Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11963-ZIM STAFF APPRAISAL REPORT ZIMBABWE POWER III PROJECT NOVEMBER 16, 1993 Industry and Energy Operations Division Southern Africa Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENTS US$1.00 = Z$5.81 Z$1.00 = US$0.17 Z$1.00 = 100 Zimbabwe cents (Zc) WEIGHTS AND MEASURES I gigawatt hour (GWh) = I million kilowatt hours I hectare 2.47 acres I joule (J) = 0.00948 British thermal units I kilogram (kg) = 2.205 pounds I kilojoule (kJ) = 1,000 joules I kilovolt (kV) 1,000 volts I kilowatt (kW) = 1,000 watts I kilowatt hour (kWh) = 1,000 watt hours kVA, MVA = kilovolt ampere, Megavolt ampere I Megawatt (MW) = 1,000 kilowatts I Terajoule (TJ) I 1 thousand million joules toe = tons of oil equivalent I ton (t) = 1,000 kg ACRONYMS AND ABBREVIATIONS AfDB - African Development Bank CAPC - Central African Power Corporation CIDA - Canadian International Development Agency DOERD - Department of Energy Resources and Development EDRMP Emergency Drought Recovery and Mitigation Project EIB - European Investment Bank ERR - Economic Rate of Return ERS - Export Retention Scheme ESAP - Economic Structural Adjustment Program ESB - Electricity Supply Board (Ireland) ESC - Electricity Supply Commission ESMAP - Energy Sector Management Assistance Program FINNIDA - Finnish Department of International Development Corporation GEF - Global Environment Facility GTB - Government Tender Board GDP - Gross Domestic Product HPS - Hwange Power Station IBRD - International Bank for Reconstruction and Development ICB - international competitive bidding IFC - International Finance Corporation IDA - International Development Association LCB - local competitive bidding LDP - Letter of Development Policy LOLP - loss of load probability LRMC - long-run marginal cost MIS - Management Information System MM - Ministry of Mines MTE - Ministry of Transport and Energy NOCZIM - National Oil Company of Zimbabwe PSE - Public Sector Enterprise OGIL - Open General Import License RSA - Republic of South Africa SAC - Structural Adjustment Credit SADC - Southern African Development Community SDP - System Development Plan SDR - Special Drawing Rights SOE - Statement of Expenditures UNDP - United Nations Development Program WCC - Wankie Colliery Company ZABO - Zimbabwe Association of Business Organizations ZESA - Zimbabwe Electricity Supply Authority ZRA - Zambezi River Authority FISCAL YEAR July I - June 30 FOR OMCIuL USE ONLY ZIMBABWE POWER 111 PROJECT TABLE OF CONTENTS Page LOAN AND PROJECT SUMMARY .............................. i-iii 1. THE ENERGY SECTOR .1-10 Economic Background. 1 Overview of Zimbabwe's Energy Resources. 2 Energy Consumption. 3 Energy Sector Organizations. 5 Zimbabwe's Energy Strategy. 5 Energy Pricing. 7 Past Role of the Bank and Lessons from Experience. 8 Bank Group Strategy and Rationale for Involvement. 9 Consistency of the Project with Bank Power Sector Policy. 9 11. THE PROPOSED BORROWER AND IMPLEMENTING AGENCY.... 11-25 ZESA's Legal Status and Operating Environment .11 Commercialization of ZESA .11 Zambezi River Authority ................................ 12 Power Generation Facilities .............................. 12 Condition and Technical Performance of the Generating Facilities ........................... 14 Hwange Power Station .............................. 14 Transmission Facilities .............................. 17 Interconnections with Other Countries . .............................. 17 Distribution Facilities .............................. 18 Losses and Outages ............................... 18 Demand Management Capability ........... ................... 19 Access to Service and Rural Electrification ............................... 19 ZESA's Staffing and Overall Efficiency . .............................. 20 Staff Development and Training ........... ................... 20 Management Information System ............. .................. 21 Accounting and Audit ............................... 21 Billing and Collection ............................... 22 Insurances and Taxes .............................. 22 Demand Forecast .............................. 22 Power System Development .............................. 23 ZESA Five-year Investment Program . .............................. 25 This report is based on the findings of an appraisal mission which visited Zimbabwe in March 1993. The appraisal mission was led by Mr. Robin Broadfield, Sr. Energy Economist (AF61E). Mr. Assefa Telahun, Sr. Power Engineer (AF61E), was responsible for the engineering aspects of the appraisal, Mr. Gulam Dhalla, Financial Analyst (Consultant) for the financial aspects and Mr. Albert Herman, Power Systems Planner (Consultant) for the power planning analysis. Secretarial support was provided by Ms Joyce Chinsen, Dotilda Sidibe and Ivonne Martin (AF61E). Messrs. David Cook (AF61E) and Stephen Denning (AF6DR) are the managing Division Chief and Department Director. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 2 Il. THE PROJECT .......................................... 26-35 Project Objectives .............................................. 26 Project Preparation . ........................................... 26 Project Description ............................................. 26 Project Cost Estimate ............................................ 28 Financing Plan ............................................... 29 Project Implementation ........................................... 30 Disbursement ............................................... 31 Procurement ............................................... 31 Environmental Aspects ........................................... 34 Project Risks ............................................... 34 Project Monitoring and Performance Indicators ........................ 35 Supervision ............................................... 35 IV. FINANCIAL ASPECTS AND COST RECOVERY .3642 ZESA's Financial Performance .36 Accounting for Foreign Exchange Movements .38 ZESA's Financial Projections .40 Projected Financing Plan .41 V. ECONOMIC JUSTIFICATION .................................. 43-46 Economic Objectives and Benefits of the Project ....................... 43 Economic Justification of the Hwange Upgrade Component .... ........... 44 Economic Justification of the Distribution Component ................... 45 Economic Rate of Return of the Power Plan IIIInvestment Program .............................................. . 45 Economic Risks ............................................... 46 VI. AGREEMENTS REACHED AND RECOMMENDATION .47-48 TEXT TABLES Table 1.1 - Final Energy Consumption, 1991 .............................. 3 Table 2.1 - ZESA's Installed Generating Capacity and Sources of Electric Energy, FY1992 ................................ 13 Table 2.2 - Availability Targets for Hwange Power Station ................... 17 Table 2.3 - ZESA Electricity Demand Forecast, FY1993/98 .................. 23 Table 3.1 - Summary Project Cost Estimate .............................. 29 Table 3.2 - Project Financing Plan . ..................................... 30 Table 3.3 - Procurement Methods .............. ....................... 33 Table 4.1 - Summary ZESA Operating Performance ....................... 36 Table 4.2 - Summary ZESA Cash Flow .......... ....................... 37 Table 4.3 - Summary ZESA Balance Sheets at June 30 ..................... 38 Table 4.4 - ZESA Financial Indicators ........... ....................... 40 Table 4.5 - ZESA Financing Plan .............. ....................... 42 3 ANNEXES 1.1 Energy Balance, 1991 1.2 Power System Performance Indicators 1.3 Sections of the Government's Letter of Development Policy relating to reform of the Power Sector 1.4 Estimation of Economic Long-run Incremental Cost of Power 2.1 Installed Generating Capacity in Zimbabwe 2.2 ZESA - Transmission and Distribution Systems 2.3 ZESA Program of Action - Consultant Terms of Reference 2.4 Electric Energy and Demand Forecast FY 1993-2010 2.5 Comparative Economic Analysis of the Two Interconnection Options 2.6 Projected Capacity and Energy Balances, FY 1993-2004 2.7 ZESA - Five year Investment Plan 3.1 Detailed Project Description 3.2 Summary Cost Estimate 3.3 Summary of Project Implementation Schedule 3.4 IBRD Loan Disbursement Schedule 3.5 ZESA Monitoring Guidelines and Performance Indicators 3.6 Project Supervision Plan 4.1 ZESA - Financial Indicators 4.2 ZESA - Income Statements 4.3 ZESA - Balance Sheets 4.4 ZESA - Statements of Source and Application of Funds 4.5 ZESA - Notes and Assumptions for the Financial Projections, 1992/93 - 1997/98 5.1 Economic Justification for the Hwange Power Station Upgrade Program 5.2 Economic Justification of the Distribution Investments 5.3 Capital Cost Expenditures of Power Plan III 5.4 Economic Rate of Return to the Investment Program 6.1 Documents on the Project File MAP IBRD No. 22659 - i - ZIMBABWE POWER III PROJECT LOAN AND PROJECT SUMMARY Borrower: Zimbabwe Electricity Supply Authority (ZESA) Guarantor: Government of the Republic of Zimbabwe Amount: US$90 million Terms: 20 years, including a 5-year grace period Project Objectives: The short-term objectives of the proposed project are to: (a) minimize the severity of the power shortage in Zimbabwe caused by the recent drought and facilitate economic recovery by increasing the performance and reliability of the Hwange coal- fired power station, Zimbabwe's largest generating station; (b) reduce losses on the power distribution system; and (c) reduce the incidence and severity of power blackouts during the power shortage to minimize the economic and social disruption they cause. Over the longer term, the project will: (d) selectively increase the capacity and reliability of the distribution system so as to serve more consumers when the power shortage is alleviated; and (e) reduce the unit cost of power and power system investment by commercializing the power utility, improving the condition of existing power facilities, economic power pricing and by short-term technical assistance and training. Project Description: The project consists of: (a) operations support, maintenance, spares, and major overhaul services and selective equipment upgrades for Hwange Power Station (79.3%); (b) distribution system reinforcement through the installation of additional transformer capacity, line uprating, and installation of capacitors and load shedding devices (9.2%); (c) training and technical assistance (5%); (d) provision of workshop equipment and maintenance vehicles (3.6%); and (e) completion of ZESA's management information system (2.9%). Benefits: The project's major short-term benefit will be to alleviate the severe shortage of electricity that Zimbabwe faces from now until the first of the planned high voltage interconnectors with Mozambique or South Africa is in service in late 1995 or 1996. The economic cost of the current power shortage to the industrial, agricultural and commercial sectors has been estimated to average - jj - Z$1.36/kWh (USc26/kWh) not supplied in 1992 prices. The increased availability and reliability of power supply will facilitate economic recovery from the drought and the expansion of domestic industry and agriculture, which is essential for the success of the Economic Structural Adjustment Program (ESAP), which is now at a critical intermediate stage. By promoting the commercialization of ZESA and appropriate power pricing, the project will both reduce the cost and improve the efficiency of power supply and utilization. Selective technical upgrading of Hwange Power Station and improved maintenance and provision of spares will allow Zimbabwe to make more cost-effective use of this major investment. Using current tariffs as a very conservative measure of benefit, the economic rate of return (ERR) of the short-term power development program, of which the project is an integral part, is estimated to be 27%. Risks: The risk of not achieving the project's economic benefits is slight. Without the project, there is likely to be significant unserved demand for power over the next 2-3 years. Over the longer term, it will increase the output and reliability of Zimbabwe's largest and most critical power station and give Lake Kariba time to recover from excessive water use for power generation over the past ten years. There is a risk that demand growth will be slower than forecast, following the introduction of appropriate tariffs. However, demand would need to be more than 50% below forecast for the ERR to fall to 10%. There is little technical risk because the project involves the use of relatively standard engineering techniques, extensive use will be made of suppliers' and expert services for implementing the Hwange Power Station component, and ZESA is a capable implementing agency with a proven track record. - 111 - Summary of Project Cost Estimate Local Foreign Total Local Foreign Total - Zim$ million - - US$ million- Component A. Distribution 36.64 80.58 117.22 5.21 12.54 17.75 B. Hwange Operations 0.68 186.56 187.24 0.08 27.83 27.91 Hwange upgrade 184.84 282.78 467.62 25.29 43.65 68.94 Hwange overhaul 2.39 206.63 209.02 0.35 32.90 33.25 C. Hwange Stage III 0.00 13.10 13.10 0.00 2.07 2.07 D. Workshops 4.70 25.69 30.39 0.70 4.20 4.90 E. Vehicles 39.22 29.89 69.11 5.85 4.89 10.74 F. MIS 11.88 24.01 35.89 1.73 3.92 5.65 G. Institutional Support 5.13 13.86 18.99 0.77 2.22 2.99 Project Total 285.47 863.10 1,148.57 39.97 134.22 174.19 Interest during 187.40 - 187.40 26.08 - 26.08 Construction Total Financing Required 472.87 863.10 1.335.97 66.05 134.22 200.27 Project Financing Plan Local Foreign Total US$ Million ZESA 66.05 44.22 110.27 IBRD - 90.00 90.00 Total 66.05 134.22 200.27 Estimated Disbursements of IBRD Loan (US$ Million) IBRD FY 1994 1995 1996 1997 Annual 8.00 60.00 17.00 5.00 Cumulative 8.00 68.00 85.00 90.00 ZIMBABWE POWER IH PROJECT STAFF APPRAISAL REPORT L THE ENERGY SECTOR Economic Background 1.1 With per capita GDP of about US$500 in 1992, Zimbabwe is one of the highest- income countries in sub-Saharan Africa. Its economy is relatively well developed, with manufacturing contributing about 28% of GDP, agriculture 15%, mining 6%, private services 28% and public services 23%. In consequence, energy use is also high by regional standards. Between 1980 and 1990, real GDP increased at an average rate of 3.4% p.a., slightly faster than population growth. While potentially more dynamic, the economy was hamstrung by excessive regulation, price and wage controls, foreign exchange scarcity (due to export growth of under 1 % p.a.) and large public sector deficits averaging 10% of GDP. 1.2 In 1991, a comprehensive Economic Structural Adjustment Program (ESAP) was launched to revise these growth-constraining policies. The main components of the Program are: (i) reduction of the fiscal deficit and tight monetary policy; (ii) liberalization of the exchange rate and trade regime; (iii) deregulation of business and investment; and (iv) alleviation of the impact of reforms on vulnerable groups. The Bank supported the first phase of the ESAP with a combined loan (US$125 million) and credit (SDR 35.9 million) approved December 1991 (Ln. 3434-ZIM). Most elements of the program are being implemented effectively, including reduction of the fiscal deficit, exchange rate adjustment, improved export incentives, establishment of an Open General Import Licensing (OGIL) system and an Export Retention Scheme (ERS). Progress has also been made in reducing the losses of state enterprises and de-regulating public and private enterprises. 1.3 Sadly, a severe drought in 1991/92 devastated agriculture and seriously curtailed electric power supply, 50% of which is from hydro-electric sources. Millions of rural inhabitants suffered shortages of food and water, GDP fell by 8 % and the supply of power was reduced by about 20%, forcing extensive load shedding and the imposition of power consumption quotas. The Bank contributed drought relief assistance through an IDA Emergency Drought Recovery and Mitigation Project (EDRMP) of SDR 109.5 million. This credit financed transportation of food and agricultural inputs, water supply projects and short-term measures to maximize thermal power generation and to finance power imports. Fortunately, the 1992/93 rains have been close to normal and a much- improved harvest has resulted. The power supply situation has marginally improved, with more reliable thermal generation and the resumption of modest imports from Zambia and Zaire. Although economic activity and power demand remain somewhat depressed, GDP is forecast to rise in 1993 by about 2 %. The Bank is supporting the recovery and deepening of the economic reform program with a second Structural Adjustment Credit (SAC II) for SDR 90.9 million, which was approved in June 1993. Economic growth of at least 5% per year is the objective. This will require both more efficient production and use and more adequate and reliable supply of electricity, which this project is designed to achieve. -2 - Zimbabwe's Energy Resources 1.4 Biomass. The total area of surviving and accessible woodland with fuel potential is around 7.5 million hectares, equivalent to about 20% of the national land area, according to a survey of forest resources completed in mid-1987 as part of the World Bank-funded Rural Afforestation Project (Cr. 1368-ZIM). The total accessible growing stock of fuelwood is estimated to be 320 million air-dried tons, with an annual sustainable yield of about 13 million air-dried tons. 1.5 Zimbabwe also produces agricultural residues with fuel potential. The most important are sugar cane molasses and juices, from which about 30 million liters of ethanol is produced annually. The ethanol is blended with petrol and used as a fuel for motor vehicles. Bagasse is used to power the sugar mills and generate surplus electricity for sale to the grid. 1.6 Coal. Zimbabwe has large coal resources located in 21 known coal fields, with probable reserves totalling about 10.6 billion tons. Over 2 billion tons can be mined by cheap open- cast methods, and the remainder has underground mining potential. Recoverable reserves are equivalent to more than 500 years of consumption at current rates. The most important coal mine is Wankie Colliery, which has total reserves of 642 million tons, of which about 300 million tons are recoverable. Annual productive capacity is around 6 million tons from surface and underground operations. High quality, low sulphur coal at the bottom of the seams, with a calorific value of 31 MJ/kg and ash content of less than 18%, is used in process heating and coke production. Low quality (25 MJ/kg) coal at the top of the seams is used for power generation at the 920 megawatt (MW) Hwange Power Station adjoining the colliery. The Sengwa coalfield, with economic reserves exceeding 450 million tons, started small-scale production in 1990 to replace about 200,000 tons of imported low-phosphorus, low sulphur coal for ferrochrome production. Methane gas with fuel potential is also present in some of the seams. 1.7 Hydropower. The hydropower potential of Zimbabwe is concentrated on the Zambezi River, which forms Zimbabwe's northern border with Zambia. The potential of this stretch totals, on average, about 37 Terawatt hour (TWh) annually, of which 10.6 TWh has been developed at the Kariba Dam and Victoria Falls. The Kariba hydroelectric complex has a total installed capacity of 1,266 MW, with 666 MW at Kariba South in Zimbabwe and 600 MW at Kariba North in Zambia. Additional hydropower potential within Zimbabwe is not large (about 2 TWh p.a.), since most of the other rivers have low, seasonally variable flows and small storage sites. The Sabi River in southeast Zimbabwe has some hydropower possibilities, as does the Limpopo River, which forms the border with the Republic of South Africa (RSA). About fifty major dams have been built in Zimbabwe for irrigation and water supply purposes, some of which could be equipped with small generating units to produce a total of about 2 Gigawatt hours (GWh) annually. 1.8 Neighboring Zambia, with which Zimbabwe is interconnected at high voltage, has 1608 MW of existing hydro capacity and the potential to develop more, including another 4-500 MW at a low-cost site on the Kafue river. The 2125 MW Cahora Bassa Power Station on the Zambezi in neighboring Mozambique is severely underutilized, due to destruction of the transmission line to the RSA. This complex could be expanded at low-cost by the addition of a 500 MW North Bank Power Station. Zaire also has substantial surplus hydro capacity, which Zimbabwe is currently tapping via Zambia, and enormous further potential. - 3 - 1.9 Solar Energy. On average, Zimbabwe receives about 3,000 hours of sunshine annually and the daily radiation is estimated to be around 2 kJ/cm2, which is relatively high. Solar water heaters are manufactured locally and installed in some hotels and hospitals. Solar energy is also used for curing tobacco, the country's main export commodity, and for lighting and radio by a few hundred households in areas unserved by the grid. The potential of solar systems is limited by their cost, but use is currently being expanded under a photovoltaic dissemination project funded by the Global Environment Facility. 1.10 Wind Energy. Meteorological records show seasonally good wind regimes in the central and southern parts of Zimbabwe. In these areas, windmills are used on remote farms for small-scale water pumping. However, wind energy is not likely to be a major contributor to the market for energy in Zimbabwe other than to supplement diesel generated power in remote areas. Energy Consumpdon 1.11 In 1991, Zimbabwe's final energy consumption totalled 262,000 Terajoules (TJ), about 6,250 million tons of oil equivalent. Energy forms other than woodfuels ("commercial energy") accounted for 52% of the total, comprising domestically produced coal and coke (25%), electricity (both domestically-generated and imported) (12%), and imported petroleum products (15%). Imported energy (all petroleum products and some power) accounted for 18% of final consumption, which is summarized in Table 1.1. 1.12 Annual per capita consumption of energy is about 26 Gigajoules, (0.6 toe). This is high for southern Africa, and reflects Zimbabwe's relatively well-developed and energy intensive industrial and agricultural sectors. The largest sectoral consumer of energy in 1991 was the residential sector (48%), followed by industry (26%), agriculture (10%), transport (10%), commercial and government services (3%) and mining (3%). An energy balance for Zimbabwe in 1991 is presented in Annex 1.1. - 4 - Table 1.1 ZIMBABWE - FINAL ENERGY CONSUMPTION, 1991 (Terajoules and Percent) TJ Percent Fuelwood 125,582 48.0 Electricity 32,230 12.3 Coal 44,102 16.7 Coke and Coke Gas 20,433 7.8 Petroleum Products 39,071 14.9 Ethanol 391 0.3 TOTAL 261,809 100.0 Source: Department of Energy Resources and Development 1.13 Fuelwood is the major source of energy in rural areas and for poor people, who usually collect rather than purchase wood. Consumption data are poor, but demand is probably growing at about the same rate as population growth, around 3% per annum. In some of the more densely populated and arid communal areas, woodland resources have been severely depleted by agricultural land clearing and wood cutting for fuel and poles. In response, the Government is implementing measures to encourage more efficient use of wood in households and rural industry, to accelerate tree planting (particularly by farmers), improve management of natural forests and woodlands and, to a very limited extent because of cost, facilitate the substitution of coal, electricity and kerosene. The forestry institutions are being strengthened to improve the management of public wood resources, encourage and facilitate private planting through forestry extension, and to ensure that due regard is paid to the environmental consequences of agriculture and woodfuel issues in land use planning. The Bank is providing considerable assistance to this effort, initially under the Rural Afforestation Project and now under the Forest Resources Management and Development Project (Ln. 31790-ZIM). A major Forestry Policy Review that assesses progress and outlines future strategy has just been completed. 1.14 Coal is used in industry, power generation, agriculture (particularly tobacco curing), for coke production, and by a few households. In 1991, coal consumption comprised 3.3 million tons of high-quality steam and coking coal and about 2.3 million tons of low-quality coal for electricity generation at Hwange Power Station. About 146,000 tons of coal were exported to neighboring countries. The bulk of the coal was mined from the Wankie Coal Field by the Wankie Colliery Company (WCC), a mixed public/private sector corporation. A few thousand tons were produced by the small Sengwa mine, which is operated by a subsidiary of Rio Tinto. Rail transport constraints periodically limited coal supply and exports during the 1980s, but are being addressed by the Railways II project (Ln. 3273-ZIM). Consumption is growing by an average of about 1 % per year. - 5 - 1.15 Petroleum products are procured competitively on the international market. They are mostly imported through Mozambique via the Beira-Feruka pipeline and then transshipped internally by rail and road. The country's only petroleum refinery at Mutare has been mothballed since 1966. The economics of reopening it are unattractive, because it is small and its configuration does not match Zimbabwe's product demand pattern. About 1.15 million cubic meters (950,000 toe) of petroleum products were consumed in 1991, 55 % of which was diesel fuel, 30% petroleum/ethanol blend, 8% jet fuel, 5% illuminating paraffin, and 2% other products. The National Oil Company of Zimbabwe (NOCZIM) is responsible for procurement and primary distribution of petroleum products. Retailing is handled by four private marketing companies and, in the case of bulk supplies to some public organizations, by NOCZIM. Demand for refined petroleum products is increasing by about 5 % annually and exerts continuing pressure on the balance of payments. 1.16 Electricity is supplied from a mix of hydroelectric and coal-fired thermal power stations in Zimbabwe and neighboring countries. The 1266 MW Kariba hydroelectric complex on the Zambia/Zimbabwe border supplies the bulk of the hydropower and the 920 MW Hwange Power Station the bulk of the thermal power. Three small, old thermal generating stations at Harare, Bulawayo and Munyati are used mainly for peaking and reserve duty. 1.17 Summary data on recent power generation and sales are presented in Annex 1.2. In FY91, sales of electricity totalled 8,992 GWh and system maximum demand was 1,578 MW. Over the previous five years, sales growth averaged just under 3 % per year and maximum demand just under 4%. In FY92, energy sales and maximum demand were constrained by the impact of the severe drought on economic activity and on available hydro-electric supply. Sales rose only 2.8% to 9,248 GWh and maximum demand fell to 1,458 MW. Energy Sector Organizations 1.18 The Ministry of Transport and Energy (MTE) has overall responsibility for most aspects of energy supply, efficiency and demand management policy. The major energy organizations under the Ministry's oversight are the Zimbabwe Electricity Supply Authority (ZESA), the national power utility, and NOCZIM, over both of which the Government has traditionally exercised close oversight. The Ministry of Mines (MM) has responsibility for the coal sector and oversees the major company involved in coal operations, the Wankie Colliery Company, which is owned jointly by the Government and the Anglo-American Corporation and operates with considerable autonomy. Measures to improve woodfuel supply are implemented by the Forestry Commission and the agricultural extension service. 