Malawi - Third Power Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2013 MAI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND PROPOSED LOANS TO THE REPUBLIC OF MALAWI FOR A THIRD POWER PROJECT March 16, 1977 This doumnent ba a restricted distribution and may be ued by recipients only In the pedormance of I their ofeii dui. Its contents may not otberwise be disclosed without World BDk authoriation. I  CURRENCY EQUIVALENTS US $ 1 - Malawi Kwacha (MK) 0.91 MK 1 - US$1.10 MK 1,000 - US$1,100 MK 1,000,000 - US$1,100,000 WEIGHTS AND MEASURES 1 meter - 1.094 yards 1 kilometer - 0.62 miles ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BWB - Blantyre Water Board CDC - Commonwealth Development Corporation DEVPOL - Statement of Development Policies ESCOM - Electricity Supply Commission of Malawi FED - Fonds Europeen de Developpement KfW - Kreditanstalt fur Wiederaufbau ESCOM's FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND PROPOSED LOANS FOR A THIRD POWER PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Malawi for the equivalent of US$8.0 million on standard IDA terms and two proposed loans for the equivalent of US$9.0 mil- lion and US$8.0 million, respectively, to help finance a Third Power Project. The US$9.0 million loan would be made to the Electricity Supply Commission of Malawi for a term of twenty years including four and a half years of grace and would bear an interest rate of 8.5 percent per annum; it would be guaranteed by the Republic of Malawi. The US$8.0 million loan would be made to the Republic of Malawi on standard Third Window terms with the first payment due on January 15, 1983 and the last payment on January 15, 2001. The proceeds of the proposed credit and Third Window loan would be relent to the Electricity Supply Commission of Malawi for a term of twenty five years, including a period of four and a half years of grace, at an interest rate of 8.5 percent per annum. The African Development Bank, the Commonwealth Develop- ment Corporation, the Federal Republic of Germany and the Fonds Europeen de Developpement are expected to participate in the financing of the proposed project in an aggregate amount of up to about US$34 million equivalent. PART I - THE ECONOMY 2. A report entitled "Recent Economic Development and Prospects of Malawi" (Report No. 560a-MAI) was distributed to the Executive Directors on January 14, 1975. An updating economic mission visited Malawi in November/ December 1975. Its report is expected to be issued in May. A summary of the mission's findings is set out below. Country data sheets are provided in Annex I. 3. At Independence in 1964, Malawi was the poorest of the three terri- tories of the former Central African F~deration. With a population of about 5 million and a land area of 93,000 km , its population density is among the highest of African countries. Its main assets are moderately fertile soils, good water resources and a climate favorable to crop production. Unlike its neighbors, Malawi has no substantial mineral resources. Forests constitute the main, essentially untapped, resource which could be exploited on a signi- ficant scale in the future. At Independence, the tax base was very narrow, government revenues had to be supplemented with British budgetary aid to support the administration, and prospects for economic development were generally regarded as bleak. 4. Measured against the country's natural endowments, progress since 1964 has been remarkable. Between 1964 and 1975, GDP at constant prices grew at an average annual rate of 7.5 percent, domestic investment and savings This document has a restricted distribution and may be used by recipients only in the performance of their oflficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  increased rapidly, and government finances have improved sufficiently to eliminate the need for budgetary aid. Agriculture, which dominates the economy and contributed 45 percent of GDP in 1975, has been directed towards export markets by encouraging cash crop estates production and integrated rural development schemes. Diversification has also been promoted. In addition, rapid industrial development (the share of industry rose from 9 percent of GDP in 1964 to 14 percent in 1975) has significantly broadened the economic base. Despite this economic improvement, however, Malawi still has a GNP per capita of only Us$150 and is listed bv the Tnijtprl NStionns qTnx the world's poorest countries. 5. Malawi's success has been the result of realistic and purposeful planning by the Government. In 1971, a Statement of Development Policies (DEVPOL) was published, which provides a general framework within which the Government operates a three-year rolling plan. DEVPOL contains guidelines for major economic indicators up to 1980 and states the main socio-economic objectives, among which are: (a) to raise living standards and productivity in rural areas; (b) to achieve an average annual growth of GDP of 8 percent through the parallel development of smallholder output, estate agriculture and industry; (c) to promote a more balanced regional development; and (d) to develop local initiatives and a gradual increase of local participation in the economy. 6. DEVPOL recognizes the important role of private investment in de- velopment which, it is anticipated, will account for about half of total fixed capital formation over the 1971-1980 period. The Government also recognizes the role of a healthy private sector in generating foreign exchange and savings needed to sustain other elements of the development strategy and has adopted policies which are intended to attract foreign investors and to ensure a continued high growth of the private sector. Trade and payments policies are liberal, profits moderately taxed and wages are held down to favor labor-intensive estates and industries. The modern private sector has been the leader in economic growth. The output of estate agriculture increased by 10 percent a year in real terms over the past decade and indus- trial production rose by 13 percent annually. 7. Within the public sector investment program, agriculture will re- ceive 19 percent, public utilities 17 percent, and social services 15 per- cent. Government investment in transport infrastructure will be reduced from 37 percent in the late 1960s to less than 30 percent of total public investment. Malawi has an effective administration which has been remarkably successful in preparing and implementing development projects. 8. Firm information on which reliable estimates of income distribution could be based dates back to 1969. At that time, income distribution was relatively favorable. The poorest 40 percent of households received 15 per- cent of incomes; the highest 20 percent received 53 percent and the highest 5 percent received 30 percent. These figures compared well with those of other developing countries. Since then, the rapid development of the modern private sector has probably led to a greater concentration of incomes.  9. To offset the adverse distributional effect of the growth of the modern private sector, the Government has directed its agricultural investment program towards the smallholders. It is true, however, that for a long time agricultural producer prices have been kept at a level which was low as compared to international levels, and which was probably also too low to provide a sufficient incentive to higher production. Only recently has the Government recognized the importance of sufficiently remunerative producer prices, and it has increased them substantially. Indirectly, wage and price policies have reduced the gap between wage earners and subsistence farmers. Over the past seven years, real wages have fallen somewhat, while the real earnings of smallholders have risen. Keeping a firm check on wage increases has also had a beneficial effect on wage employment. Total wage employment has increased by 10 percent a year on the average. About 20 percent of Malawi's labor force is now engaged in wage employment as compared to 12 per- cent in 1968. 10. Owing to its fast rate of population increase, estimated at 2.6 percent annually, population pressure is heavy in relation to arable land. While recognizing the existence of this problem, the Government has been reluctant to introduce population control policies and intends to rely instead on balanced regional development, particularly in the southern region, traditionally the most densely populated. In mid-1975, Malawi's urban popula- tion represented only 10 percent of the total population. However, because of the diversification of the economy, urban population is rapidly increasing by more than 10 percent per annum, in line with the expansion of wage employment opportunities in the non-agricultural sectors. The construction of the new capital city at Lilongwe has also contributed to spreading more evenly the newly urbanized population among the different cities. Nevertheless, this fast urban growth, coupled with Government's higher priority for rural dev- elopment and infrastructure in the use of public funds, has caused urban infrastructure to somewhat lag behind the needs of the city dwellers. 