Liberia - Power Expansion Project

RESTRICTED Report No. P-814 70,qA 6s9-L>za This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PUBLIC UTILITIES AUTHORITY OF LIBERIA FOR A POWER EXPANSION PROJECT WITH THE GUARANTEE OF THE REPUBLIC OF LIBERIA May 11, 1970  INTTERNATIONAL BANK FOR RECONSTRUCTION MID DEVELOB-{NT REPORT PAD REC ZgI'TDATIONI OF TYE PRESIDEIT TO THE EX;-.CUTI-JE DI1EO''CRS ON A Pui.OPO61D LOAN TO THE PUBLIC UTILITIES AUTHORITY OF LIBERIA WITH THE GUARA4TEE OF THE REPUBLIC OF LIBERIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$7.4 million to the Public Utilities Authority (PUA) in Liberia to assist in financing a power expansion program. PART I - HISTORICAL 2. The Government approached the Bank for financial assistance for power expansion in September 1968. However, consideration of the Govern- ment's request had to await the outcome of a U.S. AID-financed study of Liberia's power development and investigation of alternative means of meeting the expected power requirements. The consultants' final report was received at the end of August 1969. After the Bank had reviewed the report, it appraisedthe project in November 1969. 3. Negotiations were held in Washington from April 30 to May 7, 1970. The Borrower and the Liberian Government were represented by The Honorable Taylor Major, Secretary of Public Utilities, Mr. Frank Stewiart, Under Secretary of the Treasury for Fiscal Affairs, and His Excellency S. Edward Peal, Ambassador of Liberia to the United States. 4. The following is a statement of Bank loans to Liberia as of April 30, 1970: Amount (US$ million) Loan No. Year Borrower Purnose Bank Undisbursed 368 LBR 1964 Republic of Road Con- 4.2 _ Liberia struction 617 LBR 1969 Republic of Port Liberia Develop- 3.6 1.7 ment Total 7.8 of which has been sold .3 Total now held by the Bank 7.5 Total undisbursed 1.7  - 2 - 5. The road project financed by Loan 368 LBR has been completed; the port dredging project financed by Loan 617 LBRL is under execution and progress is satisfactory. 6. The Government's request for Bank Group assistance for rubber rehabilitation and replanting and for power distribution are under consideration and are scheduled to be appraised later this year and early next year, respectively. PART II - DESCRIPTION OF THE PROPOSED LOANI 7. BORROITER: Public Utilities Authority GUARANTOR: Republic of Liberia AMOUNT: Equivalent in various currencies of US$7.4 million PURPOSE: To finance the foreign cost of generating facilities, a trans- mission line, and consulting services. AMORTIZATIOM: In 20 years, including a 5-year grace period, through equal semi- annual installments beginning on July 1, 1975 and ending on January 1, 1990. INTEREST RATE: 7% per annum CON11ITNENT CHARGE: 3/4 of 1% per annum. PART III - THE PiROJECT 8. The appraisal report entitled "Appraisal of Public Utilities Authority Power Expansion Project, Republic of Liberia" (PU-38a) is attached. 9. The Borrower (PUA) is a statutory corporation with a 10-member Board of Directors appointed by the President of Liberia. It was estab- lished in 1962 with responsibility for generation and distribution of power.  - 3 - The Authority was subsequently also made responsible for wiater and sewer- age operations. The Authority generates about 35 percent of the total power consumed in the country, serving Monrovia and Buchanan, an important port for iron ore exports. The remaining 65 percent is generated by captive plants principally of the iron ore companies. As agent of the Government PUA also generates and distributes electricity in six secondary centers. As these operations are uneconomic, the Government compensates PUA for losses, and has undertaken to continue to do so. 10. FUA's power market has been growing in recent years at an annual average rate of 21 percent and the average annual growth rate during the next 5 years is estimated at 17 percent. PUA's power generation and distr_'i- bution program for 1970-74 is estimated to cost US$21.4 million, of which $15.3 million, or 70 percent, is expected to be financed from external loans and the remaining US$6.1 million, or 30 percent, from internal cash generation. Taking into consideration the proposed Bank loan and other borrowings, PUA would require additional assistance of US$5.3 million through 1974. PUA expects to borrow this amount from tlhe Bank and other sources. 11. The project would consist of installation and commissioning of one 17 MW turbine-generator unit (No. 3) for the existing IMount Coffee power station; civil works for Units 3 and 4; excavation only for Unit 5; installation of two 15 MW gas turbine units; construction of 15 miles of transmission lines; and consultants, services for Mount Coffee expansion and a distribution study. The cost of the project is estimated to be $9.7 million. The proposed Bank loan of US$7.4 million would finance the foreign cost of the project, representing 76 percent of the total. 