Docmet of

The World Bank

FOR OmCAL USE OnLY

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Reot No. P-5433-UG

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT OF

SDR 86.9 MILLION

TO THE REPUBLIC OF UGANDA

FOR THE

THIRD POWER PROJECT

MAY 29, 1991

This documeut has a restricted distribution and may be used by recipients only in the performance oftheir offical duies. Its contens may not otherwie be diselosd- without World Bank authrodzation.

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CURRENCY EQUIVALENT

Currency Unit = ShillingUS$1.0 = USh 670(as at May 1, 1991)

WEIGHTS ANI) MEASURES

1 kilometer (kIn) = 0.621 miles1 square kilometer (kni) = 0.386 square miles1 kilovolt (cV) = 1,000 volts (1,000 V)1 megawatt (MW) = 1,000 kilowatts (1,000 kW)1 megavolt ampere (MVA) = 1,000 kilovolt amperes (1,000 kVA)1 gigawatt hour (GWh) = 1 million kilowatt hours (1,000,000 kWh)I ton of oil equivalent (toe) = 10,500,000 kilocalories

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank FundBITS Swedish Agency for International Technical

and Economic CooperationCDC Commonwealth Development CorporationCIDA Canadian International Development AssociationEEC European Economic CommunityEIB European Investment BankESMAP Energy Sector Management Assistance ProgramGSMD Geological Survey and Mines DepartmentGTZ Gesellschaft fuer Technische ZusammenarbeitISDB Islamnic Development BankICB International Competitive BiddingIRR Internal Rate of ReturnJICA Japan International Cooperation AgencyKfW Kreditanstalt fuir WiederaufbauKP&L Kenya Power and Lighting Company, LimitedLRMC Long-run Marginal CostMPED Ministry of Planning and Economic DevelopmentNORAD Norwegian Agency for Development AssistanceODA Overseas Development Administration (UK)OECF Overseas Economic Corporation FundOPEC Organization of Petroleum Exporting CountriesSCADA System Control and Data Acquisition FundSIDA Swedish International Development AssociationUNDP United Nations Development ProgrammeUEB Uganda Electricity Board

UEB's Financial Year = Calendar Year

UQAM& FOR OFFIC USK ONLY

Credit and Project SUM=g

:OM r 7UTe Republic of Uganda

_ : Uganda city Bonrd (UEB)

Am:W SDR 86.9 million (US$125 million equivalent)

m: Standard IDA tms, with 40 years mawity

OWenl3ding Temns: For that portion of the credit to be on-lent to UEB, 20 years, at 7-/2% annual interest including a five-year grace period with the

foreign exchange risk to be borne by UEB.

OMWN and mFU ft:Ereign LlTalr

- --- ($ milhion )-

UEB - 34.8 34.8IDA 125.0 - 125.0Idendfied financing 104.6 - 104.6Funding Gap 70.7 - 70.7

Tota 300.3 34.8 335.1

EconomicRaof Reurn: 16.5S

Scdf ADORZort No.: 915S3-UG

Map: IBRD 22738

This document has a restricted distribution and may be used by recipients only in th. perforr.anceof their official duties. Its contents may not otherwise be disclosed without World Bent, P-"4 ,rlzation.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDrTTO THE REPUBLC OF UGANDA

FOR THE THIRD PE PROJECT

1. The following report on a proposed development credit to Uganda for SDR 86.9 million (US$125million equivalent) to help finance the Third Power project is submitted for approval. The proposedcredit would be on standard IDA terms with a maturity of 40 years. SDR 20.8 million of the credit willbe provided to Uganda Electricity Board (UEB) as equity, and SDR 65.6 million would be onlent to UEBat 7-1/2% interest rate. The credit would help to procure equipment, materials and technical assistance.UEB would bear the foreign exchange risk. SDR 0.5 million of the credit would be used to financetechnical assistance to strengthen the Ministry of Energy. The project could be cofinanced by AtDB withUS$45 million, Islamic Development Bank (ISDB) US$20 million, BITS (Sweden) US$10 million, SlDA(Sweden) US$5 million, and Norway US$24.6 million, and the Government of Uganda is seeking firthersources of financing to bridge a funding gap of US$71 million equivalent. The Government expects thatif the IDA C2redit is approved this will encourage other donors to assist it in this endeavor.

