Tunisia - Power Project

_ ESTItI CTE D RITU TO Report No. PU-84a This report is for offii_ ely authorized organizations or personsL It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF FIRST POWER PROJECT SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ (STEG) TUNISIA March 7, 1972 Public Utilities Projects Department  CURRENCY EQUIVAIENTS Tunisian Dinars (TD) 0.525 = US$1.00 Tunisian Dinars (TD) 1.0 = US$1.90 STEG's financial year ends December 31 WEIGHTS AND MEASURES kW = kilowatt NW = Megawatt (1,000 kW) kWh = kilowatt hour GWh = Gigawatt hour (1 million kWh) kV = kilovolt KilQmeters (km) 1.0 = 0.6214 miles (mi) Meters (mi) 1.0 = 3.281 feet (ft) Kilogram calorie (kcal) 1.0 = 3.968 British Thermal Units (BTU) Cubic meter (m3) 1.0 = 35.315 Cubic feet (cf) Ton 1.0 = 2,000 pounds LIT OF ABBREVIATIONS EDF - Electricite de France PMN - Peat Marwick Mitchell STEG - Societe Tunisienne de 1'Electricite et du Gaz  APPRAISAL CF FIRST POWER PROJECT SOCIETE TUNISIENNE DE L'ELECTRICIrE ET DU o&z (STEG) TUNISIA TABLE CF CONTENTS SUMMARY AND CONCLUSIONS i - ii 1. INTRDUCT TION 1 2. THE ECONOMY AND THE SECTOR 2 General 2 The Power Sector 2 3. THE BORROWER 3 Management and Organization 3 Staff 3 Accounts 4 Budget 4 Billing and Collections 4 Tariffa 5 Existing Facilities 5 STEG's Expansion Program 5 4. THE PROJECT 7 Introduction 7 Description and Cost Estimate 7 Disbursement 8 Engineering and Procurement 9 Ecological Aspects 9 Consultants 9 5. JUSTIFIDATION OF PROJECT 10 The Power Market 10 Capability of Meeting System Maxinmm Demand 10 Least Cost Solution 11 Internal Financial Rate of Return 12 6. FINANCIAL ASPECTS 13 Introduction 13 Present Financial Position 13 Past Earnings 14 Financing Plan 14 Future Earnings and Cash Generation 15 Forecast Balance Sheets 17 Gas Pipeline ProJect - Covenants 17 7. AGREEMENrS REACHED AND REC0OMNDATIONS 18 This report was prepared by Messrs. R.V. Sear, AoJeD. Hutchins and T.W. Borrie.  a,  LJBT tF ANNEXES ANNZ 1. Contents of Feasibility Report 2. Sales by Categories of Consumers 3. Number of Consumers by Categories 4. Electric Power Demand 5. Details of Existing Power Plants 6. The Project 7. Disbursement Schedule 8. Past and Forecast Energy Requirement 9. Load Forecast and System Capacity 10. Least Cost Alternative 11. Internal Financial Rate of Return 12. Balance Sheets 13. Incone Statements 14. Sources and Applications of Funds MAP  .  APPRAISAL OF FIRST POWER PROJECT SOCIETE TUNISIENNE LE L'EI=CRICITE E. DU GAZ (STE TUNISIA SUMMARY AND CONCLUSIONS i. This report covers the appraisal of the first power project for Societe Tunisienne de L'Electricite et du Gaz (STEG) consisting of two 20 MW gas turbines, transmission and distribution system expansion, and consulting services for future plant and institutional development at a total cost of US$16.7 million. The Bank loan would finance the foreign exchange cost of US$12.0 million or 72% of the Project cost. ii. This would be the second Bank loan to STEG. The earlier loan for a gas pipeline (724-TUN US$7.5 million) was made in February 1971, in conjunction with a US$2.5 million equivalent loan from the Kurmait Fund for Arab Economic Development. Progress on the pipeline is satis- factory. iii. The gas pipeline will bring natural gas from El Borna oil wells where it is at present being flared, to Rhennouch where the Government is building a new port and industrial center as part of its program to foster the economic developg-exit of the southern part of the country. The pipeline was designed to transport the full output of gas from the El Borma fields and was justified on the assumption that about 95% of the gas would be used to generate electricitys the remainder would be used by new industries in Rhennouch. iv. STEG now has under construction the Rhenrinouch steam plant (60 MW), financed by the French Government, and scheduled for completion towards the end of 1972. The proposed two 20 NW gas turbines would also be located at Rhennouch. The Project would be needed to meet forecast power demand in 1974; it is the least cost alternative to meet the projected load growth and would use the remainder of the gas from the gas pipeline. The internal financial rate of return is about 2h%. V. STEG, a government owned corporation, was created in 1962 upon the nationalization of seven foreign utilities, to take over their assets and be responsible for all public power and gas service in Tunisia. SMEG has successfully amalgamated the physical plant of the original companies into an integrated power system and overcone the more sterious staffing problems created by the exodus of expatriate staff. During the past three years the very able management group, with the advice and assistance of consultants, restructured and decentralized the organization, improved the accounting system, billing and collections; introduced budgetary controls and an internal audit, and has started to review the tariff structure. Although considerable progress has already been made in over- coming many of the institutional and organizational problems, STEG is still a relatively young entity and the proposed loan would help it to continue this work.  - ii - vi. Despite inadequate past records and accounts STEG has, with the help of consultants and its auditors, achieved a meaningful balance sheet for 1970, although reservations remain over the valuation of fixed assets. It is expected, however, that both the 1971 balance sheet and income state- ment will be fully audited and certified, and that these will record a satisfactory financial position and year of operation. vii. STEG enjoya a favorable debtsequity ratio of 31X69 with its equity free of interest or dividend requirements and with the bulk of its debt on concessionary terma. Thia, coupled with a conservative deprecia- tion policy and adequate tariffs, means that it can achieve a relatively high cash generation. In the Project construction period STEG io expected to self finance almost 50% of its capital program. viii. STEG's management agrees that its future financial viability will require an adequate level of earnings and it does not intend to significantly lower average tariffs. During negotiations STEG agreed to a tariff covenant which will ensure that the adequate earnings and cash generation presently foreseen are achieved. ix. The Project would be auitable for a loan of US$12.0 million equiva- lent for a term of 20 years including a 3-yesar period of grace.  APPRAISAL C' F IRST PCNR PROJECT SOCIETE TUNISIJNNE DE L'EIECTRICITE ET DU GAZ (STEG) TUNISIA. 1. IMTRQ)UCT MN 1.01 The Government owned power entity Societe Tunisienne de L'Electricite et du Gaz (9TEG) has requested a Bank loan of US$12.0 million equivalent to finance the foreign exchange component of the next stage of its power system expansion. 1.02 This loan would be the second loan to STEG; the earlier loan of US$7.5 million Was made in 1971 in conjunction with US$2.5 million equivalent loan from the Kuwait Fund to finance the 294 km El Bonma - Rhennouch gas pipeline which has sufficient capacity to transport the full gas output from the El Borma oil wells. The pipeline was justified on the assumption that the gas would be used at Rhennouch instead of oil to fuel thermal electric power plants and two mall industries. 1.03 The present project would consist principally of two 20 W gas turbines and would be located near the Rhennouch steam station (60 )W) now under construction by STEG and financed by the French Government. The expansion of this generating facility is necessary to meet forecast increases in power demand in 1974; the gas turbines would uBe the remain- ing capacity of the gas pipeline referred to above. 1.04 This report is based on the information given in a feasibility report submitted by STEG (see Annex 1) and the findings of an appraisal mission composed of Messrs. R.V. Sear and A.J.D. Hutchins which visited Tunisia in October 1971.  - 2 - 2. THE ECONOMY AND THE SECTOR General 2.01 Gross Domestic Product (GDP), at factor cost, which was TD111 per capita in 1970, increased between 7% and 8% in 1971 and the Tunisian Government projects a similar increase in 1972. During this period, agri- cultural output which represents 15.4% of the GDP is expected to grow by as much as 13% to 16% per year. Manufacturing which represents 15% of the GDP is next in importance, and :,roduction is rising by about 10% yearly. 2.02 The principal foreign exchange source is tourism, which earned TD29 million in 1970 and is expected to play an even greater role in the future; oil exports might also rise above the present level of over 3 million metric tons per year if exploration now taking place uncovers additional reserves. Other principal sources of foreign exchange are agriculture and phosphate products, and emigrant remittances. The Power Sector 2.03 The power sector is served principally by STEG which had in 1970 a total generating capacity of 196 NW and supplied 80% of all electric energy consumed in the country. The only other power sources are about 28 MW of captive plants serving particular industrial or mining entities which are expected to take an increasing share of their future power require- ments from STEG. 2.o4 The principal users of electricity are the industrial, mining and tourist sectors in which 1,250 consumers in 1970 consumed 399 GWh out of total sales of 577 GWh. The remainder, 178 GWh, was sold to 283,000 domes- tic and small irrigation customers who had a relatively low annual consump- tion of 630 kWh per customer. Annexes 2, 3 and 4 give details of sales, system demand and number of customers.  - 3 - 3. THE BORRMER 3.01 STEG, a government-owned corporation, is responsible for the production, transmission and distribution of electricity and gas for public consumption for the entire country. Its principal activity is the sale of electricity while gas sales account for less than 6% of its total revenues (see 6.07). STEG was created by decree law 62-8 in April 1962 to take over the operations of seven private utility companies upon their nationalization. During its early years, STEG's efforts were con- centrated on physically integrating the seven separate systems and on filling the gaps in supervisory and skilled manpower created when the expatriate personnel of the original companies left Tunisia. During the past three years STEG has been able to start on a systematic expansion of the integrated system and turn its attention to matters of organization, management and finance. The paragraphs which follow discuss these in more detail. Management and Organization 3.02 STEG is governed by a board of eight members headed by a President Director General; all appointed by the President of the Republic. The management consists of the President Director General, a Deputy Director General, a Director of Economic Studies and Operations, and a Director of Finances. Under the new decentralized organizational structure recently introduced by management, the operations of the entity come under the general supervision of nine divisions charged with production of electricity and gas; transmission and distribution; enginieering; finance; commercial relations; public relations; legal and personnel affairs; procurement; general services. The country is divided into 13 Districts which operate the local services. Owing to the relative newness of this structure there are still improvements and adjustments to be made in its implementation. STEG's management is aware of this and is continually studying the organ- ization with the assistance of consultants to make changes when these are warranted. (See paragraph 4.11 on Consultants.) Staff 3.03 In its earlier years STEG established a comprehensive training program to overcome the manpower problem referred to in paragraph 3.01. Electricite de France (EIF) assisted materially in this program by second- ing personnel to STEG and conducting training courses in France. This program was very successful and is now a penmanent part of STEG's activity. However, STEG presently has a larger total number of employees than it re- quires and under Loan 724-TUN agreed not to exceed the present level of 3,200 employees through 1975, even though sales are expected to increase by 5D% during that time. The training program will aim to improve the level of skill and efficiency so as to improve productivity of the exist- ing staff.  - 4 - 3.04 STEG's present salary structure, which is subject to government control, is characterized by a narrow scale and low salary levels for skilled manpower, supervisory staff and managemeht. A proposal for a new, productivity oriented structure has been made to government and is under review, but this problem is not having any adverue effect on STEG's opera- tions at the present time. Accounts 3.05 In contrast to the progress made in the technical and training fields, the lack of records and qualified manpower caused accounting to lag significantly behind. One of the principal weaknesses is that the assets taken over from the original companies are inadequately identified and their values are uncertain. ElF has seconded a senior accountant to help and advise STEG, and since 1969 Peat Marwick Mitchell (PMM) has been engaged in a detailed review of STEG's balance sheets and accounting and control procedures starting with fiscal year 1969. Accounts prior to 1969 are of little value for comparative purposes and have not been included in this report. Even the 1969 accounts used for the appraisal of Loan 7214-TUN were materially amended in 1970 as a result of PMM's recommendations. Neither 1969 nor 1970 accounts are certified by the auditor (PMM), but those for 1970 substantially reflect STG's real financial position. As a result of the high degree of cooperation between MTEG and P1K, it is likely that the 1971 accounts will be audited and certified. Budget 3.06 In 1970 STEG took steps to reduce operating costs, by improving its purchasing procedures, by reducing staff through attrition and by strictly controlling and reducing overtime. A further stage in this process was achieved with the publication in 1971 of detailed and realistic capital and operating budgets for 1972, which management intends to follow. These budgets are also intended as a further step towards improving both productivity and management control. Billing and Collections 3.07 STEG's accounts receivable due from the private sector consumers were slightly reduced during 1970 by the introduction of computerized billing and control procedures, whereas those from government departments and govermnent owned autonomous entities increased to an unacceptable level. During negotiations the Borrower explained that in 1971 STEG had taken energetic action to reduce these outstandings and, as a result most of the Government and semigovernment accounts were now on a current basis, although the problem of arrears prior to 1970 had not yet been settled. During negotiations the Govermnent agreed (a) that government departments, local authorities and goverrnment controlled entities would continue to settle their electricity accounts in accordanoe with normal conunercial practice and (b) that by mid 1973 arrangements satisfactory to the Bank would have been reached for the settlement of any accounts then outstanding.  -5- Tariffs 3.08 STEG has the authority to establish electricity and gas tariffs but in practice these are subject to government approval. The original tariff structure consisted of some 98 separate high voltage and low volt- age tariffs. A preliminary study led to simplifications of this unwieldy structure which was reduced in January 1970 to 18 tariffs of which two main tariffs apply to most doaestic customers and the remainder are for commercial, industrial and medium voltage customers. Because of the difference in the average tariff for industrial users (US cents 2.36) and domestic users (US cents 4.75) the gross annual revenue from the two groups is about equal. The present average revenue per kWh produces sat- isfactory cash generation but a more detailed tariff study is being made with the assistance of consultants (ElF) with a view to introducing, early in 1973, new tariff structures based upon a more equitable sharing of the cost of producing and delivering power, and giving appropriate incentives to desired categories of consumers and preferred loads so as to promote more efficient use of power wherever possible. The study is being under- taken in accordance with a provision in Loan 724-TUN. It is progressing satisfactorily and is expected to be completed by mid-1972. 3.09 STEG's financial objective is to generate internally about 50% of its expansion requirements. It therefore intends to ensure that the proposed adjustments in the tariff structure will only have a minimal impact on average revenues. Existing Facilities 3.10 STEG's power system consists essentially of: 1. 150 MW of steam power plant located in Tunis; 2. 32 MW in 3 hydro plants in the northwest part of the country; 3. a 15 M gas turbine in Menzel Bourguiba; 4. 27 MW of diesel plant at 28 isolated locations; 5. a 150 kV main transmission ring in the center of the country with secondary branches at 90 kV. These facilities are shown in the Map and detailed in Annex 5. STEG's Expansion Program 3.11 The power system expansion program proposed by STEG for the 1971-76 period consists essentially of generating plant additions to meet forecast system demand, and transmission and distribution line and substation extensions and improvement to convey the power generated to the ultimate consumer. STEG also plans to use consulting services to assist in studies of and improvements to its organization, system planning operations and rural electrification. The total cost of this six year program, including the Project, would be TD65.45 million. It is detailed in Annex 14.  3.12 The Rhennouch steam plant of two 30 MW units now under con- struction and scheduled for service in October 1972, will be fueled by the El Borma - Rhennouch gas pipeline. Progress on the construction of the steam plant and gas pipeline is satisfactory and the completion date is expected to be met. 3.13 In order to meet forecast system demand from 1974 to 1976, STEG plans the installation of two gas turbines of about 20 MW each at a site about 1 km from the Rhennouch steam plant. As en visaged when the gas pipeline loan was made, the pipe has sufficient capacity to fuel both the steam plant and the gas turbines. (See 4.02.) 3.14 System studies are being made to determine the alternatives of generating plant additions after 1975. The final choice will depend to a considerable extent upon the oil and gas availabilities proven during the next two years. Considerable exploration is taking place and re- serves of commercial quantity are expected at several locations both offshore and inland. 3.15 The transmission system expansion program covers the period through 1976 and consists of 150 kV and 90 kV line extensions and associated substations to connect the new generating plants to the load centers and to reinforce the 150 kV main transmission grid. The present project would include the 1972-73 portion of this program while the remainder is being reviewed by the Canadian Government for future financ- ing. The program is necessary to meet forecast demand. 3.16 The distribution system is being expanded continuously to connect new customers and meet increasing demand. It is satisfactorily engineered and economically constructed by STEG a own work force.  -7- 4. THE PROJECT Introduction 4.01 In 1966 oil production started in Tunisia at El Borma with natural gas being produced in association with the oil. This gas is being flared because it cannot be utilized commercially or in the oper- ation of the oil wells. In 1969 STEG investigated the possibility of utilizing this gas as a fuel for power production. Following a series of studies it decided to go ahead with the construction of a gas pipe- line from El Borma to Rhennouch, wnere the Government was planning to construct a new port and industrial center as part of its plan to promote the economic development of southern Tunisia. The gas pipeline was to supply fuel to a chemical industry and a brick factory which were to be built at the new port and to a steam power plant planned by STEG at the same site. This power plant is now under construction and scheduled for service in October 1972. 