as been running in recent years on mostly light crude from Nigeria. Products obtained from processing imported crude at the refinery do not match the requirements of the country and, with the exception of fuel oil which is in surplus, petroleum products would have to be imported to supplement the refinery's output. The refinery is owned and operated by the Sierra Leone Petroleum Refining Company Limited (SLPRC). The shareholders of SLPRC are: the Government (50 percent), Shell Oil (28.5 percent), Mobil Oil (11.3 percent), and Precious Metal Marketing Corporation-PMMC (10.2 percent). 'The Government also owns 35 percent of PMMC. The refinery is now rather old and the aging process could be the reason for a significant increase in the operating cost structure in recent years. The refinery is operated on a cost plus basis which provides little incentive for improving efficiency. The high cost of operation and lack of sufficient foreign exchange have caused the refinery to operate at about 35 percent of its capacity in the past two years. Petroleum products distribution and marketing are handled by Sierra Leone National Petroleum Company (NP), a state-owned oil company, and local subsidiaries of international oil companies (Shell and Mobil). All the three companies either pick up their market share of products from the refinery, whenever available, or import from their own sources. Consumption of petroleum products declined from 200,000 tons in 1978 to an all-time low of 133,000 tons in 1987. The consumption increased to 190,000 tons in 1989 but declined again to 163,000 tons in 1990. The decline and fluctuation in consumption mainly reflects constraints on imports caused by shortages of foreign exchange and procurement problems. See Annex 1-2 for mne breakdown of consumption among various petroleum products. 1.09 Until July 1990, the SLPRC was responsible for importing petroleum by obtaining foreign exchange from the Government. However, due to limited foreign exchange resources, the Government was not able to provide sufficient foreign exchange in a timely manner for importing crude oil and petroleum products. This caused periodic shortages, creating parallel markets for products at prices three to four times higher than official prices. In addition, often the cost of imported petroleum was higher than normal because of inability in planning to take advantage of best going prices in the market, as well as purchases in small parcels with high freight cost. Government eliminated the SLPRC's import monopoly in July of 1990 by allowing the petroleum marketing companies (or other interested parties) to import products directly. There has been some improvement in fuel supplies with reduced pressure on the Government's foreign exchange budget. Pump prices were increased about five fold between June i989 and September 1990 (see table below). At the same time a pricing formula was introduced to reflect changes in world prices and exchange rate, while allowing for distribution margins. The strufture of pricing formula was adjusted in October 1991 to: (i) reflect the economic cost of importation of products; (ii) allow for a sufficient profit margin to encourage the importation and distribution of petroleum products; and (iii) substantially increase Government excise tax on an ad valorem basis. This brought up the prices of gasoline and diesel to about US$2/imperial gallon in late 1991.  -4- REUAIL PRICES OF PrROLEUM PRODUT, LEI[O AsofJune30, 1989 110 90 100 31 AsofFebrnaql5,199() 250 200 240 79 As of June 29,1990 300 250 290 91 AsofAugut31, 1990 So0 435 450 105 As of luue, 1991 SS0 450 S0 206 As of Octobor,1991 900 845 357 W Picegald by'NPA. 1.10 Under the proposed Reconstruction Import Credit (RIC) to improve petroleum supplies, IDA over a period of 18 months would finance about one-third of the country's annual bill for petroleum imports. The balance would be met through improved availability of foreign exchange resources in the commercial banks, which is exocted to be brought about by the policy reforms associated with RIC (i.e. maintaining liberalized exchange and trade systems and a transparent diamond mining policy). As agreed under the RIC, the Government will divest itself of its share in the refinery and a medium-term supply contract ci,th a reputable international oil company will be m place soon. Also, future changes in the price oI petroleum products will be triggered automatically through the operation of the pricing formula when landed cost changes by 5 percent or more. H. THE -OWnERL R A. Organiztion 2.01 The MLEP has the overall responsibility for the power sector, while NPA is