Malawi - Third Power Project

FILE COPY Report No. 1149a-MAI Malawi: Appraisal of Nkula Falls 11 Hydroelectric Project March 11, 1977 Energy & Water Supply Division Eastern Africa Regional Office FOR OFFICIAL USE ONLY H Document of the World Bank Irhis docurnent has a restric:ted rdisiribution and may be used by recipients only in the performance of tileir off icial dulies. Its contents may not otherwise be Jdisclosed wiLhout World 13ank authorization.  MALAWI APPRAISAL OF NKULA FALLS II HYDROELECTRIC PROJECT CURRENCY EQUIVALENTS 1 US$ = 97 Tambala I Malawi Kwacha (MK) = 100 Tambala 1 Malawi Kwacha = US$1.10 WEIGHTS AND MEASURES 1 Meter (m) = 3.28 Feet 1 Kilometer (km) = 0.621 Miles I Cubic Meter (m ) = 35.3 Cubic Feet 1 Cubic Meter per Second (m Is) = 35.3 Cubic Feet per Second (cfs) 1 Square Kilometer (km ) = 0.386 Square Miles 1 Kilovolt (kV) = 1000 Volts 1 Kilowatt (kW) = 1000 Watts 1 Kilowatt hour (kWh) = 1000 Watt Hours 1 Megawatt (MW) = 1000 Kilowatts 1 Gigawatt hour (GWh) = 1 Million Kilowatt Hours 1 Kilogram - Calorie (kcal) = 3.968 British Thermal Unit (Btu) ABBREVIATIONS AND ACRONYMS AfDB = African Development Bank BWB = Blantyre Water Board CDC = Commonwealth Development Corporation ESCOM = Electricity Supply Commission of Malawi FED = European Development Fund INDEBANK = Industrial Developmemt Bank of Malawi KfW = Kreditanstalt fur Wiederaufbau SUCOMA = Sugar Corporation of Malawi UK = United Kingdom rpm = revolutions per minute ESCOM'S FISCAL YEAR January - December 31  FOR OFFICIAL USE ONLY MALAWI APPRAISAL OF NKULA FALLS II HYDROELECTRIC PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS ............................ i - ii I. INTRODUCTION .....................1.................. II. GENERAL ECONOMY AND THE POWER SECTOR .... ........... 2 The Country and the Economy ........................ 2 Energy Resources ................................... 3 The Power Sector ................................... 3 Existing Power Facilities .......................... 5 Power Development Program .......................... 5 Rural Electrification .............................. 5 III. THE PROJECT ........................................ 6 Description ........................................ 6 Estimated Cost ..................................... 6 Basis for Estimates ................................ 8 Financing .......................................... 8 Disbursements ...................................... 8 Detailed Design and Construction Supervision ....... 9 Construction Schedule .............................. 9 Procurement ........................................ 9 Environmental Studies .............................. 9 Effect of Nkula II on Existing Works .... ........... 9 IV. JUSTIFICATION OF THE PROJECT ....................... 10 Market Growth ...................................... 10 Need for Additional Capacity ....................... 10 Comparison of Alternative Development Programs 11 Rates of Return on Investment ...................... 11 Project Monitoring System .......................... 11 V. ELECTRICITY SUPPLY COMMISSION OF MALAWI 12 Institutional Framework ............................ 12 Organization and Management ........................ 12 This document has a rtticted distribution and may be used by recipients only in the perfotmance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizAtion.  TABLL OF CONTENTS (Continued) Training ........................................... 13 Accounting and Auditing ............................ 13 Risks .............................................. 13 VI. FINANCE ............................................ 14 Past Earnings and Financial Position .... ........... 14 Tariffs ..... 14 Proposed Financing Plan ............................ 15 Future Financial Position and Operating Results 18 VII. AGREEMENTS REACHED AND RECOMMENDATION .... .......... 18  TABLE OF CONTENTS (Continued) List of Annexes ANNEX 1. Statistical Data on ESCOM's Power System 2. ESCOM's Existing Facilities 3. Description of the Nkula Falls II Hydroelectric Project 4. Project Cost Estimate 5. Estimated Disbursement Schedule for IDA Credit 6. Construction Program (Chart) 7. Actual and Projected Sales and Maximum Demand 8. Interconnected System-Installed and Firm Capacity and Maximum Demand (Chart) 9. Interconnected System-Installed and Firm Energy Generation Capacity and System Energy Requirement (Chart) 10. Comparison of Least Cost Program with Alternative Thermal and Thermal-Hydro Blend Development Programs 11. Return on Investment 12. Organizational Structure 13. Project Monitoring Guidelines 14. Income Statement Projections 15. Cash Flow Projections 16. Balance Sheets 17. Notes and Assumptions to Financial Projections 18. Loans Outstanding at December 31, 1975 and Debt Statement 19. New ESCOM Tariffs MAP I - Nkula Site (IBRD 12214) MAP 2 - Proposed Hydroelectric Project (IBRD 2369R4)  MALAWI APPRAISAL OF NKULA FALLS II HYDROELECTRIC PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a hydroelectric development which would be carried out by the Electricity Supply Commission of Malawi (ESCOM), a Govern- ment owned entity, responsible for public electricity supplies in Malawi. The project would be the fourth major project in the development of the hydroelectric potential of the Shire River, which began in 1966. ii. The project will develop a hydroelectric site at Nkula Falls with a dam, a headrace tunnel and penstock system and a powerhouse sufficient for an ultimate plant capacity of 90 MW of which 2 x 18 MW hydro