4.02 The gas pipeline being financed by the Bank (Loan 724-TUN) has sufficient capacity to deliver the full output of gas from the El Borma wells of about 300 million m3 per year. As visualized when the gas pipe- line loan was made, about 5% of the gas would be used for the industrial requirement at Rhennouch and 95% would be available to operate the two 30 Hi steam plants now under construction plus about 40 NW of new gas turbine capacity included in the proposed Project. See Chapter 5 for economic justification of this investment. 4.03 The Bank engaged Gibbs and Hill, U.S.A. as consultants to review the use of gas turbines for base-load operation and they confirm that, since the gas is free of elements which would be harmful to gas turbines, it constitutes an ideal fuel. Similar experience in neighboring countries has demonstrated that gas turbines can operate satisfactorily under these conditions. Description and Cost Estimate h.o0 The Project would constitute 13.4% of STEG's 1971-76 power ex- pansion program and would consist of the facilities to be constructed during 1972-74. The description and estimated cost are as followss  -8 - Estimated Cost of Project Dinar (000,)_ US$ (000)_ Item Local Foreign Total Local Foreign Total 1) The first step of power plant expansion con- sisting of two 20 MtI gas turbines to be instanlled at Rhennouch 950 2,670 3,620 1,809 5,086 6,895 2) The transmission system and substation expansion during 1972-73 to match the first step of power plant expansion, shown on map and detailed in Annex 6 1,085 1,545 2,630 2,066 2,943 5,009 3) Distribution system expansion during 1972-73 250 525 775 477 1,000 1,477 4) Consulting services as detailed in Annex 6 13 630 643 25 1,200 1,225 5) Physical Contingencies 50 375 425 95 7114 809 6) Price escalation 100 555 655 191 1.057 1,248 7) Total Capital Expenditure 2 6,300 8.7L8 4. 6 12,000 16.663 4.05 The gas turbines would be installed near the Rhennouch steam plant. The estimated cost of the gas turbines is based upon quotations obtained from major suppliers. The cost of transmission and distribution equipment is based upon recent costs to STEG for construction now in progress. Phys- ical contingencies of about 9% have been added to the foreign costs of the gas turbines, transmission lines and substations and about 2.5% to all the local costs of the Project. Price escalation has been added of about 11% of foreign costs excluding consulting fees and 4% of local costs0 These provisions take into consideration the recent change in US dollar exchange rates and are considered adequate since the Project is already well defined, local wage rates are stable and no substantial price changes are expected during the short construction period. Disbursement 4.06 The amount of the proposed loan would be US$12.0 million which is the foreign exchange component of the Project and would not include interest during construction. It would consist of the CIF cost of imported material  -9- and equipment, the foreign exchange cost for the erection of plant, and the foreign exchange cost of consulting services. All local costs would be borne by STEG out of its own resources. The estimated disbursement schedule is given in Annex 7. If savings are made in the cost of the Project, any excess loan funds would be subject to cancellation. Engineering and Procurement 4.07 The engineering for the Project is being done by STEG's staff which is competent and has undertaken similar work in the recent past. STEG's consultants EDF will assist in making a review of the completed designs and specifications and in advising on specific problems. 4.08 The power plant will be installed by the suppliers of equipnent under a supply and erect contract. The transmission and distribution system construction will be partly under supply and erect contracts and partly by SrEG's own work force. (See 3.16.) 4.09 The procurement of goods financed from the proposed loan would be by international competitive bidding. NIo payments are expected to be made before the signing of the loan, but tenders were invited in Jan- uary 1972 to place orders in time to meet the scheduled in-service date for the gas turbines, about mid 1973. Ecological Aspects 4.10 The site for the gas turbines is in the desert on the sea shore at Rhennouch in southern Tunisia where noise will not be a problem. The gas is sulphur free and provides an ideal fuel for the gas turbines. It will not cause any atmospheric pollution. Annex 6 gives the chemical composition of the gas. The gas turbines are relatively small and would not creats any measurable thermal pollution of the atmosphere, hence no ecological