Papua New Guinea - Yonki Hydroelectric Project

Document of The World Bank FOR OFF'eIAL USE ONLY .v , I' f'- Report No. 6029-PNG STAFF APPRAISAL REPORT PAPUA NEW GUINEA YONKI HYDROELECTRIC PROJECT April 21, 1986 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their offlcial duties. Its contents may not otherwise be disclosed without World Bsnk sutborization.  CURRENCY EQUIVALENTS Currency Unit Kina (K} 1 Kins (K) USU I Kina 100 toea (t) (As of December 1985) FISCAL YEAR July 1 to June 30 through 1977 January 1 to December 31 beginning in 1978 WEIGHTS AND MEASURES m - meter (3.281 feet) cu m = cubic meter (35.31 cubic feet) cms = cubic meter per second (35.315 cubic feet per second) km kilometer (0.62 miles) sq km = square kilometer (0.386 square miles) kWh = kilowatt hour (860.42 keals) -GWh = gigawatt hour (1,000,000 kilowatt hours) kW = kilowatt (1,000 watts) MW = Megawatt (1,000 kilowatts) kV = kilovolt (1,000 volts) KVA kilovolt-ampere (1,000 volt-amp es) TCF = trillion cubit feet (0.283 x 10 cum) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ADAB - Australian Development Assistance Bureau ADB - Asian Development Bank BCL - Bougainville Copper Limited CIF - Cost, Insurance, Freight EIB - European Investment Bank ELCOM - Electricity Commission EPU - Energy Planning Unit ERB - Engineering Review Board ILO - International Labor Organization MME - Ministry of Minerals and Energy OECF - Overseas E:conomic Cooperation Fund PNG - Papua New Guinea SMEC - Snowy Mountains Engineering Corporation of Australia TR - Touche Ross Services Pty (PNG)  t -- i - FOR OMCIAL USE ONLY PAPUA NEW GUINEA YONKI HYDROELECTRIC PROJECT Loan and Project Summary Borrower: Independent State of Papua New C inea (PNG) Beneficiary: The Electricity Commission (ELCOM) Amount:. =US$28.6 million Terms: 20 years, including 5 years o grace on repayment of principal, at the standard variable interest rate. Relendings: The Government will onlend the proceeds of this loan to ELCON at its applicable rate for power project8 (currently 11X) or at the prevailing Bank rate, whichever is higher, for the same term as the proposed Bank loan. ELCOM will assume the foreign exchange risk. Project Description: The project comprises: (a) construction of a 60 m high earthfill dam on the Ramu River with a total embankment volume of about 1.8 million cu m, a spillway system and outlet struc- ture, and associated works; (b) installation of two additional 15 MW generating units together with step-up transformers at the existing Ramu I power station; (c) relocation of a part of the Highlands highway and local access roads, together totally 22 km; (d) engineering and consulting services; (e) a training program; (f) technical assistance for institutional support; and (g) a rural electrification component. Benefits: The proposed loan supports a major hydroelectric power development which would reduce ELCOM's dependence on costly imported oil and replace it with indigenous hydro resources. The project would also provide adequate training and institutional support to assist ELCOM's development of local staff resources, and develop an institutional and policy framework for a future rural electrification program. Risks: The project faces no special risks, ELCOM has endeavored to minimize the project risks during construction particularly with respect to the treatment of the embankment f-.i*ation. A grout curtain has been designed to fill cavities in tie con- glomerates with cement and possible sand lenses %ith themical grout. The design is satisfactory. ELCOM has al- *._ted promptly in preparing to upgrade the operating voltage for the transmission lines to 132 Kv. Whatever risks remain are not judged to be significant enough to preclude proceeding with the loan. This document hts a rsted distibution and may be used by recipients only in the perfomane of their offcal dutios Its contents may not otherwise be dislosed without World Bank muthmimtlon.  - ii - Estimated Costs: Local Forei Total ----US5 nnll ion -- Civil works 14.0 21.0 35*0 Electrical and mechanical 2.0 5.0 7.0 Engineering and consulting services /a 3.0 5.6 8.6 Construction related establishment expenses 5.5 - 5.5 Training and institutional development 9.4 5.1 14.5 Rural electrification 1.2 2.4 3.6 Base Cost /b 35.1 39.1 74.2 Contingencies Physical 4.2 5.0 9.2 Price 7.7 8.5 16.2 Total Project Cost 47.0 52.6 99.6 Interest during construction 7.3 10.5 17.8 Total financing required 54.3 63.1 117.4 Financing Plan. Local Foreign Total ==----- e 5n ------- IBRD loan 12.7 15.8 28.5 ADAB grant - 1.6 1.0 EIB loan 7.0 9.0 16.0 OECF loan 11.2 26.8 38.0 ELCOM internal cash generation 23.4 10.5 33.9 Total 54.3 63.1 117.4 Estimated Disbursement: Bank FY 1987 1988 1989 1990 1991 1992 - --------- US$ millon Annual 1.4 3.1 6.0 8.0 8.6 1.4 Cumulative 1.4 4.5 10.5 18.5 27.1 28.5 Economic Rate of Return: 16.5S IBRD No. 19385 a/ Includes US$1 million Project Preparation Facility from the Bank, which will be refinanced from the proposed Bank loan, and US$1 million equivalent grant from ADAB. b/ Includes import duties and taxes of about US$1.2 million equivalent.  PAPUA NEW GUINEA YONRI HYDROELECTRIC PROJECT Table of Contents Page No. I* THE ENERY SECTOR .....-.-- ....................-....* I A. Energy Resource Overview 1 D. Energy Consumption ... 2 C. Institutional Aspects ...................... , .. 2 D. Sector Issues and Policies 3 II. THE POWER SUBSECTOR ......... 4 A. Background 4 B.* Institutions....... S .**.*....*.*.. C. Subsector Policy and Sta y . . g y S D. Bank Participation in the Subsector ................. 5 III. THE BENEFICIARY 0 00 0 0 00...... 00000 , 6 A. Introduction 6 B. Orgai gto. n i z a t i on..... 0...0....000 7 Structure ...0 ......0 ........ - 7 Personnel and Staffing ................... , 7 Expatriate Staff 9 Training 10 Technical Activities 11 C. Financial Management ............ .*..**.......** 12 Financial Planning ....... 0000 0 12 Management Information Systems 13 Electronic Data Processing ....................... 13 Commercial Practices 00000000000000000000000000000013 Accounting 14 External Audit .0 0.0 0...0. 15 Internal Audit is.........o. 15 Insurance 15 Income ......... * 15 This report was prepared by Messrs. Weigong Cao and Jamil Sopher, who appraised the project in September 1985 with the assistance of Mr. Gerry Dunnion, Training Consultant.  - ii - Pate No. IV. ELCOM'S POWER MARKET AND THE PROGRAX ............... ...... 16 A. ELCOM's Operation ................... 16 B. Load Forecast .... .........t 18 C. Power Development Programs for Port Moresby and Ramu Systems * 19 V. THE PROJECT . 20 A. Project Objectives * ................................. 20 R. Projecr Description .......................-. 21 Yonki Dam - Main Civil Works ...... ................ 21 Engineering and Consulting Services ............... 22 Training, Manpower Development and Institutional Support .......................... 23 Rural Electrification .... ......................... 24 C. Project Cost Estimates ....................... 25 D. Project Financing0.6....0. 000 * eeS.0.e*eo ..:.. ....... ... 27 E. Procurement .........* ............................... 28 F. Project Implementation ........... ......... ..... 29 Go Disbursement ............. .......** ........ 30 H. Monitoring and Reporting ............................. 31 . EcoloR y ...................... .................... 31 Jo Risks ....,32 vI. FINANCE *6***000*****000e**0.*60000.......60**.*....*, 32 A* Introduction * *4**4S** ........................... 32 B. Past and Present Financial Performance ............... 33 35 "aluation of Assets ,.............................. 36 C* ............................................ ........ 36 D. Financing Plan ............... 38 E* Future Finances .. so ........................... ...... 40 VII. ECONOMIC ANALYSIS ..*...* ................................ 43 A& Background ...* ...................................... 43 B. Least Cost Analysis of the Ramu System .... ........... 43 C. Internal Economic Rate of Return for the Project ..... 45 VIII. AGREEMENTS AND RECOMMENDATIONS ... ... ..................... 