Iceland - Reykjavik Hot Water Supply Project

LI4^Ir 3[IC RESTRICTED Report No. TO-309a This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE REYKJAVIK HOT WATER SUPPLY PROJECT THE REPUBLIC OF ICELAND February 6, 1962 Department of Technical Operations  CURRENCY EQUIVAL*NTS U. S. $1. 00 = Ictlandic Kr. 43 Icelandic Kr. 1 = U.S. $0.023256 Icelandic Kr. 1, 000, 000 = U. S. $23,256 Abbreviations CM = cubic meters CMD = cubic meters per day l/s = liters per sec. (one l/s is equivalent to 86.4 CMD or 15. 9 gallons per minute) km = kilometers (0. 621i miles) m = meters nm = millimeters GCallhr. = 1, 000, 000, 000 calories per hour (3, 970, 000 BTU per hour)  APPRAISAL OF THE REYKJAVIK HOT WATER SUPPLY PROJECT THE REPUBLIC OF ICELAND Table of Contents Paragraphs SUMMARY AND CONCLUSIONS i - vii I. INTRODUCTION 1 - 2 II THE BORROWER AND SUB-BORROWR 3 - 28 General 3 - 6 Present Facilities 7 - 15 Finance 16 - 21 Rates and Past Demand 22 - 28 III. FUTURE SUPPLY AND DEMAND FCR HEAT AND HOT WATER 29 - 32 IV. THE FROJECT 33 - 41 General 33 - 39 Investment Cost Estimate 40 - 41 V. FINANCING PLAN AND PROJECTIONS 42 - 46 VI. ECONCMIC JUSTIFICATION 47 - 50 VII. CONCLUSIONS AND RECOMMENDATIONS 51 - 54 ANNEXES 1 - Organization Chart 2 - Summary of Comparative Balance Sheets, 1957-1961 3 - Summary of Comparative Income Statements, 1957-1961 4 - Summary of Investment Expenditures, 1928-1960 5 - Hot Water Usage Statistics 6 - Construction Schedule 7 - Project Construction Cost Estimate 8 - Pro Forma Income Statements 1962 - 1971 9 - Pro Forma Balance Sheets 1961 - 1971 10 - Pro Forma Cash Flow Statement 1962 - 1971 MAPS I - Reykjavik Hot Water Supply Project - Hot Water Supply System  APPRAISAL OF THE REYKJAVIK HOT WATER SUPPLY PROJECT THE REPUBLIC OF ICELAND SUMMARY AND CONCLUSIONS i. The Republic of Iceland has requested a loan of US$2.0 million equivalent to cover part of the costs of a substantial expansion of the city of Reykjavikts hot water supply system. About two-thirds of the heated buildings in Reykjavik are currently heated by the system which utilizes hot water from hot springs and wells drilled in volcanic areas in and near the city. This project would extend the system so that most of the balance of existing buildings and buildings to be built in the next five to ten years could be served. The Republic of Iceland would relend the proceeds of the loan to the Municipality of Reykjavik for the accouint of its Hot Water Supply System (paragraphs 1-6). ii. In the present systs-m, hot water flows from hot springs and wells in an area about 15 kilometers distant and is pumped to Reykjavik, and also from hot springs and wells within Reykjavik itself. The water is then distributed in street mains much as potable water is distributed in other cities. The system is in good condition,, Although the income of the Hot Water Supply System is good, the present financial position is tight due to undertaking the first stages of the proposed expansion program without proper financing (paragraphs 7-21). iii. The rates charged for hot water are adequate to cover all operating costs and to provide a reasonable return on investment which allows a surplus for system expansion. From the consumer's aspect, the rates are favorable; heating with hot water costs about two-thirds as much as heating with oil. In the past ten years, the city of Reykjavik has grown substantially; the Hot Water Supply System has not been extended proportionately and the percentage of buildings and population served has dropped. There is a great demand for the Hot Water Supply System in areas not now served (paragraphs 22-32). iv. The proposed project covers primarily the extension of the hot water distribution system to areas not now served. There is also a pro- vision for developing additional heat sources by a hot water well drilling program. The total cost of the project is estimated at IKr. 313 million or about US$7.3 million equivalent including interest during construction and increased working capital (paragraphs 33-41). v. The proposed Bank loan of US$2.0 million would cover about 27% of the total project costs. Local currency would be provided by a bond issue, a loan from the Unemployment Insurance Fund, and a loan of counterpart funds (31%) and from Hot Water Supply System revenues (42%). Although the Bank loan would be for $2.0 million, expected foreign exchange expenditures and interest during construction amount to only US$1.7 million. All significant expenditures would be made on the basis of international  - ii - competitive bidding and should contracts for some items expected to be awarded in Iceland be awarded abroad, reimbursement may be made from the $300,000 balance of the Bank loan. If these funds are not used for this purpose, it is proposed that they be used to finance local currency con- struction costs (paragraphs 42-46). vi. The project would provide heat for buildings