Oman - Power and Water Studies Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No.P2083-OM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN; TO THE EXECUTIVE DIRECTORS ON A PROPOSED ENGINEERING LOAN TO THE SULTANATE OF OMAN FOR POWER AND WATER STUDIES May 18, 1977 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 US$1 m Omani Rial (OR) 0.345 OR1 - US$ 2.9 OR 1,000 - US$ 2,900 OR 1, million US$ 2.9 million DGE Directorate General of Electricity DGW Directorate General of Water PDO Petroleum Development (Oman) Ltd  FOR OFFICIAL USE ONLY SULTANATE OF OMAN - POWER AND WATER STUDIES LOAN AND PROJECT SUMMARY Borrower: Sultanate of Oman Amount: US$1.5 million equivalent Terms: Interest rate of 8.20 percent per annum Ten years amortization including two years' grace. Project Consultants services (i) to prepare a short-term (1977-80) Description: and a medium-term (1981-85) program for high priority investments necessary for the development of electricity and water in the main urban and rural growth centers; (ii) to prepare a broad master plan for priority future proj- ects required to meet the long-term (1986-95) requirements; and (iii) to recommend improvements in the legislation, structure, organization, finance, procedures and operations of the power and water sectors. Estimated Cost: US$ Million (excluding test Local Foreign Total drilling, detailed 1.0 1.5 2.5 engineering, and supervision of construction) Consultants: About 150 man/months of professional services and about 120 man/months of support services. Appraisal Report: None; details provided in this report, including the Technical Appendix. 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 discloed without World Bank authorization.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED ENGINEERING LOAN TO THE SULTANATE OF OMAN FOR POWER AND WATER STUDIES 1. I submit the following report and recommendation on a proposed loan to the Sultanate of Oman for the equivalent of US$1.5 million to help finance studies of the power and water sectors. The loan would have a term of 10 years, including 2 years of grace, with interest at 8.20 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Oman'" dated February 10, 1976 was distributed to the Executive Directors on February 17, 1976. An economic mission visited Oman in November/December 1976 and is preparing its report. Its main findings are summarized below. Country data sheets are attached as Annex I. 3. The Sultanate of Oman occupies most of the southern corner of the Arabian Peninsula covering an area officially estimated at 300,000 square kilometers. Since no reliable population census has been taken in Oman, little is yet known of the size, characteristics or the detailed geographical distribution of its population. Under these circumstances, estimates of total population for 1975 range from 750,000 (based on the UN estimate for 1974) to the Government's official estimate, adopted for planning purposes, of 1.5 million. 4. Oil dominates the economy. Deposits of limestone and natural gas are known to exist in commercially exploitable quantities, but they have not yet been exploited. Deposits of copper, iron, coal and asbestos are also known to exist, but their value remains to be established. The only other natural resource which is currently being tapped in commercial quantities is fisheries. Due to scarce water resources, the total area under cultivation is limited to 36,000 ha, which is less than 0.2 percent of the total area of the country, although nearly 60 percent of the Omanis live in rural areas. Recent Developments 5. When Sultan Qaboos took power from his father in mid-1970, he initiated a series of political and social reforms to transform a medieval society into a modern one, with the principal aim of boosting economic development as rapidly as possible. As part of this process, he undertook a major government reorganization, which resulted in significant power being delegated to individual ministers and the creation of three high-level coun- cils to control and coordinate development activities and expenditures. However, Oman continues to suffer from a serious shortage of trained Omani manpower at both a managerial and worker level; it is thus heavily dependent, and for the foreseeable future will continue to be dependent, on expensive expatriate services in almost all fields.  - 2 - 6. The decade-old guerrilla movement in the southern province of Dhofar, known as the Popular Front for the Liberation of Oman, gave rise to heavy defense expenditures. Following a major offensive launched in late 1975, guerrilla activities seem to have been substantially crushed, if not stopped, but the process of consolidation in Dhofar has not allowed such expenditures to decrease since then. 7. Prior to the commercial exploitation of oil, Oman's economy existed at a subsistence level, based entirely on agriculture, fishing and some minor handicraft activities. Output probably merely kept pace with the growth of the population. Since 1967, with the emergence of oil as a major export, Oman's economy witnessed a period of significant growth as well as structural change. Real GDP is roughly estimated to have increased between 4-6 percent annually between 1967 and 1973, about 40 percent from 1973 to 1974, and 20 percent from 1974 to 1975; a much smaller growth rate is expected in 1976. The growth of oil revenues provided the basis for this exceptionally rapid growth, including public expenditures for development. This, in turn, is reflected in the expansion of construction, public administration and trade. The share of the oil sector in GDP rose from an estimated 30 percent in 1967 to over 67 percent in 1970 and thereafter; the share of construction, almost negligible prior to 1967, grew to 10 percent of GDP in 1970, and subsequently leveled off in the 10-16 percent range. Public administration expenditure las continued to increase in importance, from 2 percent in 1967 to 7 percent in 1975. The agriculture sector stagnated and accounted for only 2 percent of GDP in 1975, in contrast to 37 percent in 1967. 8. Using the 1974 UN population estimate of 750,000, the per capita GNP is estimated at $1,980 in 1975, based on the Bank's Atlas methodology. However, based on the current official Government estimate of 1.5 million people, the per capita GNP would be half that figure. Both figures are mis- leading as a measure of the income and living standards of the average Omani. A high proportion of the income generated in oil, industry, construction, transport and commerce accrues to the foreigners who undertake those activi- ties, although the Government receives most oil revenues. Taking this into account, the average per capita income of an Omani is roughly estimated at around $485 in 1975; but even this does not reveal the true picture of the poverty and backwardness of the bulk of the population. While the average per capita income of Omanis in major urban centers (who make up 25 percent of the total population) is estimated at about $1,250, most of the rural popula- tion (which accounts for approximately 60 percent of the total population, the remaining 15 percent being expatriates), has an average per capita income of less than $200 per year, even including transfer incomes from families working in urban centers and neighboring countries. 9. Oil revenues account for almost all government revenues and foreign exchange earnings. There are two views as to Oman's oil reserves. One, which seems more realistic on the basis of available data, estimates Oman's estab- lished oil reserves at only 1.1 billion barrels as of January 1975, which is equivalent to 9 years production at the 1975 production rate (125 million bar- rels). The other, less plausible, estimate is 3 billion barrels, which would  extend the 1975 level of production up to 24 years. Oman is not a member of OPEC but follows most OPEC decisions. The only company so far producing and exporting oil is Petroleum Development (Oman) Limited (PDO), in which the Government acquired a 60 percent share in 1974. While extensive exploration, both on and offshore, is underway by foreign companies, only two new fields with very limited reserves have so far been found in Dhofar and in the Straits of Hormuz (offshore) near the Musandam Peninsula. Production from these fields will require substantial investments, and hence the companies involved have not yet decided whether to invest the required amounts. The costs of production from these new fields will be considerably higher than that of other oil produced in Oman and in neighboring Gulf countries. Even if these new fields are exploited in the medium-term future, the total volume of oil production will continue to decline for some time from the peak level (135 million bar- rels) reached in 1976, mainly due to technical problems at the existing oil wells. 10. The relatively high level of oil income has enabled the Government to sustain high levels of expenditure in the post-1970 period, when the Gov- ernment launched major investment projects aimed at providing the minimum amount of economic and social infrastructure, as well as a substantially increased defense effort to combat the guerrilla operations in Dhofar. Gross capital formation increased from 18 to 37 percent of GNP between 1970 and 1975 while the proportion of defense expenditures in GNP grew from 15 to 39 percent over the same period. With the concomitant growth of recurrent expenditure for the maintenance of social infrastructure, the ratio of national savings to gross national product declined from 58 percent in 1970 to 34 percent in 1975, thus requiring external resources to finance part of the capital formation. Over the same period, the ratio of public to total investment increased from around 22 to 78 percent. Most of the private investment has remained in the oil sector. 