Tunisia - Third Power Project

Document of The World Bank FOR OMCIAL USE ONLY Report No. 7326 PROJECT COMPLETION REPORT TUNISIA THIRD POWER PROJECT (LOAN 2003-TUI) June 23, 1988 Industry and Energy Operations Division Country Department II Europe, Middle East and North Africa Regional Office This document has a restricted distiution and may be used by recipients only in the performance of their offldli duties. It antents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY THE WORLD SANK Washington. D.C. 20433 U.S.A. ONIce d Dt.Cew-Gta Opwaturn IWtoiwtnn June 23, 1988 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Tunisia Third Power Project (Loan 2003-TUN) Attached, for information, is a copy of a report entitled "Project Completion Report on Tunisia Third Power Project (Loan 2003-TUN)" prepared by the Europe, Middle East ard North Africa Regional Office. . Further evaluation of this project by the Operations Evaluation Department has not been made. Yves Rovani By Ram K. Chopra Attachment This document has a restricted distribution and may be used by recipients only in the performance of their offllcial duties. Its contents may not otherwise be disclosed without World Bank autboriztion.  FOR OMCIAL USE ONLY TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Table of Conteuits Page No. PREFACE ......................................................... BASIC DATA SHEET .................................................. ii HIGHLIGHTS ........................................................ v I. INTRODUCTION . . ....... .............. 1 Background . ... ....... . ......... 1 Bank Participation in the Energy Sector ................ 1 II. PROJECT- PREPARATION AND APPRAISAL ........................ 2 Project Origin rn. . .. ... ....... ...... 2 Project Preparation, Negotiations and Effectiveness.... 2 Project Objectives..... ...... ............. 4 Changes in Project Scope .... 0........... ...... ..... 4 III. IM PLEMENTATIONRMACE....................... ....... 5 Procurement ......... ....4.0......s Project Coso...................... 5 Disbursements ........0... 000...... 5 IV. OPERATING PERFORMANCE ..........* .....6 Consultant s Performance and Training..............n 6 V. FINANCIAL PERFORKANCEM....................R....... 7 Tariff Increases. ......e. . .......... . .. ...... so 7 Rate of Return........................................ 8 Debt Service Coverage .................8................ Collection of Receivables............. ... . .......... 8 Audit 8... : ~~~~~Submission of Financial Foreass. casts....... 9 This document has a restricted distribution and may be used by recipients only in the petformance of their official duties. Its contents may not otherwise be disclosed without World Bank authofization.|  Table of Contents (Cont'd) Page No. VI. ECONOMIC RE-EVALUATION .. 9 Number of New Connections and Incremental Electricity Sales ................................... 9 Fuel Savings Resulting from Reduced Distribution Losses .............................................. 10 Cost of Supply ........................................ 10 Net Fuel Savings to Consumers ..................... .. 10 ERR Computation .. . 10 VII. CONCLUSIONS ............................................ 10 Lessons Learned . . ................. ...... 11 ANNEXES 1. Main Covenants of Loan Documents .........................., 2. Comparison ctf Estimated and Actual Works and Beneficiaries.. 15 3. Comparison of Estimated and Actual Cost of Project, ...,..... .. 16 4. Cumu'lative Disbursements at the End of Quarter .............. 17 5. Comparison of Estimated and Actual Electricity Sales ........ 18 6. Comparison of Domestic and Internal Fuel Prices...... ,..... . 19 7. Economic Re-Evaluation .. ................... . .............. 20  TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN PREFACE This project, supported by Loan 2003-TUN for $41.5 million (reduced to $37.5 million during implementation owing to a redutction in the foreign cost), consisted of the first three years (1982-1984) of STEG's five-year program (1982-1986) for the development of the rural and urban distribution systems. The loan was closed on the original closing date of December 31, 1985. Final disbursemene was made on July 16, 1986 raising the total disbursements to $36.1 million. The amount of $1.4 millioi remaining undisbursed was caricelled on July 16, 1986 and the account was closed on that date. This Project Completion Report (PCR) was prepared by the Europe, Middle East and North Africa Regional Office based on the Bank's appraisal report, supervision reports and other documents in the Bank's files and on the . findings of a proj!ct completion missions which visited Tunisia in February 1987. * The PCR summarizes the main points of interest. The loan was the sixth of a continuing series of Bank loans for the energy sector, begun in 1971, whici. have helped develop STEG into an efficient national public utility. In accordance with the revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department (OED), but the project will not be audited by OED staff. Following normal procedures, OED sent copies of the draft report to the Borrower for comments; however, none were received.  - ii - TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN BASIC DATA SHEET KEY PROJECT DATA Appraisal Estimate Actual Total Project Cost (US$ Millions) 89.6 54.9 /1 Underrun () - 38.7 Loan Amount (US$ Million) 41.5 37.5 /2 Disbursed 41.5 36.1 Cancelled - 1.4 Date Principal Components Completed June 1985 December 1985 Portion Completed by Above Date (S) 96 100 Proportion of Time Overrun () - 114 Economic Rate of Return (2) 11.6 18.5 Financial Performance /3 Institutional Performance Good except in the financial and accounting area L1 Although the dollar cost was only 61.3S of the appraisal estimate mainly because of the appreciation of the dollar, the cost in dinars was 5.7% above the appraisal estimate. /2 See footnote in Annex 4. The loan was reduced by $4.0 million to $37.5 million on November 8, 1984. /3 Good through '82 and unsatisfactory thereafter.  - iii - CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ Million) As of June 30: 1982 1983 1984 1985 1986 (i) Appraisal Estimate &.0 l'.2 29.0 38.0 41.5 (ii) Actual - 2.2 10.3 22.0 36.1 /1 (iii) As % of (i) - 12.8 35.5 57.9 87.0 OTHER PROJECT DATA Original Plan Actual First Mention in Files May 1979 Government's Application June 1979 First Timetable November 1979 Negotiations 04/13 - 17/81 Board Approval 05/26/81 Loan Agreement Date 07/15/81 Effectiveness Date 10/15/81 04/21/82 Closing Date 12/31/85 12/31/85 Borrower STEG STEG Executing Agency STEG STEG Fiscal Year of Borrower Jan. 1-Dec. 31 Follow-on Project Name Fourth Power Project Loan Number 2455-TUN Loan Amount $38.7 Million Loan Agreement Date 08/28/84 /1 In view of the reduced foreign cost, the loan was reduced by US$4.0 million to US$37.5 milliou. An amount of US$1.375 million remaining unutilized was cancelled on July 16, 1986.  - iv - MISSION DATA No. of No. of Date of Month/Year Weeks Persons Manweeks / Reports Appraisal - Identification 06/79 1.5 2 3.0 0,/79 - Preparation 05/80 0.9 1 0.9 05/80 - Appraisal 10-11/80 3.0 4 12.0 12/80 5.4 15.9 Supervision I 07/81 2.0 2 4.0 07/81 Supervision II 03/82 1.0 2 2.0 04/82 Supervision III 08/82 1.0 1 1.0 08/82 Supervision IV 03/83 1.5 2 3.0 05/83 Supervision V 06-07/83 0.5 3 1.5 10/83 (along with appraisal) Supervision VI 05/84 1.0 2 2.0 07/84 Supervision VII 09-10/84 1.0 3 3.0 12/84 Supervision VIII 03-04/85 0.4 2 0.8 04/85 (along with ident.) Supervision IX 09/85 0.5 1 0.5 09/85 Supervision X 02-03/86 1.0 2 2.0 03/86 Completion 02/87 1.0 2 2.0 06/87 10.9 21.8 COUNTRY EXCHANGE RATES Name of Currency - Tunisian Dinar Abbreviation - TD Year: Appraisal Year Average (1980/81) TD 1.0 S US$2.50 Intervening Years' Average (1982/84) TD 1.0 US$1.49 Completion Year Average (1985) TD 1.0 - US$1.19 /1 _nly time spent on subject project is included.  TUNISIA THIRD POWER PROJECT - LOAN 2003-TUN HIGHLIGHTS (i! The purpose of the project was to extend electricity service in the rural areas and to improve the quality of service to urban customers. It was also part of the effort to continue the institution building activities in the energy sector, specifically in rationalizing pricing policies and in helping STEG to improve its operating efficiency and to strengthen its financial viability. (ii) The project fully accomplished its objectives except in the financial and accounting area (p-. i. 7.01). In the financial and accounting area, STEG has had a setback. Although its internal cash generation was still a respectable 302 of its investment program, this was only two-thirds of what was estimated at appraisal (para. 5.01). The project achieved a re-estimated rate of return of 18.5% (para. 6.06) as against 11.6% estimated at appraisal on the same basis. (iii) Except for the installation of a submarine cable to connect the island of Kerkennah (para. 2.07) in lieu of the planned overhead line, the project scope was unchanged. Although the number of villages electrified was less than expected, thte number of pumping stations and domestic and other customers connected to the system exceeded the appraisal estimate by 10X. The project was also completed without any significant delay. In US dollar terms, the actual project cost was ouly 61.32 of the appraisal estimate but in Tunisian dinar terms it was 5.7% above the appraisal estimate. This was because of the substantial appreciation of the US dollar and the devaluation of the Tunisian dinar during project implementation (para. 3.03). (iv) One item of particular interest is the effort to raise the domestic prices of petroleum products in the country to international levels within a period of five years from January 1, 1982. Beginning in 1981 the Government started introducing fuel increases - in certain years two increases were made during the year. In December 31, 1986, all petroleum product prices were above international prices (Annex 6). Although the Government did take bold measures in an effort to comply with the agreement, the objective was achieved partly due to the fall in international prices in 1986/87.  - vi - (v) The project demonstrated the need to take into account the political and social constraints a government is likely to encounter in implementing institutional and financial reforms of public utility corporations.  101 co,t P.tb, ate eOv Un. ta oti 8a 412c2 Qt 8ee * I j;Jo de 1b , eV1471Ctr nt; z481c'P creted0 eth -jet.de1 a* ane d12t .Oi th 4 he 'C countd f, di -lbut j.0'4Za t die sbf1 the 1.03 atio 4b sC '49 -'-t,-,bt8t :- e 2ef sepot, Ut I.? 4btjti 48so elI.20 Of& ' . 'Pec th Sys Q 4~ jec. noj,J edtal to e0r i d ta bsed a eg' oela~ed *C urbo~ a0Ond Pdu to '~de 0 the 1 t Peak --~~~eas 04e et1 a1g, pr91th Ci1 0 41,f "~ h 14- 'he(O 03 rtlra~~~~O tijes "' electt 2144,18j'a, sine C0129400,'~~e 1980  - 2 - the Bank approved another loan of US$37.0 million (Loan 1864-TUN) which would finance the foreign component of the first phar? of a gas distribution pipeline. 