Document of The World Bank FOR OFFICIAL USE ONLY S ,Z2 7fY-19 Report No. 11367-TA. STAFF APPRAISAL REPORT TANZANIA POWER VI PROJECT APRIL 13, 1993 . . ,, . :Y ',4 , ''.'...., t,'1 1 i. - t.; .-; Eastern Africa Department Infrastructure Operations Divison This document has a resricted distribution and may be used by reciplents only in the performance of their offlicial doties. Its contents may not otherwise be discosed wh0out Wodd Ba authoizaton. CURRENCY EQUIVALENTS (As of Jauuary 193) Currency Unit = Tanzanian Shilling Tsh 1.0 - US$ 0.003 US$ 1.0 = Tsh 350 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet I square meter (m2) = 10.75 square feet I hactare (ha) = 2.47 acres I cubic meter (m3) = 35.3 cubic feet 1 kilovolt (kV) = 1000 volts I kilowatt hour (kWh) = 1000 watt hours 1 megawatt (MW) = 1000 kilowatts 1 gigawatt hour (GWh) = 1 million kilowatt hours 1 megavolt ampere (MVA) 1000 kllovolt ampere. - ,OSSARY AND ABBREVIATIONS AIC = Average Incremental Cost EA = Environmental Assessment EIB = European Investment Bank ESMAP = Joint UNDP/World Bank Energy Sector Management Assistance Program JICA = Japan Interrational Cooperation Agency KfW = Kreditanstadt fUr Wiederaufbau LRMC = Long Run Marginal Cost MIS = Management Information System MTNRE = Ministry of Tourism, Natural Resources and Envi.onment MWEM = Ministry of Water, Energy, & Minerals NORAD = Norwegian Aid Development NUWA = National Urban Water Authority ODA = Overseas Development Administration PIP = Productivity Improvement Program PPF = Project Pr_paration Facility SADCC = Southern African Development Coordination Conference STAMICO = State Mining Corporation TAC = Tanzania Audit Corporation TANESCO = Tanzania Electric Supply Company Ltd. TIPER = Tanzaman & Italian Petroleum Refinery Company TIRDO = Tanzania Industrial Research an Development Corporation TPDC = Tanzania Petroleum Development Corporation Tn = TANESCO Technical Institute ZSFPC = Zanzibar State Fuel and Power Corporation FISCAL YEAR Government: July I to June 30 TANESCO: January 1 to December 31 FOR OFF CLAL USE ONLY TANZANIA Table of Conets PMw No, Credit and Project Summary ................................. iv I. THEE NERGY SECrOR . ................................ 1 Overview 1................................... Ecoomic Backgrund 1................................. Energy Resources ............................ 1 Enery Constumption and Sources of Supply ....................... 3 Energy Efficiency and Demand Management ...................... . 4 Organization of the Energy Sector .................. ... .... 5 The Government's Energy Sector Objectives, Strategy and Policy ......... . 6 Past Bank/IDA Participation in the Energy Sector .... ........ . 8 Summary Impact of Past and Ongoing Bank Lnding, Sector Work and Technical Assistance ................................. 9 Lessons Learned in Past Power Project and Actions to Implement Them ..... 10 Rationale for Continued IDA Involvement .......... .. ............. 12 II. THE BORROWER AND THE IMPLMENTING AGENCIES .... .......... 13 The Borrower .......................................... 13 TANESCO ............................................ 13 ZSFPC .............................................. 23 III. THE ELECRCITY SUB-SECTOR .............................. 25 Overview ............................................. 25 Existig Power Sector Facilities ............................... 25 Access to Electricity ..................... - . -. - .26 Electricity Demand and Supply .................... 27 Power Systems L.................... 27 Hydropower Supply Constraint ................... 28 Load Forecast .......................................... 29 Capaity Balance .................... 30 Eny Balance .................... 31 Ihis report is baed on the findings of an appraisa mission which visited Tanznia in JuneJuly 199. ne appraisal mission was led by Mr. Asaf Malk, Sr. Financl Analyst (AF6E. Ms. Paivi Koijonen, Economist eSMPD), Mr. Alfred ultne, St. Power Engineer (AFPTS), Mr. Anthony Sparkes, Sr. Power Engineer, Mr. Reynaldo Castro, Financal Anayst (ARPM, Mr. Petter Lanpeh, Sr. Peson Officer, and Mr. Jack Mossp, Chief Peoel Officer ?WFN) were the additional mission members. Ms. Elisabeth Bd (AFIE) led the p-appal misn. Valuable advice was received from Messrs. Barry Trembath (ASTEG) and Robert Tillman (AFrEN). Mr. Bashar Ahmad, Ms. Fannie Goff, Ms. Dod1da Sidbe, Ms. Rona Cook and Mr. Scott Smith provided seretarl sppor Mr. Stephen Wesnuan (AMI) and Mr. Francis Colaco (AP2DR) are the managing Dsion Chief and Depatment Diretor. he Pe Reviewer was Mr. Joseph Ghing. [Tis document has a resticted distution and may be used by recipients -yin th pefmane of their otficl duties. Its contes may not othewis be dcosedwhout wm . dd Bank authoriztion. -Hi 1V.THINfVEsTMENTPROGRAMAND THE PRoJEcr .................. 33 hle IeStnemMPVn ............................... 33 Wors in P .............................. 36 ComnittedPrOects .............................. 36 The Project .............................. 36 PojectCostS .............................. 43 PIrojectFbising .......... .................... 45 Compoxnentfor lmI4mentationbyTANESCO ..... ..... .......... 47 Compouentsfor linlementaionbyZSFPC . ........................ 49 Compoents for l aonbyMWM . ....................... 49 Procurem .................... SO Project PrepuraonFaly(PPF) .................... 52 Disbrenens....2................. 52 Special Account. ................... 2 EvlrowntaAct.52..................... 52 ProjectRlsbb ...... 53 Projea MonitorgandSupervision .............................. 54 InterinmReview ......................................... 54 V. FINANCALU ASPECTS AND COST RECOVERY ...................... 55 Overview ........... 55 Finanial Position and Ps Oting ..55 AccountigaAudk ..................................... 58 Non-Technical adBR ...........Losan. .................. 58 Collections ......................................... 59 Tariffs, StIctue ad Leves ................................. 61 FutureFnancialOpeations andPoddon .. 62 oposd Financing Plan .................................... 63 VI. PROJECT JUSTEFICATION AND ECONOMIC ANALYSIS ..... .......... 65 Bkgrund ......................................... 65 Economic trnd Rae of Retum for Conmonent In TANESCO's Investment Program ........................66 EwcnomicCostof the Inve nenwProgam ........................ 66 ProjectEcoomic Bendfts ................................... 66 SensitivityAnalysis ....................................... 67 Averagnemental Econmic Cost of Etkricity . . 68 Justfication of Mnazi Bay Development .......................... 68 VII. AGREEMfENTS REACHED AND RECO'IMENDATION ..... ........... 69 Schedule1 ............................................ 73 Annex1.1 HydrodectricPotundaofTanzank ........ .................. 75 Annex 1.2 EneWy Bala (1ce ) .................................. 76 Anex 2.1 TANESCO Mianagenent w ........Struct................... 77 Annx 2.2 TANESCO Selected Peformae Idkos ...... ............... 78 Annex 3.1 Sales, Geneadon, Los and Peak Demand 1985-1990 .............. 79 Annex 3.2 Eectrty DeiniFoest ................................ 80 Annx 3.3 Forecat Capacity and Energyw B.......................... 84 Anmex3.4 ExisthitG* raC tonFaclidesatEnd of1990 .................. .. 85 Annex4.1 LeastCost oEfuasio theP syse ...................... 90 Anmn 4.2 TANESCO I System nvesmn Prgam 1992-1998 .93 - iii - Annex 4.3 DetaWled Project rDescription .............. ., 94 Annex 4.4 Project Cost Estimates .. 108 Annex 4.5 Procurement Packages ................................. 129 Annex 4.6 Procurement Schedule (IDt Financed Pacdges) . 132 Annex 4.7 hIplementation Schedules ............... 136 Annex 4.8 Monitoring Guidelines ..145 Amnex 4.9 Estmated Schedule of Disbursements ..146 Annex 4.10 Lower Kihansi Enviomenl Assessment Summary . . . 147 Annex 4.11 Terms of Reference for Panel of Experts . . . 156 Annex 5.1 TANESCO Tariff Structure (Jan 1992) ......... 158 AnnexS.2 TANESCOIncomeStatements ... ...... 160 Amnex 5.3 TANESCO Sources and Application of Funds . ........ .... 161 Annex 5.4 TANESCO Balance Sheet ..................... 162 Annex 5.5 TANESCO Financial Projections ........... ...... 163 Annex 6.1 Econonic Rate of Retun .......... 166 Annex 6.2 Evaluation of Economic Benefits ................ 168 Annex 6.3 Cost Effectiveness of Mnazi Bay Developmet ......... 173 Amnex 7.1 TANESCO Sttement of Policy ... ...... 177 Amex 7.2 Possible Target Options for the Power Sector ..................... 179 Annex 8.1 TOR for Distbution Rehbilitation and Expansion ..... .... 186 Annex 8.2 TOR for Strengthening Distribuion Planning .....1.... Annex 8.3 TOR for Corporate Planning .............1.9......... .4 Anmex 8.4 TOR for Systems Manager ............................. ,196 Annex 8.5 TOR for Manement Consultat ............................ 197 Annex 8.6 TOR for Manpower Consultant ............................. 199 Annex 8.7 TOR for PIP Consutant ........................ ' 201 Annex 8.8 TOR for Study of Structre of Power Sector ..... ........... .. 203 Annex 8.9 Selecd Docments in Project File ...207 MAP: IBRD 22/62 POWER VI PROJECT Credit and Project Summary lDorOwern Government of Tanzania AmouLt SDR144.2 million (US$200 million equivalent) Beneficiaries: Tanzania Electric Supply Company Limited (TANESCO); Zanibar State Fuel and Power Corporation (ZSFPC); Ministry of Water, Energy and Minerals (MWEM). Ten": IDA Standard Terms, with maturity of 40 years including 10 years grace period. US$180 million will be relent to TANESCO at an interest rate of not less than 7.43% per annum, to be repaid over 20 years including a grace period of 5 years, with TANESCO bearing the exchange risk. US$2 million will be relent to ZSFPC with the same terms. The balance, US$18 million will be passed on to MWEM as a grant. Project Objecves: The man objectives of the project are to: (i) help meet the growing demand for electricity at least cost; (ii) help the Government retucture the power sector to promote efficiency and private investment; (iii) continue improving energy efficiency by reducing system losses, upgrading service quality, and suppordng demand sido- mnanagement initiatives; (iv) provide traiiwig and technology to staff of sector instituons; and (v) promote the development and operation of gas-fueled generation by private investors. Project Desciptio: The project consists of three main parts: The first part, which TANESCO will implement, includes: (i) the 180 MW first stge of the Lower Kihansi hydroelectric scheme; (ii) expansion, reinforcement, and loss reduction in the distribution systems of major load centers; (iii) vehicles, tools, and meters to improve distrbution and commercial operations; (iv) completion of rehabilitation of the Kidau hydroelectric plant; (v) management support and training; (vi) computeizd management information systems, and services to support TANESCO's decentralized operations; (vii) studies including tariffs, assets valuation, power system master plan, hydroelectric plant feasibility, and distribution standards; (viii) demand side management activities, including audits and advertising; (ix) upgrading of the dispatch center; and (x) provision of workshop equipment. The second part, which ZSFPC will implement, includes: (i) a study of the operation of ZSFPC to define feasible options for its future structure; (ii) a commercial manager to oversee commercial operations until the completion of the utility restructuring; and (iii) prepayment meters and associated materials to help improve collections. The third part, which MWEM will implement, includes: - vi - (i) a study of the structure of the power sector and its associated regulatory framework in Tanzania to define options for restrucring to improve efficiency, and to explore ways of involving the private sector; (ii) consulting services to promote private sector financing and opertion of thermal generation using gas from Songo Songo; (iii) development of generation (about 9 MW) from the Mnazi bay gasfeld in a joint arrangemen with the Private Sector; and (iv) traiing and office technology for energy staff of the ministry. Beet and Risks: The project wiUl help Tanznia meet additional dewand for power at the least-cost, improve service quality, reduce losses and improve planning and management of t&5 power sub-sector. The estimated economic rate of return (ERR) of TANESCO's investment program, of which the proposed project is a significant part, is 14 percent, which is above the opportunity cost of capital m Tanzaia. Subantial project management imputs by specialist consultants should help minimize risks to the proposed project's implementation. Nevertheless, because of Tanzania's overall economic situation and the nature of the work, the tollowing present higher than usual risks: (i) inancing for critical project components; (ii) delays in commissioning the Lower Kihansi hydroelectric plant due to unforeseen