11. The higher levels of public expenditures since 1970 brought about a marked deterioration in the fiscal situation. The budget, which showed a surplus of OR 25 million in 1970, registered deficits of about OR 18 million in 1972, OR 65 million in 1974, and OR 43 million in 1975. The deterioration took place despite continued increases in revenues resulting from successive upward revisions of oil prices (more or less in line with OPEC prices), as well as of the Government's share of income taxes and royalties and its income from its shares in PDO. While the Government's total revenue increased from OR 45 million in 1970 to OR 459 million in 1975, development expenditures also increased from an estimated OR 2 million to OR 173 million in that period. The overall budgetary deficits since 1972 were financed partly by short-term borrowing from banks at home and abroad, and partly by drawing down Government reserves, as well as by loans and grants from neighboring governments. 12. The increased level of economic activity brought about a substantial increase in the money supply, which grew from OR 7.6 million in 1970 to an estimated OR 94 million in 1976, an average annual increase of 54 percent. With an expanded money supply and the economy's limited production capacity together with the limited import capacity due to severe port congestion,  inflationary pressures were exerted on prices, particularly during 1974 and 1975. In 1976 however, due to declining growth of both Government expenditure and money supply, as well as increased imports following improvements in port facilities, inflationary pressures seem to have lightened significantly, although no reliable domestic price data are available. 13. Since the private sector plays only a minor role in the economy and all goods and services are imported under liberal trade and exchange regimes, Oman's balance of payments closely reflects developments in the public sector. Like the budget, the balance of payments has registered deficits since 1972. Due to increased Government spending, imports of goods and services increased by 88 percent per year in current prices during 1970-75, and reached OR 360 million in 1975, resulting in commensurate increases in current account deficits, even though oil exports rose sharply from OR 44 million in 1970 to OR 373 million in 1975. Non-oil exports amounted to less than OR 1 million annually in recent years. Increased imports of services reflected Oman's increasing reliance on expatriate labor and foreign construction companies. Compared to a surplus of OR 28 million in 1970 the current account balance registered a deficit of OR 25 million in 1972 and increased to OR 116 million in 1975. However, a smaller deficit is projected for 1976, mainly due to stabilized commodity imports accompanied by an increase in oil exports by about OR 100 million. 14. These current account deficits were financed partly by grants, mainly from Saudi Arabia, Abu Dhabi and Qatar, and partly by external commercial loans. Private foreign capital investment appears to have contributed little to financing these deficits, mainly because of Oman's unfavorable resource endowment, including a small domestic market and a shortage of trained man- power, rather than to inadequate incentives. Use of accumulated foreign ex- change reserves was necessary in every year since 1972, to fill the gap in the current account. Thus, Oman's net reserves fell from OR 82 million at the end of 1970 to OR 33 million at the end of 1975, and declined further to OR 8 mil- lion by the end of September, 1976, representing approximately one month of commodity imports. 15. Oman had no foreign debts outstanding until 1972. Since then, it has acquired sizeable debts. They totalled OR 78 million (outstanding and disbursed) as of December 1975. The structure of Oman's officially re- ported external debts is heavily biased toward commercial loans. Some 20 per- cent of outstanding debt was in supliers' credits, 60 percent in commercial bank credits, and the remainder in governments' and Bank loans. Thus, most of the debt has medium-term maturities of 3-7 years, and interest rates of 6-9 percent. Debt service payments on existing loans amounted to OR 13 million in 1975, about 3.5 percent of Oman's export earnings. These debt service payments were stable for 1975, but are projected to rise slightly in 1976 with a similar debt service ratio. The Five-Year Plan and Prospects of the Economy 16. One of the striking features of the Plan, which was prepared under a Technical Assistance Project which the Bank helped to finance in 1974, is  -5- a sharp decline in the volume of public investment by about 20 percent per annum between 1976-80, directly reflecting the prospect of falling oil revenues. The Plan also projects a 3 percent per annum increase in GNP (1.5 percent in GDP), despite a decrease in the value added in the oil sector by 2 percent per annum. While construction is expected to decline by 11 percent per annum, mainly due to declining Government development expenditures, agriculture and manufacturing are projected to increase by 14 percent and 70 percent per annum respectively. The Plan also projects a sharp decline in the share of economic and social infrastructure investments in overall public investment: from 84 percent in 1976 to 60 percent in 1980. In the context of declining oil reve- nues, it is important that in the next few years Oman's investment be con- centrated in directly productive sectors, including fisheries. The Plan therefore envisages investments in such projects as cement manufacture, a gas pipeline, oil refining, fisheries development, a flour mill, and sponge iron production. 