1.04 The Bank's continued involvement in the power subseetor contribut3d to the strengthening of all aspects of STEG's operations and management. At appraisal, the Corporation had consolidated its control over the sector and developed its technical capabilities and practices to reach levels that were comparable to those of similar institutions in developed countries. In addition, STEG was also able to achieve in the past a satisfactory financial position. It was expected that the cortinuation of the Bank's involvement in the energy sector would strengthen the existing institution building efforts, improve technical standards and achieve overall coordination of energy pricing. It was also expected to induce the g:,wth of the energy sector along a least-cost path. II. PROJECT PREPARATION AND APPRAISAL Project Origin 2.01 Between 1976 and 1980, the number of low-voltage consumers in urban areas increased on the average by 48,000 per year, and their average consumption by 12% per year. These high rates of growth were beyond STEG's expectations and consequently the funds set aside for the reinforcement of the distribution network were inadequate for providing the required equipment and materials. This shortfall coupled with the higher priority given to generation and transmission rendered the urban distribution system inadequate to cope with the demand. The result was a considerable voltage drop, reaching double the maximum permissible level, and frequent power failures in urban areas. Likewise, the level of service in rural areas was low. Clearly, the rehabilitation of the urban distribution system and extension of electricity service in rural areas were matters of high priority for Government and STEG. The subject project had 4ts genesis in the above state of affairs. Project Preparation, Negotiations and Effectiveness 2.02 Following a methodology introduced earlier by an expatriate firm of consultants, STEG prel-red a five-year program (1982-1986) for the extension of the rural electrification system. STEG also prepared, through sampling measurements, a five-year program (1982-1986) for the rehabilitation of the urban distribution system. The project consisted of the first three years of these programs (para. 2.05). 2.03 The project was appraised by the Bank in October/November 1980 and negotiations were held in April 1981. During the negotiations, agreement was reached by the Bank and the Tunisian delegation that STEG's assets be revalued annually using the official Tunisian wholesale price index. The following were also agreed during negotiations:  (a) Fuel Adiustment Clause. Agreement had been sought by the Bank that, whenever increases in fuel prices were introduced, electricity tariffs would be raised to cover STEG's increased fuel bill on the same date the new fuel prices were effective. The Tunisian delegation argued that the proposed simultaneous increases in fuel prices and electricity tariffs might not be feasible at all times because of political resistance to raising all energy prices at the same time. The delegation, therefore, proposed, and the Bank agreed, that tariffs be adjusted as soon as possible after fuel price increases and in any case, within a period of 2 months to fully recover the increased fuel bill for SIEG; (b) Accounts Receivable. The Bank had sought agreement to STEG's accounts receivable for electricity being limited to not more than 2 months' sales. The delegation argued, and the Bank agreed, that the 2-month limit be raised to 3 months because the lower limit could not be adhered to with STEG's present billing cycle (bi-monthly for domestic and monthly for high and medium voltage customers); (c) Rate of Return. The Bank had proposed a reduction in the rate of return from 8% to 61 in any year from 1983 through 1986 provided the average price of fuels used by STEG was increased by at least 30% per year over the period from 1082 through the year under consideration. As requested by the Tunisian delegation, it was agreed to reduce STEG's rate of return to 6% from 182 onwards if fuel prices were increased, at least by 20% in any given year, since even with a 62 return on revalued assets, STEG's internal cash generation would be fully satisfactory; and (d) Settlement of Arrears. The Bank had proposed that the arrears accumulated by State enterprises through November 30, 1980 be settled by March 31, 1982. Since good progress was being made in settling overdue payments by State enterprises, and receivables would in future be limited to three months' sales, it was agreed to delete the proposed covenant. However, Government and STEG signified their intention to settle all accumulated arrears through December 31, 1980 by December 31, 1982. The request of the Tunisian delegation that the portion of the Bank loan corresponding to the foreign costs of the rural electrification component (US$20.7 million) be lent to the Government, which would then pass it on to STEG in the form of an equity contribution was not agreed to by the Bank in view of STEG's sound financial condition which did not justify grants from the Government for this purpose. 2.04 The loan was signed on July 15, 1981 and was made effective on April 21, 1982. There were no special effectiveness conditions. 2.05 The project consisted of the first three years (1982-1984) of STEG's five-year program (1982-1986) for the development of the rural and urban distribution systems and comprised the following components:  (a) Rural Electrification. About 200 km of three-phase medium voltage lines, 2,260 km of single-phase medium voltage lines, and 2,060 km of single-phase low voltage lines to be erected, and about 1,140 transformers (for a total estimated capacity of about 32 MVA) to be installed to extend electricity service to about 990 villages in 15 Governorates; (b) Urban Rehabilitation. About 670 km of three-phase medium voltage lines and 780 km of single-phase low voltage lines to be erected, and about 150 transformers (with an estimated total capacity of 30 MVA) to be installed to strengthen the distribution systems in about 60 urban centers; (c) Equipment and Tools. Construction and erection equipment, tools and laboratory testing equipment to be provided to enable STEG to implement the urban rehabilitation component and improve its technical capabilities; and (d) Technical Assistance. About 50 man-months of consulting services to be provided for a study of the distribution