units would be included in the project with additional units being installed in the future to meet increasing power demand. The site potential is expected to be fully utilized by 1989. The estimated project cost is US$66.4 million equivalent including an estimated foreign exchange cost of US$50.6 million. Taking into account the estimated interest during construction of US$11.6 million, of which the foreign exchange component would be US$6.1 million, the project's total financing requirements would be US$78.0 million, includ- ing US$56.7 million in foreign exchange. Of these requirements up to US$59.2 million equivalent is expected to be available from various lending agencies. The Bank would provide US$25 million equivalent by way of a US$9 million standard Bank Loan, a US$8 million Bank Loan on Third Window Terms and US$8 million IDA Credit to help finance the foreign exchange costs of civil works, ESCOM's training program and interest during construc- tion on the Bank loans. AfDB, CDC, the Federal Republic of Germany and FED are expected to provide up to about US$34 million. External finance would cover the full foreign exchange requirements and possibly, a small proportion of local costs. The remaining finance would be provided from ESCOM's internal cash generation. Interest on AfDB, Federal Republic of Germany, FED, IDA and Third Window Funds would be capitalized during construction and treated as Government's contribution. iii. The project is essential to meet Malawi's power demand, which is expected to grow at an average annual rate of 11% between 1977 and 1984. The project is the least cost solution for meeting the projected level of demand among all practicable alternative solutions including a number of thermal/hydro schemes and other schemes for hydro development. iv. Contracts for civil works, which would be partly financed by the Bank Group would be awarded on the basis of international competitive bidding in accordance with the Bank's guidelines for procurement. v. ESCOM is a well managed organization and this will be the third project carried out with Bank Group financial assistance. An IDA Credit (178-MAI) for US$5.25 million made in 1970 helped finance the foreign exchange costs of the first stage of the Tedzani hydroelectric development. Parallel  - 11 - finance of US$3 million equivalent was provided by AfDB for the foreign exchange costs of 66-kV transmission system and distribution extensions. The project was completed close to schedule in 1973, at a total cost of US$16.5 million including a 14% cost overrun. To help meet this overrun CDC and the Industrial Development Bank of Malawi (INDEBANK) made further loans totalling US$1.8 million. Cost overruns were due to unforeseen rock conditions and an underestimate of contractors establishment costs. vi. A second IDA Credit (426-MAI) of US$7.5 million was made in 1973, to help finance the foreign exchange costs of the second stage of the Tedzani Hydroelectric Scheme which added 24 MW to generating capacity. The project also included a 14-MW gas turbine. CDC participated in the project finan- cing with a loan of US$6 million. The project has essentially been completed according to the original schedule, but the estimated cost of US$18 million will be 27% over the appraisal estimate. CDC has provided a further US$2 million to help finance the cost overrun which is attributable to an un- anticipated acceleration in world inflation. vii. ESCOM's financial performance, as reflected by earnings from opera- tions, has been very good since the first IDA Credit was made available to it in 1970 but earnings have been absorbed by capital expenditures leaving a tight liquid position. However, as a consequence of tariff increases and additional finance in 1977, ESCOM's liquid position should improve. ESCOM's financial objectives will include an annual 12% rate of return on revalued assets in 1978 and 1979 and 8% thereafter. ESCOM's financial operating performance is expected to be good during and after project completion. viii. The project is the first part of the least cost alternative for adding a further 90 MW of generating capacity to ESCOM's interconnected system and the internal rate of return for the complete development would be about 12%. ix. The project is suitable for Bank Group finance of US$25 million equivalent.  MALAWI APPRAISAL OF NKULA FALLS II HYDROELECTRIC PROJECT I. INTRODUCTION 1.01 This report appraises the first phase of the Electricity Supply Commission or Malawi's (ESCOM) proposed Nkula II Hydroelectric Power Project. The estimated project cost is MK 60.4 million (US$66.4 million), excluding interest during construction, with a foreign currency component of MK 46.0 million (US$50.6 million). Estimated interest during construction would add an estimated MY, 10.6 million (US$11.6 million) to ESCOM's total project financing requirements. The Government of Malawi has asked the Bank Group to help finance the foreign exchange costs and will receive further financing assistance from the Commonwealth Development Corporation (CDC), the African Development Bank (AfDB), the European Development Fund (FED) and the Federal Republiz of Germany. 1.02 This will be the third Power Project in Malawi which has been financed with Bank Group assistance. The main objective of all three pro- jects is to develop the hydroelectric potential of the Shire River, which has been the main source of ESCOM's additional generating capacity since 1966. 