17. Most of the macro targets of the Plan were projected on the basis of fairly rudimentary assumptions, and the projects, apart from a few major ones, are mere concepts not yet supported by feasibility studies. The economic growth targets, therefore, will probably be difficult to achieve. The situation both in the presently exploited oil fields, and with regard to new exploration activites, suggests that oil production will decline at a somewhat faster rate than envisaged in the Plan. Similarly, slower growth is expected in agriculture and manufacturing. Targets in manufacturing also seem high and are unlikely to be achieved, due to delays in major public and private projects and perhaps over-optimistic targets for private investment. 18. With this background, GDP is at best likely to stagnate over the Plan period, 1976-80. "Omanization" of the existing labor force will probably not progress as fast as the Plan forecasts, due to limited training and other educational shortcomings. The Plan also envisages a sharp decline in loans and grants from OR 155 million in 1976 to OR 19 million in 1980 (in constant prices), based mainly on the assumption that military expenditures will fall. If they do not decline as fast as expected in the Plan, or if recurrent ex- penditures grow faster than projected because of the operating and maintenance costs associated with the large investment program in recent years, external assistance requiremments are likely to be substantially higher than projected; part of these requirements may continue to come as grants from neighboring Arab countries. However, given its present low debt service ratio of 3.5 percent, Oman has the capacity to service conventional debt at much higher levels of borrowing than projected in the Plan, and remains creditworthy for Bank financing. PART II - BANK GROUP OPERATIONS IN OMAN 19. The Bank has made only two loans totalling $8.4 million to Oman, both in FY74, and none thereafter. The details are provided in Annex II. The education project, for which a loan of $5.7 million was made in April  - 6 - 1974, was part of an integrated program of assistance by the Bank, UNDP and the United Kingdom. Bank funds are financing two basic education/skill training centers, a primary teacher training institute and an agricultural secondary school; the United Kingdom and UNDP/UNESCO are financing technical assistance and overseas fellowships. 20. The second Bank loan, made in May 1974, provided $2.7 million for a Technical Assistance Project to help finance three specialist teams for (i) economic planning and management, (ii) agriculture and fisheries, and (iii) transport. The work of these teams has been of considerable value to the Government. The leader of the economic team and his colleagues were largely responsible for the content of the country's first Five-Year Development Plan, published in mid-1976. The team continues to play a central role in the economic management of the country. It not only introduced an awareness of the financial constraints likely to be faced, but shaped most of the budgetary and fiscal procedures being followed by the Government. The transport team has provided valuable advice to the Ministry of Communications in several areas of road transport and development, and did feasibility studies which formed the basis of the highway maintenance project, for which a loan of $15 million is being proposed. The agriculture team, after a slow start, is now helping the Government to identify and prepare a future project in rural development for Bank financing, and has provided agricultural research data to the Government. 21. These two projects, as well as likely future projects in fields such as education, non-oil industrial development (cement), fisheries, telecommuni- cations, rural development, and development finance companies, are designed to help Oman to develop despite the following serious constraints it faces: the acute shortage of trained manpower; the absence of a non-oil productive re- source base; and the lack of an institutional framework within which economic development benefitting all Omanis can be approached on the basis of economic priorities, technical feasibility and least-cost solutions. The Government is becoming increasingly aware of the need for selective development, made all the more imperative by the prospect of declining oil revenues in the early 1980s; an example of this was its recent request to the Bank to organize and monitor studies to determine short and long-term priority power and urban water needs in the country, and how these can be met on a least cost basis, which constitutes the basis of the proposed project. 