and would allow the substitution of a natural resource, hot water, for an imported commodity, fuel oil. The saving to the economy would be IKr. 60-80 million annually using hot water. The long-term rate of return on the project to the economy is expected to be at least 25% as calculated by the discounted cash flow (or present worth) method. Annual foreign exchange expenditures for fuel oil would be reduced by US$O.7-1.5 million, and the foreign exchange cost of the project would be saved each one to two years. There would also be other one- time savings by reducing imports of building heating equipment (paragraphs 47-50). vii. The project provides a suitable basis for a Bank loan of US$2.0 million equivalent to the Republic of Iceland for a period of 18 years in- cluding a four-year grace period. The Republic of Iceland would relend these funds to the City of Reykjavik on the same terms as the Bank loan and would also arrange to be made available local currency needed to carry out the pro- ject which cannot be obtained bry the Municipality. The contractual arrange- ments would require the Municipality to charge adequate rates for hot water, to maintain the financial soundness of the Hot Water Supply System, to improve financial control, and to engage independent auditors (paragraphs 51-54).  I. INTRODUCTION 1. The Republic of Iceland has requested a loan of $2.0 million to finance part of the cost of a substantial expansion of the city of Reykjavik's unique hot water supply system. Reykjavik is located in the vicinity of areas of volcanic activity. Hot water springs have been known since colonization about ten centuries ago. In fact, the moisture which rises from these springs and condenses in the air giving a smoky appear- ance gave Reykjavik its name; it may be translated "Smolcy Bay". Until about 1930, the hot water was used at the springs for laundering clothes. Then, in 1930, water at temperatures near boiling from several springs and from fourteen drilled wells was collected and distributed to about 70 houses for heating purposes and to two swimming pools. This first system was completed in 1934. The system Yas been enlarged in stages several times and additional wells for hot water have been drilled since. At the present time about two-thirds of the heated buildings in Reykjavik are connected to the system and are heated by natural hot water. This project would expand the system so that most of the balance of the buildings would be served. 2. This appraisal of the project is based on information submitted by the City of Reykjavik and cn a field investigation carried out by a member of the Bank's staff in September and October, 1961. II. THE BORROWER AND SUB-BCRROWER General 3. The Borrower would be the Republic of Iceland which would relend the proceeds to the City of Reykjavik for the account of its Hot Water Supply System. Reykjavik was granted town rights by decree of August 18, 1786. Its present administration is based on a decree of April 20, 1872 which established a city council of 15 elected members. The Mayor is elected by and P:fom tnils council. The executive power is entrusted to the Mayor and a commlttee cf 5 Aliermen who are also elected by and from the City Council. The Hot Water Supply System is the property of the city of Reykjavik and the Director reports to the Mayor through the City Engineer. An organization chart effective at December 31, 1961 is attached as Annex 1. 4. Under a law passed February 12, 1940 by the Althing (National Parliament), the City has the sole authority to operate a sysltem to supply hot water within the City, It has the power to charge fees for the hot water sold and for connecting consumers to the system and to hypothecate the property of the Hot Water Supply System to secure debt. 5. The Hot Water Supply System has separate accounts from other City Departments. For the sake of efficiency, these accounts are kept by the City Bookkeeping and Accounting Departments along with the accounts of many other Departments. In the past, some auditing of expenditures made by the Hot Water Supply System has been carried out by three appointess of the  - 2 - City Council. There has been no auditing of revenues, accounts or of the adequacy of the accounting system. The City has decided to engage a chartered accountant to audit all phases of operations for the Hot Water Supply System in the future. 