Afghanistan - Power Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY R E; u lj i Report No. P-1817-AF REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INT'ERNATIONAL DEVEIOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF AFGHANISTAN FOR A THERMAL POWER PROJECT April 21, 1976 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Afghani (Af) us$ 1 Afs 56.86 Af 1 US$ 0.01759 Afs 1 million US$ 17,587.o6 FISCAL SEAR March 21 to March 20  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDI"' TO THE REPUBLIC OF AFGHANISTAN 17OR A THERMAL POWER PROJECT 1. I submit the following report and recommendation on a proposed de- velopment credit to the Republic of Afghanistan for the equivalent of US$10 million on standard IDA terms to help finance the foreign exchange cost of a thermal power project. The proceeds of the credit would be relent to Da Afghanistan Breshna Moassessa (DABM), the national power authority, for 20 years, including 3 years of grace, with interest at 8-1/2 percent per annum. PART I - THE ECONOMY General 2. A report entit[Led "Current Economic Position and Prospects of Afghanistan" (684a-AF) dated July 7, 1975, has been distributed to the Exe- cutive Directors. An updating economic mission visited Afghanistan in November 1975. The following analysis reflects the findings of this mission. Country data sheets are attached in Annex I. 3. The Republic of Afghanistan was established in July 1973, following a military coup in which King Mohammed Zahir Shah was deposed by his cousin and brother-in-law, Sarcar Mohammed Daud Khan, who had served as IPrime Minister from 1953 to 1963. Daud serves as both President and Prime Minister; he also retains the portfolios of Foreign Affairs and Defense. The Government abrogated the 1964 Constitution and dissolved Parliament and the Supreme Court. The focus of power is now in the office of the President and in a Central Committee. Government Objectives 4. The Republican Government's major objectives were stated in Presi- dent Daud's speech of August 23, 1973. The President indicated that the state sector would be strengthened, and importance would be given to the development ,of heavy industries based on the country's mineral resources. He also committed the Government to basic economic and social reforms including reforms of the systems of taxation, land tenure and public administration. 5. After an initial period of political consolidation, the Government has made good progress in the field of economic development policy. Several laws have been passed, including a land reform law, a money and banking law, a revised customs law, and a new foreign and domestic private investment law. Organizational changes aimed at more effective development and policy plan- ning have been initiated (e.g. reorganization of Ministry of Planning and This document has a restricted distribution and may be used by recipients only in the performance of their official duties. lts contents may not otherwise be disclosed without World Bank authorization.  a new Secretariat for the Iligh Economic Council in the Prime Minister's office). An active policy of mobilizing and diversifying foreign assistance flows has been adopted. 6. Strong Government efforts to improve tax collection have resulted in an increase in revenues. The Government has also committed itself to keeping the prices of certain essential products stable (e.g. sugar, edible oils, fertilizers and some kinds of textiles) with, as a result, increased claims for subsidies from the budget. More recently, steps have been taken to implement the land reform law and Bank technical assistance has been solicited for that purpose. Other major elements of the Republican Govern- ment's program, including improvement in taxation and public administration are still to be undertaken. Economic Structure 7. Afghanistan is an extremely poor, landlocked country with severe structural, fiscal, and debt service problems. With a population variously estimated at between 13 and 18 million and a per capita income of below US$100, it is one of the largest of the countries designated as "least devel- oped" by the United Nations. The country's prospects for development are limited by a rugged physical terrain, arid conditions, and a paucity of physical and skilled human resources. Agriculture accounts for over half of GDP and engages perhaps 60 percent of the non-nomadic population. Nomads constitute an estimated 16 percent of the population, and 17 percent of the total population live in the cities. Other structural features of the econ- omy are: the low degree of monetization, a low share of government revenues in national income, heavy budgetary dependence on foreign assistance and cen- tral bank financing, the relatively heavy burden of servicing foreign debts and weaknesses in the country's balance-of-payments position. Recent Developments 8. Afghanistan's economy suffered a major setback when severe droughts in 1970 and 1971 followed by the severe winter of 1971/72, caused declines in wheat, fruit and livestock production, and especially heavy losses in the live- stock population. The recovery