Tanzania - Songo Songo Gas Development and Power Generation Project

Document of The World Bank ReportNo: 21316-TA PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 145.7 MILLION (US$183 MILLION EQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR A SONGO SONGO GAS DEVELOPMENT AND POWER GENERATION PROJECT August 21, 2001 Energy Team Infrastructure Group Africa Region  CURRENCY EQUIVALENTS (Exchange Rate Effective June 20, 2001) Currency Unit = Tanzania Shilling (TSh) I Shilling US$0.001 1 US$1 TSh890 FISCAL YEAR Government = July I to June 30 TPDC, TANESCO and Songas = January 1 to December 31 WEIGHTS AND MEASURES 1 kilometer (km) = 0.62 miles I kilowatt hour (kWh) = 1,000 watt hours I megawatt (MW) = 1,000 kilowatts I gigawatt hour (GWh) I million kilowatt hours I kilocalorie (kcal) 3.97 British thermal units (Btu) I ton of oil equivalent (toe) = 40.5 million standard cubic feet of gas (39.7 million Btu) ABBREVIATIONS AND ACRONYMS AES = The AES Corporation, the Sponsor AFUDC = Allowance for (Equity) Funds Utilized During Construction bcf = Billion cubic feet CDC = Commonwealth Development Corporation DFI = Development Finance Institutions (CDC, TDFL) EHS = Environment, health and safety EIB = European Investment Bank ERR = Economic Rate of Return ESMP = Environmental and Social Management Plan EWURA = Energy and Water Utilities Regulatory Authority IA = Implementation Agreement IDA = International Development Association IDC Interest during construction IRR = Internal Rate of Return MEM = Ministry of Energy and Minerals Mmcf/d = Million cubic feet per day Mmbtu = Million British thermal units Mcf = Thousand cubic feet NEMC = National Environment Management Council NPV = Net Present Value O&M = Operation and maintenance PAT = PanAfrican Energy Tanzania Limited PAE = PAE PanAfrican Energy Corporation PIP = Project Implementation Plan PMU = Project Monitoring Unit PPA = Power Purchase Agreement PSAC = Programmatic Structural Adjustment Credit PSMP = Power Sector Master Plan PWC = Present Worth Cost SHA = Shareholders' Agreement Songas = Songas Limited, the new private gas and power utility TANESCO = Tanzania Electric Supply Company Limited TDFL = Tanganyika Development Finance Company Limited TPDC = Tanzania Petroleum Development Corporation WVES = Wayleave Village Electrification Scheme Vice President: Callisto Madavo Country Director: James W. Adams Sector Manager: M. Ananda Covindassamy Team Leader: Karen Rasmussen  TANZANIA SONGO SONGO GAS DEVELOPMENT AND POWER GENERATION PROJECT CONTENTS Page Number 1. Project Development Objective 2 A. Project Development Objective 2 B. Key Performance Indicators 2 II. Strategic Context 3 A. Sector-related Country Assistance Strategy (CAS) Goal Supported by the Project 3 B. Main Sector Issues 4 C. Government Strategy 5 D. Sector Issues to be Addressed by the Project and Strategic Choices 6 III. Project Description Summary 6 A. Project Components 6 B. Key Policy and Institutional Reforms Supported by the Project 6 C. Benefits and Target Population 7 D. Institutional and Implementation Arrangements 8 E. Project Rationale 12 F. Major Related Projects Financed by the Bank and/or Other Development Agencies 14 G. Lessons Learned and Reflected in the Project Design 15 H. Indications of Borrower Commitment and Ownership 15 I. Value Added of Bank Support in this Project 16 IV. Summary Project Analysis 16 A. Economic 16 B. Financial 18 C. Technical 23 D. Institutional 24 E. Environmental 24 F. Social 25 G. Participatory Approach 26 H. Safeguard Policies 27 V. Sustainability and Risks 28 A. Sustainability 28 B. Critical Risks 29 VI. Main Credit Conditions 29 A. Effectiveness Conditions 29 B. Conditions of Disbursement 30 C. Dated Covenants 30 VII. Readiness for Implementation 31 VIII. Compliance with Bank Policies 31  Annexes Annex 1. Project Design Summary Annex 2. Detailed Project Description Annex 3. Estimated Project Costs Annex 4. Cost-Benefit Analysis Summary Annex 5. Financial Summary for Revenue-Earning Project Entities Songas TANESCO Annex 6. Procurement and Disbursement Arrangements Table A. Project Costs by Procurement Arrangements Table Al. Consultant Selection Arrangements