11. Since almost 90 percent of the population live in rural areas, rural development is a primary social and economic objective. At the moment, the majority of farmers are smallholders on the fringe of the market economy. Their staple crop is almost exclusively maize and their principal cash crops are tobacco and groundnuts. Until now, the principal instrument for increas- ing smallholder productivity has been relatively intensive integrated devel- opment projects in specific areas, which at the moment reach about 25 percent of the rural population. 12. In spite of the Government's efforts, however, the production from the traditional agricultural sector has lagged behind that of the estate sector. Although firm figures are lacking, indications are that the produc- tion from the traditional sector has not increased by much more than 3 per- cent a year over the past decade. The Government is concerned about this  - 4 - relatively slow growth and is preparing a country-wide approach to rural development, which would be a departure from the previous approach in that it would primarily concentrate on the provision of farm inputs and exten- sion services. This new approach - the National Rural Development Program - is to become the Government's chief vehicle for smallholder development. 13. In the past, the generation and use of domestic resources have been good. Investments grew from 8 percent of GDP in 1964 to 27 percent in 1974. Domestic savings, which were virtually nil in 1964, financed 42 percent of total investment in 1975. The Government's budget has been skillfully man- aged in order to put government finances on a firmer footing. From 1964 to 1974/75, recurrent revenues grew by 14 percent a year on the average, while the increase in recurrent expenditures was kept down to 8 percent a year. British budgetary support - which financed MK 10 million, or about one third of the current budget in 1964 - was gradually reduced and was eliminated entirely in 1972/73. In 1973/74 and 1974/75, small recurrent budget sur- pluses of MK 1.5 million and MK 5 million were achieved. At the same time, the Government's domestic medium-and long-term borrowing was also stepped up from MK 0.1 million in 1964 to MK 13.5 million in 1974/75. The financial situation of public corporations is generally healthy, and part of their surpluses is used to finance government investments. As a result of the factors mentioned above, the domestic contribution to the financing of developmens expenditures, which was negative in 1964, increased to 45 percent in 1974/75. 14. Up to 1974, Malawi's balance of payments had shown a healthy de- velopment. During 1967-74, exports increased by about 7 percent a year in real terms, while imports have increased by about 6 percent a year in real terms. The terms of trade, however, have moved somewhat against Malawi. Payments for services increased substantially but they were partly offset by increases in workers' remittances from South Africa. The balance of pay- ments current account deficit increased from US$18 million in 1967 to US$45 million in 1974. This deterioration, however, was more than compensated for by increasing private and public capital inflows. As a result, official international reserves increased from US$22.5 million at the end of 1967 to US$81.5 million (4.5 months of imports) at the end of 1974. 15. In 1975, Malawi's balance of payments deteriorated. The cur- rent account deficit is estimated to have increased from US$45 million in 1974 to about US$100 million. Private and public capital inflow did not increase correspondingly, as a result of which international reserves declined to U'S$61 million at the end of 1975 (3 months of imports). A number of factors have contributed to the deterioration in Malawi's balance of payments position in 1975. While merchandise exports increased by 13 percent in real terms over 1974, imports increased by 15 percent. As a result, the trade deficit in- creased from US$77 million in 1974 to an estimated US$115 million in 1975, which explains most of the increase in the current account deficit in that year.  16. The sharp increase in the volume of imports in 1975 was, to some extent, due to the political uncertainties in Malawi's neighboring countries, which led Malawian importers to accelerate their imports in order to build up precautionary stocks. Among domestic factors which may have adversely affected the balance of payments is the large expansion of credit, which amounted to 85 percent in 1975. Although international reserves continued to decline in the first half of 1976 to a level of US$30 milion in June (since then they have remained stable), the developments of the trade balance have been much more favorable than in 1975. In the first nine months of 1976 merchandise exports were 20 percent higher than in the corresponding period of 1975, while imports of goods were 14 percent lower, which would suggest that the balance of payments problems are being overcome. 17. Notwithstanding the recent balance of payments difficulties, Malawi's longer term prospects for growth, external trade and payments are ,ood. I'ts agricultural products have generally founld ready markets par- ticularly in the UK and more recently in the USA. Traditional outlets and Malawi's associate membership in the EEC offer good prospects of expanded markets for Malawi's exports. With the substantial expansion of sugar pro- duction that is about to get under way, total exports in real terms can realistically be expected to grow even faster in the future (more than 9 percent a year) than in the past (about 8 percent a year). However, Malawi's terms of trade are likely to show a further deterioration of about 8 percent over the next five years. On these assumptions, the current account deficit is projected to increase fromu US$100 million in 1975 to some US$150 million by 1980. 18. With the increase in the Government's investment program, net long- term public capital inflow also increased substantially from US$17 million in 1967 to US$47 million in 1975. The sources of public capital inflow have gradually been diversified. At Independence, the UK was virtually the only source, but by 1974 the British contribution had declined to less than 50 ,, rcent. International organizations, especially IDA, provided 20 percent ,iid the remainder came from a variety of bilateral sources. Development grants amounted to about 25 percent of total public capital inflow. Loan capital was generally made available on coneessionary terms. From 1971 Lhrough 1974, total commitments of public lcaus and grants averaged US$60 nillion a year. The average grant element of these commitments was 77 per- :_enlt. 19. At the end of 1975, llalawi's external public debt totaled US$322 million, of which US$239 million had been disbursed. Debt service in 1975 amiounted to US$12.7 million, equivalent to about 6 percent of foreign exchange earnings. At the end of 1975, IDA's share in Malawi's disbursed debt was 25.8 percent and servicing of IDA credits accounted for 3.0 percent of total debt services. As Malawi's need for external capital is expected to grow over the next years, the Government may encounter greater difficulty in borrowing on terms as soft as those it has received in the past. Debt service is likely to Increase, but even if the average grant element of ezternal assistance declines fromn almost 80 percent in the recent past to some 60 percent by 1980, the debt service ratio would not increase to more tharn 10 percent by 1985. The past  - 6 - record of good economic management and high growth, together with continued favorable prospects for exports and a relatively low debt service, makes Malawi creditworthy for limited amounts of lending on conventional terms. The external capital requirements will continue to be in excess of the foreign exchange component of project costs and external assistance should, therefore, normally also cover some local costs. 20. Malawi is considered eligible for Bank lending on Third Window terms on the basis of the following criteria: 1. Per Capita Income In 1975 Malawi's GNP per capita was US$150. 2. Performance The Government's development effort has been commendable and, over the last 12 years, has led to an average annual growth rate of 7.5 percent. A large part of the Government's investment program is directed towards the rural poor. 3. Ability to Repay Malawi, in view of its good economic management, and the present and prospective modest debt burden, is creditworthy for limited amounts of lending on conventional terms, although a substantial part of future borrowing should continue to be on concessionary terms. 