of agricultural output since then has been at a sustained pace due to improved weather conditions, and increased use of modern inputs. Agricultural output during fiscal year 1975/76, particularly wheat and cotton, will be at record levels with an estimated increase of 8 percent over 1974/75 which in itself was already a very good crop year. The high level of agricultural production has also stimulated domestic manufactur- ing whlch depends on the former for raw materials and is also a major supplier of inputs to it. Large-scale manufacturing, though contributing only about 5 percent of.the GDP, has also been performing quite well. The country's sole fertilizer p:Lant (urea) is expected to have produced during fiscal year 1975/76, the second year of operation, about 72,000 tons, about 70 percent of its installed capacity. Since the expected production volume is above the  country's current consumption requirement, exports of around 15,000 tons have already been programmed. Other major manufactures, cotton textiles and cement, are also performLng well, the expected growth rates for the current fiscal year being around 10 percent and 7 percent respectively. 9. During 1974-75, the average rate of the Afghani increased by 41 percent against the US dollar as compared to the average rate during 1972/73. There has been a further appreciation during the first half of 1975/76. The continued appreciatLon of the exchange rate has had a series of possible causes of which the second devaluation of the U.S. dollar, the change in the trade pattern with Pakistan and the restrictive credit policy of the Govern- ment seem to have been the main contributors; it has tended to discourage traditional exports (carpets and karakul pelts) while, on the other hand, cushioning the impact of the international inflation on domestic prices in Afghanistan. The Government is intervening in the market in an effort to bring down the Afghani/ dollar rate to promote exports. 10. Since the latter half of 1975, Afghanistan has had to contend with a difficult balance-of-payments situation, largely because of deteriorating terms-of-trade. The international recession has had negative effects on Afghanistan's exports (except natural gas) while prices of imports, partic- ularly petroleum products have increased substantially. Although exports during 1975/76 are still estimated to have increased by about 8 percent over 1974/75, imports are estimated to have increased by about 17 percent. Con- sequently, the current 8ccount deficit will be significantly higher. How- ever, aid disbursements have improved significantly and a considerable reduc- tions in amortization payments has been achieved following rescheduling of USSR debt. Development Prospects and Constraints 11. The large undeveloped human, agricultural and mineral resources of Afghanistan provide the basis for a favorable assessment of the country's long-term development potential. Although the economic performance in the last two decades, characterized by an average growth rate of GDP not much above the rate of population growth, and by a low level of mobilization of domestic resources for development, discourages optimism about the pace of growth prospects, the commitment of the Government to development and economic and social reforms gives rise to hope that the potential could be realized. Also, the recent offers of aid, notably from the Islamic oil producing coun- tries are likely, in the near future, to further increase the external capital flow into the country. 12. The realization of the development potential of the country, how- ever, requires timely and vigorous action to remove a number of obstacles that have severely inhibited the country's economic and social development in the past. Included among these are: (a) inadequacies in project preparation and the resulting shortage of projects to be financed relative to offers of external economic assistance;  -4- (b) inadequacies in public administration and manpower development which have led to inefficiencies in the imple- mentation of policies and projects; (c) shortfalls in domestic resource mobilization and the need for new policy measures (improvement of public enterprises, tax reform, mobilization of private savings); and (d) absence of a well-defined framework for the examination and coordination of policies. The Government is well aware of these problems and has already taken s actions aimed at eventual solutions. Particular attention is being given to the improvement of the taxation system and the efficiency of public enter- prises since, in the past, Afghanistan heavily depended on external assistance for the execution of its development plan. 13. Despite a narrow revenue base and consistent pressure on current expenditures, some improvement in the financing capability of the Government has taken place in the most recent fiscal year. In 1974/75, the estimated tax revenue was $162 million as against $118 million in 1973/74 while the estimated budgetary surplus in the current account was $34.0 million compared to about $8.0 million in 1973/74. In 1974/75 it financed about 48 percent