Zambia - Kafue Hydroelectric Project - Stage Two

Document of The World Bank FOR OMCAL USE ONLY Report No. 5566 PROJECT COMPLETION REPORT ZAMBIA - KAFUE HYDROELECTRIC PROJECT (STAGE II) (LOAN 919-ZA) March 27, 1985 Energy Division Eastern and Southern Africa Regional Office This document bas a resticted distnbuion and may be used by recpients ouly in the performance of their officia duties. Its contents may not oterwise be dislosed witbout World Bank ajthorizaton.  Acronyms CAPC Central African Power Corporation CEC Central Electricity Corporation CeC Copperbelt Power Company ESC Electricity Supply Commission FPB Federal Power Board KBRC Kafue Basin Research Project ,.NBC Kariba North Bank Company Limited NESCO Northern Electricity Supply Corporation VFEB Victoria FaLls Electricity Board ZESCO Zambia Electricitv Supply Corporation Limited  FOR OMCIAL USE ONLY ZMBIA KAFUE HYDROELECTRIC PROJECT (STAGE II) PROJECT COMPLETION REPORT Table of Contents Page No. Preface .................................................. Key Project Data ........ .... . ii Highlights ........ .............. ......e.......... iv I. INTRODUCTION ... ... . .............*. I The Project ........... 1 The Power Sector I..e.seee.e...eese...e ................ 1 Bank Lending to the Power Sector *......................... 2 II. PROJECT PREPARATION AND APPRAISAL ......................... 2 Origin ....., 2 Preparation, Appraisal, Negotiations and Approval ......... 3 The Project's Role in the Long-term Plan ................... 3 Project Description ...g ......OS.................... 3 Covenants ......................................4 III. PROJECT IMPLEMENTATION, OPERATION AND COST .................. 4 Loan Effectiveness and Project Startup .....0............... 4 Revisious ... -5 Implementatioa Schedule ..........* ........................ 5 Procurement .... **e....... ............................ 6 Costs and Disbursements . 8 Operations .*.................. seeeeeee ce.. 8 Ecological Aspects ............ e..e.e .e. 8 Performance of Consultants, Contractors and the Forrower ... 9 IV. OPERATING PERFORMANCE .....o ...... e...e.......ceeeeee.. 11 Market ... o...... ........ ......eeee..ee..... .ee.eee 11 Project Role .eeee.eee.e.e...e.e..e............ece.- 13 V. INSTITUTIONAL PERFORMANCE . . 15 Management and Organization Effectiveness .e.ee.eee.ee.. 15 Growth .... 15 Staff and Recruitment Training ............................ 16 Management Consultants ..... ....... ................ ec 17 I Thi document his a restrtd distnrbution and may be used by recipients only in the performanceof their ofrica duties. Its contents may not otherwis be diclosed without World Bank authorization.  VI. FINANCIAL PERFORMANCE ...... ........ ....................... 18 Financial Arrangements ............... ..................... 18 Financial Performance and Compliance with Covenants *...... 19 Financing Plan .............. s 22 Audit ............. 22 VII. PROJECT JUSTIFICATION ........ ..........e..............e.e.e 23 Least Cost Solution .... ............0* OS... 23 Economic Rate of Return .c............... . 23 VIII. BANK'S ROLE ............................................... 24 IX. CONCLUSIONS AND LESSONS TO BE LEARNED ..................... 25 Annexes 2-1 Covenants 3-1 Project Costs 4-1 Zambia/Zimbabwe Interconnected System - Comparison of Forecast and Actual Energy Demand 4-2 Generating Capacity and Energy Available 1973-1983 - Zambia/Zimbabwe Interconnected System 4-3 Projected Capacity and Energy Balances for Zambia/ Zimbabwe Interconnected System 1984-2000 6-1 ZESCO Income Statements (FY73-82) 6-2 ZESCO Balance Sheet (FY73-82) 6-3 ZESCO Funds Flow Statement (FY73-82) 6-4 ZESCO Retail Tariffs 7-1 Project Economic Costs and Benefits to Zambia Appendix A ZESCO's Comments on the PCR Appendix B CAPC's comments on the PCR  ZAMBIA KAFUE HYDROELECTRIC PROJECT (STAGE II) PROJECT COMPLETION REPORT (Loan 919-ZA) Preface The project constituted part of the 'Long-term plaa for the development of hydroelectric resources in Zambia and was justified as a least cost project to follow the Kariba North Eydro-Electric Project (Loan 701-ZA, completed December 31, 1980). As the Bank's fourth loan towards the construction of Zambia and Zimbabwe's interconnected system, operated by the Central African Power Company (CAPC), it was designed to meet the system needs through 1980. Loan 919-ZA (US$115 million) became effective on January 15, 1974 and the last disbursement was made on May 4, 1983. The Project Completion Report (PCR) was prepared by the Eastern Africa Regional Office based on the appraisal report and other documents in the Bank files, a completion report prepared by Zambia Electricity Supply Corporation Limited (ZESCO), the borrower and executing agency, in December 1978, and the findings of a project completion mission which visited Zambia in August 1983. The PCR gives the main points of the project, which was technically straightforward and satisfactorily implemented from the physical and technical point of view. towever, the demand on Zambian generating facilitics has been lower than forecast at appraisal, and it is likely to decline once Zimbabwe commussions coal-fired generating capacity from 1985 