Malawi - Energy Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P4994-?4AI MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO US$46.7 MILLION TO THE REPUBLIC OF MALAWI FOR ENERGY I PROJECT FEBRUARY 21, 1989 This document has a restricted distribution and may be used by recipients only in the perf-rmance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  MALAI ENERGY I PROJECT CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) US$ 1.00 = MK 2.53 MK 1.00 = USS 0.40 MK 1.00 - 100 tambalas WEIGHTS AND MEASURES 1 meter (m) 3.28 feet 1 square meter (m2) w 10.75 square feet 1 kilometer (km) . 0.621 miles 1 square kilometer (km2) - 0.386 square miles 1 cubic meter (m3) - 35.3 cubic feet 1 kilovolt (kV) - 1000 volts 1 kilowatt hour (kWh) - 1000 watt hours 1 megawatt (M1) = 1000 kilowatts 1 gigawatt hour (GWh) - 1 million kilowatt hours 1 megavolt ampere (MVA) = 1000 kilovolt ampere mtpy = million tons per year MVAr megavolt ampere-reactive pf power factor toe tonnes of oil equivalent tpd " tonnes per day GLOSSARY AND ABBREVIATIONS CDC = Commonwealth Development Corporation EPD = Economic Planning and Development EPU = Energy Planning Unit ESCOM - Electricity Supply Commission of Malawi NRDP National Rural Development Program FISCAL YEAR Government of Malawi: April 1 - March 31 ESCOM: January 1 - December 31  FOR OMCIAL USE ONLY MALAWI ENERGY I PROJECT CREDIT AN4D PROJECT SUH1&RY Borrowers The Republic of Malawi Beneficiary Electricity Supply Commission of Malawi (ESCOM) Amountt US$46.7 million Terms: Standard IDA terms Onlending Terms: US$31.9 million will be onlent to ESCOM at 7.65Z interest rate and 20 years repayment period including 5 years of grace and ESCOM to bear the foreign exchange risk. The remaining amount will be passed on by the Government to the Forestry Department and the Energy Planning Unit. Financing Plan: Government of Malawi US$10.3 million ESCOM US$12.3 million Austria US$17.6 million IDA US$46.7 million Total US$86.9 million Economic Rate of Return: 10.7? for the power component; 18? for the charcoal and 14.42 -19.52 for the wood energy components. Staff Appraisal Report: 7476-MAI MAP: IBRD No. 20917R This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwie be discobsed without World Bank authorization.  MEMORANDUM AND NECOMENDATIOI OF TEE PRESIDENT OF TEE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PIOPOSED CRSDIT TO THE REPUIC 0 MALAW FOR AN ENERGY I PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Republic of Malawi for SDR 34.8 million (US$46.7 million equivalent) is submitted for approval. The proposed Credit would be on standard IDA terms with 40 years maturity. It would help finance a project to expand Malawi's electricity supply system and to foster sustainable exploitation of the country's wood energy resources. The project would be cofinanced by the Austrian Government through a US$17.6 million loan (235 million Austrian Schillings). 2. Background. Malawi had a population of 8.0 million and a per capita GDP of US$170 in 1987. The economy is predominantly rural, with some 89Z of the population living in rural areas. Per capita energy consumption was 0.36 toe equivalent, which is one of the lowest in Africa. The predomninant source of energy is fuelwood, which together with agricultural residue accounts for 93.7? of total final energy consumption. Imported petroleum accounts for 3.9?, electricity 1.41, coal 0.8? and ethanol 0.2?. Almost all electricity supply is from hydro plants, but only about 16? of the nation's-estimated hydro potential has been tapped so far. Maximum power demand in 1987 was 97.2MW. Access to electricity is low at about 2?. Malawi's relatively high forestrr.cover of about 382 is dwindling at about 3.52 per year. The main energy issues facing Malawi ares the high investment cost of meeting growing power demands the instability of petroleum supplies because of