of capital expenditure as against only 14 percent in the previous year. Because of the necessity to increase capital expenditures, however, the country must continue to depend on foreign aid to finance the expanding development pro- grams. External Debt 14. As of March 20, 1975, Afghanistan's external debt amounted to $1,546.7 million of which $750.7 million was disbursed. The major creditors are the USSR (71.7 percent of outstanding debt), the USA (7.0 percent) and the Federal Republic of Germany (5.6 percent). The People's Republic of China, a relatively new creditor, hold2 5.1 percent of the loans. Loans from governments account for about 94.7 percent of all disbursed external public debt. Afghanistan concluded in July 1972 an agreement with the USSR to reschedule $30.2 million of some $152.4 million in debt service obligations coming due during 1972/73-1976/77. In addition, in early 1973 the USSR agreed to convert some $16.5 million of loan commitments into grants. In February 1975, an agreement was concluded on the rescheduling of another $136 million of debt service obligations due during 1975-1980. Meanwhile Afghanistan has also received aid offers from a number of oil-producing countries, notably Iran and Saubi Arabia. No precise figures can be given at this time for the commitment for project aid that may eventually result from these offers. Debt service payments in 1974/75 amounted to around $36 million or the equivalent of about 16 percent of the country's export earnings.  - 5 - 15. In recent years, over 65 percent of public investment in Afghanistan has been externally financed with gross aid inflows ranging from about $40 to $70 million annually. Even though most of the borrowing over the past 20 years was on quite soft terms, a heavy debt burden has resulted from the em- phasis on long-gestatiorL infrastructure projects with little export-generating or import-saving impact. Thus, the growth of the debt-servicing capacity has not been commensurat:e with that of the debt-servicing obligations which have as a result had to be mitigated by large-scale rescheduling. Given the country's debt burden, its poverty and its development stage, Afghanistan does not have the capac:ity for sustaining external borrowing on conventional terms and needs substantial capital inflows on concessionary terms. It also requires special consideration from external lenders in financing the local costs of development projects in view of its relatively low tax-base and domestic savings capacity. PART II - BANK GROUP OPERATIONS IN AFGHANISTAN 16. IDA has provided ten development credits totalling US$72 million (net of cancellations) to Afghanistan. IFC invested $0.3 million in the In- dustrial Development Bank of Afghanistan in July 1973. Annex II contains a summary statement of IDA credits and IFC investments as of March 31, 1976, and notes on the execution of the ongoing projects. 17. Bank Group lending in Afghansitan began in 1964 with an education project, but by agreement between the Government and the Association, a major portion of the credit was cancelled in 1969. A resident mission was estab- lished in Kabul in that year and since that time, with a considerable input of staff time and effort on project preparation, the Bank Group has provided financial assistance to Afghanistan at an average level of about $10 million annually. Since 1969 IDA has made four credits in the agricultural sector totalling $42 million including a supplementary credit, three credits in the transportation sector totalling $19 million, one credit of $2 million for an industrial development bank project and one credit of $9 million for a water supply project. The rEcently approved $10 million Khanabad suppLementary Fi- nancing Agreement, the proposed credit and a $15 million credit Eor a second livestock project which is being prepared for consideration by the Executive Directors would bring c:ommitments in FY76 to a total of $35 million. 18. Difficulties were experienced in making disbursements under the IDA credits made since 1971. The main reasons for this have been substantial delays in fulfilling ei-fectiveness conditions, slow progress with the selec- tion of consultants, minor project changes and, in the case of the Industrial Development Bank Project, a lack of subprojects. In most cases these problems have now been correcte(I satisfactorily, with the assistance of our resident mission in Afghanistan, but the delays incurred aggravated the effect of very heavy inflation on project costs,in particular, in the case of the irrigation  and livestock projects. Disbursements under the aviation and highway credits should now proceed on a normal schedule, since the construction works for the aviation project (Cr. 374-AF) have started and are making good progress,-and since the consultants under the highway credit (Cr. 449-AF) are now in the field to provide technical assistance for the project implementation. There has been some progress in identifying projects in the public sector suitable for financing under the credit for the Industrial Development Bank Project, and recently the Industrial Development Bank (IDBA) and the Government have requested IDA to approve a $1.8 million sub-loan which would use up most of the $2 million IDA credit. This request is under review. In general, it can now be expected that future IDA financed projects would be started without undue delays and would proceed at a more normal pace. In close cooperation with IDA staff, the Government is trying to remove potential obstacles to satisfactory project implementation for those projects currently being pre- pared. The Government has also gained useful experience during the imple- mentation of earlier projects, and continues its efforts both to increase the administrative capabilities of the project authorities concerned and to streamline its own procedures. 