4. Access to Alternative Sources of Finance Malawi's need for external financial assistance is increasing. It has, however, no special access to new sources of concessionary finance, and cannot prudently afford to borrow substantial sums on commercial terms. PART II - BANK GROUP OPERATIONS IN MALAWI 21. To date IDA has made thirteen development credits to Malawi amount- ing to US$96.7 million equivalent. Six of these credits, totaling US$42.5 million, financed agricultural projects. The remaining credits were allo- cated as follows: two credits totaling US$21.5 million for highways in 1968 and 1974; two credits totaling US$12.8 million for power projects in 1970 and 1973; two other credits amounting to US$17.9 million for education projects in 1967 and 1975; and a US$2 million credit in 1974 to finance the preparation of a planned pulp mill at Viphya. The first Bank loan (US$9.2 million) to Malawi was made on Third Window terms in June 1976 to help fi- nance the Karonga Rural Development Scheme. IFC's first investment in the country was made in February 1976 with US$6 million for a textile mill. A  - 7 - summary statement of Bank Group operations in Malawi as of January 31, 1977, is given in Annex II which also contains notes on the execution of ongoing projects. 22. Bank Group operations in Malawi will continue to emphasize rural development but importance will also be attached to infrastructure develop- ment (power, water supply and roads) and education. In agriculture, we are presently assisting the Government in devising a National Rural Development Program, for which we expect to recommend Bank Group financial assistance in FY78. Other external agencies are likely to participate in the financing of this program. We are also considering further assistance to help con- solidate two previously IDA-financed agriculture schemes in the Shire Valley and IFC is presently considering assisting a sugar development scheme. A water supply project for the city of Blantyre was appraised in May/June 1976, and is scheduled to be presented to the Executive Directors in FY77. A third highway project, which was appraised last February, is expected to include construction of the main road from Kasungu to Champira as well as the expansion of the district road maintenance program initiated under the Second Highway Project. In education, a sector study to be carried out jointly by UNESCO and the Bank is scheduled for May/June 1977 and we would expect it to lead to further Bank Group financing. Finally, the Bank Group is also assisting the Government in the preparation of a major pulp development project, whose total cost has been estimated at over US$300 million equivalent. Bank financial assistance for this project would be considered if suitable external guarantees can be obtained. PART III - THE POWER SECTOR 23. Malawi is rich in water resources. The falls and rapids of several rivers offer a source of power which can be harnessed to provide electricity at reasonable operational costs. Lake Malawi, the third largest lake in Africa, forms a gigantic natural reservoir which discharges at its southern end into Malawi's principal river and major source of potential power, the Shire. Between Khalombidza Falls and Kapachira Falls, the Shire falls about 420 m in 80 km. The total power potential of this stretch of river known as the Middle Shire has been estimated at about 500 MW. In the central and northern regions, some of the rivers which flow into Lake Malawi also possess hydroelectric potential. Alternative domestic energy resources include sone coal deposits at Livingstonia, a remote area of the northern region, and some 6eothermal power potential yet to be precisely estimated. Imports of petroleum are costly, and imports of coal from Mozambique or Rhodesia, or of electricity from the Cabora-Bassa scheme in Mozambique appear costly or unfeasible at the present time. It is therefore the Government's strategy to develop the 500-MW hydroelectric power potential of the Shire River. 24. A 24-MW hydroelectric power station at Nkula Falls uen the 'liddle Shire River, which was financed by the Commonwealtlh Developmnent Corporation  - 8 - (CDC), was commissioned in 1965. A second major scheme was the 16-MW Ted- zani Falls hydroelectric station, Stage I, which went into operation in May 1973. Credit 178-MAI of February 11, 1970 for the equivalent of US$5.25 million helped finance the foreign exchange component of a project including the latter hydroelectric station, a 3-MW diesel unit, and transmission and distribution facilities. Parallel finance for the equivalent of US$3.0 million was provided by the African Development Bank (AfDB). The project was completed close to schedule in 1973 at a cost of US$16.5 million, includ- ing a 14 percent cost overrun attributable to unexpected bad rock conditions and an underestimation of contractors' establishment costs. This overrun was financed with the assistance of CDC and the Industrial Development Bank of Malawi. 25. In 1973, Credit 426-MAI helped to finance the foreign exchange cost of Tedzani's second development stage with an equivalent of US$7.5 mil- lion. The project added 24 MW to ESCOM's hydroelectric generating capacity and also included a 14-MW gas turbine. CDC participated in the financing with a loan of US$6.0 million equivalent. The project is virtually com- pleted at a final cost of US$18.0 million, 27 percent above the appraisal estimate. This cost overrun is due to an acceleration in world inflation. It is being financed by CDC up to US$2.0 million equivalent and by ESCOM's cash generation and local borrowings. 26. These major power stations have been connected by a grid of trans- mission lines to cover the southern region and Lilongwe, which together account for 90 percent of power consumption. The town of Mzuzu in the north and some of the larger tea estates in areas where electricity is not supplied by the grid have independent supplies. A general northward extension of the grid has been uneconomic to date, given the lower population density in the north. 27. The demand for power in Malawi has been increasing at 25 percent annually between 1964 and 1967, and at 15 percent annually between 1967 and 1975 largely due to industrial growth. As industrial growth is not expected to continue at the earlier rate, the annual increase in electricity sales is projected to gradually decline to 9 percent by 1984. With the commissioning of the second stage of Tedzani, the interconnected system would be capable of meeting projected peak demand and energy requirements until 1980, after which the generating capacity to be provided by the proposed project would be required. 28. Apart from the proposed project, ESCOM's development program in the period 1975-1980 includes extensions of existing distribution facilities and the construction of a 541-kin, 132-kV transmission line from Tedzani and Nkula Falls II to Chinteche in Northern Malawi, to support industrial development in the Chinteche area. The first stage of this line, which will be routed to Salima, with a branch line to Lilongwe, is financed with the assistance of Canadian finance channelled through AfDB and is under construction and ex- pected to be operational by 1978 or 1979. Long-term planning for projects beyond ESCOM's 1975-1980 development program has started, including three major hydroelectric projects (Kapachira, Mptamanga, and Kholombidza) with a total capacity of about 360 MW on the Middle Shire River.  - 9 - 29. The main benefit of electrification in Malawi is to provide ade- quate support to the country's industrialization effort. Due to the high costs involved and the scarcity of resources, rural electrification is not at present a primary objective of the Government. PART IV - THE PROJECT Introduction 30. A report entitled "Malawi - Appraisal of Nkula Falls II Hydroelec- tric project" (No. 1149A-MAI dated March 11, 1977) is being circulated sepa- rately. A loan/credit and project summary is provided in Annex III of this report. The proposed project was appraised in November 1975. A further mission to Malawi took place in October 1976 to ascertain co-financing needs. The Government subsequently (in November/December 1976) approached various potential colenders and agreement in principle about the financing plan was reached in January 1977. Negotiations were held in Washington, D.C. from February 22 to March 1, 1977, with a Malawian delegation headed by Mr. C. Mphande. 31. The proposed project to be constructed between 1977 and 1980 would represent the second stage of the development of the Nkula Falls site. It would allow for 90 MW of generating capacity with two 18-MW units being included in the project and a further 54 MW being added at various stages in the next decade. Project Description 32. Specifically the proposed project consists of: (a) a rock fill dam about 7 m high and 700 m long on the Shire River at Nkula Site; (b) a pressure cut and cover conduit, headrace tunnel, penstock and tailrace outlet system of about 1300 m and a powerhouse designed for five 18-MW hydro units; (c) two 18-MW hydro units as a first stage of the 90-MW ultimate development; (d) consulting services; and (e) training. Project Execution 33. The project would be carried out by ESCOM with the assistance of its consultants: Kennedy and Donkin for electrical and mechanical equipment, and  - 10 - Watermeyer, Legge, Piesold and Uhlman for civil works. These two British consulting firms have been employed by ESCOM since Malawi's Independence. They have together actively participated in the preparation and supervision of all previous developments of the Shire River and in the design of ESCOM's long-term investment program. They will continue to be employed by ESCOM in the future and in particular will supervise the construction of the proposed project (ESCOM Loan Agreement, Section 3.02). 