geological conditions; and (ini) difficulties in completing institutional reforms. Financing: The Government and TANESCO expect cofinancing to come from at least six tuItilateral and bilateral institutions other than IDA. If problems occui, bccause of changing priorities of the -nstitutions involved, IDA is prepared to reallocate resources from other components to the Kihansi plant. Geological Conditions: Because of the difficult terrain at the Lower Kihansi site, the consultants have done only sufficient investigations to permit design, costmg, and tendering, viewing the construction process as the final definitive exploration and definition of subsimface conditions. An Independent Panel of Experts endorsed this approach. If a delay in commissioning becomes inevitable, TANESCO can respond by increasing the capacity of short-delifery gas turbines it plans to install prior to commissioning Kihansi. Institutional Reforms: The project envisages significant institutional reforms, which are usually difficult to implement because they affect control of the sector and often have significant impacts on employment and personnel practices. The risk of failure will be reduced by employing competent consultants, maintaining a clear view of the fundamental objectives and carefully crafting the transition to minimize any hannfil impact on the stakeholders in the process. The other major risk is the perception of country risks by potential investors whose participaxion will be an integral part of sector reform. The Government's macro-economic policy reform and its planned adoption of a well defined regulatory framework along with IDA's continuing dialog with the Govermnent should help reduce this risk. - vii- PM oteign Total Lo0wer Kibansi 30.0 179.5 209.5 Distribution Improveme 4.1 36.8 40.9 Generation RebIliton 1.3 11.8 13.1 Eqipmn & Vehicles 0.3 6.0 6.3 Institutional & Studies 1.7 20.6 22.3 ZSFPC Component Assistnce to ZSFPC 0.0 1.7 1.7 MWEM Cftm_nt Power Sector Study 0.0 0.8 0.8 <was Field Development 0.0 15.6 15.6 Technical Assistance 0 Q Q Total Base Cost 37.4 273.7 3i Physical Cowingencies 3.9 24.3 28.2 Price Contingecies 1.9 42.5 44.4 Total Project Cost 43 34A 38. Interest During Const. 56.7 0.0 56.7 Total 1_andu Required 22, 340 44Q - viii - ElSoect Pinanine Flan USS Million Equivalen Lacal Foreign Total TANESCO 99.9 99.9 IDA 200.0 200.0 NORAD I/ 51.3 51.3 EIBW g 24.0 24.0 KfW ^/ 35.3 35.3 OD.A 3.1 3.1 Govt. of Belgium Al 14.3 14.3 DANJDA Al 3.9 3.9 PRIVATE 3.0 3.0 OTHER 5.6 5.6 TOTAL 22.9 340.5 44A,4 Ai To be confrmed. Discussions with these cofinmciers are ongoing. ES1TIMATED DISBURSEMENT OPWIA RDff IDA FY 1993 1994 1995 1996 1997 1998 1999 2000 Annual 0.8 10.2 44.0 51.2 44.4 29.5 14.7 5.2 C3mmulative 0.8 11.0 55.0 106.2 150.6 180.1 194.8 200 Economic Rate of Return: 14% on TANESCO portion of the poject I. THE ENERGY SECTOR 1.1 The following review provides the energy sector seting and selected macroeconomic indicators which support IDA's rationale for involvement in the proposed project. There are three main themes that emerge from this o-verview. First, recent economic teforms have promoted GDP growth. These results provide an encouraging famewcrk for achieving the institutional objectives of the proposed project and related sector reforms, including possible privatization of certain segmeans of Tanzania Electric Supply Company Limited (TANESCO), the government-owned electric power utility. Second, the power system currently is operating under a severe supply constraint. The proposed project will help develop Tanzania's substanmi hydropower resources and increase power supply at least cost. Third, the project includes components which build on past and ongoing measures to support IDA's policies and standards for efficient utility operation in Tanzania. Economic Background 1.2 Tanzania is located on the east coast of Africa and includes the islands of Zanzibar and Pemba in the Indian Ocean. The country is predominantly agricuiw. l with a population of about 25 milion growing at a high rate of three percent per year. With a per capita GNP of only US$100 in 1991, Tazania is one of the 25 poorest countries in the world. During the 1970s and first half of the 1980s, all important sectors of the economy declined. This decline led to widespread shortages of essential goods and services along with a rapidly deteriorating infrastttcture. Inflation, as measured by the consumer price index, fluctuated between 10 percent and 35 percent per year. The Government took various steps to stem the decline, first, through a modest structural adjustment program in 1982, and then tbrough a more radical Economic Recovery Program in 1985. These reform programs resulted in an improved GDP growth rate of about 4.5 percent per year over the 1986-1990 period, a major reversal from the virtual stagnation of the economy in the early 1980s, when the growth rate was only 0.7 percent per year. E =r Resources 1.3 Tanzania has substantial and diverse energy resources, but their exploitation is relatively low. In addition to large but unevenly distributed wood resources, the country has substantial coal deposits in the southwestern region, estimated at about two billion tons, of which 300 million tons are proven. Significant, proven, offshore natural gas deposits, totalling 72S billion cubic feet (bcf), are located near Songo Songo island some 220 kilometers south of Dar es Salaam. Another gas deposit of about 20 bcf is located at Mnazi Bay, north of the Mozambique border. Despite active oil exploration in the Rift Valley and offshore, there has been no commercially viable oil discovery. Tanzania's hydro potential is estimated at 3,800 megawatts M. 1.4 Wood Fuel. One td of Tanzania's land area consists of woodland or forest amounting to some 28 millon hectares (ha). Of this total, about 13 million ha are protected forest reserves and the remainder is public land. The vast majorky is miombo woodland-scattered, slow-growing indigenous hardwood trees and bushes. Softwood plantations cover a total of 70,000 ha. Estimates of the country's sustainable wood supply range from 61 million i3 per year by the Joint UNDP/World Bank Energy -2 - Sedor Managemlent Assistn Pgam (ESMAP) to 150 million m3 per year by the Souhern African Development woordination Conference (SADCC) 'uelwood Study. Although etmted nadonal woodfuel consumption is lower than these figures, the rate of consumption clearly exceeds that of sustinable supply in certain areas, principally those with heavy concenration of population and agricultural activity, such as around Dar es Salaam, Kilimanjaro, Dodoma and Mwanza, and the semi-arid central regions of Tabora and Shinyanga. In these areas, sustainable wood supply is declining due to pressures from agricultual extension and, to a lesser extent, wood use for energy and constuction. A tradition of free wood-gathering, uncertain land tenure, and weak agricultural extension services is limiting the application of more effective supply management and supply-enhancement progmns. 1.5 Natural Gas. There are offshore naur gas discoveries near Songo Songo island, about 20 km off the coast and 220 km south of Dar es Salaam, and at Mnazi Bay, near the Mozambiqve border. In addition, there are potental gas-bearing structures at Nyuni, Songo Songo West and Barakuni. Songo Songo's proven reserves are 725 bef and probable reserves are about 1 trillion cubic feet. Gas reservoir evaluation, pipeline feasibility and gas utilization studies, completed in the late 1980s and early 1990s with IDA and Canadian assistance, concluded that the most economic uses for gas are for power generation and industial use in Dar es Salaam. Two private gas development companies are exploring the possibility of exporting gas-enerated power to Kenya, but a firm export contract has not yet resulted. Also, a recent evaluation of the Mnazi Bay field, with IDA assistance, concluded that the field has potential for fueling small-scale power generation to serve the neighboring market, which currenty depends on burning imported diesel oil. 1.6 Oil. Although Tanzania has numerous oil-bearing samrtures, after a drilling program of about 23 exploratory wells there have been no oil discoveries. However, intensive exploration of the Rift Valley and the Coastal Sediment ry Basin has shown promising results and the Government is contimuing its efforts to promote further exploration by attractng private sector interest. For this purpose, there is a comprehensive exploration promotion package, with IDA support, under the ongoing Petroleum Sector Technical Assistance Project (Cr. 1604-TA). Following exploration promotion meetings held in 1989, several companies expressed possible interest in further oil exploration, but no signifcant new activity has occurred. 1.7 Coal. Tanzania's estimated total resources are two billion tons of sub-bituminlous and bitwninous coal. Reserves of about 300 million tons are proven. There has been a detailed investigation of two coal fields in Southwestern Tanzania, Songwe-Kiwira and Ketewake-Mchuchuma. Currenly there are two underground mines operating with identified reserves of about 30 million tons. The larger, mechanized mine, Kiwira (developed with assistance from the People's Republic of China), started production in 1988 and is designed to produce 150,000 tons per year (tpy). The capacity of the equipment currently installed there, however, corresponds to an actual production capability of about 100,000 tpy. The lima mine is smaller and older, with a production rating of 10,000 tons per year by manual mning techniques. In practice, production is sporadic and seldom exceeds 2,000 tpy. Its reserves are nearly exhausted, although exploitation of an adjacent block of reserves could be possible. 1.8 Hvdr . Tanzan has hydropower sites with an estimated power production capacity of 3,800 MW and 22,000 GWh of firm annual energy. Of the current installed generating capacity of 474 MW, 334 MW is hydro. A further 66 MW is under construction at Pangani Falls. The current unit at Pangani has an installed capacity of 18 MW but is operating at only 13 MW. The retirement of this unit at the commissioning of the new unit in 1996 will result in a net capacity addition of 53 MW. Most of -3 - the hydro sites are located on the easten wp of the mountaine that nm down the center of Tanzania. These sites are reatively smll and far from the main consumion ceners, such as Dar es Salaam. As a result, the need to transmit power over long distances raies technical losses and reduces the reliability of supply. Annexes 1.1 and 3.4 provide the deails of hydro potential and of installed and available power generation capacity. Energy Cmdon and Sour of Suppi 1.9 Estimated total energy consumpton (1990) is 11.4 million tons of oil equivalent (toe) or 0.5 toe per capita. Per capita consumption of commercial energy was about 0.04 toe, which is considerably lower than the average 0.07 toe for low-income, Sub4ahaan Africa. Approximately 92 percent of total energy cornsumed was woofuel, 7 percent was petroleum products and 1 percent electricity. Table 1.1 summ=a the respective shares of each end-use sector in consumption of total energy compared to those for commercial energy. rable 1.1 Eneg Conumti by Consumer Catry Percent of Percent of Category Total(*) com ial Industry 6.7 31.3 Trnsport 2.7 31.5 Agriculre 5.3 98 Household 84.2 20.6 Comnmce & Others 1.1 6.8 TOt 100 100 'a' Tota enay include5 woodfie and residis. 1.10 WYLo1. Esimaed total primary consumption of woodfuel (1990) is about 43 million n3, of which 90 percent was firewood, and the balance charcoal. Regions with a deficit of woodfuel supply are using agricultural residues as fuel, with resulting adverse conequences for soil fertility. Despite donor- supported afforestation efforts, supply shortfals coud worsen in these areas and further action is needed to Icrease tree planting and to implement wood conservation measures. An IDA Forest Resources Management Project (Cr. 2335-TA) is addressing some of the supply issues. Furthermore, the Power Rehabilitation Project (Cr. 1687-TA) has provided assistance to manuacue and disseminate more efficient woodfuel stoves. However, additional support is required for country wide diss ion of energy conservation measr for woodfuels. 1.11 Eole Products. Imports of crude oil and refined petroleum products totalled 1,066 metric tons in 1990, represting about 40 percent of foreign exchange earing, amounting to US$528 million in fiscal year 90/91. Of these impots, 623,000 tons were cride oil for processing at the Dar es Salaam reiery, and the balance was refined products. In addition, 128,000 tons were reexported as residual fuel oil or bunkers while refiery own-use and losses amounted to 62,000 tons. Diesel and gas oil accounted for the largest share of total petroleum product consumption, about 45 percent; kerosene and -4- jet fuel had the second largest share of consumption, about 25 percent, while gasoline and fuel oil consumption each amounted to about 15 percnt of the total. The refinery also produces about 4,000 tons of LPG for local sale. The high proportion of refmed products imports to total supply is due to a mismatch between the refinery output nix and the structure of product demand, 70 percent of which is for middle distillates (diesel, gas oil and kerosene). The structure of petroleum product consumption by end use sector is as follows: transport, 40 percent; industry, 25 percent; and households, 20 percent. The agriculture and the service sectors account for the balance, i.e. 15 percent. 