19. The! Bank Group's lending strategy recognizes that special efforts are required to help Afghanistan. Its landlocked position, its extreme poverty and difficult economic problems, the structure of its political and economic system, and the shortages of physical resources and trained manpower impose severe limitations on the country's absorptive capacity and thus in- hibit its development. Considerable staff time is required, therefore, to help identify, prepare and implement future projects. We expect to establish a basis for financing two or three projects each year, which would help to improve institutions, expand production, increase the foreign exchange earning capacity, enlarge government resources for development and improve absorptive capacity. To that end, technical assistance will continue to be an important feature of most future projects. 20. A feasibility study is in an advanced stage of preparation for the second phase of the Khanabad Irrigation Project, which is expected to be ready for consideration by the Executive Directors in FY77. Other credits likely to be proposed for lending in FY77 are a second education project, which would include establishing four agricultural vocational schools and improving three existing agricultural vocational schools, and an agroindus- tries project to promote fruit and vegetable exports. Other projects are less advanced in preparation. Consultants to complete a feasibility study are being seLected for a third road maintenance and improvement project. Preparatfon of a second Industrial Development Bank (IDBA) project will depend on progress under the first IDBA Credit (see para 18 above) while satisfactory financing arrangements with other donors are being sought for the construction of a new airport near Kabul.  PABT Ill - POWLk AulD ENERGY IN AFGHNISTAN Energy Kesources 21. Afghanistan's riiain utilized energy resources are nydropower, natural gas and coal. The hydroelectric potential is estimated at about 1u0,00u Taillion kWh in an average year of which less than 1 percent has been developed, mainly in the Kabul area. Most of the renaining resources are located at a few sites on the Amu Darya (Oxus river) which formas the northern border with the USSR. 22. Natural gas reserves are estimated at 40-5U billion m3. The ,as deposits are in the north of the country and FY1975/76 (1March 21, 1975 to Li'arch 2U, 197b) production is estimated at 2.8 billion m3 of which more than 2.5 billion m3 was exported by pipeline to the USSk. Only U.25 billion m3 p.a. is used for inter-nal consumaption in a fertilizer plant and a thermal power station (36 HW), both located at Mazar-i-Sharif in the north of the country. Present plans are to increase gas production and exports (all to the USSR) to 4 billion m 3 by 1977/78. 23. Proven coal reserves are estimated at about 5u million tons ana probable reserves at abotut several hundred million tons. The main deposits are found in the north and west of the country with the best quality deposits near the town of ijara-i-Soof, northwest of Kabul. All coal mines are state- owned and exploited by tlhe Coal Exploitation Department of the Ministry of Mlines and Industries. Annual production has been fluctuating during recent years between 125,UOU and 195,000 tons. 24. Explorations for oil have been under way since the 1930's, and there have been two minor oil discoveries totalling some seven million tons of actual deposits. Plans are currently afoot for the inistallation of a refinery with an annual capacity of 200,000 tons. Demaind for oil is growing by about 15 percent yer year with the main share being conisuraed in the transport sector (over 70 percent), about 20 percent in industry and ttie balance by householus. In Afghan FY1974/75 some USi30 million in foreign exchan6e had to. be spent for imports of oil, of whiich about 85 percent was imported from the USSR ana thle rest from Iran. The Staire Oil ilonopoly, under the MiLnistry of Finance, iii- ports and markets most oj: the oil products. The price of gasoline and diesel oil is f133/ton at the Soviet border and l110/ton at the Iranian border. Sell- ing price in the country is the equivalent of about $140/ton, which is rather low by international standards. Electrical Energy 25. Installed genecating capacity in the public sector is 267 MW compris- ing 218 MW hydro, 39 MW coal-fired steam plants and 10 MW diesel installations. The national power authority (DABM) owns and operates 207 MW, private owners own and operate installations with a total capacity of 20 MW and other Govern- ment entities administer the rcst. Almost 70 percent of the installed capa- city is concentrated in the Kabul area and forms a separate power system serv- ing about 50,000 of the country's 70,000 customers. The rest is dispersed ov'er 20 isolated centers.  