constraints on Malawi's main transport routest and the depletion of forestry resources in the south of the country due to heavy demands from households (including an estimated 600,000 refugees) and industry. Weaknesses in Government planning capability is a further problem, compounded by institutional weaknesses particularly in the Department of Forestry. Whereas pricing policies for petroleum fuels and power have generally been sound, relative pricing of fuels such as ethanol, coal and charcoal warrant further scrutiny. The Government's strategy to deal with these problems includes (i) undertaking an economic study of future power supply options (completed); (2) introducing energy conservation measures in the tobacco industry and household sector; (3) developing commercial charcoaling operation based on forest thinnings; and (4) making further use of domestic coal resources. The Bank/IDA has helped finance three power projects in Malawi and has a good and constructive relationship with the Electricity Supply Commission of Malawi (ESCOM). Assistance to the sector has been complemented by two projects in wood energy as well as through technical assistance and studies. However, in view of the deterioration in Malawi's external debt situation, the Government is no longer able to continue financing the Wood Energy II Project (Loan 2670-WI) under IBRD terms, and withdrawals from the loan have ceased. At the Government's request the IBRD loan has been cancelled and the balance of the project will be financed under the IDA Credit for Energy I. 3 Rationale for IDA Involvement. The project will make a significant contribution to achieving greater efficiency in the supply and utilization of energy, which is an imr rtant element of the overall structural adjustment program that Maldwi is implementing with IMP and Bank support. By helping to finance this project IDA can seek to ensure that a  comprehensive and least cost approach is used for the development of the energy sector and that the actions of several other donors involved in the sector are adequately coordinated. In addition, by building on the results of recent IDA projects and pilot programs, continued IDA involvement can facilitate more efficient utilization of Malawi's wood energy resources, the strengthening of energy planning and the building up of institutions sector wide. 4. ProJect Objectives. The purpose of the proposed project is to assist the Government of Malawi to formulate and implement an integrated program to make efficient use of domestic and imported energy resources. Specific aims are to: (i) help implement several high priority components of the least cost power development plan; (ii) help implement a comprehensive strategy for the exploitation of wood fuels on a cost effective and environmentally sustainable basis; (iii) ensure prices of energy fuels reflect full economic costs of supply; and (iv) strengthen institutions involved in energy planning and management and improve liaison and coordination between them. 5. Project Description. The power component of the project (US$61.8 million) would comprise: (i) civil works and equipment for constructing a 50 MW hydroelectric power plant at Tedzani using an existing dam; (ii) rehabilitating existing generating capacity to maintain system efficiency; and (iii) providing consultancy services for studies and technical supervision. The energy component (US$16.5) will take over and extend the wood fuel program started under the Wood Energy II project which comprises nurseries, tree plantations. forest management and woodfuel conservation. The project activities have been reappraised and some changes introduced in the light of experience. Some 3000 hectares of Government plantation have been deleted from the project and greater emphasis given to smallholder treeplanting. The component also includes provision of consultancy and