1.19 Government's energy policy skills are limited, so many energy policy issues are not subject to adequate technical analysis. ESMAP has offered technical assistance to train sector staff and help them to: (a) establish a simple, effective energy planning system in the MTE; (b) estimate key parameters of the planning system, beginning with the economic cost of major fuels; and (c) evaluate options for reducing the consumption of major energy users and switching to cheaper fuels. -6 - Zimbabwe's Energy Sttegy 1.20 The objectives of the Government's energy strategy are to: (a) improve woodfuel supply and utilization efficiency, and promote the substitution of modern fuels, where this is viable; (b) ensure that commercial fuels are supplied reliably, in adequate quantities and at least-cost; and (c) encourage efficient use of energy by economic pricing and technical assistance in energy efficiency improvement. Scarcity of foreign exchange for new investment, Government restraint on energy prices and interference in the operation of the public energy companies have prevented full realization of these objectives in the past. Recently, however, the Government has implemented a major change in energy policy as part of its economic reform program. It has committed to: (a) commercialize the public sector energy companies; (b) allow energy prices to fully cover the financial and economic cost of supply; (c) launch a national energy conservation program; and (d) facilitate private sector involvement in meeting energy needs. While it plans to keep ZESA in the public sector, it is committed to full commercialization of the utility's operations, to more pro-active demand management, including appropriate power pricing, and to facilitating future private investment in the power system. Given Zimbabwe's level of development, its legal and institutional framework and the relatively good technical performance of the energy parastatals, this sector strategy is judged to be consistent with the Bank's current power sector policy and to provide an adequate basis for providing financial and technical support to the sector. The priority components of the new power sector strategy are: 1.21 Power Sector Reform. The objectives of policy reform in the power sector and the major steps that are being and will be taken to achieve them are outlined in paragraphs 39, 40 and 43 of the Letter of Development Policy (LDP) signed by the Government prior to approval of the second Structural Adjustment Credit. These sections of the LDP are reproduced in Annex 1.3. In essence, the measures comprise: (a) granting full autonomy to the ZESA Board on budget-setting, staffing policies and procurement below a certain threshold; (b) negotiating performance targets for the utility and encouraging all senior managers to be remunerated on a performance-linked basis; (c) allowing tariffs to fully reflect the economic cost of power supply; and (d) encouraging the participation of private investors in power generation and transmission. 1.22 As a first step in the power policy reform program, ZESA and the Government have adopted a FY94 Operations Plan for the utility. The Plan contains a performance improvement prograrn and targets for ZESA and action by the Government to reduce its involvement in the utility's operations. 1.23 Alleviation of the Electricity Shortage. The most urgent technical issue in the power sector is the current shortage of electricity supply. As noted above, the problem is due largely to the impact on the hydro-based power system of the exceptional 1991/92 drought, which was the worst on record, and followed ten years that were also the driest on record. This dry period exceeded the worst water supply scenarios used in ZESA's power system operation and development planning. With the benefit of hindsight, it is clear that Zambia and Zimbabwe overused Lake Kariba's water resources over the past ten years and failed to secure adequate alternative power supplies. When coupled with the catastrophic 1991/92 drought, this forced the two countries to reduce generation at Kariba by 30% in the second half of 1992. In FY92/93, Zimbabwe's total supply of electricity, including imports, was about 9,000 GWh, over 1,000 GWh less than the energy sent out in FY91/92. The average rains that have fallen in 1992/93 will not significantly ease the supply constraint in 1993/94 because the level of Lake Kariba is critically close to the generator intakes and must be allowed to recover by reduced generation over the next several years. With power demand increasing as economic recovery takes off, there is a serious risk of supply interruptions and further power shortages in 1994, 1995 and perhaps 1996, until a new source of bulk supply can be added to the system. That new supply will be obtained from Mozambique and South Africa by the construction of two high-voltage interconnectors (para 2.48). In the interim, ZESA's strategy, which the project will support, is to: (a) restrain demand by raising tariffs; (b) expand its load management capability; (c) reduce distribution system losses; and (d) improve the efficiency and availability of Hwange and the three Old Thermal power stations. 1.24 Energy Demand Management. Stimulated by foreign exchange scarcity and the drought, the Government is simultaneously intensifying its efforts to promote more efficient use of energy through a combination of appropriate pricing and the provision of technical assistance in energy management to energy suppliers and users. Power tariffs were raised by 76% in 1992. A recently-completed SADCC Industrial Energy Conservation Project, supported by CIDA, has performed energy audits on 20 of medium-size commercial energy users and trained their staff in energy management techniques. This has reduced energy use at the audited plants by an average of 8%. A national Electrical Energy Efficiency Program of the type implemented in North America is being developed jointly by ZESA and the Confederation of Zimbabwe Industries, with assistance from Intemational Energy Initiative. The Program includes industrial energy efficiency demonstration projects in a sample of large power consumers, design of a ZESA power conservation prograrn, development of efficiency standards for power equipment such as motors, lights, fridges and water heaters, and identification of opportunities for cogeneration and private power supply. The project is being actively followed by the Bank with a view to possible co-financing of some of the more capital-investment proposals through the next IBRD energy project, perhaps with GEF assistance. Energ Pricing 1.25 Petroleum product prices are fixed by the Government at three levels; wholesale (NOCZIM to distribution companies), retail, and ex-pump (retailers to consumers). Prices are reviewed every six months by NOCZIM and changes recommended to the Minister of Transport and Energy for approval. With the exception of illuminating paraffin (kerosene), the consumption of which is modestly subsidized to assist the poor, the prices of all products are adjusted cover economic cost, albeit sometimes with some delay during the recent period of rapid devaluation. 1.26 Electricity. The basic structure of the national electricity tariff is sound, with a capacity-related fixed demand charge that provides an incentive for consumers to maximize their power factor and an energy charge that decreases with consumption. However, for the past several years, the average tariff has been set below the financial cost of supply and prices to residential and large consumers subsidized by other users. In consequence, ZESA's financial condition was very weak from 1989 through 1991. In 1992, following launch of the structural adjustment program, the Government approved an average tariff increase of 76 % over the previous fiscal year. Subsidization of residential and large consumers was also significantly reduced by higher-than-average increases for these two groups. For FY93, and despite 10% less sales due to the drought, the average tariff - 8 - of Zc. 17.5/kWh (USc.3/kWh) allowed ZESA to achieve a debt service coverage ratio of 1.3 and to finance a small portion of its investment program from internal funds. A further 28 % tariff increase was implemented in September 1993. Residential tariffs now cover the estimated financial cost of service and tariffs to large consumers cover 80% of financial cost, up from 65% in FY92. Given the critical stage of the ESAP and justified concern about exacerbating inflation and maintaining the competitiveness of energy-intensive exporters, this rate of progress towards appropriate power tariffs is considered to be satisfactory. 1.27 While reasonably adequate financially, the average tariff is still below the long-run economic cost of supply, which is increasing due to recent rapid devaluation of the Zimbabwe dollar and the heavy future power investment program. The continued divergence between the tariff and cost of service to different consumer groups also confirms that the tariff structure does not yet fully reflect the cost of supply to the different consumer categories. An indicator of the future economic cost of power is its long-run average incremental cost. Based on the firm components of the investment program, this is estimated to be about Zc.29/kWh (USc.5/kWh) in 1992 prices (Annex 1.4). To bring tariffs in line with the economic cost of supply, ZESA has agreed to estimate either the long-run average incremental cost or the long-run marginal cost of power for each consumer group by January 30, 1995, and ZESA and the Government have agreed that tariffs will be adjusted to reach one or other of these costs by July 1, 1995. This timetable will provide a transition period before full economic pricing and give consumers time to adjust to the higher tariffs that will result. 1.28 Coal prices are adjusted annually by a cost-plus formula that ensures WCC a 12.5% return on unrevalued capital assets for domestic sales and an additional 5% for export sales. In late 1992, pit head coal prices ranged from an average of about Z$30/MT for HPS coal sold to ZESA, through Z$80/MT for higher-quality steam coal, to Z$105/MT for washed coking coal. The pricing of HPS coal is reflective of the fact that, at the current quantities required by ZESA, its marginal economic cost of production is very low as it must be removed to reach the high-value coking coal. The first part of the pricing formula is a monthly fixed charge, Z$4.5 million in late 1992, in addition to which ZESA pays a relatively low price of Z$8 per ton for its actual off-take. Past Role of the ak and Lessons from Expenence 1.29 The Bank has been very active in supporting development of the power system in Zimbabwe and in attempting to deal with the principal subsectoral issues since Independence. The Power I Project (Ln. 2212-ZIM, US$105 million) helped to finance construction of Stage II of the Hwange Power Station (2x220 MW), associated transmission works, technical assistance for training and manpower development and an energy pricing study. The project was completed in 1990 close to schedule and below its foreign exchange budget. However, the mixture of equipment from different sources installed at Hwange and cost-cutting economies in the design have caused some performance problems which this project will help to alleviate. Overall, both the PCR and PAR concluded that the project achieved its objectives and its benefits are likely to be sustained. In parallel, the IFC financed expansion of the Wankie open-cast coal mining operations to increase the supply of coal to the power station in the mid-1980s. 1.30 The Power II Project (Ln. 2900-ZIM, US$44 million), which is currently being implemented by ZESA, is financing distribution system rehabilitation and reinforcement, operations - 9 - support, design and installation of a management information system, workshop equipment, vehicles and further training. The project is nearing completion and will close in June 1994 after an 18-month extension. Implementation and disbursements have been managed efficiently and are close to the original schedules. The major problems have been with achievement of the loan's financial covenants and retention of experienced local staff. The substantial tariff increases implemented in late 1992 have significantly improved ZESA's financial performance, and the Government has agreed under the ESAP to implement full economic pricing of power. ZESA's management is being put on incentive-based pay and more junior staff salaries reviewed. These past problems should therefore not be repeated under the new project. 1.31 Earlier, the Bank made several loans for regional power development, including a loan of US$28 million in 1952 to the Government of Southern Rhodesia for urban electrification (Ln. 145-RN); a loan to the Federal Power Board (Ln. 392-RN) in 1956 for the Kariba dam and the South Bank Power Station and associated high voltage transmission works in Zambia and (then) Southern Rhodesia; a loan of US$7.7 million in 1964 to CAPC for extension of the high voltage transmission system in Zambia; and a loan of US$40 million (Ln. 701-ZAM) in 1970 and supplemental loan of US$42 million (Ln. 701-ZAM) in 1974 to assist Zambia to finance construction of the Kariba North Bank Power Station, for which CAPC acted as implementing agency. The Project Completion Reports concluded that these projects were completed in a timely fashion and within cost estimates. The plants have operated very reliably and are the backbone of the interconnected power system. 1.32 The Bank, in collaboration with other donors, has provided substantial technical assistance in the energy sector and the power subsector. An Energy Sector Assessment was carried out in 1981 under the Joint UNDP/World Bank Energy Sector Assessment Program, and was updated in 1983 under ESMAP. An ESMAP Power System Loss Reduction Study was prepared in early 1983, which identified economically-justified investments in the power distribution system to reduce technical losses. A Power Sector Management Assistance project under ESMAP assisted Government with the formation of ZESA and to develop its energy planning capability. In 1990/91, ESMAP helped the Government prepare an Integrated Energy Strategy to identify the least-cost means of meeting Zimbabwe's future commercial energy requirements. In 1992, the Bank and ESMAP helped ZESA revise its System Development Plan in light of the power shortage and to design a consumption quota system. Throughout this period, the Bank has helped ZESA and the Government develop and implement a least-cost power expansion program by analyzing alternative investment strategies and assisting with the mobilization of donor funding. Bank Group Strtegy and Ratonale for Involvement 1.33 The Bank's proposed role in the power sector both continues and deepens the past program of assistance and supports and complements the Bank's overall strategy in Zimbabwe. The major objectives of this overall strategy are to assist the Government to effect the economic liberalization and restructuring needed to achieve sustained growth. To achieve these objectives, the strategic power sector must: (a) improve its technical and financial performance so as to provide adequate quantities and a reliable supply of electricity at minimum cost to facilitate economic expansion; (b) implement sound pricing policies to ensure efficient use of power; (c) further promote efficient use of electricity through active demand management and by reducing losses; (d) strengthen its institutional, manpower and planning capabilities; and (e) continue to follow a least-cost - 10 - development path, attract private investment into the sector and make full use of low-cost regional power supply options. 1.34 The proposed project will contribute to the achievement of these power sector and overall economic objectives in several ways. First, it will facilitate commercialization of the power utility. This will increase ZESA's efficiency and facilitate private sector participation in the power sector. Second, it will sustain past efforts to efficiently operate, maintain and upgrade the strategic Hwange Power Station, thus making maximum use of its capacity, minimizing the current shortage of power and facilitating economic recovery. Third, it will reduce losses in the distribution system to ensure that maximum use is made of available power supply. Fourth, it will encourage economic power pricing, which in turn will strengthen demand management, and it will allow the Bank to continue to advise on power policy, on least-cost power system expansion and to assist in the co- ordination of investment financing. Consistency of the Project with Bank Power Sector Policy 1.35 Bank policy in the power sector calls for: (a) movement toward the establishment of a satisfactory legal and regulatory framework; (b) importation of services to improve efficiency; and (c) commercialization and/or corporatization of public power utilities and participation of the private sector in power supply. The project is consistent with all three of these guiding principles. On the first principle, the Government has given an explicit commitment in its Letter of Development Policy to reform the legal and regulatory framework for the power sector to grant ZESA greater autonomy. It has initiated a study of the required legal and regulatory reforms and agreed that they will be included in the FY95 ZESA Operations Plan, which the Bank will review and agree during the Interim Project Review. On the second, use will be made in the project of a variety of imported services to improve ZESA's performance. At Hwange Power Station, the project will finance expert services from the original generating equipment suppliers to undertake all major overhauls and to trouble-shoot the equipment. Experienced advisers to each of the senior station managers will be responsible for improving production, maintenance and stores management systems and documentation. A private Vehicle Fleet Management consultant has been appointed to design and implement a modern vehicle fleet management system for the utility. On the third principle, commercialization of ZESA is a basic objective of the Government's power sector policy and the driving force behind the planned legal reforms and provision of operational autonomy. While the Electricity Act already explicitly provides for private sector participation in the supply of electricity, the Government has pledged in its LDP to seek ways to facilitate this. With regard to commercialization of ZESA's operations, the Government has approved tariffs consistent with commercially-sound financial performance, an automatic tariff adjustment formula to compensate for unanticipated and unavoidable cost increases and incentive-based contracts for senior management. It has pledged, in the LDP, to remove subsidies, such as tax and customs duty exemptions, to grant the Board autonomy on personnel policy and to raise the threshold above which ZESA's procurement is subject to Government review. These and additional regulatory and legal reforms to complete the process of commnercialization will be included in the FY95 ZESA Operations Plan, which the Government, ZESA and the Bank will agree in the first half of 1995. - 11 - H. THE PROPOSED BORROWER AND IMPLEMENTING AGENCY ZESA's Legal Status and Opeating Envimnrnent 2.1 ZESA, the proposed borrower and implementing agency, is a national power utility established under the Electricity Act of 1985. Previously, responsibility for the power system was divided between the Electricity Supply Commission (ESC), a thermal power generation, subtransmission and distribution company; four municipal electricity distribution departments (Harare, Bulawayo, Gweru and Mutare); and the CAPC, which operated the Kariba hydro-electric complex and the associated bulk transmission system. The amalgamation of the municipal electricity departments into ZESA and ZESA's take-over of operational responsibility for CAPC's generation and transmission facilities in Zimbabwe were completed in 1987. Legal transfer of the CAPC assets in Zimbabwe to ZESA has been delayed by a disagreement between Zimbabwe and Zambia over compensation for the split of the CAPC assets and liabilities. The two countries have now agreed to independent arbitration to resolve the issue. The Bank will be monitoring this process to ensure that it is completed in a manner which does not adversely affect ZESA's financial viability. 2.2 The Electricity Act stipulates that the functions of ZESA are to: (i) generate, transmit and distribute electricity throughout Zimbabwe; and (ii) investigate options for new or additional facilities for the generation or supply of electricity. The Act allows for the private generation, transmission and distribution of power, with the consent of ZESA and the Minister, and on terms acceptable to both parties. 2.3 ZESA's operations are controlled by a Board of Directors. The Minister responsible for Energy appoints and dismisses members of the Board, which in turn appoints the General Manager, who is an ex-officio member of the Board. The Board consists of six to nine members, of which at least one represents the interests of the local authorities. 2.4 The Electricity Act provides that ZESA shall conduct its business on sound commercial lines. However, the Minister must approve any changes in tariff levels and charges, the Ministries of Energy and Finance must approve annual capital expenditure budgets and borrowings, and the Ministry of Labor must approve staff dismissals. Furthermore, ZESA's foreign borrowing must be arranged through and approved by the Government. A number of other Government regulations and practices, such as those regulating procurement and customs clearance, have also limited ZESA's autonomy, and that of other parastatals. Commemialion of ZESA 2.5 In the past, these Governrment regulations, together with close oversight of operational decisions, have adversely affected ZESA's performance, which nevertheless is one of the best among African power utilities. As outlined above (para 1.21), Government has now begun to fundamentally reform the public enterprize sector. It has decided that ZESA will remain a public corporation, but that its management will be granted greater autonomy and allowed to conduct its business on fully commercial lines. Private companies will be able to compete on equal terms with ZESA or to joint venture with ZESA in future generation and transmission projects. - 12 - 2.6 With the help of consultants, the Government is reviewing the legislative and regulatory framework under which ZESA and other major parastatals operate. Their report, to be completed in the second half of 1993, will propose legal and regulatory reforms to increase the autonomy and efficiency of the parastatals. With the help of consultants funded under Power II, ZESA prepared an Operations Plan for FY94, which has been agreed with the Government. This sets efficiency and technical performance targets for the utility and specifies the steps that the Government will take immediately to ease restrictions and increase the autonomy of ZESA's management so that the targets can be achieved. After completing the FY94 Plan, ZESA and the consultants are conducting a detailed efficiency audit of the utility and developing a long-term efficiency improvement program. The program will set year-by-year efficiency targets which will be included in future annual Operations Plans, together with the legal and regulatory reforms that Government will implement to fully commercialize ZESA's operations. To ensure that the program of commercialization and efficiency improvement stays on track, it has been agreed that an Operations Plan for FY95 satisfactory to the Bank that contains appropriate operational and financial targets for ZESA, a formula for adjusting tariffs for unavoidable cost increases and Government commitments to the legal and regulatory reforms necessary to complete the commercialization of ZESA, will be agreed and adopted by both parties by June 30, 1994. An Interim Project Review Mission in May or June 1994 will review a draft of the plan prior to its finalization. Thc Zambezi River Authoriy 2.7 Management of the shared Zambian and Zimbabwean stretch of the Zambezi River on which the main hydro-electric power stations are located is the responsibility of the Zambezi River Authority (ZRA). The ZRA was established in August 1987 through an Inter-Governmental Agreement between Zambia and Zimbabwe to take over the river and dam management functions of the former CAPC. As defined in its enabling legislation, the main functions of ZRA are to: (a) operate, monitor and maintain the Kariba dam, reservoir and telemetry stations and regulate the water level in the reservoir; (b) investigate the desirability and make recommendations on constructing new dams on the Zambezi river (defined as the part that forms the border between the two states); (c) construct, operate, monitor and maintain any other dams on the Zambezi river. 2.8 ZRA's performance has been hampered by limited management and technical skills. Consultants have recently prepared an Institutional Strengthening Program for which financial assistance is being sought. ZRA's efforts to manage the use of Lake Kariba's waters have been further handicapped by periodically poor cooperation between the two governments and national power utilities that must agree on and put ZRA's policy into practice. Intergovernmental and utility relations now show evidence of improvement which, if sustained, will lead to more efficient water use planning and operation of the hydro-power stations. Power Generation Faciiies 2.9 ZESA's total installed power generating capacity is 1961 MW, comprising 666 MW (34%) of hydro capacity at Kariba South and 1295 MW (66%) of coal-fired steam power plants (Table 2.1 and Annex 2.1). Some 110 MW of privately-owned thermal plants are run by two sugar - 13 - estates (Triangle, 45 MW; Hippo Valley Estates, 23 MW), by the Wankie Colliery Company (27 MW), and several industries (ZISCO, Express Nickel, Lomagundi Smelting, total 15 MW). Triangle sells small quantities of surplus power to the grid during the cane processing season. 2.10 The Kariba hydroelectric complex on the Zambezi river consists of two power stations, one on the south bank, (Kariba South in Zimbabwe), with 6x1 11 MW sets commissioned between 1959 and 1962, and the other on the north bank, (Kariba North in Zambia), with 4x150 MW sets commissioned between 1976 and 1977. The combined energy output from both stations is shared equally between the two countries. Table 2.1 ZESA'S INSTALLED GENERATING CAPACITY AND SOURCES OF ELECTRIC ENERGY, FY92 Energy Percent of Capacity Production Energy (MW) (GWh) Supplied Hydro: Kariba South 666 3,161'/ 30.8 Thermal: Hwange 920 4,310 42.0 Municipal Units 375 766 7.5 Purchase from Industrial Self Producers 9 Total Production 8,246 80.3 Imports 2JL03 19.7 Gross Consumption 10,255 100.0 I/ ZESA's Kariba entitlement, which is 50% of the power generated by the Kariba complex. 2.11 The largest thermal generating station in Zimbabwe is the coal-fired mine-mouth plant at Hwange, comprising 4x120 MW and 2x220 MW units for a total nameplate capacity of 920 MW. The sent-out capability of each unit is approximately 95% of nameplate, at 114 MW and 209 MW respectively, giving a maximum total capacity of 874 MW sent out. The three other coal-fired thermal plants, known as the "Old Thermals," are at Munyati (120 MW), Harare (135 MW) and Bulawayo (120 MW). The major sources of electricity for Zimbabwe in FY92 were: Hwange Thermal Power Station (4,310 GWh/42 %), the Kariba Complex (3,161 GWh/31 %), the Old Thermal Stations (766 GWh/7%) and imports from Zambia (2,038 GWh/20%). 