problems are anticipated. Consultants 4.11 As already mentioned, EDF has been STEG's consultant for a number of years on technical and operating matters; it is expected that EDF will continue in this role, much of which is undertaken through French Govern- ment aid under its Programme d'Assistance Technique. More recently SiEG has also used the U.S. Executive Assistance Program, sponsored by US AID, and is now considering engaging US consultants on distribution work under the same program. The auditing firm of Peat, Marwick and Mitchell, Paris, has been used during the past three years on accounting and auditing work. STEG intends to continue engaging consultants satisfactory to the Bank to undertake studies on (i) system analysis to improve system stability; (ii) the investigation of potential power plant sites for future use; (iii) organization and the improvement of management infonmation to further STEG's programs in these areas; (iv) the accounting system; (v) the devel- opment of a Rural Electrification program. STEG is already undertaking a tariff study and is preparing an inventory of its physical assets, with the assistance of consultants previously approved by the Bank. The foreign currency element for all the above mentioned studies amounting to US$1.2 million has therefore been included in the Project. Details of these studies are given in Anex 6.  - 10 - 5. JUSTIFICATION OF PRIOJECT The Power Market 5.01 STEG's principal load center is the Tunis region in northern Tunisia, where almost half of the total public power consumption takes place. The next area of rapidly growing importance is along the coast south of Tunis, in the region of Sousse, where hotel construction has developed at a rapid rate in response to tourist demands. This activity is spreading further south to the Djerba area. The Bank has under consid- eration a Tourism infrastructure project which would serve to coordinate and further stimulate development of these regionso 5.02 In making its forecast of sales through 1976 STEG has extrapolated the demand for its low voltage customers on the basis of past trends which showed an average annual growth rate of about 7.8% and known recent changes to give a forecast average annual growth rate of about 8%. STEG then re- viewed its industrial customers individually to ascertain their planned expansion for the period and applied a factor to take care of delays and projects which might not materialize. The result gave an average annual industrial growth rate of about 10% for the period. Finally, in view of the Tourism Project now under review by the Bank, the sales which would be created by this activity were examined. The average of these forecasts gave an annual average growth rate in total energy requirements of 8.8% during the period through 1976 as shown in Annex 8. This forecast is realistic and is considered a suitable basis upon which to plan system expansion. 5.03 Total system losses including station serrices were reviewed and found to average about 17% which is not excesaive for this type of system. When the Rhennouch plant in the south comes into operation, some reduction in losses can be expected because the transmission ring will then receive power from two major sources and the transmission distances between power sources and load centers will in effect be reduced. Distribution system improvements now underway and planned for the future would further reduce losses. Capability of Meeting System Maximum Demand 5.04 Annex 9 shows the forecast of system maximum demand and the system firm capacity after taking reserve requirements and plant de-rating because of age into consideration. In 1971 the generating plants in service provided an aggregate of 196 MW of available capacity which would provide 151 MW of firm capacity after allowing a reserve requirenent of the largest and the smallest unit on the system for normal maintenance and unscheduled plant outage. This is more than sufficient to meet the system maximum demand of 142 NW in 1971. When the two 30 MW Rhennouch steam units cone into service about October 1972, along with the simltaneous retirement of some obsolete plant, the firm system capacity will increase to about 184 W  - 11 - which would be sufficient to meet forecast demand through 1973. The estimated peak in 1975 would be about 200 NW and the 410 N of gas turbines under the proposed project would provide somewhat more capacity than re- quired to meet estimated system peak demand until early 1976. The reason for considering comiissioning the gas turbines at the earliest possible date (mid 1973) is to utilize the remaining available gas from El Borma which is at present being flared. Least Cost Solution 5.05 The gas pipeline from El Borma to Rhennouch was justified under Loan 72h-TUN on the assumption that the then estimated total gas output from the oil wells would have a well-head price of zero and would be used at Rhennouch. It was also assumed that 95% of the gas would be used in thermal electric generating plants. 