Malawi - Third Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4859 PROJECT COMPLETION REPORT MALAWI: NKULA FALLS II HYDROELECTRIC PROJECT (CREDIT 691-MAI AND LOANS 1387-T-MAI AND 1388-MAI) December 29, 1983 Energy Division Eastern Africa Regional Office This document his a restxleted distribution and may be used by recipients only in the perfonmance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJECT COMPLETION REPORT FOR OFFICIAL USE ONLY MALAWI: NLULA FALLS II HYDROELECTRIC PROJECT (CREDIT 691-MIW AND LOANS 1387-T-MAI AND 1388-MW!) Table of Contents Page No. Preface i Basic Data Sheet ii Highlights v I. INTRODUCTION II. PROJECT PREPARATION AND APPRAISAL 2 Origin, Preparation, Appraisal and Negotiation 2 Project Description 2 Project Objectives 3 III. PROJECT IMPLEMENTATION, OPERATION AND COSTS Credit/Loan Effectiveness and Project Start-up 3 Project Execution 3 Ecological Aspects 4 Reporting 5 Project Costs and Related Financing 5 Disbursements 6 Performance of Consultants and Contractors 6 IV . OPERATING PERFORMANCE 7 V. FINANCIAL AND RELATED ASPECTS 8 Financial Arrangements 8 Accounting and Audit 9 Financial Performance and Compliance with Covenants 9 VI. INSTITUTIONAL PERFORMANCE 10 Management and Organization Effectiveness 10 Training 11 VII. ECONOMIC JUSTIFICATION 12 Market Growth 12 Return on Investment 12 VIII. BANK PERFORMANCE 13 Overall Performance and Working Relationships 13 IX. CONCLUSION 13 Overall Achievements 13 L.essons Learned 13 This document has a restricted distribution and may be ulsed by recipients only in tlhe performance of their of ficial duties. Its contents rnay not otherwise be disclosed without World Bank authcrization.  Table of Contents (contd.) Page No. Anrnexes .. Main Covenants of Legal Documents 15 2. Construction Program 16 3, Statement of Conitracts and Works 17 4. Project Cost Estimates 18 5. Schedule of fLsbursements 19 6. Incone Statement 20 7. Balance Sheet 21 8. Funds Flov Statement 22 Appendices A. Comments from the Office of the President and Cabinet 23 B. Cormnents from ESCOM 25  PROJECT COMPLETION REPORT KALAWt: NKULA FALLS I I HYDROELECTRIC PROJECT (CREDIT 691-MAI AND LOANS 1387-T-MAI AND 1388-MAI) Preface The project constituted part of power generation program of the Electricity Supply Commission (ESCOMX in the period 1976-1980 and included the construction of the Nkula dam and hydropower plant on the Shire River containing three 20-iW generating units, consulting services, and training. The Bank Group assisted in this with Credit 691-MAI and Loans 1387-T-MAI and 1388-MAI (US$25 million in total) which were agreed on April 28, 1977. The agreements became effective on November 11, 1977, and the last disbursement was made on September 30, 1980. The Project Completion Report (PCR) was prepared by the East African Regional Office based on the appraisal report and other documents in the Bank files, a completion report prepared by ESCOM, and the findings of a project completion mission which visited Malawi ini March 1982. The PCR summarizes the main points of particular interest. It shows the vulnerability of a landlocked developing country, which, even when the administratLon of the relevant utility is smooth and the project free of procurement problems, must rely on imported equipment and materials for maior construction works. The PCR also notes the success of ESCOM's training program and manpower development. The project has not been subjected to an audit by the Operations Evaluation Department. Following normal procedures, a draft copy of this report was sent for comments to the Government, ESCOM and the co-financiers for the project. Those conments which were received have been taken into account in finaliz- ing this report, and are attached to the report as Appendices A and B.  - ii - PROJECT PERFORMANCE AUDIT BASIC DATA MALAWI: NXULA FALLS II HYDROELECTRIC PROJECT (CREDIT 691-MAI AND LOANS 1387-T-MAI AND 1388-MAI) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 66.4 82.5 Overrun (%) - 24.0 Credit and Loan Amounts (US$ million)a/ 25.0 25.0 Disbursed 25.0 25.0 Cancelled - - Date for Completion of Physical Components 12/80 12/80 b/ Proportion of Time Overrun (%) 0 0 Financial Rate of Return on the Project 9% 10% Financial Performance Unsatisfactory Institutional Performance Satisfactory Cumulative Estimated and Actual Disbursements 12/31 As of June 30: 1978 1979 1980 1981 1981 (i) Appraisal Estimate 8.0 c/ 11.2 14.6 16.2 17.0 d/ (ii) Actual 8.0 c/ 4.6 16.2 17.0 17.0 (ii) as % of (i) 100 41 110 105 100 a/ Co-financiers for the project: Commonwealth Development Corporation, African Development Bank, Kreditanstalt fur Wiederaufbaum and European Development Fund (para. 1.03). b/ The third unit was commissioned in April 1981, but was not part of the original design (para. 2.02. The completion of the barrage gates was delayed about a year due to transportation difficulties (para. 3.03). c/ CR 691-MAI. d/ Third Window (US$8 million) and Standard IBRD (US$9 million) Loans.  - iii - OTHER PROJECT DATA Actual or Item Original Revisions Est. Actual First Mention in Files or Timetable - - 1/30/75 Government's Application - - 1/21/75 Negotiations - - 2/22/77 Board Approval - - 3/29/77 Credit and Loan Agreement Date - - 4/28/77 Effectiveness Late 8/77 - 11/11/77 Closing Date 12/31/81 - 12/31/81 Borrower Government of Malawi (Credit) and Electricity Supply Commission (ESCOM) (Loans) Executing Agency ESCOM Fiscal Year of ESCOM January 1 - December 31 Follow-up Project Name None  - iv - Mission Data Month/ No. of No. of Date Year Weeks Persons Manweeks of Report Appraisal 11/75 3 3 9.0 3/11/77 Supervlsion I 9/76 2 2 4.0 II 5/77 1 2 2.0 6/13/77 III 12/77 1 2 2.0 2/10/78 IV 8/78 1 1 1.0 9/14/78 V 7/79 1.5 2 3.0 10/23/79 VI 3/80 1 1 1.0 5/06/80 ViI 12/80 1.5 2 3.0 2/26/81 VIII 3/82 1.5 2 3.0 6/21/82 Total 13.5 28.0 Currency Exchange Data Appraisal US$1 - MK 0.91 Tntervening Years Average 1978 US$1 - MK 0.84 1979 US$1 = MK 0.81 1980 US$1 = MK 0.81 1981 US$1 = MK 0.89 1982 US$1 = MK 0.93 1983 US$1 = MK 1.05  - v - PROJECT COMPLETION REPORT MALAWI: NKULA FALLS II "YDROELECTRIC PROJECT (CREDIT 691-MAI AND LOANS 1387-T-MAI AND 1388-MAI) Highlights The project comprised the construction of a hydroelectric generation station with two 20-MW units, consulting services and training components. A major objective was to meet Malawi's growing industrial, commercial and domestic electricity demand. The power station constituted the first step in the least cost capital development program of the Electrieity Supply Commission (ESCOM) from 1980 to 2005. It also had as its objective the strengthening of the power sector through the development of local manpower through appropriate training facilities and programs and through establishing the financial viability of ESCOM. The objectives were fully achieved except for the financial objective. Time overruns were minimal and the achievement exceptional under the circumstances (paras. 1.02 and 3.02-3.04). Cost increases (para. 3.09) were justifiable given the circumstances. Institutional performance under the project was satisfactory except in the financial area. ESCOM has reduced its unskilled manpower to an acceptable level and is gradually replacing expatriates with nationals (para. 6.08). To achieve greater efficiency, it has decentralized its operational management. Actual sales and revenues were lower than the estimates. Although tariff increases were implemented yearly, they were made too late in most years to enable ESCOM to comply with the rate of return covenant (para. 5.06). Among the lessons learned are the importance of not underestimating the transportation difficulties of a landlocked country (para. 3.05), the importance of instituting good training programs (paras. 6.04-6.07), and difficulties in load growth forecasting (para. 7.02).  - 1 - P'ROJECT C0KMPII,TToN RE1PORT MALAW1: NKLILA FALf,S Tl. IIYDROELEICTRI.C PROJECT (CREDIT 091-MA] AND LOANS L:387-T-MAI AND 1388-MAI) I. INTRODUCTION 1.01 The Nkuiia Falls 'IT project was one of a series of planned projects to develop the hydropoteritial of the ShJire River to further the Government of Malawi's policy of meeting the country's growing industrial, comnmercial and donesttc MtoctrLcily damnaud at the cheapest cost. The project comprised: construction of a rork-fill dam about 7 m in height and about 700 m in lengtlh at the Nkula site; construction of a low pressure cut and cover conduit, a headrace ttunnel, penstock and a tailrace outlet system of about 1,280 m and a powerhouse with three 20-MW hydro units consulting services and training. 1.02 The project was completed about a year behind the original schedule mainly because of difficulties caused by a war in the region during the period of construction and in transporting equipment and materials. Although the hydroelectric units were commissioned on time, these delays put the construction and installation of the barrage gates about a year behind. The project was completed with a cost overrun of US$16 million, about 24% higher then the appraisal estimate. This increase was due to contractor's claims under price escalation provisions, transportation difficulties, and construction of a third generating unit not included in the appraisal estimate and other changes in design (para. 2.02). 1.03 The Bank Group assistance of US$25 million was made in three lending operations, effective on the same date, November 11, 1977: US$8 million (IDA Credit 691-MAI); US$8 million (Third Window Loan 1387-T-MAI) and US$9 million (IBRD Loan 1388-MAI). It was agreed with the borrower that Credit funds should be used first. Other assistance was provided by the Commonwealth Development Corporation (CDC), European Development Fund (EDF), Germany (KfW), African Development Bank (AfDB) and Barclays Bank/Standard Chartered Bank. 1.04 During the appraisal annual average growth rates of electricity sales were estimated at 12% as against the actual of 6%; the decrease is mainly caused by the country's economic slow-down and worldwide recession. The lower load growth does not affect the economic justification of the project which remained the least cost solution. 