1.03 In 1966 ESCOM's first significant hydro plant was completed through the first stage development of Nkula Falls site which added 24 MW of generating capacity. The project was financed with CDC assistance. 1.04 In 1970 through an IDA Credit (178-MAI) the Bank Group provided US$5.25 million to help finance the foreign exchange costs of a project adding a further 16 MW of hydro generating capacity through the first stage of the Tedzani Falls development. The project also included a 3-MW diesel generating station and transmission and distribution facilities. Parallel finance of US$3 million equivalent was provided by the African Development Bank. 1.05 The project was completed close to schedule in 1973 at a cost of US$16.5 million including a 14% cost overrun. CDC and INDEBANK provided a further US$2.1 million to help finance this overrun. The overrun was attributable to unexpected bad rock conditions and to an underestimate of contractors establishment costs. 1.06 In 1973 Credit (426-MAI - Second Power Project) of US$7.5 million was made to help finance the foreign exchange costs of the second stage of the Tedzani Hydroelectric scheme which added a further 24 MW to generating capacity. The project also included a 14-MW gas turbine unit to avoid a power shortage in 1976 and subsequently for operation as a standby and peaking unit. CDC also participated in the project financing with a loan of US$6 million.  1.07 The Second Power project has substantially been completed according to original schedule at an estimated cost of US$18 million, 27% above the appraisal estimate. CDC has provided a further US$2 million to help finance the estimated cost overrun and additional funds will be provided from a tariff increase supplemented by a temporary bank overdraft. The cost overrun is due to an unanticipated acceleration in world inflation after the project was appraised. 1.08 The proposed project to be constructed between mid-1977 and end-1980 would represent the second stage of development of the Nkula Falls site and would provide for 90 MW of generating capacity with 2 x 18 MW units being included in the project and a further 54 MW being added at various stages in the 1980s. 1.09 All the above developments of the Shire River are based on the recommendations of two British consulting firms, Kennedy and Donkin, and Watermeyer, Legge, Piesold and Uhlmann who have been employed by ESCOM for many years. Another British consulting firm, Coopers and Lybrand Associates Ltd., also assisted in preparing the report on the proposed development. 1.10 This report is based on the findings of an appraisal by Messrs. I. Tuncay, E. Greenwood and J. deWeille who visited Malawi in November 1975 and on information provided by Government, ESCOM, Mr. R. Bloor (a Bank consultant), and the consulting firms mentioned in the preceding paragraph. Messrs. Tuncay and Greenwood visited Malawi in November 1976 to bring their previous findings up-to-date. II. GENERAL ECONOMY AND THE POWER SECTOR The Country and the Economy 2.01 Malawi is a land-locked country in South East Africa, bordered by Zambia, Tanzania and Mozambique. About one quarter of the country is coyered by lakes, the largest being Lake Malawi with an area of some 33,000 km . Mlalawi's total land area is about 93,000 km , which consists largely of plateau about 1,460 m above sea level; the mountainous north rises to 2,500 m and the extreme south is only 200 m above sea level. With a popula- tion of about 5 million growing at about 2.6% per year, Malawi is one of the most densely populated countries in Africa. Th2 population is concentrated in the Southern Region, with 180 persons per km in 1975, compared with 114 and 60 in the Central and Northern Regions. 2.02 Since independence in 1964, GDP at constant prices has grown at a comparatively high rate of almost 8% per year; the GNP per capita of about US$150 is, however, still one of the lowest in the world. The economy is based primarily on agriculture, in which over 90% of the population is engaged, much of it at the subsistence level, and it supplies more than  90% of exports (mainly tobacco, tea, sugar and groundnuts). Total GDP in 1975 at current market prices was estimated to be US$755 million, of whichl agricul- tural output accounted for approximately 45%, and manufacturing 14%. Between 1970-1975, high growth of investments and domestic savings (11% and 15% per year), played an important role in the favorable development of Malawi's economy. On the basis of past performance and present potential, an economic growth of about 6.5% per year might be possible with manufacturing, large agricultural estates and most services including electricity, growing at a higher rate than the economy as a whole. Energy Resources 2.03 The only known fossil fuels in Malawi suitable for thermal genera- tion are coal deposits at Livingstonia, a remote area of the Northern Region. The development of these deposits is, at present, uneconomic due to their distance from the main centers of population. In any case, local coal would not be cheaper than coal imported from Mozambique and Rhodesia. Fuel oil is not imported in bulk because there is little demand for it; diesel fuel in Blantyre now costs about US$15.4 per million keal. 2.04 Geothermal power potential exists in the north of the country but extensive investigations have still to be carried out before a real estima- tion of the potential and feasibility of development can be established. 