onwards. Consequently, even after allowing for the effects on hydroelectric production of abnormally low rainfalls in the region during 1982-1984, and for major maintenance work on turbo-generating units, a/ it Is concluded that the investment iin the project should have been delayed by eleven years. The report notes that ZESCO did not generate adequate earnings during the project peried in part because demand was lower than forecast at appraisal and in part because tariff increases proDosed by ZESCO were not accepted by the Government. In accordance with the revised procedures for project performance audit reportier., this PCR was read by the Operations Evaluations Department (OED) but the project was not audited by OED staff. Following standard procedures, OED sent copies of the draft report to the Government and the Borrower. The comments which were received have been taken into account in preparing the final report and they are reproduced as Appendices to the report. a/ ZESCO's comment - see Appendix A.  - .il - ZAMBIA KAFUE =DELCRCPJECT (STAGE II) PROJECT COKPLETION REPORT - LN 919-zA Key Project Data Actual or Appraisal Carrent Item Estimate Estimate Total project cost (USs millions) 156.4 148.5 Underrun (%) - 5% Loan amount (US$ millions) 115.0 110.9 Disbursed - 110.9 Cancelled - 4.1 Date physical components completed 12/78 3/80 Proportion completed by appraisal 100% 95% target date (Z) Economic Rate of Return (%) 18% 6.6% Financial performance Unsatisfactory Institutional performance Satisfactory Cumlative Estimates and Actual Disbursement (US4 Millions) 73/74 74/75 75/76 76/77 77/78 78/79 79/80 80/81 81/82 82/83 (a) Appraisal esto 12.1 34.8 61.6 81.0 98.0 115.0 115.0 115.0 115.0 115.0 (b) Actual 13.1 31.1 53.6 81.7 96.9 108.4 109.8 110.6 110.7 110.9 (b) as % of (a) 108 89 87 101 99 94 95 96 96 96  - iii - Other Project Data Actual or Estimated Item Original Revisions Actual First mention in files 1/72 Governiment's application 6/72 Negotiations 4/73 Board approval 7/5/73 Loan agreement date 7/16/73 Effective date 10/15/73 12/15/73 1/15/74 Closing date 12/31/79 12/31/82 12/31/82 a/ Borrower Zambia Electricity Supply Corporation Limited (ZESCO7 Fiscal Year of Borrower July 1 - June 30 up to 1974 July 1, 1984 - March 311 1975 April 1 - March 31 since 1975 b/ Mission Data Number of Number of Date of Item Month/Year Weeks Persons Nanweeks Report Identification Preparation Preappraisal 1/72 2 2 4 5/1/72 Appraisal 8/72 3 3 9 5/7/73 TOTAL Supervision I 10/73 1 2 2 11/28/73 Supervision II 10/74 4 2 8 11/27/74 Supervision III 12/74 2 2 4 1/23/75 Supervision IV 6/75 3 2 6 8/6/75 Supervision V 1/76 2 2 4 3/10/76 Supervision VI 7/76 4 3 12 8/10/76 Supervision VII 2/77 2 2 4 3/30/77 Supervision VIII 5/78 3 2 6 5/30/78 Supervision IX 3/79 i 1 + 5/3/79 Supervision X 3/80 1 1 1 5/20/80 Currency Exchange Data Name of Currency Kwacha (K)-100 Ngwee (N) Appraisal Year Average US$ 1 = 0.649 Intervening Years Average US$ 1 = 0.697 Coupletion Year Average USS 1 = 0.83 a/ Final disbursement was made on April 6, 1983. b/ ZESCO's comment - see Appendix A.  - iv - ZAMBIA KAFUE HYDROELECTRIC PROJECT (STAGE II) PROJECT COMPLETION REPORT (Loan 919-ZA) Highlights The project is the second stage of the Kafue hydroelectric development, and consists of the construction of a dam on the Kafue River at the Itezhitezhi site to provide storage, the installation of two additional 150-MW generating units at the existing station located 250 km downstream from the dam, and a 60-km, 330-kV transmission line. Its main objective was to meet the forecast needs to 1980 of the Zambia/Zimbabwe interconnected power system, of which the Zambia Electricity Supply Corporation (ZESCO) forms a part and for which institution this was the first Bank Loan. Other objectives were the strengthening of ZESCO institutionally, chiefly in respect to recruitment of key personnel and technical assistance to management, and the requirement that ZES0O should earn adequate revenues. The project achieved its technical objective, but it failed in the self-financing objective. Time overruns ranged from about seven months on one unit to ten months on the transmission installation (paras. 3.07-3.10). Overall actual costs were very close to the estimate, the most significant cost overrun being on interest during construction related to the time overrun on implementation (para. 3.14). Institutional performance under the project was satisfactory except as related to generation of revenue, in which ZESCO was relatively powerless since its proposals to increase retail tariffs on which the financial performance had been predicated were not acceptable to the Government. Another factor beyond ZESCO's control was that demand has been lower than anticipated, resulting from the general economic recession (para. 4.02). Furthermore, there are poor prospects for demand in the region increasing quickly to absorb the potential for power production from Kafue Stage II, especially with regard to exports to Zimbabwe. The updated estimated economic rate of return is only 6.6X (see para. 7.03, Basic Data, Annex 7-1) compared to the 18Z at time of appraisal, reflecting that the project was earlier than was economically justified. Some of the lessons learned are predictable in view of a main conclusion drawn from the project completion report in Fambia's Kariba North Hydroelectric project (Loan 701-ZA, June 27, 1983)'and in view of sector experience in the Eastern and Soutnern Africa region. Firstly, the need is highlighted for a reliable demand forecast and analyqis to take account of major uncertainties in demand (para. 4.07). Secondly, following from the first lesson, it is emphasized that in cases where after commissioning the project, it emerges that the main market for its output is different from the appraisal forecast, in this case the market became a/ Project Performance Audit Report No. 4661, August 12, 1983.  