2.12 Neighboring Zambia has major hydro-generation plants at Kafue Gorge (900 MW), Kariba North (600 MW) and Victoria Falls (108 MW). These three plants constitute 90% of the installed capacity on the Zambian power system, which is connected to the Zimbabwe network at Kariba through a strong synchronous tie at 330 kV and to the Zairian power system at 220 kV. In most years, Zimbabwe has imported significant quantities of power from Zambia and relied on - 14 - Zambia for peaking capacity and system reserve. However, the imports were interrupted in 1990, due to a serious fire at Kafue Gorge Power Station, and again in 1992 due to the drought. Over the past year, they have been supplemented by up to 100 MW of imports from Zaire, wheeled through Zambia. Condton and Techninal Perfornance of the Generatng Facilites 2.13 The Ka,iba South hydropower station is in very good operating condition and consistently achieves an availability factor of over 95%. An ongoing refurbishment will ensure that this performance is sustained. The three 'Old Thenmal' power stations at Bulawayo, Harare and Munyati have been in service for over 40 years and are approaching the end of their useful lives. Most of the units have not been overhauled for more than 20 years, largely due to the shortage of foreign exchange. In 1991/92, their availability averaged only 46%. Over the next two to three years, achieving a higher level of availability is essential to minimize the power shortage. Based on an ESMAP technical assistance report that was reviewed and agreed with the Bank, ZESA has contracted for a fast-track and modestly-sized rehabilitation program costing US$32 million to be completed in early 1994. This will refurbish 90 MW of capacity, one unit at a time, and ensure that these units achieve 65% availability over the final few years of their life, and particularly during the critical period 1994-96. Hwange Power Station 2.14 The 920 MW Hwange Power Staton, the main focus of this project, is the largest generating station on the system. It is a pulverized coal-fueled steam plant, Stage I of which (4x120 MW) was commissioned in the early 1980s and Stage II (2x220 MW) in 1986/87. Construction of Stage I commenced in 1973, was suspended in 1975 following the Unilateral Declaration of Independence, and resumed in 1980. Consequently, it is based on late-1960s technology. Some of the equipment, such as the boiler controls, is now technically obsolete and difficult or impossible to repair, because spares cannot be obtained. Stage II, which was financed under the Power I Project, is of more modern design, but the machines and equipment were supplied by a large number of different manufacturers and to a variety of specifications, not all compatible or appropriate to the relatively harsh coal and climatic conditions and to operation in Zimbabwe. Cost-saving economies, particularly in the undersized cooling water system have reduced the station's effective capacity to only 750 MW, 85% of nameplate, in the hot season. Its availability has been reduced by rapid wear of the coal mills, due to the high and variable ash content of the coal; by persistent boiler tube leaks; by inadequate feed water systems; and by malfunctioning boiler drum level and fuel oil burner controls on the Stage I units. These technical problems have been compounded by limited engineering skills and operator experience in Zimbabwe, relative to those required to operate a large, coal-fired power station; by a persistent shortage of foreign exchange for maintenance, equipment upgrades and spares; and by bureaucratic delays in the issue of work permits and in customs clearance. Despite these problems, the station has never failed to achieve at least 75% of its maximum design output and in three of the past five years has achieved over 85%, in part due to assistance from the Bank. 2.15 Funding was provided from the Power I loan to rehabilitate some of the problem equipment. The Stage I coal mills were retrofitted with more wear-resistant materials, and foreign exchange provided for major overhauls of the Stage I boilers and turbines and the provision of some - 15 - critical spares. Power II has financed operations advisers to assist and train station staff, upgrade of the auxiliary water treatment system, major overhaul services and technical assistance from equipment suppliers on an as-needed basis. Currently, the EDRMP is funding overhaul parts and spares through the end of 1993. Spares availability has been improved through the supply of foreign exchange, but inadequate stores facilities and systems have hampered efficient spares procurement and utilization. New stores facilities have recently been established to improve physical storage of spares and ZESA has employed a stores specialist to help computerize stock records and institute a fully satisfactory stores management system. This system will be in operation before any parts to be financed by the proposed loan are delivered. 2.16 Hwange's year-to-year plant availability factors in recent years are shown in Chart 1 below. In Zimbabwean conditions, a realistic average availability target for Hwange is 80%. For comparison, the average availability target for a coal-fired power station of similar size in Europe or the United States would be around 83%. As the chart shows, Hwange achieved first-World availability in three of the last five years, but fell short of the 80% target in the other two years. Diagnosis of the shortfalls shows that they were due to a combination of continuing design weaknesses and to one major equipment failure in each of those two years, partially caused by operator errors. In 1988/89, a generator transformer was badly damaged, due to an operator error, and the associated generating unit was out of service for most of the year. In 1991/92, one Chart 1 Hwanae Availability Factors 90 1989-93 Financial Years so - 60 50 40- 30 - 20 - 0 19BB-B919091923 1989-90 1991-92 Jul-Apr 3 AVAILABILIfTY FACTOR - 16 - of two boilers serving the large Stage II generators exploded and required substantial repair, putting one of the 220 MW generating units out of service for six months. Overall, Hwange's performance has been acceptable and the program of IBRD assistance has been producing results. But to sustain and further improve that performance, the program of expert operations support and training, and the provision of overhaul and maintenance services needs to be continued and strengthened, spares provision, storage and use further improved, and investments made to upgrade the remaining problem equipment that it is economic to replace. These are the steps that the project will support. 2.17 Funding to help sustain and improve Hwange's performance is currently in place through end-1993, when the Power II and EDRMP loans will close. Within three to four years, assuming the ESAP reforms stimulate exports and ZESA has been able to fully commercialize its operations, ZESA should have the human and financial resources and adequate access to the foreign exchange it routinely requires for the operation of Hwange and other parts of the power system. In the interim, this loan will supplement ZESA's and Zimbabwe's currently limited sources of foreign exchange and ensure adequate finance is available for and directed to the comprehensive maintenance, overhaul and upgrade program required for Hwange Power Station. In so doing, it will: (a) increase Hwange's output and reliability over the next two to three critical years when Zimbabwe will be short of power due to the drought; and (b) improve the station's long-term operating characteristics and performance so that efficient use can be made of this costly and valuable asset. 2.18 The Hwange performance program to be supported by the project was developed by ZESA, with the help of experts and consulting engineers familiar with the power station whose services were funded from the Power II project. It was reviewed by the Bank to ensure that the various components are technically and economically justified, constitute an integrated and comprehensive program that reflects the lessons of experience, and are sufficient to achieve the station's output and reliability targets. 2.19 The program, which is summarized in Chapter 3 and described fully in Annex 3.1, consists of: (a) a small team of senior expatriate power station engineers with extensive thermal power station experience and familiarity with Zimbabwean conditions who will advise the senior ZESA plant engineers on critical aspects of plant operation and maintenance, train their technically- competent but still relatively inexperienced Zimbabwean counterparts and help improve and better document station operating procedures; (b) equipment suppliers' expert services to assist the ZESA engineers with major maintenance, statutory overhauls and emergency repairs on an as-needed basis; (c) essential consumable materials and spares; and (d) a selective upgrade program that is designed to eliminate the most serious remaining technical problems in the station's design that are economic to rectify over the next three years. An experienced expatriate adviser to the Station Manager was appointed in mid-1992, and is partially responsible for the significant improvement in Hwange's performance that has occurred in the last 12 months. Three other key expatriate advisers - the Maintenance Adviser, Production Adviser and Stores Adviser - funded initially from the Power II loan, were appointed in August, 1993. 2.20 The minimum availability targets for Hwange that the project is designed to achieve, and against which its results will be assessed, are outlined in Table 2.2. - 17 - Table 2.2 Availability Targets for Hwange Power Station Fiscal Year 1993/94 1994/95 1995/96 1996/97 Availability (%) 80 81 83 83 2.21 At the conclusion of the project, the staff of Hwange Power Station should be sufficiently experienced and well-trained to manage it without full-time expatriate assistance. Also, the loss of trained engineering staff will have been arrested by the improved conditions of employment that ZESA will be able to offer to skilled workers following its commercialization. Assuming the Economic Reform Program has liberalized and increased the supply of foreign exchange as intended, ZESA should be able to purchase the foreign exchange it requires for regular maintenance of and material inputs for the power system and should need to borrow internationally only for major capital investments in system upgrades and/or expansion. The Hwange Power Station component of the project should therefore result in a sustainable improvement in the performance of this costly and strategic power facility. Thsmission Faciies 2.22 The backbone of the country's power transmission system comprises 3444 km of 330 kV lines connecting the major generating stations at Kariba and Hwange to the major load centers through step-down substations at Alaska, Norton, Warren (near Harare), Sherwood, Bulawayo and Orange Grove (Annex 2.2). Feeders, nearly all radial, operating at 132 kV, 88 kV and 66 kV, constitute the remainder of the interconnected grid. 2.23 Much of the 330 kV transmission system has been in service since the 1950s and 1960s. Although technical losses are within acceptable limits, (about 3 % of generation) outages are relatively frequent and sometimes sustained for long periods. Failure and mal-operation of the switching and protection equipment, mainly due to age or lack of maintenance, has become a concern. To alleviate these problems, the Power II Systems Studies recommended construction of some new 330/132 kV substations and the upgrading of many 88 kV and 132 kV substations. The African Development Bank, the European Investment Bank and FINNIDA are financing a co- ordinated program of transmission and primary distribution reinforcement and extension projects based on the study findings to improve the system's capacity and reliability. ZESA has also recently signed a contract to upgrade its inadequate National Control Center. Interconnections with Other Counties 2.24 Apart from the 330 kV Zimbabwe-Zambia link at Kariba, which also allows Zimbabwe to tap into the Zaire system through Zambia at 220 kV, an 11 kV link with Zambia exists at Chirundu, north of the Kariba complex. There is also a stand-by facility for a 20 MW import at Victoria Falls through 33 kV lines for emergency purposes. In eastern Zimbabwe, a 110 kV link at - 18 - Mutare can supply up to 40 MW of emergency power from the Mozambique central region system. The possibility of upgrading this link to cater for a larger transfer (up to 100 MW) is being studied. 2.25 A 33 kV interconnection with South Africa, formerly used to supply the border area near Beitbridge, has recently been uprated to 132 kV to permit increased imports from the South African grid. A 220 kV line interconnects Zimbabwe and Botswana, and exports up to 100 MW from Zambia through Zimbabwe to Botswana when surplus power is available on the Zambian system. Unfortunately, due to system stability problems, this line cannot be used to reverse the flow of power to relieve the current shortage situation in Zimbabwe. DistWbution Facilies 2.26 ZESA's primary distribution voltage is 33 kV, with a route length of 7000 km and total transformer capacity of 1250 MVA. This is stepped down mainly to 11 kV for local distribution and to 0.4 kV for supply to consumers' premises. The 11 kV network totals 27,750 km and the 400 volt network 11,868 km. (Annex 2.2). The installed capacity of the 11 kV/0.4 kV transformers is not available. ZESA has agreed to compile this important indicator and update the mapping of and carry out a technical audit on the condition of the distribution network. ZESA will also complete a distribution system expansion study by December 1995, complementing the master plans for generation and transmission systems. Losses and Outages 2.27 Total losses on the transmission and distribution systems have averaged just under 10% of energy sent out during the last five years (Annex 1.2). This is low for Africa and an acceptable level, considering the extent of the two systems. It confirms that the distribution system, accounting for almost two thirds of the total length of the transmission and distribution network, is well designed, following British standards and practices. It also demonstrates the benefits of the live- line training programs that ZESA has instituted for its transmission and distribution engineers. Planned outages on the transmission system are nevertheless on the high side (Annex 2.2). Corresponding information for planned and unplanned outages on the distribution network is not available, but ZESA has reported a rising trend in the number of outages. These are bound to grow with the expansion of the system, but are exacerbated by shortages of foreign exchange for maintenance and reinforcement. Analysis of loss reduction and reinforcement options shows that installing additional capacity at key points in the distribution system is economic. The proposed project therefore provides materials and equipment for selective distribution network reinforcement. 2.28 ZESA is constructing mechanical and electrical workshop facilities to improve its distribution system repair capacity. To ensure that effective use is made of these facilities, the project will finance the procurement of key items of workshop equipment. ZESA also operates a vehicle fleet of over 1700 units, the bulk of which are devoted to distribution system maintenance and repair. A Transport Management Study has recently been completed by expert consultants funded under Power II. It recommended the installation of a modern computerized fleet management system, standardization of vehicle types and the procurement of a substantial number of vehicles to replace those units that are well beyond their economic life. ZESA has accepted these recommendations and retained the planning consultants to design and install the new fleet management system. The project - 19 - will finance the procurement of some of the specialist vehicles recommended by the consultants to improve distribution maintenance. Demand MAnagement Capabity 2.29 ZESA's principal tool for demand management is its tariff, which is appropriately structured with demand and energy charge. For peak demand management, ZESA has negotiated interruptible tariffs with several of its large consumers and can disconnect about 30 MW of domestic water heating load in Harare at peak through use of a ripple control system. The latter is a highly economic demand management tool, which the project will extend to the other major towns and expand to cover about 60 MW of water heating load. In addition, technical auditing of the existing ripple control system will be carried out and needed refurbishment and upgrading will be undertaken under the project. 2.30 ZESA currently lacks an automatic mechanism to shed large segments of load from the power system in the event of a major supply shortfall. Such a mechanism can prevent a supply failure shutting down the entire power system, as occurred on two occasions in late 1992. The project will eliminate this system control weakness by installing automatic below-frequency load shedding equipment that will progressively shed load at a time of supply shortfall and balance the system at the reduced level of supply with a minimum of disconnections (Annex 3.1, para. 13). Access to Serice and Rur4l Ekctnfladon 2.31 The public power system supplies electricity to about 320,000 customers in Zimbabwe. Approximately 20% of households are connected to the system. High-density housing areas are given priority for new connections, followed by schools, commercial business and rural growth points. Given the shortage of supply, very few new consumers will be connected to the system over the next three years. Thereafter, the pace of electrification will be groomed by the need for cost-recovery. 2.32 The dispersion and low incomes of the rural population renders rural electrification an expensive, often non-viable and hence a slow process. The Government launched a Rural Electrification Program in 1985 which envisaged the provision of electricity to 24 'growth points'. A budget of Z$3 million was allocated from ZESA's own financial resources for Phase I of this work. By the end of 1986, a further 48 growth centers had been identified and Z$8 million set aside (from ZESA's own resources) for their electrification in Phase II. 2.33 All the 24 growth centers in Phase I now have supply, but only 13 of the 48 Phase II centers are connected. Progress has been slowed by rising costs of imported materials and additional scope of work in some centers, created by the build-up of demand during construction. Shortages of foreign exchange have also contributed to the slow down of the Phase II works. An updated Rural Electrification Plan has been prepared, with technical assistance from GTZ, to identify the most economic sites for further grid extensions. Consistent with its policy of commercializing ZESA and to avoid the risk that future rural electrification projects will weaken ZESA's financial performance, the Government has agreed to subsidize any financially non-viable grid extensions that, for social reasons, it instructs ZESA to construct and operate. - 20 - ZESA's Staing and Overail fficiency 2.34 The integration of six separate power entities into ZESA was achieved without any major delay or decline in the reliability of the power system. ZESA now has a total of 7,500 employees, roughly one for every 42 consumers. This ratio is much higher than developed country standards, but about half that of the utilities in neighboring Malawi and Zambia. 2.35 ZESA's management recognizes that there is considerable scope for further efficiency improvement. Consequently, it has arranged for an independent performance diagnostic study, based on Terms of Reference developed jointly with the Bank (Annex 2.3) to be conducted in 1993 and 1994. The study will outline a comprehensive and integrated program of actions needed for ZESA to operate efficiently and on commercial lines. It is being done in two phases, a first, overview phase was completed in September 1993, and a second, in-depth phase, to be completed by mid-1994. The first phase outlined a program of immediate measures to improve efficiency and set related performance targets for FY93/94, to which ZESA has committed in its FY93/94 Operations Plan. The second phase will identify the longer-term steps needed to improve efficiency, and note any legal and regulatory changes required by Government in parallel, and will recommend appropriate performance targets for FY94/95, to be incorporated into an updated Operations Plan for that year. Staff Development wad Trnaing 2.36 ZESA has an active and comprehensive staff development and training prograrn which is implemented by its Area Offices and power stations and coordinated by a Training Section at Head Office. Training is organized into four categories: (1) routine basic training (apprentice and post- graduate); (2) advancement and reinforcement training (advanced technical and supervisory skills); (3) new technologies (advanced engineering, total quality management); and (4) targeted training (live-line working, AIDS awareness, etc.). Routine training programs are derived from the annual Manpower Plan and standards approved by the Ministry of Higher Education or the relevant professional bodies. Advancement training is planned on an individual basis from performance appraisals or skills analysis. New technologies training is initiated by the managers responsible for the technology and often integrated with equipment installation. Targeted training is generally initiated by the Training Section in consultation with senior management. 2.37 ZESA has adequate and well-equipped training facilities. It has a large training center in Harare, and smaller training centers in Bulawayo and Hwange. The Harare Training Center provides pre-apprenticeship courses for a duration of 12 weeks for up to 300 staff each year, and apprenticeship courses for 6 months in distribution engineering, power generation and transmission. The Center is equipped with electrical and mechanical workshops, a welding shop, a laboratory and a training simulator for steam power plant operators funded under the Power I Project. The Harare Training Center is capable of catering for the training needs of neighboring countries as well as Zimbabwe. The Hwange Training Center provides a comprehensive program of courses in power station operations and maintenance and the Bulawayo Center specializes in transmission and distribution system training. A total of 410 staff were in full-time technical training in June 1992. - 21 - 2.38 ZESA also provides overseas post-graduate training opportunities for its staff. Priority in this form of training is given to technical areas, due to the present shortage of engineering skills and the past dependency on expatriates. Trainees are bonded to ZESA for a period equivalent to the period of training. Seventy-one staff were in full-time post-graduate training in mid-1992. ZESA also sponsors staff to attend the University of Zimbabwe and several local colleges for training in mechanical and electrical engineering disciplines. In addition, ZESA sends staff regularly on various courses, seminars and workshops, both locally and overseas. A series of courses at middle management, junior management and supervisor levels are arranged from time to time, run by the Zimbabwe Institute of Management. Overall, ZESA's training activities are comprehensive, well organized and effectively conducted. The major constraint has been the availability of foreign exchange, particularly to finance specialist training overseas and foreign instructor visits to Zimbabwe. The Bank has helped to finance both these needs under the Power I and Power II Projects and this project will continue Bank support to those parts of the training program requiring foreign exchange. Management Information System 2.39 ZESA's operating efficiency will be enhanced by the completion, under this project, of a comprehensive, computerized Management Information System (MIS), the installation of which is well underway with funding from Power II. Most of the computer hardware has been installed, the software selected and tailored to ZESA's needs, and installation of the financial systems is nearly complete. This project will finance design of information systems for each of the thermal power stations and their integration into the overall MIS and modernize cash receipting from load limited consumers in Harare, Bulawayo and Chitungwiza. Accounting and Aumt 2.40 The responsibility for accounting and financial functions, which will soon be fully computerized as part of the MIS project, is vested in the Finance Department, which is headed by a Finance Director. The department is adequately manned for its present level of operations, but suffers from excessive staff turnover. This should be alleviated with the recent granting of greater salary autonomy to ZESA by the Government. 2.41 ZESA has an internal audit unit which reports directly to the General Manager. The functions of the unit are carried out effectively. An independent private audit firm appointed by the Board verifies ZESA's financial statements, as agreed under the Power 11 Project. ZESA also agreed under that project to have certified financial statements sent to the Bank within six months of the close of each fiscal year. The audited accounts for FY92 have been received. During negotiations, it was agreed that ZESA will continue to have its accounts audited by an external auditor acceptable to the Bank and send its audited financial statements to the Bank within six months of the close of each fiscal year. - 22 - Bilig and Col1ection 2.42 Prior to the formation of ZESA, billing and collection were the responsibility of the respective separate electricity undertakings, i.e., ESC and the four municipal electricity departments. Following amalgamation in 1987, billing and collection in the municipalities of Bulawayo, Mutare and Gweru have been taken over by ZESA. Billing and collection in Harare are still handled by the municipality, because it has well-developed computer facilities which ZESA is still to acquire through its new MIS. There is an agreement between ZESA and the municipality for it to act as agent to ZESA until ZESA has its own billing and collection system fully in operation and is able to efficiently absorb these functions. 