1.12 Electricity. Electricity generation totalled 1,629 GWh in 1990 with corresponding sales of 1,304 GWh. Compared to 1989, total generation increased by 8 percent and sales by 13 percent. The interconnected system, which consists mosdy of hydroelectric units, generated 1,565 GWh, amounting to 96 percent of the total, and the remaining 4 percent of generation (64 GWh) came from small, isolated systems. With assistance under the Power Rehabilitation Project, TANESCO reduced estimated losses in the system from 25 percent to about 21 percent of net generation. The proposed project will address the issue of losses further, in conjunction with system rehabilitation work. Peak demand in 1991 was 297 MW, an increase of 4 percent over 1990.1/ Industry and commerce accounted for 54 percent of consumption and residential consumers for 31 percent. Agriculture, water pumping, public lighting and bulk sales to Zanzibar accounted for the remaining 15 percent. Currenly, the system is operating under a severe supply constraint due to recent drought conditions affecting hydropower availability (para 4.2). 1.13 Coal. Total sales of Tanzanian coal were about 16,000 tons in 1990. The major coal consumers are the Mbeya Cement Company (MCC), Southern Paper Mills (SPM) and the tea industry, all located near the mines. The total consumption of coal in Tanzania totalled 75,000 tons, most of which Tanzania imports from Zambia The low demand for Tanzanian coal results from its high ash content and its inconsistent quality which does not meet industrial requirements. So, despite the existence of extensive coal reserves, Tanzania imports much more coal than it produces. The potential for increased production of better quality coal to displace imported coal is therefore an important consideration in the development of Tanzania's energy sector. E =,a Efficiency and Demand Management 1.14 A recent ESMAP study of efficiency in the energy use of large industrial energy consumers concluded that there is considerable scope for low-cost energy efficiency improvement, and owitlined a related program of action. The Tanzania Industrial Research and Development Organization (TIRDO), which collaborated in the ESMAP work, has done some fobow-up work on the recommendations of the study. But additional incentives for industries to increase energy efficiency are required. 1.15 ESMAP has recently received funds for the preparation of a demand side management strategy for Tanzania. TANESCO and the Myiistry of Water, Energy and Minerals (MWEM) will jointly formulate the strategy which will focus on improving the efficiency of electricity use by the major industrial an. commercial consumers. The proposed project wfll finance the implementation of the strategy. IDA and TANESCO have agreed that TANESCO will produce, by December 31, 1993, a detiled plan of action 1/ The peak in 1991 was truncated by load shedding. for a demand management program acceptable to IDA (Schedule 1).2/ Distortions in energy pricing have hampered efficiency improvement efforts for a long time, but the Goveranent has also started to bring petroleum and electricity prnces into line with the full economicz cost of supply. In the traditional energy market, IDA and several bilateral donors have supported measures to increase the efficiency of woodfuel use e.g. through development of more efficient charcoal stoves and kilns and improvement of the efficiency of woodfuel use in small industries. Oranization of the Ener' 1j;s 1.16 The Government cwti:f'-y plays a dominant rote wa establishing and implementing energy policy. The MWEM is responsible wor policy on hydrocarbons, electricity, energy efficiency (including woodfuel conservation) and coal. The Ministry of Lands, Tourism and Natural Resources (MLTNR) is responsible for forestry and fuelwood supply. In addition to their policy fornmlation responsibilities, the miistries also oversee the activities of the organizations operating in the energy sector. In the case of MWEM, the most important of these are TANESCO, the Tanzania Petroleum Development Corporation (TPDC), the State Mining Corporation (STAMICO) and the Tanzan and Italian Petroleum Refinery Company (PER). 1.17 Within MWEM, the Department of Energy handles energy sector maes. The Department is responsible for national energy planning and policy review, evaluation of energy projects, energy pricing and oversight of TANESCO and TPDC. The Head of the Deparnment is the Commissioner for Energy and Petroleum Affairs. The current orgamization has divisions for petrolemn, electricity, new and renewable energy resources and national energy planning and policy making. The Department has about 30 professional staff. 1.18 TANESCO, established in 1931, is the major power company operating in Tanzania (para 2.2). it became the national power utility in 1964 and since then has been responsible for all power generation. ransmission and distribution throughout mainland Tanzania. Although TANESCO exports electricity to zanzibar through an interconnecting submarine cable, a separate authority, the Zanzibar State Fuel and Power Corporation (ZSFPC), administers power distribution within Zanzibar. 1.19 The initial role of TPDC, established in 1969, was to cooperate with AGIP, an Italian oil company, in oil exploration. But in 1977, the govermment expanded TPDC's role to cover all oil exploration activities, the import of crude oil and oversight of refining and bulk sales. TPDC has 50 percent ownership of TIPER, the oil refinery company, and fity percent ownership of two of the five established petroleum distribution companies operating in the country: BP Tanzania and AGIP Tanzaia. 2/ SADCC is planning an electricity demand side management project for the SADCC region. Within this project, TANESCO will have the opportunity, in collabortiton with other SADCC utilities, to investigate and develop additional utility demand side management programs. -6- The Gover_ment's EnerQv Sector Objectives. Strateav and Policy 1.20 The Government's seven broad objectives in the energy sector are to: (i) exploit the country's considerable hydroelectric resources; (ii) develop and utilize other indigenous energy sources, such as coal and natural gas; (iii) increase petroleum exploration activities; (iv) arrest forest depletion; (v) ensure reliability and security of energy supply; (vi) minimize energy price fluctuations; and (vii) develop the country's human resources in the energy sector. 1.21 Exploitation of Hvdroelectric Resources. During the past two years, about 95 percent of electricity generation has come from hydroelectric sources, with the balance coning from diesel oil. This situation has began to change, however, due to the severe drought conditions of recent years and the consequent reduction of hydro generation (para 4.2). In 1992, an esdmated 18 percent of totl generation came from thermal sources. The least-cost expansion of the power system during this decade will continue to include exploitation of Tanzaia's hydro potential. The next major generation plant will be the 53 MW Pangani hydro-electric redevelopment scheme, which is scheduled to come on stream in 1996. The proposed project would follow this with the 180 MW Lower Kihansi hydro scheme in 1998. The Government also is emphasizing the expansion of the derconnected transmission and distribution system to make electricity available to most of the major populaion centers by the year 2005. 1.22 Develooment of Other Enerey Resources. The Governument will focus its strategy to develop non- hydro energy resources during the 1990s on exploitation of the Songo Songo natural gas reserve. Assuming the development of this field for the domestic market, the current plan is to transport gas by pipeline to Dar es Salaam by 1998/99 for use in fueling a gas-fired power generation plant, and to displace fuel oil and diesel in large industrial plants. An acceleration of field development and pipeline construction could occur under two conditions: (i) to displace diesel fuel for around 100 MW of gas turbines that will be necessary before the Lower Kihansi hydro plant is commissioned; or (ii) if a viable power export contract with Kenya can be developed. TANESCO's planning consultants concluded in earlier studies that the least-cost means of meeting power demand after completion of Lower Kihansi is gas-fired thermal generation usiog gas from Songo Songo.3/ The proposed project includes a study to re-examime the least-cost sequence in light of several new developments. These include the role of the gas turbines that are being installed prior to Lower Kihansi, the possibility of increasing peaking capacity at Kihansi up to 300 MW at low incremental cost, and at least two new candidate hydro plants which the project will study to the feasibility level. The study also will include an update of the load forecasting models and consider the potentl impact of demand management. In addition, the Government plans to develop the Mnazi Bay naural gas field (para 1.3). The proposed project includes a scheme to bring the gas field into production and generate electricity, using small gas turbines, to supply surrounding towns. In addition to options for gas use, the Govermment plans to identify further markets for coal, particularly in the Mbeya area, to better utilize the capacity of the Kiwira coal mine. 1.23 Petoleum o . IDA assisted Tanzania in preparng a petroleum exploration promotion package whieh was presented to the oil industry in 1989. This has stimultd some futher interest, in addition to the exploration activities already underway or planned in southern Tanzania and off-shore at yI The addition of relatively low-ost, flexible, gas-fired capacity to the hydro-based system is both economic and environmentally atactive: gas is a clean buming fuel and can back up hydro supply in dry years. -7- Mafia Island. In view of the heavy drain of petroleum im on Tanzn's scarce foreig exchange resources, the Governmen plans to continue an active exploration promotion effort with the goal of a viable oil discovery. 1.24 Wogdfgel Deoletion. Localized depletion of Tanzania's wood resources has serious implications for energy, environmental and agricultral policy. Both the use of woodfuel and land clearing for agricultural expansion have greatly depleted the country's forests. Growing energy demand is contributing significanly to the depletion. The Government's strategy is to tackle the problems of shriking supply and rising demand for woodfuel simultaneously. The emphasis in supply policy is on improved management of existing forests and woodlands and increased vi1lage planting on farms. Clarifying resource ownership and improving the collection of wood fees are two essential steps in the process. On the demand side, the Government, with IDA support, is introducing and promodng efficient charcoal stoves and charcoal production tecniques as well as encouraging wood buning industries to increase their energy efficiency. Although the scope for wood substtution is limited, expansion of the power system and of coal utilization will make a marginal contribution to reducing woodfuel demand. 1.25 Reliability and Sec;ritY of EnemQV SUDpIy. The Government's major policy goals are to improve the reliability and reduce the cost of petroleum products distribution, which IDA is supporting through the petroleum Sector Rehabilitation Project (Cr. 2202TA). In addition, the Government, with support from ]DA, has focussed on improving the reliability of power supply, which was the major objective of the Power Rehabilitation Project (Cr. 1687-TA) and will continue this work under the Project, through the reinforcement of the distribution system. 