34. ESCOM itself is a well managed organization with experienced and competent staff in its senior management positions. Its performance under the two previously IDA-financed projects has been excellent. The General Manager has been employed by ESCOM for many years. About thirty percent of the senior positions are occupied by expatriates, including three of the four top management posts. ESCOM has designed a well considered training program aimed at complete Malawization by 1980. To ensure the continuation of ESCOM's management capability, appointments to top management positions would be made after consultation with the Bank (ESCOM Loan Agreement, Section 4.04). Project Cost and Financing 35. The estimated cost of the proposed project is US$66.4 million (including an insignificant amount of taxes and duties, since duties on all directly imported goods and services are expected to be waived) with a foreign exchange component of US$50.6 million. Taking into account interest during construction estimated at US$11.6 million, of which US$6.1 million would be in foreign exchange, the project financing requirements are estimated at US$78.0 million, of which US$56.7 million would be in foreign exchange. A summary of the project cost estimates is given below.  - 11 - Summary of Project Cost Estimate Millions of US dollars % of Description Local Foreign Total Total Cost Civil works 7.2 16.9 24.1 36.3 Mechanical & Electrical Works 2.8 17.1 19.9 30.0 Engineering & Admin. 1.4 4.1 5.5 8.3 11.4 38.1 49.5 74.6 Contingencies: Physical 1.7 5.1 6.8 10.2 Expected Price Increases 2.6 7.2 9.8 14.7 Sub-total 15.7 50.4 66.1 Training 0.1 0.2 0.3 0.5 Total Project Cost 15.8 50.6 66.4 100.0 Interest During Construction 5.5 6.1 11.6 Total Project Financing Requirements 21.3 56.7 78.0 36. The foreign exchange requirements of the project (including interest during construction) are expected to be financed on a parallel basis by the African Development Bank (AfDB), the Commonwealth Development Corporation (CDC), the European Development Fund (FED), Germany, and the World Bank Group. The proposed Bank Group contribution of US$25 million equivalent (which would consist of a US$9.0 million Bank loan on standard terms, a US$8.0 million Bank loan on Third Window terms, and a US$8.0 million IDA credit) would be used to finance the foreign exchange cost of the civil works component and of ESCOM's training program, as well as interest during construction on the Bank loans, and would cover about 32 percent of total financing requirements. AfDB finance (up to US$6 million equivalent) would be used to help finance the foreign exchange costs of gates, screens, penstocks; CDC funds (US$13.7 million equivalent) would be available to the project without any restrictions as to their use. FED funds (US$9.5 million equivalent) would help finance the foreign exchange costs of turbines, generators and cranes, and Federal Republic of Germany funds (up to about US$5 million equivalent) would help finance the foreign exchange costs of switch-gear and transformers. External funds, which on the basis of present offers might reach up to US$59.2 million, would thus  - 12 - cover the full foreign exchange requirements of the project and possibly some US$2.5million of local expenditures. The balance would be provided by ESCOM, with local interest during construction being capitalized and regarded as government contribution to the financing of the project. 37. The Bank loan of US$9 million would be made to ESCOM at 8.5 percent for a period of 20 years, including a grace period of 4-1/2 years. The US$8 million IDA credit and US$8 million Bank loan would be made to Malawi on standard IDA and Third Window terms, respectively, with the proceeds being relent to ESCOM for a period of 25 years, including a grace period of 4-1/2 years, at an interest rate of 8.5 percent per annum. The AfDB loan, which is expected to be considered by AfDB's Executive Directors towards the end of April or early May, is likely to be for a period of 15 years including a grace period of 5 years, and to carry an interest rate of 8 percent per annum. The CDC loan, which would be made to ESCOM for a period of 20 years, including a grace period of 5 years, at an interest rate of 8.5 percent per annum, has been approved. The proposed FED contribution is expected to be approved around mid-April and to be made available to ESCOM for a period of 40 years, including a grace period of 10 years, at an interest rate of 1 percent per annum. The proposed German contribution was recently appraised by KfW which is expected to recommend for consideration by the German Government a loan of up to US$5 million equivalent. Consideration is expected by July. The loan would probably be made available to Malawi on soft terms with the proceeds relent to ESCOM for about 25 years including a grace period of up to 5 years, at an interest rate of about 8.5 percent per annum. The effectiveness of the AfDB, CDC and FED Loan Agreements would be a condition of effectiveness of the Bank loans and IDA credit (ESCOM Loan Agreement, Section 7.01(c), TW Loan Agreement Section 6.01(a), and Credit Agreement, Section 5.01(b)). As finan- cing 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, cross effectiveness would not be required in this case. Procurement and Disbursement 38. The project would be executed under several contracts with procure- ment and disbursements arrangements to meet the requirements of the respective colenders. The civil works contract, which would be financed by the Bank Group, is expected to be awarded shortly. The procurement procedure followed Bank Group guidelines for international competitive bidding. The Bank Group's funds would be disbursed on the basis of 100 percent of foreign expenditures for civil works and for training, as well as against interest during construction on the Bank loans to lessen the burden on ESCOM's cash requirements during the construction period in view of the large size of the project. Disbursements would first be made from the IDA credit and thereafter, on a proportionate basis, from the two Bank loans. Bids for gates, penstocks, screens and manifold (to be financed by AfDB) were received in December 1976, and the award is expected by April 7. Tender documents for turbines and alternators (to be financed by FED) were issued in December 1976 and bids are expected early in May. Tender documents for transformers and switchgear have not yet been issued. Contracts for engineering and supervision have been entered into by ESCOM and the consulting firms of Watermeyer, Legge, Piesold  - 13 - and Uhlmann (civil consultants) and Kennedy and Donkin (electrical consul- tdnts), both of the United Kingdom. Finances of ESCOM 39. ESCOM's financial performance has been very good. Between 1970 and 1975, kilowatt hours of electricity sold increased by 93 percent, revenues by 114 percent and net income by 126 percent. During the same period, net fixed assets in operation, expressed in historic costs, increased 2.3 times from MK 9.7 million to M1K 22.0 million. Of the capital expenditures, including interest during construction, about 23 percent have been financed by ESCOM's internal cash generation, which is considered satisfactory given the high level of these expenditures. ESCOM's annual accounts will continue to be audited by independent accountants acceptable to the Bank (ESCOM Loan Agree- ment, Section 5.02). 40. The rate of return on average net fixed assets valued at historical cost was at a high of 14 percent in 1972, declining to 8 percent in 1974 witl the addition of the Tedzani Falls Scheme to the asset base. In 1975, it was 13.6 percent. To secure a more realistic assessment of its performance, however, ESCOM has revalued its assets at the end of 1975. Beginning December 31, 1977, ESCOM will revalue its assets annually using methods acceptable to the Bank (ESCOM Loan Agreement, Section 5.05). In order to maintain ESCOM's financial viability, it has further been agreed that the rate of return on average revalued assets will be no less than 12 percent in 1978 and 1979, and no less than 8 percent in 1980 and thereafter (ESCOM Loan Agreement, Section 5.03a). 