2.05 There is some hydroelectric potential in the north of the country which has yet to be investigated, but the principal large potential source of power in Malawi is the Shire River which flows out of Lake Malawi through the southern part of the country to join the Zambezi in Mozambique (see Map IBRD 2369R4) Lake Malawi is a large natural reservoir and the Shire River, which carries the overflow from the Southern end of the lake, falls about 420 m in a distance of 80 km between Kholombidza Falls and Kapachira Falls. The total power potential of this stretch of river known as the Middle Shire has been estimated at about 500 MW with a productive capacity of some 3,500 GWh per annum at 80% load factor and a probability of a water shortfall only once in 80 years. The Power Sector 2.06 Because it operates mainly in the regions of Malawi in which most of the economic development has occurred, the power sector has been growing much more rapidly than the economy as a whole. Sales by ESCOM, which is responsible for public supplies throughout the country, rose at an average rate of 18% per annum between 1965 and 1975. Total investment by ESCOM during 1965-1969 amounted to MK 3.5 million (US$4.3 million) 1/ or about 2.5% of the national total of MK 138.7 million (US$169.1 million). 1/ Power investment in the Government's 1970-1974 plan was projected at MK 25.1 million (US$30.6 million) 1/ at constant 1969-1970 prices, which represented 1/ Converted at the then prevailing exchange rate of MK 0.82 = US$1.  - 4 - about 6.4X of the total planned national investment of MK 394.1 million (US$480.6 million) 1/ during the same period. 2.07 The industrial sector accounts for the bulk of electricity con- sumption. During 1970-1975, industrial users accounted for about 63% of total energy sales, followed by the commercial sector with about 18% and the residential sector with about 17%. A statistical summary for 1970 and 1975 together with a forecast for 1980 is given below and Annex I gives fuller details. Between 1967 and 1975 annual growth of total sales ranged from a high of 23% in 1975 to a low of 8% in 1974 influenced largely by varying rainfalls, which affected annual power requirements for irrigation, and by industrial expansion. ESCOM's kWh Sales and Related Data Actual Forecast 1970 1975 1980 Electricity Generated (GWh) 132 258 468 Electricity Sales (GWh) 122 237 430 Electricity Generated per Capita (kWh) 27 52 90 Maximum Demand (MW) 22 48 82 Installed Capacity (MW) 37 71 132 2/ Firm Capacity (MW) 28 56 106 Annual System Load Factor (%) 65 60 60 Proportion of Sales: Residential (Low Density) (%) (see para. 4.04) 18 14 14 Residential (High Density) (%) (see para. 4.05) 1 2 5 Commercial (%) 17 18 19 Industrial (%) 61 64 61 Other (%) 3 2 1 Annual Growth of Sales (%) 15 23 16 Losses as % of Units Generated 8 9 9 2.08 It is estimated that about 1 million of Malawi's 5 million popula- tion live in areas with a potential for access to present electricity supply facilities. Of this number about 100,000 are supplied through existing connections numbering about 15OOO. Most of the 100,000 are in Blantyre, Malawi's main industrial and commercial center with an estimated population of 210,000 and in Lilongwe, the capital city with an estimated population of 87,000. 1/ Converted at the then prevailing exchange rate of MK 0.82 = US$1. 2/ Includes proposed project capacity of 36 MW in 1980.  -5- 2.09 Present consumption per person living in conntected houses is about 500 kWh per year is high due largely to the air conditioning and water heating loads of expatriates and high-ranking local officials. Connection density is about 0.10 per 1,000 population in rural areas and about 60 per 1,000 population in urban areas. Existing Power Facilities 2.10 ESCOM's principal generating facilities are located in the Southern Region, which accounts for about 92% of the kWh sold. Apart from a small diesel station at Mgugu, installed capacity 1.0 MW, there are no public electricity supplies in the Northern Region. Malawi's current total installed generating capacity is about 109 MW, consisting of 65 MW of hydro, 30 MW of thermal, and a 14-MW gas turbine. About 90% of total installed capacity is owned by ESCOM; the remaining 10% is owned by power users who are either out of reach of ESCOM's supply lines or find it more economical to use industrial by-products as fuel for their generating equipment. Plants already under construction and scheduled for commissioning in the period 1976-1980 will bring ESCOM's installed capacity to about 130 MW and the country's total to about 140 MW. ESCOM's existing facilities are described in greater detail in Annex 2 and are shown on the Map 2 (IBRD 2369R4) attached to this report. Power Development Program 2.11 Apart from the proposed project, which will meet the growing demand in the interconnected system, ESCOM's development program in the period 1975- 1980 includes extensions of existing distribution facilities and construction of a 541-km, 132-kV transmission line from Tedzani and Nkula Falls II to Chinteche in Northern Malawi, which will supply expected industrial loads in the Chinteche area. 1/ The first stage of this line, which will be routed to Salima, with a branch line to Lilongwe, is being constructed with Canadian finance channelled through AfDB and is expected to be operational by 1978 or 1979. If the second stage of the 132-kV line from Salima to Chinteche were to be postponed, it would have no significant effect on the timing of the installa- tion of the additional generators required to bring the project facilities to maximum use (see para. 4 in Annex 11). 