Table B. Thresholds for Procurement Methods and Prior Review Table C. Allocation of Loan Proceeds Annex 7. Project Processing Budget and Schedule Annex 8. Power Sector Reform Program Annex 9. Songas Corporate Structure and Risk Allocation Annex 10. AES and PAE PanAfrican Energy Corporation Annex 11. Songas Contractual Agreements Annex 12. The Gas Subsector Annex 13. Environmental and Social Impact Assessment Summary Annex 14. Documents in the Project File Annex 15. Statement of Loans and Credits Annex 16. Country at a Glance Maps IBRD 28096 and 28097  TANZANIA Songo Songo Gas Development and Power Generation Project Project Appraisal Document Africa Regional Office AFTEG Date: August 21, 2001 Team Leader: Karen Rasmussen Country Director: James W. Adams Sector Manager: M. Ananda Covindassamy Project ID: P002797 Sectors: Gas Development and Power Generation Lending Instrument: Specific Investment Loan (SIL) Theme(s): Energy Poverty Targeted Intervention: N P-rojet Financing Data- ] Loan [X] Credit [ ] Grant [ Guarantee [ ] Other For Loans/Credits/Others: Amount (US$M): 183.0 Proposed terms: (IDA): Standard Credit Grace period (years): 10 Finaiing Plan (S$M): Source Local Foreign T- 1:- Euuity AES Corporation (the Private Sponsor) 5.5 44.5 50.0 CDC 2.0 16.0 18.0 EIB/TDFL 0.4 3.6 4.0 Debt EIB 5.6 34.4 40.0 IDA 24.2 158.8 183.0 Government 0.2 0.0 0.2 Total: 37.9 257.3 295.2 Borrower: UNITED REPUBLIC OF TANZANIA Responsible agencies: SONGAS AND THE MINISTRY OF ENERGY AND MINERALS Songas Address: Third Floor, Maarifa House, Ohio Street, P.O. Box 6342, Dar es Salaam, Tanzania Contact Person: Mr. Jim McCardle, Managing Director, Songas Tel: (255 22) 2117313 Fax: (255 22)2113614 Email: jim_mmcardle(songas.com Ministry of E:nergy and Minerals Address: Samora Avenue, P.O. Box 9024, Dar es Salaam, Tanzania Contact Person: The Permanent Secretary, Attention Mr. Bashir Mrindoko, Commissioner for Energy and Petroleum Affairs, Ministry of Energy and Minerals Tel: (255 22) 2139455 Fax: (255 22) 2120799 Email: mrindoko-mem@raha.com Estimated disbursements (Bank FY/US$m) FY 2001/02 202/03 2003/04.- 2004405 - 20Il Annual $19.5 $145.4 $ 12.7 $ 3.3 $ 2.1 Cumulative $19.5 $164.9 $177.6 $180.9 $183.0 Project implementation period: Four and a half years Expected effectiveness date: October 31, 2001 Expected closing date: March 31, 2006 Implementing agencies: Songas and the Ministry of Energy and Minerals  2 I. PROJECT DEVELOPMENT OBJECTIVE A. Project Development Objective (see also Annex 1) 1. The main development objective of the proposed project is to develop Tanzania's natural gas reserves to produce least-cost power generation for domestic and industrial use in an environmentally sustainable and efficient manner. The project will promote private sector ownership and management in the gas and power sectors. In addition, it will encourage increased access of the poor to electricity supply by developing financially and institutionally sustainable rural energy schemes to presently unserved areas along the pipeline corridor. 2. Several analyses, most recently the June 1999 Power System Master Plan and its November 2000 update, have concluded that the proposed project forms the first component of the least-cost power development program to satisfy Tanzania's electricity requirements. In addition, the project supports the most environmentally sustainable solution to generate power because: (a) it uses the cleanest available fuel source for energy production; (b) it will provide cheaper and more affordable electricity and fuel for industrial use; and (c) the gas infrastructure system and Ubungo Power Plant will be owned and operated by the private sector. 