41. Despite an adequate level of income between 1970 and 1975, ESCOM's cash position has been tight because of the high level of capital expenditures. Tariff increases of 12 percent and 20 percent were introduced on January 1, 1975 and on September 1, 1976, respectively. Further tariff increases will be necessary to achieve the above rates of return. ESCOM and Malawi have agreed that an increase of not less than 30 percent will be introduced no later than January 1, 1978. This would bring ESCOM's tariffs into the middle range for Eastern African countries. In addition, it has been agreed as an additional condition of effectiveness that ESCOM would make arrangements satisfactory to the Bank to raise an additional MK 3.6 million (US$4.0 million equivalent) to meet a temporary cash shortfall that could occur during the second half of 1977. This is expected to include a combination of a renewal of overdraft facilities, short-term local or external borrowing, and possibly a moratorium on interest due to Government on account of past loans. Until project com- pletion, ESCOM will not undertake capital expenditures of more than US$1.5 million other than the proposed project without the agreement of the Bank (-SCOM Loan Agreement Section 5.07) and will not incur debt without prior Bank approval, unless future debt service is covered at least 1.5 times by internal cash generation (ESCOM Loan Agreement, Section 5.04).  - 14 - 42. The introduction of future tariff increases provides the oppor- tunity of bringing ESCOM's tariff structure closer to long run marginal cost pricing. It has therefore been agreed that ESCOM's tariff structure will continue to be reviewed, in consultation with the Bank (ESCOM Loan Agreement, Section 5.03b). Environmental Effects 43. The proposed Nkula II dam will raise the natural water level of the Shire River by 7 m at most. Although this change would have an effect on the existing Nkula I hydroelectric facilities and on the water intake facilities of Blantyre Water Board (BWB), only minor modifications to these would be necessary. 44. The proposed project should cause no major ecological problems. There are no permanent human habitations and no crops which would be inun- dated when the dam is commissioned. Nonetheless, ESCOM will examine the possible ecological changes arising from the project and steps which should be taken to avoid or mitigate any undesirable side effects (ESCOM Loan Agree- ment, Section 3.03 and Guarantee Agreement, Section 3.04). Irrigation Aspects 45. There are at present no competing claims for the waters of the Shire River upstream of Nkula II. Since continued availability of water in sufficient quantities for the project would be essential, it has been agreed that 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 Hydrostation, unless the Government and the Bank agree that such abstraction would be economically justified, and will permit ESCOM to divert water from the Shire River in such amounts as may be necessary (but not less than 170 cubic meters per second) for the purpose of power generation at Nkula Falls II (Guarantee Agreement, Section 3.03). Economic Justification and Risks 46. The proposed project is the least cost solution among several alter- natives for meeting Malawi's growing power demand until the early 1980's. In addition to the proposed project, several alternatives for meeting long-term demand were analyzed: (a) two diesel sets of 10 MW each as a first step to be followed by the Nkula Falls scheme; (b) two coal-based steam units of 20 MW each followed by hydro projects; and (c) only hydro units. Calculations demonstrate that for discount rates lower than 21 percent the proposed project is the least cost solution. Moreover, this conclusion is not affected by substantial changes in the assumptions underlying the calculation. The rate of return of the proposed project is estimated at 10 percent, while that of the complete Nkula Falls development would be 13 percent. Project risks are no greater than can normally be expected with operations of this type.  - 15 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 47. The draft Development Credit Agreement between the Republic of Malawi and the Association, the draft Loan Agreement between the Republic of Malawi and the Bank, the draft Loan Agreement between the Bank and the Electricity Supply Commission of Malawi, the draft Guarantee Agreement be- tween the Republic of Malawi and the Bank, the Recommendation of the Commit- tee provided for in Article V, Section l(d) of the Articles of Agreement of the Association, the Reports of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, and the texts of three draft Resolutions approving the proposed credit and loans, are being distributed to the Executive Directors separately. 48. Features of the Credit and Loan Agreements of special interest are referred to in paragraphs 33, 34, 37, 39-42, 44 and 45 of this Report. Additional conditions of effectiveness of the credit and loans are that Government and CDC have released the security on debenture stock provided in trust deed of April 21, 1965 between ESCOM, Malawi and Barclays Bank, that satisfactory arrangements have been made to meet ESCOM cash requirements during 1977 and that cofinancing agreements, except for the loan of the Federal Republic of Germany, have been signed and conditions precedent to their disbursement have been fulfilled. 49. I am satisfied that the proposed credit and loans would comply with the Articles of Agreement of the Association and of the Bank and with the established criteria for Third Window loans. PART VI - RECOMMENDATION 50. I recommend that the Executive Directors approve the proposed cre- dit and loans. Robert S. McNamara President Attachments March 16, 1977  ANNEX I Page 1 of' 1 pages TABLE 3A MALAWI SOCIAL INDICATORS DATA SH4EET LAND AREA (THOU KM2)......................... ............... 4~~~~~ALAWI REFERFNCE COUNTRIES (1970) TVTAL 118.5 MOST RECENT AGRIC. 47.I4 1960 1970 ESTIMATE SOMALIA TANZANIA SwAZILAND - SNO PER CAPITA (US51) 500 0. 100 7.020.0 230.0 POPULATION AND VITAL STATISTICS 0JPtILATI1N (MID.Y.A. "ILLT3N) 3.5 0.5 5.1 /a 2. A I2.9 /jR 0.0 DPOjUATIIN DENSITY 0EQ qQ(IARE K.4M 29.0 18.0 04.0 /a. o.o 104. 0 20i.0 OER SQUARE Km. AGFIlC. LAND . 102.0 . 23.0 VITAL STATTSTICS CRUDE BIRTH4 RATE PEQ TAlLiSAND 149.0 149.3 147.7 i4?.7 50.5 50.3 CRUDE DEATH4 RATE PEQ TWJIDSAND 30.6 28.1 23.7 23.8 23.0 214.6 INFANT MOIATALITY RATE (/T4.gnU). 142. 0 .. 6.0 /b LIFE EXPECTANCY AT RTRT.4 CYR9) 35.0 38.5 a0I. 0 38. 141.8 01. IAw1S9 REPIVODUCT1ON RATE 3. 323.'.012 3. 01RULAT]IN GROWATH RATE (X) T )TAL4 2. 2 2 .6 2.6 & 2.4 3. 0 2.q 10900 7.0 7.0 S . . /5 a l 1.o/a JORAN PIP,,LATI(IN (0 IF TITAL) .. . 0/a 6. ../a 7.0/b AGF SIR ICTILJE (PFACEYT) n TO 1o YEARS RR 5 /a 0 3R ./a . 06.0 00 4 0/b u6b bt IS TO 64 YFAPS 51II0 7a S2.1 i7. 52. 0 51.0/ 09. 6I5 YSAR5 AND 3VER 0.S 7a- 0. :.. . . . * ACE EPENnENCY RAT!) I.0 b_.1. 7CONiIMT4C DEPENDENCY RATIO II1/b 0.9 7 . 1. 5 1 "A41LY PLANNING. ACCEDTIR% (CU'4IILATIVE, TH4fl)) .. ISEa (T IIF .4ARWTEO OOe1EN) ........ 0MLIYMENT TITAL LaS1R FOriCE fr4iiAOSnD) I1600 .0 2 3 00II.0 .10 0. 0 s,60T 04/~~1 150.0 '."J"R F1RCE TN AGOIICJLTIIQE (14) 93.D AR.( .. 2.0( 91.:0 la 50.0 IN4FmLIYEIn (0 nF LA910 F-OOCE) . 2 0. 0 Ia NZ1N04E )IIOTQYIVJI 1 % IF 'R)TVAIF INCOME REC'1n PY. HI GMTS 55 OF HDUMIWLD . 2R.5 . 351.5 InGH&ST2L0pmO HUSZHWLD8 52.9 . 6 3. 3 IDWZST 20* OF HsiUSmNDLD ...7 ... .3 LWWET 40% OF MwS1Es . 1.0 7 . Ft ')15T01j9tTION IIF LAND DAWNERSNI1P t loME') RY TIP lOX O)F OwNERS . .. I Nf'JE R4Y SAALLF4T lOT O..NFQS ... -EAtLTs Ao) NoITQITI-IN >30IJLATIIlN PFR PHYSICIAN . 752%n00* 2100i. 0. 21 570 . 0/a 7690.0 'lli)LoT1IIN PEA ',IkJR5pN- sF5n,0 . 655 0 .0 1b690 0 mt0.o 7a 930 .0 '0L' PFw 40SPITAL :%En R400. /c 600.0 760.0 5 70. 0 ,on.o7-a 290.0 2E4 CA-1TA SIIPPLY IF - 'AL JRIFS (0 'IF REIIJFIRENTS) gb.( 911.0 Rb.0 77.0 713. 0 '4OTEIY TG.RAMq PFR IAY) 50.0 54.0( 63.0 57.0 U3.0 . FHICN4 A'41 4AL~ AND0 PIL1E 6 .0 /d 9.0 /d ? 7.0 /b P3*Y ')EkT- RATh (/IH 4 U) AGES 1.0. !D )CAT) T I ') IJEIFFO ENWILL'4ENT RIATIO 0,A)OARY SCA4 VIL 39*0 36.0 I 0. 0 36.0 A4.0 9ET. (ol-AQY SCPV(L I0 2.0 .0. 3.0 1 70 YEARS IF RCHMlJLING DROvtIDEn (FIRSqT AND) %Fcn4l LEVEL) 10.0 10.0) 1 .0 1?.o I1 0 12.0 VPJChTTOsOL I-NwnLLm~ENT rO iF sFCo4NOARY) ;0*0 3 .0 . .0 /c I10. 0 IS 2 .0 A) LI LI TFRACY RATE (1) I . . .. 0 .0 'FS1J4 OF4 010n4 (&vF:AAGE) ..1.RISe 1.7 )CMI0I)1 0.wFLLlNSD ATT4'SJ1` 01T1'' 4ATFO (0) .. 7R.0/0.f .. o. L0/bd ACCE%SS I" ELICTOICITY fy IF ALL 1o~FLLI'J~S) .. 16.0/e.f ... . R0 - OTI `l.5ITQ 'T.Y ( CTY :C)49JI I IT - l?AlTl PrrFVIOLS (PF4 I.s PIP01) 9.( /e 20.0 75. 1.0 I I. 0 70.0 'ASSF.1i" ZOWS (O(Q 5-.), - 40)I 2 .0 2 .0 7).0 3 .0 1 1 .0 TLFCTPT:ITY (4.-,I/YR PCO ZAO) I4 00 s?.n 00.0 10.1) 31.0 /a FOESP001',t (,';IY.l PF4 AP)I 0.03 . 0.1 1. 2 0 .1 STE N.150119 ' a Or FFTNY.TITN. IN .JEVF05F  Page 2 of 4 pages NOTES teeotberwite noted, date for 1960 refer to amy year between 1959 aod 1961, for 1970 between 1966 aid 1970, end for K.