2.43 As a condition of the Power II loan, ZESA reports quarterly to the Bank on the status of its billing and collection efforts. Until FY91/92, collection performance was satisfactory, total outstanding receivables being equivalent to about two months of sales. This was close to the target of 60 days agreed with the Bank as a condition of the Power II loan. However, due to the difficult economic situation and ZESA's late settlement of some of its own accounts, accounts receivable rose to 85 days of sales in 1991/92. ZESA has since implemented a more aggressive collection program, and the backlog is falling. Under this project, ZESA has agreed to report to the Bank the status of its billings and collections as of December 31 and June 30 each year and not allow its outstanding customer accounts to exceed 75 days of revenues in FY94 and FY95, 65 days in FY96 and 60 days of revenues in FY97. Insurances wad Taxes 2.44 ZESA maintains insurance coverage on all assets, stores and inventories and on vehicles, as well as for liability to third parties. The insurance coverage is in accordance with normal power utility practice and includes insurance for boiler explosion at the generating stations. The insurance cover is reviewed periodically by the Bank to assure its continuing adequacy and is currently satisfactory. ZESA does not pay income or corporation tax, but is liable for customs duties on imported vehicles and some materials and equipment. These exemptions are not consistent with commercial practice, and are being reassessed in the Government's parastatal reform study with a view to their elimination. Demd Forecas 2.45 Consumption of electric power rose by an average of 3 % per year over the five years prior to the 1992 drought, about the same rate as GDP and close to the 3.3% growth forecast in ZESA's 1988 System Development Plan. Using the econometric forecasting model developed for the plan, and taking account of the current supply constraint, ZESA and the Bank have prepared an updated demand forecast that is summarized in Table 2.3 for the period up to FY98 (with FY92 actuals for reference) and presented in full in Annex 2.4. - 23 - Table 2.3 ZESA Electricity Demand Forecast. FY1993-98 FISCAL SALES DEMAND YEAR (GWH) (MW) 1991/92(a) 9,248 1,458 1992/93 8,118 1,416 1993/94 8,629 1,634 1994/95 9,173 1,770 1995/96 9,906 1,821 1996/97 10,402 1,878 1997/98 10,818 1,942 2.46 For the first three years of the forecast period, FY93-95, sales will be constrained by a combination of reduced demand and shortage of supply due to the drought. In early 1996, it is assumed that at least one of the high voltage interconnectors that Zimbabwe plans to install with neighboring Mozambique and South Africa will be commissioned and the supply constraint fully alleviated. Until this year, consumption is not forecast to exceed the FY92 actual level. Meanwhile, economic growth is projected to resume in 1993, as the economy recovers from the drought, and to average over 5% in real terms during the mid-1990s as the benefits of the Structural Adjustment Program feed through. Historically, the elasticity of electricity demand to GDP is 1.08, which would suggest that power demand growth will also be in the 5% range. There is also considerable suppressed demand due to past under-investment in the distribution system that is progressively being eliminated by distribution investments financed under this and other projects. However, tariffs were increased substantially in real terms in 1992 and are projected to rise further as ZESA introduces full commercial and economic prices during 1993, 1994 and 1995. These real tariff increases are expected to shake out some uneconomic consumption and to restrain demand growth. Electricity demand is therefore forecast to rise more slowly than GDP at an average rate of 4% per year after 1996. Power System Development 2.47 ZESA and the Government's reliability target for power system development planning is a Loss of Load Probability of 20 hours per year, which is considered appropriate. The recently- revised power development program that was developed with the help of ESMAP and the Bank following the drought is based on this target and consists of the following major committed projects: (i) rehabiliation of the three Old Ihermal power stations, costing about US$32 million, to be completed in early 1994. The rehabilitation program is designed to increase the output of those stations over the next three years until a major new source of power supply is available and allow them to provide reserve and limited peaking capacity for another ten years, before their retirement in about 2003; and - 24 - (ii) construction of two high voltage (400 kV) intenatonal tranm ioan ines, one to link the Zimbabwe power system to the Cahora Bassa Power Station in Mozambique, which currently has 2000 MW of surplus hydro-generating capacity, the other to interconnect through Botswana with the South African power system, which has substantial excess thermal capacity, at the Matimba Power Station in Northern Transvaal. 2.48 Before finalizing the Old Thermals Rehabilitation Project, ZESA and the Government sought the advice of the Bank and technical assistance from ESMAP to ensure that the final project scope and implementation schedule were tailored to the current power supply and demand situation. This analysis concluded that a substantial reduction should be made in the original scope of the Rehabilitation Project and its implementation schedule revised to increase firm supply from the Old Thermal stations during the power shortage. These conclusions were accepted by the ZESA and the Government and the revised project is now being implemented. 2.49 The decision to construct the two high voltage transmission lines to Mozambique and South Africa was taken after a review of alternative options for both alleviating the current shortage of electric energy and meeting future power demand. Given the existence of excess generating capacity in the region and the short lead time and lower capital cost of transmission facilities, interconnection rather than the construction of new generating capacity was clearly the optimal strategy. The choice was between two technically-equivalent solutions: Option 1, a double circuit line to the Cahora Bassa Power Station in Mozambique; and Option 2, two single circuit lines, one to Cahora Bassa, the other to the South African power system at the Matimba Power Station in Northern Transvaal. To compare the economic cost of these two options, an estimate of the economic cost of meeting power demand over the period up to 2005 was made for each alternative. The same subsequent supply project was assumed to be implemented in both cases - extension of Hwange Power Station by a further two units (the Hwange III Project), which is the project that ZESA's planners have provisionally concluded to be the next least-cost. The analysis, which is summarized in Annex 2.5, confirmed that Option 2, the twin single line alternative selected by ZESA, is the lower cost of the two options by Z$427 million in 1992 prices. Annex 2.6 show3 the projected system capacity and energy balances with the selected option, rehabilitation of the Old Thermals and this project. 2.50 In addition to being the most economic option for alleviating the power shortage, the two new international transmission lines will significantly expand the interconnected southern Africa power grid. Following their completion, the power systems of Zimbabwe, Zambia, Zaire, Mozambique, Botswana and South Africa will be connected at a voltage of 220kV or higher. This development offers tremendous long-term prospects for the sharing of reserve capacity, trade in surplus energy and ultimately for the joint development of power generation projects. The regional benefits of such coordinated power system operation and development over the next 18 years alone are conservatively estimated by the recent ESMAP-managed SADC Power Interconnection Study to exceed US$1.5 billion in 1992 prices, a saving of about 15% of incremental power supply costs. 2.51 In addition to completing the above two new investment projects, the third priority element of ZESA's power supply strategy is to maximize the availability and, in the short-term, the output of Hwange Power Station. This is particularly critical over the next two to three years until the first of the high voltage interconnectors is in place. As outlined earlier, Hwange's performance, while better than that of many coal-fired power stations in other developing countries, has not been - 25 - as good as a station of its design and vintage is capable of. Achieving maximum performance will require more professional station management, an adequate supply of spare parts, timely maintenance and the elimination of design weaknesses that can be rectified relatively quickly and economically. The major objective of this project is achieve this improvement in Hwange's performance in order to maximize its output over the 1994-96 period and raise its reliability in the longer term by providing these critical inputs. The project will raise Hwange's effective capacity from a low of 736 MW in the hot season to 836 MW and ensure that it is capable of producing at least 5,000 GWh/year. 2.52 A transmission network analysis study completed under the Power 11 project is the basis for the domestic components of ZESA's planned transmission investment program. The study confirmed the economic and technical justification for the Tokwe-Triangle 330 kV line, which is now nearly complete. The other major weakness identified in the transmission system is in the area to the north and east of Harare. A new 330 kV line from Alaska to Mutorashanga and a 132 kV line from Mutorashanga to Bindura is the recommended solution, and has been incorporated into ZESA's investment program. This line will form part of an eventual 330 kV ring around the city, and will provide an alternative routing for the proposed supply from Cahora Bassa, which will feed into the Bindura substation. 2.53 The 132 kV, 88 kV and 66 kV transmission systems require selective reinforcement over the next five years, particularly in the Midlands and Bulawayo areas. Projects funded by the AfDB, EIB, FINNIDA and Switzerland will cover the highest priority needs. Investment is also required in the low voltage distribution system to reduce losses and serve new and growing loads in the longer term. This and an AfDB project will meet the most urgent and economically-justified of these needs. ZESA Tve-year Investment Progrwn 2.54 The resources required to implement ZESA's FY93-98 investment program, which includes all the above projects, total Z$8,191 million (US$1,054 million) in current prices, excluding interest during construction, of which Z$4,085 million (50%) is in foreign exchange. The program is large and a considerable technical, managerial and financial challenge to the Authority. However, it is needed both to compensate for past under-investment and to ensure that adequate power is available in future to support economic growth and development. A summary of the investment program is presented in Annex 2.7. 2.55 To allow the Bank to continue to assist in the process of power system investment planning and help identify least-cost solutions, ZESA has agreed that it will continue to consult annually with Government and the Bank on its power investment program for the next three successive fiscal years. Following these consultations, ZESA has agreed to adopt an investment program satisfactory to the Government and the Bank and not to implement any power investment project costing in excess of US$50 million not in the agreed investment program without prior consultation with the Bank. - 26 - HI. THE PROJECT Project Objectives 3.1 The short term objectives of the proposed project are to assist ZESA to: (i) minimize the shortage of power by improving the reliability and the performance of the Hwange power plant; (ii) increase the efficiency of the distribution system through loss reduction measures, thereby satisfying unmet demand; and (iii) better manage the power shortage through discriminative load shedding measures. Over the longer term, the project will facilitate the commercialization of ZESA and help ZESA build sustainable technical capability, which will lead to more efficient operation and planning of the power system. Project Preparaqon 3.2 A Bank preparation mission visited Zimbabwe in November 1992 and agreed with the Government on the main components of the proposed project, after detailed discussions with ZESA. These emphasized the operation and upkeep of Hwange power plant, economic loss reduction measures for the distribution network and priority maintenance equipment and special duty vehicles. The detailed project description, the timing of its implementation and the project costs and financing plan were discussed with ZESA and the Government at appraisal in March 1993, and reviewed and agreed upon at negotiations. Project Description 3.3 A detailed description of the proposed project is given in Annex 3.1 and is summarized below. The project consists of: A. Distribution Rejaforcement (i) The distribution network subcomponent has the main objective of loss reduction (estimated at 7MW peak) and the subsidiary objective of providing for unmet demand when supply becomes available. It includes the following: installation of about 53 MVA of 33/11 kV distribution and 30MVA of 132/llkV substation transformer capacity, complete with switchgear and control equipment; construction of 50km of 132kV line, reinforcement of about 100km of 33kV and 75km of 1 lkV distribution lines; and installation of 7.5MVAr capacitors. (ii) Installation of ripple control devices and under frequency relays for peak demand management and load shedding, including provision for needed upgrading of existing ripple control equipment. - 27 - B. Hwange Operatons and Upgrade Improving the reliability and sustaining the performance of Hwange power plant will be achieved through: (i) institutional technical assistance of 310 man-months to help in power plant management and operations, including technical auditing, to further strengthen indigenous capability initiated under Power I & II loans and ensure sustainability in managing the operation and maintenance of Hwange power plant by ZESA through transfer of know-how and job-oriented training; (ii) the acquisition of materials and spares needed to operate the power plant; (iii) the provision of about 200 man-months for proprietary maintenance service contracts; (iv) the provision of services and equipment for major overhaul of 5 of the 6 Stage I & Stage II units; and (v) upgrading the capacity of the cooling water system, a major constraint in Hwange's operations, including the construction of an additional cooling tower and improving cooling water quality through the provision of additional circulating water pumps, prevention of ingress of debris, minimizing silting presently infiltrating the cooling towers and the cooling system; installing a closed auxiliary cooling system for bearings and other equipment through the provision of separate pumping and cooling systems; replacing the outdated pneumatic process control system of the Stage I units by an electronic system and improving the level of instrumentation to ensure effective control of the generating units and reliable monitoring of their performance; refurnishing the air conditioning system of the power station; and providing additional station transformer, switchgear equipment and transformers for standby diesel generating sets. C. Design of Hwange Stage IH Consultancy services (substitution technical assistance) to: (i) review and update the design and the cost estimate and prepare bid and contract documents for the Hwange III extension; and (ii) prepare a project document incorporating the feasibility of the extension in a manner satisfactory to the Bank. - 28 - D. Mecanical and Elctricl Workshops Acquisition of tools, machinery, equipment handling cranes and electrical testing plant and equipment for the mechanical and electrical workshops. E Vdki Acquisition of heavy duty vehicles and specialized equipment for distribution works, including pick-ups, 4-wheel drive trucks etc. F. Managaent I4fonnaton System (WIS) (i) Acquisition of additional computer hardware and software to complete the on-going MIS project under the Power II loan; (ii) Provision for computer-aided cash-receipting facilities for load limited consumers in Bulawayo (82,000), Harare (18,000) and Chitungwiza (13,800); and (iii) Technical assistance to strengthen MIS operations. G. Insidional Suppoyt (i) Provision for training for ZESA staff and technical personnel; and (ii) Provision for studies on issues critical for the operation of ZESA. Prjedc Cost EUMae 3.4 Project costs are detailed in Annex 3.2 and summarized in Table 3.1 below. The total cost of the project, including physical and price contingencies but excluding duties and taxes and interest during construction, is estimated to be US$174.19 million, of which the foreign exchange cost would be US$134.22 million or 77.1% of the total project cost. The total cost of the project including interest during construction is estimated to be US$200.27. Base costs are at June 1992 price levels, with physical contingencies of 10% for all project components. Price contingencies are based on local inflation estimated at 40% in 1992, 30% in 1993, 20% in 1994, 18% in 1995, 15% in 1996 and 1997. International inflation is estimated at 5% in 1992 through 1997. - 29 - Table 3.1 SUMMARY PROJECT COST ESTIMATE Local Foreign Total Local Foreign Total -ZimS milion - US$ milion Comoonent A. Distribution 36.64 80.58 117.23 5.21 12.54 17.75 B. Hwange Operations - support (IDTA)/* 0.00 28.10 28.10 0.00 4.34 4.34 - spares 0.00 134.28 134.28 0.00 19.93 19.93 - maintenance 0.68 24.19 24.86 0.08 3.57 3.64 - upgrade 184.84 282.78 467.62 25.29 43.65 68.94 - overhaul 2.39 206.63 209.02 0.35 32.90 33.24 Subtotal Hwange 187.91 689.07 876.98 25.63 106.45 132.08 C. Hwange m Design (STA)/* 0.00 13.10 13.10 0.00 2.07 2.07 D. M/E Workshops 4.70 25.69 30.38 0.70 4.20 4.90 E. Vehicles 39.22 29.89 69.11 5.85 4.89 10.73 F. MIS 11.88 24.01 35.88 1.73 3.92 5.66 G. Institutional (IDTA)/* 5.13 13.86 18.99 0.77 2.22 2.98 Project Total 285.47 863.11 1,148.57 39.97 134.22 174.19 Interest during 187.40 - 187.40 26.08 - 26.08 Construction Total Financing Required 7 8 63.11 1.335.97 66.05 1 2 200.27 */IDTA = Institutional Dcv. Technical Assistance; STA = Substitution Technical Assistance. Fina1cndg Plan 3.5 The total financing required, including interest during construction, is US$199.14 million, of which US$134.22 million is in foreign exchange. IBRD will finance 67% (US$90 million) of the foreign exchange costs. It was agreed at appraisal with the Government and ZESA that the remaining foreign exchange amount of US$44.22 million will be borne by ZESA and sourced through a combination of Government allocations (code 54), purchases of ERS funds and procurement through OGIL or other facilities. ZESA will finance the local cost of US$39.13 million in equivalent local currency and interest during construction, estimated at US$25.79 million. The proposed loan of US$90 million will be directly to ZESA for a term of 20 years, including 5 years grace, at the prevailing IBRD interest rate. ZESA would bear the foreign exchange risk on loan repayments. Table 3.2 summarizes the financing plan for the project. - 30 - Table 3.2 FINANCING PLAN ZESA ZESA IBRD (US$ milLion) (USS milL;on) (USS milLion) (Local) (Foreign) A. Distribution 5.21 12.54 B. Hwange plant Operations support 1.34 3.00 Maintenance spares 0.08 15.43 4.50 Maintenance contracts 3.57 Overhaul spares 13.74 5.74 Overhaul services 0.35 13.41 Hwange upgrade 25.29 13.71 29.94 C. Hwange consultancy 2.07 D. Workshop equipment 0.70 4.20 E. Vehicles 5.84 4.89 F. MIS 1.74 3.92 G. Institutional support 0.77 2.22 Sub-Total 39.97 44.22 90.00 Interest during construction 26.08 TOTAL 66.05 44.22 90.00 rojed Iwklementaton 3.6 ZESA will be responsible for the implementation of all components of the project. Execution of the project is expected to start in the last quarter of 1993 and to be completed in June 1997. All distribution works, substation expansion and reinforcement, including capacitor bank installation, will be carried out by ZESA's own work force. Transmission lines, upgrade works and major overhauling and repair of Hwange generating station will be undertaken by contractors under the direct supervision of ZESA. Annex 3.3 summarizes the Implementation Schedule of the proposed project. In order to facilitate timely implementation, agreement was reached at negotiations that ZESA and the Government Tender Board will complete the bid adjudication and approval process for all equipment and material procurement in a maximum of three months. 3.7 In order to ensure efficient and timely implementation of the project, agreement was reached at negotiations that ZESA will appoint an experienced Project Coordinator, with terms of reference satisfactory to the Bank, prior to signature of the loan documents. It was also agreed at negotiations that the Project Coordinator's role will be to plan and coordinate the activities of the project managers for each component, to arrange for tendering and equipment deliveries at the appropriate time, to monitor installation of the equipment, to prepare quarterly progress reports in - 31 - accordance with the reporting requirements of the Bank, to update cost estimates, to liaise with the Bank on Project related activities and to prepare the Project Completion Report. In view of the volume of procurement (Table 3.3) and the need to ensure quality control of the overhauling and repair of the Hwange units, ZESA will employ an experienced mechanical engineer (production adviser), a maintenance adviser and a stores adviser to assist the Power Plant Superintendent in the detailed implementation of the Hwange component, including the procurement aspects of Hwange operations. Project managers will also be assigned to follow up the implementation of each major component (A, B & C, D & E, F & G of para 3.3 above) of the Project. Disburzsement 3.8 The proceeds of the loan will be disbursed over a period of about 34 months from March 1994 through June 1997. Disbursement from the loan account will be made for 100% of foreign expenditures for equipment, materials and consultant services. In order to expedite disbursement of funds, a special account in foreign currency, with an initial deposit of US$4 million, will be opened in a bank acceptable to IBRD. Disbursements will be made on the basis of Statement of Expenditures (SOE) for contracts below $100,000. Supporting documents thereof will not be submitted to the Bank for reimbursement of such expenditures, but will be properly filed and kept by ZESA for verification annually by auditors acceptable to the Bank (para 2.32) and review by Bank supervision missions. The anticipated schedule of disbursements from the proposed loan, based on the annual estimated project costs, is given in Annex 3.4 and is consistent with standard profiles for Bank loans and IDA credits for power projects in the Africa region. Both the Power I and Power II loans disbursed close to their planned schedule, and a similar good performance is expected for this project. The closing date for the proposed loan would be December 31, 1997, six months after project completion. Procurement 3.9 ZESA's procurement of major items, as with that of all parastatals, is subject to review by the Government Tender Board (GTB). Tenders are invited through the GTB, and review and approval procedures must conform to Government instructions. ZESA is familiar with the Bank's procurement guidelines and standard bidding documents and experience with procurement on the Power I and Power II projects has been generally good, although the review and approval process by the GTB can sometimes take time. Government and ZESA's agreement to follow the Bank's procurement guidelines and to use the Bank's Standard Bidding Documents for components financed by the Bank was obtained during negotiations. During negotiations, the Bank and ZESA also agreed on the project's Implementation Schedule (Annex 3.3), including a target of three months or less for the adjudication and bid evaluation approval process. The Implementation Schedule outlines essential target dates that must be achieved to complete the project on schedule. An Implementation Plan was discussed at negotiations and agreement was reached to detail at project launch (Annex 3.6) the various stages of the procurement cycle for each contract package of the individual components of the Project. It will be noted from the Implementation Schedule that the bid opening for most of the components of the project is planned for January 1994, soon after the estimated date of declaration of effectiveness of December 1993 for the proposed loan. To facilitate achievement of this target, ZESA has prepared the bid documents for the distribution component and is in the process of preparing the documents for operations support, as well as for procurement of spares and equipment - 32 - of Hwange power plant, in line with similar packages under Power II. The tender documents for the Hwange Upgrade Program are under preparation with the help of consultants. These advance procurement actions will expedite contract award after the declaration of effectiveness of Power III. 3.10 Procurement of distribution materials, workshop equipment, vehicles and computer hardware and software (MIS component) will be made through international competitive bidding (ICB), in accordance with the Bank's guidelines for procurement and in compliance with the relevant Bank Standard Bidding Documents. Preference to domestic manufacturers will be given in accordance with the Bank's procurement guidelines. Expert services for Operations Support (para. 18 of Annex 3.1) will be by direct contracting of individual experts with relevant specialized experience on coal fired power plant operation and maintenance, which experience with Power II has shown to result in higher quality and more cost-effective services than contracting through a consulting firm. Consultancy for Hwange Stage III and for studies under the Institutional Support component (paras. 39 and 45 of Annex 3.1 respectively) will be procured on a competitive basis in accordance with the Bank's guidelines for the selection of consultants. 3.11 In order to ensure compatibility with existing equipment, the spare parts, materials and services required for the repair, major overhauling and maintenance of Hwange Power Station (paras. 