Rhodesia - Central African Power Corporation Project

RESTRICTED FILE COPY Report No. P-400 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CENTRAL AFRICAN POWER CORPORATION OF NOR THERN RHODESIA AND SOUTHERN RHODESIA September 23, 1964 FILE COPY REPORT AND RECOMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CENTRAL AFRICAN POWER CORPORATION OF NORTHERN RHODESIA AND SOUTHERN RHODESIA 1. I submit the following report and recommendations on a proposed loan of $7.7 million to the Central African Power Corporation for the Second Kariba project in Northern Rhodesia and Southern Rhodesia. PART I - HISTORICAL 2. In June 1956, the Bank made a loan of $80 million (Loan No. 145 RN) to the Federal Power Board of the Federation of Rhodesia and Nyasaland for the construction of the Kariba hydroelectric project (first stage). The loan was guaranteed by the Federation of Rhodesia and Nyasaland and the United Kingdom. The project, which was to serve Northern Rhodesia and Southern Rhodesia, has now been virtually completed and the Bank loan is fully disbursed. When the Federation was dissolved at the end of 1963, the Governments of Northern Rhodesia and Southern Rhodesia agreed to operate and develop the Kariba power system under their joint ownership and control. A new Central African Power Corporation (CAPC) was established and the assets and liabilities of the Federal Power Board were transferred to it. Under a loan assumption agreement and guarantee agreements, which were signed with the Bank on December 30, 1963, CAPC has assumed the Federal Power Board's obligations to the Bank and Northern Rhodesia and Southern Rhodesia have each guaranteed a half of the payments due under the Bank loan. The United Kingdom guarantee has remained unchanged (R 63-140, circulated on December 11, 1963). 3. In 1963, before its dissolution, the Federal Power Board had approached the Bank for a loan of $7.7 million to assist in financing the construction of a second transmission line from Kariba to the Copperbelt in Northern Rhodesia and the expansion of existing substations. CAFC sub- sequently confirmed this request and preliminary discussions were held with CAPC representatives at the Bank in April, 1964. The governments of the United Kingdom, Northern Rhodesia and Southern Rhodesia indicated their willingness to guarantee the proposed loan on the same basis as their exist- ing Cuarantees for the first K ariba loan. The Bank's staff visited Northern Rhodesia and Southern Rhodesia in April and May for an appraisal of the proposed project and an examination of the economic position and prospects of the two countries. The loan negotiations were conducted in Washington in August. 4. The proposed lending would be the Bank's sixth loan in the consti- tuent territories of the former Federation of Rhodesia and Nyasaland. The earlier loans (amounting to $146.6 million), which are guaranteed by the United Kingdom, are fully disbursed. Of a total outstanding amount of about $121.7 million on August 31, 1964, about $64.3 million is held by the Bank and the remainder is due to participants. The Bank has already made the following loans with the guarantee of the United Kingdom: -2- Amount as of August 31, 1964 (in Year Borrower Purpose U.S. $ m. equivalent) 1952 Colony of Southern Rhodesia Power 28.0 1953 Territory of Northern Rhodesia Railways 14.0 1955 East Africa High Commission- Railways and Harbors 24.0 1956 Federal Power Board (Federa- tion of Rhodesia & Nyasaland) Power 80,0 1958 Federation of Nigeria Railways 28.0 1958 Federation of Rhodesia & Nyasaland Railways 19.0 1960 Federation of Rhodesia & Nyasaland Agriculture 5.6 1960 Colony and Protectorate of Kenya Agriculture and roads 5.6 1961 Uganda Power 8.4 1961 Colony of British Guiana (net of cancellation) Agriculture 0.9 1961 Trinidad and Tobago Electric Power 23.5 1961 Colony and Protectorate of Kenya Agriculture 8.4 1963 State of Singapore Electric Power 15.0 1963 Swaziland Electric Power 4.2 1963 State of Malta Electric Power 7.5 1963 Mauritius Electric Power 7.0 Total (net of cancellation) 279.1 of which has been repaid 35.8 Total now outstanding 243.3 Amount sold 155.7 of which has been repaid 35.3 120.4 Net amount held by the Bank 122.9 The total amount held by the Bank includes $41.3 million not yet disbursed. There has been no IDA lending in Northern Rhodesia or Southern Rhodesia. PART II - DESCRIPTION OF THE PROPOSED LOAN 5. The main characteristics of the loan are as follows: BORROWER: Central African Power Corporation. GUARANTORS: United Kingdom. Northern Rhodesia and Southern Rhodesia will each also guarantee one-half of the payments in connection with the loan. ANITNT: The equivalent in various currencies of $7.7 million. -3- PURPOSE: To assist the Central African Power Corporation in financing the construction of a second transmission line from Kariba to the Copperbelt in Northern Rhodesia and the expansion of existing substations. AMORTIZATION: In 44 semi-annual instalments beginning on March 1, 1968 and ending on September 1, 1989. INTEREST RATE: S2 o per annum. COMITMENT CHARGE: 3/8 of 1% per annum. PAYMENT DATES: March 1 and September 1. PART III - LEGAL INSTRUNENTS AND LEGAL AUTHORITY 6. A draft loan Agreement between CAPC and the Bank and three draft Guarantee Agreements, one between Northern Rhodesia and the Bank, one between Southern Rhodesia and the Bank, and one between the ihited Kingdom and the Bank, are attached (Nos. 1, 2, 3 and 4), The loan Agreement 7. The draft Loan Agreement is substantially similar to the loan agree- ment dated June 21, 1956 between the Ban1 and the Federal Power Board in connection with the original Kariba Project, as amended by the Loan Assumption Agreement dated December 30, 1963 between CAPC, the Bank and the United Kingdom. A number of changes to the Loan Regulations have been necessary to adapt them for use with three guarantors and to reflect the relationship between the United Kingdom and Northern and Southern Rhodesia. These changes are embodied in Schedule 3 to the draft Loan Agreement. Attention is also drawn to the following provisions in the draft Loan Agreement: (a) the Borrower undertakes to carry out Stage 2 of the program (as defined in Section 1.02) in pace with the growth of power demand; and, before completion of the program, to undertake any other power project only with the prior agreement of the Bank (Section 5.08); (b) the Borrower undertakes to maintain prices for the sale of electricity at a level which will cover operating expenses and debt service and produce a reasonable surplus (Section 5.09); (c) the Borrower undertakes (unless otherwise agreed with the Bank) to ma.intain rates at levels calculated to provide surplus sufficient to finance at locat blf of the cost Q Stagp 2 of the proaram, rnd not to borrov soro than half the cost of Stage 2 (Section 5.10); (d) the Borrower undertakes (unless otherwise agreed with the Bank) not to incur long-terrm indebtedness after the completion of Stage 2 of the program if its net revenues for any twelve consecutive months out of the fifteen- month period last preceding the date of incurrence of such indebtedness would amount to less than one-and-three- tenths times the maximum debt service requirements in any future year on this and other long-term indebtedness (Section 5.11). The Guarantee Aareements 8. The draft Guarantee Agreement to be entered into between the United Kingdom and the Bank is in substantially the same form as the Bank's guarantee agreements with the United Kingdom in connection with the original Kariba Project and with other loans to United Kingdom dependent territories. The United Kingdom will, as usual, give the Bank a letter confirming the inter- pretation to be given to Section 2.02 of the Guarantee Agreement (No. 5). 9. The draft Guarantee Agreements to be entered into between Northern Rhodesia and the Bank and Southern Rhodesia and the Bank are substantially similar to each other and to the guarantee agreements in connection with the original Kariba loan entered into with each of these territories at the time of the dissolution of the Federation of Rhodesia and Nyasaland. Each territory guarantees one-half of the payments due under the Loan Agree- ment and the Bonds (Section 2.01). Section 2.02 of each of these Guarantee Agreements provides that the territory involved will take all action on its part necessary or desirable to assure the punctual performance of all the other covenants and agreements of the Borrower as set forth in the Loan Agreement and in the Bonds and agrees to refrain from taking any action which will interfere with the punctual performance of any of such covenants and agreements. Section 2.03 of each of these Guarantee Agreements provides that, if additional funds are needed for carrying out the project, each territory will make arrangements in conjunction with the other territory, satisfactory to the Bank, to provide such funds. In addition, in side letters similar to those in connection with the original Kariba project which were signed at the time of the dissolution of the Federation, Northern and Southern Rhodesia will agree to obtain the approval of the Bank before making any change in the legislation or Intergovernmental Agreement establishing CAPC which would substantially alter the organization, powers, responsibilities or immunities of CAPC (No. 6 and No. 7). 10. The Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 8). PART IV - APPRAISAL OF THE PROPOSED LOAN The Project 11. An appraisal report (No. TO 438a) entitled "Central African Power Corporation Project" is attached (No. 9). 12. The proposed project provides for the continuing development of the Kariba hydroelectric scheme by the construction of a second 330 KV trans- mission line from Kariba to Kitwe in the Copperbelt, some 268 miles in length, and an intermediate switching station at Broken Hill in Northern Rhodesia, together with the expansion of the existing substations at Kariba, Lusaka and Kitwe. The existing 330 KV transmission line between Kariba and Kitwe is now operating practically at its full capacity. It is necessary to install a second transmission line and to increase the capacity of the existing substations in order to meet growing demands for power by the Copper- belt and the Central Electricity Corporation at Lusaka and in order to assure the security of supply. At present, the Copperbelt draws power from Katanga at a rate of about 260 million kwh per year. The contract for the Katanga power will terminate during the second half of 1966 and the proposed project will then enable CAPC to increase itspower supply to the Copperbelt. 