exports to Zimbabwe, a/ the Bank should have the power to be consulted on any proposal that prejudices sales to this market, in this case the agreeement of July 1, 1977 between CAPC, CPC and ZESCO (para. 6.01). Thirdly, the need for a redefinition of Zambia and Zimbabwe's power-sharing relationship is stressed (paras. 1.04, 4.04 and 5.03). Fourthly, the dominant effect of Government policy on the financial viability of a utility (para. 6.02), the problems caused by lack of foreign exchange to purchase spare parts (para. 6.07) and the success of particular forms of technical assistance (paras. 9.05 and 9.0g) are common findings with the Kariba North Project Completion Report. b Lastly, as in the case of the Kariba North Project, the importance of thorough ground investigation during the preparation of a dam project is emphasized by the experience at Kafue (para. 3.04). a/ ZESCO's comment - see Appendix A. b/ Project Performance Audit Report No. 4661, August 12, 1983.  ZAHBIA KAFUE HYDROELECTRIC PROJECT - STAGE II LOAN 919-ZA PROJECT COMPLETION REPORT I. INTRODUCTION The Project 1.01 The project is the second stage of Kafue hydroelectric development and consists of a dam at Itezhitezhi on the Kafue River to provide storage, the installation of two additional 150-MW generating units at the existing station located 250-km downstream of Itezhitezhi and a 60 km, 330-kV transmission line. 1.02 The project was implemented by the Zambia Electricity Supply Corporation (ZESCO) generally as scheduled, meeting essential target dates. The Power Sector 1.03 In 1963 the Central African Power Corporation (CAPC) was formed by Zambia (Northern Rhodesia) and Zimbabwe (Southern Rhodesia) to take over the assets, staff and functions of the dissolved Federal Power Board (FPB), namely the supplying of bulk power to the two countries. All major generating stations in both countries are connected to the CAPC grid and are operated by CAPC as owner or, in the case of Kariba North Power Station, a/ under leasing arrangements. The output was sold to five distributing companies - The Copperbelt Power Company (CPC) and ZESCO in Zambia, the Electricity Supply Commission (ESC), and the municipalities of Harare and Bulawayo in Zimbabwe. This interconnected system generated 13,897 GWh i/in FY 1983. 1.04 Over the years both Zambia and Zimbabwe have not been completely satisfied with these bulk distribution procedures and the functioning of CAPC. Zambia revised the financial a/ relationship between ZESCO, CPC and CAPC in July 1977 (Section VI, para. 6.01) and has now entered into a joint study with Zimbabwe, concerning the operations and future status of CAPC. The recommendations of this study committee are scheduled to be available shortly (para. 5.03). 1.05 ZESCO was incorporated on December 3, 1969, to be responsible for all aspects of power generation, transmission and supply in Zambia other than those functions performed by CPC, CAPC and the Kariba North Bank Corporation (KNBC), the latter having been formed to construct the Kariba North Bank Station. In January, 1970, the Zambian Electricity Supply Act became effective, which vested the assets, liabilities, rights and obligations of existing electricity undertakings in ZESCO by statutory a/ ZESCO's comment - see Appendix A. b/ CAPC's comment - see Appendix B.  -2- order of the Hinister responsible for electricity. On July 1, 1970, ZESCO acquired the Central Electricity Corporation (CEC) which distributed power to Lusaka and the surrounding areas, the Northern Electricity Supply Gorporation (NESCO), which supplied small towns and villages In isolated areas and the Victoria Falls Electricity Board (VFEB) which owned three generating stations at Victoria Falls. On January 1, 1972, ZESCO assumed responsibility for the Livingstone municipal operations from VFEB and the Ndola Council Electricity operations. By July, 1972, ZESCO had also taken over five municipal electricity operations in the Copperbelt area. Currently ZESCO supplies all areas of Zambia except the Copperbelt mines and the Broken Hill mines at Kabwe. Bank Lending to the Power Sector 1.06 The Bank's first power operation in the region was a loan of US$80 million (Loan 145-RN, June 21, 1956) to FPB to finance part of the cost of the first stage of Kariba, consisting of a dam across the Zambesi River, a 600 MW power station on the South Bank and a 330-KV transmission system extending to principal centers of demand in Zambia and Zimbabwe.l/ The second loan for US$7.7 