19 through 21 of Annex 3.1) will be obtained from the original manufacturers through direct negotiations by ZESA. The aggregate amount of contracts (estimated at a minimum of 11 contract packages) for the supply and installation of proprietary spares and equipment shall not exceed $29 million equivalent. It will be noted from Table 3.3 that this total is made up of Maintenance Spares ($4.50 million); Maintenance Contracts ($3.57 million); Overhaul Spares ($5.74 million); Overhaul Services ($13.75 million) and Upgrade Services ($1.45 million). ZESA has successfully negotiated numerous similar arrangements in the past and keeps good records of prices for essential materials and services for Hwange. The draft contracts for these proprietary spares and services will be reviewed by the Bank. The Hwange Upgrade (Annex 3.1, paras 22 through 28) will be procured through ICB, based on specifications and bid documents under preparation by ZESA's consultants. The design and the construction of the additional cooling tower (para. 30 of Annex 3.1) will be funded by ZESA and procured under local competitive bidding in accordance with Standard Bidding Documents. The training component (about 80% of the amount under institutional, Table 3.3), other than graduate studies, will be done through direct contracting with power utilities and consultants on the basis of proposals obtained by ZESA for appropriate courses with which it is familiar. Selection of universities for graduate studies will be through short listing of institutions agreed with the Bank. Workshop equipment will be packaged (electrical separate from mechanical, machinery and equipment separate from tools, etc.) as far as possible to attract appropriate potential suppliers. These packages as well as procurements of other components will, to the extent possible, be bulked into orders of not less than US$500,000 and subjected to ICB. For procurements of packages under US$500,000 (up to an aggrega!e amount of US$1 million), no less than three suppliers would be invited to submit quotations. All contracts for goods estimated to cost over US$500,000 equivalent would be subject to prior review of bidding and contract documents by the Bank. All contracts exceeding US$100,000 and all terms of references for consultancy services shall be subject to prior review by the Bank. Procurement advice will also be secured from the consultants and experts involved in the operation of the Hwange power plant. In addition, ZESA will employ an experienced mechanical engineer to assist in the preparation of the detailed specification for the Hwange component of the project (para. 3.7). A summary of the procurement methods to be used in the project is given in Table 3.3. - 33 - Table 3.3 PROCUREMENT METHODS (USS million) Proiect Element JCB A/ Other I/ NBF LCB Total Distribution 17.75 17.75 (12.54) (12.54) Hwange Operations support _I 3.00 1.34 4.34 (3.00) (3.00) Maintenance spares 4.50 15.43 19.93 (4.50) (4.50) Maintenance contracts 3.64 3.64 (3.57) (3.57) Overhaul spares 5.74 13.75 19.49 (5.74) (5.74) Overhaul services 13.75 13.75 (13.41) (13.41) Upgrade 45.60 13.71 8.18 67.49 (28.49) (28.49) Upgrade supervision 1.45 1.45 (1.45) (1.45) Hwange consultancy 2.07 2.07 (2.07) (2.07) Workshop equipment 3.90 1.00 4.90 (3.20) (1.00) (4.20) Vehicles 10.73 10.73 (4.89) ((4.89) MIS 5.66 5.66 (3.92) (3.92) Institutional support cl 2.98 2.98 (& training) (2.22) (2.22) Total 83.64 38.13 44.23 8.18 174.19 (53.04) (36.96) (90.00) Note: Figures in parenthesis are the respective amounts financed by the Bank Loan. NBF: not Bank-financed. LCB: local competitive bidding funded by ZESA. al International Competitive Bidding. IBRD procurement guidelines apply. hI Consultancy, training (graduate studies) and proprietary spares procurement and proprietary service contracts direct from and with original suppliers or consultants. cl Direct contracting of individual experts for plant maintenance and operations, and for training. - 34 - Envirunmental Aspects 3.12 The main component of the project is the refurbishment and upgrading of the existing generating plant and equipment of the 920MW coal fired power plant at Hwange. With the exception of the local mine township, Hwange Power Station is in a sparsely populated region of Zimbabwe. It is equipped with precipitators for dust particle removal from the flue gases, but does not have flue gas desulpherization. Ash disposal practices were reviewed by the Bank and found to be fully satisfactory. This review also found no evidence of significant local pollution from the plant. The project will not increase in the installed capacity of the power plant. However, plant reliability and performance is expected to improve, which should result in slightly lower specific coal consumption. The project's distribution component is also mainly reinforcement of the existing system. New facilities, where they are provided (as in the case of a 50km 132kV line, para 3.3A-i) are replacements of existing facilities. The project is therefore not expected to have adverse impacts on the environment during its execution and following its completion. In the medium term, when additional power becomes available and the unmet demand is catered for, the project will marginally reduce domestic woodfuel consumption through the provision of access to electricity for domestic consumers presently awaiting connection to ZESA's distribution network. P,ject Risk 3.13 Delayed delivery of spare parts and materials for Hwange could result in postponement of the major overhaul program for some of the units, particularly units 5 and 6 (Annex 3. 1, para. 20). Such a delay could result in more frequent unplanned outages and in unavoidable load shedding of some industrial and commercial consumers. This risk will be minimized through bid document preparation and tendering proceeding simultaneously with loan processing, with the aim of concluding contracts as soon as the loan is declared effective (para. 3.9). There is little physical risk associated with the distribution component since the distribution works involve increasing the capacities of existing systems, with a minimum of civil works associated with the activity. Most of the work is routine in nature, and similar tasks are being carried out successfully by ZESA and its contractors. The volume of similar activities being undertaken simultaneously by ZESA, and ZESA's past inability to retain sufficient qualified and experienced technical staff may, however, impede timely implementation of the project. There is also the possibility of a financial risk, should project costs exceed the estimates. ZESA and the Government are taking steps to improve ZESA's financial performance. This will reduce the risk of a possible financial shortfall. In addition, should cost increases occur, some of the less critical project components are such that the scope of the work or the volume of deliveries may be marginally decreased to accommodate the funds available with little detrimental effect upon the achievement of the project's major objectives. There is risk that demand will grow slower than forecast, particularly if the Government fails to sustain an effective program of structural adjustment. There is also a risk of interruption to power supply, due to breakdown of generation or transmission facilities. The risk of generation failure is reduced by the provision of technical assistance for the maintenance and upgrading of Hwange Power Station. The risk of transmission failure is reduced by the extension and reinforcement works being financed by AfDB, EIB and FINNIDA projects. These risks are therefore considered slight. - 35 - Project Monitorng and Peifonnance Indcor, 3.14 Records and reports necessary to monitor the progress of the project and the achievement of its objectives were discussed during project preparation and will be agreed upon during negotiations. Performance in reinforcement and expansion of the distribution system for each ZESA region will be monitored separately in accordance with the format given in Annex 2.2. Supervision missions will monitor relevant information and the performance indicators contained in Annexes 2.1, 2.2 and 3.5. The number and duration of planned and unplanned interruptions on ZESA's transmission and distribution systems will also be monitored. The detailed reporting requirements will be explained during a Project Launch Workshop (Annex 3.6) to be held soon after the declaration of effectiveness of the project. Preparation of a Project Completion Report not later than six months after project completion was agreed upon during negotiations. 3.15 A mechanism for beneficiary assessment during project design and implementation has been established. This involves regular consultative meetings between the Bank, ZESA and the Power Committee of the Zimbabwe Association of Business Organizations (ZABO). ZABO members account for about 80% of power consumption in Zimbabwe. The Power Committee has been briefed on the project objectives and content and consulted on the power policy reforms being supported by the project. Bank supervision missions will, when necessary, liaise with the Committee to obtain their feedback on project progress and sector reform. Superuon 3.16 The project will require relatively intensive supervision in the first year for the project launch and to review tender documents and adjudication reports for the major equipment and materials purchases (see para. 3.10). Supervision in the second and third years will be less intensive, but will require visits to Zimbabwe about twice a year to assess physical progress and determine whether the project is on track with regard to its development objectives and compliance with legal covenants. An interim review will be held in mid 1994 to assess progress with the power policy reform program and agree the content of the FY95 ZESA Operations Plan. A midterm review late in mid 1995 will be carried out to assess progress and the need for redesign of some of the components of the project. A Supervision Plan is outlined in Annex 3.6. 36 IV. FINANCIAL ASPECTS AND COST RECOVERY ZESA 's FInncial Performance 4.1 ZESA's financial operating performance, cash flow and the financial position for the last three fiscal years are set out in detail in Annexes 4.1 to 4.4. The following table provides a summary of the operating performance for the last three years. Table 4.1 SUMMARY OPERATING PERFORMANCE 1989/90 1990/91 1991/92 % Chante al bl Electricity Sales GWh 8925 9021 9253 + 26 Average Tariff Zc/kWh 5.67 6.63 9.16 + 38.10 Average Tariff USc/kWh 2.51 2.51 1.81 - 27.90 Average Operating Income Zc/kWh 1.07 1.46 2.88 + 97.30 Sales Revenue Z$mln 505.90 598.30 847.30 + 41.60 Operating Expenses Z$Mln 424.90 515.20 697.20 + 35.30 Operating Income Z$Mln 95.50 131.80 266.70 +102.30 Return on Assets c_ % 8.20 9.70 15.20 + 56.70 a/ Based on old foreign exchange policy (see para 4.12 below). b/ 1991/92 over 1990/91. c/ On partly revalued assets. 4.2 The operating performance of ZESA has improved in Zimbabwe dollar terms over the past three years, during which inflation has doubled to about 30% in the last fiscal year and the Zimbabwe dollar depreciated by nearly 60%. However, the performance measured in terms of return on partly revalued assets has been inadequate throughout this period, registering only 15.2% in 1991/92. The real rate of return would be considerably less on a fully revalued basis due to the significant local inflation and devaluations in the recent past. 4.3 Electricity sales increased by a modest 2.6% in 1991/92, 6% below the forecast for the year. The anticipated levels of sales were not realized due to 64 days of load shedding, as a result of: (a) the severe drought affecting hydro generation; and (b) the interruption caused in switching electricity imports from Zambia to Zaire in April 1992. In order to meet the shortfall in revenue as a result of lower volumes, and to meet increased operating costs and debt service requirements due to high local inflation and devaluation of the Zimbabwe dollar, electricity tariffs were increased by an average of 15.5% in July 1991, December 1991 and May 1992. This average tariff in 1991/92 increased by 38.1 % over the previous year. Heavier reliance on electricity imports and higher payroll and plant maintenance costs contributed to the bulk of the increase in total operating costs in the last year. 37 4.4 After providing for interest, and based on a new foreign exchange accounting procedure that ZESA plans to introduce for FY93, ZESA made a profit of Z$30.2 million in FY1991/92, compared to net losses of Z$15.9 million in 1990/91 and Z$1.6 million in 1989/90. Interest costs have accelerated at a fast pace due to a mushrooming debt, following large currency devaluations, and negative internal cash generation for capital expenditure, which had to be met by borrowing. 4.5 The following table summarizes the cash flow of ZESA and shows aggregate capital expenditure and the manner in which it was financed during the last three years. Table 4.2 SUMMARY CASH FLOW Z$ Million 1989/90 1990/91 1991/92 Total % Cash Generation from Operations 205.6 218.3 367.0 790.9 138 Less: Debt Service 218.9 293.2 459.6 971.7 169 Incr in Working Capital/Inv a/ 129.2 57.5 200.4 387.1 68 (142.5) (132.4) (293.0) (567.9) (99) Consumer Deposits 2.8 3.6 5.4 11.8 2 Internal Sources (139.7) (128.8) (287.6) (556.1) (97) Decr/(Incr) in Net Liquid Funds 87.3 42.9 (38.6) 91.6 16 Borrowing 182.7 215.3 640.8 1038.8 181 Total Net Cash Sources 130.3 129.4 314.6 574.3 100 Capital Expenditure 130.3 129.4 314.6 574.3 100 Debt Service Ratio (times) 0.9 0.7 0.8 0.8 Self Financing Ratio (%) (112) (67) (84) (97) a/ Excluding net liquid funds. 4.6 The above figures clearly show the financial inadequacy of electricity tariffs during the period under review. ZESA was financially not viable as it was unable to meet its debt service requirements during this period. Internal cash generation provided only 80% of debt service needs. The negative internal financing of Z$556 million, together with a slightly larger capital expenditure, was financed entirely by borrowing. External borrowing represented almost 200% of capital expenditure during the last three years. 4.7 The table below provides a summary of the financial position of ZESA over the past three balance sheet dates. 38 Table 4.3 SUMMARY BALANCE SHEETS AT JUNE 30 Z$ Mlillon 1990 1991 1992 Net Fixed Assets in Operation 1,420.2 1,544.7 1,965.5 Work in Progress 106.4 181.0 504.8 Investments 3.2 7.0 18.3 Net Current Assets/(Liabilities) (11.2) (7.9) 59.4 Total Funds Employed l.S18.6 482548.0 Equity 599.3 584.9 615.3 Long-term Debt 904.4 1,121.4 1,908.8 Consumer Deposits 14.9 18.5 23.9 Total Funds Employed 1.5186 w_48. Debt/Equity Ratio (%) 60 66 76 Current Ratio (times) 1.0 1.0 1.1 Receivables/Sales (days) 72 74 85 4.8 The Zimbabwe dollar depreciated by about 58% against the US dollar over three years to June 1992, declining by 35% in the last twelve months. The devaluation has had considerable negative impact on the financial position of ZESA. Since July 1989, ZESA has incurred exchange losses of Z$852 million on its foreign currency debt; Z$285 million of which was realized in debt repayments during the three years. The cumulative loss represents 138% of equity at June 30, 1992. The effect of devaluation, together with external financing of 100% of additional working capital requirements and capital expenditure, is witnessed in the deterioration of the debt/equity ratio from a healthy 55% at June 30, 1989 to a high 76 % at June 30, 1992. The financial squeeze is evident from specific current net debt obligations of Z$378 million. The ratio of accounts receivable from subscribers to annual sales deteriorated from 72 days at June 30, 1990 to 85 days at June 30, 1992. Accoxtg forfordm exchange ,nevenn 4.9 Due to the continuing and significant devaluation of the Zimbabwe dollar during the past few years, ZESA's historic accounting policy with respect to foreign exchange obligations became increasingly inappropriate. Consequently, the Bank and ZESA agreed upon a new policy to be adopted in its audited financial statements for the year ended June 30, 1993. The new policy, which is in compliance with the International Accounting Standard 21 (IAS 21 - Accounting for the effects of changes in foreign exchange rates), has been agreed upon by ZESA's Board, and its external auditors, Deloitte & Touche. 39 4.10 The revised accounting policy provides for the following: Exchange losses arsing on long-term loans relating to the acqui&iion of fixed assets. (a) Unrealized exchange losses to June 30, 1990 plus losses arising during 1990/91 and 1991/92 to be capitalised to fixed assets, provided the resulting asset values do not exceed replacement cost or recoverable amount of assets in their present condition and use. (b) Capitalised exchange losses to be depreciated from July 1, 1990 over the remaining asset lives as at that date. These were determined at 18 years for Hwange I and 22 years for Hwange II. Exchange losses relating to on- going projects such as Power II are taken to work in progress and are to be depreciated from date of commissioning. (c) Exchange losses arising from significant future devaluations, including gradual devaluation which adds up to a sizable decline in any year, will be capitalised, provided: (i) such devaluations are permanent in nature and are not likely to be reversed by subsequent appreciations; and (ii) the conditions in (a) above are met. Such additional capitalised losses will be depreciated as described above. AU other exchange differences (a) All other exchange gains and losses, both realized and unrealized, are to be taken to income in the year in which they arise. 4.11 It is considered that the new accounting policy will better reflect the underlying financial performance and position of ZESA. Assets will be regularly revalued (in Zim$ terms) for the effects of all significant devaluations and the additional charge for depreciation will give a more accurate measure of the costs of electricity supply. Exchange losses will no longer be charged to income as incurred, but will instead be spread over the productive lives of assets which give rise to those loans. In other words, costs will be better matched against income. In summary, the equity base will not be eroded, and the rate of return and debt/equity ratios will provide a more meaningful measure of financial performance. 4.12 The historical financial performance for 1990/91 and 1991/92 and the financial projections to 1997/98 are presented on the basis of the new foreign exchange policy described above. However, the 1989/90 figures have been stated under ZESA's old accounting policy, except that the realized exchange losses charged to income have been added to operating expenses (instead of finance charges) and thus deducted in arriving at operating income, and the return on assets is based on the historical book value of assets in service, plus deferred (unrealized) exchange losses. 40 ZESA 's Plnndal Projections. 4.13 The financial projections of ZESA for the next six years 1992/93 through to 1997/98 are set out in detail in Annexes 4.1 to 4.4. Notes and assumptions made in the preparation of these forecasts are given in Annex 4.5. Certain important assumptions with regard to currency exchange rates, load growth, plant availability, electricity imports and inflation are subject to considerable uncertainty. Adjustments may therefore be required to the projected figures if these assumptions are not met in any significant respect. It is also assumed that ZESA's credit worthiness in the capital markets will be maintained throughout to enable it to raise the necessary financing for its heavy capital expenditure program during the next six years. 4.14 The major projected financial indicators for three selected years are set out in the following table. Despite a 12 % fall in sales due to the drought, financial performance in FY1992/93 will be much improved over 1991/92 due to cumulative tariff increases of 76%. Debt service coverage is forecast to be a satisfactory 1.33. However, funds from internal sources are projected to contribute only 1 % to the three-year average of capital expenditure. Table 4.4 FINANCIAL INDICATORS 1992/93 1994/95 1997/98 Electricity Sales GWh 8,118 9,173 10,818 Average Tariff Zc/kWh 17.53 32.13 41.46 Average Tariff USc/kWh 3.34 3.86 3.47 Average Operating Income Zc/kWh 8.27 13.90 17.18 Debt Service Ratio times 1.33 1.57 1.25 Self Financing Ratio % 1 25 29 Return on Assets'/ % 27.1 27.1 17.5 Debt/Equity Ratio % 75 71 67 Current Ratio times 1.5 1.6 1.4 Receivables/Sales days 92 75 60 '/ On partly revalued assets 4.15 For ZESA to operate commercially, retain its credit worthiness and meet its future financial needs, its financial performance must improve further and be sustained at a higher level. This will be achieved by the attainment of appropriate financial targets for debt service coverage and revenue contribution to capital investment throughout the life of the project. In this regard, agreement was reached at negotiations that ZESA will achieve a minimum debt service cover of at least 1.25 times and will finance an average of at least 25% of its capital investment program from internal sources. These are considered to be appropriate and mutually consistent minimum financial targets for the utility. 41 4.16 ZESA has implemented a tariff increase of 23.8%, effective September 1, 1993, for 1993/94 sufficient to achieve the proposed financial covenants. A provision of the FY94 ZESA Operations Plan allows ZESA to adjust tariffs during the year without the need for further Government approval should the devaluation of the Zimbabwe dollar and the cost of fuel and/or power imports diverge significantly from the forecasts on which the tariff adjustment was based. A method for adjusting FY95 tariffs for similar unavoidable cost increases will be included in the ZESA FY95 Operations Plan. 4.17 After 1993/94, the scale of tariff adjustments that will be required to achieve the financial performance targets will depend largely on the rate of local inflation and the consequent slide in the value of the Zimbabwe dollar, which will result in higher operating costs and debt service, and on the size of the capital expenditure program, which will require external financing and add to debt servicing obligations. Based on the Bank's current inflation assumptions and ZESA's planned investment program, the following increases in the average tariff are forecast to be required over the next four fiscal years in order to achieve the financial covenants: July 1, 1994 22.5% July 1, 1996 26.5% July 1, 1997 2.0% 4.18 With these increases, it is projected that the Authority will generate adequate funds from its operations to achieve a satisfactory debt service coverage ranging between 1.25 and 1.63, and to finance approximately 24% of capital expenditure during the period. The rate of return on partly revalued assets would vary between 20% and 31%, but would be much lower on a fully revalued basis. As part of its FY94 Operations Plan, ZESA has agreed to complete a revaluation of its assets and to estimate the rate of return on net revalued assets so that this important indicator of financial performance is available. ZESA's debt/equity ratio is projected to decline from 76 % in June 1992 to 67% in June 1998, which is still high compared to the 60% gearing normally expected of power companies by the capital market. The status of accounts receivable deteriorated during the past fiscal year from 85 days of sales at June 30, 1992 to 92 days at the end of 1992, compared to 60 days target agreed under Power II loan. The projections assume a gradual improvement in ZESA's collection efforts, consistent with the annual targets formally agreed with ZESA, so as to reach the desired 60 days of sales by 1996/97. 4.19 The financial projections will require constant updating to take account of changes in macro-economic variables and the availability of external financing for the significant capital investment program. The levels of electricity tariffs will be regularly reviewed by Bank supervision missions in the light of evolving circumstances. Prviectad F Zaacing Pla. 4.20 A detailed statement of sources and applications of funds for ZESA is provided in Annex 4.4. The following table shows a summary financing plan for capital expenditure for the five years to June 1998. 42 Table 4.5 FINANCING PLAN 1993/94 - 1997/98 Z$ Million USS Million % of Total Capital Expenditure - Construction 9,251.1 1,000.6 94 Interest during Construction (IDC) 593.8 60.4 6 Total Requirements 9,844.9 940.5 92 Generation from Operations 9,066.9 940.5 92 Less: Debt Service 5,703.0 585.4 58 Increase in Working Capital'/ 1,047.0 109.0 11 2,316.9 246.1 23 Consumer Deposits 61.3 6.3 1 Internal Sources 2,378.2 252.4 24 Decrease in Net Liquid Funds 43.3 4.4 1 Borrowing 7,423.4 804.2 75 Total Net Sources 9,844.9 1,061.0 100 '/ Excluding net liquid funds 4.21 The total construction program during the next five years is estimated to amount to Z$9845 million (US$1061 million), including interest during construction of Z$594 million (US$60 million). Funds from internal sources, including consumer deposits and after covering debt service and working capital requirements, will finance approximately 24% of planned capital expenditure. External borrowing will meet the balance. - 43 - V. ECONOMIC JUSTIFICATION Economic Objectives and Benefits of dIe Project 5.1 The project's major short-term objective is to minimize the risk of power shortages in Zimbabwe over the next two to three years. In FY92, the last fiscal year before the drought in southern Africa, 10,226 GWh of power was supplied to the Zimbabwe system and final electricity sales totalled 9,248 GWh. In FY93, Zimbabwe's available power supply was reduced to only 9,000 GWh, equivalent to sales of 8,100 GWh - a 12.5% decline. The drought also reduced power demand in FY93, but only by about half the fall in sales. The remaining shortfall forced the imposition of consumption quotas for four months and load shedding on 64 days during the year. 5.2 In FY94, an additional 500 GWh of supply will be available from Zaire, but Zimbabwe's entitlement from the Kariba hydro complex will be cut by 450 GWh, so that the lake level can begin to recover. With average rains in 1993, generation at the Kafue Gorge Power Station in Zambia has resumed, which allows Zambia to provide some energy and short- term emergency support to Zimbabwe. Assuming there are no significant technical problems with any of the major generating stations and transmission links, and that Zimbabwean demand remains below the FY92 level, power supply may be just sufficient to meet demand in FY94. Conversely, any major supply interruption or more rapid demand growth would cause a power shortage to re-emerge. The supply outlook for 1994/95 depends heavily on next season's rains, but with Lake Kariba so low, the probability is that supply will continue to be inadequate, particularly as economic recovery should be well underway. Certain relief from the supply constraint will only come with the commissioning of the first of the planned high-voltage interconnectors with either South Africa or Mozambique in late 1995 or 1996. 5.3 If not contained, the shortage of electric energy and system reserve that Zimbabwe faces for the next two to three years could impose a very significant economic cost on the country. In a thorough impact assessment of the power shortage in 1992/93, the Confederation of Zimbabwe Industries estimated that each kWh of unmet power demand from its members resulted in the loss of over Z$1.35 in gross output, not counting any secondary impacts. With 70% of electricity being consumed by the industrial, mining and agricultural sectors, any serious shortfall in power supply results in a significant economic penalty. With incomes and employment having been severely cut by the drought and the ESAP at a pivotal stage when the perceived pain outweighs the gain, Zimbabwe cannot afford the economic disruption that further significant power shortages would cause. 5.4 In addition to the steps taken to secure maximum imports from Zaire, the keys to minimizing the severity and duration of the power shortage, and hence its economic cost, are to: (a) maximize output from the four thermal generating stations, particularly Hwange, by far the largest and most modern; (b) raise tariffs to a full cost-recovery level to squeeze out uneconomic consumption; and (c) commission the planned high-voltage interconnectors with Mozambique and South Africa as quickly as possible. Reducing technical losses on the transmission and distribution system would also help. This project will help achieve the first two - 44 - of these objectives, and will also marginally reduce losses. It will therefore produce considerable economic benefits over the 1994-96 period alone. Over the longer term, the improved performance of Hwange Power Station and reinforcement of the distribution system will mean more adequate and reliable power supply and better use of existing power assets. The process of commercializing ZESA, which the project will facilitate, will also produce considerable economic benefits for Zimbabwe, mainly through the efficiency improvements it will stimulate in ZESA, resulting in lower electricity costs. Economic Jusl ation of the Hwange Power Sation Upgrade Component 5.5 While the planned Mozambique and South African interconnectors will satisfy much of the incremental power demand after 1996, improving the performance of Hwange Power Station will be critical to meeting demand in the interim and to reducing the cost of power and sustaining reliability when adequate import supplies are available. This improved performance will be partially achieved by the comprehensive maintenance, overhaul and technical assistance program and by the improved spares provision facilitated by the project. The project also includes a substantial Upgrade Program for the Hwange station, which is intended to correct some of the most serious technical flaws in the station's design and equipment specifications that have significantly affected its reliability and efficiency. Due to its considerable capital cost (40% of total project costs), the economic justification of this project component was analyzed separately and confirmed. First, some of the potential upgrade investments, such as the costly installation of a third coal mill on each of the Stage II generating units, were reviewed and ruled out by a preliminary cost/benefit analysis. The remaining candidate upgrade investments were then subjected to a detailed technical assessment by specialist consultants and the final scope of the component based on their recommendations. 