Tanzania - Kidatu Hydroelectric Project

FILE COPY RESTRICTED Report No. P-879 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TANZANIA ELECTRIC SUPPLY COMPANY LIMITED FOR A SECOND POWER PROJECT WITH THE GUARANTEE OF THE UNITED REPUBLIC OF TANZANIA November 25, 1970  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TANZANIA ELECTRIC SUPPLY COlIPANY LIMITED FOR A SECOND POWER PROJECT WITH THE GUARANTEE OF THE UNITED REPUBLIC OF TANZANIA 1. I submit the folloTwmg report and recommendation on a proposed loan in an amount in various currencies ecuivalent to $30 million to the Tanzania Electric Supply Company, Limited (TANESCO) to be guaranteed by the United Republic of Tanzania. PART I - HISTORICAL 2. In February 1966 the Government of Tanzania requested Bank Group assistance in financing the 1966-1975 development program of TANESCO, a Government-owned company responsible for public power supply in mainland Tanzania. After having considered ten hydroelectric and several thermal alternatives, the Government had focused its attention upon two possible projects, Kidatu and Wami, and it contracted consul- tants to undertake a comparative study of these two major schemes. The study, which was completed in July 1968, concluded that the Kidatu Projeot would be the more economic alternative. The Bank received the full feasibility report for the Kidatu Project in December 1969, and the project was appraised in the field in April 1970. 3. In November 1967, the Bank made a $5.2 million loan to TANESCO (Loan No. 518 TA) to finance the installation of 21 megawatts (NWr) of diesel generating facilities and the extension of its transmission and distribution systems, as part of an interim expansion program which was intended to help meet the demand for power in the main coastal region of Tanzania until a major station could be commissioned. This project is being implemented according to schedule. 4. Negotiations for the proposed loan took place in 'Jiashington in mid-September 1970. Negotiations were held concurrently for the provision of an additional $12 million for the project by the Kingdom of Sweden. The Tanzanian delegation consisted of: Yessrs. E. A. lMayisela, Commissioner for the Exchequer and Budget, Treasury; G. F. Mbowe, Com- missioner for National Industries and Power, Ministry of Commerce and Indastries; J. E. Borneo, Legal Consultant; A. M. Maalim, Chairman, TANESCO; F. S. Batty, General MIanager, TANESCO; J. M. Sneddon, Chief Accountant, TANESCO; T. J. Kasella, Assistant Secretary, Treasury; and P. A. Nordstrom and J. M. Vedin, Consulting Engineers, the Swedish Consulting Group (SIECO). The Kingdom of Sweden was represented by Messrs. G. Westring, A. Aastrup and A. Trydell of the Swedish Inter- national Development Authority.  - 2 - 5. The proposed loan would be the third Bank loan to Tanzania, which has also received eight IDA credits. The position of these loans and credits as of October 31, 1970 is summarized below: Amount (US $ Million) No. Year Borrower Purpose Bank IDA Undisbursed 45 TA 1963 Tanzania Education 4.6 _ 48 TA 1964 Tanzania Roads 14.0 _ 80 TA 1966 Tanzania Agricultural Credit 5.0 .9 518 TA 1967 TANESCO Power 5.2 1.7 11 TA 1968 Tanzania Supplementary Roads 3.0 1.1 132 TA 1968 Tanzania Ranch 1/ Development 1.3 .9 142 TA- 1969 Tanzania Roads 15.5 7.8 586 TA 1969 Tanzania Roads 7.0 7.0 149 TA 1969 Tanzania Education 5.0 5.0 217 TA 1970 Tanzania Tobacco 9.0 9.0 Total (less cancellations) 12.2 57.4 of wihich has been sold .1 Total now held by Bank and IDA 12.1 57.4 Total undisbursed 8.7 24.7 33.4 1/ This credit, originally $8.0 million, was increased to $15.5 million in November 1969. 6. The Agricultural Credit Project (Credit No. 80 TA) encountered initial delays, principally due to staffing shortages and organizational problems affecting the National Development Credit Agency (NDCA), the channel for credit under the project. Action to resolve these diffi- culties has been taken, and performance has since improved. In light of this improvement, the Association agreed to postpone the closing date for the Credit from December 31, 1969, to June 30, 1971. Further steps to strengthen NDCA's staff and structure have recently been taken in connection with the Flue-Cured Tobacco Project (Credit No. 217 TA), for which NDCA is again the channel for credit to participating farmers and agencies. 7. The Tanzania Government has advised the Association that it proposes to establish a new Rural Development Bank which would incorporate NDCA. The structure of this new bank is under consideration by the Government, and the timing of its establishment has yet to be determined.  - 3 - The Tanzania Government is fully aware of its obligations under Credit No. 217 TA and Credit No. 80 TA with regard to replacement of NDCA and has confirmed that action to implement its proposal to establish a Rural Development Bank will be taken only after mutually satisfactory arrange- ments have been agreed. 8. The Ranch Development Project (Credit No. 132 TA) started slowly, mainly because of a reorganization of parastatal organizations in Tanzania, which necessitated amendment of the Development Credit Agreement, and delays in obtaining satisfactory land titles for the project ranches. Both these difficulties have now been resolved and the rate of disbursement of the Credit has recently improved significantly. 