22. IFC has made no investments in Oman, but has expressed an interest in helping to finance industrial development in the private sector. Oman has purchased almost $40 million of Bank bonds, of which $30 million consisted of 15-year bonds purchased in 1974. PART III - THE POWER AND WATER SECTORS 23. The greatly increased economic activity, undertaken following the commercial exploitation of oil starting in the late 1960s, has resulted in an  - 7 - unprecedented surge in all aspects of economic, social and commercial develop- ment, with accompanying increased demands for electric power and water, centered in the Capital Area (comprising the cities of Muscat, Mutrah and Ruwi) and the coastal strip extending to Sib. The Power Sector 24. Oman had no public electricity supply until 1948 when the Municipal- ity of Muscat installed small diesel generating sets to serve the city. In 1967, private interests purchased this system, constructed the Riyam Bay diesel station and expanded the distribution system to supply the Capital Area. In 1971, the Government purchased these facilities, consisting of about 4 MW generating capacity, as the basis for expanding public electric service. At the time the country's total generating capacity was only about 22 MW, in- cluding privately-owned diesel stations at industrial sites, at the oil fields, and 2 MW of public supply at the major town of Salalah in the south. 25. Since 1972 the country's generating capacity has expanded six-fold to about 134 MW. Public electricity supply is the responsibility of the Directorate General of Electricity (DGE) which reports to the Ministry of Communications. DGE supplies the Capital Area via a 33/115-kV transmission system from the Riyam Bay diesel station and the Ghubra power and desalination station (totalling 114 MW capacity), supplies Salalah and seven regional towns from separate isolated systems, and is constructing small systems to supply nineteen rural centers. The national oil company, Petroleum Development (Oman) Ltd., owns power stations at the oil fields in the interior and at the oil- loading facilities in the Capital Area. Because of the absence of an adequate public supply system, there are also many small generating sets scattered throughout the country supplying industries, shops, schools, hospitals and military establishments. 26. The country's national power system can be divided into three independent systems: Northern, Southern and Rural. The Capital Area is served by the Northern System; the town of Salalah and its surrounding area in Dhofar Province are served by the Southern System, and the Rural System supplies a number of towns and villages from separate local power stations. 27. Electricity rates are determined by the Ministry Qf Communications in consultation with the Ministry of Finance. Currently all customers are charged a uniform rate of Omani Rials (OR) 0.020 ($0.06) per kWh, which bears little relation to the cost of the service. All revenues collected go to the Government's general budget, and yearly requests for funding are made by the electricity authority to the Government. The disadvantages of this system, with regard to efficiency and incentive for improvements, are considerable. 28. Little reliable work has been done on projected lQad growth, which will be one of the prime concerns of the consultants to be hired under the proposed project. Very rough estimates are that, from a peak load growth of 63 percent in 1977, annual growth rates will fall to 25 percent in 1978 and 20 percent in 1979.  -8- The Water Sector 29. Oman has an arid climate characterized by extremely hot and dry summers and mild winters, with the exception of the Dhofar region in the south which has a monsoon climate. The winter rainfall averages about 100 mm for most of the country and increases to about 300 mm in the Hajar mountain range in the north. The only available water sources are the mountain streams in the north and groundwater resources in the Batinah plain and in the Dhofar region. Several regional water surveys were initiated in the last few years by consultants. Although most of these studies were incomplete or inconclu- sive, they suggest that the country has few, if any, large unexploited water sources. 30. The only major piped water system in the country supplies the city of Muscat in the Capital Area by pipelines from wells about 50 km west on the coastal plain and from the Ghubra desalination plant which has a nominal capacity of 4 million gallons per day. Town water supplies also exist at Salalah in the south and at Sur on the east coast, supplied from area wells. The Muscat and Salalah systems are operated by the Directorate General of Water (DGW) of the Ministry of Communications and the system at Sur is pri- vately operated. 