Malawi - Power VI Project

Report No. PIC841 Project Name Malawi-Power VI Region Africa Sector Energy Project ID MWPA1680 Borrower The Republic of Malawi Implementing Agency The Electricity Supply Commission of Malawi, P.O.Box 2047, Haile Selassie Road, Blantyre, Malawi. Tel. 265-622 000; Fax: 265-622 008 Date of Initial PID December, 1993 Date of Revised PID November 17, 1995 Tentative Appraisal Date May, 1997 Tentative Board Date January, 1998 Country and Sector Background 1. Macroeconomic. Malawi is a small land-locked country with a total population of about 10 million (85% rural) and with a population density among the highest in Africa. Malawi's agriculturally based economy is fragile and the resource base is narrow. During the 1960s and 1970s GDP, driven by the expansion of the agricultural estate sector, showed a healthy increase of an annual average of 39 in real terms. Deterioration in terms of trade and increasing transport costs due to the war in Mozambique slowed economic growth to an average of only 1.8% in the 1980-87 period, well below the high population growth rate of 3.39. Recent improvements in the output of the smallholder sector and in balance of payments stimulated economic growth to an average of 4% during 1988-90. The recurring drought during 1992-94 severely impeded growth, and GDP declined by over 129 in 1994. The continued depreciation of the Kwacha (currently stabilizing at 15.1 to the US Dollar), the substantial fuel price increases and the poor harvest accelerated inflation to 66% by the close of 1994. Given the structural reform programs the Government is implementing and reasonably stable export earnings GDP is projected to grow at over 4% up to 1995 and possibly beyond. 2. The Energy Sector. Fuelwood and agricultural residues are the predominant energy resources, accounting for aost 94% of 1989 primary energy supply. Commercial energy sources (petroleum 3.8%, electricity 1.69 and coal 1%) account for the remainder. Access to electricity is low at 3%-. The main indigenous energy resource contributing to commercial energy supply is hydro-power. Although petroleum accounts for less than 4% of energy supply, it drains aost 16% of the country's scarce foreign currency earnings. 3. The Government's main objectives and strategies for the energy sector are: (i) developing a sustainable supply of fuelwood; (ii)  developing the least cost power supply to meet the economic and social needs of the country; and (iii) minimizing the impact of the high cost of imported oil and coal. 4. Under the IDA - supported Energy I Project, the Government is implementing a cost-effective strategy for an environmentally sustainable wood energy policy through support to small holder tree plantations, rationalization of woodfuel pricing policy and woodfuel conservation measures. With regard to power, a Power Development Plan (the Plan) has established a least cost sequence of development. Accordingly, the 50MW Tedzani III hydroelectric scheme, a major component of the Energy I Project, is due for commissioning by December 1995. The next least cost power source justified by the Plan is the 4x32MW Kapichira hydroelectric power plant, with two units for commissioning in 1998/99 (Phase I) and the additional two units by about 2001 (Phase II). The on-going Power V Project will help finance Phase I of Kapichira. Phase II, comprising mainly the installation of the two generating units, will be implemented under the proposed Power VI project. 5. Cost recovery pricing policies are in effect for petroleum fuels and, until the 1994 floating of the Kwacha, also for power. ESCOM'S financial situation has been severely affected by the floating of the Kwacha, and the gradual adjustment of its tariff rates have been too slow to put ESCOM back on track. Government recognizes the need for faster adjustment of tariffs to ensure ESCOM+s financial viability and attain the economic cost of supply determined by the electricity tariff study under the Energy I project. The conditionalities in the Energy I and Power V credits are designed to ensure the implementation of rational energy pricing policies. Lessons Learned 6. The experience on the wood energy component of the Energy I project has paved the way for encouraging smallholder tree plantations which would ensure sustainable wood fuel supply in Malawi. To ensure effective supervision and transfer of knowhow, future projects on wood fuel supply should be addressed by environmental or forestry-oriented schemes. Coordination with the energy sector should be dealt with at project design phase. In light of this consideration, the proposed Power VI project does not make any provision for wood fuel. 7. Unforeseen fast devaluation of the Kwacha followed by its floating early in 1994 has impeded progress towards full compliance with the financial covenants of the Energy I and Power V credits. The fast depreciation of the Kwacha and the slow adjustment of the electricity tariff rates have eroded ESCOM+s ability to generate sufficient funds to finance cost increases on the Power component of the Energy I project. Unexpected high domestic inflation rates have also slowed achievement of cost recovery of wood fuel prices covenanted under the Energy I credit. The restructuring of the energy sector under the proposed PowerVI project will address these issues. 8. Project Objectives and Description. The Project would assist Malawi in meeting its growing demand for power in a least cost manner, - 2-  improve the quality of power supply and strengthen the country's overall capability to plan, manage and operate the energy sector in general and the power sector in particular. The Project would: (a) increase hydro generation capacity by 64MW through the installation of 2x32MW units at the Kapichira hydroelectric plant; (b) provide consultancy services for the design and supervision of Phase II of Kapichira; (c) rehabilitate existing hydro and, subject to the findings of the Mozambique/Malawi interconnector study, also the standby gas turbine and diesel power plants to improve the availability of the units; (d) reinforce and expand the transmission and distribution systems to reduce transmission outages and distribution losses; and (e) strengthen the energy sector through the provision of: (i) technical assistance; (ii) computer hardware and software; (iii) training technical and other professional staff; and (iv) restructuring of the power sub-sector. 9. Environmental Issues. The environmental assessment of the Kapichira hydroelectric scheme has already been carried out. The proposed Project will not involve major construction activities but provide only additional generating units in the Kapichira hydroelectric plant, to be constructed under the Power V project (Phase I), and help in rehabilitating other existing facilities. No significant environmental impact is therefore anticipated under this project. However, the project is proposed to be classified as Category B in anticipation of possible rerouting of some sub-transmission and distribution systems for which reinforcement is provided. Provision will be made for mitigation measures and for monitoring implementation as may be needed. 10. Project Implementation. Review of the power demand forecast will be part of the exercise to be carried out under Power V+s Study of a Project to follow Kapichira. This will help determine the timing of the installation of the two additional units at Power V+s Kapichira hydroelectric power plant. This is currently assessed to be about 2001. To meet this target, consultants need to be employed, under a PPF or a similar arrangement, by the first quarter of 1997, and contracts should be awarded by not later than mid-1998. 11. The project would be implemented by ESCOM, a well established power utility to supervise and operate power systems. A Project Management Office, currently in place for the Tedzani III scheme and due to be strengthened to supervise Phase I of Kapichira, will have the required implementation capability to be able to supervise the second Phase of Kapichira. Additional staff would be trained by ESCOM under Phase I of Kapichira to ensure sustainability in the management and operation of the project. 12. Costs and Financing. The tentative cost estimate of the project, including provision for reinforcement of the transmission and distribution systems and institutional strengthening, is US$90 million of which about 85t will be in foreign exchange. About US$75 million will be used for Phase II of Kapichira, US$10 million for transmission and distribution, and US$5 million for institutional strengthening. The proposed IDA credit is expected to finance about 40t (US$30 million) of the foreign exchange cost. Cofinancing will be sought for the difference. ESCOM will finance the local cost. - 3 -  13. Project Sustainability. The restructuring of the power sub-sector proposed in the Project coupled with the long experience of the power utility in successfully managing and operating the power system would ensure the sustainability of the sub-sector. 14. Program Objective Category. Energy development (EN) is the primary program objective of the proposed Project. Public enterprise reform (PE) is the secondary objective. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 4 -