2.12 Long-term planning for projects beyond ESCOM's 1975-1980 development program has started, including three major hydroelectric projects (Kapachira, Mpatamanga, and Kholombidza) with a total capacity of about 360 MW on the Middle Shire River. Rural Electrification 2.13 Government has yet to determine its goals for rural electrifica- tion. This type of development electrification would be unprofitable; Gov- ernment's prior social objective is to extend electric service to the urban poor. Some electrification of poor urban areas is taken into consideration in housing development programs; however, comprehensive plans have yet to be developed for supplying electricity to the bulk of the urban poor. 1/ The Chinteche load is estimated to total 9 MW, consisting of a pulp mill I MW, a chemical factory 6 MW and mill town 1 MW, district require- ments I MW.  - 6 - III. THE PROJECT Description 3.01 The project will be the major part of ESCOM's 1975-1980 generating program. It consists of: (a) Construction of a rock-fill dam about 7 m in height and about 700 m in length at Nkula site to form a reservoir adequate for daily regulation; (b) Construction of a low pressure cut and cover conduit, a head- race tunnel, penstock and a tailrace outlet system of about 1,280 m and a powerhouse with two 18-MW hydro units (first phase of a 90-MW ultimate capacity); (c) Consulting services; and (d) Training. A detailed project description is given in Annex 3. 3.02 The dam is to be constructed about 50 m downstream of the existing Nkula I Barrage, and 8 km upstream of Tedzani II dam (see Map IBRD 12214). The selection of the site was based on favorable ground conditions and power optimization studies. 3.03 The location and dimensions of the dam, waterways, sizes of the plant and individual generating units, and dimensions of the other major equipment (such as transformers and switchgear equipment) are acceptable and have all been determined by ESCOM's consultants, as a result of a series of cost optimization studies based on the estimated load growth in the power system, the prevailing local conditions (hydrological, geological and topo- graphical), and sound engineering principles. 3.04 Although there are no competing claims for the waters of the Shire River upstream of Nkula II, continued availability of water in sufficient quantities for the project would be essential. Government will not permit any abstraction of water from the Shire River or its tributaries upstream of Nkula that would reduce the potential output of the Nkula II Hydro station (unless the Bank agrees that such abstraction would be economically justified), and will permit ESCOM to divert water from 3the Shire River in such amounts as may be necessary (but not less than 170 m Is) for the purpose of power generation at Nkula Falls II. A similar covenant was included in Credit for the Second Power Project. Estimated Cost 3.05 The estimated total cost of the project is MK 60.4 million (US$66.4 million equivalent), of which MK 46.0 million (US$50.6 million), about 76%, would be foreign exchange. These costs are before interest and commitment  -7- charges during construction. The cost estimates, which are detailed in Annex 4, are summarized below: Summary of Project Cost Estimate (MK 1.0 = US$1.10) Millions of M Kwachas Millions of US dollars % of Description Local Foreign Total Local Foreign Total Total Cost Civil works 6.5 15.4 21.9 7.2 16.9 24.1 36.3 Mechanical & Electrical Works 2.5 15.6 18.1 2.8 17.1 19.9 30.0 Engineering & Admin. /1 1.3 3.7 5.0 1.4 4.1 5.5 8.3 10.3 34.7 45.0 11.4 38.1 49.5 74.6 Contingencies: Physical 1.6 4.6 6.2 1.7 5.1 6.8 10.2 Expected Price Increases 2.4 6.5 8.9 2.6 7.2 9.8 14.7 Sub-total 14.3 45.8 60.1 15.7 50.4 66.1 99.5 Training 0.1 0.2 0.3 0.1 0.2 0.3 0.5 Total Project Cost 14.4 46.0 60.4 15.8 50.6 66.4 100.0 Interest during construction (IDC) /2 5.1 5.5 10.6 5.5 6.1 11.6 Total Financing Requirements 19.5 51.5 71.0 21.3 56.7 78.0 /1 The average per man-month billing rate (excluding expenses) for engineering consultants fees is about US$3,800. /2 Foreign IDC consists of interest on Bank, FED, CDC, AfDB and Federal Republic of Germany loans. 3.06 As in the case of the Second Power Project, Government confirmed that it would waive duties on all imported goods and services required for the project. Preliminary investigation costs amounting to about MK 500,000 (US$575,000) have been covered by ESCOM and have been excluded from the above costs.  -8- Basis for Estimates 3.07 The project costs are based on ESCOM's consultants estimates, as revised by the mission, and base costs are stated as of March 31, 1977. Physical contingencies of 20% on civil works and equipment have been added. Following discussions with Government, ESCOM and its consultants, local costs have been assumed to escalate, 9% annually between 1977 and 1981. Following the Bank guidelines, annual foreign price escalation for civil works has been taken at 9% for 1977 through 1979 and 8% thereafter and foreign price escalation for equipment at 7.5% for 1977 through 1979 and 7% thereafter. On the basis of these estimates, the project would cost about US$2,000 per kW for the first phase capacity of 36 MW, and about US$1,200 per kW for the ultimate capacity of 90 MW. 3.08 Estimates of the foreign exchange costs of civil works at 70% are justifiably high as local costs would consist only of land and unskilled manpower, while materials would be imported. Financing 3.09 The proposed Bank Group