the public utility charged with generating, transmitting and distributing electricity in Sierra Leone. The MLEP is responsible for establishing and controlling implementation of overall policy of the power sector on behalf of the Government, and it is to perform that role by approving concessions, appointing the members of the Board of Directors of NPA and reviewing its annual budgets and reports. Development of the power sector in Sierra Leone was the responsibility of the Government's Public Works Department (PWD) until 1964, when the Government created the Sierra Leone Electricity Corporation (SLEC). SLEC was managed by a Board of Directors appointed by the Minister of Works and developed largely as an autonomous corporation operated on a commercial basis up to 1969, when its senior management was changed fnllowing serious labor unrest. The "oil crisis" of 1973, combined with a series of failures in the Kingtom power station, accelerated SLEC's financial deterioration. In 1974, the Government abolished SLEC's Board and vested management responsibility in the then newly-reated Ministry of Energy and Power. The Ministry retained a foreign consulting firm to provide day-to-day management which remained until mid-1982. A study of the organitional and financial requirements of the power  sector was carried out in 1980-1981 by the Eleticity Supply Board of Ireland (ESB) with UNDP financing and the Bank as executing agency. On the basis of ZSB's recommendations, the National Power Authority (NPA) was established on January 21, 1982, through the National Power Authority Act, to succeed SLEC. 2.02 Today the power sector in Sierra Leone Is in a state of physical and financial disrepair, reflecting years of neglect, poor management, and a shortage of foreign exchange. Organizational and managerial problems of the power sector could be divided into two categories: (i) probiems arising out of the institutional framework within which NPA operates, and (ii) managerial and operational deficiencies within NPA itself. The first problem is addressed here, and the second problem is discussed later (para 3.02). The National Power Authority Act of 1982 was established to provide NPA with a high degree of autonomy through an independent Board of Directors made up of five to seven members appointed by the MLEP who also appoints the 'Board's Chairman. However, there has been a high degree of Government interference in the utility's affairs, which can partly be traced to Government's history of directly operating t0' ut9lity until 1964 and, then again, over the period 1974-82. Although recent developments have given NPA more autonomy than it has had in the past, it remains to be seen to what extent the Government interference is reduced in practice.2/ Previously, MEP officials got involved in the day-to-day management of NPA and the involvement by them extended to important operational areas such as managemcnt decisions to disconnect non-paying customers. Indeed, the offices of the Minister, Permanent Secretary, Chairman of the NPA Board, General Manager, and Deputy General Manager are all still located on the same floor in the NPA's headquarters building which facilitates interference of the Government in NPA's operations. 2.03 NPA needs to have a strong and independent Board of Directcrs in order to manage its affairs without undue interference from the Government. The NPA Act oQ 1982 does not explicitly define the responsibilities and qualifications of the Board members v'ho could be removed at the discretion of the Minister of Labor, Energy and Power. 'Me Governent has agreed to review and modify the 1982 NPA Act particularly with regard to the mandate to NPA, the composition, qualifications and appointment of the Board members, and responsibilities of the Board to ensure that NPA will operate with an adequate degree of autonomy. To further underscore its commitment to give NPA fill autonomy, Government has agreed to hire a firm to manage NPA under a performance-based management contract. Changing the NPA Act requires parliamentary approval; therefore, in the meantime, the required modifications will be incorporated in a management contract to be approved by the Government and NPA as discussed in para 3.12. B. Generation Failities 2.04 Total installed electricity generation capacity in Sierra Leone is about 120 MW, of which 116 MW are diesel power plants, and 4 MW are hydroelectric (one run-of-river hydro plant in the Guma Valley). Of the total installed diesel capacity, NPA operates 33.4 MW in a major grid (Western Area) and 14.5 MW in isolated provincial stations. There are some 28 MW 2I NPA's Board of Directors was replaced last August and a new Ministem was appointed last September. The new Board members are from the commerce, industry and banking sectors, have more appropriate qualifications, and seems to have played a major role in substantially increasing electricity tariffs last August.  - 6- of captive capacity in the mining sector located far from the Western Area served by NPA. However, because of the unreliability of the power system, there has been a proliferation of captive private generation in recent years in areas served by NPA. These private sets range in size from a few kilowatts for a private dwelling to hundreds of kilowatts installed in commercial and industrial establishments. The private generation capacity in Freetown was estimated at 30 MW by the Energy Assessment Report and was confirmed by a survey prepared by NPA in 1989. A preliminary update of the survey carried out for the reappraisal mission indicates that the total capacity of auto-generators had reached 40 MW by the end of 1991. INSTALLED GENERATION CAPACIY-FY92 : sr Area 33.4 : v : Diael Plants 14.5 ''"' ma Rydro Plant '. Subtotal: 5.9 28.3 Subttal TOTrAL IZ 2.05 NPA's two diesel generating plants serving the grid of Westemn Area system have a total installed capacity of 33.4 MW. 'Te largest one is the Kingtom plant with two 9.2 MW Suizer marine low-speed units installed in 1978-80, and four high speed KHll units of 3 MW each installed in 1986. There are three 6.6 MW MAN units at the Kingtom plant that were installed in 1964-71 but have now been decommissioned. The smaller plant at Falconbridge with 3.0 MW of installed capacity (derated by 50 percent) op-aates only sparingly. The calculated firm capacity of the Western Area System (available capacity less largest unit) was 31.0 MW at the beginning of ' 1980. This capacity was reduced to 25.6 MW in July 1981 but could handle the 25.0 MW peak demand readhed in the last quarter of 1981. By year-end 1984 the fim capacity had dropped to 8.8 MW and it reahed a low of 6 MW in September of 1986. The firm capacity was significanldy boosted to 18 MW in March of 1987 when the KHD units became operational, but declled again when these units broke down. hne firm capacity of Western Area system is esimated at about 6.5 MW in FY91. Available capacity of the Westen Area was reduced to virtuWaly zero in the first quarter of FY92, but NPA was late able to partially utiize some of the KHD units. 2.06 The extremely poor condition of the Kingtom staton is the result of poor maitenance, shortage of spare parts, and inadequate technical skill of the NPA staff. Shortage of  - 7 - spare parts is compounded by difficulty in obtaining foreign exchange. When die first units of the Kingtom plant were financed by the Bank Group in 1963 provision was made for expatriates to operate them because the utility's staff was not familiar with units of this size. The expatriate assistance ended in the late 1970s, when the utility's finances had started to deteriorate in parallel with worsening economic conditions in the country. Foreign exchange was scarce and spare parts could not be purchased. As a consequence, plant maintenance deteriorated when the first three units (MAN), due to age, were requiring more intensive maintenance. To offset the levering performance of these units, the newer ones (Sulzers) were overworked, aggravating L overall condition of all units. Major overhauls were delayed considerably and the engines started to experience frequent and prolonged breakdowns which continue to date. As for the KHD units, they have been used as base load units since their installation in late 1986 because of the unavailability of the MAN and Sulzer units. But, unlike the MAN and Sulzer units, the KHD units are small high speed engines with a shorter operational life and are mainly designed for standby or peaking operation. Therefore, the KHD units are being ruined by constant use as base load units and inadequate maintenance. Under the proposed project the Sulzer units will be rehabilitated and the MAN units will be replaced with new smaller size units to provide the capacity for base load operation. Rehabilitation of the KHD units will be carried out under an emergency rehabilitation program discussed in the paragraph below. 