45  - iii - ANUMEXES 1. ELCOM's Organization Chart 2. Terms of Reference for the Institutional Support Technical Assistance 3. Existing Ceneration Facilities 4. Operating Statisics 5. Electricity Sales by Category of Consumers 6. Existing Transmission and Substation Facilities 7. Port Morseby and Ramu Systems 8. Ramu System - Electricity S&les by Catagory of Consumers 9. Port Moresy System - Electricity Sales by Category of Consumers 10. ELCOM': Load Forecast (1985-95) 11. Blance of Ramu System Load Requirements and Capabilities 12. The 1985-1995 Power Investment Plan 13. Pertinent Project Data 14. Terms of Reference for the Construction Management Services 15. Terms of Reference for the Training Consultants 16. Terms of Reference for Rural Electrification Institutional and Policy Development 17. Project Cost Estimate 18. Organization Chart of the Construction Unit 19. Project Construction Schedule 20. Engineering, training, Technical Assistance and Rural Electrification Implementing Schedules 21. Key Dates of Project Implementation Schedule 22. Disbursement Schedule 23. Financial Statements and Projections 24. Least - Cost Analysis 25. Internal Economic Rate of Return 26. Selected Documents and Data Available in the Project File HAP Yonki Hydroelectric Project (IBRD 19385)  PAPUA NEW GUINEA YONKI HYDROELECTRIC PROJECT I. THE ENERGY SECTOR A. Energy Resource Overview 1.01 Papua Nev Guinea (PNG) is spread-over 2,072,000 sq km of tropical seas north of Australia. The eastern half of the istand of New Guinea and three largest outer islands - namely, New Britain, New Ireland and Bougainville - comprise most of the land surface of 462,000 sq km. The land surface shows unusual diversity with extremely rugged mountain ranges, wide valleys, large river systems, extensive jungles, and vast swamps. Although PNG's population is rather sparse at 3.2 million, the country is relatively well-endowed with energy resources. However, its energy options are severely constrained by the difficult topography, the geographical fragmentation of the population and the small size of total domestic energy demand. The most abun- dant energy resource is the hydroelectric potential created by the mountainous topography and generally heavy rainfall, particularly on the Fly, Purari, and Kibori rivers flowing into the Gulf of Papua and the Musa river flowing into Oro Bay (see Map IBRD 19385). The total hydropotential is estimated at 14,000-21,000 MW (or nearly 5 to 7 kW per capita, one of the highast for any country in the world). However, because of the scattered islands and limited demand in anf one locality, development of large hydro resources has not been justifiable.y Existing hydro stations aggregate only 123 MW and most of them are run-of-the-river power stations with little firm energy potential. 1.02 Substantial exploration work has been done in the oil and gas subsector in the past fifty years. Moderate size gas discoveries have been made, both onshore and offshore, with gas reserves conservatively estimated at 1.5-5.0 TCF and condensates at over 60 million barrels. However, considering the large area underlain by sedimentary rocks with potential for petroleum and natural gas, past exploration has been quite modest and these hydrocarbon resources are essentially univaluated. In order to accelerate petroleum exploration 1n PNG, activity under a Bank financed Petroleum Exploration Technical Assistance Project was begun in 1982. This project has already resulted in bids for exploration of 14 blocks in the9Papuan Basin. PNG's extensive forests provide a significant biomass potential. These forests cover nearly 33 million hectares, of which less than lOX are being exploited 1/ One difficulty in planning hydro development is the lack of stream gauging records for all except the largest rivers. The joint UNDP/World Bank Energy Assessment Program in PNG has recommended that action be taken to introduce new gauging stations on small rivers throughout the country. As of 1983, expanded efforts in conducting an inventory of mini-hydro resources were being pursued, with assistance from the New Zealand Government.  -2- for logging operations. The country has surface manifestation of geothermal energy. Coal occurrences have been reported in Gulf Province and near Lae. These have generally been small deposits of low grade coal with seams dipping at moderate angles. The country': resourci,base provides a wide variety of long-term options for its energy planners.- B. Energy Consumption 1.03 Traditional fuels (wood, charcoal and crop residues) are the main sources of energy for the rural population (approximately 80X of PNC's total population). Limited studies conducted in certain localities have estimated fuel wood consumption at 1.2 kg/capita/day, equivalent to 1.4 million tons annually. On this basis fuel wood contributes about 37Z of total energy consumption. In most of the rural areas, fuelwood is likely to continue to be used for cooking in households, and the demand for this purpose may be expec- ted to grow at the same rate as the population. 1.04 In 1984, PNG imported about 674,500 tons of petroleum products, representing about 90% of commArcial energy consumption in PNG. During the period 1976-84, overall consumption increased by an average of 4.4% annually; the increase was particularly high for diesel oil (8.2%) as a result of (a) increased thermal power generation; and (b) a shift from gasoline .o diesel oil in the transportation sector. On the other hand, consumption of fuel oil and gasoline increased at a slower rate (1.5% and 0.2% p.a., respec- tively). The energy sector of PNG has developed alongside the various enclaves. The major enclave is Bougainville Copper Limited (BCL), which is on Bougainville Island separated from the country's major demand centers and which consumed almost 37% of total consumption of petroleum products in 1984 (250,000 tons). Most of this fuel was residual fuel oil used in power geaeration. 1.05 Electricity consumption in 1984 was approximately 1,200 GWh, of which about 62% was used by BCL. The Electricity Commission (ELCOM) supplied 421 GWh to 43,000 consumers in 1984. The per capita consumption of electri- city in PVG is about 387 KWh (1984); this is very low compared to 487 KWh (1982) in Fiji, 405 KWh (1982) in Philippines and 764 KWh (1982) in Malaysia. With only 34,200 domestic connections currently, less than 7% of PNG's population has access to electric power. C. Institutional Aspects 1.06 The Ministry of Minerals and Energy (MME) has broad responsibilities covering the assessment and development of PNG's minerals and energy resour- ces, the monitoring of mining and petroleum licensees, land surveys, water resources, mapping and cartography, geological surveys, the formulation of national energy policy and the implementation of certain renewable energy 2/ A mure detailed discussion than appears herein is prov,ded in: "Report of the Joint UNDP/World Bank Energy Sector Assessment Program: Papua New Guinea - Issues and Options in the Energy Sector," (June 1982).  -3- projects. Under the Minister, a Secretary supervises the Ministry's three divisions which respectively have responsibility fort (a) Policy and Planning; (b) Geological Surveys; and (c) Mines. ELCOM, the national power company, reports directly to Minister of Minerals and Energy. ELCOM is organ- ized as a Commercial Statutory Authority whose policies are formulated by a Boa-d of Commissioners. 1.07 The Energy Planning Unit (EPU) of the Policy and Planning Division of MME has responsibility for energy planning. So far, the Unit has mainly provided advice on key energy projects, has initiated the collection and com- pilation of sector data, and promoted the use of renewable energy resources. D. Sector Issues and Policies 1.08 Although PNG is well-endowed with potential energy resources, all its commercial energy needs are currently met through imported petroleum products and, to a limited extent, hydropower generation. Oil imports in 1984 were estimated at US$159 million (CIF), representing more than 7% of GNP and more than 10% of export revenue. Without major efforts by the Government to reduce this deper.dence, energy imports wi2l eventually impose a severe burden on the economy. The Government established EPU in 1978 for assisting it in its efforts to diversify sources of energy. EPU has emphasized the role of renewable resources for alleviating PNG's energy problems. These include, in particular, ethanol for the transport sector, wood pyrolysis for the indus- trial sector, and solar water heating and photovoltaics for households. More conventionai areas of activity tended to be neglected and energy planning did not advance significantly. The Government has reouested technical assistance in developing a strategy for improving the current situation by identifying and implementing a reliable and least cost supply option, which would reduce dependence on imported petroleum products. During the past three years, with joint UNDP/Worli Bank assistance, EPU began to place more emphasis on the electricity subsector, where 42% of petroleum products are used, and where options are available to substitute for the oil used in power generation. Work has begun on comprehensive energy studies and planning, aiming at organizing and accelerating the oil and gas exploration effort and the rational develop- ment of other indigenous energy resources. Efforts to optimize the power expansion program based on the least cost development plan (paras. 