-c Recent Esthae.ti beweco 1971acod1973. - S..ail-od bat bee goleoted as en oblective uo-trv bece.c he econonic atrroctree cf both cootiriec are quite eLiflar. MALAWI1 1960 Ia 1962, kfricco population- lb Ratio of pojpoletion uder 15 and 65 and over to total I.c, forte, 1c 1963, Id 1961- 1963. Ie Including data for Southern Rbodecaia ad Zomebie 1970 la 1966, lb Ratio of popolalo un der 13 ted 63 and teen to tote' labor forc.. Ic C-ovrage of data unknown, Id 1964- 1__ _ 966, 7e 1967, It Uitbon only MOST RLECENT ESTIMiATE- I 1973. lb 1970-75 01*4ALIA0 1970 IaUrbac oly, lb 1964-66, 7 Public education onLy. TANZCANiA 1970 IaMainland Tan...nie; lb 396?, Ic 1965, Id Urbae only. SWAZILANDO 7970 Ia 1936-66, lb 1961, I/c Afnire.. population oly, Id Ratio of .poplati.on tdet 15 and 65 and ove to total labor force M9 JuLy 19, 1976 SEP TNIlSONS OP SOCIAL IDJIICATORS Land urea (than Ion2) PoPlattion Per -uring person - Population divided by camber of practcinfg Total Total araearea conpniaiog land are and inland water. nele end f,mele graduate nr.een, "trained" or "certified" a.rson, and Agree. -Moa reet-timate of agritoltrat area uaed semporerlly or anoillcry personnel with training or e.perleo.e. peoacetyfoe cropa, pea.t-ra, narket 6 kitobee. gardena or no lie P.p.l.tion. Per hospital bed - Population divided by cancelr of hospital beds fallo- available in publlc and private general and apecialieed hoeplal tand rehabilitation tentera; emelade. uan homeen and cetabliebmete.t for GRP per capita (US$3 - GliP per capita e-tinten at ourrent market pricee, ...atadial and prevetive tare.' calculated by acm c-on-rion netbod at Wdotld Bank Atlan (1973-75 basis); Par capita eupply of calorie C (7If reosirenento) - Composed from energy 1960, 1970 ad 1979 data. equIvalent of net fend nupplica aveflable is country per napite per day. available cappllea conepriac 4-teaci produceion. ioparte le..ceaporta, PpoplatIon and vitel sitatotlca end chtanges Sn etoek; not aupplien emolude animal feed, needa, quatities Popalation (nid-yr. million) - An of JalY lOran- if not avaIlable, sted in feod pr-ce-ing and Icaesc to dttreibutio.. requirmnenr nere average of two end-year eati-utes; 1960, 1970 and 1975 data. aatimatcd by PFA0 based on pbyitlegicl- .. neda for noma activity and health o-nidering enwtonmntal tspertatur, body weighta, ago and see Popslatioc de...ity - ncr anure len Mid-year population per aquare kilo- dietrihutiono of populatIon, and allowing lIt for wcete at hotaahold lnel1. neter 10 eotaree) oI "totlara Poe.. i oin deuntn s nt uaare. (mc oferie, land - Campated aa above for Per caPita eapply of protein (gran per day) - Protein content of per agri-aItrura land only. caPita net topply og food per day; net supply If food is defined aa above; reqo ire nto for elI1 o .u.r tiea eatabliehnd by 0006I icoandoI Vital statiatico R.earoh Sevi... Provide for a ninimea aloac f 60 grant of Crade birth rate e thouad. avereot - AnnualI live births pet tho .cand total p-acein per day, cod 20 gran of animal and puSae protetn.of of mid-year pouaSn en yea artmti .vrgec ending in 1960 sand whioh IS grem ebould be animal protein, these oan.darda are lowe 1973. and flo-year avrge ending Sn 1975 for most recent eatimate. than cbtee of 73 grant of total protein and 23 groma of animal protein Crude death rate per thoucand. o-erace- Acosa1 deaths per thantand of ndd- as as average far the warld, propoced by FA0 in the 'Third World Food yer population; ten-yeaer -ithnatit --ertg ending ic 1960 and 1970 cand la y fiv-_year average ending in 1973 fo otrcetetmte e aia protein supply fra anmland Du.c -Protein e-pply og food Infant mortality rate (Ithool - Ansoa1 deaths of indents ondee one year aie ftom an lmal end pulsVes 9rns$ per day. of ge per thou..and lIve birt hs. Sna1i rte. (Irhow) Reea 1-4 - SAcua1 deatha per tbhuoaod in age group Life :.enprtanoy at birth Cyr.) - Average caber of years of life remin- 1-4 years, to children in thia age greop; suggested on as indicator of cin at birth, ,a,Illy fiv-year a-ergen ending in 1960, 1976 cod nalm-trition. 193foe developing aocrie.. Irnee eprodntion ate -Average nunber of live d-ughtera a woa will Education betin be ora eproductive period Ii ahe emperieccec Prasent age- Adlu~atad enrollment ratio - p.ita,v achool - Enr1llment of all agea as opeifir fertility ranea, -ou_lly fiv-year avrages ending in 1960, pernentege of primarycohoel-age populatio.. inludoa children aged 197.0t ad .1973 fIordeve,lo,ping counriec. h-Il y.are but adjaned fo'r different lenthba of primacy ed-atite, Poalaio towl at () - total - Cnpound annul growth ratee of mid- fen conutries with eivere-l eduction. earelloent may ea...ed 1057. ,year popolation for 1950-60,,1960-70 nod 1970-75. aisce tom Pupils are below or above the official aehoo1 age. Popultion rowtb rain 17.; - -oban - IMPuted like groweh rate of total Adjotted enrollmentratio- secondary school - Conp.ted an above; popoltyiof. difeetcdfntoso ra ra ayefc mpr-ocm - educatio requires an leaat four yearn of approved primery hRyofdte amngconrie. Sonirtutioc; provides geaeral, v-etiooel or reanbee training Urbat popolati f, of total) - Ra tio.of ubnt total population, iSnnt-ution for pupils of 12 to 17 yearn of age, -orrespordenee diffren defInittino of urban ar-e a affct omoporability of dota nouraee are generally e-oluded. om:ong cos-triec. Yeo.r,.a of sohon1ln crovded (float and ..erond leves) - Total yearn of ag iutre (onronon) - ahlde (fl erl okn-g 1-64 years). scoln;s eondary level. v-etios..l imatrution may be par- and recited f63 year end over) aspercentagee of mid-yea population. tiaIly or cmpletely emeIoded. Ate deonedetoy ratio Ratio of popalotion under 13 and 65 and avr to Vocatioeel enolma I f iaecondary) - V1ocational institotioss titan of a 1e I through 64.1 Inld technical, indoatrial or other programos whicb operate ic-oni dependency ratio -Ratio of popalation under 13 and 65 and over Independentl or ondep tan,onnta of oconndnry inc titutione. to the labo fore n aegopf1-4yar.Adult literaoly ft()-Literate ednO (able to read and write) cs Family plann.ing - acator (csmulativn. thou) - clative I-otbr of Percentage of total adult population aged 1 years and oven. acoe ptora of hirth-oc-tol d-vicee nder -npioca of national family pla.nng prgaIAeicpin. Hooin familY olnia-uac fmrried acc)-Per-ettgee of macind P pars e room Corbas) - Average ocncar of Pernos per roan in wosnof child-bearing age (13-44 ye,ar) who man birih-cnoctal deviena oco-pied ta-entiosal dwellings in urban areas, dwellings eaclude to allnrnied wome in atne age group. nan-Permamennt Steoctures cod unccupied penc Occu,pied dwelina, without piped watro (%) - QocupIed convetional Tlotal l.et dwellings icd)n urban and total trees withnuc oneide or outside Piped locallahorforceItbotandI- EconomitaIly active persona, including water facilities a- Percentgag of all recopied dunIlinga. armed forceei and nemploeyd but eneloding bouewive, tcudento, etc.; Acettoeetict 7 of all dwellings) - Conventional duallinge deficcoai aitue cowocrica are not comparable. wiCh electricity in Iving quarters at Percent of teral duel1lga is Labor force is acricotinre (71) - acgni-Itu-Ai labor force (in farming, urban and r,cral ar-n foc r,hooting, and fleh,Ing) as percentage of total labee domce. Intel dwellimga consented to lc. rr (7.3 - Computed as above for farnoed t: t of labor fac)- Unemployed are a-taily defined as rura dw-llagc on ly. pereone w~ho too able and willing ton take a Job, our of a Job a -given day, raesaiced our of a Job, and aseking oath for a papcifilad Cons,apction miohecet period nout e...edini one week. may not be -aParable between Radio receiv-ra (per thou poar) - All typec of r-eoivere for radio broad- no0-irins dce to diiierent deftisicion af uneployed and source of Casta no general public per btue-ed of popolunion, e-cidec data.eg, e m ployment office aetoietiec, aeple -.rvY., anspulury unlicensed reteivere it coutrien and in ye ra when registration of umnploy.etneoic ae radio aesa -a in effect, data for recent peara may nor be conparable 1c.we di.tribution - p-~c.go of pri_t. incstore moo rutcniec aboliaha'd liten..iog. Income icoribtioc -Percentge of rivateinemec(both in caeb and Pa ...acegrcrs (per thou pop) - P eaeger cars comprIse motor cars bind) rei-ed by rihebet 3%. richesr 207%, po-rrt 20%, and poroeating lean than night per.anna; -acidesabtlne heanees and 40l of hotnebolds. military vehiules. Electr~icity (bab_lyr per cace) - Annual conoption of induerria1, ca-- Dlstribution of lend -werehia - P-ertecgna of land owsd by, weltbienr Ierial. pblia and private electricity in kilowatt haute per capita, 10t and p-oreo 10% of lard oer.gene.rally based on producitio darta wirhoan allowance for Il...e. in Health and N.triti.. g~~~~~~~~~~rid. but allowing for imports and eaporte of eletricity. grainS end Sotrition ~~~~~~~~~~~~~~~~~~~~~N_venit Ibelyr per oap) - Prcpt nulcnapini iarm Population per olcyicila - Population divided.by nt-beriof prac.ticing eti_'ated from do,nearic produ-sioc PIca net imports of newPrint. phyaicia_ qcalified fron a medita1 coor atIci_erniy level.  M A L A W I Page 3of4pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1975 ANNUL RA1E OF GRDWTU (7. constant prices) US $ Mln. % 1965- 74 1975 GNP at Market Prices 771.6 100.0 7.7 5.6 Gross Domestic Investment 208.2 27.0 12.4 23.5 Gross National Saving 105.0 13.6 20.5 -5.0 Current Account Balance -103.2 -13.4 Exports of Goods, NFS 171.7 22.3 6.7 15.9 Imports of Goods, NFS 292.3 37.9 6.2 17.4 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1975 l/ Value Added Labor Force'1 V. A. Per Worker US i Hln.