6. The Management of the Hot Water Supply System is experienced and has operated the present facilities for more than twenty years. It has been good from technical and operational aspects but has had problems in the financial and planning areas. Although over-all responsibility for the enterprise is theoretically vested in the Director of the system, in order to meet these problems, finances have been actually managed by the City Secretary and planning by the Chairman of the Hot Water Committee, a committee appointed by the Council to plan and promote the extension of the system. The City recognizes that, for good management, responsibility and authority should be vested in one individual for all phases of operations. A new Director and necessary additional staff are appointed or to be appointed shortly. Present Facilities 7. Hot water and heat for the system is obtained from wells with a total flow of almost 500 liters per second; heat available in this water totals 73 GCal/hr. after allowing for losses. Additional heat totaling 42 GCal/hr. can be added to the system at a heat boosting station giving the system a total heat capacity of 115 GCal/hr. The present water distribution facilities of the Reykjavik Hot Water Supply System are shown on Map 1. 8. Most of the hot water used in the system is obtained from hot artesian wells in the Reykir area at a temperature of about 800 C. This water is pumped about 15 km. through two 350 mm. steel pipes to Reykjavik. The pipe is insulated and enclosed in a concrete box-type conduit which is above ground. The temperature drop in transmission is only 30 C. Green- houses and farms in Reykir and along the way to Reykjavik use some of the hot water for heating purposes. 9. The balance of the hot water comes from wells in the city of Reykjavik itself. There are a total of 15 producing artesian wells with bottom-hole diameters of 100-150 mm. which have been drilled since 1928 with small drilling rigs. Water from these is at a temperature of about 900 C. There are also seven producing wells drilled since 1958 with a modern oil-field drilling rig with bottom-hole diameters of about 220 mm. Water from these is at temperatures averaging 1310 C and at pressures above atmospheric. One of the wells is 2.2 km. deep and is believed to be the deepest well ever drilled in a volcanic area.  - 3 - 10. Sufficient heat has sometimes not been available from the natural hot water wells to handle the peak city heating demands on cold days in the winter time. At these times, the temperature of the water has been increased (or additional hot water added by heating river water) at the Municipal Power Works at Ellidaar. This plant is a thermal electric generating station which is only used to carry peak electric loads. When the plant is not being used for electricity generation, the steam from the two boilers can be used to heat water for the hot water heating system. The electric load peak is of short duration and the heating system has thermal storage capaci- ty, both in hot water storage tanks and in the heat capacitance of the buildings heated, to carry itself when the steam is used for electricity generation. The plant therefore can take the peak loads of both the electricity and the heating system. 11. The hot water flows either to distribution system pumping stations or to eight storage tanks. In the distribution system pumping stations water is pumped through more than 50 km. of distribution piping to the houses and buildings of Reykjavik. The water is used both as hot tap water and for circulating through radiators for heating. After heating use, the temperature of the water is akout 40-450 C and most of this drains to the combination storm and sanitary sewer system. Some of the water is recircu- lated through return piping to the pumping stations where it is mixed with the incoming water to maintain a temperature of 80-850 C for the water in the supply system. Water substantially hotter than this would be dangerous for use as tap water, could not be stored in the storage tanks, and would adversely affect the insulation used in some older parts of the system. 12. Present hot water supply facilities are in good condition. Main- tenance has been good and the water is not corrosive. The small part of the system built in the very early 1930's is, for the most part, still working well after about 30 years of service. The bulk of the system was built in the early 1940's and is about 20 years old, there is no reason to suspect that it will not last at least as long again. The system has been extended substantially since 1956 and this part, of course, is practically new. 13. Water metered and paid for by customers amounts to 75% of water production. Three public swimming pools and two public laundries receive hot water free of charge and the Hot Water Service Department does not meter water for its own use; these users probably account for about 5% of water production. The balance of 20% represents water which is lost in flushing out new and repaired pipelines, water which is not registered by water meters due to inaccuracies and sometimes water which overflows from the system during periods of low use. Leakage in the system is not believed to be a major problem. Water not registered by water meters is believed to be the major factor.  - 4 - 14. As mentioned in paragraph 13, the accuracy of water meters is a problem. This is not unique to Reykjavik; it is a problem in most water supply systems, especially where the less costly turbine-type meter is used in preference to the positive displacement type which costs several times as much. Reykjavik hopes to remedy this by a preventative main- tenance program; the meters will be brought in for testing and repair on a periodic basis rather than only when they stop functioning at all or are obviously reading low. 15. As was noted in paragraph 11, the hot water drains after use to the storm and sanitary sewer system in a majority of the system. This sewer system is adequate to handle any reasonable potential load increase due to increased hot water heating in the future. Finance 16. Financial statements for the Hot Water Supply System are shown in Annexes 2 and 3. These statemc-nts were not audited but represent the approximate financial positior., It is not expected that an audit would uncover any errors which would adversely affect the represented income, liquidity or equity positions to any major extent. 17. The projected balance sheet position of the Hot Water Supply System as at December 31, 1961, will be barely satisfactory with respect to the current assets to current liabilities ratio which is expected to be about 1.2:1. The long-term debt to equity ratio is adequate at about 41:59. The current ratio at the end of 1960 was much worse, 0.53:1. The poor current ratio is the result of undertaking expansion projects and an extensive well drilling prograrm to develop additional sources of hot water without adequate financing. To meet the expenses of these programs it was necessary to borrow on a short-term basis from a local bank and payments due for fuel oil and the use of the Power Booster Station to the MAunicipal Electricity Works could not be met. This illustrates the lack of proper financial management mentioned in paragraph 6. The introduction of adequate financial controls will be included in the contractual arrangements for the loan. 18. The real value of the assets of the Hot Water Supply System would exceed the amounts stated in the balance sheet by a considerable margin. Interest accrued in the past on accounts receivable for connection fees (as noted under current and medium-term assets) has not been calculated or included. Fixed assets are carried at historical cost; replacement value would be about twice the amount noted (see Annex 4). Depreciation has been taken based on a twenty-year life for the facilities; actual life should be at least twice this. The investment in drilling operations includes only the costs incurred with the new oil field drilling rig in the last three years; expenditures for developing over 60% of the geothermal heat capacity of the system during the last thirty years with the small drilling rigs have been charged against income and represent a valuable asset not carried on the balance sheet at all. All told it is likely that the real assets and equity stated in terms of 1961 price levels are at least IKr. 125 million more than shown. If the assets were revalued, the long-term dobt to equity ratio would be about 20:80.  - 5 - 19. Net income of the Hot Water Supply System for 1957-1961 has averaged about IKr. 5.5 million annually after interest and a payment to the City general accounts in lieu of taxes. Operating profit has averaged IKr. 8.0 million returning about 11% on net fixed assets; this would amount to a return on assets if revalued at prevailing price levels of close to 6%. Depreciation charged against income is satisfactory; the assets depreciated are carried at about half of their real value but the depreciation rate is based on a life expectancy of 20 years when the actual life is expected to be at least twice that. The Hot Water Supply System meets its full costs and is not subsidized in any way. 20. Accounts receivable for water sales are reasonable and amount to little more than one weok's revenues. Delinquent accounts are not signif- icant and bad debt write-offs have been negligible. Meter reading and the billing system is operated by a joint office which also serves the Municipal Electricity Works to minimize overhead costs. The good collection record can be explained by the shutoff policy in the event of non-payment of bills, If a bill is not paid and has been delinquent 10 days, the electricity may be shut off. If it is not paid promptly after that, the hot water may be shut off. Although in actual practice the shutoffs are not made this quickly, they have been made often enough to motivate prompt payment. 