2.07 Lack of proper maintenance and the poor quality of the fuel oil used caused a complete breakdown of the KHD units and, finally, Kingtom power station was completely shut down during the month of July 1991 leaving Freetown with virtually no public supply of electricity. The continuous deterioration of the power station is illustrated by the monthly generation graph in Annex 2-1. Given the seriousness of the situadon and upon request from NPA, EC in consultation with IDA and GTZ financed a study to prepare an emergency rehabilitation program. The study was prepared by the same consultants (Lahmeyer Engineering Co.) previously involved in studies required by the main rehabilitation project and culminated in a report that was submitted in October of 1991 to NPA and was reviewed with the re-appraisal mission. As a result, the Government and NPA, in consultation with IDA, have decided to opt for the emergency rehabilitation of all KHD units, as well as Sulzer #4 unit. This program is expected to be completed by mid-1992 and should hold the system together, albeit with reduced capacity (18 MW) and reliability, until the main rehabilitation project begins. The emergency rehabilitation program would dovetail into the proposed Power Sector Rehabilitation Project. The emergency program will in effect advance some of the measures that were to be undertaken under the rehabilitation project. However, given the limited scope of the program, its effect will not be long lasting in the absence of the proposed rehabilitation project. It is hence critical that the rehabilitation project commence as envisaged, otherwise the gains made under the emergency program will vanish. For more detail on the emergency rehabilitation program see Annex S1. 2.08 There are 15 isolated provincial systems that are supplied by diesel sets of various sizes ranging from 0.1 MW to 2.0 MW of capacity (Annex2-2). The largest system is at Bo which has a new 5.3 MW power plant built in 1987 under a Danish grant and is connected by a transmission line through Kenema to the run-of-river hydroplant at Goma. There are 4 other provincial systems with installed capacity of 1 MW or more including the one at Lungi airport near Freetown which has 3 units of 0.5 MW each. With the exception of Bo, the situation in many provincial systems is worse than Freetown with little or no available capacity to generate power. The proposed project covers only the rehabilitation of NPA's Western Area system. See paragraph 3.08 regarding improvement of the provincial systems.  C. Distribution- FadUlties 2.09 Primary distribution in Freetown is at 11 kV and secondary distribution is at 230/400 volts. Ihe industrial area of Freetown is located about 16 km from NPA's main source of generation at Kingtom. To reduce voltage regulation difficulties and increase the carrying capacity, a 33 kV subtransmission system for Freetown was built in 1984 but could not be utilized fully because of a faulty cable which still needs to be repaired. The 11 kV switchgear at Kingtom power station is in such a bad condition that it is beyond rehabilitation and needs to be replaced when the plant is rehabilitated. The 11 kV primary substations on the Western Area network, which are fitted with oil circuit breakers, have been placed under great strain because of lack of maintenance and regular load shedding since 1983 leading to contact erosion and in some instances, malfunctioning of the circuit breakers. The complete identification of the work that needs to be carried out to rehabilitate the existing subtransmission and distribution system (33/11 kV) was achieved through an engineering study financed under the PPF. Rehabilitation of the Western Area subtransmission and distribution network will be carried out under the proposed Project. D. Electrdqt Conswmnto and l)emand EorecW 2.10 Electricity sales increased steadily during the decade preceding 1982 before power supplies started to decline because of equipment failures and fuel shortages (see table below). In the Western Area, from FY71 to FY82 electricity sales grew by 4.6 percent per year, but, from FY82 to FY91 NPA's generation and subsequently sales declined sharply at about 11 percent per year. Generation and sales in FY91 declined substantially below their FY71 levels (see Table below). The situation became even worse with a reduction of about 60 percent in power generation and sales during the FY92. Before the sharp decline in power generation in the recent years, some 80 percent of the power generated by NPA was consumed in the Western Area with the following breakdown of sales by consumer category: Residential, 46 percent; Large Commercial/ Industi, 30 percent; Small Commercial/Industrial, 22 percent; Others, 2 percent. Western Area system, which supplies the Freetown area, served about 25,000 consumers out of total of about 35,000 in the country. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... .......... ....... ... .... ... S~~~~~ .... .. ... A... 76~~0 1$~.