million (Loan 392-RNS, October 1, 1964) in 1964, to CAPC, financed part of the cost of transmission expansion in Zambia. Both loans were guaranteed by the U.K. Government as prime guarantor and subsequently, by the Governments of Zambia and Zimbabwe. The third Bank loan of US$40 million (Loan 701-1, July 7, 1970) to KNBC was to finance the second stage of Kariba, consisting of an underground power station on the North Bank of the Zambesi River at Kariba with an installed capacity of 600 MW, a generating plant of four 150 MW turbo-generator units and a transmission line to the main Kariba substation. A supplementary Bank loan of US$42.1 million was approved in July 5, 1974, to cover additional project costs. The first two projects were completed before the establishment of the Operations Evaluation Department, and completion reports were not prepared. The Kariba North Hydroelectric Project (Loans 701-1 and 701-2) was audited by OED and the report was distributed on August 18, 1983. II. PROJECT PREPARATION AND APPRAISAL Origin 2.01 The project is the second stage of the Kafue project which was the means for achieving Government of Zambia's objective of self- sufficiency in power for Zambia. a/ The Kafue project, in accordance with CAPCO's system development plan (February, 1969), was also the recommended project to follow Kariba North and the expansion of CAPC's generation and transmission a/ system in Zambia and Zimbabwe. 1/ The name-plate rating of the six turbo-generators at Kariba South is 100 MW, but the machines were uprated to 117.5 MW after commissioning based on judgment of their delivery capability. Following the commissioning of the Kariba North Bank Power Station in 1976, CAPC reassessed the capacity of each unit from 117.5 MW to 111 MW (in total from 705 MW to 666 Mw).al a/ ZESCO's comment - see Appendix A.  Preparation, Appraisal, Negotiation and Approval 2.02 Feasibility studies and project preparation for the Itezhitezhi reservoir development were performed during 1967-71. These studies determined that the project represented the most economic method to provide additional firm energy capability required to meet the for-east energy demand of the Zambian power system of which ZESCO's dystem forms a part. In July, 1972, the Government of Zambia applied fo: Bank financing. In response, an appraisal mission visited Zambia in August, 1972, and a loan equivalent to US$115 million became effective JanoAary 15, 1974. The Project's Role in the Long-term Plan 2.03 The development of the hydroelectric potential of the Kafue River has been overshadowed by the development of the Zambezi River at Kariba. The debate as to whether Kariba or Kafue should have been developed first dates from the time of the short-Lived Central African Federation (1953-63). In early 1953 development of the first stage of Kafue was the consultants' least cost solution. In spite of the ensuing opposition, especially from the main industrial and mining consuners in the Copperbelt, to the decision of the Federal Government to develop Kariba in preference to the Kafue Scheme, the construction of the first stage of the Kariba development (Loan 145-RN) began in 1955 and was completed in 1960. Two major Kariba developments followed (para. 1.06). After Southern Rhodesia's unilateral declaration of independence in November 1965, Zambia decided to embark on the Kafue scheme with the objective of being self-sufficient in meeting its own power demand, a/ and thus the first stage of the Kafue hydroelectric development was begun in 1967 and completed in 1972. 2.04 The project for the second stage of the development of Kafue was seen by the Government to be a continuation of developments to ensure Zambian self-sufficiency in power. The Bank's appraisal mission viewed the Kafue II Project in the context of the Zambia-Zimbabwe interconnected system, and its analysis inaicates that a large proportion of the output from Kafue II would be sold to Zimbabwe consumers under the CAPC arrangement. At that time the Zambia-Zimbabwe interconnected system was and presently is operated by CAPC. Subsequently, Zimbabwe unilaterally commenced development of thermal generation capacity based on coal to be supplied from the Hwange coal fields. Stage I (4x120 MW) and Stage II (2x220 MW) are scheduled to be commissioned in 1984-86. A new long-term power plan for the combined Zambia/Zimbabwe system was prepared for the Government of Zimbabwe in 1981 and updated in 1983, and it determined the extensioa of the Kariba Hydroelectric Power complex to be the least-cost option as the next project. However, due to the uncertain demand outlook and the historically complex relationship between Zambia and Zimbabwe in power sector development, which is now undergoing review (para. 5.03), the timing of a further project is not definite. Project Description 2.05 The project consists of a storage dam on the Kafue River at Itezhitezhi and a 300 MW addition to the Kafue power station located 250 km downstream. The project increased the firm output of Kafue from 1800 GWh  - 4 - to 5250 Gvh and the total average a/ annual generation from 3600 GWh to 6200 GWh. The main features of the project are: (i) a rock and