5.o6 STEG's Rhennouch steam plant of two 30 SW units now under con- struction is scheduled to come into service about October 1972 when the pipeline is also scheduled to be completed. This plant will use about half the gas available for the generation of electricity. The gas tur- bines proposed in the Project would be installed about the middle of 1973 and would use the remainder of the gas. 5.07 There are three possible strategies of installing generating plant of different types which can be considered to meet the forecasts of load growth up to 1988; namely using industrial gas turbines only, using conventional steam plant only, or a mixture of the two types of generating plant. The gas turbines have the advantage that they can be installed in about 18 months and would be available by mid 1973 to utilize the remainder of the gas from the pipeline. If this gas is not used for electricity gen- eration from mid 1973 through 1975 the power requirements for the system would have to be generated in the existing oil fired plants in Tunis, as is now taking place. On the other hand by using the gas, the consumption of imported fuel oil used in the Tunis plants would be correspondingly reduced and a cost savings of about TD2,000,000 in the period mid 1973 through 1975 would accrue to STEG. Early in 1976, the growth in system peak demand (kW) requires the installation of a further generating plant. 5.08 The three alternative plans for installing generating capacity are shown in Annex 10. In scheme "A", the all gas turbine alternative, the first two 20 MW units would be installed by mid-1973 followed by another unit in 1976, two more in 1977 and one or more units as required annually from 1979 onward. In scheme "B". the all steam alternative, the earliest that the first unit could be installed would be toward the end of 1975. 60 MW of steam capacity is assumed to be in operation in that year followed by further 60 NW increments in 1977, 1979, 1982 and 1984. The implementation of this alternative would entail, up to the end of 1975, a somewhat greater risk of failure at the time of system peak de- mand, but this risk has not been quantified. In scheme 'IC"., the mixed gas turbine and steam alternative, the first installation would again be  - 12 - two 20 MW gas turbine units in mid-1973. This would be followed by 60 MW of steam units in 1976, 1979, 1982 and 1984 respectively. The difference in the total present values for all three alternatives, for test rates of discount of 10% through 14%, are not sufficiently distinguishable to make a clear choice between them considering the limits of.accuracy of the data used. However, the marginal advantage appears to be with the mied gas turbine and steam strategy. There is no reason why STEG's present plan to install 40 MW of gas turbines as a first step should not be accepted. Internal Financial Rate of Return 5.09 The internal financial rate of return for the Project was cal- culated by obtaining the discount rate of costs and revenues attributable to the Project over the life of the latter (see Annex 11). The internal financial rate of return of the Project is in the range of 23% to 25%.  - 13 - 6. FINANCIAL ASPECS Introduction 60ol STEG' s finances are characterized by a high level of self- financing of expansion. In 1970 about 31% of capital expenditure was financed from cash generated after debt service. This self-financing is expected to average about 50% for the forecast period 1971 through 1976 (see Annex 14), despite a low return averaging 6% on average net assets employed. This low return, however, is the result of the con- servative depreciation policies followed; and is also of limited value as an objective measure of performance because of the existing uncertain- ties about the asset values on which it is based (see 6.03). Several factors contribute to STEG's high net cash flow after debt service. They are: (a) the high proportion of dividend free equity in its capital- ization (69% in 1970), (b) the low interest cost (averaging 4.8% in 1970) and long-term nature of its debt, both reflecting the high proportion of borrowings on concessionary terms (see 6.02 (b)); and (c) the adequate tariff level. STEG's management expects this favorable borrowing situa- tion to change gradually over the years as new debt is incurred, but intends to offset this change through improved productivity and earnings rather than by lowering its self-financing objectives. Present Financial Position 6.02 STEG's balance sheet as of December 31, 1970 (Annex 12) shows a generally satisfactory position. The debtsequity ratio is 31:69. Total assets, net of current liabilities, are TD69 million (US$131 million), financed by: (a) Equity of TD42 million (US$80 million) of which TD34 million is the value of assets originally provided by the government, and TD8 million is accrued earned surplus; (b) Debt of TD21 million (US$40 million) of which TD19 million was from foreign aid sources at concessionary rates of interest of 4