5.6 The Upgrade Program's composition and scheduling are designed to minimize outages of the affected parts of the power station. None of the work will require a total station shut-down. Most of the individual upgrades can be implemented with minimal effect on operation, other than short-term outages of parts of the station for commissioning of the new equipment. In the cases of the Stage I Process Control and Auxiliary Cooling Water System upgrades, work will be coordinated with the planned and statutory unit outages. 5.7 The economic justification of the Hwange Upgrade Program was confirmed by estimating its economic rate of return (ERR). The period of analysis used for the estimate is a very conservative 12 years. The economic costs used in the analysis are the capital costs of the investments, escalated by a shadow foreign exchange factor of 25%, plus the variable costs of the incremental output that the upgraded station will be required to supply and be capable of following the upgrade program up to the year 2005. The benefits are the incremental delivered supply that ZESA's system production costing model shows will be required of the station to meet demand at least cost up to 2005 and which can be achieved only if its average availability is improved to 80% and sustained at this level, which it is judged the upgrade investments will render feasible. The incremental supplies, net of transmission and distribution losses, are valued at the most conservative indicator of consumer willingness-to-pay, the FY93 average tariff of Zcl7.5/kWh. The variable cost of generation includes a full program of maintenance, overhaul and spares, which the project will ensure through 1996 and are essential for the benefits of the - 45 - upgrade program to be fully realized. From this analysis, the ERR the Hwange Upgrade component is estimated to be at least 14% (Annex 5.1). Economic Justfation of the Dishibution Component 5.8 The project's distribution component consists of eleven sub-projects selected from a slate of candidate distribution investments on the basis of their economic viability. Although all of the candidate distribution investments will permit additional demands for power to be served in the longer term, this is not feasible for 2-3 years, due to the shortage of supply. In the economic evaluation, it has therefore been assumed that the additional demands are realized from 1996 onwards. These benefits are valued at Zc7/kWh, the estimated margin between the cost of bulk supply and the current tariff. The distribution investments will also reduce technical losses on the distribution system, which will provide immediate economic benefits by increasing the supply available to consumers. The estimated loss savings of each potential investment, valued at the current tariff, are used as the measure of these benefits. The resulting total benefit stream is evaluated against each sub-project's capital, operating and maintenance costs, with the foreign exchange components shadow priced at a premium of 25 % to reflect the scarcity value of foreign exchange. An economic rate of return of 10% was set as the minimum to qualify a candidate distribution sub-project for acceptance. The estimated costs and benefits of the eleven sub- projects that met this qualification standard, their benefit/cost ratios and economic rates of return are summarized in Annex 5.2. Economic Rate of Rturn 5.9 The major short-term economic benefit of the proposed project will be to reduce unserved energy and the risk of supply interruptions over the critical two to three years when hydro-electric generation will be constrained and until the first of the interconnectors with either Mozambique or South Africa is in service. Later, in addition to reliably meeting power demand, it will minimize the cost of supply by making more effective use of existing generation facilities and giving ZESA greater flexibility in power purchase and system dispatch decisions. 5.10 The project is an integral part of ZESA's Power Plan III investment program, which is designed to meet the demand for power through the balance of the 1990s and into the early years of the next century reliably and at minimum cost. Given that the project is an integral part of Power Plan III, it is impossible to forecast precisely the contribution to power supply of any one component of the Power Plan III Program in isolation. Hence the Economic Rate of Return has been estimated for the Power Plan III Program as a whole. The period 1994-2005 was conservatively used as the reference period for the analysis on the grounds that, while there will be significant benefits after this date, their size is hard to predict. 5.11 The capital costs of Power Plan III, expressed in economic terms, are summarized in Annex 5.3. These capital costs are combined with the operating and maintenance costs of the kilowatthours to be supplied from the facilities to be constructed under Power Plan III to estimate its total cost. ZESA's System Production Costing model estimated the incremental power supply that will contributed by those investments each year and the operating and maintenance costs of that output. This model uses actual costs of all generating plants and interconnections to - 46 - optimally despatch the supplies available to meet the system load at least-cost. Both the capital and operating costs are converted from financial to economic costs by use of a shadow price factor of 1.25 for the imported components to reflect the scarcity value of foreign exchange. 5.12 The incremental energy to be supplied by the Power Plan III investments over the period 1995-2005, valued at consumers' willingness to pay for electricity, is used as the measure of benefits. The very short time-frame used for benefit estimation relative to the asset lives means that the selected methodology certainly understates the Program's actual benefit stream. The most conservative measure of willingness to pay for the incremental power to be supplied by Power Plan III is the current average power tariff of Zc17.5/kWh (USc3/kWh). Based on this measure, the Economic Rate of Return (ERR) of the program is 27%, well above the estimated opportunity cost of capital in Zimbabwe of about 10% (Annex 5.4). Economic Risks 5.13 Power Plan III involves no major technical risks and there is little risk of a significant cost overrun as most of the items to be procured are standard power station and transmission equipment. The major potential risk with respect to the economic viability of Power Plan III is that future demand growth will be slower than forecast. Although the forecast average growth in demand of just under 3% over the 1992-2010 period is marginally below historical experience and is considered relatively conservative, given the economic reform program and existing suppressed demand, it is likely that recent substantial tariff increases and further projected increases will cause consumers to reassess and in some cases reduce their use of electricity. This could moderate future demand growth. The sensitivity of the ERR to a slower rate of demand growth was therefore tested by estimating the switching value for this variable. From this analysis, it is estimated that the demand forecast would need to overstate actual demand by 53% for the ERR to fall to 10%, the estimated opportunity cost of capital. Over-estimation of demand to this extent is considered highly unlikely. It is therefore considered that the program's economic viability is robust over the likely range of demand forecasting error. 5.14 There is a serious economic risk to Zimbabwe from delay in implementation of the project proposed and other components of the Power Plan III investment program, due to the shortage of power that would probably result. Hwange Power Station will need to produce around 5,000 GWh of electricity in FY94 and nearly 5,500 GWh in FY95 to meet projected demand. In order to achieve these high levels of output, all the Hwange components of this project must be completed on or close to schedule. By FY96, power demand is very likely to exceed supply from existing sources. It is therefore imperative that at least one of the interconnectors to be constructed under Power Plan III be commissioned early in this fiscal year at the latest. - 47 - VI. AGREEMJENS REACHED AND RECOMAENDATION 6.1 During negotations, agreement was reached ta (i) ZESA will estimate either the long-run average incremental cost or the long- run marginal cost of power for each consumer group by January 30, 1995, and ZESA will adjust its tariffs to reach one or other of these costs by July 1, 1995 (para. 1.27). (ii) ZESA and the Government will implement the FY94 ZESA Operations Plan agreed with the Bank (para.2.6). (iii) A ZESA Operations Plan for FY95 satisfactory to the Bank, that contains appropriate operational and financial targets for ZESA, a formula for adjusting tariffs for unavoidable cost increases and Government commitments to the legal and regulatory reforms necessary to complete the commercialization of ZESA, will be agreed and adopted by June 30, 1994 (para. 2.6). (iv) The Government will subsidzie any financially non-viable grid extensions that, for social reasons, it instructs ZESA to contract, operate and maintain (para. 2.33). (v) ZESA will continue to have its accounts audited by an external auditor acceptable to the Bank and send audited financial statements to the Bank within six months of the close of each fiscal year (para. 2.41). (vi) ZESA will report to the Bank the status of its billings and collections as of June 30 and December 31 each year and will not allow its outstanding customer accounts to exceed 75 days of revenue in FY94 and FY95, 65 days in FY96 and 60 days of revenue in FY97 (para. 2.43). (vii) ZESA will consult annually with the Government and the Bank on its power investment program for the next three successive fiscal years. Following these consultations, ZESA will adopt an investment program satisfactory to the Government and the Bank and will not implement any power investment project costing over US$50 million not in the agreed investment program without prior consultation with the Bank (para. 2.55). (viii) ZESA and the Government Tender Board will complete the bid adjudication and approval process for all equipment and material procurement in a maximum of three months (para. 3.6). (ix) ZESA will prepare a Project Completion Report not later than six months - 48 - after loan closure (para. 3.14). (x) ZESA will achieve a minimum debt service cover of 1.25 times and will finance an average of at least 25% of its capital investment program from internal sources (para. 4.15). 6.2 Ihc Conditon of E;ffectiveness is dLa (i) ZESA will appoint an experienced Project Coordinator with terms of reference satisfactory to the Bank (para. 3.7). 6.3 Recommendagion With the above agreements, the project is suitable for an IBRD loan of US$90 million equivalent to the Zimbabwe Electricity Supply Authority, with the guarantee of the Republic of Zimbabwe, on standard terms for a period of 20 years, including 5 years grace. MISJThY OF TP.AkWOAT & ENEPGY; ENERGY INFORMATION SYSTEM 1991 ZIMBABWE ENERGY BALANCE IN T*, AJOUL'. ITJI Cod CaeA Be-se Cad IN Cob VW EIo.. d Dboe- Pod J.51 Al P-01Fn A.g- LPO 818d LFO bo-LNdry Woodl_ Chb_ool Mt. TOTAL 4MAAY SUPF __Y 143 714 .1 832 - 1826 -861 -170 23240 10649 6 300 -107 143 218 17633 126 886 106 322 061 163103 11 209 126 88 2810 0 026 740 22287 11182 6874 130 268 0817 47726 lpen. -4 30 -2 320 -463 1346 -292 -168 -7 868 Steo6Chon.. 4026 -1 826 -861 -173 1 406 -287 -309 -107 7 21 -7 .9 14 TRAX&tOR lAtION * 1101 19 113 1 933 118 6 023 609 -1 087 20 684 448 209 -60 006 CN..c. -448 20_ -238 C.e &bypadu .26031 1 113 1833 I lBS 6023 486 EdwIl 669 668 14w pe station -60 *67 -1 079 17 31 -40 11b Old Mutop pm dn -13 360 @ 2 663 10 700 P,Iw.h po-W moe.o 0 4 EN"WY SECTOR 3102 -1 630 -301 -10 641 -2 2tO 2 270 10 040 -b 296 .10 434 Tearoom -391 .10 649 2 270 2 270 10 640 0 O_n Ca,",envilv _-4 70 -470 Laamea, -3 602 -1 636 -4 826 -8 863 FINALSUfY 44 113 10 640 340 3480 22163 3 03 2 163 143 278 10 940 32 822 126 638 44 261 013 1W 4ttmence0 -0 -4 0 0 -2 -11 -0 -7 _I 1 2 0 -0 FINALCON.ump1ON 44 102 10 698 9 345 3 478 22 600 3 424 2 306 164 281 10 792 32 230 126 638 44 261 0OB A..c.w _ 17 201 3 196 306 2 81 8 086 3271 Coene 0 ga-vie. 1 207 4 061 1 001 3 766 10 04 W .UY 18 378 16 667 348 3 470 3 460 130 746 14 8104 14 63 069 M.w 2 301 2 9 472 4 888 0o 7 792 q.mdieO. 626 2306 162 6677 110463 20 126033 T.mopwt 4 370 29 6 302 3 424 164 8 740 106 23 124 6 606 8 740 14 346 :4 _ 4 370 20 697 106 6 201 3424 164 3 618 mai: LFO to4 Mos. writlod bcs,aw edw,Ievsk.a. naa krown. Ewe bhteas Wmh 0.6 D N0 E11181.101111,I3 - 50 - Annex 1.2 ZIMBABWE POWER m PROJECr ZIMBABWE POWER SYSTEM PERFORMANCE INDICATORS 1. Energy Generated and Sals in GWH YEAR ENDING JUNE 30 1984 1985 1986 1987 1988 1989 1990 1991 1992 Kariba entitlement 3574.0 3625.0 32913 3022.7 2520.4 3195.8 4368.5 3152.5 3160.6 Hwange Power Station 385.4 10693 1863.6 3441.8 4714.6 4920.0 4102.2 5100.9 4310.3 Old Thermals Bulawayo 167.9 75.5 198.1 380.7 231.9 182.8 Harare 133.1 78.2 211.4 201.8 746.9 203.4 338.8 223.9 317.1 Munyati 108.9 88.2 52.7 171.3 215.1 266.0 Other ZESA/ESC sources 15.1 11.4 15.2 17.8 17.5 17.0 **23 12.1 8.5 Total Zimbabwe Supply 4384.5 4944.6 5381.5 6684.1 8144.6 8587.0 9384.5 8936.4 82453 Imports from Zambia 3183.0 2845.9 3146.1 2215.0 854.2 819.0 0*0305 1164.7 2037.7 Energy Sent Out 7557.5 7791.5 8527.6 8899.1 8998.8 9406.0 9689.5 10056.0 10255.9 Transmission Lse 327.9 349.5 322.4 354.3 321.5 304.6 310.1 403.9 372.8 Total Bulk Sales 7239.0 7442.0 8205.2 8544.8 8677.3 9101.4 9379.4 9652.1 9883.1 Distribution lose 485.1 427.1 322.1 364.0 564.4 545.5 310.1 659.7 635.2 Total retail sales 6754.5 7014.9 7883.1 8180.8 8112.9 8555.9 U851.8 8992.4 9247.9 Total loues (%s.o.) 10.7 10.0 7.6 8.1 9.9 9.0 8.6 10.6 9.8 2. Power Sent Out and Demand in MW YEAR ENDING JUNE30 1984 1985 1986 1987 1988 1989 1990 1991 1992 Max. Demand Sent Out 1155.0 1195.0 1319.0 1342.0 1406.0 1430.0 1538.0 1578.0 1458.0 Transmission los 53.0 43.0 45.0 47.0 50.0 28.0 63.0 45.0 50.0 Maximum Demand at Bulk 1102.0 1152.0 1274.0 1295.0 1358.0 1402.0 1475.0 1533.0 1408.0 Supply Points MAX DEMANDS SENT OUTr Zimbabwe Sources 659.0 738.0 971.0 1058.0 n1.. n.a. nUA n.a. n.a. Export (normal) 498.0 420.0 370.0 320.0 ns. n.- n.a. n.a n.a. Import (emergency) 529.0 495.0 600.0 DA. na. n.n UAL n.a System LDad Factor(0) 74.8 74.4 73.8 75.7 72.9 75.1 71.9 72.7 75.8 Year on Year Changes (3) Energr Sent Out -2.1 3.0 9.4 4.4 1.1 4.5 3.2 4.0 2.0 System Max. Demand -2.7 5.0 10.4 1.7 4.7 1.7 7.5 2.5 -7.6 NOTES Zimbabwe entitlement from Kariba fomy year 1984 - 50% of actual Kariba output *0 Other ZESAIESC Sources refer to Imporu at Bcitbtidge, Chirundu4 Mozambique, Victoria Fall. Fiures up to May 1990. 000 Imports from Zambia refer to NET imports - 51 - Annex 1.3 Page 1 of 2 SECTIONS OF THE GOVERNMENT'S LETTER OF DEVELOPMENT POLICY RELATING TO REFORM OF THE POWER SECTOR 1. Government will implement reforms in the legal and institutional framework to enable PSEs to increase efficiency and to increase their autonomy and responsibility. Under the UNDP-supported assistance to the Public Enterprise Reform program, consultants will help Government prepare reform programs no later than June 1993. The measures involved will include: (i) Revisions to legislation, including statutory corporation acts, to streamline ministerial oversight of PSEs and confer greater authority to Boards for decisions regarding budget approval, salary levels, hiring and dismissal of employees, procurement, product lines, and pricing policies; (ii) Legislative reforms, including revision to statutory corporation acts, to facilitate private sector participation in areas currently subject to public sector monopoly, and, in particular, to remove any legal impediments to joint ventures between PSEs and private sector companies; (iii) Review of the regulatory framework under which PSEs operate in relation to Government. (iv) Reforms to create a more transparent environment for the operation of PSEs through the phased reduction of indirect subsidies such as government loan guarantees, exemptions from customs duty, indirect and direct tax exemptions. 2. For PSEs that remain in the public sector, phased enterprise-specific reform programs are being developed to increase their efficiency and improved financial performance. The broad strategy of commercialization is to be pursued through granting greater autonomy, creating incentives for management to improve efficiency, and establishing performance targets. Generic actions being taken include: (i) The general introduction of performance targets and performance-related pay for the top management of NRZ, ZESA, PTC, AFC and the four major agricultural marketing boards with extension to all PSEs by December 1993. (ii) The development of a corporate plan to be the basic tool for monitoring PSE performance. 3. Consistent with Government's plan for commercializing PSEs, the restructuring program for Zimbabwe Electricity Supply Authority (ZESA) has been launched. The Government will reach agreement by July 1993 on an operational framework to be introduced in FY93/94 under which: (a) - 52 - Annex 1.3 Page 2 of 2 ZESA will undertake to complete its program of internal reorganization and streamlining its managerial structure to increase efficiency and reduce costs and to meet specified operational and financial targets; and (b) Government will undertake to ensure ZESA autonomy in its operations, notably in the determination of its personnel policies and procurement goods and services below a threshold value, which is under review. The framework will also provide for tariffs to be reviewed regularly, and adjusted if necessary, to reflect the economic costs of power generated and distributed, and for performance related pay for senior managers. Government has made provision in the new power system development plan for the private sector to generate and supply power to the national grid. - 53 - ANNEX 1.4 ESTIMATION OF ECONOMIC LONG-RUN INCREMENTAL COST OF POWER FISCAL ENERGY INCREMENTAL PRESENT INCREMENTAL PRESENT YEAR SENT OUT ENERGY SENT WORTH ECONOMIC WORTH (GWH) OUT (GWH) FACTOR COST OF INCREMENTAL SUPPLY COST 1993 9,020 0 0.9091 451,559 410,508 1994 9,588 0 0.8264 1,399,406 1,156,534 1995 10,192 0 0.7513 1,131,681 850,249 1996 11,007 751 0.6830 927,767 633,677 1997 11,558 1,302 0.6209 421,655 261,815 1998 12,020 1,764 0.5645 214,901 121,306 1999 12,501 2,245 0.5132 107,405 55,116 2000 13,001 2,745 0.4665 54,959 25,639 2001 13,521 3,265 0.4241 57,228 24,270 2002 14,062 3,806 0.3855 61,210 23,599 2003 14,625 4,369 0.3505 68,172 23,894 2004 15,209 4,953 0.3186 89,664 28,570 2005 15,818 5,562 0.2897 5,865 1,699 TOTALS 162,122 30,762 1 1 4,991,473 3,616,876 ECONOMIC LONG-RUN INCREMENTAL COST (Z$/KWH) 0.2935 -54 - AM= 2.1 ZIA PEER III PROJECT Irstatted Genwreting Capacity in Zfeb.bv In tatt d Capacity Effective CapaCity Commisaioning TYPf Pint news Unit Size Totat (NW) I Dato (NW) so (NW) Pubticlv Owed L Intsrcoriected Hydro Kariba III 6 Am Er 32 1959-62 South Therft (coat-fired stem)b Nurera 7.5-5-30 a 135 113.4 1946-58 Numyati 10 - 20 7 120 75.2 1947-57 Butleiyo 15 - 30 5 120 96.6 1948-57 Ih nie 1 120 4 480 458.0 1963-86 NHwome I1 220 2 MR muL0 1966 Subtotat 1 296 1,096fo Totat 6 1,666 Priv t*tv gened Thrmot 7riaroLe Ltd 45 20 Nippo VaLtey Estates Ltd. 23 23 Zi-blbe Iron & SteeL Co. 5.5 5.5 Ltd (ZISM) Empresa MickeL Nining Co. 8.0 1.8 Ltd. Longundi $=lting Ptnnming 1.5 1.5 (Pvt) Ltd HuNme Cotliery Co. Ltd Z.LD 1L2 TOTAL 2 071 0 17Y3L5 1Q Zimebue entitLtme_nt froe Karibe is 570 N, axclwuding 10t spiming reserve. Emeplete Year maplato YTer No. Rating NW Comissioned NO. Rating MN Ccmifsiored Harare No. 2 1 7.5 1946 Munyati 4 20 1953 2 7.5 1947 5 20 1954 3 10 1952 6 20 1955 4 10 1953 7 20 1957 5 20 1954 120 6 20 1955 BuLawayo 1 15 1948 Harare Wo. 3 1 30 1957 2 15 1952 2 30 1958 3 30 1953 135.0 4 30 1955 5 30 1957 120 unwyati 1 10 1947 2 10 1947 3 20 1950 - 55 - ANNEX 2.2 ZIMBABWE POWER m PROJECT ZESA - TRANSMISSION AND DISTRIBUTION SYSTEMS Route Planned Unplanned Length Substation Outages Outages Km MVA' Hours2 Hours3 Yoltage 330 kV 3,443.90 1,804 700 7 132 kV 1,021.00 840 57 51 110 kV 5.00 - 6 0.2 88 kV 2,081.90 794 860 110 66 kV 178.00 79 10 0 33/11-12 kV 7,047.02 1,250 10 n.a. 33/0.4 kV - 54 n.a. n.a. 11 kV/0.4 kV 27,750.91 n.a. LV 11,867.70 n.a. n.a. n.a. TOTAL 53,396.44 4,767 Transmission and Distribution, excluding step up transformers at power plants. 2 Planned outages are based on the fact that the line is taken out of service for several days in order to allow for line gang to travel along the line to do the maintenance. The lack of radio communications necessitate prolonged planned outages. Line maintenance is coordinated with the maintenance of the terminal equipment. However, situations may arise where the line may be out of service because of planned outages for the terminal equipment. 3 Unplanned outages include line faults and terminal equipment faults that cause the line to be out of service. - 56 - Annex 2.3 ZIMBABWE Page I of 4 POWER III PROJECT ZIMBABWE: PUBLIC ENTERPRISE REFORM - ZESA PROGRAM OF ACTION Consultant Terms of Reference 1) Overall Objective To define a two-phase Program of Action for implementation by the Government and ZESA that will raise the operational performance of ZESA to that of a well- managed power utility within a period of two to three years and sustain that performance thereafter. The first phase of the Program, to consist of immediate measures and first year perfornance targets, is to be in place by July 1, 1993 and the design of the second phase is to be completed by December 31, 1993 for implementation on or before July 1, 1994. 2) Description of Work PHASE I Task 1: Design a ZESA Performance Improvement Program for FY93/94 Objective: Identify priority actions to improve the performance of ZESA that can be taken in the short-term (prior to or early in FY93/94) by the Government and ZESA and prepare and negotiate with the two parties an Operations Agreement defining the steps to be taken by both parties and the related target performance to be achieved by ZESA in FY93/94. Scooe of Work: Working to a timetable consistent with implementing the first phase of a ZESA efficiency improvement program in FY93/94, the consultant will: (1) Undertake a preliminary assessment of ZESA's operational and financial performance over the past three years, taking account of the drought situation, and identify the major areas and approximate degree of inadequate performance. (2) Identify the major causes of the poor performances in these areas, such as: (a) weaknesses in ZESA's organization, management, staffing, financial and operational practices; and (b) Government policies and practices, including investment and procurement oversight, foreign exchange allocation, tariff and financial policies, influence on operational and personnel decisions, etc. (3) Identify the actions that can be taken immediately or in the short term to remove or reduce the major impediments to ZESA's improved performance and recommend a first-phase Program of Action by ZESA and the Government that will remove or reduce these critical impediments. The Program should comprise a series of specific steps to be taken by ZESA and the Government and be based on a realistic timetable for their implementation. (4) Propose a set of simple, achievable and monitorable performance targets for ZESA for FY93/94, covering finance, operations and technical areas, based on the recommended Program of Action. (5) Prepare, negotiate and agree with ZESA and the Government an Operations Agreement, to be signed by both parties prior to July 1, 1993, that sets ZESA's performance targets for FY93/94 and outlines the agreed Program of Action by both parties that will permit the achievement of those targets. - 57 - Annex 2.3 Page 2 of 4 PHASE 11 Task 2: Detailed Operational Performance Review of ZESA and development of a second- Dhase Plan of Action for Performance Improvement for FY94195. with achievable and monitorable performance tareets Objective: Assess ZESA's current management, financial and technical performnance in all key areas of its operations, relative to the standards achievable by a power utility of its size and with its plant and human resource base. Review current management and operational practices, manning levels and skills. Identify the areas of inefficiency, overmanning and performance shortfall and their principal causes. Recommend a detailed Plan of Action for performance improvement, including, where necessary, changes in management and organization structure, operational and maintenance practices, facilities standards, financial systems and controls, personnel policies, training and staffing skills and levels. Taking account of the legal and regulatory framework of the power sector and Government plans for changes therein, propose a specific Plan of Action to achieve and sustain an appropriate standard of performance for ZESA. Define a set of specific performance indicators and appropriate targets against which ZESA's future performance can be assessed over the period beginning FY94/95. Draft, negotiate and agree with ZESA and the Government an Operations Agreement for FY94/95 that defines ZESA's agreed performance targets and the actions that ZESA and the Government will take to permit their achievement. Scope of Work: The consultant will address all the major aspects of ZESA's performance and the factors affecting it through a series of sample studies, including but not limited to the following performance areas: (1) Efficiency of existing organizational and management structure, taking into consideration existing proposals for change in this regard. (2) Output per employee in each major functional area of the company, relative to comparator power utilities, identification of areas of poor performance and low productivity and of the principal causative factors. Recommendations for performance targets and means to achieve them, including capital injection, training, incentives, retrenchment and changes in operations systems. (3) Outage rates for generation, transmission and distribution plant and a causative diagnosis, target setting and action program. (4) Customer service performance, including speed of fault-finding and rectification, accuracy and timeliness of billing and collection. (5) Financial management performance, including accuracy and timeliness of financial reporting, adequacy of financial planning, accounts receivable management, etc. (6) Past and present cost per unit supplied in constant price terms and appropriate cost targets for the next 3-5 years, based on planned operations. - 58 - Annex 2.3 Page 3 of 4 Task 3: Preparation of an Operations Agreement for ZESA for FY94/95 Obiective: Draft, negotiate and agree with the Govemment and ZESA an Operations Agreement for ZESA, based on the conclusions of Tasks I and 2 above and on the initial experience of the 1993/4 performance improvement program, that is acceptable to both the Government and ZESA and commits ZESA to the achievement of appropriate performance targets for FY94/95 and the Government to taking all the key actions needed to facilitate ZESA's achievement of the agreed performance targets prior to the start of FY94195. Scope of Work The Consultant will perform the following tasks: (1) Review with the Government and ZESA the results of the work performed under Tasks I and 2 above and initial experience with the FY93194 Program of Action and revise the analysis and conclusions to reflect experience and constructive comment. (2) Propose to and discuss with both parties appropriate performance targets for ZESA for FY94195 and (a) the priority performance improvement actions to be taken by ZESA; and (b) the legal, regulatory and behavioral reforms to be implemented by Government. (3) Draft a ZESA Operations Agreement for FY94195 that is acceptable to both parties. It should define appropriate performance targets for ZESA, the actions ZESA will take to achieve them and the regulatory and behavioral reforms required on the part of Government. It will also include the Government's commitment to prompt action on any needed revisions to the Electricity Act and any other legislation, regulation or practice that seriously hampers ZESA's performance and whose application to ZESA is not vital to the public interest. 