26. Power generation in the Kabul area is based on three hydroelectric stations, located on the Kabul river with a total capacity of 178 MW: Sarobi (22 MW), Naghlu (90 MW) and Mahipar (66 MW). The only storage on the Kabul river is a small amount of seasonal storage provided by the Naglu forebay. Power availability is therefore highly dependent on water conditions in the Kabul basin. In addition to these plants there are a small hydro station of 1 MW, a diesel station (1 MW) and a small coal-fired steam station (2.8 MW), which serves a textile mill. Their importance for the power balance is in- significant. The Kabul power stations are interconnected through 110-kV transmission lines. Development Program 27. There appears to be no nationwide energy policy, designed to make optimum use of national resources. Development planning has been carried out since the mid-fifties on the basis of a collection of projects which were included in relatively short term (4 years) State Plans without reflecting a clearly perceived development strategy. The first Seven-Year Plan, which spans the period of Afghan FY76-82 and covers all sectors of the economy, is expected to be prepared by mid-1976. 28. Planning and development of the power sector has been hampered in the past by unclear delegation of responsibilities and lack of coordination between the authorities concerned. In fact the need for the proposed project, being the only feasible solution left within the available time frame to meet- ing system needs until 1980/81i, has arisen because of poor planning in the past. As evidenced by the ongoing preparation of the first Seven-Year Plan mentioned above, the Government is now giving more attention to planning and efforts are being made to correct the situation with foreign asistance. Plan- ning capabilities within the Water and Power Authority (WAPA) are expected to be improved in general under a technical assistance program financed by the Canadian International Development Agency (CIDA) (see paragraph 41 below) and two studies on power development of the northern and central parts of Afghanistan are being prepared: An FAO study for the development of a master plan for the Kabul River Basin, and a USSR study, financed under an agreement of February 1975 for the electrification of northern and central Afghanistan (including Kabul) through 1985. The Government has agreed to prepare by March, 1977 a nationwide power development plan which would establish prior- ities for the development of the country's power potential to meet future demand (Section 3.02 Credit Agreement). The above two studies are to be used by the Government to establish this power development plan. Organization of the Sector 29. First power generation in Afghanistan goes back to 1893 and exist- ing plants were operated throughout the country by separate private companies. In 1966/67 a national power authority (DABM) was formed under the Ministry of Mines and Industries as a governmental enterprise for the construction and operation of the country's generation, transmission and distribution  - 9 - facilities. Though DABM operates under its own charter, its staff is gov- erned by civil service salary regulations and it has functioned like a Gov- ernment department. It is headed by a General President but all major decisions such as approval of budgets and financial statements, tariff policy, and appointment of DABM's senior staff have been taken by the Minister. DABM's headquarters are in Kabul. In addition there are nine branch offices, two covering the Kabul area and the other seven sharing responsibility for generation and distribution in the rest of the country. In April 1975, the Government set up a new department called the Water and Power Authority (WAPA), merging the country's water resource development and power functions and also assuming responsibility for DABM. The head of WAPA is a General President with the rank of a Minister and reporting directly to the Deputy Prime Minister. DABM continues to exist as a separate entity although its status within the organization of WAPA is not yet clearly defined. Major improvements in DABM's management structure as well as its operations are expected in the course of project execution and are being carried out in parallel cooperation with a technical assistance program of CIDA, as described in paragraph 41. PART IV - THE PROJECT Project History 30. The project is based on a feasibility study which was prepared at the request of the Afghan Government by Harza Engineering Company Interna- tional (Harza), with UNDP financing and the Bank acting as executing agency, following a project identification mission which visited the