31. The water problem in the Capital Area, at the moment, is more a matter of distribution rather than of supply. The DGW believes additional output could be obtained fairly readily from the desalination plant, but because the piped distribution system is inadequate, the full benefits of the desalination plant are not available to the consumers. 32. Rural water supply is a more serious problem, as the sources are very limited, and whatever water there is has to serve both domestic and agricultural needs. The domestic supply in most rural areas consists of carrying water by hand from a public source, such as a single village well, or the outlet of a small spring, which is also used for washing and bathing. PART IV - THE PROJECT Project History 33. The Government's intensive development efforts, as explained in Part 1, have resulted in rapid economic growth around the Capital Area and other urban centers, where power and water demand has expanded rapidly. At the same time, there is considerable pressure to provide adequate sources of rural water supply in the key rural regions, where the great majority of the Omanis live. Given this situation and the limitations of financial resources which can be spent on the development of these utilities, and given other develop- ment needs, it is essential that steps be taken to ensure that adequate sup- plies of power and water are provided, based on priority and least-cost solu- tions, to facilitate the balanced development of both the urban and rural areas.  - 9 - 34. In December of last year, the Government proposed that the Bank organize consultants' studies to determine the short- and long-term needs for power and urban water of the Capital Area, Salalah in the South, and other growth centers, both urban and rural. They requested that the consultants be required to recommend a development program for the immediate period 1977-80, (to coincide with the remaining years of the Development Plan) and for the medium term period 1981-1985, and also prepare a broad master plan for future projects required to meet the long-term 1986-1995 requirements. The Govern- ment also wished the consultants' work to include detailed engineering of projects identified as having priority for the 1977-80 period and supervision of their construction, besides detailed feasibility studies of identified priority projects for the 1981-85 period. The Development Plan, prepared with the help of a Planning Team provided under the on-going Technical Assistance Loan, envisages an expenditure of OR 122 million (US$365 million) for these two sectors, about 15 percent of total planned investments. The Government is anxious that such expenditures should be made on clearly identified priority needs, and be based on least-cost solutions. Finally, the Government wanted recommendations in these studies for improvements in the legislation, struc- ture, organization, finance, procedures and operations of the power and water sectors. At the request of the Government, in early 1977 Bank staff under- took a desk review of available power and water studies done in the past by consultants or equipment suppliers. In late March 1977, a mission visited Oman and discussed the technical aspects of the Government's request, and reached preliminary agreement on draft Terms of Reference for the studies involved. At this time, the Government urged the Bank to consider providing at least a portion of the foreign exchange cost of the work involved, besides undertaking the monitoring of the consultants' work. 35. The normal channel for financing such studies is the UNDP, for whom the Bank could act as executing agent. However, the UNDP allocation for Oman for 1977 has been reduced substantially to less than $1 million in view of the UNDP's fiscal constraints and general reduction of its country programs. Fur- thermore the amount available for Oman is fully budgeted for experts provided under existing commitments. The Bank, therefore, agreed to consider the Gov- ernment's request for financing and technical assistance. Negotiations were held in Washington from April 18 to 21, 1977. The Omani delegation was headed by Mr. Abdullah Bakatheer, Director General for Electricity, Ministry of Com- munications. Project Description and Financing 36. The scope of work for both the power and water studies would follow the same. general pattern, and would be divided into three phases to reflect the Government's request mentioned in para 34 above. Phase One would be to determine the optimum projects to supply the power and water requirements of the Capital Area and Salalah for the period 1977-1980, and to implement the approved projects required immediately, including the design, procurement, supervision of construction and commissioning of facilities. The amount of work involved in the supervision of construction and start-up operations can- not be clearly identified until the studies are well underway, and in any  - 10 - case would not be financed