9. Implementation of the Second Education Project (Credit No. 149 TA) was held up for some time by a Government request for amendments to the project, to which the i:ssociation agreed in May 1970 (IDA R70-8 dated March 19, 1970). Frepcvation of architectural drawings and other necessary preliminary work for tile execution of the amended project are now pro- gressing satisfactorily, and it is expected that construction of school buildings will begin during the first half of 1971 in accordance with the revised schedule. 10. Delays occurred in recruitin6 experts to be financed under the Supplementary Highway Project (Credit No. 115 TA) for a staffing and training program in the Roads and Aerodrome Division of the Ministry of Co=munications, Labour and WIorks, but arrangements for the recruitment of the required experts have now been made. Actual construction work on the roads being financed under this Credit, and also under the Second Highway Project (Credit No. 142 TA and Loan No. 586 TA), is proceeding satisfactorily. 11. Further projects in Tanzania under active consideration include an Agricultuoal Education Project, for which I expect to seek the Executive Directors' approval of a Credit of $4.25 million shortly. A proposed Third Highway Project is now being appraised. 12. In addition to the lending set out in paragraph 5 above, the B.ank has made six loans for cormon services in East Africa. All of these loans are guaranteed jointly and severally by Tanzania, Kenya and Uganda; the United Kingdom is also a guarantor for the first loan for the East African Railways. The following is a summary statement of Bank loans for coimmon services as of October 31, 1970.  Amount (US $ Million) No. Year Borrower Purpose Bank Undisbursed 110 LA 1955 East African Railways Corporation 1/ Railways 24.0 1428 EA 1965 East African Railwlays Corporation 2/ Railways 32.4 1.7 1966 East African Harbours Corporation 2/ Harbors 5.6 .7 483 EA 1967 East African Posts and Telecommunications Teleconmiuni- Corporation 2/ cations 13.0 .1 63F EA 1970 East African Harbours Corporation Harbors 35.0 33.-4 674 EA 1970 East African Rai'lways Corporation Railways 42.14 42.4 675 EA 1970 East African posts and Teleconnunications Telecommuni- Corporation cations l0.4 10.4 Total 162.8 of which has been repaid to Bank and others 16.5 Total now outstanding 146.3 Amount sold: 23.8 of which has been repaid 16.4 7.4 Total now held by Bank 138.9 Total undisbursed 92.7 1/ Loan rmade originally to East Africa High Commission. 2/ Loan made originally to East African Comnmon Services Authority. 13. IFC has no investments in Tanzania at the present time.  - 5 - PART II - DESCRIPTION OF PROPOSED LOAN 14. BORRO!W.ER: - Tanzania Electric Supply Company (TANESCO) GUARANTOR: - The United Republic of Tanzania PURPOSE: - To assist in financing the develop- ment of hydroelectric generating capacity at Kidatu on the Great Ruaha River, the extension of an exis-ting diesel ge:nerating station, the constiruction of tr,ansmission facilities, and consultants' services AMOUNT: - Various currencies equivalent to $30.0 -illion A4ORTIZATION: - In 25 years including a 5-year period of grace, through serii- annual installments beginning August 1, 1976 and ending February 1, 1996 INTEREST RATE: - 7-4.per arnum CONIIITVJENT CHARGE: - 3/4 of 1% per annum RATE OF RETURN: - Incremental financial rate of return estimated at 16% 15. The proposed Swedish credit of $12 million will be extended on IDA terms to the United Republic of Tanzania and will be relent by the Government to TANESCO on terms similar to the terms of the Bank loan, except that no conmitment charge will be levied. PART III - THE PROJECT 16. An appraisal report entitled "Appraisal of the iidatu Hydro- electric Project of Tanzania Electric Supply Company Ltd." (PU-48a) is attached. The proposed project, which would be by far the largest power project so far undertaken in Tanzania, is intended to meet the rapidly growing demand for power through 1980 in the coastal region of the country where most commercial and industrial activity is concentrated. The main items in the project are:  - 6 - (a) construction of the first stage of a hydroelectric power complex at Kidatu on the Great Ruaha River, including a dam creating a reservoir and an under- ground generating station with a capacity of 100 NWlJ and with provision for the addition of two more 50 1W units when required; (b) extension by about 15 nW of an existing diesel generating station at Ubungo, near Dar es Salaam, to provide addi- tional power needed before the commissioning of the Kidatu Project; (c) construction of a single circuit 220 KV transmission line from Kidatu to Ubungo and related step-dowm substation at Ubungo; and (d) consulting services required for implementing the project and to study and make recommendations for dealing with the ecological effects of the project and subsequent stages of development. 17. The total cost of the project is estimated at $59 million, excluding interest during construction. The foreign exchange component is $42 million, which would be financed by the $30 million Bank loan and the $12 million Swedish credit. The $17 million local currency component would be provided by the Government in the form of a subscription to TANESCO's equity capital. Interest during construction, estimated at $6.5 million, would be financed out of TA.UESCO's own internal cash generation. Reimbursement of expenditure of up to $1 million incurred for consultants' services in preparing the project and for the construction of an access road to the Kidatu site will be made out of the Swedish credit. Thereafter disbursements from the Bank loan and the Swedish credit will be made so as to maintain a 2