4.09-4.11) are also in progress. 1.09 While progress has been made in strengthening the sectoral policy and technical capabilities, the pace of this development has been slow and further action is required. MME has traditionally focused on hard-rock minerals (so far, mostly copper and gold), as these contribute substantially to the Government's revenue earnings. PEG's commercial energy needs are mainly met through imported petroleum products. However, the energy sector is now in transition, with the Government encouraging the development of the country's vast hydroelectric potential and its natural gas and oil, all of which could play a pivotal role in PNG's energy future. The rate at which PNG can respond to, and therefore benefit from, these changes depends largely on the imagination and dynamism being shown by its policy level institution in directing and controlling activity aimed at implementing these new energy sector policies. Institutional strengthening in the areas of planning, imple-  -4- mentation, and system operation is therefore a high priority which should be addressed in the context of mrjor development projects in the sector (paras. 3.08-3.15).- - 1,10 The scant domestic utilization of electricity, particularly in rural areas, indicates that rural electrification is a sector issue which needs addressing. Development of the courtry's rich agricultural and resource potential depends directly on efforts to enhance the capability of larger segments of PNC's population to exploit those resources; achieving a greater penetration of electricity into the rural areas, especially the Highlands-, is essential to these efforts. However, because of the sparse population and difficult tertain, most rural electrification projects are prohibitively expensive. Consequently, the Government of PNG will need to develop policy parameters and an institutional framework for enabling investment in rural electrification. The proposed project addresses this particular issue (para. 5.09). II. THE POWER SUBSECTOR A. Background 2.01 At the end of 1984, the total installed capacity of the power sub- sector in PWG was about 467 MW, of which about 26% (123 MW) was hydroelectric and 74% (344 MW) was diesel. Tne scattered smaller islands and the extremely rugged (in some places inaccessible) mountain ranges on the main island pre- clude any possibility of a fully integrated power system. At present, public electricity suppty in PNG consists of 19 independent power systems serving 25 urban centers scattered throughout the country. At the end of 1984, the installed capacity and generation in the country were: Table 2.1: THE INSTALLED CAPACITY AND GENERATION IN THE COUNTRY Installed Capacity (MW) Generation Hydro Thermal Total (%) (GWh) (Z) ELCON 117.0 77.9 194.9 (41.6) 432.9 (27.7) Government 0.5 6.0 6.5 (1.4) 7.0 (0.4) Bougainville Copper -.- 196.0 196.0 (41.9) 966.8 (61.8) Ok Tedi Mine 2.2 28.0 30.2 (6.5) 66.1 (4.2) PNG Forest Products 3.5 -.- 3.5 (0.7) 17.0 (1.1) Other Private -.- 37.0 37.0 (7.9) 75.0 (4.8) Total 123.2 344.9 468.1 (100.0) 1,564.8 (100.0)  8. Institutions 2.02 ELCOM is responsible fcr public electrictty supply thrQughout the coantry. At the end of 1984, ELCMM's system bad a total installed capacity of about 195 MW (this represented about 42% of the total installed capacity in the country). ELCOM also operates and maintains a number of small facilities (totalling abotst 7 MW) for which the Government retains ownership and finan- cial responsibility. The installed capacity of facilities owned by other private sector entities is about 267 MW. The largest private licensee, with an installed capacity of 196 NW, is BCL. BCL sells its residual power to ELCON for distribution in the Kieta-Arawa area in Bougainville Province. A small hydro plant with an installed generation capacity of 3.5 MW, which is located near Bauine to the south of Lae, is owned by PNG Forest Products Ltd. The rest of the private generating facilities are owned by mining and forest companies, plantations and religious organizations. These include mostly small diesel units and also a number of small hydro plants. C. Subsector Policy and Strategy 2.03 The fundamental objectives underlying ELCOM's strategy for electric power development are as folLows: (a) meeting the increasing demand for public electricity supply in the country; (b) utilizing indigenous natural resources, especially firm hydropower} to reduce the country's dependence on costly oil imports; (c) providing less costly power to industrial, commercial, rural and domestic consumers; (d) rationalizing power production and distribution through expansion of the high-voltage transmission grid; (e) recruiting, developing, compensating and maintaining a workforce for the electric power industry, capable of sustained performance at internationally acceptable standards and comprised, to the greatest extent possible, of PNG nationals. D. Bank Participation In The Subsector 2.04 During FY71 and FY74 the Bank made two loans (now fully disbursed) to ELS/N totalling $34 million to help finance a hydroelectric power plant and related training. The First Power Project (Loan 737-PNC) financed the first stage of the Upper Ramu Hydroelectric Development Scheme (Ramu I). Completion of the project was delayed by about nine months. A cost overrun of about 29Z was incurred, primarily because of currency fluctuations. A Project Completion Report (No. 1687) dated October 1979 was prepared. The lessons learned included: (i) detailed project preparation, particularly extensive exploratory drilling, contributed towards successful implementation of the project; and (ii) training programs helped further the policy of employing national staff. The Second Power Project (Loan 999-PNC) consisted of  (a) technical assistance for ELCOM's in-service training program during the period 1974 through 1979; (b) financing of the shortfall in funds for meetinK the foreian exchange expenditures for the Ramu I project; and (c) distribution system expansion. The project was executed as planned. The objectives of the project have largely been met. The project was completed on schedule and at the estimated cost. A Project Completion Report (No. 3912) dated April 1982 was prepared. An important lesson learned from this project is that local- ization, especially of senior management, should be implemented after a much longer period of in-service training, and expatriate support should be main- tained until local counterparts have gained adequate experience (paras. 3.09- 3.11). The Bank's involvement in the power subsector remains highly desir- able. III. THE BENEFICIARY A. Introduction 3.01 ELCOM will be the beneficiary of the proposed loan. ELCOM was established as a Commission of the Government of PNG in 1963. Later, over- sight of its activities was assigned to the MME. In October 1983, it was reorganized as a Commercial Statutory Authority, continuing to report to the same Ministry. ELCOM's management enjoys nearly complete indepgndence in managing day-to-day affairs. So long as it respects Government guidelines, management provides the predominant inputs and has responsibility for decisions concerning planning, contracting, staffing, pricing, and financing of investment. ELCOM's customer service operations are conducted from 25 load center facilities. In addition, ELCOM operates about 27 small and technically simple generating facilities. Its field locations are scattered throughout the PNG side of New Guinea and on the islands of New Britain and Bougainville. 