system of Tunis aiming at determining the least-cost long-term development of the city's distribution system, improving the quality of service, and reducing system losses. The project also provided for training of STEG's staff abroad (about 70 people for a total of about 130 man-months). Proiect Obiectives 2.06 The proposed project aimed at extending electricity service in the rural areas and improving the quality of service to urban customers. About 30,400 new domestic customers, 2,100 pumping stations and 300 commercial and small industrial consumers in rural areas were to be connected to the national grid, and about 150,000 urban customers were to benefit from the improved quality and reliability of the service. The project was intended to helF implement the least-cost program for rural electrification, improve operating efficiency by reducing system losses, continue the Bank's efforts in assisting STEG to improve its technical competence by providing financing for equipment, tools and training, and to strengthen its financial viability, and follow up on the efforts started under a previous Bank loan to the energy sector (1864-TUN) in rationalizing pricing policies. Changes in Proiect Scope 2.07 The project was completed as envisaged at appraisal except for the increase in project scope so as to include the connection of the island of Kerkennah to the main grid via a submarine cable. 1/ The original design involved the connection of the island to the main grid via an overhead medium voltage line for which the project scope provided only for the financing of the supply of materials but not for its erection. 1/ When the project was studied in detail, the submarine cable yielded the least cost solution.  - 5 - 2.08 Annex 1 sets forth the major covenants of the Guarantee and Loan Agreemt.nts. Except in regard to the revenue and audit covenants (paras. 5.03 and 5.06), compliance with the covenants was satisfactory. III. IMPLEMENTATION 3.01 Project implementation was initiated on schedule with materials drawn from STEG's stores (to be replaced by Bank-financed materials wher received). There were no problems in project implementation and the project was successfully completed with a slippage of only six months (December 1985 as against the appraisal estimate of June 1985). Procurement 3.02 There were protracted discussions between the Bank and STEG in reaching agreement on substantive tender document revisions proposed by the Bank for compliance with the Bank's procurement procedures. Considerable delays in procurement also occurred on account of the delayed initiation of the procurement cycle for each year by STEG. Although a great deal of effort was made to shorten STEG's procurement cycle, only some improvements were achieved by way of concrete change. Obviously old habits and established procedures die very hard. Project Cost 3.03 Annex 2 gives a comparison of the estimated and actual number'of villages electrified and connections made, the estimated and actual works under the rural component, and the estimated and actual lines and transformers rehabilitated under the urban component. Although the actual new connections made were more than estimated at appraisal, the number of villages electrified 4nd the quantities of materials used - with the exception of transformers in urban areas - were less than those estimated. Annex 3 gives a comparison of the actual and estimated cost of the project. It will be seen that in US$ terms, the actual cost was only 61.3% of the appraisal estimate. However, in TD terms, the actual cost was 105.7% of the appraisal estimate. This is because of the substantial appreciation of the US dollar and the devaluation of the Tunisian dinar during the implementation of the project. Disbursements 3.04 Annex 4 compares the actual disbursements with the appraisal estimates. Altiiough disbursements at the end of December 1984, after nearly three years of project implementation, were only about 39% of appraisal estimates, procurement of equipment and material gained momentum and loan funds committed for works and serv'ices financed under the loan amounted to about US$33.0 million. Disbursements were slow in the beginning stages of the project due to slow tendering resulting from substantial revisions of tender documents for compliance with the Bank's procurement guidelines. However, the  - 6 - execution of the project itself was not delayed because of slow tendering and slow receipt of materials since implementation was started with the draw-down of the required materials from STEG's stores that were replaced by the Bank-financed materials on receipt. IV. OPERATING PERFORMANCE 4.01 The project was completed by December 1985, six months later than estimated at appraisal. The facilities constructed under the project have been operating satisfactorily. Annex 5 gives a comparison of STEG's total forecast and actual sales for the period 1981-1985, as well as forecast and actual sales broken down into three consumer categories (high, medium and low voltage). Although during this period total sales and sales in each year to each consumer category increased at an average anniual rate of about 8%, actual sales were below those forecast mainly due to the slow down of the Tunisian economy. In summary, STEG's average sales over the period 1981-1985 were only 86% of forecast sales. This shortfall had an adverse impact on STEG's net revenue which, coupled with the devaluation of the Tunisian Dinar contributed to the corporation's poor financial performance. 