3) Timetable and Resource Requirements (1) It is intended that an initial Operations Agreement for ZESA go into effect from the beginning of FY 1993/94. Given that the consultant is expected to start no earlier than January 1993, the work on this first phase of the assignment is to be completed within a timeframe of less than 6 months, according to the following timetable (in weeks)- -2 to 0 Data collection and analysis (ZESA/MTE project team). 0 to 6 Consultant initial analysis. INCEPTION REPORT ON FULL SCOPE OF PHASE I AND PHASE II WORK. 6 to 8 Discussion of inception report with ZESA and MTE, interaction as needed with MOF and with World Bank Energy and Resident Mission staff. - 59 - Annex 2.3 Page 4 of 4 8 to 14 Analysis of options for Phase I (FY93/94) performance improvement program and preparation of recommendations. INTERIM REPORT ON PHASE 1 PROPOSALS 14 to 16 Review of report with ZESA and MTE, and also with MOF parastatal reform oversight bodies. 16 to 18 Preparation of draft Operations Agreement for FY93/94. 18 to 20 Negotiation and signature of the Operations Agreement. (2) The work on the second phase of the assignment will be completed within a further six months in accordance with the following timetable: 20 to 40 Detailed analysis of scope for performance improvement at ZESA and steps needed by ZESA and Government to achieve that improvement. FINAL REPORT 40 to 42 Draft ZESA Operations Agreement for FY94/95. 42 to 45 Negotiate and agree Operations Agreement for FY94/95. (3) The consultant will need to provide following expertise: power utility senior management (leader); power utililty organization and human resources specialist; corporate accountant; power engineer with extensive utility experience in generation and distribution; and public enterprize reform expert (a total of at least 5 persons). The consultant should offer a mix of Zimbabwean and international personnel, with the Team Leader preferably being a senior manager of a foreign power utility. Estimated total input required of the consultant would be 30 person months, with equal time put in by a ZESA/MTE project team. sb/rb ZESATOR November 16, 1992 - 60 - Annex 2.4 ZIMBABWE POWER III PROJECT ELECTRIC ENERGY AND DEMAND FORECAST FY 1993-2010 FISCAL SALES SENTOUT DEMAND LOAD YEAR (GWH) (GWH) (MW) FACTOR 1991/92 a/ 9,248 10,256 1,458 70.96% 1992/93 8,118 9,020 1,416 69.15% 1993/94 8,629 9,588 1,634 64.29% 1994/95 9,173 10,192 1,770 65.92% 1995/96 9,906 11,007 1,821 68.99% 1996/97 10,402 11,558 1,878 71.90% 1997/98 10,818 12,020 1,942 71.82% 1998/99 11,381 12,501 2,011 71.80% 1999/2000 11,831 13,001 2,087 71.90% 2000/2001 12,332 13,521 2,173 71.99% 2001/2002 12,839 14,062 2,262 71.98% 2002/2003 13,372 14,625 2,355 72.01% 2003/2004 13,921 15,209 2,452 72.00% 2004/2005 14,463 15,818 2,553 71.84% 2005/2006 15,076 16,451 2,659 71.92% 2006/2007 15,677 17,109 2,768 71.84% 2008/2009 16,688 18,205 3,001 71.71% 2009/2010 17,607 19,245 3,125 71.47% a/ Actual ZIMBABWE POWER III PROJECT OPTION 1 SCENARIO - HCO (2 UNES) & HWANGE 7 & 8 Economic Coots-1992Z$ (000'.) ZAMBIA MO'IQ COAL UNITS HYDRO UNITS & & CAPITAL COSTS OPERATION & MAINTENANCE EXPENSES 0 & M EXPENSES ZAIRE ESKOM TOTAL TOTAL FISCAL _URCHAS URCHAS 0 & M CAPITAL & YEAR FE.C. Loca Total Coal , Oil Fixed Variable Total Variable Fixed Total COSTS COSTS O & M 1992 0 0 0 0 0 0 0 0 0 a 0 0 0 0 0 1993 59,485 40,115 99,600 81,509 236 70,320 4.217 156,282 399 22,988 23,387 35,920 0 215.588 315,188 1994 951,064 155,056 1,106,119 120,068 273 70,863 5,178 196,382 324 25,887 26.211 35,920 0 258,513 1,364,632 o 1995 1,208,687 222,085 1,430,771 106,413 217 70,863 4,933 182.426 402 25,887 26,289 35,920 0 244,635 1.675,406 1996 769,441 246,546 1,015,986 61,310 214 70,863 3.115 135,502 510 25,887 26,397 35,920 113,147 310,965 1,326.952 1997 248,446 144,397 392,843 23,198 199 58,741 1,959 84,098 510 25,887 26,397 35,920 113,147 259,561 652,404 1998 114,407 57,751 481,574 26,786 199 67,756 2,223 96,964 510 25,887 26,397 35,920 113,147 272,427 754,002 1999 36,969 14,883 820,821 48.416 261 76,771 2,500 127,948 510 25,887 26,397 35,920 113,147 303,411 1,124,233 2000 0 0 0 30,039 356 76,771 2,828 109,992 '5 0 25,887 26,397 35,920 113,147 285,456 285,456 2001 0 0 0 31,830 261 76,771 3,183 112,045 610 25,887 26,397 35,920 113,147 287,508 287,508 2002 0 0 0 35,214 261 76,771 3,555 115,801 510 25,887 26,397 35,920 113,147 291,264 291,264 2003 0 0 0 45,623 261 76,771 4,503 127,157 510 25,887 26,397 26,940 113,147 293,641 293,641 2004 0 0 0 68,434 356 76,771 5,832 151,392 510 25,887 26,397 0 0 177,789 177,789 2005 0 0 0 76,106 418 76,771 7,947 161,242 510 25,887 26.397 0 0 187.639 187,639 TOTALS 3,388,498 80,832 5,347,716 754,946 3,513 946,799 51,974 1,757.232 6,223 333,635 339,858 388.135 905,172 3,388,397 8,736,113 _ m ZIMBABWE POWER III PROJECT OPTION 2 SCENARIO - ONE LINE FOR MATIMBA/CAHORA BASSA & HWANGE 7 & 8 Economic Costs-1992ZS (000's) ZAMBIA MOZ'BIQUE COAL UNITS HYDRO UNITS & & CAPITAL COSTS OPERATION & MAINTENANCE EXPENSES 0 & M EXPENSES ZAIRE ESKOM TOTAL TOTAL FISCAL PURCHASE 'URCHAS 0 & M APITAL & YEAR F.E.C. Local Total Coal Oil Fixed Variable Total Variable Fixed Total COSTS COSTS O & M 1992 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1993 288,778 162,780 451,559 81,509 236 70,320 4,217 156,282 399 22,988 23,387 35,920 0 215,588 667,147 1994 1,081,858 317,548 1,399,407 120,068 273 70,863 5,178 196,382 324 25,887 26,211 35,920 0 258,513 1,657,919 o 1995 916,142 207,602 1,123,744 82,156 217 70,863 4,360 157,596 402 25,887 26.289 35,920 46,646 266,451 1,390,194 1996 622,823 231,603 854,426 57,182 214 70,863 2,978 131,236 510 25,887 26,397 35.920 138,302 331,854 1,186,280 1997 248,446 144,397 392,843 21,789 199 58,741 1,835 82,564 510 25,887 26,397 35,920 142,444 287,325 680,168 1998 114,407 57,751 172,158 24,728 199 67,756 2,085 94,768 510 25,887 26,397 35,920 144,172 301,257 473,414 1999 36,969 14,883 51,852 28,117 261 76,771 2,364 107,512 510 25,887 26,397 35,920 144,237 314,066 365,918 2000 0 0 0 29,160 356 76,771 2,706 108,992 510 25,887 26,397 35,920 142,163 313,472 313,472 2001 0 0 0 31,043 261 76,771 3,058 111,132 510 25,887 26,397 35,920 142,292 315,741 315,741 2002 0 0 0 34,247 261 76,771 3,427 114,705 510 25,887 26,397 35,920 142,702 319,723 319,723 2003 0 0 0 41,471 261 76,771 4,330 122,833 510 25,887 26,397 26,940 150,516 326,685 326,685 2004 0 0 0 55,649 356 76,771 5,572 149,931 510 25,887 26,397 0 171,849 348,177 348,177 2005 0 0 0 76,592 356 76,771 7,303 172,606 510 25,887 26,397 0 65,375 264,378 264,378 TOTALS 3,309,423 1,136,565 4,445,988 683,709 3,450 946,799 49,411 1,706,538 6,223 333,635 339,858 386,135 1,430,697 3,883,228 8,309217 yo > o a. F x ZIMBABWE POWER III PROJECT PROJECTED CAPACITY AND ENERGY BALANCES FY1 993-2004 Projected Capacity Available to Zimbabwe (MW) Surplusl Peak Thermal Ip rta Firm Shortfall Fiscal Demand Hydro Total Zaire Total Supply Capacity Year IMW) Kariba Hwanga I Hwenge Illi Harare Munyati Bulawayo Thermal Zambia HCB ESKOM Imports (MW) (MW) 1992/93 1.430 666 736 50 40 30 856 160 160 1,682 252 1993/94 1,520 611 736 50 40 30 856 200 200 1,667 147 1994/95 1.616 625 836 50 40 30 956 200 200 1,781 165 1995/96 1,745 750 836 50 40 30 956 200 500 500 1,200 2,906 1,161 1996/97 1,832 750 836 50 40 30 956 200 500 500 1,200 2,906 1,074 1997/98 1,906 750 836 50 40 30 956 200 500 500 1,200 2,906 1,000 1998/99 1,982 750 836 50 40 30 956 200 500 500 1,200 2,906 924 1999/2000 2,061 750 856 50 40 30 956 200 500 500 1,200 2,906 845 2000/01 2,144 750 856 50 40 0 926 200 500 500 1,200 2,876 762 2001/02 2,230 750 856 50 40 0 926 200 500 500 1,200 2,876 676 2002103 2,319 750 856 200 50 40 0 1,156 200 500 500 1,200 3,106 787 2003/04 2,411 750 856 400 0 0 0 1,256 200 500 500 1,200 3,206 795 Projected Sources of Energy for Zimbabwe IGWH) Total Energy Imp rts Firm Fiscal Req'ment Hydro Thermal Total Zaira Total Supply Surplus/ Year IGWHi Kariba Hwange I Hwange IlIl Harare Munyati Bulawayo Thermal Zambia HCB ESKOM Imports IGWH) Shortfall 1992/93 9,020 2,466 4,800 267 193 132 5,392 1,162 0 0 1,182 9,020 0 1993/94 9,588 2,002 4,936 500 283 203 5,922 1,664 0 0 1,664 9,588 0 1994/95 10,192 2,484 4,682 329 206 101 5,318 1,664 0 726 2,390 10,192 0 1995/96 11,007 3,150 3,439 251 148 31 3,869 1,664 2,064 260 3.988 11,007 0 1996/97 11,558 3,150 2,279 86 27 0 2,392 1,664 4,161 191 6,016 11,558 0 1997/98 12,020 3,150 2,701 97 30 0 2,828 1,664 4,161 217 6,042 12,020 0 1998/99 12,501 3.150 3,154 125 33 0 3,312 1,664 4,181 214 6,039 12,501 0 1999/2000 13,001 3,150 3,720 89 28 0 3,837 1,664 4,161 189 6,014 13.001 0 2000/01 13,521 3,150 4,252 78 25 0 4.355 1,664 4,161 191 6,016 13,521 0 2001102 14.062 3,150 5,028 49 14 0 5,091 1,664 4,161 59 5,884 14,062 0 2002103 14,625 3,150 5,000 495 47 15 0 5,557 1,664 4,161 93 5,918 14,625 0 2003/04 15,209 3,150 5,099 2,300 0 0 0 7,399 1,664 2,787 209 4,660 15,209 0 - --- ----1--.----- -_ ^ , U ^°53 - c _ : 3 * * : .- - - ': _ _ . - - - - * I~~~~~~~~~~~~~~~~I i-_ ! 3a - 0- 3' --=~~ 3 - s3 to * -----a----- - , . - - - L,-z - Xo- ' :: - : a . 3 _ , _o :: . - :a a ~ a a = 4__ __ ,. = s=_-_-_-a_=---- - =C 3u :: 3: ~___=__ -= =_ 0 - 3.…… -_- -3- __ 3. * ~ 3 -a -- 5-= :: E:_.… _= _ -~ 3 .. a -- - - ~ -- 3 I .. -3 - -a x -* ~ -- …-.a =-= - sfr a..3;_ oz - _ __.~s a, …_ 3 _ _ - t :: _ : a - _ a - I _-_=_=_-_, r ::- : I t . . _ -.… __----- ….. LZ~~~~~~~: _ o__uu_:y - 65 - ANNEX 3.1 Page 1 of 15 ZIMBABWE ELECTRICITY SUPPLY AUTHORITY POWER III PROJECT Detailed Project Description A. DISTRIBUTION ZESA has carried out a series of technical audits of its generation and transmission facilities in connection with developments of its master plans for the power sector. ZESA is planning to carry out a master plan for its distribution systems in major consumption centers with the assistance provided by the AfDB. Technical auditing of ZESA's existing distribution system, has, however, not been carried out extensively and is expected to be done by ZESA during the implementation period of this project. Any major rehabilitation which may thus be identified will either form part of a next project or, depending on the availability of funds, added to this project. The requirements described below will solve urgent known problems in the existing system. Northern Region 1. Guruve Substation (Nl) Installation of a 5 MVA 33/11 kV OLTC (on-load tap changes) transformer, complete with protection and measuring year for four feeder bays, and construction of 22 km 33kV line, with the objective of loss reduction (300 kW peak) in the 11 kV distribution system, presently fed via 1.5 MVA transformer and 11 kV lines. 2. Centenary North (N2) Installation of a lx5 MVA 33/11 kV substation, complete with protection and measuring gear for four feeder bays, with the objective of saving 400 kW peak on the existing overloaded 11 kV network. (18 km of 33 kV line will be constructed under a separate funding). 3. Battlefields - Venice - Brompton (N3) Network reinforcement through the installation of a 1 x 15 MVA 88/33 kV transformer and the construction of 30 km 33 kV lines. Voltage conditions will be substantially improved and an estimated loss reduction of 300 kW peak will be achieved. 4. Golden Valley - Chakari (N10) A total of 470 kW peak losses will be saved by installing a total of 4 MVAr 11 kV capacitors at Golden Valley and Chakari. (35 km 33 kV line will be uprated to 175 mm2 ACSR under ADB funding). 5. Kadoma - CheLutu - Norton (N15) Reinforcement of 20 km 33 kV line in Kadoma, Chegutu and Norton, through reconducturing by 175 mm2 ACSR. A loss saving of 400 kW peak will be achieved. - 66 - ANNEX 3.1 Page 2 of 15 Southern Region 6. Gweru Network Rehabilitation (S4) Overload and voltage problems exist on the Gweru 11 kV network strung with 16 mm2 copper conductor. Reliability of supply is also poor due to theft of copper conductor which has a high scrap value. The estimated peak loss is excessively high at 1500 kW peak. The project provides for the reconducturing of the line using 100 mm2 ACSR. The benefits that accrue are substantial improvement in reliability of supply and voltage conditions, and reduction of peak losses by about 1200 kW. 7. Gwenoru Dam (S 10) Installation of a 2 MVAr capacitor bank to reduce losses by about 220 kW peak and improve the voltage profile. Western Region 8. Shaneani Substation (WI) Loading and voltage problems exist on the Marvel/Shangani 66 kV network. Present maximum demand is 17 MW, and unmet demand is estimated at 4.5 MW. Network losses exceed 2.5 MW and the voltage drop is estimated at 16%. The project provides for the construction of a 50 km 132 kV line, a 132 kV feeder bay and a 1 x 30 MVA 132/11 kV substation at Shangani. 9. Figtree - Plumtree Reinforcement (W2) Installation of a total of 1 MVAr Capacitors at Figtree and Plumtree. 10. Beitbridge - Mazunga - Nottingham M) Construction of 28 km 33 kV line to reinforce the network in the area. Voltage conditions will be normalized and loss reduction is estimated at 200 kW peak. 11. Gwanda - Colleen Bawn Reinforcement (W4) Constructing 25 km of 175 mm2 33 kV line to reinforce an existing overloaded line thereby reducing losses by an estimated 500 kW peak. The reinforcement will also help provide the additional requested demand by Gwanda - Colleen Bawn when capacity becomes available. 12. Load Shedding. The need for load shedding when there is a major plant shutdown has been aggravated by the recent regional drought and the consequent shortage of imported and indigenous hydro power. ZESA has therefore introduced improved management of power shortage through load shedding as one of the objectives of the proposed project. 13. Load shedding can be effected automatically by applying automation equipment in progressive steps, using either the simpler devices which apply ripple control signals to switch off water heaters and similar loads or more sophisticated devices which trip feeder circuits at substations upon major system disturbance. ZESA has a ripple control device which could switch off about 40MW of load (water heaters) by sending signals from the load control center at Harare. Switching on upon restoration of supply is also done manually, and in view of this ripple control devices are semi- automatic (not actuated automatically by system behavior). ZESA intends to install additional ripple control equipment in Harare and other major towns to be able to switch off selectively additional - 67 - ANNEX 3.1 Page 3 of 15 loads until major plant outages are restored. Technical auditing of the existing ripple control system will also be carried out and needed refurbishment and upgrading, will be undertaken under the proposed project. Automatic load shedding is best performed by making substation equipment respond to pre-set frequency thresholds and instigate load shedding action in pre-arranged steps and programs. ZESA has carried out a study to assess the needs for under frequency actuated load shedding of up to 400MW under severe system disturbances. The following load shedding schemes are planned: (i) instantaneous under frequency 50MW load shedding for each of the following frequencies: 48.5 Hz, 48.25 Hz and 48 Hz; (ii) instantaneous rate of change of frequency at 0.8 Hz per second for load shedding of 100MW; and (iii) time delayed under frequency 25MW load shedding for each of the following: 48 Hz, 1 second duration; 48.75 Hz, 30 seconds; and 49.5 Hz, 60 seconds. A single under frequency relay will manage the load shedding over the frequency ranges outlined above. Some 30 relays will be purchased for installation at the following substations: Northern area (substations Bindura, Muzowe, Mutorashage, Chinhoyi, Kudoma, Chegatu, Norton and Morondera); Southern area (Gweru, Kwekwe, Zvishavane, Zimasco): Western area (Forrestvale, Valleyfields, Hyde Park, Mpopoma, London Road, Donnington); and Harare area (at thermal station and at substations to be determined). B. HWANGE POWER PLANT 14. Hwange power plant, accounting for 47% of ZESA's total installed capacity, will continue to be the major source of electric power supply to Zimbabwe. Improving and maintaining Hwange's reliability at a high level, particularly over the period up to the commissioning of the next source of power supply, is a major objective of ZESA's generation planning. Staffing the power plant with qualified and experienced personnel, providing resources to maintain the power plant are essential strategies of the generation planning 15. ZESA's mine-mouth coal fired power station at Hwange was constructed in two stages. The first stage (Stage I) with 4 x 120MW installed capacity was commissioned in 1984, and the second stage (Stage II) with 2 x 220MW installed capacity in 1987. Hwange's performance has been erratic in the past. In 1989/90, the plant load factor was as low as 54.6%, but after carrying out modifications of the Stage I coal mills under the Bank's Power I loan, the performance of Stage I units has improved substantially, with plant load factor for the last three years averaging 75.4%. On the other hand, the number of trips has been increasing from 227 in 1989/90 to 336 in 1991/92. This makes the reliability of Stage I unsatisfactory. The trippings also result in increased diesel fuel consumption. These are attributed to poor process control and unsatisfactory instrumentation, inadequate and, designwise less than satisfactory, cooling water system, dusty environment, and high ambient temperature particularly in the control and relay rooms. The undersized cooling water system has been a cause for vacuum loss accounting, almost without exception, for complete shutdown of Hwange occasionally experienced in the ZESA system. (On August 25, 1992, there was a complete shutdown of the power plant, attributed to this cause. Resumption of supply took 17.5 hours.) The proposed project aims at addressing major constraints in the smooth and efficient operation of Hwange power station. 16. The Power I Loan (Ln 2212-ZIM) has, among others, provided assistance to operate and maintain the power plant and spare parts. The Power II Loan (Ln. 2900-ZIM) is also providing - 68 - ANNEX 3.1 Page 4 of 15 support for Hwange operations. The proposed Power III Project will provide support to Hwange as follows: (i) Operations Support; (ii) Maintenance Materials and Spares; (iii) Maintenance Services; (iv) Generating Plant Major Overhauls; and (v) Upgrading and Refurbishment. 17. Operations Support. The main objective of the Hwange operations subcomponent is to strengthen indigenous capability initiated under Power I Loan and to ensure, through transfer of know-how and job-oriented training, sustainability in managing the operations and maintenance of the Hwange power plant. Accordingly provision is made for a total of about 310 man-months of expert services as follows: in the areas of power plant management and performance (72 m/m); computer-aided stores administration and system (36 m/m); computer-aided power plant maintenance planning (36 W/m); protection systems (36 m/m); generation services engineering (48 m/m); training of ZESA power plant and generation staff through short term employment of training specialists and the use of ZESA's training facilities, as well as through exposure to functional overseas experience (48 m/m); technical auditing on as needed basis and expert services in specialized fields (36 m/m). 18. Maintenance materials and spares Government's foreign exchange yearly allocations of US$ 1.5 million for generation and transmission is not adequate to meet ZESA's needs for spare parts and materials. Recent experience indicate annual expenditure of US$ 3.1 million for consumables and spares alone. These total US$ 9.2 million for a 3-year program. An overall total of US$ 11.9 million, in 1992 prices, is provided for materials and spares. 19. Maintenance Services Proprietary highly skilled maintenance service contracts, estimated at a total of 200 m/m, are needed for the main plant components such as coal milling, boilers, turbo- alternators, water treatment plant. 20. Generation Plant Major Overhauls Major overhauling every 50,000 equivalent running hours, is programmed for Hwange units as follows: Unit 5 October 1993 Unit 6 February 1994 Unit 3 February 1995 Unit 4 October 1995 Unit 1 February 1996 Unit 2 will be overhauled in February 1993 under Power II for spares and services. Based on the historical costs for major overhauling of units 4, 3 and 1, and the quotations in hand for units 5 and 6, a provision of US$ 27.4 million is made for spares and services over the period 1993-1996. 21. Hwan,e Upgrade Program. ZESA employed a consultant (Technical Audit Consulting Services Ltd of UK) to review major causes for plant breakdown, suggest remedies, prepare a Design Report and specifications and bid documents for the purchase of the required plant. The main - 69 - ANNEX 3.1 Page 5 of 15 findings of the Consultants are given in the Draft Design Report (February 1993)1/, and is summarized hereunder. 22. Major problem areas affecting plant availability, output and efficiency are the Process Control System for Stage I and the Cooling Water Systems. 23. The Process Control System refers to boiler sequence control and its interface with the burner management system. The existing boiler control system is based on pneumatic technology for the closed loop system, and relay technology for the open loop burners management system. Pneumatic controllers require clean environment and pure dry air supply. The high humidity of Hwange and stem/water leaks within the power station are causing ingress of moisture into the pipework generating internal oxidation which results in ingress of iron oxide into sensitive components of pneumatic controllers and associated equipment. Rate of replacement of spares and costs thereof have been increasing substantially. On the other hand, manufacturing of pneumatic control equipment is being phased out gradually due to changes in technology. In addition, the response of a pneumatic control system to rapid turbine load changes following system disturbances in the relatively small power system of ZESA is not fast enough. The system is satisfactory for base load operation, but does not cope fast enough to keep the unit within drum level or furnace pressure tripping limits during system disturbances. The 300m long pipelines also limit its speed of response. In view of these constraints, false indications and spurious alarms and trips were common, resulting in the abolition of the use of the system in favor of manual control. The hardwired relay sequence control system referred to above being susceptible to pulverized fuel fouling is becoming progressively unreliable for boiler protection. Maloperation is becoming frequent and coal mills have to be tripped manually. Sourcing and replacement of parts is also becoming difficult because of the outdated design of relay control system. 24. The boiler control panel instrumentation is either out of service or missing. the generally accepted safety standards requiring redundancy in instrumentation are not complied with in the boiler field instrumentation (for furnace supervision and protection) and for boiler drum level measurement. 25. The burner management system has one set of four oil burners between two coal mills A and D and another set between the remaining two mills C and D. Each oil burner supplies 750 kg/hour of oil to the furnace. The oil burners are used for start up (up to 20% load), and also for flame stability when an adjacent mill is operated at less than 60 % of rating. There is no sidewall lighting up of burners, resulting in excessive consumption of imported oil in the existing oil burners. A project to provide coke oven gas to Hwange power plant is under discussion. the gas can be install as sidewall lighting up burners for the 16 coal burners. In the event of introduction of sidewall lighting, it is suggested to replace the existing burner management system for the oil burners by an extension of a digital microprocessor control system. The control system would provide for automatic starting and stopping of light oil and coke oven gas support as a function of mill loading requirements. 1/ Design Repoin (final), March 1993, TA Consultants Services and Electrowatt Engineering Services Ltd., U.K. - 70 - ANNEX 3.1 Page 6 of 15 26. The entire Stage I pneumatic control and relay control system would be replaced by either a solid state electronic system as is provided for Stage II or by a proven technology microprocessor based distributed digital control system. The pros and cons of the two systems, including the durability of the type of system selected, as well as the long term availability of spares and probable redundancy of Stage II solid state design, will be discussed and agreed upon during the detail engineering phase. In addition, the level of automation and instrumentation for the boiler and turbine would be improved to ensure coordinated unit control, and the existing boiler control panels would be replaced. Deficiencies in all areas of instrumentation and control would be rectified under the project. 27. The Cooling Water Systems refer to the circulating cooling Water System and to the Auxiliary Cooling Water Systems of Stages I and II. The Circulating Cooling Water (CCW) system condenses the low pressure steam exhausted by each unit's turbine through the use of individual surface type condensers in conjunction with two common cooling towers. The Auxiliary Cooling Water System (ACW) taps water from the main cooling water system for cooling the auxiliary equipments in the station (like oil coolers, bearing coolers, hydrogen coolers etc.). The essential components of the circulating cooling water system of Hwange are five motor driven pumps, two natural draught cooling towers with storage basins and a forebay area linked by cooling water channels, chlorine dosing equipment, and a pipe network connecting the pumps to the unit condensers and other users. The make up water is supplied from the Zambezi river through pumps and storage tanks to a forebay area and into the cooling tower basins. 