21. Since 1957 when the first phases of the present expansion program of the Hot Water Supply System were initiated, substantial expenditures on the system have been made (see Annex 4). In the four-year period 1957-1960, total expenditures for system expansion and well development have aggregated approximately IKr. 105 million and have averaged about IKr. 26 million annually. About IKr. 71 million has been invested in the supply and distri- bution system and the balance of approximately IKr. 34 million in hot water well development. This four-year program was financed out of earnings and depreciation (IKr. 35 million), an advance from the Municipality (IKr. 20 million), a decrease in working capital (IKr. 16 million), the sale of unutilized fixed assets (IKr. 11 million), short-term bank credits (IKr. 5 million) and a loan from FT 480 counterpart funds (IKr. 18 million). Rates and Past Demand 22. Water rates are proposed by the Hot Water Supply System and must be approved by the City Council and ratified by the Ministry of Social Affairs (price control) of the Central Government. Average water rates for the years 1957-1961 are noted in Annex 3. In these years rates have been adjusted upwards over 50%, and have more than kept up with increases in the cost of living index of about 25% and increases in the cost of building index of about 35%.  - 6 - 23. The current tariff for the Hot Water Supply System was approved July 14, 1961, immediately after a general wage increase had increased operating costs. As evidenced by recent financial results, the basic water rate and the water meter rental fee together have been adequate to cover all expenses and still provide a reasonable surplus for system expansion. Fees paid by building owners to connect up to the hot water system are currently more than sufficient on the average to cover the costs of running the hot water service lines from the street mains to the buildings. 24. In addition to the rates being satisfactory from the Hot Water Supply System's aspect, they are favorable for the consumer. The cost of heating the normal house or apartment with hot water is only about 66% of the cost of heating with fuel oil and furnace maintenance costs (and capital costs for new buildings) are saved. Another critical comparison is that an owner of an existing building may connect to the new hot water system and pay off his connection fee over a period of five years and the combined pay- ment for both the hot water and the connection fee amortization will bo 5 - 10%o less than he would have paid for fuel oil alone. There is therefore every reason for property own-,crs in new areas brought into the system to avail themselves of the syster 'immediately. This is confirmed by connection experience in a recent area brGught into the system; out of 321 houses in the area only one did not wish to be connected. 25. Attached as Annex 5 are various statistics of water production and metered consumption for recent years in Reykjavik. In the ten-year period from 1951 to 1960 annual water production has increased from just over 7 million cubic meters to 9.8 million cubic meters, or about 40%. Metered water consumption has increased from about 5.9 million cubic meters to about 7,5 million cubic meters or some 25%. Metered consumption as a percentage of total production has dropped from 84% to about 75%; this is most likely caused by the increased use of less expensive turbine-type water meters in recent years (see paragraphs 13 and 14). 26. The total number of I-eated houses and establishments has increased from 4,705 to 6,657, or 41% in the ten-year period. The number of houses and establishments connected to the hot water system has only increased from 3,342 to 4,391, or about 31%o As a result of the building boom the percentage of heated establishments served by the hot water system has been reduced from 71% to 66%. Before implementing the first stages of the present expansion program in 1957 this percentage was as low as 61%. 27. The percentage of the total population served has dropped even more significantly from 65% in 1947 to about 52% at the end of 1960. This not only results from the reduced percentage of buildings served as noted in paragraph 26 but also because the average population per building is lower in the older part of the city which is served by the system than it is in the newer areas where many large apartment buildings have been built.  - 7 - 28. It is evident that considering the favorable cost of heating with hot water to consumers and the number of homes and establishments and the amount of the population not currently served by the Hot Water Supply System that there is a substantial unsatisfied demard. III. FUTURE SUPPLY AND DEMAND FOR BEAT AND HOT WATER 29. Estimates of the total heat demands for different areas of Reykjavik have been made by the Hot Water Committee and the Hot Water Supply System. These estimates should be reasonably accurate as they are based on up to 30 years actual experience with heat demands in the parts of the City now servad, on accurate knowledge of existing buildings in areas not yet served and on definitive zoning and building plans for land and lots which are still undeveloped. 