4.02 Although the rehabilitation of the urban system has yielded the anticipated results as witnessed by the improved voltage level of supply (no voltage reductions are currently experienced in many heavily populated areas) and more secure supply of power (failures were considerably less frequent than they were in 1981), no adequate hard data exist to estimate the achieved reduction in power loss. STEG's failure to accumulate the needed data is due to the late delivery of the special recording instruments which were financed under a Technical Assistance Project (Loan 2197-TUN) extended to the Government of Tunisia. However, the appropriate instruments and computer facilities to collect and treat the data have now been received and the administrative procedures for undertaking a power loss study are in place. It is expected that this issue would be examined in more detail under the ongoing Fourth Power Project. Consultant's Performance and Training 4.03 As agreed, STEG hired the services of a consultant to execute the study of the distribution system of Tunis. The study was initiated in November 1981 and was completed in May 1983 -- six months ahead of the estimaLced datce -- at about 44% of the original cost estimate (US$220,000 compared t' US$500,000). The performance of the consultant, including the training of STEG's staff, was exceptionally good. 4.04 Although STEG formulated and submitted to the Bank its training program for the period 1982-1984, the program was not implemented in its entirety. The training foreseen within the context of the study of the distribution system of Tunis was completed with great success, as was the training undertaken in the training center of Khledia. However, the  -7- progranmed short duration specialized training of 50 staff members was not undertak~en because the devaluation of the Tunisian Dinar rendered the per di allowance stipulated by law inadequate to cover the expenses of trainees abroad. Although this training would have helped STEG improve its technical capabilities, its lack did not seriously detract from STEG's operating capability. V. FINANCIAL PERFORMANCE 5.01 One of the objectives of the Project was to increase the domestic selling prices of petroleum products progressively to reach international levels by January :987 and thus to gradually eliminate the subsidies extended to petroleum products. During appraisal, it was recognized that while seeking to achieve this goal of energy pricing a balance would have to be maintained between the need to maximize internal cash generation, to restrain borrowings to the minimum and at the same time to avoid disruptive electricity tariff increases. Accordingly, the loan covenants required STEG: (i) to achieve a minimum rate of return on revalued assets of 82; and (ii) not to incur any debt, without the Bank's approval, if its debt service coverage ratio was less than 1.5 in each year. If the average price of fuels used by STEG increased by at least 2U% in any given year, starting from 1982, the minimum rate of return would be reduced in these years from 82 to 62. The covenants farther provided that Government and STEG would implement revised electricity tariffs promptly, and in any case not later than two months after the fuel price increases, so that STEG recovers the total increases in its fuel cost. Unfortunately, Government and STEG did not live up to the commitments regarding tariff increases and the rate of return with the result that STEG's financial position was significantly eroded during the project period. The problem was compounded by the substantial appreciation of the dollar and the devaluation of the Tunisian dinar during this period, raising STEG's debt service obligations considerably. STEG's net internal cash generation as a percentage of construction requirements, after deduction of customers contributions, decreased from 87% in 1981 to 172 in 1984 and closed at 27% in 1986. The average net internal cash generation ratio for the project period was around 302 as compared to 45S estimated at appraisal. The details of Government's and STEC's performance vis-a-vis their commitments are given below. Tariff Increases 5.02 STEG was not allowed by Government to increase tariffs, as necessary, during the project period. For example, fuel prices were increased in January 1982 but the tariff increase to compensate for the fuel price increase was postponed to October 1982 for political reasons. There was a further fuel price increase on October 1, 1982 but no further tariff increase until a 10% increase on June 1, 1984. During 1981, 1984 and 1985, Government gave subsidies to STEG to compensate for the increase in the cost of fuel, notably gas, which was against the policy objective of gradually eliminating the  -8- subsidies to consumers on petroleum products. The subsidy was as high as about 10% of STEG's fuel cost in 1984 and 1985. Rate of Return 5.03 STEG failed to achieve the agreed rate of return targets from 1983 mainly because of Government's reluctance to authorize tariff increases and the slower growth of load than estimated at appraisal. The actual returns in 1985 and 1986 fell significantly short of even the reduced target of 52 (under Power IV). X Rate of Return 1981 1982 1983 1984 1985 1986 Required 8.0 6.0 6.0 6.0 5.0 /1 5.0 /1 Actual 6.7 6.0 4.6 4.5 3.0 3.3 / Reduced from 8.0/6.0% under Power IV. Debt Service Coverage 5.04 Debt service coverage during the project period was generallv adequate and except in 1986 (when it dropped to 1.2 times) in excess of 1.5 times. However, STEG experienced shortages of cash from time to time. In March 1983 a Bank mission observed that owing to a shortage of cash, STEG had not met its debt service obligations from 1981 onwards on two loans 'one of US$15.0 million due to a French bank and the other of US$13.4 million onlent to STEG by Government out of USAID funds). Collection of Receivables 5.05 In view of STEG's past problems in collecting its bills the loan covenant required STEG to maintain at all times its accounts receivable for electricity at a level not exceeding three months' sales. The