country in April 1972. Pre-appraisal and appraisal of the project took place in February and June 1975 respectively. Negotiations were held in Washington from February 23 to March 19, 1976. The Afghan delegation was led by His Excellency M. E. Abdullah Malikyar, Ambassador to the U.S.A. Description of the Project 31. The project would improve in the shortest possible time the power balance of the Kabul electric system, which since 1971 has been inadequate, and help meet the growing power needs of the Kabul area until other power projects can be studied and implemented. The project consists of a package type gas turbine power station, comprising two units of about 20 MW each. The gas turbine units will be installed at the East substation near Kabul for dual oil/gas firing, but fitted initially for oil firing with crude oil as the normal fuel and diesel oil as unit cleansing and standby fuel. They will be equipped with intake air filters, lubricating oil cooling systems, and other usual components. The project would also include fuel facilities for handling, storage, and treatment of the oil. Arrangements would be made with consultants to provide for supervision during construction. The report of the appraisal mission entitled "Appraisal of a Power Project" is being distrihuted separately to the Executive Directors. A credit and project summary is attached as Annex III.  - 10 - 32. The environmental impact of the power station is negligible, since the gas turbine units will be located outside the residential area of Kabul, in a zone which has been assigned to future industrial expansion. Neverthe- less, silencers will be installed to limit plant noise to acceptable levels. DABM has agreed to carry out the project with due regard to environmental factors (Section 2.08 Project Agreement). Project Cost and Financing 33. The total cost of the project is estimated at US$11.0 million equivalent with a foreign exchange component of US$10.0 million. The cost estimates are based on prices for similar equipment which were updated to October 1975 price levels. Physical contingencies of 5 percent on the overall cost of the project have been allowed. Price contingencies have been calculated for equipment at 10 percent in 1976 and 8 percent there- after and for civil works at 14 percent in 1976 and 12 percent thereafter. 34. The proposed credit would cover the foreign exchange costs of the project while the local costs of US$1.0 million equivalent would be financed by DABM as part of its investment program, about 25 percent of which would be financed from internally generated funds, and the balance from other sources. 35. The IDA credit would be relent to DABM by the Government for 20 years, including 3 years of grace, at 8-1/2 percent interest. Ratification of an appropriate subsidiary agreement would be a condition of effectiveness of the IDA credit (Section 3.01(b) Credit Agreement). Project Execution 36. The contract for the generating units would include transport and installation and would provide training for local operating and maintenance personnel over a period of one year. DABM would be responsible for design, contract preparation and supervision during construction and would be assisted by the project consultants (Harza or other) and the supplier-. The construc- tion unit of WAPA, long established as part of the former Irrigation Depart- ment, would execute the civil works. Contracts are scheduled to be awarded in August 1976 with delivery of equipment starting in February 1977. Start of commercial operations is expected in October 1977. Procurement and Disbursement 37. Procurement of all equipment for the gas turbine power station would be under international competitive bidding in accordance with the Bank's Guidelines. Civil works are not expected to attract foreign contrac- tors because of the limited amount involved, and would be carried out under force account.  38. The IDA credit: would be disbursed against 100 percent oE the foreign exchange costs of import:ed equipment and materials, engineering , supervision during construction and training, and 55 percent of the cost of civil works. Disbursements for the cost of the crude oil handling, storage and treatment facilities would be made only after arrangements satisfactory to IDA have been made for the supply and delivery of the oil to the project site. A Schedule of expected disbursements is given in Annex III. Technical Assistance an(d Institutional Aspects 39. In the course of project appraisal the Bank mission identified a number of institutional and organizational shortcomings in the power sector and in DABM in particular, which are reflected in a low level of performance in almost all fields of operation. Major. efforts will be required to improve DABM's management and quality of staff and particular attention will have to be given to the financial aspects of the organization including the account- ing practices, metering of customers, collection system and tariff policies. The joint and coordinated technical assistance efforts with other donors (see below) under the project-are geared to meet these needs and are expected to yield substantial improvements. 