by the proposed loan. Phase Two would be to deter- mine the projects required to meet the power and urban water requirements for the period 1981-85, and to conduct feasibility studies and related exploration work so that these high priority projects could be fully prepared for construc- tion within this period. This Phase would also involve the preparation of a broad plan for future development during 1986-1995 as a guide to future invest- ment requirements. To the extent that there are competing claims on the same source of water for both urban and agricultural purposes, the consultants will evaluate the alternative water uses to determine the most appropriate alloca- tion. Phase Three would be related to institutional aspects, and the consul- tants would be required to prepare recommendations for improvements in the legislation, structure, organization, finances, procedures, and operations of the power and water sub-sectors. As is normal in cases when several studies are scheduled to be undertaken at more or less the same time, and therefore will necessarily overlap, one contract is expected to be a.:arded for all the studies. The terms of reference for the studies have been agreed with the Government. A summary of the scope of work to be performed by the consultants is attached as a Technical Appendix. 37. The proposed loan would cover all three Phases of the studies, except (a) sub-contracts for test drilling under the water studies, (b) the supervi- sion of construction and commissioning of facilities with regard to projects for power and water which may be undertaken between 1978-80, and (c) detailed engineering of projects recommended for implementation in the 1981-85 period. The costs of these items will not be known until the studies have begun to yield results, and would be borne by the Government. The estimated total cost of the studies (excluding those items) is about $2.5 million. This cost estimate includes the consultants' salaries and overhead, external travel and living expenses, local living expenses and office accommodation. The proposed loan of $1.5 million would cover the estimated foreign costs, with the balance of $1 million in local costs, and any overrun of foreign costs, to be borne by the Government. 38. The estimated foreign exchange cost is based on 146 man/months of professional services at $9,000 per man/month, plus 118 man/months of support services at $1,000 per man/month. Details are given below. Most of the support staff will also be expatriate, but hired locally. The Government would be required to provide the consultants with appropriate support facili- ties and counterpart personnel. Foreign Cost Estimates Man/Months Cost Personnel Water Power Total Rate $ $1,000 Professional 109 37 146 9,000 1,314 Support 93 25 118 1,000 118 Sub-Total 1,432 Contingencies: 5 percent 72 Total 1,504  Project Implementation 39. The project would be implemented by consultants working under the direction of the Ministry of Communications. At the express request of the Government, the Bank will help in evaluating the proposals and in monitoring the work of the consultants covered by the loan. The Government's short list of consultants has been reviewed and approved and the Government is taking steps to select and hire consultants according to Bank procedures (Loan Agree- ment, Section 3.02). The Bank and appropriate Government officials will dis- cuss the findings and proposals of the consultants at various stages during the course of the studies. The Government's request for comprehensive Bank help stems from previous experiences in Oman where, due to lack of manpower for supervision on the part of the Omani authorities, the selection and per- formance of consultants have not always been in the best interests of the country. In many cases, consultants and suppliers have written their own terms of reference, and their recommendations have sometimes led to unneces- sary and costly investments. Wishing to avoid a repetition of these exper- iences in an area as economically vital as power and water, Oman is seeking the Bank's technical and financial assistance. This request provides the Bank with an opportunity to play a needed and important role in establishing the future development of these sub-sectors on an economically and financially sound footing. PART V - LEGAL INSTRUMENTS AND AUTHORITY 40. The draft Loan Agreement between the Sultanate of Oman and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of the Resolution approving the proposed loan are being distributed to the Executive Directors separately. Special con- ditions of the project are listed in Section III of Annex III. The employment of consultants acceptable to the Bank, on conditions satisfactory to the Bank, is a condition of effectiveness of the proposed loan. 41. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 42. I recommend that the Executive Directors approve the proposed loan. Robert S. 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