Zambia - Kariba North Hydroelectric Project

RESTRICTED ||ITRU (OF (0)Report No. P-843 This report was prepared for use within the Bank and its affiliated orgonizations. They do not accept responsibility for its accurocy or completeness. The report may not be published nor may it be quoted as representing their views. INTENATIONAL BANK PO12 RECONSTizUCnoN AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KARIBA NORTH BANK COMPANY WITH THE GUARANTEE OF THE REPUBLIC OF ZAMBIA FOR A HYDROELECTRIC POWER PROJECT June 24, 1970  2 rE-'T.;.IOI-L BAE! FOR RECOZSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE IARIBA NORTH BANK COMPANY FOR A HYDRO-ELECTRIC POWER PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US $40 million to the Kariba North Bank Company (KNBC) for the construction of a 600 MW power station on the north bank of the Zambezi river in Zambia. The loan will be guaranteed by the Republic of Zambia. PART I - HISTORICAL 2. The present project is the second stage of the Kariba hydro-electric scheme. The first stage, financed in part by Loan No. 145-RN of $80 mil- .ion in 1956, consisted of a dam on the Zambezi river, a 705 MW power station (Kariba South) on the south bank of the river, and a transmission system interconnecting existing generating stations and load centers in Southern and Northerm Rhodesia. Other sources of loan finance were: the Commonwealth Development Corporation (CDC) which lent i 15 million, the Commonwealth Development Finance Company (CDFC) which lent i 3 million, and the Federation of Rhodesia and Nyasaland (the Federation) which lent OR 28 million. 3. The various loans for the first stage, including the Bank loan, were all made to the Federal Power Board (FPB). The Bank, CDC and CDFC loans were guaranteed by the Govermzents of the Federation of Rhodesia and Nyasaland (the Federation). The Bank loan was,in addition, guaranteed by the United Kingdom. The project was completed on schedule in mid-1962 at a cost of US $217 million, about 5% below the initially estimated cost. 4. When the Federation dissolved at the end of 1963, the United Kingdom established, by an Order-in-Council, the Central African Power Corporation (CAPC), which assumed the obligations of the FPB under the Bank's loan agreement. NIorthern and Southern Rhodesia each respectively assumed the guarantee of half of the amount of the Bank loan previously guaranteed by the Federation. The United Kingdom guarantee remained in force. 5. In October 1964, the Bank made a loan (392-RNS) of US $7.7 million to CAPC to assist in financing a second transmission line between Kariba South and the Copperbelt in Northern Rhodesia and the expansion of sub- stations. This loan was guaranteed as to half each by Northern and Southern Rhodesia, with the guarantee of the United Kingdom for the whole amount of the loan. The project was completed in October 1968 at a cost (US $15.3 million) slightly less than had been estimated.  - 2 - 6. The Republic of Zambia, established as an indePendent nation in October 196h, assumed the responsibilities of Northern Rhodesia in respect of the guarantees for loans 145-RN and 392-RNS. 7. The Unilateral Declaration of Independence (UDI) by Southern Rhodesia in November 1965 had a number of consequences for CAPC and its creditors. In the first place CAPC was unable to obtain from the Govern- ment of Zambia and the Smith regime in Southern Rhodesia foreign exchange to service its external loans. Since December 1965 the United Kingdom, as Guarantor, has paid on the Bank loans the 50% due from CAPC in Southern Rhodesia. Zambia is paying, also as Guarantor, the other half. CAPC reimburses the Zambian Government in Kwacha for payment made to the Bank by Zambia as guarantor, and pays the other half in Rhodes:an currenev into a blocked account in Southern Rhodesia in the name of the British Govern- ment. 8. Payments due by CAFC under the CDC and CDFC loans are also affected. The Zambian Government and the Smith regime now refuse to grant foreign exchange transfer permits to CAPC for payment of its debt service on these loans. Zambia pays as Guarantor half of the amount due. CDC has obtained judgments against CAFC in Zambian courts requiring CAPC to pay, in Kwacha, the other half, but the funds so recovered are sub-,ect to Zambian Exchange Control; although usable in Zambia for approved purposes their direct transfer into sterling has not been permitted. On the CDFC loan, the half of the payments not made by Zambia as guarantor is being paid by CAPC into bloclced accounts in Southern hlodesia. Debt service on the government loans has been duly paid by CAPC in Zambia and Southern Rhodesia. 9. When the Federation was dissolved, the United Kingdom established by Order in Council a Higher Authority for Power consisting of two ministers from Northern Rhodesia (later Zambia), and tiwo from Southern Rhodesia. The Higher AuthDrity for Pbwer was required to approve major commitments by CAPC and also appointed the Chairman of the CAFC Board and one member acceptable to CDC. The Board consisted in addition of three members appointed by Northern Rhodesia (later Zambia) and three by Southern Rhodesia. The quorum was five. Following UDI the Higher Authority for Power ceased to function. When the terms of office of the Chairman, the CDC member and the Southern Rhodesian members expired the Board itself was without a quorum, and CAFC could not enter into major new commitments. Day-to-day operations have carried on under a Committee consisting of three Zambian members, three members from Southern Rhodesia and the Chairman of CAPC, who has remained in function after his legal term of office expired. 10. In the above circumstances, it was impossible for CAPC to carry out its expansion program, in particular the construction of a second station of up to 900 NW on the north bank of the Zambesi river, which had been planned to be started immediately after completion of Kariba South, with the completion of the first unit in 1970. Faced with the prospects of serious power shortage if supplies of power from the CAPC system were  - 3 - ni,erru?ted, tlhe 7amV,an Go.ernm.ent undertook to build two small hydro stations (one of which is completed) at Victoria Falls, and the first stage of amajor power development on the Kafue river. Construction at Kafue oegan early in 1967, financed by the Government of Zambia and Yugoslav contractors. The station will have an installed capacity of 600 HW, expandable to 900 MI, but until upstream storage is provided in a second phase, firm outout will be little more than 200 M\d. Kafue Stage I, estimated to cost about US$115 million, is scheduled to be completed in 1971. Upstream storage and installation of two additional 150 IpThJ genera- ting sets at Kafue will require an additional investment of approximately US$65 million. Even with the power becoming available from Kariba North in 1974/75, the expected power demand in the two territories served by CAPC by 1977/78 will be such that a decision on the construction of Kafue Stage II may have to be taken as early as 1972. 11. By 1968 it became clear that the power from Victoria Falls and Kafue Stage I would not be sufficient to meet the growing demands on the CAFC system. A 1969 report by CAPC's consultants recommended the early construction of Kariba North (600 MW, expandable to 900 MfA), expansion of transmission systems in Zambia and Southern Rhodesia, followed by the con- struction of Kafue Stage II at a later date. The Government of Zambia (GRZ) and CAFC accepted these recommendations, and the Bank was asked to consider financing the foreign exchange cost of those parts of the CAPC program located in Zambia. 12. The political, legal, financial and administrative problems created by UDI that stood in the way of the implementation of the CAPC program were considered at great length by the governments of the United Kingdom and Zambia, together with the Bank, and at a meeting in London in mid-196