3. Songas, a limited liability majority privately owned and managed company, has been established to develop, construct, own and operate the project. Songas will be responsible for processing natural gas from the Songo Songo Island reservoir and transporting it to Dar es Salaam by pipeline. Some of the gas will be delivered to the existing Ubungo Power Plant (112MW) which will be upgraded and converted to operate on gas. Also, the Ubungo Power Plant will be privatized, and its debt will be assumed by Songas in exchange for the issue of shares. Power produced at the Ubungo Power Plant will be available for sale to the Tanzania Electric Supply Company Limited (TANESCO), and the remaining gas will be available for commercial use including to the Twiga cement plant at Wazo Hill. 4. Under the project, a private sector joint venture consortium between PanAfrican Energy Tanzania Limited (PAT) and the Tanzania Petroleum Development Corporation (TPDC) will be established. It will be responsible for developing and marketing gas to commercial and industrial users and for exploiting opportunities for exports to neighboring countries. Under the terms of the Contractual Agreements, Songas is obligated to transport gas to end users, applying a transparent transportation pricing mechanism. Almost all of the revenues resulting from incremental gas sales (above those to the Ubungo Power Plant) will accrue to: (a) TANESCO, and thus power consumers in the form of a reduced transportation charge, which will decrease the capacity payments to be made by TANESCO to Songas; (b) the Government in the form of additional gas fees; and (c) PAT and TPDC for the production and sale of gas in accordance with the terms of the Production Sharing Agreement. B. Key Performance Indicators (see also Annex 1) 1. The performance indicators listed below will measure the impact of the project on the macro-economy and on the power sector. They will reflect the reduction in the dependence of Tanzania on more costly imported fuel, the increased use of natural gas for power generation and for industrial use, the impact of the project on private investment in the energy sector, and the potential for exports to neighboring countries: * Domestic gas consumption for electricity generation and cement production (Mmcf/d): Increasingfrom project commercial start in September 2003 from 24 Mmcf/d to about 30 Mmcf/d in 2006; * The level of (domestic and foreign) private investment in energy and gas infrastructure: Increasing annuallyfrom 2004 by US$5 million; and  3 Creation of an enabling environment to promote efficient gas utilization: Establishing a transparent pricing mechanism for gas production and transport; providing open access to the pipeline for future gas producers and users; and regulating by contract to produce efficient transactions (until a gas regulatory function would be warranted). 2. These indicators will be made available in Government and Bank economic reports, gas and power sector statistics and Songas annual reports. The above performance indicators only capture gas sales related to the 112MW Ubungo Power Plant and those anticipated to the Twiga cement plant. With additional gas-based power generation expected to be required through 2007 to meet the country's least cost power expansion needs (for which generation investments are not financed under the project), the gas pipeline infrastructure would be fully utilized. This will also result in a corresponding increase in gas revenues accruing to the Government. II. STRATEGIC CONTEXT A. Sector-related Country Assistance Strategy (CAS) Goal Supported by the Project Report No. IDA/R2000-90(IFCIR2000-96) Date of latest CAS discussion: June 15, 2000 (see also Annex I) I. The project supports the CAS objectives of promoting sustainable growth and poverty reduction through: (a) expanding the role of the private sector in the provision of infrastructure services, both in the power sector and in the development of a privately owned and managed gas infrastructure system; (b) the development and efficient use of indigenous natural resources in line with Tanzania's comparative advantage and following the least cost principles of power generation expansion; and (c) encouraging increased access of the poor to electricity supply through the design of sustainable rural electricity and community development schemes along the pipeline corTidor. The following performance indicators will measure the impact of the project in respect of the CAS objectives: * The foreign exchange savings from domestic fuel substitution for power generation and industry: Increasing from US$42 million in 2004, to US$44 million in 2006;