2. Black.gund. Under Uganda's Economic Recovery Program, there has been an impressiveincrease, since 1987, in GDP of between 6 and 7 percent per year. Sustained real GDP growth of atleast 5 percent per year seems attainable if economic stability is achieved and the constraints on growthof the productive sectors can be alleviated. The severe deterioration of the power infrastructure has beena serious obstac !.e the revival of the commodity-producing sectors. Through the ongoing SecondPower project support is being provided to relieve immediate electrical energy constrains caused by theill-maintained 30-year old generators at the 150 MW Owen Falls hydroelectric power station, where most(96%) of Uganda's electricity is generated, and by the inadequacies of a long-neglected, out-of-datetransmission and distribution system. However, in order to meet the medium to long-erm electricalenergy demands of a growing economy (current Uganda demand and export commitment to Kenyaalready exceed the power station's capacity), it wil be essential to exploit firter Uganda's considerablehydroelectric power potential, which is the cheapest source of electrical enemr in the region, and tostrengthen and extend the country's transmission and distribution facilities.

3. Government strategy in the sector is effected through the Ministry of Energy, which formulates,periodically updates and follows an economic least-cost energy plan aimed at meeting the energy demandof Uganda's recovery program as well as its long-term requirements. The strategy is to rehabilitateexisting facilities, construct new ones, support the objective of strengthening the electricity utility, UEB,set fuel prices, expand electricity exports, and monitor and control imported petroleum products and theirprices. Government is seeking, where possible to replace the use of petroleum imports by hydroelectricity. Government plans to accelerate the program for rural and urban electrification; to acceleratethe development and use of alternative new and renewable sources of energy; and to encourage researchand studies towards efficient use of woodfuel and overall energy conservation. The Bank's lendingstrategy for Uganda has been to concentrate on rehabilitation needs in the short term, to financeimmediate import requirements and to support the Government's efforts to reform economic policies andinstiutions, and to focus this assistance increasingly on projects designed to restore the country'sproductive capacity, its basic infrastructure and institutions. Energy is one of the main targets of theBank's sectoral coverage.

4. Ptoiect .b . IlThe proposed project will continue and build upon the rehabilitation workunder the ongoing Second Power project to prevent bottlenecks that would otherwise hinder economicdevelopment by providing urgently needed least-cost capacity additions to Uganda's power generation,

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transmission and distribution facilities to satisfy the requirements of all the productive sectors of theeconomy. The project embraces the major priority components of UEB's five year power developmentprogram and will also help to enhance the utility's operating and management capability and improve itsfinancial performance through policy reforms and institutional strengthening. Among other things, thiswill include the establishment of realistic tariffs, agreement on a least-cost sector investment program,and a link with a utility of another country. Tbis latter component would give UEB access to tehncaland practical on-site and overseas training and experience in modem practices in routine and preventativeplant maintenance and operation, load forecasting and planning, accounting and computer procedures,and managerial skills.

5. Proijet Deiption. Tle project consists of (a) measures to strengthen the 35-year old OwenFalls dam; (b) additional spillway capacity and the expansion by 102 MW of the hydroelectric plant atOwen Falls to a total of 282 MW, and expansion of the transmission and distribution systms; (c) supportto the Ministry of Energy for studies of alternative sources of energy, environmental aspects of sectorplanning; and (d) the appointment by UEB of a panel of dam experts. Ihe total cost of the project isestimated at US$335 million equivalent, with a foreign exchange component of US$300 million. Abreakdown of costs and the financing plan are shown in Schedule A. Amounts and methods ofprocurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetableof key project processing events and the status of Bank Group operations are given in Schedules C andD, respectively. A map is attached. The Staff Appraisal Report, No. 9153-UG, dated May 23, 1991,is also ataced.

6. Rationale for IDA Involvement. The project, besides helping to safegard the existing OwenFalls dam, supports the expansion of the least cost investment in Uganda's electrical energy needs andhelps to define pricing and investment options in a sector which, becase of its capital-intensive nature,is a drain on Uganda's foreign resources. It is evident from the success of the ongoing Second Powerproject that the Bank has a valuable role to play in promoting policy and institutional refrs in thepower sector to guide its development in support of the overall economic recovery program. TheGovernment's priorities include the restoration to full utilization of existg productive cqapcity and rapidexpansion of agriculture and industrial sectors. The power secor directly supports other productivesectors and is a source for resource mobilization, including foreign exchange. The Ban's involvementin the current phase of power sector development in Uganda is necessary to strengthen its maagement,improve its training procedures, and advise on the protection of its current and future asses and theexpansion of the system. The proposed operation is an important element in the Bank's countryassistance strategy; it will help ensure that power system development is based on the least cost oons,without adverse environmental effects, assist Uganda in exploiting its comparative advnage indeveloping hydroelectric resources for power expors in the region, and attract other mitional andbilateral financiug for the development of the sector. Through the use of intional competitivebidding procedures for procurement, UEB will benefit from lower construction and equipment prices.