~ %~ Thousand 7. US $ % Agriculture 322.3 44.5 1,300 87.3 247.9 5i.0 Industry 162.2 22.4 75 5.0 2,162.7 444.0 Services 239.7 33.1 115 7.7 2,084.4 428.9 Unallocated _ _ I 100.0 Total/Average 724.2 100.0 1,490 100.0 486.0 GOVERNMENT FINANCE Public Sector Central Government { t EIn.) 7D. of GDP ( . Mln.) _% of GDP 1973 1973 1969-73 1974/752V 1974/75 1_LlLZJ-1974/75 Current Receipts 63.4 14.4 14.8 78.7 13.5 14.0 Current Expenditure 64.5 lI.L 16.5 .2L-8 J12.7 13.8 Current Surplus -1.1 - 0.2 -1.8 4.9 0.8 0.2 Capital Expenditures 47.6 10.8 11.0 40.8 7.0 7.9 External Assistance (net) 43.5 9.9 10.8 19.1 3.3 5.1 NOTE o 11 nnversionq to dollars in this Anne?, are ar the average exchange rate prevailing during the period covered. 1/ Total iabor force defined as male population between 15 and 60 years of age plus women actually employed. 2/ The fiscal year is from April to March; the GDP has been adjusted accordingly. not available not applicable  ANNEX I Page A of 4 pages MONEY, CREDIT and PRICES 1965 19 72 1973 1974 1975 (Million MK outstanding end period) Money and Quasi Money 25.3 63.5 85.6 116.0 127.6 Bank Credit to Public Sector -2.1 11.0 11.4 19.8 72.5 Bank Credit to Private Sector 10.1 35.7 33.0 49.7 56.1 (Percentages or Index Numbers) Money and Quasi Money as 7 of GDP 14.0 16.7 19.4 21.0 19.2 General Price Index (1970 = 100) 78.9 112.1 117.8 135.9 157.2 Annual percentage changes in: General Price Index .. 3.6 5.1 15.4 15.7 Bank credit to Public Sector .. 150.0 3.6 73.7 266.2 Bank credit to Private Sector ,, 6.1 -7.6 50.6 12.9 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 197 3.75) 1973 1974 1975 US $Mln % (Millions US $) Exports of Goods, NFS 121.2 157.0 171.7 Tobacco 46.6 39.2 Imports of Goods, NFS 168.3 220.3 292.3 Tea 20.5 17.2 Resource Gap (deficit = -) -771 -5673 -120.6 Groundnuts 7.0 5.9 Sugar 9.8 8.2 Interest Payments (net) -3.0 -3.0 ( All other commodities 35.1 29.5 Workers' Remittances 23.7 35.7 ( 9.3 Total 119.0 100.0 Other Factor Payments (net) -18.5 -22.1 Net Transfers 7.0 7.0 8.1 EXTERNAL DEBT, DECEMBER 31. 1975 Balance on Current Account -37.9 -45 -103.2 US $ Mln Direct Foreign Investment (net) 6.4 11.9 9.3 Net MLT Borrowing Public Debt, incl. guaranteed 239.0 Disbursement (37.4) (31.7) Non-Guaranteed Private Debt Amortization (-4.) (-j,7) Total outstanding & Disbursed Subtotal 33.2 25.0 31.3 2/ Capital Grants 9.6 11.9 16.2 DEBT SERVICE RATIO for 1975 Other Capital (net) 16.9 14.3 (-11 0 Other items n.e.i. C. - (. Increase in Reserves (-) -33.0 -14.4 .+57.4 Public Debt, incl. guaranteed 7.0 Non-Guaranteed Private Debt Gross Reserves (end year) 66- 7 81.8 61-5 Total outstanding & Disbursed Net Reserves (end year) 62- 1 75 .8 24-1 PETROLEUM PRODUCTS 1973 1974 1975 (Million US$) Imports 11.3 17.9 22.9 Re-exports 2.1 1.0 - RATE OF EXCHANGE IBRD/IDA LENDING, (end Dec. 76) (Million US $): ____________ 1971 1972 1973 1974 1975 IBRD IDA US$ 1 20 1.23 1.19 1.1624 US$ 1 MK 0.83 0.81 0.82 0.84 0.86 Outstanding & Disbursed - 3/ 6.1 Undisbursed 9.2-- 24.6 Outstanding incl. Undisbursed 9.2 7F Since June 6, 1975 the Malawi Kwacha is pegged to SDha. 1/ IMF, International Financial Statistics, September 1976 i Ratio of Debt Service to Exports of Goods, Non-Factor Services and Workers' Remittances ,' Tll rd window loan. January 12, 1977  ANNEX II Page 1 of 4 THE STATUS OF BANK GROUP OPERATIONS IN MALAWI A. Statements of Bank Loans and IDA Credits (as of January 31, 1977) Amount Bank US$ Million Loan or Third (less cancellations) Credit No. Year Borrower Purpose Window IDA Undisbursed 6 Credits have been fully disbursed ... ... ... ... 41.2 - 102-MAI 1967 Republic Education 6.3 0.1 of Malawi 282-MAI 1972 " Agriculture- 6.6 1.0 Karonga 363-MAI 1973 Agriculture-Shire 10.5 2.8 Valley II S-17-MAI 1974 Transport Engineering 2.0 0.6 and Services 523-MAI 1975 Second Highway 10.0 7.0 550-MAI 1975 " Agriculture- 8.5 5.6 Lilongwe III 590-MAI 1976 Education II 11.6 11.5 1286T-MAI 1976 Agriculture - 9.2 - 9.2 Karonga II TOTAL 9.2 96.7 37.8 of which has been repaid 0 0 TOTAL now held by Bank & IDA 1/ 9.2 96.7 TOTAL undisbursed 9.2 28.6 37.8 B. Statement of IFC Investments (as of January 31, 1977) 1976 Loan Equity Total David Whitehead and Sons Textile Mill (Malawi) Ltd. 6.0 - 6.0 Held by IFC 6.0 - 6.0 Undisbursed 4.5 -4.5 1/ Prior to exchange adjustments.  ANNEX II Page 2 of 4 C. Projects in Execution 1/ Credit No. 102-MAI First Education Project; US$6.3 million credit of May 4, 1967; Date of Effectiveness: July 3, 1967; Closing Date: June 30, 1977 The project consists of the construction and equipping of one national primary teacher training college and the provision of technical instruction facilities in 12 secondary schools. The project has been implemented satisfactorily and school premises have been in use for about two years. A request from the Government to use savings under the credit, amounting to about US$420,000, for the construction of a post and telecom- munications school to be jointly used by Malawi, Botswana, Lesotho and Swaziland was agreed to by the Executive Directors on December 4, 1973. The Closing Date has consequently been postponed to June 30, 1977. Con- struction of the post and telecommunications school has been completed and the credit is expected to be fully disbursed shortly. Credit No. 282-MAI Agriculture - Karonga Development Project; US$6.6 million credit of January 26, 1971; Date of Effectiveness: August 14, 1972; Closing Date: December 31, 1977 Due to cost escalation the project period has been reduced from five to four years. Only minor reductions of physical targets have occurred. Completion of the irrigated double cropped rice scheme, reduced from 1,500 ac to 1,000 ac was delayed due to exceptional flooding. Extension and research are working satisfactorily. All necessary staff for the health component are in post and bilharzia control is now a continuous program. Lake transporta- tion has been generally improved, but the barge purchased under the credit and put in operation in early 1976 proved defective. Corrective measures are expected to be undertaken shortly. In addition, the Government has requested and obtained IDA's approval to use project funds to raise the Chilumba jetty by 2 feet to avoid flooding caused by high tides. The project is being fol- lowed by a Phase II project (Loan 1286-T-MAI). Credit No. 363-MAI Agriculture - Shire Valley Development Project Phase II; US$10.5 million credit of March 28, 1973; Date of Effective- ness: April 27, 1973; Closing Date: December 31, 1978 The project is a continuation and an expansion of the program com- pleted under Phase I and includes extension services, credit and marketing facilities, a livestock component, health facilities, fisheries development, 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered and the action taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 3 of 4 feeder road construction, research on irrigated and rainfed crops, land registration and wildlife protection. Due to a combination of technical and social factors, crop output may be lower than envisaged at appraisal. The Government is currently reviewing the cropping program in detail and a revision of the production targets may become necessary. The road con- struction program is making satisfactory progress. A senior health officer for the health component assumed duties recently and is now working on the urgently needed operational health program. A Phase III, or a consolidation phase, project is currently being prepared by the Ministry of Agriculture with assistance from RMEA. Credit No. S-17-MAI Transport Engineering and Services Project; US$2.0 million credit of June 13, 1974; Date of Effectiveness: August 28, 1974; Closing Date: June 30, 1978 The project would help determine the infrastructural requirements and provide technical assistance for the exploitation of the Viphya forest resources. Necessary transportation studies and the design of the required transport facilities have been completed. VIPCOR, the Malawi organization which is in charge of the Viphya project, is in the process of seeking financing and technical partners. Credit No. 523-MAI Second Highway Project; US$10.0 million credit of December 19, 1974; Date of Effectiveness: February 21, 1975; Closing Date: June 30, 1978 Construction works for the main road from Lilongwe to Champira, although some months behind the original schedule, are about 40 percent completed. The first results from the maintenance pilot program indicate satisfactory progress. The present cost estimates indicate that the final project costs will be well within the appraisal estimates. Credit No. 550-MAI Agriculture - Lilongwe Land Development Program Phase III; US$8.5 million credit of May 27, 1975; Date of Effective- ness: August 12, 1975; Closing Date: June 30, 1979 The Phase III project of the Lilongwe Land Development Program has made good progress. Construction of project infrastructure is now almost on schedule. Due to reduced input use as a consequence of last season's high fertilizer prices and adverse weather conditions, average maize and ground- nut yields were lower in 1976 than in the preceding year. However, overall production of high value crops such as tobacco and groundnuts has increased considerably. The stall feeder and poultry programs are expanding rapidly, contributing to sizeable income increases of small farmers. Credit adminis- tration and loan repayments continue to be outstanding.  