1.26 Energy Prices. The Government has set a uniform price for petroleum products to meet social objectives. This has resulted in significant inter-regional cross subsidies and periodic petroleum product shortages in some of the more isolated areas, due to the reluctance of the distributors to extend supplies to areas where fiull cost recovery is not possible. The ongoing Petroleum Sector Rehabilitation Project (Credit 2202-TA) is addressing this issue. Also the government recendy increased petroleum prices. In electric power, the Government is committed to setting tariffs to cover TANESCO's financial costs, generate a reasonable return on its investments, and to reflect the long-run economic cost of supply (LRMC). In 1988 TANESCO received government permission to raise tariffs every six months in order to achieve the financial objectives. The increases, however, have not been sufficient to compensate for the contined devaluation of the Tanzanian currency or to raise the rates to the level of economic supply costs. TANESCO recently raised its taifs substtally and has agreed with IDA that it will increase the average tariff level again in mid 1993, and adjust them to offset inflation (para 5.24), while awaiting the results of tariff study under the proposed project. 1.27 Human Resource Developm . The development of human resources will remain largely the responsibility of the energy organizations themselves, particularly TANESCO, TPDC and a proposed gas utility, when established. The Govenment plans to complement the traing efforts of these organizations with expanded teaching of energy and environmental analysis in the schools and universities. The proposed project will complement this effort by financing further training of TANESCO and MWEM staff. -8- Past Bank/IDA Participation in the Energy Sector 1.28 Electric Power. The Bank Group has long been involved in Tanzania's power sector. The first Bank loan (518-TA) to TANESCO was for US$5.2 million in 1969, to meet projected power demand during 1970-71, by adding 20 MW of diesel generating capacity to the system. The Bankl made the second power loan (715-TA) of US$30 million in 1970 to help finance the first phase of the Kdatu Hydro Project, with a capacity of 102 MW, located on the Great Ruaha River. The project also financed the expansion of diesel capacity by 15 MW, and construction of a transmission line from Kidatu to Dar es Salaam. A third window loan (1306-TA) of US$30 million, which the Bank approved in 1976 to finance the second phase of the Kidatu development, involved the construction of an upstream dam at the Mtera site and the addition of 102 MW generating capacity at Kidatu. TANESCO completed all three projects broadly within their orginal construction schedules, though there were cost overruns in the second and third power projects, due mainly to unexpectedly bad rock conditions encountered during the excavation and the higher than anticipated interational inflation that affected the cost of civil works. 4/ The Bank Group provided supplementary funds to cover the cost overruns (US$5 million for Power 11 and US$7 million for Power Im). In 1983, the Bank approved Credit 1405-TA for US$35 million equivalent to partly finance the Fourth Power Project. This US$160 million project comprised the construction of an 80 MW power plant and related civil works at Mtera, the constuction of a national control center, tainng and management planning and pricing studies. TANESCO completed the project in 1991 and a project completion report (PCR) is in a draft phase. The Power Rehabilitation Project (Cr. 1687-TA) included the rehabilitation of the generating plant, transmission and distribution facilities, engineering services, training and the introduction of energy-efficient charcoal stoves and kilns. The credit for this project closed in 1992, and a PCR is being prepared. In early 1992, IDA approved the Power Engineering and Technical Assistance Project (Cr. 2330-TA), which includes detailed engineering studies and preparation of the bid documents for the proposed Lower Kibansi hydropower scheme, along with modern billing and accounting systems and associated training. 1.29 Proleu. In the petroleum subsector, IDA provideL three credits for exploration (Cr. 527-TA, Cr. 1199-TA and Cr. 1604-TA). The first, for US$30 million in 1980, was for the initial phase of the Songo Songo exploration program. The second, in 1982 for US$20 million, was to fiance the second phase of the program. The combined driling program resulted in the discovezy of natural gas reserves. Tanzania, Zaire, Burundi and Uganda completed an aeromagnetic survey, financed in the context of existing World Bank Group technical assistance projects, in each of these countries. The Bank also sponsored a seismic reconnaissance program over Lake Tanganyika that confirmed the findings of the aeromagnetic survey. In 1985, the Bank approved the third credit, a Petroleum Sector Technical Assistance Credit for US$8 million. This credit also has financed a workover of the Songo Songo gas wells, a domestic gas utilization study, and a petroleum product distribution study. In addition, the Credit has helped Tanwania to: (i) prepare a comprehensive exploration promotion package; (ii) reconfirm gas reserves; (iii) prepare the Petroleum Pricing Policy Study; (iv) evaluate the domestic gas pipeline option; and (v) improve the capability of local staff through training. The Bank approved a Petroleum Sector Rehabilitation Credit (para 1.26) early in 1991, to help improve facilities for the bulk handling, internal transport and storage of petroleum products. 4/ Project Completion Report No. 4622 (Loan 1306-TA) June 1983. -9- 1.30 Cal. A Coal Engineering Project (Cr. 1371-TA) ended in 1991. The project provided the Governmet with updated geological infomation, assisted with the exploration and delineation of reserves to extend the life of the Ilima colliery, and strengthened the manpower capabilities of MWEM and STAMICO. 1.31 Technc Assistance. In 1984, ESMAP completed a comprehensive analysis of the energy sector (Issues and Options in the Energy Sector, Report No. 4969-TA). The Government has implemented several of its reconmendations, including the formation of a Department of Energy within MWEM and an analysis of gas utilization options. ESMAP has subsequently assessed the options for energy efficiency improvement in industries and has identified components of a possible forestry project to increase the supply of woodfuel. An ESMAP Power Loss Reduction and Distribution Expansion Study (199011991) introded modem distribution plannig techniques, successfully trained TANESCO staff in their use, and assisted TANESCO in preparing an action plan to reduce both technical and non-technical losses. This assistance helped in the preparation of the Power Engineering and Technical Assistance Project (para 1.28) and has helped to identify the distribution components of the proposed project. Sumar Imgact of Past and On,oing Bank Lendina. Sector Work and Technical Assistance 1.32 Development of an Energy Planning Capability. The Bank, through an energy assessment, helped establish the Energy Department of MWEM, which is responsible for national planning, among other functions (para 1.17). 1.33 Identification of Potential Energa Savings Through Demand Manaaement. The ESMAP study (para 1.15), in cooperation with MWEM and TANESCO, will help defme an appropriate electricity demand management strategy for Tanzania. Furthermore, the Bank, through ESMAP, has identified significant potential energy savings through low-cost improvements in the end-use efficiency of large-scale ndustrial consumers, but further work, including energy audits, an examination of incentives, etc., will be necessary to achieve a better grasp of expected net benefits. 1.34 Transfer of Mana_ement and Technical Skills. Through substantial training support to the power sector, and more recently to the petroleum sector, Tanzanian nationals are playing a much greater role in the management and operation of public sector energy enterprises, reducing the number of expatriate suaff. 1.35 Promotion of Petroleum Exploration with Private or Donor Risk Capital. IDA, through several credits, also has been instrumental in establishing a petroleum sector exploration program, finanm largely by either international oil companies or outside donors. The major result so far has been the discovery of commercial-scale gas deposits which, after development of the necessary infrastructure, will make a sigifican contribution to Tanzamia's energy supply and possibly earn the country foreign exchange through exports. 1.36 Expansion of the Electric Power System at Least Cost. A succession of loans and credits (para 1.28) has helped transform the power sector, on a least-cost basis, from a small, diesel-based operation to a substantial, hydro-based power system with a record of good technical performance. - 10- 1.37 Idenifwaton and Inmlemention of mprovements to TANESCO's Operational Efficiency. The Bank. hrough an ESMAP study, has helped TANESCO determine system losses and develop a program of awvities to minimize them. The ESMAP study identified the main cause of the technical losses as deficiencies in the tram ion system and recodmmeed reactive power compensation equipment in both the transmission and distribution systems to reduce losses. An important aspect of the ESMAP study was close cooperation with TANESCO staff and an emphasis on training counterpart staff in the techniques and methodologies of distrbution system planning. To facilitate this process, in the course of the study, TANESCO established a distribution system planning unit to collect and analyze power distribution network data. This unit has now become a regular part of the organizational structure. The ESMAP study also investigated the non-technical losses in the system and found their principal causes to be unmetered supplies, defective metering, meter reading errors and deficiencies in the system of billing and collecting payments for electricity used. The study recommended that TANESCO establish a task force to conduct a country-wide program of reducing non-technical losses based on a program of prioritized actions to ensure proper connection registration and billing of all customers. 1.38 Based on ESMAP study findings on non-technical losses, IDA provided TANESCO with a Credit for a Power Engineering and Technical Assistance (TA) Project in 1992 (para 1.28) to correct some of the deficiencies identified in commercial operations, and established an improved accounting system. For overall commercial operations, the TA will help TANESCO provide high-quality customer service, bill all of its customers on time, manage non-technical losses and collect the money customers owe the utility on time. The TA for the accounting system will replace the existing system with one that produces accurate, timely accounting and management information consistent with internationally accepted electric utility accountig principles. The new system also will include modem computer software for managing all aspects of electric utility accunting, including payroll and employee accounts, materials management, cost accounting, debt, etc. 1.39 Productivitv Incentive Program (PIPM. TANESCO began a program in 1991 to reduce the surplus work force through severance packages and provided incentives, such as bonus programs, to encourage higher productivity among renaining staff. The program resulted in better employee atndance and some reduction in costs (para 2.31). However, after a period of initial success, there was a relaxation of productivity. Therefore the proposed project will provide for technical assistance to monitor further progress under the progrm. Lessons Learned in Past Power Projects and Actions to nplemrent Them 1.40 IDA has reviewed the major lessons leamned from past experience with power projects in Tanzania and has incoworated them into the design and implementation framework of the proposed Project. The lessons focus mainly on improvements to technical design, project cost estimation, financing arrangements, the bidding an contracting process, meeting TANESCO's financial objectives and strengtheing the skills of TANESCO staff. Box 1.1 outlines these lessons, along with actions IDA has proposed to incorporate in the project framework. - 11- flgjfl Major Lessons Leaed From Past Power Projects and Actions to Implement Them ON l~~U. thoogh a e_iew o ethe disi work live arisLFor aydoe-twI IxJ*p uma #0 t w qmfta byevm* *Ol -Id Of pmlh DoNSPter t ndfirt _wIdd to revew poInt d*I r :' Y r ~~~~~~~.euterlatueout esiteto .ne thatthe are relU. A C _ JfbAd t_pc s _ . ,!.-:.J,'.E-u,. -1S | ~~~0 21* Oaem S .tC re he aIen slgdcninet cm t * 2XYXS~~~~~~~uleisM (putat:nerodoitt uaEigefth&wMb t"~~~6m'l 7 = ==V .-s. .~~~~~~~~~~~~~~O-Oi A-'th.p..U4.*t.i. . gro.p.ter . ofa.pe$oz.e.*ct..to , -::0YN# hare. -8 ttpe.. -k--W -, wtlhastt. - mtfh . A.o -h .ema - s ~~~~ if tsffd *tlc wM 0fi*n*U A. :P .':46, Af. o# amstms $20 no; . US M e A UI,IWSv_''\ . l f5=:==lhlf3fdf d=r7 AWi - 12 - Rationale for Continued IDA Involvement 1.41 As a result of the Government's economic recovery efforts. Tanzania's per capita GlDP has grown at appreciable levels for the past six years. Furthermore, the Government has initiated several reforms in parastatal enterprises including some privatization and, in this context, recognizes the need to increasw TANESCO's autonomy for improved productivity and to promote greater private sector participation in the power sector. These developments promise an improvement in the future operating environment for TANESCO, which IDA supports. Hence, IDA's objectives in remaining active in the energy sector are the promotion of: * energy supply expansion based on least-cost criteria, consistent with available financial and foreign excharge resources. * efficient domestic energy resource development and end use. * sound fmancial management and financial planning for energy enterprises through appropriate pricing policies and prudent capital structures. 