30 Total heat demands for the different areas of the City as noted on Map I are estimatcd as follows. These demands indicate the heat necessary to maintain the inside temperature in houses at 200 C when the outside temperature is - 60 3> They include a 30% safety factor to give the system capacity to heat iup buildings in the daytime after they have cooled down somewhat at night- During very cold spells, the temperatures in the homes would drop slightly; with this heat supply6 howevsr, the inside temperature of the house would not drop below 18 C at all and not below 190 C for more than two days per year based on weather records for the last 25 years. Total Heat Demand Available Additional District when Fully Developed Heat Supl Heat Needed -Ca/r--- - -------- Area served on December 31, 1961- 82 B - balance not served now 5 C - balance not served now 9 D 12 E 30 F 22 Potential Heat Demand 160 115 45 to be satisfied Of which an amount of ...(28) represents the demand for buildings not yet built in undeveloped areas. Existing Heat Demand to be satisfied 132 115 17  - g - 31. The total heat available from present sources is approximately 115 GCal/hr. (see paragraph 7). In order to satisfy the present heat demands for the city as now developed, the Hot Water Supply System would need to develop new hot water sources with heat equivalent to 17 GCal/hr; to meet the potential demand for the areas of Reykjavik noted, new sources with a total heat equivalent to 45 GCal/hr. would have to be found and developed. 32. From a geological aspect, there are favorable indications that sufficient hot water can be found to meet the total heat demands under the assumptions noted. In the unlikely event that water is not found, the system could still work adequately by utilizing existing furnaces in some buildings, and by not reducing house temperatures during the night in cold spells. IV. THE PROJECT General 33. The project is designed to provide hot water for building heating purposes to all residential and commercial areas of Reykjavik which have or are expected to have in the foreseeable future a sufficient building and population density to allow economic hot water distribution. The areas proposed to be served are shown on Map I. Municipal development plans have been completed for almost all of these areas which include specific building types, approximate sizes and locations; future construction must comply with these plans. The northern and eastern fringe areas along the bay which will not be served are industrial areas; the central areas on the map still not served are parks or still used for agriculture. The area to the south includes the airport and agricultural areas and the area to the west is agricultural or very low density housing; these areas will not be included at this time in the proposed system. 34. The major part of the project consists of the expansion of the hot water distribution system to now unserved areas of Reykjavik and the construction of two pumping stations. Over 50 km. of distribution mains are proposed to be installed; about one half of this will be a two-pipe system and in the areas served by this two-pipe system the water will be returned to the pumping stations after use and mixed with water from the new wells and from the heat boosting station which reaches the pumping stations at temperatures over 1000 C. The water supply to homes will be maintained at about 800 C. The project also includes funds for installing service connections from the street mains to individual buildings and water meters for these new connections.  - 9 - 35. The street mains will be laid in small concrete conduits under- ground and will be insulated with plastic foam. The house service connection piping will be insulated and buried in the ground without conduit except when it crosses roads and streets. These systems have been found to be most economic and best in Reykjavik; the Hot Water Supply System has been reason- ably progressive in testing new systems and improving the old system; if, during the proposed project implementation period, technological progress is made in improving installation methods, the project may be altered to benefit from the improvements. 36. As mentioned in paragraph 31, additional heat sources with a total heat capacity of 45 GCal/hr. are required to meet the potential demand of the proposed area to be served with a safety factor to allow for day and night temperature variations. To this end, the project includes a hot water well drilling program. It is proposed to drill wdells in Reykjavik with an oil well drilling rig during 1962 and 1963. This program would continue one carried out recently when other heat sources with a useable heat capacity of 28 GCal/hr. were found. 