3.02 ELCOM has been remarkably effective at managing its operations and at operating its facilities. To attain this effectiveness, ELCOM has relied heavily on expatriates for both guiding operations and management, and devel- oping local manpower resources. With their help, ELCOM has successfully built expansion projects, operated its system, adapted modern office technology for its own use, and introduced some sophisticated managerial systems and proce- dures. Now, however, ELCOM is beginning to implement a substantial expansion program (para. 6.16). After completion of that program it will become a medium sized utility facing much greater technical and managerial complexity than it does currently. In view of its anticipated future requirements, ELCOM's results in developing local manpower resources has been dis- appointing. 3.03 Initially, the Government of PNG asked the Bank to include in the proposed project an extensive training component aimed at furthering ELCOM's manpower development objective. In the context of appraisal, an intensive assessment of ELCOM's potential to adjust to its future role revealed numerous factors that had frustrated past manpower development efforts, including:  (a) A lack of standardization among similar jobs; (b) a profusion of managerial systems and procedures, often including several aimed at achieving the very same managerial objectives; (c) except for financial management -,here the development of systems and procedures was centralized, scant effort to eliminate redundant or unnecessary activities; (d) a tendency among expatriates to emphasize their operational objectives while underplaying their manpower development objectives; and (e) a lack of the breadth and depth needed to meet the increased complexity of technical and managerial demands expected during the intermediate term future. In the following analysis, ELCOM's organization, staffing, management, train- ing, operations and maintenance, commercial practices, and financial systems and procedures are examined against this background. Where appropriate, the proposed project includes manpower development components aimed at enhancing ELCOM's ability to meet its future responsibilities. B. Organization Structure 3.04 ELCOM's Board of Commissioners is responsible for establishing policies and ensuring that management conducts operations effectively and in accordance with those policies. The Board consists of seven commissioners, including the Chairman. They are selected from among high-ranking public ser- vants and distinguished private sector businessmen. They are usually appoin- ted by the Minister of Minerals and Energy for terms of two years, and may be reappointed upon completion of their terms. 3.05 ELCOM's organization structure is displayed in Annex 1. That structure is similar to the structure of Australian utilities of similar size and scope. Operations are decentralized, with each location being managed as a separate entity consisting of units organized to provide specific ser- vices. The headquarters staff is organized functionally around particular disciplines. This organization structure is appropriate to ELCOM's current and anticipated needs. Personnel and Staffing 3.06 Currently, to correct for past tendencies to carry excessive numbers of semiskilled and unskilled staff, ELCOM has put in effect a recruitment freeze and is developing a program for reducing its staff. New personnel can be recruited only if ELCOM has a vacancy and it can prove both (i) that the particular position is critical and (ii) that no present employee possesses the requisite skills. -Otherwise, vacancies must either be filled through  -8- redeployment or be left unfilled. Table 3.1 shows ELCON's establishment and staffing, 4istributed according to function, as of August 31, 1985: Table 3.1: ELCOM: ESTABLISHMENT AND STAFFING -- ALLOCATED BY DEPARTMENT (As of August 31, 1985) Positions Positions Establish- Department filled vacant ment Top management 11 0 11 Middle management and staff -- - centers and HQ 718 234 952 Administration 403 165 568 Commercial 190 79 269 Planning 9 17 26 Operations and maintenance 421 182 603 Design and construction 96 83 179 Total 1,848 760 2,608 3.07 Including 293 temporary appointments who are not counted as staff, ELCOM had a total of 2,141 employees as of August 31, 1985. This aggregate number may appear ample for ELCOM's current size and scope; however, it belies shortages of certain categories of professionals, most particularly engineers and supervisors. In addition, ELCOM has imbalances between the availability of, and its deployment requirements for skilled, semiskilled and even some unskilled staff. Moreover, if expansion proceeds is expected (para. 6.16), its current establishment could be severely stretched even if all existing vacancies were filled. In connection with its Management Information System (para. 3.18), ELCOM is currently installing a well-designed manpower planning and budgeting procedure; when fully operational, that exercise could greatly enhance ELCOM's management of its manpower resources. 3.08 At the same time, ELCOM's establishment provides far too many different categories of staff; and, too often, the level of skills, knowledge, and qualifications varies greatly for the various jobs within the same cate- gory. To make more effective ELCOM's efforts at (i) manpower planning; (ii) manpower development (para. 3.11); and (iii) training (paras. 3.12 and 5.08), ELCOM needs to implement a Job Standardization Study, included under the proposed project, which would, inter alia, include recommendations for: (a) simplifying the number of staffing categories; (b) defining clearly staffing category and job requirements; (c) stan4ardizing jobs;  -9- (d) standardizing to the degree possible skills, knowledge, and qualifications required for each job; and (e) developing job manuals. At negotiations, ELCOM agreed that it will (i) by January 1, 1987t appoint consultants, according to terms of reference and selection procedures acceptable to the Bank, to conduct a Job Standardization Study; (ii) by December 31, 1987, complete the study and discuss its recommendations with the Bank; and (iii) according to a schedule acceptable to the Bank, implement those mutually agreed recommendations. Terms of reference for this Study, which were discussed and agreed at negotiations, are shown in Annex 2. Expatriate Staff 3.09 As of August 31, 1985, ELCOM employed about 126 expatriates, distributed functionally as shown in Table 3.2. Table 3.2: ELCOM'S EXPATRIATE STAFF - ALLOCATED BY DEPARTMENT (As of August 31, 1985) Department Headquarters Field offices Aggregate Top management 7 7 Middle management and staff 5 - 5 Administration 20 2 22 Commercial 19 - 19 Planning 2 - 2 Operations and maintenance 25 11 36 Design and construction 24 11 35 Total 102 24 126 Most expatriates occupy positions in or serve as advisors to top management of their departments. They bring to ELCOM levels of expertise which are largely unavailable among PNG nationals. These expatriates have not only managerial and advisory functions, but they also have manpower development objectives. 3.10 The Government of PNG has a continuing concern about the increasing cost to the economy, including related capital outflows, associated with main- taining the large overall number of expatriates in PNG. It has a policy of localizing as rapidly as prudently possible the staffs of most large Govern- ment establishments. In response to this policy, ELCOM abruptly reduced its expatriate staff after independence, with a consequent rapid deterioration in the quality of operations and maintenance of plant and equipment, commercial practices, and manpower development.  - 10 - 3.11 While ELCOM ultimately needs to reduce substantially its reliance on expatriates, it should not do so prematurely and abruptly once again. Instead, ELCOM should try to accomplish a phased replacement of expatriates by suitably trained national officers. In this regard, the expatriates should be encoutraged to provide enhanced technology transfer and special on-the-job training to carefully selected local personnel. The proposed Bank loan would support this objective through a provision of an allocation of US$1.2 million, which would be applied to financing some or all of the foreign exchange por- tion of existing compensation for qualified expatriate senior- and middle- level managers and advisors, between January 1, 1987 and December .31, 1989. ELCOM would use the foreign exchange obtained through this allocation to enable an equal amount of local currency generated from operating revenues to be invested otherwise in the project; moreover, ELCOM would specifically be prohibited from using the allocation to increase the compensation of any expatriate over the level stipulated in that expatriate's contract or,-at contract renewal, over the level authorized by ELCOM's Board of Commissioners. Details regarding disbursements against this allocation were discussed and confirmed during negotiations; accordingly, the amount of disbursements could be allowed to vary from month to month, provided that it did not exceed US$60,000 in any given month and that the remaining balance at the end of each month was sufficient to finance disbursements of at least US$20,000 per month thereafter. To qualify, an identified expatriate would have assigned to him for the purposes of technology transfer or on-the-job training, one or more identified counterpart PNG nationals. Prior to January 1, 1987, the qualified expatriates would be asked to develop specific training objectives for his identified couterpart(s); these objectives would include a program for increasing the scope of the counterpart's responsibility upon attainment of monitorable levels of improved job related proficiency. ELCOM would furnish these objectives to the Bank for review t :d comment. Thereafter, ELCOM would furnish to the Bank a semiannual report summarizing the progress of each expatriate in pursuing his manpower development objectives. At negotiations, ELCOM agreed to advise the Bank prior to making any decisions which might result in major changes to ELCOM's organization. Training 3.12 ELCOM has for years placed a high priority on formal training. It has built and equipped a complete training college adjacent to its headquar- ters building, provided some training facilities at several of its larger field offices, and employed numerous expatriate training specialists. Despite these substantial inputs, the results of ELCOM's training efforts during the recent past have been disappointing because (a) the training staff emphasized academic and general training in preference to programs designed to impart specific skills and knowledge needed for specific jobs, and (b) line managers were not involved in training and its aftermath sufficiently to ensure that trainees used the concepts and techniques covered in their courses to improve job performance. Through administration of the allocation for compensating expatriates (para. 3.11), ELCOM will use a component of the proposed project to redirect the attention of line managers toward manpower development and the necessary direct linkages between formal training, improved job performance, and greater devolution of responsibility to lower levels of staff. In addi- tion, the proposed project includes a provision for new training inputs  (para. 5.08), including some fasalities and new training specialists, which are appropriate to ELCOM's training needs as redefined during appraisal. Technical Activities 3.13 ELCOM's technical activities are divided into three categories: (a) Planning - ELCOM has developed its own ten year (1985-1994) Generation, Transmission, and Distribution Development Plan. Now, it needs to follow this global effort with detailed plans; prepar- ation of these detailed plans will involve a substantial volume of complex work, etpecially if the interconnection of the Port Moresby and Ramu grids is to be undertaken as intended during the period. ELCOM's capacity to produce this work is limited due to its lack of suitably experienced and qualified staff. In the near term, ELCOM will need the continued support of expatriates to realize its planning activities. In the long term, it needs to decide which of its planning activities should appropriately be the responsibility of ELCOM staff and which may be handled by consultants (para. 3.15); (b) Design and Construction - ELCOM staff designs and constructs all distribution and some wood pole transmission lines; consultants and contractors are used to implement all generation and other trans- mission projects. For the future, ELCOM's expansion plans are so extensive that its present staff may have difficulty meeting its own share of the design and construction responsibilities (para. 3.15). To the degree possible, ELCOM should standardize designs, materials, and work methods for all localized construction (para. 3.14); and fc) Operations and Maintenance - In recent years, ELCOM has operated and maintained its plant and equipment well in relation to load factor, plant availability and supply continuity. Transmission and distri- bution losses have averaged about 10Z,' which is satisfactory in view of the low customer density and the extensiveness of distribu- tion networks. However, with the expected growth in demand and corresponding increase in complexity of the system, standardized operational procedures and practices need to be developed and imple- mented (para. 3.14). In addition, ELCOM needs to review its organi- zational arrangements to ensure closer coordination betwen opera- tions and maintenance activities and support systems such as materials management, manpower planning, financial budgeting and management information (para. 3.15). The current operation and maintenance units lack suitably qualified staff to meet likely future requirements anticipated as a result of ELCOM's projected growth (para. 3.15). 3/ Not including station use, which amounts to nearly 21 of generation (para. 4.01).  - 12 - 3.14 In its technical functions, ELCOM is increasingly handicapped by a lack of standardization. Increased standardization of design of the systems it constructs could result in increased decentralization of that activity, with consequent savings resulting from maximizing the use of locally available materials and enhancing levels of individual productivity. By increasingly standardizing operations and maintenance procedures, ELCOM could increase the productivity of its staff and enable training efforts to be more effective. The proposed project includes a provision of technical assistance aimed at increasing standardization of ELCOM's technical functions and developing manuals for standard operating procedures. At negotiations, ELCOM agreed that it will (i) by January 1, 1987, appoint consultants, according to terms of reference and a selection procedure acceptable to the Bank, to standardize ELCOM's technical functions and to prepare manuals for standard operating procedures; (ii) by December 31, 1987, complete the manuals and discuss the consultants' recommendations with the Bank; and (iii) according to a schedule acceptable to the Bank, implement those mutually agreed recommendations. Terms of reference, which were discussed and agreed at negotiations, are displayed in Annex 2. 3.15 Once job categories have been defined clearly and activities have been standardized to the degree practicable, ELCOM needs to assess the range of its functional activities in the light of resources available to it. It needs to determine which of those activities should remain under its direct responsibility and which may be entrusted to consultants and contractors. In addressing those responsibilities it wishes to retain, it should identify the resources it needs and the financial and training inputs needed to develop those resources. To this end, the proposed project contains a provision for a technical audit. At negotiations, ELCOM agreed that it will (i) by June 30, 1988, appoint consultants, according to terms of reference and a selection procedure acceptable to the Bank, to conduct a technical audit; (ii) by January 31, 1989, complete the audit and discuss the consultants' recommenda- tions with the Bank; and (iii) according to a schedule acceptable to the Bank, implement those mutually agreed recommendations. Terms of reference, which were discussed and agreed at negotiations, are displayed in Annex 2. C. Financial Management Financial Planning 3.16 ELCOM is one of four Commercial Statutory Authorities required to submit a five-year rolling financial plan to the Government by December of each year. In October 1984, ELCOM did submit its first such plan, the basis of which was the ten year engineering plan (para. 3.13(a)). Formulation of the financial plan involved substantial coordination between ELCOM's finance staff and all technical departments. 3.17 ELCOM prepares budgets annually in coordination with the Govern- ment's budget exercise. The budget is reviewed and updated several times during the year. ELCOM compiles some operating results monthly and more comprehensive data quarterly; variance analyses are conducted to establish why results may have differed from budget.  - 13 - Management Information Systems 3.18 In early 1984, ELCOM received a US$250,000 technical assistance grant from the Asian Development Bank (ADB) to (a) recommend an integrated accounting package, adaptable for use with electronic data processing, to serv-ce ELCOM's future needs for management information, and (b) prepare internal audit manuals. Touche Ross Services, Pty. of PNG (TR) was selected to provide this technical assistance. In July 1984, TR recommended using an integrated accounting system named MIDAS; TR then developed the extensive manuals needed to adapt MIDAS for ELCOM's use and delivered the r age to ELCOM in March 1985. To date, implementation is proceeding as exed4itiously as prudently possible. An accounts payable system is already in operation. The general ledger system is scheduled for introduction in January 1986. The inventory control system is scheduled for introduction in February 1986* and the fixed asset accounting system will be introduced thereafter, most likely in June 1986. All organization changes needed to accomodate the management information system have been made and ELCOM is currently trying to recruit necessary suitably qualified speoialists. Electronic Data Processing 3.19 ELCOM began computerizing its activities in early 1981 with the purchase of a small mainframe computer. In January 1982, ELCOM began operat- ing a live general ledger system, which included production of various manage- ment reports. In late 1983, ELCOM introduced a computerized revenue billing system, with Port Moresby becoming the first center to have its customer accounts maintained on the computer. The payroll system was computerized in early 1984. Also in early 1984, ELCOM substantially upgraded its computer hardware. Since then, a number of ELCOM officers have arranged the purchase of a variety of personal computers. To cope with this proliferation of different hardware and software, a Computer Policy Committee was-formed to review the purchase of new equipment and standardize future electronic data processing development at ELCOM. Commercial Practices 3.20 Accounts Receivable. ELCOM's commercial systems are necessarily slow and cumbersome due to the lack of reliable mail service (for that reason, many trade credits in PNC assume a 45 day payment period). Even so, ELCOM's recent performance at billing and collecting has been disappointing (para. 6.04) and ELCOM is currently taking remedial action. ELCOM's systems and procedures differ depending on whether or not the consumer is a governrment agency; collections from governmental consumers are much slower than from the general public. All of ELCOM's consumers are metered. 3.21 Government Consumers. The meters on each government installation are intended to be read monthly. When all bills for all installations belong- ing to a particular Ministry (or Department) have been accumulated, a single itemized bill is written and sent to that Ministry. This results in a single large claim which will not be paid until the individual Ministry has verified all included line items. In some cases, this process means that bills may be outstanding for as much as 90 days. The Government of PNG has agreed that  - 14 - ELCOM may now remit bills for larger installations directly to the individual Ministry as soon as the particular meter is read, and separate from all other bills pertaining to that Ministry'. ELCOM believes this could shorten the collection time at least for bills pertaining to larger government installa- tions by as much as 20 days. ELCOM has tried, with unfavorable results, discotnecting installations belonging to Ministries which had protracted their payments excessively. 3.22 General Public Consumers. ELCOM's policy is that each consumer's meter should be read monthly by a meter reader, who enters the reading onto a preproduced bill generated at headquarters. That preproduced bill includes any outstanding balance. The customer has two days from the rendering of a bill to pay any opening balance (thus implying a 32 day payment cycle). ELCOM disconnects without exception customers who are in default within very few days of the due date's passing. As a result, it experiences very few instances of default among general public consumers. 3.23 ELCOM's principal internal problem in collecting from both govern- mental and general public consumers is that the current staff of meter readers has not been able to keep pace with the rate of growth of consumer connec- tions. As meters are not being read as intended every 30 days, bills on the books represent much more than 32 days' consumption (para. 6.04). ELCOM is currently strengthening its staff of meter readers and is exploring approaches for making them more productive. As ELCOM's operating cash flow expands, it cannot afford to manage its billing and collection activities loosely. If the steps that are already being taken -- namely, (i) increasing the number of meter readers; (ii) increasing the productivity of meter readers; and (iii) billing large government installations separately -- do not succeed in shortening the period of outstanding accounts receivables, ELCOM may need to consider adopting other measures to realize that objective. At negotiations, ELCOM gave an undertaking that it will reduce accounts receivable (net of unread meter accruals) and maintain them at less than 45 days' sales, beginning in 1986. 3.24 Accounts Payable. In periods of constrained liquidity, ELCOM has obtained short-term finance inter alia, by stretching its accounts payable (para. 6.04). As it grows, ELCOM 1TE become increasingly reliant on receiv- ing favorable commerical credit terms. Such favorable terms would b;e avail- able only if ELCOM observes continual discipline in managing its accounts payable. At negotiations, ELCOM gave an undertaking that it will maintain accounts payable (net of accrued interest) at the aggregate of (a) one and one half month's construction expenditures and.(b) one and one half month's cash operating expenses. Accounting 3.25 ELCOM uses a double entry commercial accounting system patterned after the one being used by the State Electricity Commission of Victoria, Australia. The system was first adopted in 1963, and was modified in 1977 to improve the system's costing procedures. Otherwise, the only substantive changes were those necessitated by adaptation of the system for computeriza- tion. The accounting system is adequate and appropriate for ELCOM.  - 15 - External Audit 3.26 ELCON's annual accounts must be audited by the Auditor General's Department, or its nominee. Until 1981, the audit was performed by the Audi- tor General's own stafft thereafter, ELCOM's audit was performed by major accounting firms (TR between 1981-83, and Peat Marwick Mitchell of PNG in 1984), acting on behalf of the Auditor General. Accounting and auditing standards are established and monitored by the PUG Associotion of Accountants Inc. In turn, the Auditor General has a stated objective that audits for Government bodies should meet internationally acceptable stsadards. As a result, ELCOM's audit reports for the recent past have been comprehensive, thorough, and well documented. These audit arrangements are satisfactory. At negotiations, ELCOM agreed that six months after the end of each financial year, it will furnish to the Bank audited annual accounts for the year just concluded, together with the certification and report of an acceptable auditor. Internal Audit 3.27 ELCOM has an active internal audit unit. The unit reviews continuously the accounts at field offices and headquarters for accuracy and for conformity to accounting standards; until recently, however, it did not review the appropriateness of accounting procedures. In 1984, TR prepared internal audit manuals (para 3.11). In addition to its past activities, the internal audit unit will review (a) the appropriateness of accounting procedures; (b) inputs and outputs of the management information system; and (c) inputs for and the compilation of ELCOM's annual financial statements. ELCOM is currently recruiting from within PN5 and abroad, suitably qualified personnel needed to implement these new activities. The range and scope of ELCOM's internal audit activities are satisfactory. Insurance 3.28 ELCOM has been insuring its assets against large risks with commercial insurers. In order to maintain premiums at acceptable levels, its commercial policies include large deductible provisions (K 1 million on each casualty loss, up to an aggregate maximum of K 2 million in any calendar year). ELCOM believes it has adequate liquidity or, alternatively, access to short term credit to cover these deductibles. ELCOW's risk management activi- ties have been satisfactory to its commercial insurers; moreover, its casualty losses have been minor in recent years. These insurance arrangements are satisfactory. Income Taxes 3.29 ELCOM has been subject to income tax since 1983. The tax rate is 35% of taxable income. Taxable income is defined as income after interest charged to operations and deductions allowed under the tax code. Currently, those deductions include (a) an allowance of 100% of training expenses (which effectively means that training expenses are subtracted twice from revenues for tax purposes) and (b) all interest during construction (which gets capita- lized and is not charged to revenues for reporting purposes).  - 16 - IV. ELCOM'S POWER MARKET AND THE PROGRAM A. ELCOM's Operations 4,01 ELCOM's operations are conducted from 25 load center facilities, which supplied 421 GWh to about 43,000 consumers in 1984. Of this total consumption, 121 CGh (or 29%) were for domestic use and the balance (71%) was for commercial/industrial consumption. At the end of 1984, ELCOM's total installed capacity was about 195 MW, consisting of about 117 MW of hydro (60%) and 78 MW of thermal generation (40%). The major generating stations are listed in Annex 3. Table 4.1 below, which shows ELCOM's annual growth rates of energy generation, sales and number of consumers from 1974/75 to 1984, demonstrates the changed market situation. In addition, ELCOM purchased for resale 32-58 GWh from privately owned sources of generation. Total system losses were about 12%, including station use. ELCOM's operating statistics and electricity sales by category of consumers are given in Annexes 4 and 5 respectively. Table 4.1: ELCOM's INSTALLED CAPACITY, ENERGY GENERATION, SALES AND CONSUMERS Installed Energy Energy Number Capacity Generation Sales of Consumers Year (MW)/a (MW)/b (GWh) (1,000) 1974/75 89 289.0 256.0 26.7 1975/76 115 315.0 214.0 28.4 1976/77 111 335.0 303.0- 30.1 1977 (1/2 year) 121 183.0 153.0 30.9 1978 140 387.0 340.0 32.4 1979 166 440.0 380.0 38.2 1980 175 465.0 410.0 39.5 1981 176 460.0 423.0 40.9 1982 192 443.0 394.0 41.6 1983 217 452.0 398.0 42.5 1984 204 479.0 421.0 42.7 Average rate of growth 9.1% 5.5% 5.4% 5.1% /a Includes purchased capacity (9-12 MW) from private sources. 75 Includes purchased energy (32-58 GWh) from private sources. 4.02 The largest load centers are served through three independent systems, which although modest in size, are integrated networks: (i) the Port Moresby System serving the National Capital District (City of Port Moresby) as well as surrounding towns in Central Province; (ii) the Ramu System serving Lae, Kadang, and the Highlands region; and (iii) the Gazelle Peninsula System  -17- serving the Rabaul, Kereuat and Kokopo areas in East New Britain Province. The PNG electricity systems are depicted in Map IBRD 19385. The transmission and substation facilities for the three independent systems are listed in Annex 6. The Port Moresby and Ramu Systems (details in Annex 7) alone account for more than-75% of the power generated by ELCON, with the balance shared by the Gazelle Peninsula System and the many isolated generating facilities, which usually serve single localities. 4.03 In the period 1974/75 to 1984, energy generation has been growing at an average annual rate of about 4.0X for the Port Moresby System and 5.6X for the Ramu system. Growth rates in peak demand and energy generation over the past 10 years are shown in Table 4.2. Table 4.2: HISTORICAL LOAD GROWTH Peak Demand (KW) Energy Generation (GWH) Year Port Moresby Ram-i Port Moresby Ramu 1974(75 23.7 - 129 - 1975/76 25.5 16.8 142 104 1976/77 27.8 20.4 154 115 1977 (1/2 year) 28.1 21.1 79 60 1978 31.3 23.6 176 135 1979 34.8 25.4 192 138 1980 35.6 28.1 195 156 1981 36.4 28.7 182 159 1982 35.8 27.5 183 150 1983 36.4 27.7 184 154 1984 42.4 29.9 199 165 Average rate of growth (p.a.) 6.3% 7.0% 4.0% 5.6% 4.04 Past load growth in the Ramu System was rapid in the late 1970s due to the economic expansion of that period, followed by considerably slower growth in the early 1980s resulting from (a) unreliable power supply caused by poor maintenance during late 70s and early 80s; (b) high tariffs caused by rising fuel prices and dry weather conditions; and (c) the economic recession. Of the 155 GWh energy sales in 1985 (the first full year of industrial tariffs) in the Ramu system, 22.6% have been consumed by domestic users, 61.3% by commercial and small industrial enterprises, and 16.1% by larger industries. Annexes 8 and 9 give details of energy sales by categories of users from 1978 to 1985 for Port Moresby and Ramu respectively. 4.05 The distances between the Port Moresby and Ramu grids (on the order of 420 km) and the relatively small magnitude of their demands ard rates of growth, have juitified their continued isolation through the 1970s and 1980s; but integration of the resources within the two largest grids through a unified high voltage system is a future ELCOM objective.  - 18 - B. Load Forecast 4.06 The load forecasts of ELCOM as a whole, and the Port Morseby and Ramu grids separately, were made by analyzing historical energy sales data by consumer category for each load center. Trends=in growth of the number of consumers and average use were noted and projections were extrapolated according to these trends, taking into account the future economic environment of the load center. Information on future economic developments in each load center was obtained from various government departments and consultations at site with local government and business officials. The energy sales forecasts also included projections of new large consumers developed in the context of an on-going power market survey of ELCOM's local centers. Energy sales projections for each load center were consolidated to provide overall ELCOM, as well as Port Moresby and Ramu, load forecasts. Energy requirements from the supply systems were derived from the total energy sales by applying appro- priate losses developed from historical data. Peak demand was then derived from energy requirements by applying an appropriate system load factor. Energy requirements and peak demand of ELCOM for the period 1985-1995 are shown in Annex 10. The load forecasts of Port Moresby and Ramu are shown in the following table: Table 4.2: LOAD FORECAST (1985-1995) Peak Demand (MW) Energy Generation (GWh) Port Moresby Ramu Port Moresby Ramu 1985 43.3 32.4 218.9 179.0 1986 45.9 35.8 323.3 197.6 1987 46.8 39.9 244.1 220.4 1988 49.2 43.0 256.6 237.0 1989 51.6 46.5 269.0 256.6 1990 53.2 50.3 280.7 277.1 1991 55.5 54.3 297.9 299.9 1992 58.6 59.0 313.0 324.4 1993 61.7 63.6 329.0 351.2 1994 64.9 69.2 347.9 381.7 1995 67.5 75.0 360.0 413.5 Average growth Rate (S P.a.) 4.5 8.8 5.1 8.7 4.07 The Ramu System is expected to be the fastest growing supply system in PUG and surpass the Port Moresby system's total load in 1991. The peak demand and energy generation for the Ramu System would be increased from 32 MW and 179 GWh in 1985 to 75 MW and 413 GWh in 1995, representing an annual rate of about 8.7%.  - 19 - 4.08 This load forecast is reasonable considering that: (a) the load growth in the early years 1985 to 1987 reflects a number of conservative assumptions, including (i) a decrease in the real value of tariffs with only minor tariff increases over the next two to three years; (ii) the introduction of an industrial tariff that discourages autogeneration 4t; (iii) economic recovery from the world recession of 1981-83; and (iv) the connection of a number of tea and coffee factories and government centers in the highlands; (b) the population of the supply area of the Ramu system is approximately 2 million, representing about two thirds of the nation's total population, And rural communities there close to the system are likely to be connected as their financial health improves; and (c) energy sales are apt to grow rapidly in the early 19909 as 8aresgXt of the likely beneficial effects of both the Porgera Gold Mining Project- on the local economy and the connection by road of the highlands region with Port Moresby. C. Power Development Programs for Port Moresby and Ramu Systems 4.09 Power expansion planning is mainly conducted by ELCOM with the assistance of consultants. The extensive investigations made by ELCOM and its consultants, Gibb Australia and Snowy Mountains