acquisition of vehicles and equipment to expand charcoal production and stimulate private :ector involvement in charcoal distribution and marketing. It also includes technical assistance and training to upgrade the capabilities of the principal Government departments and institutions concerned with the energy sector. The total project cost is estimated at US$78.3 million equivalent (excluding interest during construction), with a foreign exchange component of US$59.9 million. For the power component the Government would on-lend to ESCOM US$31.9 million from the Credit for a period of 20 years, including 5 years of grace, at 7.651 (current IBRD interest rate). The remaining US$14.8 million would be used by the Government for the woodfuel subcomponents, technical assistance and training and energy pricing studies. A breakdown of costs and the financing plan are shown in Schedule A. Amounts, methods of procurement, and the allocation and disbursement of the IDA Credit are shown in Schedule B. A timetable of key processing events and the status of Bank Group operations in Malawi are shown in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report No. 7476-MAI is also attached. 6. Agreed Actions. The Government has agreed on the following main actions: (i) Government and ESCOM will take tariff and other measures to enable ESCOM to generate sufficient revenues to be able to finance at least 301 of its investment program; (ii) ESCOM will maintain a debt-service coverage ratio of at least 1.5; (iii) Government and ESCOM will review annually with IDA ESCOM's updated power sector investment p..ogram and will conclude an agreement for financing a 132kV transmission line from Nkula  - 3 - power plant to Lilongwe by December 31, 1989; (iv) Government will make regular increases in stumpage rates so as to reach a full recovery stumpage rate by the December 31, 1994; (v) Government will enable the Forestry Department to make suitable incentive payments to smallholders to encourage them to plant small woodlots; (vi) Government and IDA will undertake a joint review of the wood energy component half way through the projected implementation period. 7. Benefits. Economic benefits under the proposed project are expected from: (a) meeting growing power demand at minimum cost through investments in rehabilitation and new generating capacity; (b) increases in private wood production; (c) conversion of forest thinnings (now waste) to charcoal ior commercial sale; (d) introduction of improved charcoal production and marketing techniques and more fuel efficient methods in tobacco curing. The project would also strengthen energy planning and management and would help make the pricing of alternative fuels better reflect economic supply costs. The economic rate of return for the power component is estimated at about 11Z. The charcoal and wood production components have rates of return of 18? and 142 - 19.5Z respectively. 8. Risks. The Tedzani civil works involve construction of a short tunnel. To minimize risk, confirmatory drillings would be carried out to suspected fault zones of the tunnel route and at the power house site. There would be no significant effect on the quantity or the quality of water discharged from Tedzani power plant into the Shire river which flows into Mozambique, and the Government of Mozambique has communicated its no objection to the development of Tedzani. Because of the long gestation period of hydroelectric power investments there is risk that new capacity could be brought on stream too early or too late if demand forecasts prove inaccurate. Both such eventualities can be costly, In the case of Malawi, forecasting uncertainties have been increased by the situation in Southern Africa. Accordingly, the power development program is being designed to permit flexibility to respond to demand through phasing of generators. The risk of energy