problems persisted for a long time, the receivables at the end of 1983 being about 110 days' sales. However, as a result of STEG's determined efforts the receivables have been brought down to reasonable levels; at the end of 1986 they amounted only to 74 days' sales. Audit 5.06 The loan covenant required STEG to rubmit to the Bank its annual financial statements, audited by independent auditors acceptable to the Bank, within five months after the end of each fiscal year. With the allocation of increased computer time to the accounting department, it was hoped during appraisal that the past delays in the submission of audited accounts would not recur. However, for one reason or the other (computing problems,-change of auditors to improve quality or to save foreign exchange, etc.), the delays persisted. The extent of delays is clear from the following:  -9- Receipt Within Bank Year Due Date Actual Delay 1980 05/81 03/82 10 months 1981 05/82 02/83 9 months 1982 05/83 11/83 6 months 1983 06/84 /1 04/85 10 months 1984 06/85 06/86 12 months 1985 06/86 Not Yet 11 months /1 Under the Fourth Power Project of August 1984, the time limit for the submission of audited accounts was increased from five months to six months. Submission of Financial Forecasts 5.07 During most of the project period, STEG did not produce financial forecasts by October 31 of each year, thus frustrating the objective of giving Government, the Bank and itself an opportunity to assess its earnings prospects for the next year and to determine the measures required to be taken to secure the agreed rate of return for that year. -- Vi. ECONOMIC RE-EVALUATION 6.01 An economic re-evaluation of the project has been done, essentially on the same basis of the SAR. The re-evaluation is based on constant end-1982 prices. The main points which highlight the differences between the data and assumptions used in the SAR and those used in the re-evaluation are summarized below. Number of New Connections and Incremental Electricity Sales 6.02 Parallel to the Third Power Project financed by the Bank, STEG implemented another project financed by the African Development Bank. Through these projects STEG was able to expand its rural network and considerably reinforce its urban network which allowed, between 1981-1985, the connection of a greater number of low voltage consumers (about 252,400) than envisioned in the SAR. In addition, the average specific consumption per consumer was also greater than that assumed in the SAR. As a result actual low voltage incremental sales in 1985 were about 207 GWh compared to 126 GWh assumed in * the SAR.  - 10 - Fuel Savings Resulting from Reduced Distribution Losses 6.03 As mentioned in para. 4.02, no adequate hard data exist to estimate the achieved reduction in power losses stemming from the rehabilitation of the urban network. Thus in the economic re-evaluation no attempt was made to calculate the benefits resulting from loss reduction due to the rehabilitation. However, the direct consequence of connecting considerably more consumers at a marginal incremental capital cost has reduced the average cost per consumer which, combined with the greater sales and fuel savings achieved, contributed positively towards the Internal Economic Rate of Return on the investment. Cost of SuPplY 6.04 In 1986/87 the Bank reviewed Tunisia's Public Expenditures. The mission which reviewed the electricity subsector calculated among other things STEG's Long Run Marginal Cost of Supply which for the low voltage was estimated at: - Capacity Charge: 162 TD/kW/Year - Energy Charge : Peak 32 milliemes/kWh Day 22 milliemes/kWh Night 20 milliemes/kWh On the basis of these costs and.assuming that the low voltage consumers' load factor is 502, the cost of power delivered to the distribution system was computed. Net Fuel Savings to Consumers 6.05 Although the domestic price of kerosene increased from 61 TD/ton in 1982 to 216 TD/ton in 1987, in the economic re-evaluation the same net fuel saving assumed in the SAR to accrue to the domestic consumers who benefitted under the project, namely 120 milliemes/kWh, was used. ERR Computation 6.06 Details of the economic re-evaluation are presented in Annex 7. The IERR (internal economic rate of return) works out to about 18.52. This is above the SAR figure for the reasons stated above. VII. CONCLUSIONS 7.01 The project provided the facilities envisaged for the development of the urban and rural systems. Though the number of villages electrified was less than expected the number of new customers connected to the system  - 11 - exceeded the appraisal estimate by 10%. The project was also completed without any significant delay. Thus the project more than fulfilled the appraisal expectations regarding the physicai facilities and the social and economic considerations. However, in regard to the institutional objectives, the results were mixed. In the financial and accounting area, clearly STEG has had a set-back although its cash generation during the project period was still a respectable 30% (paras. 5.01 and 5.06). STEG has, moreover, brought its collection problem under control. Lessons Learned 7.02 The Bank's expectations on electricity pricing policies were not achieved because of lack of political will on the part of the Government. Consequently, STEG's financial position has continued to deteriorate. The lesson may be that setting institutional objectives in public utilities projects to be financed by the Bank should be carried out with a more realistic appreciation of the political and social framework. 