1.05 ESCOM's operations through the project period were generally satisfactory although the covenanted rates of return were achieved only in FY80 due to lower load growth and Government delays with tariff increases. FY82 estimates indicate that 8% rate of return required for that year will not be achieved. ESCOM also incurred long term debts in FY81 which appear to have contravened the covenanted debt coverage ratio (para. 5.07). uQSl 4O? 41101  - 2 - II. PROJECT PREPARATION AND APPRAISAL Origin, PreparationL Appraisal and Negotiations 2.01 The project had its origin in the overall development program of the water resources of the Shire River basin, which was the subject of many studies and investigations in the late l.960s. The Bank Group assisted the Government in the development of the Shire River through its lending operations for the Tedzani hydropower station (Credits 178-MAL in 1970 and 426-MAL in 1978). 2.02 In August 1974 the UK Ministry of Overseas Development assisted the Government of Malawi and ESCOM in commissioning two consultant companies for studies of all the major hydroelectric development possibilities in Malawi and to advise the Government of Malawi on the physical and economic feasibility of the second stage development of the Nkula Falls Hydroelectric Scheme. Their report, presented in May 1975, confirmed the earlier conclusion that, following completion of the Tedzani Falls Stage II Project, the next hydroelectric development should take place at Nkula Falls. The recommendation was that the first two units (2 x 18 MW) should be in operation by January 1, 1980, and the estimated total cost would be MK 35 million, based on December 31, 1974 prices. The project was appraised in November 1975 and negotiations were held in Washington in February 1977. No problems arose during negotiations and agreements were concluded between the Bank Group and the Borrower. The only significant change in the project from the original scope as presented to the Board of Directors was the increase of the number of generating units to three and purchase of 20-MW generating units as a result of very favorable bid prices. Annex 1 sets forth the major covenants of the credit and loan agreements. Project Description 2.03 The project originally consisted of the following: (i) construction of a rock-fill dam about 7 meters high and 700 meters long on the Shire River, at the Nkula site, to form a reservoir and enable daily regulation of the river flow; (ii) construction of a low-pressure cut-and-cover conduit, headrace tunnel, penstock, and tailrace outlet system of about 1,280 meters, and a powerhouse with two units with a generating capacity of about 18 MW each, but designed so as to enable the installation of three additional units of the same generating capacity each; (iii) consulting services; and (iv) a training program for the Borrower's professional and technical staff.  -3- Project Objectives 2.04 The principal objectives of the project were: providing additional generating capacity for the national power system (60 MW) and 175 GWh yearly average), thus saving on foreign expenditures by substituting less expensive hydropower for imported oil; initiating institutional improvements through a well-conceived training program; as well as gradually reducing the number of expatriates and employing inore local staff. In general, the above objectives have been achieved. III. PROJECT IMPLEMENTATION, OPERATION AND COSTS Credit/Loan Effectiveness and Project Start-up 3.01 The conditions of credit and loan effectiveness were confined to the fulfillment of all conditions of effectiveness of other co-financiers and various legal actions (authorization and ratification of credit/loan documents and the subsidiary loan agreement). The credit/loans were made effective on November 11, 1977, about two and a half months late. Project Execution 3.02 After advertising in the international press and approval by IBRD and other lenders, tender documents were issued progressively from September 1976 to suit the project program. The contract for the main civil engineering works was awarded on 31 March 1977 and the site works commenced in June 1977. Details of this and other contracts are shown in Annexes 2 and 3. Having started later than intended, the contractor did his best to adhere to the implementation schedule. Although certain milestone dates affecting other contractors were missed, by rescheduling barrage gate installation with the modification of the method of construction of civil works, the contractor was able to complete the main part of waterways in April 1980 about two months later than the original date. Delivery delays (para. 3.05) resulted in the need for revislons to the program and the steel penstocks and tunnel liners were completed to that revised schedule. 3.03 Barrage gates were delayed until March 1982, about 19 months, mainly as a result of late manufacture and delivery of parts (para. 3.05). Substantial completion of the civil engineering works was attained in approximately 44 months from the date of issue of tender enquiries; this is to be compared with the 42 months allowed in the construction program in the staff appraisal report. 