% 52.7 20.7 $~~3% -9.8% -60.7 Sae i 0. 9.R '~ 13R '4.6 -1,% .0, '%. ~~~~~~~~~~.. -. :. X:X......... .... 2.11 The pattern of electricity generation and sales discussed above clearly indicates that power consumption in Sierra Leone is now characte&r;ed by a highly suppressed demand due to  - 9 - inadequate supply brought about by a very low availability of the NPA's installed capacity and worsened by fuel supply problems. The inadequate and unreliable power supply has seriously inconvenienced residential consumers and adversely affected economic activity across a wide spectrum of users from tourist hotels to commercial and industrial establishments. A measure of the suppressed demand (the gap between estimated demand and available supply at the prevailing tariff rates) and the associated economic losses due to proliferation of auto generation are provided in the Energy Assessment Report and summarized here. The suppressed demand for the country in FY86 was estimated at 81 GWh, of which 54 GWh was in the Western Area. Auto generation was estimated at 40 GWh, mostly (80 percent) by commercial and industrial establishments, with additional cost to the economy of US$4 million per year due to the higher fuel and capital costs of privately owned generators. The suppressed demand and the losses to the economy have continued to date if not worsened. In FY91 and FY92 NPA's generation was only 36 percent and 14 percent of what was needed to meet the demad in Western Area. Auto generation is now estimated to be about 60 GWh per year in Western Area. As for the future demand for electricity, the Energy Assessment Report, under its base case scenario, projects an average annual growth rate of 4.6 percent per year during 1990s for the Western Area which follows no growth in late 1980s and starts with about 2-3 percent growth in early 1990s. This projection conservatively assumes only 2-3 percent annual GDP growth rate in 1990s after modest economic reforms are gradually introduced and begin to produce results. For this report, the demand for electicity is based on the projections of the Energy Assessment Report as provided in Annex 2-3 which show electricity demand forecast for the Western Area and how it is expected to be met through mid-1990s by the rehabilitation of the NPA's generation and distribution facilities (Annex 2) under the proposed project. E. Secor .I& Lt 1. Rehabilitation of Existing Facilities 2.12 At present the Western Area System needs at least 33 MW of firm capacity to meet the peak demand for power. In FY91 NPA's firm capacity was about 7.5 MW with the corresponding shortfall in energy generation of about 92 GWh. Rehabilitation of the two Sulzer units (2x9 MW), replacement of the MAN units (with 2x5 MW new units), and rehabilitation of the subtransmission/distibution system that are considered under the proposed project, together with rehabilitation of the four KHD units (4x3 MW) under the emergency program, would enable NPA to meet the demand through FY96. Tne Sulzer and new medium-speed units would be used for base load operations while the high-speed KHD units would normally serve the peak. Deficiencies would be compensated with auto generation from the available privately owned generating capacity which would be utilized and retired gradually in the course of the next few years. This is the least cost option to meet the demand for electricity in the short term. Any other thermal option would not be less expensive and the construction of the Bumbuna hydroelectric project will not be completed until at least FY97 (see paras. 2. 13-2.18 below). It should be noted that the proposed project is addressing the minimum rehabilitation requirements of NPA's Wester Area system and will only restore NPA's generation and distribution capabilities to their previous levels of a decade ago. In the absence of the proposed rehabilitation project, the available capacity restored under the emergency program would gradually diminish to zero in a few months. This would result from the dilapidated state of the installations and lack of maintenance which would require the continued operation of the KHD units in base load, rather than peaking service, thereby reducing their useful life. Furthermore, the state of disrepair of the Sulzer units is such that rehabilitation, rather than maintenance, is required to keep them  - 10 - operating longer than a couple of years. If rehabilitation is not undertaken, the mechanical and, more probably, the electrical equipment would soon suffer a catastrophic breakdown, and the risk of a major fire would increase significantly. 