7.03 There is one aspect that needs to be stressed and that is that while certain aspects of a utility's operations are outside its control (increases in tariffs, increases in fuel prices, economic conditions in the country etc.), there are others that are fully within its control such as compilation of accounts, audit of accounts, revamping of procurement procedures etc. A utility that is on a path of progress should be expected to show strong improvement in areas that are primarily within its control, and stringent standards should therefore be applied to measurement of performance in such areas. STEG's performance was less than satisfactory in this respect. In the light of this shortcoming a "contrat programme" has been drafted which is expected to come into force in 1987, and would set standards on the basia of which the performance of the utility woalld be measured. L  ANNEX 1 -12 - Page 1 of 3 TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Main Covenants of Loan Documents Section of Substance of Covenant- Loan/Guarantee Action Required To Extent of Agreement Be Taken Compliance For Government GA 2.02 Provide STEG, if necessary, with Complied with. funds required to carry out the project. GA 3.02(a) Allow STEG to increase tariffs as Not complied required to enable it to achieve with. the covenanted rate of return of 82 (or 6S when the prices of fuels used by STEG are raised by at least 20X). GA 3.02(b) Implement revised electricity Not complied tariffs promptly, and in any case not with from the later than 2 months after the fuel beginning. price increase, so that STEG recovers the total increases in its fuel cost. GA 3.03 Take all measures necessary to enable Not complied STEG always to maintain its receivables with through for electricity at no more than three 1983 but com- months' sales. plied with subsequently. GA 3.04 -Progressively raise the domestic Complied with. selling prices of petroleum products to international levels, within five years from January 1, 1982.  - 13- ANNEX 1 Page 2 of 3 Section of Substance of Covenant- Loan/Guarantee Action Required To Extent of Agreement Be Taken Compliance For STEG LA 3.02 Employ, for the study of the dis- Complied with tribution system of Tunis, consultants satisfactory to the Bank. LA 3.03 Furnish to the Bank for approval its Complied with proposed training program. LA 5.02 Submit to the Bank, within five months Not complied after the end of each year, financial with in all the statements for the year audited by years, the de- independent auditors acceptable to lays ranging the Bank. from six months to one year. See para 5.06. LA 5.04 Implement revised electricity rates Not complied promptly, and in any case not later wit'" from the than 2 months after the fuel price beginning. Increase, so that STEG recovers the total increase in its fuel cost. LA 5.05(a) & (b) Take all measures, including tariff Not complied increaser, to enable STEG to achieve a with from 1983 return on revalued assets of not less onwards, the than 82 (from 1982, the rate of shortfall in return would be 6% in any year in which the return the prices of fuels used by STEG are rising as much increased by at least 20%). as 22 in 1985. LA 5.05(a) Submit to the Bank and the Government, Not complied by October 31 of each year, financial with during forecasts for the current and most of the following years indicating the measures period. proposed to produce the required annual rate of return. LA 5.05(d) Revalue each year the fixed assets that Complied with relate to. its power activitiy on the basis of a methodology acceptable to the Bank (the agreed methodology involved using as revaluation factor the wholesale price index for Tunisia).  - 14 - ANNEX 1 Page 3 of 3 Section of Substance of Covenant Loan/Guarantee Action Required To Extent of Agreement Be Taken Compliance LA 5.06 Not to incur any debt, without Complied with the Bank's approval, if its debt in all years service coverage ratio is less except 1986. than 1.5 in each year. In 1986, the ratio was only 1.2 but the Bank's prior approval of borrowing was not obtained. LA 5.08 Ensure that its receivables for Not complied electricity shall at no time exceed with through the equivalent of three months' sales. 1983 but com- plied with subsequently. June 1987  - 15 - ANNEX 2 TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Comparison of Estimated and Actual Works and Beneficiaries Actual As 2 Appraisal of Appraisal Estimate Actual Estimates Number of villages electrified 990 520 53 Number of connect;.ons 32,800 36,068 110 Works in Rural Areas: - MV lines (km) 2,460 1,060 43 - MV submarine cable (km) - 18 N.A. - LV lines (km) 2,060 1,274 62 - Transformers (units/MVA) 1,140/32 653/31 57/97 Works in Urban Areas: - MV lines (km) 670 562 84 - LV lines (km) 780 703 90 - Transformers (units/MVA) 150/30 325/51 217/170 June 1987  - 16 - ANNEX 3 TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Comparison of Estimated and Actual Cost of Project (US$ Millions) Actual Cost as 2 of Appraisal Estimate Actual Appraisal Local Foreig Total Local Foreign Total Estimate Rural Component 26.68 20.68 47.36 13.65 12.97 26.62 56.2 Urban Component 17.15 13.32 30.47 17.54 3.77 21.31 69.9 Equipment etc. 4.30 7.51 11.81 1.45 5.55 7.00 59.3 Total 48.13 41.51 89.64 ;2.64 22.29 54.93 61.3 ~~~~~= ==__= - .