12. The proposed expansion program represents the least-cost means of meeting demand for power. The rate of return on the incremental hydro- investment would be 15 percent. The incremental financial rate of return on the proposed investment as a wihole, including gas turbines required to firm up Mount Coffee power, is estimated at 20 percent. 13. PUA staff is generally competent. Since 1963 PUA has had a management contract with an American consulting firm, Sanderson & Porter. Assurances have been obtained during negotiations that PUA will delegate greater responsibility to its Liberian staff, with a view to train;ing them for management positions and phasing out management consultants in a reasonable time. There are a number of procedural deficiencies. PUA has undertaken to engage extra staff to remedy these deficiencies, parti- cularly in the area of accounts receivables, meter reading and disconnec-nr< services. 14. In the past PUA has not alwxays run its operations along sound commercial lines. In 1967 power rates were reduced by an average of 23 percent to mark the completion of the first phase of the IMount Coffee project. This caused the rate of return on average net fixed assets  in operation to fall to 4.2 percent in 1968. Assurances have been obtained that PUA will not reduce its tariffs during the loan disbursement period, and would set rates to enable it to earn a rate of return of at least 10 percent on its power department's average net fixed assets in operation as from the beginning of 1974, thereby ensuring that it would be able to meet about 30 percent of future power construction requirements. Debt service will be barely covered in 1970, and PUA has agreed not to incur any further long-term debt unless peak debt service in any succeeding year is covered at least 1.5 times by internal cash generation. 15. PUA intends to apply commercial standards also to its water and sewerage operations. The financial return from these operations has been 1 low or negative, but PUA has undertaken from January 1, 1974, to ensure that revenues from water and sewerage operations cover operating costs and debt service and make a contribution to capital. 16. Procurement will be on the basis of international competitive bidding. Consultants will be engaged for design review, and preparation of tender documents and specifications for Mount Coffee. The staff of the Borrower, with the assistance of their management consultants, is capable of installing and commissioning the gas turbine units and is also capable of designing and erecting 69 KV transmission lines. The cormis- sioning of the first gas turbine unit is scheduled for March 1971 and the second for March 1972. The hydro unit at Mount Coffee will be in service in March 1973. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 17. The draft Loan Agreement between the Bank and the Public Utilities Authority and Guarantee Agreement between the Republic of Liberia and the Bank, the Report of the committee provided for in Article 3 Section V(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft Loan Agreement and the draft Guarantee Agreement substantially follow the pattern of loan and guarantee agreements for pow3r projects. The following provisions, in addition to those referred to abovee, are of particular interest: (a) PUA will not engage in any non-power activities other I ', than water and sewerage unless it shall have first - satisfied the Bank that the extension of its present activities shall not adversely affect the efficiency of power operations (see Section 5.14 of the draft Loan Agreement), and (b) Except as the Bank shall otherwise agree, the Guarantor shall give the Borrower priority in the use of the flow of the St. Paul river up to a natural flow of 18,300 c.ft. per second for power generation at Mount Coffee (see Section 2.06 of the draft Guarantee Agreement).  - 5 - PART V - TIE ECONOMY 18. Liberia has a dual economy with enclave operations in iron ore mining and rubber plantations and a large and underdeveloped agricultural sector which provides a living for over 70 percent of the population. While per capita GNP is estimated at around $230, per_capiaYinJnms.ato side the enclave operations are probably hardly r. 19. The report entitled "The Current Economic Situation and Prospects of Liberia" (AW'-5a) which was circulated to the Executive Directors on June 2, 1969, noted that the economy of Liberia had continued to grow at a satisfactory rate during the 1960's, mainly due to strongly expanded iron ore and rubber production; GDP in real terms increased by 4 percent between 1960 and 1967. In 1968, GDP in real terms is estimated to have grown at about 5 percent. No GDP estimate is available for 1969, but iron ore and rubber production are known to have increased substantially; iron ore exports are estimated to have increased by more than 10 percent. As a result of these improvements, the surplus on the foreign trade account has risen from $33.6 million in 1967 to an estimated $55.0 million in 1969. After allowing for invisibles, the current account showed deficits of less than US$10 million in 1968 and 1969 as compared to US$30 million in 1967. 