Engineering Corporation of Australia (SMEC), have considered a number of alternative power system devel- opment programs for both the Port Moresby and Ramu systems. The system development programs examined included alternative scenarios involving hydro plants, thermal plants and possible interconnection of the two major systems by a transmission line (para. 7.01). The study has indicated that the optimum power development program for the Port Moresby and Ramu systems is as follows: (a) a 12 MW heavy-oil diesel plant at Moitaka in the Port Moresby system by the end of 1984; (b) a 13 MW hydroelectric power station at the Rouna IV site in the Port Moresby System by the end of 1986; (c) an additional 6 MW heavy-oil diesel plant at Moitaka in the Port Moresby system by the end of 1987; 4/ A recent survey conducted by ELCOM estimates 15 MW of the private generation capacity in areas which ELCOM could service without significant distribution expense, including approximately 7.3 MW in Lae, 2.5 MW in Coroka and 3.6 MW in Mt. Hagen. Autogeneration in 1984 is estimated to account for 40-50 CWh of energy. Assuming ELCOM supplies 50% of this demand, its load will increase by 20-25 Giii. 5/ The load of the Porgera gold mine (17-45 MW depending on production rate) is not included in the forecast as it may be built as an enclave project using local hydro generation. Two further projects planned for the late 1980's, early 1990's are (a) two cement factories near Lae (4 MW); and (b) the Bundi chromite mine near Madang (about 10 MW). These loads are also not included in the forecasts.  20 - (d) a 12 NW gas turoine plant at Lae in the Ramu system by the end of 1987; (e) a regulating reservoir upstream of the existing Ramu I Power station at Yonki in the Ramu system by the end of 1990; (f) installation of 2 x 15 MW turbine-generator units in the existing Ramu I Power station by the end of 1990; (g) a high-voltage transmission line interconnection between the Port Moresby and Ramtu system for completion in the period 1990-95, following commissioning of the Yonki Dam; and (h) a 5 x 18 MW hydroelectric power station at the Ramu 2A site in the proposed Ramu-Port Moresby interconnected system in 1995. 4.10 A review of the development program supports ELCOM's decision to start the proposed Yonki Hydroelectric Project as expeditiously as possible. It also shows that the construction of the proposed Yonki Hydroelectric Project is fully justified by load growth expectations in the Ramu System alone, and does not depend on the potential interconnection of the Port Moresby and Ramu Systems. Nevertheless, following completion of the proposed Yonki Hydroelectic Project, the Ramu System is likely to have some excess energy available; this energy could be used in the Port Moresby System during the 1990-1994 period, if a transmission interconnection between the two systems were constructed. The transmission interconnection needs to be carefully investigated. The appropriate timing for the interconnection is now being studied under an ADB technical assistance project. The Ramu System's balance of system load and capacity is given in Annex 11. 4.11 ELCOM's generation expansion plan, 1985-1995, includes ongoing works totaling 26.7 MW, and new projects of 140 MW capacity (including the Yonki Hydroelectric Project). The cost of the expansion plan (excluding interest during construction) is estimated at about K 298.8 million (US$298.8 million) for the period 1985-1995. Of that total, K 183.7 million (US$183.7 million) represents foreign costs and K 115.1 million (US$115.1 million) represents local costs (Annex 12). V. THE PROJECT A. Project Objectives 5.01 The proposed project supports a major hydroelectric power development which would reduce the PNG's dependence on costly imported oil insofar as ELCOM's operations are concerned, and replace it with indigenous hydro resources. Besides this, the proposed project furthers objectives including: (a) adequate training and institutional support to assist ELCOM's development of its local staff resources;  - 21 - (b) development of an institutional and policy framework for future rural electrification efforts; and - (c) cofinancing. B. Project Description 5.02 The proposed project is located on the Ramu River in the Eastern Highlands of PNG, about 190 km by road from Lae and 24 km from Kainantu (see Map IBRD 19385). The Yonki dam is the first of a four-stage Ramu Hydroelec- tric Development Scheme. The dam site is adjacent to the Yonki township, near where the Highlands Highway crosses the Ramu River, and approximately 3 km upstream from the existing Ramu I run-of-the-river power station. The - construction of the dam will provide a storage reservoir to increase the firm energy of the Ramu 1 from the existing 126 GWh level to 418 GWh, and the firm energy of the planned Ramu 2A and Ramu 3 hydroelectric stations. 5.03 The proposed project comprises: (a) construction of a 60 m high dam, a spillway system and outlet structure, and associated works; (b) installation of two additional 15 MW generating units together with step-up transformers in the spaces provided at the Ramu I power station; (c) relocation of a part of the Highlands Highway and local access roads, together totalling 22 Kn; (d) engineering and consulting services; (e) a training program; (f) technical assistance for manpower development and institutional support; and (g) a rural electrification component. Yonki Dam - Main Civil Works. 5.04 The Dam comprises the following main civil works: (a) construction of a 60 m high zoned earthfill dam with a total embankment volume of about 1.8 million cu. m; (b) an ungated concrete chute type spillway with a crest length of 85 m; (c) the diversion and outlet works, consisting of twin 4.0 m diameter concrete culverts appoximately 430 m long (one conduit to be steel lined to form a permanent outlet conduit), a concrete outlet tower measuring 7 m in diameter and 46 m high, and associated gate structure; (d) a concrete dissipator structure and associated outlet works control valves; (e) the relocation of 6 km of the Highlands Highway, including relocation over the dam crest and across a bridge over the spillway; (f) the construction of approximately 16 km of local access roads above flood level near the reservoir area (Annex 13).  - 22 - Engineering and Consulting Services 5.05 In September 1984, a joint venture of SMEC in association with Cardno and Davies of PNG was selected in accordance with the Bank Guidelines as the consulting engineer, to provide the following services: Stage I (a) update and extension of previous studies in order to bring the proposed project to full feasibility status; and (b) preparation of a detailed cost estimate and construction schedule. State II (a) preparation of detailed design drawings, schedules, bills of quantities, tender specifications and conditions of contract; and (b) preparation of prequalification documents for contractors and assistance in prequalification evaluation, and preparation of full tender documentation for the project. Stage III (a) preparation of supplementary notices to amend tender documents, if necessary; and (b) assistance for tender evaluation. 5.06 This project preparation activity is being co-financed by a Project Preparation Facility (PPF) financed by the Bank pt)d a grant from the Australian Development Assistance Bureau (ADAB).' The terms of contract have been agreed between ELCON and SMEC (in association with Cardno and Davies). Their engineering and consulting service commenced in October 1984. The consulteacy has been extended to include construction supervision, project control and responsibility for the final commissioning of the works. Terms of reference foi the 'onettuction management services are given in Annex 14. An Engineering Review Board (ERR) has been established to advise on the design and safety aspects of the Yonki dam. Since November 1984, ERB has made three visits to the site to review the investigation, layout and design of the Yonki Dam. ELCOM will continue using the services of ERB throughout construction of the proposed project. 5.07 A full feasibility report for the proposed project was completed in August 1985 and reviewed by ELCOM, ERB and the Bank. The detailed study has concluded that construction of a storage reservoir at Yonki is feasible. The 6/ US$1 million from the Bank in the form of a PPF which will be refinanced from the proposed loan, and AUD$1.45 million from ADAB in the form of a art