3 capable national energy planning and management through training, studies and technical assistance. * promotion of efficient structural reform, including privatization of selected energy sector activities. 1.42 The proposed project will directly serve the five IDA objectives outlined above. Also, it will continue the process of least-cost power system development by financing the Lower Kihansi hydroelectric scheme, the next major hydro project in the least-cost generation expansion program, on a timetable consistent with the need for additional generating capacity. Through a series of generation, transmission and distribution rehabilitation measures, combined with the promotion of end-use efficiency, the proposed project will ensure efficient use of existing power facilities and investment in new facilities. The credit will also finance a study of the long-run marginal cost of power supply, which should result in a power tariff that reflects the future economic cost of supply. The introduction of systematic corporate planning and a computerized management information system should help improve the flow of critical performance data and strengthen management control. Finally, the proposed project's components for insttutional strengthening should help improve TANESCO's operating performance and financial results, in line with sector reform policies which include promotion of the privatization of parts of TANESCO's operations. 1.43 Continued IDA assistance to Tanzania's energy sector includes a gas project scheduled for the mid-199Os. The proposed project would facilitate private sector involvement in gas production, treatment and transport from Songo Songo to Dar es Salaam, construction of a gas-fired power station, development of a gas grid to serve industrial enterprises in the Dar es Salaam neighborhood, conversion of industries from oil to indigenous natral gas, and the establishment of a gas utility, preferably with private participation. II. THE BORROWER AND THE IMPLEMENTING AGENCIES The Borrowr 2.1 The Governmen of Tanzania would be the Borrower of the proposed IDA credit of SDR 144.2 million (US$ 200 million equivalent). The implementing agencies for the Borrower are the Tanzaia Electric Supply Company Limited, the Zanzibar State Fuel and Power Company (ZSFPC) and the Ministry of Water, Energy and Minerals (MWEM). TANESCO 2.2 Backeround. TANESCO, the govermment-owned power utility, originally was a private enterprise, incorporated in 1931 as Tanganyika Electric Supply Company. The Government bought the utility in 1964, established it as a public limited company, and adopted the present name, TANESCO. As a public utility, TANESCO operates under both the country's Company Ordinance, and the Electricity Ordinance. Under the Company Ordinance, TANESCO is subject to the general rules and regulations of al other public limited companies in the country. Through the Electricity Ordinance, the MWEM, in consultation with TANESCO, controls electricity produced by other entities (small captive plants) through a licensing mechanism. Currently TANESCO supplies about 95 percent of all electricity consumed in Tanzania. 2.3 TANESCO's Board of Directors consists of a Chairman who is also the Chairman of Parastatal Sector Reform Commission, a Managing Director and nine other Directors who represent most interest groups in Tanzanian society, including the workers. The Government, as the sole shareholder of the utility, nominates all directors. The appointment of Board members is staggered, each serving for a two- year period. The Board is required to meet every third month but in practice meets more frequently. 2A In accordance with TANESCO's Articles of Association, the Board of Directors is responsible for the appointment of the Managing Director. The Maraging Director is the Chief Executive of TANESCO. In practice, however, the President of Tanzania nominates the Managing Director and the Board ratifies the appointment. As indicated in Annex 2. 1, there are three Deputy Managing Directors who report to the Managing Director. They are responsible for the following three activities: (i) Operations; (ii) Technical Services; and (iii) Administration, Finance and Corporate Services. In addition, the Director of Internal Audit, Director of Security and the Company Secretary report to the Managing Director. The positions of Managing Director and the Deputy Managing Directors are crucial to both the success of the project and the sustainability of TANESCO as an effective and viable institution. 2.5 TANESCO has seven geographical zones of operations-South, Southwest, Central, Northeast, West, Lake and Coastal. Previously the zonal managers as well as the heads of three interconnected generating stations (Kidatu, Mtera and Pangani) reported to the Department of Finance, at headquarters, on financial matters and to the Technical Departnent, at headquarters, on technical matters. But the 1990 reorganization upgraded the positions of zonal managers and heads of major generating stations to that of director level. As a result, each zonal director, and each manager of the three major generating stations, now has full responsibility for the operations of the respective zone or station. The revised organizational structure, shows a third position of Deputy Managing Director (operations), to whom the zonal directors now report. The other two positions, that of the Deputy Managing Director (Technical Services) and the - 14- Deputy Managing Director (Adminstration, Finance and Corporate Services), remained intact. The heads of power stations report to the Technical Services Department. Another significant refinement under the reorganized structure is the establishment of the Management Information System (MIS) Department at headquarters. Since the reorganization, TANESCO has spent considerable effort and time to refine the utility's institutional structure to meet its emerging needs. In addition to these improvements under the curnt electricity sector structure, the Government's program for parastatal reform is considering overall sector changes which will have a major impact on TANE5CO's organizational set-up, including possible privatization of certain activities (paras 2.32-2.39) which this proposed project would support. 2.6 As a public utility, TANESCO has the following objectives: * Contribute to the economic development of the country by meeting the current and future demand for electricity cost-effectively and with mutually acceptable levels of reliability and quality, while respecting the integrity of the environment. * Recover its costs of capital, operation, and maintenance, from its revenues (mostly tariff) and generate a reasonable rate of return on its investnents. * Cover a reasonable portion of system expansion costs from internal cash generation and mainain the utility's credit ratings and, therefore, the ability to raise additional capital from domestic and/or foreign sources at reasonable costs. The Govemment supports all of the above objectives. Additionally, as part of the country's development program, the government ultimately would like to extend electricity to the entire population, and, in meeting this objective, may wish to make electricity available to consumers that lack the means to pay the fu,ll cost of power services, or maintain low tariffs for selected income groups. However, this policy may intfere with the utility's ability to meet its financial objectives. The Government can reconcile conflicting objectives by direct payment to the utility of the differential between the normal taiff applicable for services provided to such groups and the revenues actually received from them by the utility. Such an arrangement would allow the Goverment to target clearly the needy groups of customers and limit subsidies to them. To provide a policy for TANESCO to operate on a commercially viable- basis, and to ensure self-sustain ibility, the utility has adopted a Statement of Policy to which the Government has agreed (Annex 7.1). This statement, among other things, reflects the separation of utility and goverment objectives and provides a stable basis for TANESC& v fuure development. TANESCO has agreed that it will not change the policy without IDA's approval (para 7.2(v)). 2.7 Onerating Performance and Problem Areas. Despite the difficult operating environment in Tanzania for more than a decade, TANESCO's performance has been relatively good and it is considered as one of the better Government owned organizations in the country. TANESCO's overall management quality is acceptable but has several problems which it needs to address in order to ensure its sustainability as an independent, tecbnically and financially viable utility. These are: (i) skill deficiencies among both professional, tecnical and administrative staff; (ii) absence of medium and long-term corporate planning; (iii) extemal influence in management of corporate affairs; (iv) lack of integrated functiong among the different operatig and functional units; (v) scant awareness of the business objectives of the institution, especially among the lower level headquarters and field staff; (vi) inadequate financial resources; and (vii) inadequate delegation of authority leading to a low level of incentives to - 15 - take initatives. As a result, staff efforts often lack direcion or a grasp of major issue and priorities. Also field managers are often hesitant to fully accept their responsibilities, pardcdulary in collecting overdue accounts and disconnecting delinquent customers. Furthere, the lack of appropriat, guidance and direction from the Head Office at tim has contributed to less than satisfactory performance of field staff. Compounding these problems is the declining level of employee compensation. Based on the lessons learned from the past experience, TANESCO will focus its institutional development efforts on four key areas: (i) corporate planning; (ii) management; (iii) manwer development; and (iv) the Productivity Improvement Program (PIP). 2.8 TANESCO has a dedicated management and staff. However, middle-to-lower level managers, accountan, engineers and technicians are scarce due pardy to loss of qualified people to better paid jobs elsewhere. Although the company nas had to follow the pay scale for the civil service, it has been innovative in creating incentives in the form of group allowances for, inter alia, overtim and special jobs performed well and on time. The incentive system has provided some protection against a drop in real incomes, although there have been some abuses of the system since aX staff do not have access to the group incentives program and it has received little supervision and monitoring. However, despite the incentive system, the average salary in TANESCO has declined drastically from about US$220 equivalent a month in the 1970s to about US$50 equivalent per month at present. At this level, many employees are not able to support their families and sometimes are forced to have a second or even a third job, which they occasionaUy perform during official working hours. TANESCO has agreed with IDA that it would do a survey of salaries which competing commercial organization in Tanzania pay and, based on the resuts of the Survey, establish a competitive ompensation structure by January 1, 1994 for all levels of employees (Schedule 1). 2.9 FM= Plan. For several years the demand for electricity in Tanzania will substantially exceed the capacity of TANESCO to supply it and coherent planning in the use of scarce resources will be crucial. So, beginning on July 1, 1994 and thereafter, on each anniversary date, TANESCO has agreed to prepare an Annual Corporate Plan for each year, startng with Jamnary 1, 1995. This plan will establish medium-term, five-year business objectives and financial projections as well as annal budget, acceptable to IDA. (Schedule 1). Also, it will specifically reflect the objectives of TANESCO's Statement of Policy and will estimate: (i) aggregate power demand and its distribution by type of consumers (industrial, commercial, household) and area; (ii) financial, human and fixed physical resources available to TANESCO; (iii) proposed capital expendits on infrastructure and other facilities; and (iv) manpower development and training programs. Based on these estimate, the plan will establish: (i) priorities among customers (by type) and geographical location, based on commercial considerations; (ii) aggregate supply targets linked to those priorities; (iii) cash requirements and sources of funds (internal cash generation, equity amd loan capital); (iv) non-financial resource requirements e.g. personnel by number and distribution within the staffing pattern, facilities, and equpment; and (v) assignment of responsibilities to specified units within the organization. 