20. In the past seven years the economic policy of Liberia has centered around the implementation of a stabilization program associated with financial and technical assistance from the IMF. The stabilization program was necessitated by financial difficulties resulting from a large amount of foreign debts incurred between 1958 and 1962, in anticipation of substantial increases in iron ore production, and subsequent increase in government revenues. This, however, did not materialize due to un- expected decline in iron ore prices. Under the stabilization program, the government restrained its current expenditure, introduced tax measures, improved tax administration and enforcement, and was able to obtain a rescheduling of its debt repayments. The p=uit of these pp icies together with d echeduling o t repayments due in the years 1969-1971 were primarily responsil for a marked improvement in the country's budget position in the past two years. The budgetary surplus (after allowing for debt service payments) has increased from $0.3 million in 1967 to $4.7 million in 1969. 21. Pu.blic debt service payments continue to represent a heavy burden on the budget. These payments constituted about 24 percent of total budzet- ar_revenues in 1969, inspite of the recent rescheduling agreement. As a percentage of commodity exports,'debt service payments amounted to 7.7 percent in 1969. However, after allowing for the substantial amount of interest and profit remittances by foreign concessionaires, debt service payments would amount to about 16 percent of "net" export earnings in 1969.  22. Th-e Dprospects of the Liberian economy in 1970 seem to be favor- able. Both the value and volume of iron ore and rubber production are expected to continue rising. Priva-te and public investment, both of which increased in 1069, are expected to rise moderately in 1970. Beyond 1970 there is some prospect for lurther major investments, should the present prospecting for oil and for new iron ore deposits be successful. The governmnentis emphasis in its development effort is shifting towards the long neglected agricultuwal sector (outside rubber plantations). The irnitial aim is to increase the output of rice with a view to achieving self-sufficiency. There are aIlso fairly good prospects for increased forestry exploitation. 23. 0t.ing to the continued budgetary pressure arising from its debt service obligations, it is desirable that part of the external assistance to Liberia be extended on concessional terms. However, continuation of the present sound fiscal policies should enable the government to increa3e its ;public saving contribution to development expenditure and make it possible to incur some newT debts on conventionlal terms. PART VI - COH?LIANCE WITH ARTICLES OF AGREIMT1RIT 2h. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - E2COii . Z-DATIS 25. I recommend that the Executive Directors approve the proposed loan. Attachment Robert S. i,cilamara President by J. Burke Knapp Washington, D.C. Mvay 11. 1970  BASIC DATA (Curreincy: US dollars) 1968 Area: 43,000 square miles Population (thousand): 1,117 Rate of growrth: 1.5% Density: 26 per square mile GNP Per Capita ($): 232.6 Gross Domestic Product ($ mil. and current market prices) 196C 1964 1965 1966 1967 1968 (estimate) 222.1 279.3 297.3 317.2 329.8 351.8 Gross National Product ($mil. and current market prices) 1960 1964 1965 1966 1967 1968 (estimate) 174.3 200.5 216.0 228.9 239.9 259.8 Sates of Grovwth (average annual): GDP: in current market prices, 1960-1968: 6.0% GDP: in constant market prices, 1960-1968: 4.0% (estimate) GNP: in current market prices, 1960-1968: 6.0% Volume of Production: 1965 1966 1967 1968 Iron ore (mil. long tons) 15.9 16.7 17.5 19.2 Rubber (mil. pounds) 110.0 122.0 135.0 14i.0 Investment & Saving (as % of GNP) 1965-67 average Investrment 30% Gross National Saving 4% Capital Imports 26%o Public Finance - Central Government ($ mil.): 1966 1967 1968 1969(revI.A. Receipts 49.1 50.6 53.1 57.9 Expenditures 49.5 50.3 51.8 53.2 Sur)lus or Deficit -0.4 0.3 1.3 4.7  Credit (> mil.): End of Period 1965 1966 1967 1968 1968 1969 To the Government(net) 13.7 14.5 10.3 10.9 6.9 8.6 To the Private Sector 18.2 17.8 20.1 22.6 23.4 25.2 Foreign Assets(net) -8.5 -10.2 -7.5 -10.6 -8.8 -6.3 Prices: 1965 1966 1967 1968 Consumer Price Index 101.7 105.5 110.4 113.9 Average Annual Increase (1965-68): 3.8% External Trade ($ mil.): 1965 1966 1967 1968 1969( est