40. DABM has had a series of uncoordinated technical assistance pro- grams which have had varying degrees of success. Presently in operation are a USSR program in the field of power planning, an Indian program for developing small hydroe:lectric schemes and a German program for setting up a pole factory and for Improving the Kabul distribution system and the accounting work. 41. The long-term institutional improvements necessary in DABM have engaged the Bank's attention since 1971 following a Bank sector mission. Upon the Bank's recommendation, the feasibility study for the project iden- tified also specific areas in DABM requiring long-range technical assistance. This study was then used by CIDA as a basis for a technical assistance pro- gram to help reorganive DABM as.a utility operating on a sound basis and with appropriate policies. This program will also secure urgently needed imprbve- ments in the financial area through experts working in senior advisory posi- tions. CIDA has decided to concentrate on this priority area after consulta- tion with the Bank and lhas been carrying out its technical assistance efforts in close coordination with IDA since December 1975. The CIDA agreement provides US$1.1 million equivalent of technical assistance in the first year; an extension for up to five years is likely. However, should the program not be extended the Governent would make other adequate arrangements satisfactory to the Association to provide for technical assistance at least until June 30, 1979 (Section 3.04 Credit Agreement).  - 12 - Financial and Institutional Aspects of the Project 42. There are indications that the present power operations incur sub- stantial losses mainly due to theft of energy through illegal and unauthorized connections, inadequate metering, technical defects and unbilled supply to preferred customers. However, in the absence of adequate accounts, the ex- tent of these losses is difficult to ascertain with precision; estimates range from 40 to 53 percent during the last five years. In order to place DABM's operations on a satisfactory organizational and financial footing, DABM would with the assistance of the consultants implement programs to improve its policies and procedures in the field of management and organization, account- ing practices, metering of customers, collection systems, tariff policies, and take other measures which are in particular geared to reducing losses to not more than 20 percent over a period of 5 years which is considered to be an acceptable level (Section 3.05 Project Agreement). 43. The rates for electric energy in the country vary according to the source of energy. The bulk of electricity is supplied from hydro sources for which a flat rate of 1 Af per kWh is charged. This rate was fixed about 20 years ago, is not related to the cost of supply and does not provide for an ade- quate revenue basis for DABM to operate as a financially viable power enter- prise. The Government would therefore, as a condition of credit effectiveness, take a combination of actions to increase during the Afghan fiscal year 1976/77 DABM's revenues by at least 20 percent (Sections 3.05(b) and 5.01(c) Credit Agreement). This combination of measures would also include a minimum 20 percent tariff increase expected to become effective in about the middle of this fiscal year. In addition to these immediate steps DABM would take action including necessary tariff adjustments to achieve an 8 percent rate of return on its fixed assets beginning in Afghan FY1980/81 (Section 4.03 Project Agreement). 44. DABM's charter provides for a separate corporate status with the Minister of Mines and Industries being responsible for all important opera- tional and policy matters 1eaving the management of DABM only a limited area of responsibility. With the creation of WAPA the control of the MilTister of Mines and Industries no longer exists but the status of DABM within WAPA has not been defined. The Government has agreed to revise DABM's charter by June 30, 1976 on the basis of principles acceptable to the Association (Section 3.03, Credit Agreement). These principles would include autonomy in personnel matters and in day-to-day operations for DABM with only approval of investment programs and budgets and of tariffs being subject to guidelines established by the Government. 45. DABM's management structure needs reorganization with clear dele- gation of responsibilities within headquarters as well as between headquarters and its branches. In addition, the quality of staff needs upgrading by ap- propriate training in the country and abroad. Reorganization of DABM and introduction of appropriate training measures are included in the objectives of the CIDA technical assistance program and would be facilitated on the basis of DABM's revised charter as described above.  - 13 - Justification 46. In evaluating the need for additional plant, the consultants com- pared the capacity of existing plant with forecast energy demand and deter- mined that an additional energy source would be required in the Kabul system by October 1977 if shortages were to be avoided in dry years. Alt:hough.ini- tially the consultants had considered only hydro alternatives, the review of the energy situation ruled out any hydro alternative because of the rela- tively long construction time involved. An analysis of other alternatives indicated that in the available time frame a gas-turbine installation of about 40 MW capacity would be the only feasible solution to meeting system needs until 1980/81, by which time additional studies for storage hydro projects, or indigenous-fuel based thermal, could be completed and an optimum develop- ment program selected. After 1980/81 the plant is expected to be used for meeting system peaking demand. In view of the possibility that the gas turbine plant would be required to generate substantial amounts of energy after 1978/79 in dry periods, the consultants suggested that the gas turbines be equipped for-future addition of a 20-MW combined-cycle steam turbine, which would reduce the average operating costs; the proposed project includes pro- vision for such possible future addition. 47. The project, by providing complementary thermal capacity to augment the predominant hydro system, would permit serving additional load with a reliablity at least equal to that of the existing system. The internal finan- cial rate of return of tlhe project has been calculated as 7.1 percent using incremental revenues as an approximation of benefits, and project costs with an allowance for transmission, distribution and administration expenses. Since these revenues refLect the low level of prices charged for electricity supply they understate the economic benefits especially because a tariff increase of reasonable magnitude would not be expected to reduce demand significantly. Furthermore, there are operating advantages which, although not quantifiable, are important such as providing alternative capacity during maintenance outages and .-requent breakdowns of some of the existing hydro plants. The project also includes a technical assistance program with other donors, which is expected to yield substantial institutional improvements and ultimately result in a better performance of the power sector as a whole. PART V - LEGAL INSTRUMENTS AND AUTHORITY 48. The draft Deve]opment Credit Agreement between the Republic of Afghanistan and the Association, the draft Project Agreement between the Association and Da Afghanistan Breshna Moassessa (DABM), the Recommendation of the Committee provided for under Article V of Section l(d) of the Articles of Agreement, and the text of a Resolution approving the proposed Development Credit are being distributed separately to the Executive Directors.  - 14 - 49. Features of the Development Credit and Project Agreements of special interest are described in paragraphs 28, 32, 35, 41, 42, 43 and 44 above. 50. An increase of tariffs together with other measures to achieve a 20 percent revenue increase, conclusion of a subsidiary agreement between the Government and DABM, and ratification of the Project Agreement by DABM would be conditions of effectiveness of the credit. Arrangements satisfactory to IDA for the-supply and delivery of oil to the project site would be a con- dition of disbursements against the cost of crude oil handling, storage and treatment facilities. 51. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 52. I recommend that the Executive Directors approve the proposed development credit. Robert S. McNamara President Attachments Washington, D.C. April 21, 1976  W0U0TR DATA - APOHAAtiST'AN e,35_,tXO t l 213-ld3 0 mrtIIon (.id-1t72)" IDO Por sto2r *reble land sOCIAL INDICATORS hraareon Cot iarita_ Syria, Afghenistes hexS5 dAO Arab 7 NP PER CAPITA US$ (ATLAS aASI)1 30 L. Po l3.0 DEM,;PAPHIr Sr;ide gth rate (pop thosa.nd) SO Lke 4s Lb , 9 L b Crude death rate (per thousand3 26 23 1 15 i Infant nortality rate (per thousand live births) 182 7cd 9. Life eoxpetancy at birth (years) 38 7 LI /bL L1 SL ttross reproductim rats /2 3. ai &^ 3 0 'b 3.L, 3, Population growrth r:te LI 2 0 S 1 8 e 2 Ft 'a 3 3/ Population growth rato - urban 2. 3. 7b. 3 /b. . ,7 Agr structure (percen-t) 15-6i, 134hi h 65 and over ,3 6 52 7 Age dependency ratio / E-onorir dpeondancy rts, /b '5 - 1' 7 2 7 Urban population as peroent of ttal 15 /df L /d f 13 1" farily Plnrcingg No of aecaptora ewunolative (thous.) to No. of .,ers (ii of oarried 'oen) D(PL09ENT Totbl lator force (thousando) 4,600 L 9"C) 5,ltt ,. 4. Perrentage exployed in agricull.ure ,6 / .l 9, 5,n0, i( ' Percentage ornemployed 8 fj i'c s ; lttCt DSTNRINUTION eren of n ational inoomaa racaoied by highest 5% Percent of national ince. r.eeited by hdighst 20% Peroant of national income reeoised by lowest 20% Percent of national tncomo rec i ed by lowest 40% MSTh2IBTfION OP LAND 0AIINRSHu S owned by top 10% or ownere S -o-od by smallest 10% of owner, RtALTH AND bUTHITION per physician 32,000 /I 20,5 _k 49,170 & 15,9tL 1, 1' Population per curing person 22,760 l 22,120 k,. 35 600 1,950 L16q Population per hospital bed 8,400 /, 6,890 /, 6,750 ,k 1,0uo ,j 1 l;C Per capita calorie aupply as S or r.q.irements /5 36