earthfill dam, 1500 m in length and 55 m mzaximum height; (ii) two diversion tunnels in rock, each with a cross sectional area of 190 m2 and a length of 500 m, which incorporate regulating structures and gates; (iii) a concrete chute spillway with three radial gates; (iv) two 150 HW generating units at Kafue station with ancillary civil works and switchyard extensions; and (v) a 330 kV single circuit traasmission line, 60 km in length, connecting the Kafue power station to the Kafue town grid substation. Covenants 2.06 The principal covenants of the Loan and Guarantee Agreements are shown, annotated, in Annex 2-1. They include safeguards for the standard of engineering consultants and senior management to and in ZESCO, require- meats for inspection of the dam, and conventional financial clauses. IIl. PROJECT IMPLEMENTATION, OPERATION AND COST Loan Effectiveness and Proiect Startup 3.01 The loan was scheduled to become effective on October 15, 1973, but iwas delayed until December 15 to allow for transfer of legal title of Kafue Stage I to ZESCO. Effectiveness was again delayed until January 15, 1974, to allow time to obtain complete understanding of the legal opinion. Thus, the loan became effective on January 15, 1974, six months after signature. 3.02 Some preparatory works, which included camp construction, a transmission line to supply power to the construction site, a ferry for crossing the Kafue at the damsite, and paving of the access road were carried out in advance of the execution of the maiu works. In June, 1972, ZESCO instructed its consultants to prepare tender documents for construc- tion of the main dam. The Bank was not associated with the preparatory works which were substantially completed by October, 1973. The Bank was, however, involved in the process for prequalification of civil works contractors and in the selection of the contractor for construction of the main dam and appurtenant works. This contract was awarded on May 15, 1973, and the contractor was on site by mid-June, 1973. a/ ZESCO's comment - see Appendix A.  -5- Revisions 3.03 The substantial change to the project was the addition of 30 relief wells required to reduce high artesian pressures, and the installa- tion of a system of pneumatic boostering for use under special circumr stances. In September 1976 it was determined that the aquifer, because of its great width and depth, has a very low flow velocity, and therefore, will have very little effect on the safety of the dam. The artesian pressure of the aquifer, however, coald have an unfavorable effect on the dam stability, and uncontrolled leakage from the aquifer downstream of the dam could cause erosion in alluvium, mudstone or weathered rock, which, over a long period, might affect the supporting fill causing settlements and slides. The relief wells control the aquifer by discharging the flow downstream at lower head losses than would occur at discharge at natural springs. The cost of this effort was about US$6 million equivalent. 3.04 Other design changes and variations were: (i) use of concrete lining of bottom and side walls of tL2 diversion tunnel outlet canal necessitated by the quality of the rock; (ii) use of rockfill in downstream berm to facilitate future raising of the dam; (iii) installation of an emergency spillway to ensure means of discharge if one of the main spillway gates were to become inoperative; (iv) modification of design of main dam to allow use of unclassified rock, thus offsetting prior delays in fill work; Cv) use of impervious fill at spillway of wing dam, lining of the walls of the channel and weighted berm on filter downstream due to foundation rock being pervious; (vi) repair of cavitation damage to bulkhead gates of the diversion tunnels including steel lining, resulting from discharges during construction period; (vii) use of rock fiLl in front of intake and outlet canals of diver- sion tunnels; and (viii) omission of radio link system. Although these changes did not have a significant effect on construction costs, they do show the need for adequate ground investigations at dam sites during the project preparation stage. Implementation Schedule 3.05 Construction work on the dam had been scheduled to start during the latter half of 1973 and the reservoir was scheduled to be filled during 1978. Prior to initiation of the project, the water conductor system of the power station and the power house excavation had been completed as part  - 6 - of Stage I. Work related to Stage Is (the project) at the power station involved mainly the steel lining of penstocks and the installation of the generating units scheduled for the end of 1976. 3.06 The Itezhitezhi reservoir was filled to fuLl retention for the first time on June 2, 1978, in accordance with the schedule. 3.07 The two generating units (numbers 5 and 6) were scheduled for commissioning on October 1 and December 15, 1976, respectively. Actual commissioning took place on April 28 and May 25, 1977, due to earlier delays in the installation of the erection program for the generators and control equipment. Completion of the penstock steel linings was also delayed due to an inability to obtain steel of the prescribed quality for the lower parts of the linings, but this delay did not influence the date of commissioning as the linings were available in time to meet the revised erection schedule. 