deficits following probable prolonged consecutive dry years would be mitigated through the contingent plan of.dredging the entry channel from Lake Malawi to the Shire river. The wood energy component involves simultaneous implementation of a wide array of policy measures and programs and will pose some implementation difficulties for the Forestry Department. These difficulties would be overcome through strengthening of the Forestry Department and the Energy Planning Unit which, together with IDA supervision missions, would review progress and provide timely advice on corrective measures. 9. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington DC By: W. David Hopper Februarr 21, 1989  -4- SCHlEDULE A ENBRGY I PROJMCT Prolict Cost Estiite, Local foreign Total Power Component A. Tedani III Main civil works 8.49 15.22 23.71 Zlectromechanical 1.04 17.65 18.69 Substations 1.99 9.94 11.93 Eagineering 0.74 4.66 5.40 Subtotal Tedzani III IZf1 477 3YT7W 3. Generation Rehabilitation 0.02 1.47 1.49 C. Institution Strengthening -- 0.60 0.60 Subtotal Power 1tF2U ZW3T . 6712 Interest During Construction 8.58 -- 8.58 Total Power W 49.54 70.40 Energy Component ace a ee._.'...e.e.. D. Charcoal 0.10 1.00 1.10 Z. Wood Energy 6.02 8.86 14.88 P. Energy Pricin . 0.50 0.30 Total nergy ____ __ __._ Total Financing Requirement M 59.90 86.88 Project liaaaCiaa Plan Local ioria.a Total Government of Nalav 10.3 . 10.3 ESCOM's Cash Generation 12.3 - 12.3 Austria - 7.6 17.6 IDA 4.4 42.3 46.7 Total 27.7 3V7 FT1  -5- SCHEULE B Page 1 of 2 KALAVI ENERGY I PROJECT Procurement Method al Power Cooneot ICn LC8 remLetan U.S. Tt Ia Civil Works 2i.71 23.71 (16.22) (16.22) Electromschanical 1.03 17.66 16.69 Substations 11.93 11.93 ( 9.94) (9.94) Generation Rehabilitation 1.49 1.49 (1.47) (1.47) Institution Strengthening . Computers 0.35 0.86 ( 0.36) (0.86) . Studies 0.26 0.25 (0.25) (0.26) Enginoering 6.40 5.40 Servicos (4.66) ( 4.86) Totsl Power -S.99 MU0j 6.es iT.U6 1.49 1.62- (25.61) (4.91) (1.47) (81.9) EnergyCeeet Charcoul Production 1.10 1.10 n1.00) ( 1.00) Wood energy . Vehicles, equipment and materials 2.07 0.60 0.10 2.67 ( 2.07) (0.60) (0.10) ( 2.67) . Technical Assistance 0.40 0.40 (0.40) (0.40) . Civil works 0.67 2.54 8.21 (0.67) (2.64) ( 8.21) . Operating costs etc. 8.60 6.60 (6.97) ( 6.97) Energy Pricing Study 0.50 0.50 (0.60) ( 0.50) Total Energy fTT- 1T.1 7 0.9 1.49 18e T4 ( 8.07) (1.17) (0-9) ( 2.84) (1.47) (6.97) (14.75) Total Project 39.16 2.20 6.55 20.80 1.49 8.60 78.80 (28.58) (1.17) (6.81) ( 2.64) (1.47) (6.97) (467 ) a) Amounts In brackets are IDA financod. b) Consulting services and tochnical assistance under IDA guidelines. c) Tied to Austrian suppliers for the power component. Force account or negotiations with contractor, and local shopping for the *norgy component. d) Proprietary spare parts that can only be purchased through direct contracting with manufacturers of original equipment. e) N.A. * not applicable.  SCHEDULE B Page 2 of 2 M1ALAVI ENERGY I PROJECT IDA Credit Allocation Category Amount Expenditures to be financed (US$ Million) (1) Civil Works 18,600,000 100I of foreign expenditure for power, and OOZ for wood energy (2) Equipment (electrical machinery, office technology, workshop, vehicles) 16,900,000 100? of foreign expenditure for power, and 100? for wood energy; 100? of foreign expenditure and 902 of local for charcoal. (3) Consulting services and 5,710,000 100? of foreign expenditures studies and 80? of local; 100? for technical assistance for wood energy. (4) Incentive payments and seed money, operating costs, wages for temporary labor 5,490.000 100? of expenditure for wood 46,700,000 energy. Estimated Disbursement of IDA Credit IBRD's PY 1989 1990 1991 1992 1993 1994 (in million US dollars) Annual 1.5 7.5 4.4 10.8 13.6 8.9 Cumulative 1.5 9.0 13.4 24.2 37.8 46.7  -7- SCHEDULE C NAL&VI ENERGY I PROJECT Timetable of Key Proiect Processing Event (a) Time taken to prepare: 18 months (b) Prepared by: ESCOM. Government and Consultants -c) First Bank mission: January 1987 (d) Appraisal mission departure: June 2, 1988 se) Negotiations: January 17 - 25, 1989 Cf) Planned date of effectiveness: June 30, 1989 Cg) List of relevant PCRs and PPARss Power: PCRs for Credits 691-MAI, Loans 1387-MAI and 1388-MAI. PCR on First Wood Energy Project, National Rural Development Program II.  -8- SCN03UJLE D VALAWI ENER9 OIPROJECT STATUS OF S" CROP OPERATIONS IN MALAWI SUMMARY STATEVENT OF ON AND IDA TREDITS (LOA Data* as f 9/80/88) Acounts In USS.llion (less cane llotions) Loan or Fiscal Utndis- Closing Credit No. Year Borrower Puos Bank IDA burs- Date Credit 28 Credits(s) Closed 862.69 C11830-MAL 1982 MALAWI NRDP III 7.30 2.68 09/30/88(R) C13300-MAL 1983 MALAWI EDUCATION V 34.00 16.29 09/30/89(R) C13430-MAL 1983 MALAWI NRDP IV 10.80 6.95 09/30/89(R) C1l310-MAL 1983 MALAWI HEALTH-NUTRITION 6.80 1.97 12/31/88(R) CFOO8O-MAL 1984 MALAWI HIGHWAYS V 13.80 4.89 09/30/90 C14230-MAL 1984 MALAWI HIGHWAYS V 13.10 2.06 09/20/90 C14280-MAL 1984 MALAWI TECH ICAL ASST. 1.50 .06 06/30/89(R) C16280-MAL 1985 MALAWI URBAN I 15.00 16.38 06/30/91 C16490-dAL 1986 MALAWI AGRI RES. 23.80 22.90 10/31/90 C16260-MAL 1988 MALAWI EXT. PLANNING 11.60 12.70 09/01/91 C16440-MAL 1986 MALAWI SAL III 30.00 .14 09/30/88(R) C17420-MAL 1987 MALAWI LILONGWE WATER (WTR) 20.00 16.92 06/30/93 C17670-MAL 1987 MALAWI EDUCATION VI 27.00 26.78 12/16/93 C17680-MAL 1987 MALAWI HEALTH/POP. II 11.00 9.29 08/30/93 C18S10-MAL 1988 MALAWI AGRICULTURE CREDIT 5.90 5.94 08/30/95 C18790-MAL 1988 MALAWI TRANSPORT I 13.40 10.48 08/30/94 C19200-MAL 1988 MALAWI IND. TRADE POL.ADJ.CR 70.00 66.29 12/31/90 TOTAL Number Credits a 17 314.80 219.68 Loans 6 Loans(s) closed 74.9S L23630-MAL 1984 MALAWI HIGHWAYS V .8.00 2.72 09/30/90 L24880-MAL 1986 MALAWI WOOD IND.RESTR.TAS 6.40 2.25 03/31/91 L26460-MAL 1986 MALAWI IND. 7 ACRIC. CR 7.80 6.09 06/30/93 L28700-MAL 1988 MALAWI WOOD EGY.II 16.70 15.10 06/30/93 TOTAL Number Loans a 4 48.90 28.17 TOTAL*** 128.85 877.39 of which --- 16.32 10.35 TOTAL held by Bank & IDA 107.53 867.03 Amount sold .80 of which TOTAL undisbursed 245.85 NOTES: * Not yet effective Not yet signed *r Total Approved, Repayments, and Outstanding balance represent both active and inactive Loans and Credits. (R) indicates formally revised Closing Date. The Net Approved and Bank Repayments are historical value, all others are market value. The Signing, Effective, and Closing dates are based upon Department Official data and are not taken from the Task Budget fi e.  9- SCHED ULE D Page 2 of 2 MALAWI ENERGY I PROJECT STATEMENI OF IFC INVESTMENTS (as of September 30. 1988) Invest Type of Number FY Obligor Business Loan Equity Total (US$ million) 326-MAI 1976 618-MAI 1982 D Withehead & Textiles 10.8 10.8 Sons 362-MAI 77/81/85 Dwangwa Sugar Sugar 11.3 11.3 Corp. 434-MAI 1979 INDEBANK Dev't 0.6 0.6 Finance 502-MAI 1980/84 Malawi Hotels Tourism 2.1 2.1 Ltd 543-MAI 1981 641-MAI 1982 Ethanol Co.Ltd Chem/Pet. 2.2 0.3 2.5 832-MAI 1986 Leasing & Money/Cap. 0.9 0.1 1.0 Co. Market 741-MAl 1985 872-MAI 1987 Viphya Plywood 4.1 0.5 4.6 Total Gross Commitments 31.4 1.5 32.9 Less: Cancellations, terminations, exchange adjustments, repayments, write-offs, and sales 13.6 0.0 13.6 Total commitments held by IFC 17.8 1.5 19.3 ToLal Undisbursed 0.7 0.0 0.7 Total Disbursed 17.1 1.5 18.6  Wpa 2 MALAWI ENERGY I PROJECT,e. Rl ' \ }' -} X * SS~Vwnalftw e Towns H,yf t r Powe * Dlstict Capitals MajorSubstalon HydajorP Subtations N* l C i Cital * CyrFO Ploestatio - Region Boundaries Possibte Future international Hydro Power Stations oundades 132 kV O,H.L Existing ;132 kV O.H.L Planned 66 kV O.H..L Exditng -tt i ew -. . * 66OkV.H.L Planned ,n . . ._ 33 kV O.H.L Exdisng ZA MBIX.3 g A - % v te m _ ... .33 kV O.H.L Planned 14^I. I-.eL kt ^.a;v' *-. -'' II W O.H.L cm*~~~~~~ Obr198I