37. Planning for the proposed project has been carried out by the Hot Water Advisory Committee, a special committee appointed by the Municipal Council to consider the possibie expansion of the system. Engineering design has been and will be carried out by Almenna Byggingafelagid Limited, the largest consulting engineering firm in Iceland. It is capable of carrying out the design work for the project. The project construction and control will be carried out by a Project Manager to be appointed in the near future. 38. Procurement for purchases by the Hot Water Supply System and other city departments is handled by the Reykjavik Purchasing Center, a department of the City Government. All material to be purchased would be procured on the basis of international competitive bidding. Contracts for construction would also be placed on the basis of international competitive bidding although it is unlikely that foreign firms will be interested. There are a number of firms in Iceland competent to undertake the proposed work which will be offered in sections. In the past, competition on these bids has been good and it is expected that there will be sufficient competition to assure reasonable prices in the future. The number and size of the contractors and the current level of construction activity in the area do limit the amount of work which can be done within a given time, however, and the construction schedule reflects this limitation. 39. Project construction will be carried out over the years 1962-1965 as shown on the attached schedule (Annex 6). The work should be completed in total by the end of 1965, but each section of the project will be put into operation as it is finished.  - 10 - Investment Cost Estimate 40. The total financial requirements associated with the project are estimated at IKr. 313.8 million (US. 7.3 million equivalent) as shown below. A detailed construction cost estimate is included as Annex 7. Foreign Exchange Local IKr. Currency Total US$ Equuiv. IKr. IKr. 'OGOs -- -- millions------____ Drilling Program 218 9.4 20.6 30.0 Supply Pipelines and Pumphouses 211 9.1 14.3 23.4 Distribution Systems 731 31.4 98.4 129.8 Freight 116 5.0 - 5.0 Engineering Costs - - 9.3 9.3 Contingencies (approx. 20%o) _224 906 29.9 39.5 Total Construction Cost 15-00 64.5 0Z2^5 237_0 Interest during Construction 185 8.0 20.5 28.5 Increased Working Capital J - - 28.3 28.3 Other Contingencies - 20.0 20.0 Grand Total 1L65 72D5 241.3 313.8 g/ Includes receivables due over 4 years, 41. The estimated costs for supply pipelines, pumphouses and distri- bution systems have been based on actual costs of completed system expansions adjusted for price level changes and should be reliable if current price levels prevail. The cost of the drilling program necessary to develop the desired heat sources is a more speculative estimate and has a greater possibility of error. Freight at about 10% of imported material cost and engineering at about 5% of the total project cost should be adequate. Contingencies for project construction are included at a rate of approximately 20%. These should be more than adequate with regard to foreign exchange expenditures. For local currency expenditures they should be adequate if the Government's stabilization program is reasonably effective and construc- tion cost levels do not increase at a rate of over 4% per year.  - 11 - V. FINANCING PLAN AID PROJECTIONS 42. The total cost associated with the project is proposed to be financed as follows: Total % of IKr. Total millions IBRD Loan ($2.0 million) 860,o 27% Local currency loans 9604 31% Self-provided funds 1314 42/q Total 313.8 43. The IBRD loan will amount to about 27% of the total cost of the project. Local currency f-4-iancing is expected to be provided by a bond issue underwritten by local banks, a loan from the Unemployment Insurance Fund and a loan from PL 480 counterpart funds. These borrowings will amount to about 31% of the total cost. Self-provided funds will cover approximately 42% of the project cost. 44. The proposed IBBD loan is for US$2.O million. Purchases of items not produced in Iceland, together with interest on the Bank's loan during the construction period, are now estinated at $1.7 million. The direct foreign exchange cost may be higher than this if foreign firms outbid Icelandic firms for goods which could be produced in Iceland. The loan would be applied to the reimbursement of identifiable foreign exchange expenditures, any balance being disbursed against payments to civil works contractors, who are expected to be Icelandic. 45. The proceeds of the IBRD loan will be relent to the city on the same terms as the Bank's loan. The government will pass on the Loreign exchange risk to the city for the account of the Hot Water Supply System. For local currency financing, interest and terms are assumed for the bond issue at 9% and 15 years including four years grace, for the Unemployment Fund loan, 8% and 18 years including four years grace, and for the counter- part fund loan 6% and l years including four years grace. 46. Pro forma income statements are provided in