3.08 During testing of the turbines, troubles were experienced with settings of mechanical overspeed guards which required the modification of the guards. 3.09 The transformer bank of three single units and the three 330 kV cables with auxiliary equipment were scheduled to be commissioned on October 1, 1976. This schedule could not be met due to transport problems. The 330 kV cable failed before the start of the trial run. SiLa repair was unsuccessful and a new cable had to be manufactured. This new cable was put in service in August, 1977, but failed after one month's operation. The transformers were commissioned on April 28, 1977, utilizing the spare cables as replacement for the cable that failed. 3.10 The delay in commissioning did not cause any significant loss in usable a/ energy production as the existing four units were capable of consuming the total water flow at that time. Liquidatiag damages were obtained from the manufacturers of the cable to cover the extra costs resulting from the longer stay of the engineering staff and the additional costs of other contractors resulting from the delay in commissioning. Procurement 3.11 All goods and services costing over US$20,000 were procured through international competitive bidding in accordance with Bank guidelines, with no regional preference. Prospective contractors on the dam and larger contracts were prequalified. On the Itezhitezhi dam, twenty-five firms were prequalified, including eight from West Germany, five from Italy, three each from U.K. and Yugoslavia, two each from France and U.S., and one from Greece and Sweden. Ten submitted bids. Ten firms from various countries prequalified for the 330 kV switchgear and transformer connection. Bids on the dam were opened on January 26, 1973, while power house bids were not opened until the end of 1973. Contracts were awarded as follows: a/ ZESCO's comment - see Appendix A.  -7- Itezhitezhi Dam Ci"il Works Italy Dam Access road, Zambia exploratory drilling, relief wells and strengthening works Permanent colony Yugoslavia Mechanical works Gates and hoists, diversion Yugoslavia and left tunnel SpilLway gates and hoists India Kafue Gorge Works Civil Works Yugoslavia Turbines, valves, cooling, Norway drainage and rewatering plant Penstock linings India Generators, switchyard and France connecting line Transformers and cables Italy Generator, switching station, West Germany control equipment, power and lighting Heavy equipment transport Zambia in Africa 3.12 Procurement was carried according to Bank practices and there do not appear to have been any problems arising from this requirement. Problems did occur from insufficient planning by the contractors, manufacturing delays, inability to obtain prescribed steel for penstock linings, and transport problems from the port to the site. 3.13 Two engineeriag consultants were retained, one for the 330 kV transmission line, and the other for all other aspects of the project. The contract with the main consultant was an existing contract with the Government which had been assumed by ZESCO. Payment under the contract was based on percent of the construction costs (5% plus reimbursables). This contract approach was not very satisfactory to either party, as ZESCO was required to pay reimbursable expenditures which were not under its control, and the consultant was concerned about a ceiling on cost variations. Although the terms were interpreted and revised to everyone's satisfaction, a specific contract for the work to be performed under the project based on manmonths of effort would have been a better approach.  -8- Costs and Disbursements 3.14 A comparison of the appraisal estimate of project costs with actual project costs is shown in Annex 3-1. Total project costs of US$148.4 million were US$8 million (5Z) below the appraisal estimate of US$156.4 million. Construction costs of the dam were US$16.5 million (15Z) below the estimate, partially offset by the high costs of the power house and transmission system, and interest during construction being over the estimated US$3.3 milLion (13Z) and US$5.1 million (27X), respectively. Thus, overall actual costs were very close to the estimate, despite considerable inflation during the implementation period and various revisions to the works (para. 3.04). This good performance is partly due to the Bank's engagement of a consultant to make an independent estimate of the costs of the main civil works prior to agreement on these costs. The most significant overrun was in interest during construction due, to a large extent, to a longer than originally planned implementation period. 3.15 The Bank's disbursements under the loan were slightly behind the estimation at appraisal, and at the close of FY79, when full disbursement was expected, ran about 6X below the figure even though the project was complete. The Bank agreed to extend the closing date of the project to December 31, 1982, and to make the remaining undisbursed loan funds available for drilling more relief wells and associated civil works, if needed to control the aquifer problem (para. 3.03). In 1982 ZESCO requested that the closing date be deferred to December 31, 1983 and that the excess funds be made available for spare parts and maintenance services. This request was denied on the grounds that these costs should be handled under aormal maintenance and replacement procedures. 