13. CAPO is efficiently organized and has powers to establish its own tariffs. A "Higher Authority for Power", which consists of representatives of Northern Rhodesia and Southern Rhodesia, controls and directs CAPC on matters of general policy. During the loan negotiations, Northern Rhodesia and Southern Rhodesia reaffirmed to the Bank their willingness to continue to operate CAPC's power system on the basis of joint ownership and control. CAPC supplies electricity in bulk to five large undertakings in Northern and Southern Rhodesia for distribution to consfumers. Although the sales and revenues of the Federal Power Board and CAPC have fallen short of the forecasts made at the time of the Bankts granting of the first Kariba loan, the long term financial prospects of CAPC are satisfactory and should enable CAPC to service the proposed loan. 14. The proposed project is estimated to cost about $15.4 million equivalent, including about $9.7 million equivalent for imports. The Bank loan, which would be disbursed on imports, would cover 50% of the total estimated cost; the remainder would be provided by CAPC out of its own resources which would be supplemented by some short-term borrowing. Except for certain items which, for purposes of standardization, would have to be purchased from the same supplier as for the original Kariba project, the construction and equipment contracts for the project will be awarded on the basis of inter- national copetitive bidding. Economic Situation 15. Two reports (Nos. AF 30a and AF 29a) on the economy of Northern Rhodesia and on the economy of Southern Rhodesia are attached (No. 10 and No. 11). Northern Rhodesia 16. Northern Rhodesia, a territory with a total population of about 3.5 million (including 76,000 Europeans), obtained internal self-government late in 1963 and is scheduled to become independent on October 24, 1964 as the new State of Zambia. Of the present 75 seats in Parliament, Dr. Kaunda's United National Independence Party (UNIP) holds 55; the African National Congress Party (ANC) holds 10 seats and the Europeans hold the remaining 10 "reserved roll" seats on the opposition side. Although there is internal pressure in -6- favor of speedy Africanization of jobs and a radical policy towards Southern Rhodesia, the Northern Rhodesian Government is following a policy of multi- racialism internally, and of technical cooperation with Southern Rhodesia on the three intergovernmental services provided by CAFC, Central African Airways and the Rhodesia Railways. 17. The economy of Northern Rhodesia depends heavily on mining: the copper mines in the Copperbelt area, and the lead, zinc and vanadium mine at Broken Hill. The mining industry contributes normally about 50% of Northern Rhodesia's gross domestic product and 90% - 95% of its total exports. Copper alone accounts for about 90% of the total export proceeds. Investment in mining averaged over $50 million equivalent a year over the period 1954 to 1963, or about 40% of the total gross fixed investment in the whole economy. Other productive sectors of the economy are less significant: manufacturing industries are limited to relatively few plants set up to serve the local market. There are a small number of large-scale European farms; but, apart from this, the dominant farming technique is subsistence farming. Thanks to the mining sector, per capita gross national product of Northern Rhodesia is higher than in some of its neighbors: equivalent to about $150 in 1963. Yet, although the copper output has almost doubled over the past decade, the growth in gross natioal product has barely exceeded the population growth, due to liidted opportunities for development outside the mining sector. 18. The Northern Rhodesian Government is pursuing a sound budgetary policy which provides for current surpluses to finance capital expenditure. If, as envisaged, the increase in current expenditure remains moderate, the Government should be able to finance a large part of its development expenditure from revenue, even without increases in taxation. By January 1964, Northern Rhodesia's external public debt was about $168.0 million equivalent, the annual debt service charges amounting to about 55 of the expected export earnings in 1964. Together with a fairly large share of locally-registered stock taken over from the former Federal Government which may be held by non-residents, the debt service charges would probably amount to 7-8% of the export earnings. This burden is not excessive. However, the country is at an early stage of its development; there is an acute shortage of trained staff and skills. Outside the mining sector, the range of available natural resources is very narrow and the prospects are for a rather slow rate of growth. Northern Rhodesia,nevertheless, has a margin of creditworthiness