contribution of US$25 million equivalent would be used to finance the foreign exchange cost of the civil works compo- nent and of ESCOM's training program, as well as interest during construc- tion on the Bank loans, and would cover about 32% of total financing require- ments. AfDB finance (up to US$6 million equivalent) will be used to help finance the foreign exchange costs of gates, screens and penstocks, FED funds (US$9.5 million equivalent) to help finance the foreign exchange costs of turbines, generators and cranes, and Federal Republic of Germany funds (up to US$5 million equivalent) to help finance the foreign exchange costs of switchgear and transformers. CDC funds (US$13.7 million equivalent) will be available to the project without any restrictions as to their use. Avail- able funds are expected to cover the foreign exchange requirements of the pro- ject and possibly a small portion of local expenditures. The remaining fi- nancing requirements would be provided by ESCOM's internal cash generation, and in the case of AfDB, Federal Republic of Germany, FED and Third Window Funds passed by Government to ESCOM under onlending agreements. Interest dur- ing construction would be capitalized and treated as Government contribution. As a condition of effectiveness of Bank Group finance, all conditions of effectiveness of AfDB, CDC and FED agreements should have been fulfilled. As financing for the project components expected to be financed by the Federal Republic of Germany will not be required until 1978 and, since these items could be obtained through suppliers' credits as a last resort, should this be necessary, the cross effectiveness arrangements would not be required in this respect. Disbursements 3.10 It is proposed to use the Bank/IDA finance to help meet foreign ex- change costs by disbursing the foreign costs of civil works and ESCOM's train- ing program, and interest during construction on the Bank Loans.  -9- 3.11 If any of the Bank Group Funds remains undisbursed after completion of the project, they would be canceled. An estimated disbursement schedule is given in Annex 5. Detailed Design and Construction Supervision 3.12 The project is being designed jointly by Messrs. Watermeyer, Legge, Piesold and Uhlmann (civil consultants) and Kennedy and Donkin (mechanical/ electrical consultants) both of the United Kingdom (UK). These firms are ESCOM's joint consultants and are acceptable to the Bank Group. They designed and supervised both the Nkula Falls I and Tedzani Stage I and II developments and they will be responsible for the preparation of all docu- ments and evaluation of tenders and will supervise construction of the project. ESCOM will continue to employ suitably qualified consultants on terms and conditions satisfactory to the Bank in carrying out the project. Construction Schedule 3.13 Tender documents have already been prepared and issued for the main project components. Contractors' offers for the construction of the main civil works were received in December 1976. Construction is expected to commence mid-1977, and to be completed in 1980. The project construction schedule is shown in Annex 6. Procurement 3.14 Contracts for civil works, to be partially financed from the Bank Group funds and also gates, penstocks and screens which would be financed by AfDB, will be awarded shortly on the basis of international competitive bidding, following the Bank's Guidelines for Procurement. Other contracts will be awarded in accordance with co-financiers procurement procedures. Environmental Studies 3.15 A general ecological review of the Tedzani site, 8 km downstream of Nkula Falls II, was completed in late 1974 during the course of the construc- tion of Tedzani Barrage. This study and experiences on Tedzani Stage I and Nkula Falls I, at the same site, indicate that the project should not cause major ecological problems nor have any negative effects of such magnitude as to impair the feasibility of the damming. There are no permanent human habitations and no crops which are likely to be inundated when the dam is commissioned. ESCOM has arranged a reconnaissance study satisfactory to the Bank to examine the possible ecological changes arising from the project and to recommend the steps which should be taken to avoid or mitigate undesirable side effects. The study is being carried out by the University of Malawi. Government and ESCOM will review the conclusions and recommendations of the study with the Bank and take any remedial action as is considered necessary. Effect of Nkula II on Existing Works 3.16 The proposed Nkula II Dam will raise the natural water level of the Shire River about 7 m (maximum). Although this change will have an effect on  - 10- the existing Nkula I hydroelectric facilities and on the water intake facili- ties of Blantyre Water Board (BWB), only minor inexpensive modifications to these facilities will be needed for the facilities to function satisfactorily. IV. JUSTIFICATION OF THE PROJECT 4.01 The proposed project represents the least cost solution for meeting Malawi's growing power demand until the early 1980's. Market Growth 4.02 The project would supply additional energy to ESCOM's interconnected system which supplies, inter alia, Blantyre, Malawi's main industrial and com- mercial center with a population of 210,000, Lilongwe, the new capital, with a population of 87,000, Zomba, the old capital, with a population of 19,700 and also a large sugar estate. The interconnected system accounts for about 98% of ESCOM's sales. Between 1967 and 1975, ESCOM's annual average sales increased by 15%, largely due to industrial growth. As industrial growth is not expected to continue at the earlier rate the annual increase in sales is projected to gradually decline to 9% by 1984. 