2.10 The Annual Corporate Plan will be the principal insument for an on-going review of TANESCO's operations and institutional development. It also will determine TANESCO's funding needs in relation to its projected growth. The Plan will detail the budget for the fo4lowing year, including the availability of financial resources through normal business operations, loans, the issue of share capial and bonds, etc.; as well as a program for capital and other expenditures, and manpower development and training. It will reflect the future operations of TANESCO based on inputs which the operating units (zones, power plants) as well as headquarters, provide. In addition to a detailed budget for TANESCO, - 16- the plan will discuss the assunptions used and strategies designed for improving performance in the following areas: billing, collection, employee/customer ratio, productivity improvement, operating and inestment programs, an amalgamation of yearly plans into five-year projecdons (including justification for investment proposals). Also, the plan will permit a critique of performance in key areas such as collections, disconnections, write-offs, administrdtive costs, staffing and performance evaluations and manpower/training activities. Fina1ly, Annual Corporate Plans will also include information on, and rationale for, any changes in the agreed investment program. 2.11 DePgartmental and Unit Work Planning. In practice, to make corporate plans work, it will be necessary to disaggregate them into annual departmental and sub-departnental work plans. Each deparment, division, zone, power station and other work unit within TANESCO would be directly responsible for preparing its own specific work plan according to guidelines which the Planning Division in the Administration, Finance and Corporate Services Department (para 2.12) issues. Managers from departmental through zonal and sectional levels would specify tasks for staff to implement work plans efficiently and effectively, allocate available resources in support of those tasks and supervise staff performance. The Managers should delegate the operational responsibility for task performance to staff and devote their time to monitoring performance. 2.12 ManaMement of the Planning Process. The Planning Division in the Administaon, Finance and Corporate Services Department would have specific responsibility for coordinating and developing TANESCO's Annual Corporate Plan and financial objectives as a framework for preparing and updating five-year projections. However, the planning process also would require inputs from TANESCO's managers at all levels. In order to ensure effective and timely participation in the process, the Planning Division would develop an annual "Planning Cycle", for which it would issue d:tailed instructions explaining the corporate objectives, outlining the kind of information required and its format, and designating responsibility for its preparation and timing for submission. These instructions also would set up a process for reviewing the operating and financial performance along with cost control incentives at appropriate levels within TANESCO. In order to establish the Planning Division, develop the related Planning Cycle and provide appropriate training to relevant staff in TANESCO, the proposed project provides for the employment of a Planning Manager, by January 1, 1994, for a period of three years. Annex 8.3 provides terms of reference on which IDA and TANESCO have agreed for this position. TANESCO also has agreed that the qualifications and experience of the candidate considered for this position as well as the terms and conditions of the Planning Manager's employment would be acceptable to IDA (Schedule 1). 2.13 The Planning Division would assemble inputs from the various planning units into one corporate plan for the utility. Formal approval of the Annual Corporate Plan, as an aggregate of all departmental, divisional, zonal and unit plans, would be the responsibility of TANESCO's Board of Directors. After adoption of the Annual Corporate Plan by the Board, the Plan would serve as the program of action for the following year's business activities. TANESCO would measure actual performance against planned activities on a monthly basis and present the results in a formal report for Board review. 2.14 Systems and Procedures. TANESCO does not have well-defined systems and procedures to assist employees, at various levels of the organization and at different locations (zones, power plants), to accurately delineate their responsibilities and the extent to which they are authorized to commit the organization and its resources. At the senior management level, employees often rely on precedence and institutional memory. However, at middle and lower management levels, the absence of up-to-date, - 17- wrtten sysms and procedures can impede the exereie of initiative in fiuthering institutional objecdves. TANESCO's management is aware of this shortcomg and has therefore agreed to engage an internationaltv-recruited Syste Manager for a period of three years. The Systems mMar would head a small Systems Unit witbin the Directorate of Fhinance. This unit would be ponsible for reviewing the existing systems, pcedues and practices, in onction with concened operational and staff functions, in order to establish their relevance to the exiting and fue institutional needs. Based on its findings, the unit would moditr existing systems as appropriate, dicard those systm which are no longer relevant and introduce new systems and procedures to meet the institution's emerging needs. A special Systems Mamnal would consolidate all the new and modified systems and this manual would be available to TANESCO employees as a guide in the perfomce of their duties. Annex 8.4 provides terms of reference for the Systems Manager, as agreed between IDA and TANESCO. Also, TANESCO has agreed to employ the Systes Manage by January 1, 1994, and that the qualificadons and experience of the candidate being considered, as well as the terms and conditions of his/her employment would be acceptable to IDA (Schedule 1). 2.15 Manaaement Infonation Svstem. IDA and TANESCO recognized the need to implement a comprehensive program for modernizing TANESCO's data processing system under the Power Rehabilitation Project (CR. 1687-TA). That operation financed the services of a senior financial advisor, and a systems analyst to implement the progrm. But TANESCO's difficulty in attng and retaining competent advisors unfortunaely has delayed the implementation of a fully funcdonal MIS. In the meitime, the situation has deteriotated to the point where a group of experts is now required, in the short term, to prevent the existing system from collapsing and, in the longer term, to assist TANESCO in acqiring modern computrized accuntb iing systems and procedures along with an up-to-date MIS at headquarte, as well as in the zones. The above activities, including training of TANESCO staff, are now receiving financing under the Power Engineering and Techical Assistance Project, which IDA approved in 192. In the meantdme, TANESCO has developed a mini-MIS to assist in monitoring performance under Productivity Improvement Program (PIP). 2.16 Manow Development. TANESCO does not have a systematic manpower development program, or the resources to develop one, and the absence of such a program has affected the peformance of TANESCO adversdy. Therefore TANESCO is placing greater emphasis, in the future, on istitutional and manpower development, which will consist of the following: (i) rationalizing its saffing paer; (ii) improving the staffs managerial, professional and tecnical skills; (ii) providing sustainable capacity tough orderly trsitions from one employee generation to another; (iv) offering adequate inucives to motivate staff performance at opmm levels; and (v) developing and maintaining up-o-date systems and procedures to provide appropriate staff guidance in performing their fincions systematically. 2.17 .ff . TANESCO has put a freeze on staff hiring except to fill essential vacancies pending the preparation of a staffing plan. Considering existing and pending positions, TANESCO would have 7,500 employees, with an employee/customer ratio completely out of line with similar utilities in the region. Also there is an inadequate match between the qualifications and experience of this staff and TANESCO's staffing needs. The detmination of the appropriate size, availability and distrution of staff within TANESCO is an ongoing proress which will depend on the requrements resulting from the utility's Anmual Corporate Plans. However, TANESCO urgently needs to address the availability of resources, an initial revision of the staffing patter and determination of both staffing gaps and redundancies. In order to facilitate this work, TANESCO, as part of the proposed project, has agreed to recruit a manpower - 18- expert externally, and retain the services of this expert for six months. Annex 8.6 provides the terms of reference for this position as agreed between IDA and TANESCO. The expert would review TANESCO's work in each work unit, prepare a detailed stfing plan, and rxcommend the means to implement it. TANESCO has agreed to maintain the freeze on new appointments, pending the results of the staffing assessment. TANESCO also has agreed that it would review staffing proposals with IDA no later than December 31, 1993 and would implement the agreed recommendations by June 30, 1994. TANESCO further has agreed that the qualifications and experience of the candidate being considered, as well as the terms and conditions of his/her employment, would be acceptable to IDA (Schedule 1). 2.18 Training. Training requirements within TANESCO far exceed what TANESCO is able to provide. TANESCO's manement is aware of this and is main,g efforts to bringte lFtvel of t.a' for all its staff to a point which would meet its future managerial, techical and other needs. In this context, here is a need to modify, srngthen and expand present training programs to meet TANESCO's current objectives and evolving requirements under the decentralized organization. Additional instructors and investments in physical facilities also would be necessary to support expanded training activities. An essential element of thel new training program would be greater emphasis on conducting specialhized training at the zones ahid the three major power stations. The administration of training programs which address the common needs of the organization would continue on a centralized basis. Achieving these objectives would require strengthening the personnel training and administrave functions in the zones and at the three major generating stations. Conspondingly, there would be appropriate curilment of these functions at the Head Office. To facilitate realignment of fctions among headquarters, the zones and the power stations, and to introduce and implement new training programs for the managers and supervisors, the proposed project will finance a Management Training and Personnel Expert for a three- year period. This expert, togeier with 1 ANESCO's Director of Personnel as his/her counterpart, will report to the Deputy Managing Director Admmistration, Finance and Corporate Services. Annex 8-5 gives the terms of reference for the Management Development Expert as agreed between IDA and TANESCO. Also, IDA and TANESCO have agreed on the hiring of the Management Training and Personnel expert by January 1, 1994, and that the qualifications and experience of the candidate being considered for this position, as well as the terms and conditions of employment of tne Management Training and Personnel Expert, would have to be acceptable to IDA (Schedule 1). 2.19 For middle and lower level managers and supervisors, it is possible to organize suitable training in upgrading the general management, financial management and supervisory and communications skills within the country. However, it will be necessary to hire training experts from outside the country, for short periods of time, to design and conduct the training programs. These training programs would take place, as the needs dictate, in collaboration with local training institutes and involve local industry representatives who have demonstated exceptional management skills and practices. Bringing together foreign experts and the best available local managers in the training programs should ensure that the training provided is pracdcal, has a problem-solving orientation. and responds to the needs of the utility. Both foreign and local trainers will need to collaborate closely with the Management Training and Personnel Expert in assessing the training needs, preparing and conducting training programs, evaluating the impact of training programs and assisting individual participants in making use of the newly acquired skldls and management practices in their own working enviromnent. 