7. A,ereed Actions. At negotiations agreement was reached as follows: (a) as conditions of crdeffectivenes, UEB's tarif&t will be increased to the equivalent of US cents 4.8/kWh, UEB's net fixedassets will be revalued and appropriate adjustments to reflect the revaluation reflected in UEB'saccounting prcedures, and UEB will convene a panel of experts in dam maintenance to give its opinionon consultant's recommendatins to strengthen the dam; (b) as a condion of disbursement for the civilworks conutact the resetlement plan will be fully implemented and the borrower/UEB has obtainedfinancing for the project to close the fumding gap. Conants cover: a review of UEB staff andmainenance of competiive compenuation, maintenance of a rate of return of 8% on net revalued assets;and Government ensure Ihat Ministries and parastatals pay promptly their dues to UEB.

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8. Ressetlement and Environmental Impact and Riparian Ins,ues The prject involves theresettlement of about fifty families in the area where the canallspillway is to be excavatd for the OwenFalls extension. A plan, acceptable to IDA, to resetlle them to arby plots and to recompeme themsuitably has been prepared by Government and reviewed by the Bank. A condition of first disbumentfor the civil works under the credit will be the fbll implementation of the plan. The main componemof the project, the extension of the existing plant at the Owen Falls dam, will utilize the excess waterwhich has flowed unharnessed through the dam sluices to the river since the existing station was built 30years ago. Thus, it will have minimal environmental impact. No effects on flora or fiau are expWecte.Studies on the 132 kV transmission corridor to the west indicate minimal environtal effets. l. flowof Lake Victoria into the Nile is regulated by an arrangement among the riparians, which requires Ugandato operate the Owen Falls power plant and sluices as if there were no manmade stnuct and the riverwas flowing in its natural form. To maximize the beneft from the exist plant ad the proposedextension, the lake could be treated as a reservoir by reulating the flow of water more evenly, butmaintaining the total flow at historic levels. Nevertheless, the project is fully justfied and economicallyviable based on the water flow resulting from the opeaing arrangement. Uganas operation of the lakeas a reservoir in the future would be contingent on the riparians reahing a comensus on the matter.

9 Befits. Justificadon. and Project Risks. The project will help safeguard the dam, and wfllhave benefits from electricity generation which will be felt throughout private buiness, in te commerciand industrial sectors, by Government and by the domestic market. For busins as well as for theGovermment, adequate and reliable power supply will mean enhanced management efficiency, improvedcoordination of economic activities and will likely lead to increased productvity and growth. Improvedpower supplies would also support the extension and enhancement of hedth, education, govementadministtion services and water to rural areas. 'he economic rate of retur of a dme-slice of UEBstotal system development program including the proposed expansio of t trsmibson and dismbutionsystem and the extension of Owen Falls is 16.5%, based on an analyis of coss and benefits to theeconomy. The design and size of the extension is based on depndable records of river flows whichhave persisted since 1960. The risk tat the hydrology could revert to a condition descrbed by the pre-1960 data is estimated by the consultants to be less than 1%, which is judged to be an acceptable ri;Other project risks are insutial and financial becse the rnimpove to UEB's pooroperating and financial performance andlor inadequ management controls are still precaiou. Theproposed financial and tariff covenants, organization and managem en m res and techna assitacomponent, and UEB's stated intention to review frequently with IDA the performance monitorig targetsshould minimize these risks. Benefits wil be fast accruing becuse of the caurent imbalnce betweonsupply and demand as well as projected growth in demand.

10. Remmedaio. I am satisfied that the proposed credit would comply with the Articles ofAgreement of the Association and recommend that the Executive Directors approve the proposed credit.