for conventional external borrowing. The proposed Bank loan can be justified within the limits set by the creditworthiness position. Southern Rhodesia 19. Southern Rhodesia is a self-governing Colony of the United Kingdom, with a total population of 4.1 million which includes 222,000 Europeans. Primarily because of immigration, the European population grew at a rate of 5.5% a year from 1954 to 1960, but the rate of increase has since slowed down drastically. During 1963 and the first quarter of 1964, there has been some net emigration of Europeans due to the uncertainties over the future of the country. The present government of the right wing Rhodesia Front Party, elected in April 1964 on the basis of qualified franchise, -7- controls 35 seats in Parliament, as against the 29 seats held by the op- position Rhodesia National Party. Both parties are dominated by Europeans. Two competing African opposition groups, which are not represented in Parlia- ment, seek an African majority government based on "one man, one vote". The United Kingdom has set no date for the independence of Southern Rhodesia and a unilateral declaration of independence has been mentioned by some Government leaders in Southern Rhodesia as a possible course of action in the case of a prolonged delay in the attainment of independence. At this time there is not in sight a workable compromise between the extreme positions adopted by the Government and the African political groups. The present dif- ficulties in finding a durable solution to assure cooperation between the Africans and the Europeans in the political life of the country overshadow the economic problems and, until the political issue is settled, the credit- worthiness position of Southern Rhodesia would have to be assessed with con- siderable reservations. 20. Southern Rhodesia has a dual economy. The Europeans are engaged in large-scale farming, a variety of manufacturing and mining enterprises, and fairly diversified service industries. The Africans are engaged in peasant agriculture and provide unskilled labor for European enterprises. The economy as a whole is in many ways one of the most balanced and diversified in Africa, well-endowed in agricultural and mineral resources. Inflow of foreign capital and European immigrants with a wide range of mangerial, professional and artisan skills has been instrumental in the development of the country's re- sources. Southern Rhodesia is now well-equipped with roads, public utilities and social infrastructure, although educational services available to the Africans need to be expanded, particularly in the field of semndary educa- tion. There is a growing volume of unemployment which, together with a general underemployment in the African areas, poses a serious problem for the government. 21. The political uncertainties of the last few years have had a depres- sing effect on personal consumption and investment and on business confidence generally both in Southern Rhodesia and abroad. As a result, the exceptional rate of economic growth of over 7% per year which was attained during the Federation has come to a halt. In 1963, per capita income of Southern Rhodesia (about `200 equivalent) actually declined. Assuming no further deterioration on the political scene, Southern Rhodesia's main problem is to inspire confidence in the future of the country. There are promising opportunities for increasing export proceeds by some 3-4% per year, even after allowing for a possible contraction of the Northern Rhodesian market. The -overnment will, moreover, have to step up public investment in order to maintain the momentum of economic growth. 22. By January 1964, Southern Rhodesia's external public debt was about $336.0 million equivalent, with a debt service charge of about $31 million equivalent in 1964 or some 10% of tile estimated export proceeds in that year. Because of a peak in the debt maturities, the service charges on the existing debt will reach $80 million equivalent in 1970. The debt service burden is rather high for an underdeveloped country in the process of transition,, although in the past Southern Rhodesia has achieved high standards of debt management and has a competent administration. As indicated before, the -8- present political uncertainties make any judgment on Southern Rhodesia's long-term creditworthiness position too hazardous at this time, and the Bank, in considering lending in Southern Rhodesia, would have to rely on The United Kingdom's guarantee. PART V - COMPLIANCE WITH ARTICLES OF AGREENENT 23. I am satisfied that the proposed loan will comply with the require- ments of the Articles of Agreement of the Bank. PART VI - RECOMI1DATIONS 24. I recommend that the Bank at this time make a loan to the Central African Power Corporation in an amount in various currencies equivalent to $7.7 million for a total term of 25 years, with interest of 5 1/2% per annum, and substantially on such other terms as are specified in the attached draft Loan and Guarantee Agreements, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 12). Washington, D.C. George D. Woods September 23, 1964 President Attachments by S. R. Cope