4.03 About two-thirds of ESCOM's industrial sales are to four large con- sumers. By far the largest industrial customers are SUCOMA, a sugar estate and the Blantyre Water Board, both of whom use electricity primarily for pump- ing water. Growth in industrial sales between 1967 and 1975 has varied between 30% in 1975 to 4% in 1974 with an average annual growth rate of 16%. After taking into account the plans of major industrial consumers, the growth rate from 1977 to 1984 is projected to average 11% per annum. The average annual growth rate for commercial electricity sales is projected at 10% from 1977 to 1984, as compared to 15% between 1967 and 1976. 4.04 Sales to low density residential consumers, who are mainly higher ranking government officials and expatriates living in Blantyre, Lilongwe and Zomba, are projected to increase at an average rate of 9% between 1976 and 1984. As a percentage of total sales, low density sales are expected to decline from 16% in 1976 to 12% in 1980. 4.05 Sales to ESCOM's high density residential consumers, who live mainly in the larger towns in Government low rental housing, started from a low base and had the highest growth between 1967 and 1975, ranging between 18% in 1975 and 50% in 1967 with an average growth rate of 34%. Such high growth rates are not expected to continue in the future and a gradual fall in demand growth to about 20% by 1984 is expected. Detailed historical sales figures from 1967 to 1976 and projected sales figures from 1976 to 1984 are shown in Annex 7 together with corresponding trends in maximum demand and generation. Need for Additional Capacity 4.06 In 1976 ESCOM's 71 MW of generating facilities included diesel, steam and hydro plant with the hydro component representing about 70. of the total. The hydroelectric power stations are all basically "run-of-river"  - 11- developments. An assurance of a sufficient flow rate to operate hydro plants at maximum capacity, even during the driest years, is provided by the Liwonde Barrage with the almost unlimited reservoir capacity of Lake Malawi. Diesel sets and steam units are being used to meet peak demand and to cover the excess energy requirements over existing hydro capacity and for standby pur- poses. 4.07 The projected maximum demand and energy requirements are shown in Annexes 8 and 9, which demonstrate that, with the commissioning of the second stage Tedzani Project, the interconnected system would be capable of meeting peak demand and energy requirements until 1980 after which the generating capacity to be provided by the project would be required. Comparison of Alternative Development Programs 4.08 After extensive studies by the consultants involving the analysis of 80 different development strategies, the project (Alternative I) has been demonstrated to be the next step in the least cost solution to ESCOM's capital development program over the next 25-year period from 1980. Future develop- ment will be a blend of hydro and thermal generation with hydro predominating. 4.09 In addition to the above development program, other alternatives considered for meeting long-term demand included: (a) two diesel sets of 10 MW each as the first step followed by the Nkula Falls scheme (Alternative II); (b) two steam units of 20 MW each followed by hydro projects (Alterna- tive III); and all hydro units (Alternative IV). 4.10 Analysis of the four development programs indicated that Alterna- tive I would be preferable to Alternatives II, III and IV at discount rates up to 24%. A description and analysis of the alternative development programs are given in Annex 10. Return on Investment 4.11 The project, which includes the development of a hydroelectric site sufficient for 90 MW of generating capacity, will include 36 MW of hydro plant to be followed in the later 1980's by a further 54 MW of hydro plant. 4.12 Measuring the rate of return on the complete development and using present tariff levels in calculating benefits gives a rate of return of 11.5%. For the project only the rate of return would be 9%. The method of calcu- lating the rate of return is described in Annex 11. Project Monitoring System 4.13 Project monitoring standards were agreed with ESCOM at negotia- tions. Major project elements to be monitored against target dates would be the contract award and the construction of coffer dam, main dam, and power station. Financial monitoring would focus on (a) financtbii plans under five yearly forecasts prepared annually; (b) rate of ret;r]; 'f cdllection of revenues; and (d) staffing. Guidelines for a project monitoring system are given in Annex 13.  - 12- V. ELECTRICITY SUPPLY CO14MISSION OF MAALAWI 5.Oi The US$9 million standard Bank Loan would be made directly to ESCOM. The Government of Malawi would be the borrower in the case of the US$8 mil- lion Bank Loan on Third Window terms and US$8 million IDA Credit. Government would relend the latter US$16 million finance to ESCOM (the beneficiary) (para. 6.08). Institutional Framework 5.02 ESCOM is a body corporate, established by the Electricity Act in 1963, when it took over the assets, liabilities and staff of the Ulyasaland Electricity Supply Commission. 