Barber B. ConablePresident

AtachmentsWashington, D.C.May 29, 1991

4-

3cheSe A

UGAIDA

Estimated Co and Fiancino Plan

Estima tedPrject Cost

Foreign Local Total--USS million)-

Q=FallshCivil works including spillway 117.2 12.2 129.4Dam strengtbening 23.0 2.0 25.0Electrical & mechanical equipment 60.4 4.5 64.8Owners cost (site housing, etc) 1.9 7.8 9.7Engineering supervsion 18.4 1.0 19.4

Technical assistance to UEB and Minnergy 7.7 0 7.7

Transmission and Distnbution 6.5 0.1 6.6

Next major site study 2.9 0.1 3.0

R(payment of project preparation advance 0.8 0 0.8

Base Cost 238.8 27.6 266.4

Physical Contingencies 29.0 3.4 32.4Price Contingencies 32.5 3.8 36.3

Total Financing required 300.3 34.8 335.1

i1 Base cos at end-I990 levels.

Financing Plan:EPwgu LOW l-(--$--(US$ mllion)-

UEB - 34.8 34.8IDA 125.0 - 125.0ADB 45.0 - 45.0BITS/SIDA 15.0 - 15.0ISDB 20.0 20.0Norway 24.6 - 24.6Unidenified 70.7 - 70.7

Total 300.3 34.8 335.1

' ' ' ~~~~Lost TOIohi* ICB @hs NMA o con cog

-U S S m~~~~tilLieul

1. 9gd

1.1 C hi voln 149.6hi 15. 1703(45.2) (65.2)

1.2 Inaallds of detla 11.2 1.4 12.6and uwlmlm ga

1.3 Dom monsom4 *27.8 2.4 30.2(278) (27.8)

2. h (uwy and

2.1 8que 13.5 Of 14.0be, 0-

2.2 Tueam 21.0f 1.1 22.1

23 Swirsand Usa- &6 15 10.1ndsdon ham

2.4 Genaot 20.4 1.1 215

2.5 Gasarto numms 1.6 1.6

2.6 0i. an didon .9 Q1 7.9(7.9) (7.9)

2.7 owns. oost 2.4 9.6 12.0

3.

3.1 EuGwbg & 22.8a 1.2 24.0wupagvls (228) (28)

3.2 Tocbna as.sL to U1BB 0OSg 8.7 93& a "fost to Min. of Ray. (0.5) (0.5)

3.3 Hydroudy 3.6 I 3.6

4. Mbokw

4.1 Repsymit of PPP 0.3 0.8(0.8) (0.8)

185.3 23.3 91.8 345 335.0(100.9) (23.3) (0.8) (125.0)

&i Piguta in pWAenhes ishow Veepvessv eluonts to be financed by MDA.hi To be proud i accordan w ih Bank's Guenas for Ptourmet an prpose to be ooflnW by AIDS nd

1 DB.gI Scni and TA wM be prowd in acoordum with BDan 'sGuldf on he Use of Consu_ms' August 1981.dl To be aeod by Nowy.I To be hood by door co yet Ideaied.

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Page 2 of 2

Amount of die Percentsge ofCredit Aoca xpeditu

Cste M~~~~~~~~~tSS mika to be, FapS

Civi work and 101 100% of forelgnelecical and expenditures

hnical equipment

Consultants services 23 100% of foreignexpendiues

Technical ass8itance 1 100% of foreipexpenditur

Emated 1isbu of IDA Credit

EY92 EX23 EY29 EX29 FY22

Annual 5.9 23.8 42.4 37.7 12.7 2.5Cumulative 5.9 29.7 72.1 109.8 122.5 125.0

Includes refinancing of PPF advance.

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Scbedule C

U-GANDA

THIRD POWVE

(a) Time taken to prepare 30 monthis

(b) Prepared by Uganda Electricity Board,wit assistance from JIDAand consultants

(c) FirstI]DA mission October 1988

(d) Appraisal miission departure June 26, 1990

(,e) Negotiations February, 1991

(f) Board consideration June 18, 1991

(g^) Planned date of effeetiveness November, 1991

(h) Relevant PCR lhere are no relevant PCRs. The FirstPower project loan closed before IBRDrequired PCRs.

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STATUS OF BUAK CROUP OPERATIONS li UGANDA Schedule 0.................... ........... Page of 2A. STATEMENT Of SAMK LOANS AND IDA CREDITS

(as of March 30, 1991)---b-- US$ Nillion .....Amount(Less Cancellations)

Loan Of Fiscal Undis-Credit No. Year Sorrower Purpose Bank IDA bursed................ ....... ............ ...... ........... ......... ... .... ......