3.16 Although the loan was closed December 31, 1982, withdrawals for eligible expenditures incurred prior to che closing date were allowed up to June 30, 1983. On July 8, 1983, ZESCO was informed that the undisbursed balance of the loan, in the amount of US$4,07,101.28, was cancelled as of lay 4, 1983, the last withdrawal date. Operations 3.17 Phase II of the Kafue Gorge Power Station was commissioned in April and May of 1977, but no contribution could be made to the Zambian system until September 1977 due to a fault in the cable to the Phase II transformer.a/ The output of the station was further restricted in October, 1977, by an earth fault on the low voltage winding of a Phase I transformer. This transformer was temporarily replaced by the Phase II transformer whose cable had failed.a/ These problems were not cleared until the first quarter of 1980 Gpara. 3.23). However, they did not seriously affect the interconnected system, as power demand was lower than had been anticipated (para. 4.02). The Itezhitezhi reservoir was filled to full retention level for the first time on June 2, 1978. Ecological Aspects 3.18 The project was examined for potential environmental effects at appraisal, in particular the consequences of the elimination of the a/ ZESCO's comment - see Appendix A.  flooding of the Kafue Flats below the dam during dry years. Such flooding is essential for the growth of the grass upon which a large number of animals survive, including a rare antelope, the Lechwe. After two years of the project's operation this was found to be fully compensated for by augmentation of the low flows of the river by special releases from the storage reservoir. No monitoring was set up so the success of this measure is uncertain. 3.19 By the time of the project the Kafue Gorge hydroelectric development had already stimulated the University of Zambia to establish a Kafue Basin Research Project (KBRC, 1967) to "encourage a balanced program of incerdisciplinary research and to contribute to the planned development of the Kafue Basin. As a result a selection of papers were published 2/, which pioneered acceptance of the need for an integrated approach to the development of energy resources. As the energy sectors of Sub-Saharan African ce.intries are being comprehensively assessed the case for this is becoming increasingly clear. 3.20 The appraisal report mentions the precautions necessary against schistosorniasis and tsetse flies which would presenc a health hazard to the labor force working on the project. No specific follow-up to this was found on file. Performance of Consultants, Contractors and the Borrower 3.21 The technical competence displayed at all levels of the consulting engineers' organization dealing with the project was acceptable, and their performance overall was satisfactory. They acted promptly and represented ZESCO generally with fairness to the contractors. Some differences did occur between LESCO and the consultants on the need for an emergency spillway, the criticality of alluvial flow in the diversion inlet channel, the timing for the erection of the regulation gate, and the need for design of the penstock steel lining. Rowever, these differences must be considered, to a great degree, subjective, as they refLect different concepts of design to fulfill a structural requirement. ZESCO has concluded from the experience that no amount of expertise in the consult- ancy sulpport can replace competent corporate personnel. They consider that their staff and the consultants cooperated well and collectively performed effectively. The consultants continued to inspect the dam periodically after completion in 1979 to check that no oroblems were developing. ..22 The panel of experts performed extremely effectively, particularLy in relation to a critical aquifer problem which developed during construction. Although the Government of Zambia and ZESCC initially believed chat this panel should serve as advisors to the consultants rather chan ZESCO, their opinion now is that it vould have been better to have had them advise ZESCO directly with the full cooperation of the consultants. 3.23 The performances of the various contractors were as follows: 2/ "Developmerit and Ecology in the Lower Kafue Basin in the Nineteen Seventies," KBRC, 1977.  - 10 - Itezhitezhi Dam (a) Access road - completed in early 1970, on schedule; (b) Permanent camp - completed in mid-1973, on schedule but requiring some accelerating measures; (c) Ferry and landing - completed on mid-1973, on schedule; (d) Permanent access road - completed in mid-1973, on schedule despite need to extend it to meet the new Fusaka road; (e) Transmission line - completed in mid-1973, on schedule; (f) Diversion tunnel - construction was significantly delayed due to insufficient planning by contractor. Delay was not detrimental to the other works; (g) Spillway - manufacture of radial gates was delayed but delivery was in time to prevent any effect on project schedule; (h) Main civil works - This work was subjected to major design changes during implementation. It appears that the contractor underbid for the project which resulted in major funding problems. Generally, the workmanship was good, but management difficulties were apparent and reliance on second hand construc- tion equipment was evident. Kafue Gorge Power Station Extension (a) Civil works - Commissioning was delayed, but did not cause any serious problems; Cb) Turbines, valves, cooling, drainage and revatering plant - Commissioned on April 28 and May 25, 1977, rather than the scheduled October 1 and December 15, 1976. During tests of the turbines some trouble with setting mechanical overspeed guards was experienced and the guards had to be modified. The turbines then performed very well, causing no power losses. The coopera- tion of the contractor was very good; (c) Penstock steel linings - The steel iinings were delayed in manufacture, but did not seriously affect the other contractors or cause any additional delay. The contractor could aot obtain the prescribed quality of steel and hamd to modify the design to accept a lower quality steeL. The cooperation of the contractor was good, and the standard of work was satisfactory. (d) Generators - The generators were commissioned on April 28 and May 5, 1977 rather than October 10 and December 15, 1976. The initial delay was due to an insufficient number of erectors and the lengthy operation for balancing the rotor of unit 5. During the first year of operation the overvoltage protection capacitors in the excitacion system were damaged and a fault developed in a  - 11 - winding bar of uutt 6, requiring replacement of the bar. Except for these faiLures, the quality of the work was good and the generators performed well; (e) Transformers and cables - The plant was commissioned on December 6, 1976, rather than as scheduled on October 1, 1976. The major cause for the delay was transport problems. However, the 330 kV cable failed before the trial run and had to be replaced. The replacement cable failed in August 1977, seriously limiting the unit's contribution to the interconnected system. This failure was the manufacturer's responsibility and would have had extremely serious effects had demand not been lower than forecast. Other than the cable, the quality of the work was good; (f) 330 kV Switchyard, 330 kV connecting line - The plant was commissioned on April 28, 1977, rather than as scheduled on October 1, 1976. The quality of the work and the cooperation of the contractor were very good. The plant has performed effectively; (g) Generator switching station, control equipment, local power and lighting - This equipment was also commissioned in April and May, 1977 rather than as scheduled on October 1, 1976. The standard of work and the cooperation of the contractor was very good. The equipment has performed without problems. 3.24 The performance of the borrower has been satisfactory. Staffing is reasonably well organized. Maintenance procedures are in accordance with manuals and good records are maintained. The major operating problem has been lack of spare parts due primarily to lack of foreign exchange for their purchase. IV. OPERATING PERFORMANCE Market 4.01 The performance of ZESCO in the bulk and retail power sales markets is the key to the prospects for the Kafue Stage II Project. There has been a significant shortfall to date in market growth, both in Zambia and Zimbabwe, compared to the power demand forecast made at the time of appraisal. Furthermore, there are poor prospects for demand in the region increasing quickly to absorb the potential for power production from Kafue Stage II, especially with regard to exports to Zimbabwe. Developing trends in demand during the 1970s and early l980s and the decision of Government of Zimbabwe to develop indigenous, coal-fired generating capacity (para. 2.04) have removed the prospects for achieving the appraisal forecast of selling the full output from Kafue Stage II from the early 1980s. In contrast, there appears to be strong prospects that the demand on ZESCO's generation facilities to the late 1980s could be met from installed generation capacity without Kafue Stage II.  - 12 - 4.02 Government of Zambia's decision to proceed with Stages I and II of the Kafue project was based on its own forecast for the Zambian system, taking into account CAPCO's requirements.a/ The Bank's appraisal of the Kafue Stage II Project was based on a market forecast prepared by CAPC in 1972, which was during a period of high optimism for growth in export- oriented industries and mines in the region, but was also shortly before the onset of the slowdown in worldwide economic growth resulting from the 1973 increases in oil prices. CAPC's forecast growth rate for demand prepared in 1972 for the period to 1980 was 36 percent higher than the corresponding growth rate forecast by CAPC in 19b9 for the Kariba North Project appraisal (Annex 4-1). The forecast and actual growth rates for the period 1973-1980 are as follows: Combined Zambia Zimbabwe System