ANNEX II Page 4 of 4 Credit No. 590-MAI Second Education Project; US$11.6 million credit of November 24, 1975; Date of Effectiveness: February 24, 1976; Closing Date: March 31, 1981 The project will provide prototype construction models of primary schools, strengthen the program of rural education, establish a new primary teacher training college, and add facilities for the teaching of practical subjects in selected secondary schools with emphasis on facilities for girls. Prior to becoming effective on February 24, 1976, the project had made a good start by early appointment of consultant architects. Key personnel for the Project Implementation Unit had been appointed, including a Malawian Project Director and a Project Architect. The Commonwealth Fund has provided two architects and a quantity surveyor to assist the Project Architect in the design of the primary schools and the supervision of construction. Due to lack of skilled manpower, difficulties have arisen in finding Malawian draftsmen for the Project Unit's design staff. However, efforts are being made to recruit them. Loan No. 1286-T-MAI Second Karonga Rural Development Project; US$9.2 million loan of June 3, 1976. Date of Effectiveness: August 18, 1976; Closing Date: March 31, 1981 The project, financed on Third Window terms, is in part a continua- tion of the first Karonga project and covers a larger area. It consists of the provision of seasonal and medium-term credit to farmers, extension ser- vice, market complexes, health facilities, boreholes and other infrastruc- tural facilities, agricultural and hydrological research in Karonga and Chitipa districts. The project also provides for preparatory investments for the National Rural Development Program, and rehabilitation of berthing facilities at Chipoka Lake terminal. Project implementation has begun.  ANNEX III Page 1 of 3 MALAWI THIRD POWER PROJECT LOAN/CREDIT AND PROJECT SUMMARY Borrowers: Republic of Malawi and Electricity Supply Commission of Malawi (ESCOM). Guarantor: Republic of Malawi (in respect of standard Bank loan) Beneficiary: Electricity Supply Commission of Malawi Amount: US$9.0 million loan on standard Bank terms US$8.0 million loan on Third Window terms US$8.0 million IDA credit Interest Rate: Standard Bank loan: 8.5 percent p.a. Third Window loan: 4.5 percent p.a. Terms: Standard Bank loan: 20 years, including four and a half years of grace Third Window loan: first payment due January 15, 1983 and last payment, January 15, 2001 IDA credit: standard Relending Terms: The proceeds of the Third Window loan and the IDA credit would be onlent to ESCOM for 25 years, including four and a half years of grace, at the same interest rate as the Bank loan. Project Description: The project consists of: (a) a rock-fill dam on the Shire River at Nkula site; (b) a pressure cut and cover conduit, headrace tunnel, penstock and tailrace outlet system and a power house for five 18-MW hydro units; (c) two 18-MW hydro units as the first stage of the 90-MW ultimate development; (d) consulting services; and (e) training. Estimated cost: Total project cost, including physical and price contingencies, is as follows:  ANNEX III Page 2 of 3 Summary of Project Cost Estimate Millions of US dollars % of Description Local Foreign Total Total Cost Civil works 7.2 16.9 24.1 36.3 Mechanical & Electrical Works 2.8 17.1 19.9 30.0 Engineering & Admin. 1.4 4.1 5.5 8.3 11.4 38.1 49.5 74.6 Contingencies: Physical 1.7 5.1 6.8 10.2 Expected Price Increases 2.6 7.2 9.8 14.7 Sub-total 15.7 50.6 66.1 Training 0.1 0.2 0.3 0.5 Total Project Cost 15.8 50.6 66.4 100.0 Interest During Construction 5.5 6.1 11.6 Total Project Financing Requirements 21.3 56.7 78.0 Estimated Disbursements: Fiscal Year 1978 1979 1980 1981 1982 -----------US$ million------------ Amount 8.0 7.7 5.0 2.3 2.0 Cumulative 8.0 15.7 20.7 23.0 25.0  ANNEX III Page 3 of 3 Procurement Arrangements: The civil works contract, which would be financed from Bank Group funds, is expected to be awarded shortly. The procurement procedures followed the Bank Group guidelines for international competitive bidding. Procurement for items to be financed by other institutions would be in accordance with the rules of the institutions concerned. Consultants: Detailed engineering of the project is being carried out by Messrs. Watermeyer, Legge, Piesold and Uhlmann (civil works) and Kennedy and Donkin (mechanical and electrical works), both of United Kingdom and who already designed and supervised Nkula Falls I and Tedzani Stage I and II. It is expected that these consultants will supervise the construction of the project (about 160 man-months). Rate of return: The rate of return of the complete development is esti- mated to be 13 percent, and that of the project alone 10 percent. Appraisal Report: Report No. 1149A-MAI dated March 11, 1977. Maps: IBRD No. 2,2L. enrd 2369R4  ANNEX IV Page 1 of 2 pages SUPPLEMENTARY PROJECT DATA SHEET Section I: Timetable of Key Events (a) Time taken to prepare project: Three years (b) Preparation: ESCOM and consultants (c) Initial Discussion with Bank Group: June 1974 (d) Identification Mission: September 1975 (e) Appraisal Mission: November 1975 (f) Post-appraisal Mission: October 1976 (g) Meeting of Colending Institutions January 1977 (h) Negotiations: February 22 - March 1, 1977 (i) Planned Date of Effectiveness: Mid-August 1977 Section II: Special Association/Bank Implementation Actions None Section III: Special Conditions of the Project (a) Cofinancing agreements with AfDB, FED and CDC should be signed and conditions precedent to their disbursement should be fulfilled (condition of effectiveness, para. 37); (b) ESCOM should make satisfactory arrangements to raise an additional MK 3.6 million (US$4.0 million) to meet short- term cash requirements in 1977 (condition of effectiveness, para. 41); (c) Government and CDC should release the security on debenture stock provided in the trust deed of April 21, 1965 between ESCOM, Malawi and Barclays Bank (condition of effectiveness, para. 48); (d) ESCOM's tariffs should be maintained at a level which would yield not less than 12 percent on average revalued net fixed assets in 1978 and 1979, and 8 percent in 1980 and thereafter (para. 40);  ANNEX IV Page 2 of 2 pages (e) A tariff increase of not less than 30 percent for the sale of electricity should be implemented by not later than January 1, 1978 (para. 41); and (f) ESCOM should review the conclusions and recommendations of the study of the ecological effects of the project with the Bank and take such remedial action as con- sidered necessary (para. 44).  IBRD 12214 MAY 1976 MALAWI NKULA FALLS HYDROELECTRIC SCHEME J STAGE II -R_____Roadss q Rivers ` L SProposed reservoir , , PUMP STATION INTAKE TOWER mmpm=Exsting embonkments ., , / PROJECT SHOWN IN RED O, 150 300 450 600 METERS/ o sTo sos0 isso so FEETL 10\ 1 ~ I , j rt ~ | IL |LANTYRE WATER BOAR tVALKERS PERR PUMP STATION *BARRAGE EMBANKMENT EXISTING INTAKE AT - \--o ~ '~ONKULA SAlGE INTAKE EXI ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ I /f "" l. 7 ' "' W) ,', ~~~~~~~~~~~- /i- s~~~~~~~~~~z7 (I - - SURGE CHAMBER I EXIING5 PENSTOCK AJ POWER PLANT NKULASTG POWER STATIONSAE1 TAILRACE S>WITCH YAR P.,//1 h b-o.- *- {nh" -P d, I'll -n.pl -dF,nenn r FVF O,fd,,Id8k -d 1,r,vIhr- /~~~~~~~~~~~~~~~~~~~~3' SS I '4 NEW ACCESS ROAD T. X T A Z A N I A 10. Ch ,v,.'h. " -'. IZAMB1A ', ' ~MALA%Wl!. I~~~~~~~~~~~~~~~~~~~~~~~- Nif' I' '' 'F_\\ il ||} 3 X -15\~~~~~~~~~~~~~~I Pro1ect oreoo) Zo2ebo 4 T IS 9 \\ ,.v_,, 4 r, *-' ~~ ~~~~ ~~-I b.31), 15', R V' ! -A R H O D E 51 A V 93. . / D/ .>.> t>; | ~~~~~~~~~-20- 20 '-S4 V ~~~~~~~~~~~~3,0' , 5-4,0  IBRD 2369R4 JANUARY 1976 M OZ A M B I O U E \-\ JF- V f Z ~~~~~~~A tE M A ZA WI/0 LIONGWE I ZA M B IA <_r<Chipo MALAW I ( \ PROPOSED HYDRO ELECTRIC PROJECT ) N U, O P ROPOSEDI PROJECT, NKULA FALLS 11 HYDROI ELECTRIC STATION L n / L FUTURE HYDRO GENERATION STAT ION @ \ \ Loo-d, B.ro3ge / * EXISTING HYDRO GENERATION STATION K...V W s p. A EXISTING THERMAL GENERATION STATION _ _ _ _ PROPOSED 132 KV TRANSMISSION LINE (li PHASE) EXISTING 66 KV TRANSMISSION LINES ........ M 2t A/e\ EXISTING 33 KV h 11 KV PRIMARY DISTRIBUTION LINESZ i- MoP , O BA \ ........... FREGIONAL BOUNDARIES N U ab / MAIN ROADS l\_T d o l 1 ---,--I-I-- fRAILROADS . INTERNATIONAL BOUNDARIES Ch-d-ul 9\ale*e reereP>#te OD.. ES S.L...j LNTRf LIMB) ZAIRE K.p-h- CROCk [I- T A N Z A N I A capered 2 o<u _PX t \ ~~~~~~~~~~~Ch.k-tocX\ ,VORTHEPO, I Mzuzu ECR PE . < WI CE':2rRL S 9 l . 11 o0 RECION L-.- lC \1 ;