One (1) loan and eighteen (18) fully disbursed, 8.40 369.1SOf which SECALs, SALs and Program Loans/Credits a/

Cr. 03400 1988 Uganda Economic Recovery Credit/SAF 24.00 0.03Cr. 18411 1989 Uganda Economic Recovery Credit 0.00 1.70Cr. 12520 1982 Uganda Reconstruction Credit 11 0.00 70.00Cr. 14740 1984 Uganda Reconstruction III 0.00 50.00

Cr.12480 1982 Uganda IDf I 35.00 2.95Cr.13280 1983 Uganda Agricultural Rehabilitation 70.00 8.50Cr. 14340 1984 Uganda Second technical Assistance 13.00 0.55Cr.1t450 1984 Uganda Third Nighway 58.00 15.93Cr.15390 198S Uganda Agricultural Developtmnt 10.00 6.23Cr.15600 1985 Uganda Second Power 28.80 17.41Cr.15610 1985 Uganda Petrolewi Exploration Prom 5.10 5.08Cr.1800 1987 ugada Fourth Highway 18.00 3.91Cr.18240 1988 Uganda Forestry Rehabilitation 13.00 6.97Cr.18440 b/ 1988 Uganda Economic Recovery Credit/SAF 65.00 1.86Cr.18690 1988 Uganda South west Ag. Rehab. 10.00 9.03Cr.18930 1988 Uganda Sugar Rehabilitation 24.90 18.87Cr.19340 1988 Uganda Health Roc. 42.50 33.19Cr.18442 b/ 1989 Uganda Econ. Recovery Credit 25.00 1.14Cr.19510 1988 Uanda Tech. Asst. 1II 18.00 14.22Cr.19620 1989 Ugand Public Enterprises 1S.00 10.10Cr.19650 1989 Uganda Education IV 22.00 8.49Cr.1986W 1989 Uganda Railways I 7.00 6.12Cr.19910 1989 Ugana Telecom II 52.30 37.03Cr.03410 b/ 1990 Ugnda Ecenomle Recovery Credit 12.80 0.60Cr.184W3 b/ 1990 Uganda Economic Recovery Credit 1.50 0.20Cr.20870 b/ 1990 Uganda Eeonmic Recovery Credit 125.00 22.93Cr.20880 1990 Uganda Poverty & Sos. Costs 28.00 26.57Cr.21240 c/ 1990 Ugd Water S&pply 11 60.00 60.97Cr.29871 b/ 1991 Uganda Economic Recovery II 2.00 2.03Cr.21?60 c/ 1991 Ugada Livestock 21.00 21.77Cr.21900 bc 1991 Uganda Ag. Sector Adj. Credit 100.00 78.84Cr.22060 1991 Uganda Urban 1 28.70 27.96

Total 8.40 1282.75 449.47of which repaid 8.40 25.74

total held by Bank & IOA 0.00 1257.01

TOTAL Undlsburee 449.47

............................... ...............................................

*/ Approved after FB80bJ SAL. SECAL or Program Loan/Creditd/ Not yet effective

usledl.wkl04-20-91

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Scehdule DPage 2 of 2

S. STATEMENT OF IFC INVESTMENTS IN UGANDA

(as of Deceober 30, 1990)

Aowunt in USS #illion

Fiscal ....

Year Obligor Type of Business Loan Equity Total,........ ....... . ............ .... ..... ....... .... ....

1985 DFCU Spiming Veaving & Finishing 0.00 0.38 0.38

1965 WILCO Food Beverages, Tobacco, Weaving 4.32 0.71 5.02

1984 TAITECO rood Products 1.62 0.00 1.62

1972 TPS Tourism Services 1.11 0.00 1.11

1984 Uganda Sugar Cocoa Chocolates, Sugar 6.00 0.00 8.00

1985 Uganda Tea Food Products NEC 2.81 0.00 2.81

of Uganda ---- .

Total gross comaittmnts 17.86 1.09 18.94

Less: RepaVments, cantoelations,exchange adjustments,terminations and sales 8.28 0.71 S.99

..... . ..... ..........

Total Comitaments noi held by IFC: 9.58 0.38 9.f9

Total undisbursed 0.00 0.00 0.00

Total Outstanding IFC 9.58 0.38 9.96

0ug2ed .9i04-20-91

l / S / Dr£j_o~N I * , IB

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