3.04 Electrical and mechanical plant scheduled for completion in June 1980 was delayed three months owing to transport disruptions but the schedule as agreed In September 1979 was maintained until completion. The generating sets were put into commercial service at the following dates: unit 1, October 1980; (appraisal schedule September 1980); unit 2, November 1980 (appraisal schedule December 1980) and unit 3, April 1981 (unscheduled by appraisal mission).  -.4- 3.05 A number of probiems not anticipated during project appraisal were encountered during the construction of this relatively small project located in a landlocked country, such as: (a) transportation difficulties in equipment and material due to a war in the region; (b) continuous congestion at the port of Beira in Mozambique due to inefficient operation; (c) shortage of motor fuel due to transportation difficulties; (d) shortage of reinforcing steel (some of which had to be flown into the country) due to transportation difficulties; (e) shortage of cement due to machinery breakdovn at the cement factory in Malawi which caused delays in the construction of civil works; during the breakdown period cement had to be imported from neighboring countries, but it created additional problems because of transportation difficulties; (f) faccory strikes in supplier's country affected delivery dates of various equipment; (g) workshops of a supplier were flooded and powerlines were washed away and consequently spillway gates and associated equipment had to be transported to Malawi at a time when hostilities in the region had intensified and further delays occurred during transportation; (h) the contractor had difficulties in casting gears for radial spillway gates, as it was the first time for him to cast gears of this size; and (i) bad rock conditions were encountered during the excavation of the headrace tunnel (1,200 m) which caused some additional delays. Ecological Aspects 3.06 A general ecological review of the Tedzani site, B km downstream of Nkula Falls II, was completed in late 1974 during the course of the construction of Tedzani Barrage. This study and experiences on Tedzani Stage I and Nkula Falls I, at the project site, indicated that the project would not have any negative effects of such magnitude as to impair the feasibility of the dams nor to cause major ecological problems. However, the breeding areas for fish downstream have been subjected to constant water levels and this has affected the breeding habits of fish. Normially, the level of the river goes up and down thus exposing some of the areas to sunshine. It is not known quantitatively how much this has reduced fish production downstream (Appendix A). There were no permanent human habitations and no crops likely to be inundated by the proposed dam. ESCOM had 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 urdesirabte side effects. The study was carried out by the University of Malawi. The Government and ESCOM reviewed the conclusions and recommendations of the study wl'h the  - 5 - Bank, implemented those which related to the project and noted those relevant to future hydro projects. Reporting 3.07 ESCOM was informed of the Bank Group's reporting requirements immediately after credit/loan signing and reporting has been satisfactory. The progress reports on the project were regular and contained the necessary information. The Bank Group has had full insight into all major project problems such as transportation difficulties. Project Costs and Related Financing 3.08 The final project costs of K73 (US$82.5) million were 24% higher than the original estimates of K60.4 million (UF,$66.4) million. A detailed comparison of these costs is given in Annex 4. The appraisal estimates were revised in 1977 to allow for the effect of high inflation rates and modified scope of work. 3.09 The major portion of the excess cost was for local expenditures of civil works (59%) due to very high inflation on labor and material costs. Despite the change in the project scope (para. 2.02), the extra cost of the equipment due to addition of a third unit was only 1% because of extremely low bids. Cost overruns were ftnanced by ESCOM. 3.10 The original financing plan at appraisal is given below. Each financing agency financed the foreign exchange cost of separately, identifiable components (as shown in Annex 4) except for CDC whose financing was flexible and could be applied to local or foreign exchange costs. -----Funds Allocated- Financing Agency MK million US$ million IBRD/IDA 22.8 25.0 AfDB 3.6 4.1 EDF 8.6 9.5 Germany (KfW) 3.8 4.0 CDC 12.5 13.7 Government/ESCOM 6.8 7.4 Other 3.5 3.9 132-kV line 12.8 14.1 Total Sources 74.4 81.7 3.11 Foreign funds provided by the above arrangement were in excess of the appraisal cost estimate by US$5 million. Immediatelv after bidding the Government and ESCOM determined that they would be able to add a third unit to the project because they had received lower manufacturers' offers than estimated. 3.12 The final financing plan is given below. It shows that the foreign currency financing requirement for the construction of the project was about US$56.7 million compared to all available funds of about US$55.9 million. (Deficit of US$0.8 million was covered by the Government.)  -6- Funds Total Available Required Funds Funds for for Foreign Surplus Available IDC Construction Costs (Deficit) -----(US$ million)