2.20 While TANESCO intends to implement most of its training programs in Tanzania, a selective group of TANESCO managers will require training outside the country. For senior managers, it would be advisable that they not only attend the above-mentioned training programs within Tanzania, but also - 19- gain exposure to specialized external courses which focus on problem solving as well as theoretical courses. 2.21 Financial and Commercial Training. TANESCO's Commercial School in Dar es Salaam teaches basic accounting skills. But the physical facilities of the school are too limited to even serve present needs. Therefore, TANESCO is in the process of constructing a bigger, better-equipped school at Morogoro where, inter alia, commercial and financial training, including triing in computer use, would take place. To make the training programs more responsive to TANESCO's needs, there would be an expansion of the curniculum, placing more emphasis on corporate finance, management information systems and new accounting procedures. TANESCO will hire an expatriate Director of the Institute and an expatriatc .ead Instructor, 'fr about t ye:ars, to assist TANESCO clearly define the objectives of the school, articulate an appropriate strategy for fulfilling them and help design and implement the revised, expanded training programs. IDA and TANESCO have agreed that the hiring of the Director of the Institte and Head Instuctor would take place by January 1, 1994. Also, TANESCO has assured IDA that qualifications and experience of the candidates being considered for these positions, along with the terms and conditions of their employment would be acceptable to the Association (Schedule 1). 2.22 Comnuter Skills Training. TANESCO is in the process of insalling new computers and mplementing up-to-date acounfi and biing procedures, being financed under the recently approved Power Engineering and Technical Assistance Project. The consultants and the suppliers of the software/hardware will train TANESCO staff in implementing and operating the new systems. In addition, that project is also financing training abroad of TANESCO staff in computer science and data base management. However, there is a need to train staff in the use of personal computers. It is possible to provide certain training effectively at the new training center at Morogoro. Some TANESCO employees, particularly those in charge of the MIS data processing and system analysis divisions, would benefit from working with utilities abroad for a few months to obtain more practical experience. The proposed project will provide such overseas training. 2.23 Technical rairi. On the technical side, there are two main problem areas which TANESCO needs to address. These are: (i) deterioration of the distnbution network, due partly to overloading and sbstrd qwJity of work; and (ii) low availability of the diesel stations due mainly to inadequate maintance. TANESCO has a shortage of good-quality, mid-level engineers and technical staff. Also, its craftsmen have received little training. TANESCO needs to train linesmen in upgrading and standardizing the maienance of the distnbution network. There is also a need to train the protection engineers in operatng and mntaining the power grid. Under the proposed project, financing would be available to send line protection engineers overseas for specialized courses. Regarding the linesmen, the consultant who will suprvise the distribution work will also provide them with training. 2.24 TANESCO staff, with the support of FINNIDA, are receiving training iinland on maintaing the diesel plants that TANESCO uses. In addition to this program, long-term training would be necef-ry at the technician level. This type of training would take place at the Technical Training Institute (flI) at Kidatu, which currfftly provides courses in electronics, mechanics and auto-diesel. The proposed project would provide financing of an extemal specialist for a three year period, to assist in preparing course material and provide classroom and practical training, as well as procutnent of a diesel generator, teaching materials and equpment. IDA and TANESCO have agreed that the employment of the Training Expert will take place by January 1, 1994, and that the qualifications and experience of the candidate -20- being considered for this position along with tfe tenns and conditions of employment, candidate would have to be acceptable to the Association (Schedule 1). 2.25 There is also need for training in maintaining hydro stations. TANESCO has recently obtained financing from SIDA to rehabilitate the Kidatu Hydroelectric Plant which includes maintenance training as part of the contract. 2.26 The supply of newly-qualified technicians from TM at Kidatu is insufficient to satisfy TANESCO's requirements. This is partly due to a large number of students leaving before graduating. TANESCO also has faced difficulties in attracting promising students since the school is not recognized at the nattional level. The I tefor requir cx pansion to accommodate a iiaioe vicisive curriculum and pro-vide for rmore students. Worishops, laboratories and classrooms need modern equipment. In a4dition, there should be an increase in the level of the technician's diploma to correspond to the national level in order to attract good students. The Credit for the proposed project would finance the foreign exchange costs of the above requirements. 2.27 Power System Planning. TANESCO has a small group of staff within the Directorate of Planning who have received training from consultants abroad in load forecasting and preparing least-cost generation development plans. They also have participated in reviewing consultant work in this field. However, there is a need to strengthen the unit. The proposed project would finance overseas training for three employees in power system planning. 2.28 Distribution Planning. Recently, TANESCO established a distribution planning unit at the utility's headquarters with the assistance of ESMAP. This unit, however, needs to be expanded and replicated in the zones. The proposed project includes the services of the consultant to set up distribution planning and train TANESCO staff in the zones. IDA and TANESCO have agreed on the hiring of the consultant for taining in distribution planning by January 1, 1994 and that the qualifications and experience of the candidate being considered, along with the terms and conditions of his/her employment, would be acceptable to IDA (Scbedule 1). 2.29 Qn-the-Job Training. TANESCO staff would continue to receive training under contracts for construction work, both as counterparts with the contractors as well as at the manufacturers' facilities abroad. This mode of training has proven to be successful in the past and would continue under the proposed project. 2.30 Productivity Inmrovement and Incentive Program (PIP). In early 1990, TANESCO devised an incentive program aimed at raising the productivity and efficiency at all levels in the company. With the active participation and support of employees at all levels, TANESCO set performance criteria and targets for all operating and functional work units. Under this scheme, the intention was to reward groups of employees achieving agreed performance targets developed by zonal and functional (HQ) teams. Furthermore, TANESCO designed a Management Information System (MIS) to allow accurate and timely monitoring of the performance versus the targets. The PIP was to address many of the chronic problems in TANESCO with the following major objectives: (i) providing high-quality service to power consumers at reasonable cost; (ii) raising productivity and efficiency in all major operating and functional areas of the company so as to maximze output from existing fa,ilities and delay the need for new major investments; (iii) generating sufficient savings through PIP activities to make the program financially self-sustaining and raise the incomes of participants appreciably; (iv) eliminating or reducing power - 21 - system and inventory losses as well as the high level of accounts receivable; and (v) motivating employees to understand and accept TANESCO's overall objectives and actively participate in their fulfilhment, including the need to reduce staff t,o a level that would allow the utility to operate more efficiently. 2.31 The implementation of the program began in March 1991. The program experienced notable success in the initial phase of its implementation. Against the overall planned reduction of 30 percent in workforce (from 6,500 to 4,550) spread ove, a period of three years, actual reduction in the first six months was about 500. The reduction, which took place through a severance package, was consistent with the overall PIP objectives of having a smaller work force with higher productivity at better pay. During the frst six months of PIP inmlementation, employee attendance and attention to work improved with a resultant increase in productivity, as demonstrated by reduction in accounts receivable and operating costs. On the other hand, the employees' compensation nearly doubled. Initial success, however, led to relaxation of commitment on the part of the management with a corresponding lowering of commitment by the participants. Early in 1992, TANESCO took some urgent measures to address this reversal, such as reducing bonuses until performance improved. These measures partially restored the previous level of commitment of the participants as well as the level of their compensation. In order to provide the impetus for the successful implementation of this program, a full-time, experienced person would be necessary to manage it. The project therefore provides financing for the services of an internationally recruited expert for a period of three years. Annex 8.7 provides terms of reference as agreed between IDA and TANESCO. Furthermore, TANESCO has agreed that hiring of the qualifications and experience of the candidate being considered for this position, along with the terms and conditions of his/her employment, would be acceptable to IDA (Schedule 1). 2.32 Institutional Reform of the Power Sector. Earlier this year, the Government of Tanzania issued a policy statement on parastatal reform as a part of a development strategy which emphasizes creating an efficient, well-functioning and rapidly-growing economy. The basic objectives of the parastatal reform program are to: * improve the operational efficiency of enterprises that are currently in the parastatal sector and their contribution to the national ec>iiomy; * reduce the burden of loss-making ,parastatal enterprises on the Government budget; * expand the role of the private sector in the economy, permitting the Government to concentrate public resources on its role as provider of basic public services, including health, education, and social and economic infrastructure; and * increase and encourage a wider participation of the people in the running and management of the economy. 2.33 In line with these objectives, the Government intends to take specific steps to restore the operating eficiency of Government-owned enterprises, both by improving the existing management and supervisory capability and by attracting capital, technical know-how and management resources from the private sector. This will include diversification of shareholding and equity participation in these enterprises. - 22 - 2.34 To implement its institutional reform program the Government has established a Public Sector Reform Commission which the Chairman of the Board of Directors of TANESCO directs. The Bank plans to support the Commission's endeavors through the proposed Public Sector Adjustment and Technical Assistance Credits. Further support to the Commission's work i likely through grants from bilateral donors. 2.35 This project provides institutional strengthening measures to improve the operational efficiency and financial performance of TANESCO in line with the Govermnent's parastatal reform objectives. Successful implementation of these measures will help establish TANESCO as a well-managed, financially self-sustaining entity and facilitate a move to privatize portions of the utility. As a first step, TANESCO proposes to offer for sale to private investors all or part ot the transmission and distribution line construction. TANESCO will contract these services in future. To this end, the government has agreed to offer TANESCO's transmission and distribution constuction business for sale to pnvate investors by December 31, 1993 (para 7.1(i)). 