5.03 Under the Act the Commission consists of a chairman and not less than three or more than five other members, all of whom are appointed by the Minister. At the present time, ESCOM reports to the Ministry of Trade, Industry and Tourism. 5.04 The present board consists of a local businessman, who is chairman, and five other members, one of whom is a businessman. The four other members consist of the CDC representative in Blantyre, the Permanent Secretary, Ministry of Trade, Industry and Tourism, a retired civil servant, and an official of the M1alawian Congress Party. 5.05 Under its Act ESCOM is at all times subject to the general direc- tion of the M'inister and requires ministerial approval of borrowings, capital and revenue budgets and tariff changes. However, good working relationships exist between the Minister and ESCOM which is allowed considerable initiative in day-to-day operations and whose recommendations are usually accepted. Organization and Management 5.06 ESCOM is a well-managed utility with experienced and competent staff in its senior management positions. The General Manager has been employed by ESCOM for many years and there has been little recent turnover of staff in the senior management positions. Some shortages of supervisory engineering staff exist, however, and higher salaries may be required to attract the expatriate staff required. ESCOM's organizational structure is shown in Annex 12. 5.07 ESCOM's total staff at the end of 1975 was about 1,200. Of about 110 senior positions, 33 were occupied by expatriates including three of the four top management posts. However, through a well-considered training program, the number of expatriates has been graduallv reduced and by 1980 ESCOM seeks to localize its entire staff. 5.08 A staff of 1,200 for an electricity supply undertaking of HSCOH's size is rather high. Efforts have been made to control staff additi,-m9 however, and since the last Credit was made, they have l- -iJes - re- lation to ESCOMI's growth. The suQcess of these efforts - ;e I -c itored through the Project monitoring Guideline: -hown in Annex 13I  - 13 - 5.09 ESCOM's staff is competent to carry out the project with engineer- ing consulting assistance and to carry out other capital works during the project implementation period. To ensure the continuation of ESCOM's manage- ment capability, were new appointments to the positions of General Manager, Chief Engineer, Secretary and Financial Controller will not be made before taking into account the views expressed by the Bank Group on the proposed appointments. Training 5.10 As mentioned in para. 5.07, ESCOM's objective is to be fully staffed with Malawi nationals by 1980. To achieve this, there has been a continuous training program in operation since 1963. An expatriate training manager was replaced by a Malawi national last year. ESCOM has sent the new manager to the United Kingdom to familiarize himself with training in a British electricity undertaking. 5.11 At the present time, ESCOM has 13 students studying overseas for degrees in mechanical and electrical engineering, one in civil engineering, and a further five students taking technician courses. In 1977 it is expected that five students will obtain their degrees and will join the Commission to- gether with a further two students who have had technician training. ESCOM also has two students studying abroad for professional accounting qualifi- cations and one returned to Malawi in 1976. 5.12 To assist ESCOM in its training efforts, an amount of US$330,000 has been included in the proposed Credit for training. The amount is intended to provide short-term management and technical training abroad for about 20 Malawian managers and technicians employed by ESCOM. ESCOM will continue to finance the remaining parts of its training program from its revenues. 5.13 ESCOM recruits its technicians from the National Apprenticeship Scheme and trains them by sending them to the local polytechnic for one year followed by a three year apprenticeship. This program appears to have been successful. In addition, to improve employee job performance, ESCOM conducts a number of weekly classes on practical topics and also provides refresher courses. Accounting and Auditing 5.14 ESCOM's accounting records are well maintained and financial reports are prepared promptly. Budgeted performance seems to be ade- quately monitored and billing and collections are good. Inventory levels are satisfactory. 5.15 ESCOM's audit is conducted by the international firm, Deloitte and Company, and the arrangement is satisfactory. ESCOMI would contnl__e have its annual accounts audited by independent accountants e Bank. Risks 5.16 No major risks to the success of the project are foreseen.  - 14 - VI. FINANCE 6.01 ESCOM's earnings over the last few years have been good and it is expected that this will continue during the project construction period and subsequently. ESCOM's actual and projected financial statements, consisting of income statements, cash flow projections and balance sheets, are given in Annexes 14, 15, and 16, respectively. The notes and assumptions for the financial statements are in Annex 17, and a statement of loans outstanding at December 31, 1975 and a debt statement are presented in Annex 18. Past Earnings and Financial Position 6.02 The following 1970-1975 operating summary shows a good financial performance by ESCOM. During the five-year period, kilowatt hours of elec- tricity sold increased by 93%, revenues by 114% and net income by 126%. 1970 1971 1972 1973 1974 1975 Sales (millions of kWh) 122 132 158 178 192 236