2. Bumbuna Hydro Scheme 2.13 The Government of Sierra Leone has decided that the next step in meeting the system demand in the medium term is the development of the Bumbuna Hydro scheme. In the early 1980s the Bumbuna hydro scheme was included as the next generation project in Sierra Leone's least-cost generation and transmission development program which was prepared under Credits 734-SL and 1265-SL. The Bumbuna scheme was identified by engineering consultants in 1971 during a comprehensive survey of Sierra Leone's hydroelectric potential. After a preliminary study of the hydroelectric potential of the Seli river, a further review recommended a staged development of this river with Bumbuna Falls as the first stage. In 1977, IDA (Credit 734-SL) and the OPEC Fund financed a comprehensive feasibility study of the project, which was completed in 1980. Also, with the OPEC Fund, IDA (Credit 1265-SL) financed in 1982 further engineering work, including preparation of bidding documents for Bumbuna (70 MW). Meanwhile, the Sierra Leone Government obtained a loan from the Italian Government to build the permanent camps and river diversion works of the project. This work was completed by the end of 1984. 2.14 In 1983, the Bank prepared a reporta/ which concluded that under the economic conditions in Sierra Leone at the time, further major work on the Bumbuna project should be deferred until such conditions improved, particularly those related to balance of payments and debt servicing. Simultaneously, NPA's consultants together with Bank staff, examined firther staging of the Bumbuna scheme to benefit from the relatively large investments4/ already made by Government in the Bumbuna project, while maintaining its economic merits under falling oil prices. Certain components of the project, such as transmission circuits, were deferred and the size of the project was reduced through design modifications but without jeopardizing the work already done or further stages in the Seli river power development as originally designed. The reduced Bumbuna with a single Turbine of 47 MW installed capacity and a single circuit transmission line would require an investment of about US$160 million in addition to what has already been invested. It is essentialy a run-of-river plant with firm capacity of 24 MW, firm energy output of 157 GWh/year, and expected average energy output of 290 GWh/year. 2.15 The analysis carried out for the Energy Assessment Report in 1987 confirmed that the reduced Bumbuna followed by a pure thermal development was the least cost generation development program over a wide range of load forecasts and oil prices assumptions.J/ This development wiUl also allow diversification of the country's energy supplies and provide some insurance against oil supply disruptions. Also, a preliminary estimate of the balance of payment impact of the reduced Bumbuna made for the Assessment keport suggested that the reduced l/ Macroeconomic impact of Bumbunz Hydroelectric Project, dated November 22, 1983. A/ According to Government accounts, these expenditures amount to US$42 million. E/ However, according to the Assessment Report there may oe some room for improvement in the design and sequencing of the project.  - Ii - Bumbuna will lead to greater net outflows than the pure thermal scheme, but the level of excess outflows was relatively small averaging US$1-2 million per year. The balance of payment impact would be more favorable under a better financing arrangement than the 12-year loan with 10 percent interest which was assumed for the analysis in the Assessment Report. Beyond the loan payment period, the investment in Bumbuna would save between US$5-10 million (depending on oil prices) per year in foreign exchange through the reduction in oil imports. While the reduced Bumbuna scheme would not add significantly to debt servicing compared to thermal alternatives, initial financing of such a lumpy investment could create problems given the constraints on the foreign exchange resources of the country and fiscal revenues required for meeting local costs. 2.16 During 1988-89 the Government actively sought financing for the reduced Bumbuna scheme, and a loan agreement for financing the civil works of the reduced Bumbuna Scheme (47 MW installed capacity) was signed in October 1989 between the Governments of Sierra Leone and Italy. The Italian contractors started work at the project site in early 1990. Subsequently, financing for the rest of reduced Bumbuna (i.e., electromechanical equipment, transmission line and substations) was completed by the Government with a loan from African Development Bank (AfDB) which was approved in December of 1990.