2.36 TANESCO has already started restructring itself so as to facilitate possible privatization (para 2.5). It has decentralized its distribution operations and is upgrading management in its seven distribution zones. Under the Engineering Credit (Cr. 2330-TA), TANESCO will install independent accounting and customer service systems in each zone. These zones may serve as the nuclei of fure independent distribution compames. It is relatively easy to privatize distribution compai and regulate tariffs using indexed formulas so as to promote competition with a conceptual "ideals company for the zone and this will be explored in a study (para 2.39). A prerequisite for privatization of the distnuton zones is permittng competition in generation. At present, TANESCO does not have a legal monopoly for generation, so there is no existing legal impediment to competition in generation. In fact, both the Government and TANESCO are actively seeking private participation in the provision of emergency thermal generation and development of gas based generation using the gas from the Songo Songo gasfield. 2.37 The aforementioned approach to institutional reform is consistent with experience in other countries, which has shown that privatization is most successful through the division of the utility into its component parts so as to separate those parts that are natural monopolies from those in which competition is possible. In this way, normal conmmercial forces regulate the operadon of the parts in which competition is possible, restricting the regulatory effort to the parts that are natural monopolies. Annex 7.2 discusses the advantages and disadvantages of various feasible structures for the sector. 2.38 Carefil planning is essential for successful instdtutional reform, including privatization. Some of the major issues the transiton must address are the following: * The inMact of the changes on employment Although any new entidtes formed would absorb many of the present employees, special provisions will be necessary to retrain and find useful employment for those employees not hmmediately required. * Phase-in gf tarff cges Tariff changes need to be co n with improvements in the reliability and quality of electricity supply to minimize opposition by the customers. * Legal frork The legal framework governing the sector needs revision to accommodate the proposed structure and provide a mechanism for setting disputes between all interested parties. - 23 - * Regulatory framework A regulatory framework ppropriate for supporting the selected option must be finnly in place at the introduction of die new structure. This framework nmust address price, safety, quality of supply and environmental issues. * Valuation and tmsfer of assets and debt The assets of any entity under restructuring need commercial valuation and will require rational decisions on the transfer of the assets, and the responsibility for debt service. * Power Sector Planing: For a decentralized option, it is necessary to form an organi7ation to plan the sector biut the activities of this organization must not 1w;zfere with competition in the sector. Rather, the organizaton should guide rationa development by collecting, analyzing and providing information on rational generation and transmission expansion strategies. An important part of this organization's work would be idenifying sites and evaluating potential hydroelectric resources. Also, it would have to evaluate effects on the ecology and settlements, as well safety issues. - Managi the transi: Special adminisfttive arrangements by the Government and the Utility would be necessary for managig the transition and resolving problems as they arise. 2.39 The project includes consulting services to help the government and TANESCO examine options for institutional reform, set up the necessary regulatory framework, and create a timetable for implementation and the first steps. Terms of reference for the work are shown in Annex 8.8. To start the process as soon as possible, the Government has agreed with IDA to engage consultants, no later than January, 1994 to: (i) prepare a study examining options for institutional reform, including privatization; (ii) review the study's recommendations along with IDA's comments; (iii) agree with IDA on the plan of action; and (iv) implement the plan (para 7.1(ii)). Furthermore, IDA and the Government have agreed that the aforementioned review should take place by the end of June 1994 (para 7.1 (vii)). ZSFPC 2.40 ZSFPC is the public company responsible for administering electric power distribution to the island of Zanzibar, which is supplied via an iterconnecting submarine cable. At present, ZSFPC experences difficulty in managig its commercial operations because of both a lack of an experenced commercial manager and outdated billing and collection systems. Under the project, ZSFPC will supervise a US$2 million component which addresses the company's rstructuing and improvement of its commercial activities (para 4.31). m. THE ELECTRICITY SUB-CTOR Overview 3.1 Tanzania has experienced high electricity demand growth in recent years due to an upswing in economic growth, which followed a period of virtual stagnation in the early 1980s. This increased demand, coupled with only panal availability of generating units due to drought and repair, has resulted in a system which is operating under a severe supply constraint. As a result, the system will contne to experience energy deficits in the short term. Forecasts of electricity demand indicate a continued high rate of growth, though not as high as during recent years due to the impact of expected efficiency improvements, tariff increases and demand management measures. The following sections describe existing power failitics, outie recent deman and generauon trends, and provide a load forecast which serves as the overall framework for the proposed project. Exisin Power Sector Facilities 3.2 Generation System. TANESCO provides electrical energy to its consuiers through an interconnected system which receives its supply from hydroelectric and diesel generating stations. The total installed capacity of the system is 474 MW of which 326 MW is hydropower. Two major stations, located west of Dar es Salasm, in the Great Ruaha River basin, supply the bulk of hydropower to the system: (i) the Kidatu station, built in 1975, with an installed capacity of 204 MW; and (i) the Mtera station, built in 1988, with a total installed capacity of 80 MW. The output of Kidatu has been about 153 MW since 1989 due to the failure of one unit and more recenty declined to about 95 MW due to low reservoir levels caused by drought conditions. SIDA financed the repair of the unit, which was put back in service in late 1992, and in financing the replacement of exciters on the other units. The proposed project includes additional work reqwired to improve reliability at this generating station. Moreover, the mtera station has been operating at only 30 MW due to low reservoir levels, since October 1992 (para 4.2). Tbree smaller stations in the Pangani River basin, built in 1934, 1964, and 1969, with a total available capacity of 42 MW, are also connected to the system. In addition, ten diesel generating stations, in varying stages of availability, provide an alternative source of energy during low river-flow periods, and during equipment failures. A second-hand gas turbine (13.5 MW), installed at Ubungo in 1973, has been out of commission for several years. The forecast demand for electrical energy indicates that additional thermal generation will be required immediately to meet peak demand and energy requirements, especially if poor hydrology prevents the Kidatu and Mtera stations from operating at maximum capacity. 3.3 TANESCO also owns and operates 20 small diesel generating stations, providing service to isolated areas too distant to receive electricity supply from the grid. Finland, through FINNIDA, has provided many of these units and also has an extensive program for repairing tem and providing maintenance training. Additionally, there are a number of private generating plants. These plants service sugar, tea, and cotton estates, with a total installed capacity of about 43 MW. Annex 3.4 provides a list of the existing generating facilities. 3.4 Load Disptgch Center. TANESCO inlled a new load dispatch center in 1990 with financing from KfW. Unfortunately, the available fimds were inadequate, and the contract did not include several featumes which would have improved the system. Also, there are several equipment deficiencies, both in - 26 - the center and in the various sub-stations, which prevent accurate data transmission. Completion of this facility and upgrading the data transmission system are components of the proposed project. 3.5 Tasmission and Distribution Systems. Transmission and distribution lines operating at 220, 132, 66, 33 and 11 kV deliver elect- -'wer to the system's customers. There are about 1600 km of 220 kV lines, which form the main transmission link between Kidatu and Dar es Salaam (via Morogoro), with an interconnection to Mtera to the southwestern section down to Mbeya on the border with Zambia, and the northwestern section up to Mwanza on the shore of Lake Victoria. The 132 kV network, consisting of about 1200 kn of lines, supplies the towns of Musoma, Tabora, Tanga, Moshi and Arusha, as well as other small load centers in the western part of the country. It also connects Zanzibar with mainland Tanzania through a submarine cable. In addition, 128 km of 66 kV lines connect the hydro station at Nyumba ya Mungu and the Moshi area via Arusha. Annex 3.4 provides a list of these lines and IBRD Map 22162 shows their location. These transmission lines are in good operating order, except the 132 kV line in the vicinity of Dodoma. TANESCO has received CIDA fimds to repair defects in this line. 3.6 TANESCO operates about 3,000 km of 33 kV lines and 2,900 km of 11 kV lines, as wei as 440/220 V lines to small consumers. Some of this low-voltage system has deteriorated or is severely overloaded. Frequent, unplanned shutdowns on the 33 kV and lower voltage lines have reached a level that imposes significant costs on industrial and commercial consumers and causes inconvenience to the domestic consumer. The proposed project includes the repair and rehabilitation of these lines in the main load centers. 3.7 Insuramce. Duties and Taxes. TANESCO's insurance coverage is typical of other power utilities; it covers fire, public liability, and comprehensive coverage on vehicles (third party only on vehicles over six years old) as well as group personal accident insurance for its employees, but it does not cover machinery or equipment breakdown. The latter is self-insured because it is very expensive, and claims, are fiequently hard to settle because of the difficulty in assigning responsibility. The coverage is adequate. The insurer is the sole Government isurance company, the National Insurance Corporation, which re-insures with the European market. TANESCO is exempt, on request, from duties on imported equipment and parts, but is subject to corporate tax. Access to Electricity 3.8 Tanzania has a population of about 25 million people but only 6% have access to electricity because it is available only to those living in the major cities and towns. The system rehabilitation component of the proposed project will examine options for lowering the cost of distribution, thus making electricity more affordable for rural populations. Electricity Demand and Suplv 3.9 After a period of practically no economic growth in the 1980s, electricity demand rose rapidly in the second half of the decade, in large measure due to the government's Economic Recovery Program. During 1985-90, electricity demand averaged 10.3 percent annually compared to an average GDP growth rate of about 4.5 percent. Maximum demand on the system concurrently increased at an average yearly rate of 7 percent. In 1990, total electricity generation was 1,565 GWh in the i system and 64 GWh in the isolated diesel systems. Corresponding electricity sales amounted to 1,304 GWh with - 27 - maximm demand at 297 MW. Since 1985, the share of isolated diesel generation has declined from about 10% to around 4% due to the increasing integration of these units into the main grid. 3.10 Sales of electricity amounted to 1304 GWh in 1990 of which industrial and commercial consumers accounted for 54 percent; residential consumers for 31 percent; the National Urban Water Authority (NUWA), public lighting and bulk sales to Zanzibar for 10 percent; and agriculture for 5 percent (Table 3. l).S/ As noted in Table 3. 1, the combined share of industrial and commercial electricity consumption in total consumption has declined markedly since the 1970s, when it averaged 80 percent of sales.
Groupe de la Banque mondiale · Staff Appraisal Report
Tanzania - Sixth Power Project
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