= ~=_== ==s=-=s= Comparison of Estimated and Actual Cost of Project (TD Millions) Actual Cost as 2 of Appraisal Estimate Actual Appraisal Local Foreign Total Local Foreign Total Estimate Rural Component 10.67 8.15 18.82 9.47 8.53 18.00 95.6 Urban Component 6.85 5.36 12.21 12.51 2.34 14.85 121.6 Equipment etc. 1.73 3.10 4.83 1.02 4.04 5.06 104.8 Total 19.25 16.61 35.86 23.00 14.91 37.91 105.7 June 1987  11 - ANNEX 4 TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Cumulative Disbursements at the End of Quarter Actual as Bank Fiscal Year Appraisal 2 of Appraisal and Quarter Estimates Actual Estimates 1982 December 31, 1981 0.05 March 31, 1982 0.48 June 30, 1982 4.04 _ _ 1983 September 30, 1982 7.90 0.03 0.4 December 31, 1982 10.37 0.17 1.6 March 31, 1983 14.53 1.17 8.1 June 30, 1983 17.16 2.18 12.7 1984 September 30, 1983 19.90 3.33 16.7 December 31, 1983 23.01 '5.58 23.4 March 31, 1984 26.12 7.95 30.4 June 30, 1984 29.00 10.25 35.3 1985 September 30, 1984 32.00 12.00 37.5 December 31, 1984 36.00 14.00 38.9 March 31, 1985 37.00 19.70 53.2 June 30, 1985 38.00 22.00 57.9 1986 September 30, 1985 39.00 24.10 61.8 December 31, 1985 41.50 30.00 72.3 March 31, 1986 - - 2.2 June 30, 1986 36.12 /1 87.0 /L In view of the significant reduction in the foreign cost of the project arising mainly irom the appreciation of the US dollar, the loan was reduced by $4.0 million to $37.5 million on November 8, 1984 at the request of the Tunisians. An amount of $1.375 million remaining unutilized out of the revised loan amount of $37.5 million after the final disbursements was cancelled on July 16, 1986. June 1987  - 18 - ANNEX 5 TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Comparison of Estimated and Actual Electricity Sales TOTAL SALES SALES AT HIGH VOLTAGE Actual As Actual As Year Forecast Actual % of Year Forecast Actual S of (GWh) (GWh) Forecast _ (GWh) (GWh) Forecast 1981 2,430 2,292 94 1981 520 503 97 1982 2,730 2,376 87 1982 590 462 78 1983 3,070 2,671 87 1983 660 584 88 1984 3,44Q 2,867 83 1984 720 619 86 1985 3,850 3,113 81 1985 790 636 81 Average 3,104 2,664 86 Average .656 561 86 SALES AT MEDIUM VOLTAGE SALES AT LOW VOLTAGE Actual As Actual As Year Forecast Actual X of Year Forecast Actual X of (G) (GWh) Forecast (GWh) (GWh) Forecast 1981 1,130 1,058 94 1981 780 731 94 1982 1,250 1,125 90 1982 890 789 89 1983 1,400 1,213 87 1983 1,010 874 87 1984 1,580 1,283 81 1984 1,140 965 85 1985 1,780 1,435 80 1985 1,280 1,052 82 Average 1,428 1,221 86 Average 1,020 882 86 June 1987  - 19 - ANNEX 6 TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Comparison of Domestic and International Fuel Prices (US$/ton) March 1987 September 1980 Prices January 1987 Prices Prices In-.er- Do,,es- Interna- Interna- Products Domestic national /1 tic /4 tional /2 tional /3 LPG 358 '40 296 308 113 Premium Gasoline 743 .-37 764 240 175 Regular Gasoline 726 327 764 226 155 Kerosene 153 307 274 197 161 Gas Oil 208 280 379 209 143 Fuel Oil 60 182 122 92 92 Natural Gas - - 122 96 - /1 Italian spot market prices excluding transport costs (FOB prices). /2 CIF Tunis prices plus average internal distribution cost. j3 Mediterranean FOB prices. /4 Retail prices. June 1987  TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUH Economic Re-evaluation Cumulative New L.V. Average Annual Connections Consumption (kWh) Annual Sales (GWhl Annual Revenues from Sales (TO Mils) Connections Charces (TO Nils) Surf. Deep Surf. Deep Surf. Deep Domestic Pumina Surf Deep Domestic PUMS P sDomestic Pumps Pums Dom estic Pums Pumps Sales Charc Sales Charges ITol Dots Pump Pmp Total 1982 58.316 880 15 584 15.000 82.750 34.1 13.2 1.2 2.08 0.07 0.39 0.01 2.55 2.92 0.07 0.30 3.29 1983 133,821 1,429 29 616 15,000 82,750 82.4 21.4 2.4 5.03 0.16 0.64 0.01 5.84 3.78 0.04 0.28 4.10 1984 181,928 1,843 39 650 15,000 82,750 118.3 27.6 3.2 7.22 0.22 0.75 0.02 8.21 3.13 0.0S 0.20 3.38 1985 250,293 2,079 51 687 15,000 82,750 172.0 31.2 4.2 10.49 0.30 0.84 0.02 11.65 4.44 0.03 0.24 4.71 1986 260,000 - - 725 15,000 82,750 188.5 31.2 4.2 11.50 0.31 0.84 - 12.67 - - - - 1987 270,000 - - 766 1S,000 82,750 206.8 31.2 4.2 12.62 0.32 0.84 - 13.80 - - - - 1988 280,000 - - 808 15,000 82,750 226.2 31.2 4.2 13.80 0.34 0.84 - 15.00 - - - - 1989 290.000 - - 853 15,000 82,750 247.4 31.2 4.2 15.09 0.35 0.84 - 16.30 - - - - 1990 300,000 - - 901 15,000 82,750 270.3 31.2 4.2 16.49 0.36 0.84 - 17.71 - - - - 2011 300,000 - - 901 15,000 82,750 270.3 31.2 4.2 16.49 - 0.84 - 17.71 - - - - June 1987 (3283P) 0. 0  TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2,003-TUN Economic Re-Evaluation -------------- C O S T (TO Million) ------------------ ----------- 9 E N E F I T (TO Million) ----------- Incremental Revenue From Consumers Cumulative LV Power Sales and Connection Net Fuel xlar Sales IGWhl Capital a B M Delivered Total Service Charaes Charges Sayinfs Total 1982 48.5 27.0 1.08 3.05 31.13 2.5S 3.29 4.09 9.93 1983 106.2 29.4 1.86 6.69 37.95 5.84 4.10 9.89 19.83 1984 149.1 31.1 3.50 9.39 43.99 8.21 3.38 14.20 25.79 1985 207.4 32.0 4.78 13.07 49.85 11.6S 4.71 20.64 37.00 1986 223.9 4.78 14.11 18.89 12.67 - 22.62 35.29 1987 242.2 4.78 15.26 20.04 13.80 - 24.82 38.62 1988 261.6 4.78 16.48 21.26 1S.00 - 27.14 42.14 '1989 282.8 4.78 17.82 22.60 16.30 - 29.69 45.99 1"9O 305.7 4.78 19.82 24.60 17.71 - 32.44 50.15 2011 305.7 4.78 19.82 24.60 17.71 - 32.44 50.15 June 1987 (3283P) - w  TUNISIA PROJECT COMPLETION REPORT THIRD POWER PROJECT - LOAN 2003-TUN Economic Re-Evaluation ------------------------------- C O S T (TO Million) ----------------------------------------------E_ -------- N E F I T -------- Total Cost Fore1an Cost Local Cost _ Total Total Benefit Net In Current In Current In Constant In Current GOP In Constant 1982 Const. In Current GOP In Const. Cash Year Prices Prices H W Index 1982 Prices Prices _ Deflator 1982 Prices Prices Pr1ces Deflator '82 Prices Flow 1982 31.13 10.80 100.0 10.80 20.33 100.0 20.33 31.13 9.93 100.0 9.93 (21.20) 1983 37.95 11.80 97.4 12.11 26.15 109.0 23.99 36.10 19.83 109.0 18.19 (17.91) 1984 43.99 12.40 95.7 12.96 31.59 117.6 26.86 39.82 25.79 117.6 21.93 (17.89) t 1985 49.85 12.80 96.6 13.25 37.05 126.1 29.38 42.63 37.00 126.1 29.34 (13.29) N) 1986 18.89 - - - 18.89 126.1 14.98 14.98 35.29 126.1 27.99 13.01 1987 20.04 - - - 20.04 126.1 15.89 15.89 38.62 126.1 30.63 14.74 19!8 21.26 - - - 21.26 126.1 16.86 16.86 42.14 126.1 33.42 16.56 1989 22.60 - - - 22.60 126.1 17.92 17.92 45.99 126.1 36.47 18.55 1990 24.60 - - - 24.60 126.1 19.51 19.51 50.15 126.1 39.77 20.26 2011 24.60 - - - 24.60 126.1 19.51 19.51 50.15 126.1 39.77 20.26 ERR 18.SX June 1987 (3283P) 0