28. The cooling towers are designed for a cooling load for all of Stage I units (4 x 120MW) and for only one (not two) of the Stage II units (1 x 220MW). The assumption of 26.1°C ambient temperature specified in the design of the cooling towers lowers appreciably the performance of the towers during the hot season at Hwange when temperatures range between 35°C - 45°C. The design capacity of the circulating cooling water pumps is also insufficient to meet the requirements of all six units let alone the additional cooling water loads of the station's auxiliary cooling water requirements. Prudence dictates that for a station of such relative importance and for critical components like pumps, at least one standby pump should be provided in order to maintain total station output in the event of failure of a pump. Installation of two pumps would thus be necessary. Site conditions do not permit installation of one additional pump. 29. ZESA has considered a number of options to resolve the capacity constraints of the cooling tower and the water pumps. Possible options for the cooling tower are: (i) replacing the existing cooling fills with a more efficient design; (ii) install a compact induced draught cooling tower to service all the station auxiliary cooling water, thereby reducing the cooling load on the cooling towers; and (iii) advance the building of the natural draught cooling tower required as part of Hwange Stage III development, thereby maintaining the existing towers at their design cooling load duty. For the first option, the down time of about two to three months to effect the replacement of a new fill will be too costly to ZESA {(estimate at say 200MW x 1440 x .72 x (.13, sales price less cost of coal and diesel oil of .03) =Z$20.7 million)) and damaging to the economy. The second option is estimated to produce a 3.9% reduction in cooling load, still leaving a deficiency in cooling tower performance of at least 5%. Thus this option offers only a partial solution. The third option presupposes that Hwange Stage III, which will be an extension of Stage II providing additional 2 x - 71 - ANNEX 3.1 Page 7 of 15 220MW capacity, will be implemented. Stage III provides for two new natural draught cooling towers, and envisages installation of three additional cooling pumps to cater for the needs of unit 6 of Stage II and for the two additional units of Stage III. The cooling tower with 2 pumps is estimated to cost US$4,804,000 in foreign exchange and Zim$25,1 10,000 in local costs. A construction period of one year is considered sufficient. This is considered to be the cheapest option to ZESA is Stage III is to be implemented, with a payback period for this investment of less than three months from the above figures. 30. The Auxiliary cooling water system utilizes water from the circulating cooling water system for the cooling of the power plant equipment, primarily for the bearings, but also for other equipment. The poor quality water in the CCW system has resulted in extensive scaling, silting and general buildup of solids in the ACW circuits. The upgrade project proposes to replace the existing system by a closed ACW system. Water is taken from the CCW main through a shell and tube, water to water type of heat exchanger and circulates within a closed loop pipework system to ACW users for cooling purposes. A header tank makes up for any water loss during the circulating process. Chemical dosing at the header tank introduces a regulated flow of corrosion inhibitor chemicals. A blowdown system, operated intermittently as required, limits the concentration of impurities. 31. The conceptual design considered for the ACW systems are three separate bearing cooling water systems, one each for units 1 and 2, units 3 and 4, and units 5 and 6; and four separate identical and interchangeable ACW systems are proposed as follows: one each for units 1 and 2, units 3 and 4, and for unit 5 and unit 6. 32. The quality of the cooling water circulating in the system will be improved through the introduction of a sidestream filter, prevention devices of debris ingress, and dosing of anti-scale and corrosion inhibitor chemicals. Extra chlorine dosing devices will also be introduced in the circulating cooling water system, and monitoring, recording and analysis equipment will be installed. 33. In addition to the support to be provided for the implementation of the recommendation of the T & A Consultants, the appraisal mission has agreed with ZESA to include the Stage I LP turbine retrofitting in the Upgrade Program (Annex 3.2, page 5 of 9). The first unit has been retrofitted under Power I loan. The major damage was found to be in the diaphragms and the inner casing of the LP turbine. The causes for the damage to the diaphragms are: the erosion in the area of the welded joints between the guide vanes and the inner and outer rings; the erosion between the axial and radial guides of the diaphragms and the inner casings; and erosion of the cover rings resulting in some separation of the caulked-in sealing strips. The erosion of the guide grooves and guide pins which locate the diaphragms are the main causes for the damage to the inner casing. The retrofitting of the remaining three units of Stage I, working under conditions of steam temperature identical to that of LP turbine unit 1, is provided for under the Hwange Upgrade component of the proposed project. One new complete set of diaphragms, upgraded by a more erosion-resistant material, and one new inner casing will be purchased. The first of the three LP turbine units will be replaced by the purchased set and the replaced set will be sent to the manufacturer's works for repairs. The repaired set will then replace the diaphragms and the inner casing of the next set, and so on until all the three units are retrofitted. The last repaired set of the diaphragms and inner casing will be kept - 72 - ANNEX 3.1 Page 8 of 15 in the power station as spare. This approach is evaluated to be the least cost, shortening the outage time of a turbine during repair by 27 weeks (from 32 if repair is done on site to 3 weeks). 34. The availability of units 5 and 6 is seriously hampered by different voltages of the two station transformers (3.3 kV for station transformers 1 and 2 and 11 kV for station 3, the latter serving units 5 and 6). In the event of failure of station transformer 3, units 5 and 6 will be switched off by consequential loss of auxiliary supplies. Both units will remain off the supply system until the station transformer 3 is returned to service. The project provides an additional 30MVA 33/11 kV station transformer to supplement transformer 3 for units 5 and 6. 35. The two 554 kW emergency diesel generators were installed to serve Stage I. No additional capacity was provided for Stage II, although the essential services load increased substantially. ZESA will be transferring from one of its stations 3x1500 kW spare packaged units to provide the additional capacity. The project will provide new transformers, switchboard and cables to directly supply the essential services switchboard. 36. The air conditioning equipment was undersized for Stage I due to higher ambient temperatures than was provided for in the design. The project will refurbish the various systems presently out of commission using replacement equipment of higher rating and with 100% standby plant. 37. In addition, measures to reduce dust generation in the coal handling plant including installation of insertable collection units at all transfer points, replacement of belt cleaning equipment and wornout plates will be provided for. Vacuum cleaning plant in the station will be overhauled and refurbished and the mobile plant will be replaced with more powerful units. A side stream filtration system to clean up the Cooling Water System, reducing total suspending solids from levels of up to 200 mg/l presently experienced to less than 40 mg/l, will be installed. A comprehensive monitoring equipment for conductivity, pH and oxygen content of the steam/water cycles will be installed on all Stage I units. The corresponding monitoring equipment on Stage II units will be overhauled. C. HWANGE STAGE III 38. Consultancy services will be required to review and update the bid and contract documents prepared in 1985 for Hwnge Stage III extension (units 7 and 8, 2x220MW) which ZESA's development plan has determined to be the least cost option to meet ZESA's growing power demand by about the turn of the century. ZESA with the assistance of consultants will prepare a project document to be submitted to financing institutions . This document will, in addition to reviewing designs and updating costs and specifications, compare all alternatives to demonstrate that the Hwange extension will be the least cost and technically feasible option. The environmental impact of the expansion program will also be assessed in accordance with the relevant directives of the Bank. The Project provides an estimated 100 man-months for the document preparation and for the review and updating, and 30 man-months for environmental assessment. The terms of reference for the services will be agreed upon with the Bank. - 73 - ANNEX 3.1 Page 9 of 15 D. MECHANICAL AND ELECTRICAL WORKSHOPS 39. ZESA has procured a large site near Harare for the construction of a main warehouse, mechanical and electrical workshops including a garage, a transport and heavy items storage yard. Construction by ZESA is in progress for the garage and a small part of the mechanical workshop. The design of the remaining parts of the workshops has been completed, and bids received for some of the priority workshops. ZESA's financial position rendered it difficult to proceed with the award of contract. With the recent tariff adjustments and anticipated improvement in ZESA's financial performance, construction is expected to start in some order of priority for the remaining parts of the mechanical and electrical workshops. Construction is expected to require about two years. Workshop equipment to be procured under the proposed project include: gantry cranes of 5-100 ton capacity, eccentric presses of about 20 ton capacity, hydraulic presses of 20 and 150 ton capacities, milling and lathe machines, and a variety of tools and equipment which would enable ZESA fabricate accessories for the distribution system and carry out repair and maintenance of mechanical parts which are no longer supplied by the original manufacturers. A testing generator and testing transformers, a high frequency furnace , a drying oven, and ancillary testing sets and equipment will be procured for the electrical workshop. The workshop equipment and tools are listed in Annex 3.2, page 7. . VEIICLES 40. There a total of 100 different type vehicles and 216 models from 27 different makers in ZESA. The average age is excessive at 11.3 years, with 812 vehicles beyond their economic life. The availability factor is 47% compared to a required normal average of about 80%. Based on the recommendations of a consultant, ZESA has the objective of standardizing, to the extent possible, vehicle types and has prepared a plan for the gradual replacement of old vehicles. This project will replace about 25% of the vehicles beyond the economic life. The procurement list includes pick-ups of various sizes, 4 wheel drives and standard passenger sedans mainly for distribution supervisory and operating personnel at and between ZESA's operating sites. Augher vehicles are also needed for the distribution system. Three 20-ton mobile cranes are needed to handle heavy equipment and cable drums in the regions. In addition one DZ bulldozer will be purchased for ash disposal at the Bulawayo power plant. The detail list of the vehicles and their quantity is given in Annex 3.2, page 8. F. MIS OPERATIONS 41. Shortfall of Power II Loan One of the main objectives of the on-going MIS activities farming part of Power II Loan is to develop a computerized MIS in the critical areas of Consumer Information; Financial, Materials and Fleet Management; Human resources and application to maintenance of the generation facilities. There is a shortfall in the Power II Loan to meet fully the above objective. The proposed project aims at filling the shortfall by providing funds for the following: (i) computer hardware facilities for Harare power station, Munyati power station, Bulawayo power station and for transmission; - 74 - ANNEX 3.1 Page 10 of 15 (ii) computer software for the above with the application in the fields of maintenance, material management, human resources and budgetary management; (iii) computer hardware and software for the self-billing and self-accounting offices at Marondera, Kadoma, Bindura, Masvingo, Chitungwize and KweKwe; (iv) purchase of a 4GL development platform; and (v) expert services of about 5 man-months for the above including the preparation of bid and contract documents and provision for training. 42. Computer-aided Cash ReceiDting. ZESA is taking over the collection activities of load limited consumers, presently undertaken by respective Municipal Councils, in Bulawayo (81,800), Harare (12,838) and Chitungwiza (13,881). There are 8 collection points in Bulawayo, 9 in Harare and 3 in Chitungwiza. A computer hardware configuration coupled with application of software would be required to replace the existing manual operations with computer-aided management of the load limited consumers. It is estimated that 9 hardware configurations (consisting of 3 PCs acting as 3 cash receipting stations, including a slip printer; one 24 pin 132 character wide matrix printer, all with associated networking accessories) and 7 hardware configurations (consisting of 2 PCs acting as 2 cash receipting stations, including printers and accessories as above). The hardware configuration would in addition have: the capability to operate with a minimum of two and a maximum of 5 PCs at each collection point; provision for balancing and audit trail activities; and transfer data for additional data security. The software application would, as a minimum, support cash receipting (involving identification of consumers' point of supply, validating data entering the computerized systems, recognizing mode of payment, issuance receipts to consumers, generating reports on transactions daily and cumulatively), and record keeping (involving tariff classification and rates including charges, fixed data on each consumer, disconnection and reconnection penalties, new connection reporting, end of month reporting). G. INSTITUTIONAL SUPPORT 43. Manpower Training. ZESA has established a Training Institute with teaching aids for electricians and mechanics. Training experts would be brought to ZESA to increase the number of staff to be trained in the areas of power plant and distribution system operation and maintenance. The project provides funding for about 20 man-months for services by training experts. Provision of about 540 man-months is also made for specialized training abroad of senior staff (including postgraduate studies where warranted by the specific needs of ZESA) in the areas of power system planning and operation of power utilities. The indicative training needs are given in Annex 3.2, page 9. 44. Studies. The project provides 100 man-months for studies and expert services, on as-needed basis, for ZESA's operations. The terms of reference for the studies or for the expert services will be agreed upon with the Bank. - 75 - ANNEX 3.1 Page 11 of 15 OUTLINE TERMS OF REFERENCE FOR CONSULTANCY SERVICES FOR THE UPGRADE COMPONENT OF HWANGE POWER PLANT Gilbert Commonwealth Inc. of USA and Technical Audit Consultants of UK have identified major problem areas of Hwange upon which priority was established for an upgrade program of the power plant in an effort to improve plant availability and reliability. The first phase of the program has been carried out under funding of the World Bank. The implementation of the second phase of the program forms the major component of this project. The study for this second phase was carried out by TA Consultants Services and Electrowatt Services of UK funded under Power II loan and based on TOR approved by the Bank. The TOR which follows is an abridged version for the study and is included to elaborate the continuation of the supervision phase included under this project. Scope of Services for the Study The study phase of the services shall focus on the following main features of the Hwange power plant: the process control of the Stage I with the objective of reviewing the Stage I boiler sequence control and recommending measures to obviate difficulties hampering the smooth operation of the power plant; the review of problem areas and recommendation of measures for the Stage I Control and Instrumentation; taking cognizance of the fact that the cooling water system is undersized and a major cause of plant breakdown, review of the cooling water system, including the Auxiliary Cooling Water system, and recommendation of measures to overcome the overall cooling water problem; Assessment and recommendation for the air conditioning plant and equipment; assessment of other problem areas hampering plant efficiency and performance; Main features of Services related to the Study Site visit with the objective of understanding the problems of the Hwange power plant operation, investigation of data, studies, reports on the plant and analyses thereof; On the basis of the investigations, preparation of recommendations on optimum measures needed to improve the reliability and performance of the power plant, with due regard to proven technologies and sound engineering practices; Preparation of schematic diagrams, specifications and bills of quantities, and cost estimates for each upgrade project; Preparation of an implementation plan for each upgrade work with due regard to minimum interruption of supply; and Preparation of a report detailing findings and justifications complete with implementation plans and recommendations. - 76 - ANNEX 3.1 Page 12 of 15 Main Features of Supervision Phase Definition of contract packages Preparation of detail design, specifications, bills of quantities and engineer's estimate for each contract package Preparation of bid and contract documents on the basis of the Bank's standard bidding documents Bid evaluation and recommendation for contract award Supervision of the delivery, the installation or construction and commissioning of the respective contract packages Transfer of know-how and training of ZESA staff on the above activities Preparation of project completion report - 77 - ANNEX 3.1 Page 13 of 15 OU TLINE TERMS OF REFERENCE FOR EXPERTS FOR ZESA OPERATIONS SUPPORT The project will provide funds for employment of individual experts by ZESA to assist in the efficient operation of Hwange Power Plant and help implement the objectives of this project. The additional objective of their assignment is to strengthen ZESA's capability to manage the power plant and to ensure sustainability of its operation through transfer of know-how and on-the-job training. ZESA will prepare a detailed job description for the approval of the Bank. The following is an indicative outline of main functions for a maintenance expert: Prepare a preventive maintenance plan for the various plant and equipment of the power plant, and supervise implementation thereof in a manner least disruptive to electricity supply; Specify requirements for spare parts, recommend appropriate procurement method, and, where appropriate, identify potential suppliers; Prepare bid and contract documents for the supply of spare parts and, where needed, for service contracts; Evaluate bids and recommend contract award; in the event of sole sourcing ensure that prices are reasonable to ZESA; Follow up the carrying out of the preventive maintenance work and prepare a report on the works carried out; and Train the counterpart staff on the activities undertaken, including computer aided maintenance scheduling. - 78 - ANNEX 3.1 Page 14 of 15 OUTLINE TERMS OF REFERENCE FOR CONSULTANCY SERVICES FOR HWANGE STAGE III DESIGN ZESA'S Power Development Plan, prepared in 1986 with the assistance of its consultants Gilbert Commonwealth of USA, has indicated that increasing the capacity of the existing mine-mouth coal fired Hwange power plant (4x12OMW plus 2x22OMW) by 2x22OMW (Hwange Stage III, units 7 and 8) to be the likely least cost option to meet Zimbabwe's growing demand on or about the turn of the century. This will require the extension of the existing power house to accommodate the installation of the two additional units. Accordingly, ZESA, assisted by the same consultants, has carried out the design and prepared specifications of requirements for Hwange's Stage III extension. These findings require to be updated. The proposed Power III project provides for consultancy services to review and update the project Design Report and the Detailed Design Tender Enquiry Documents of Hwange Stage III extension. The Consultant shall review the relevant studies done by ZESA and shall carry out the following main activities based on detailed terms of reference and terms and conditions to be specified by ZESA. For the Project Design Document In close collaboration with ZESA, review the generation optimization study taking into account all alternatives to demonstrate that the Hwange Stage III extension is the least cost and technically feasible alternative option to meet Zimbabwe's demand by about the turn of the century; review the demand growth and assess the timing for the need of additional generating capacity; Carry out environmental assessment and incorporate mitigating measures, in line with the operational directives of the World Bank; Define the contract packages and prepare a detail schedule for their implementation including a critical path approach to essential features; Update the base costs and assess current prices with indicative yearly disbursements of both foreign and local currency requirements, including justification for the basis of the base cost estimates, for the various contract packages; Identifify and design of an effective training program for the appropriate ZESA staff to be implemented throughout the course of this assignment; Not later than .... 1994, submit of a Project Design Report of a standard suitable for arranging financing with financing institutions, comprising a brief outline of the existing generating units at Hwange, a broad definition of the main features of the Hwange Stage III - 79 - ANNEX 3.1 Page 15 of 15 extension and the technical and economic feasibility thereof, implementation schedules, cost estimates and financing plan; and Describe the services to be carried out during the engineering supervision phase of the Hwange Stage III extension. For the Detail Design and Contract Documents With due regard to ensuring compatibility with and sufficiency of common facilities for the efficient operation of the Hwange complex, investigate the site, and update the design and outline the criteria therefor and define standards, review the specifications, bid and contract documents for the extension of the power house and for the 2x22OMW turbo-generating sets and for ancillary plant and equipment including provisions for tie-ins to the existing Hwange generating units; Ensure that all the necessary mitigation measures on environmental issues are incorporated in the design of the plant; Prepare drawings, schedules and bills of quantities for the civil works and for the electro- mechanical plant and equipment; and Ensure that the bid and contract documents are in line with the World Bank's Standard Bidding Documents for contract packages likely to be funded by the World Bank and on the basis of procurement guidelines of other International Financing Institutions (IFI) for packages likely to be financed by the respective IFI. - 80 - ANWEXr3.2 ZIMBABWEELEcTRPCITYSUPPLY AU7HOPl7Y PAPe 1 of10 POWER 11PROJECT SUMMf ARYCOSTESMATE* Local Fore rotl LocI Forein Total (Zim $ ' minion) (US $ 'nmillion) A. DLSTRRiUTION Netwo,k 26.08 54.29 80.37 3.71 .4S 12.16 Demandmgt 10.56 26.29 36.86 1.50 4.09 5.59 Sbtotal 36.64 &).S5 I1Z23 5.21 12.54 17.75 A. HWAGE OPERATIONS SuPpoil 0.00 28.10 2510 0.00 4.34 4.34 SPAe, O00 134.28 134.25 0M 19.93 19.93 Mbaitance 0.65 24.19 24.56 0.05 3.57 3.64 Slwb total 0.6 156.56 187.24 0.0* 27.53 27.91 Upgrade 184.84 282.75 467.62 25.29 43.65 68.94 OVAUI Equi pCet 0.00 119.23 119.23 0.09 19.49 19.49 Services 2.39 $7.40 89.79 0.35 13.41 13.75 Sub total 2.39 206.63 209.02 0.35 32.0 33.24 C. HWANaESTAOEIIl Defag Sota Q00 13.10 13.10 000 2.07 2.07 HWANGE Total 187.91 659.07 876.98 25.71 106.45 132.16 D. Wotksboap 4.70 25.69 30.3J 0.0 4.20 4.90 AE Vehickle 39.22 29.89 69.11 5. 85 4.9 10.73 P. MJS 11." 24.01 35.58 1.73 3.92 5.66 0. nti7tauppod 5.13 13.56 15.99 0.7 2.22 2.95 Total 60.92 93.45 154.36 9.05 15.23 24.25 Project Total 255.47 863.11 1145.57 39.97 134.22 174.19 'V Cats iclude cooeWeeaccs. - 81 - ZDWIEBWE ELECTRIC1YSUPPLY AUHNORrTY ANNEX3.2 POWER El PROJECT Pate 2 of 10 SUMMARYCOSTESMMATET LocIl Pomign Total Loal Fomien Total Zim S millijn) (US $ million) A. DLSTRIBUTION NCeWo* 10.I 31.77 41.77 J. 72 5.47 Z719 DemdMgnt 4.05 15.39 19.44 0.70 265 3.35 ToLiA. bae co 14.05 47.15 61.20 242 S12 10.53 B. HWANGE PLANT Ope,ud- aa -po,t 0(X) 16.35 1635 0.00 251 281 Spr 0.00 69.03 69.03 0.00 11.J5 11." Maintence conncta 0.26 1251 1276 0.04 2I5 220 Hwae U-doe 65.63 162.38 225.01 11.30 27.95 39.24 Hwae OvrhAul -eu"ipnet 0.0a 81.93 51.93 0.00 14.10 14.10 - wvica 0.9S 49.55 50.82 0.17 8.51 £75 ToalE. bAe coat 66.56 392.04 45590 11.51 67.4S 7J.98 C HWANOE DESAG 0.0Q 7.99 7.99 0.00 1.35 1.35 D. WORKSHOP 201 IZ65 19.66 0.35 3.04 3.38 A VEHCLES 16.79 20.54 37.32 2.9 3.53 6.42 P. MIS 4.59 16.50 21.35 0.54 254 3.68 P. fNSTUTIONAL 222 J.J5 11.07 0.35 1.52 1.90 Tota Pomwr VBiae Cot 106.80 510.72 61Z53 18.38 57.90 106.29 CONT (GB GlE A. DistnUtio PhYalea 1.41 4.72 6.12 0.24 0.51 1.05 Price 21.19 2J.72 49.90 255 3.61 6.16 a Hwae Pla Phyalcr 6.69 39.20 45.89 1.15 6.75 Z90 Plice 114.37 24. 73 359.09 13.07 30.16 43.23 C. Hwaqe D*ai Pacl 0.03 0.0 0M 0.00 0.14 .a14 Price 0.0 4.31 4.I3 Q0OO 0.56 0.56 D. WorbhW Pcal 0.20 1.77 1.97 0.03 0.30 0.34 price 245 6.27 £76 0.32 0.56 1.15 , r~~~~~~~~~~~ Vehicle. Phyaicl 1.68 205 3.73 0.29 0.35 0.64 Price 20.75 Z30 205 267 1.0 3.67 P. MIS PhAlical 0.49 1.65 2.14 0.05 0.25 0.37 Price 6.50 5.56 12.36 0.51 0.80 1.61 Phyalc 0.22 0.59 1.11 0.4 0.1 5 0.19 Pice 2.69 4.12 6.51 0.35 0,54 0.59 Tota ccatdecles phyaical 10.65 51.07 61.75 1.54 £79 10.63 Price 167.95 301.31 469.29 19.77 37.52 57.29 Total ProjectCst Base Cot 106.30 510.72 61Z53 38 57.90 106.29 PCalet. COd 10.68 51.07 61.75 1.54 £79 10.63 Pie CO. 167.98 301.31 469.29 19.77 37.52 57.29 Totl Power V 285.47 S63. 11114. 39l99 134.22 7174.2 *W/ CoeIea ah aparntely - 82 - ANNEX 3.2 Page 3 of 10 ZIMBABWE ZIMBABWE ELECTRICITY SUPPLY AUTHORITY Power il Project Summary of Distribution Base Costs (1992) DISTRIBUTION 0.9 Foreign Local Northern Reaion US^1000 ZimS*100 ZImS*1000 Curuve Ni 153.6 892.4 506.4 Centenary N2 153.6 892.4 506.4 Battleflelds N3 383.4 2227.5 1103.1 Golden Valley N1O 57.4 333.6 12.0 Kadoma N15 95.8 556.6 388.1 Southern Reaion Gweru S4 223.5 1298.6 405.0 Gwenora S10 55.8 324.1 8.0 Western Realon Shangani Wi 3874.0 22498.0 5750.0 Plumtree W2 141.1 819.8 237.9 Beitbridge W3 83.4 484.6 362.6 Gwanda 248.4 1443.2 735.8 Total Distribution 40.0 31770.7 10015.3 DEMAND MANAGEMENT Ripple Control 2595.3 15072.8 4000.0 Underfrequency relays 54.7 317.7 50.0 Total demand m'amt 2650.0 15390.5 4050 Total 8120.0 47161.3 14065.3 - 83 - ZIMBABWE ANNEX 3.2 ELECTRICITY SUPPLY AUTHORITY Page 4 of 10 Power IiI ProJect Summary of Hwange Base Costs (1992) Foreign Equlvalent Local Operations Support U S$1 000 Zim$ 1000 ZimS 1000 Technical Assistance 2021.2 11766.9 0.0 Specialized Services 421.1 2446.5 0.0 Training 367.7 2136.6 0.0 Sub total 2810.0 16350.0 0.0 Maintenance materials and Spares 0.9 Stage I & II ash plant 141.0 819.2 0.0 Spares for hydrogen paint 23.5 136.5 0.0 Stage I Instrumentation 296.1 1720.4 0.0 Stage Il Instrumentation 199.3 1157.8 0.0 Stage 11 mills gear boxes 98.7 573.5 0.0 Stage 11 boiler feed pump 51.7 300.4 0.0 Stage 11 turbine lub-oll pump 47.0 273.1 0.0 Jones crane-spares 3.8 21.8 0.0 Dlesel generator spares 91.2 529.8 0.0 Water treatment spares 288.6 1676.7 0.0 Stage I turbine rings 127.8 742.8 0.0 Stage I transformer bushings 70.5 409.6 0.0 Vacuum plant spares 43.2 251.2 0.0 Coal plant new engine 857.3 4980.9 0.0 Stage II BlT control equipment 190.8 1108.7 0.0 Stage I sootblower 407.0 2364.8 0.0 Stage I & Il feed valve 50.8 294.9 0.0 Stage II HP feed heaters 159.8 928.5 0.0 Stage I transformer breakers 83.7 486.1 0.0 Miscellaneous spares 8648.2 50253.3 0.0 Sub total 11880.0 69030.0 0.0 Maintenance Services 0.9 Stage I mills 418.8 2436.4 50.0 Stage I turbo-alternators 418.8 2436.4 50.0 Stage II turbo-alternators 418.8 2436.4 50.0 Stage II boilers/mills 502.6 2926.6 60.0 Stage I boilers 195.5 1137.6 25.0 Water treatment plant 139.6 812.1 15.0 Instrumentation 55.8 324.5 5.0 Sub total 2150.0 12510.0 255.0 *I/ ZESA funded - 84 - ZIMBABWE ANNEX 3.2 ELECTRICITY SUPPLY AUTHORITY Page 5 of 10 Power IlIl Project Summary of Hwange Base Costs Foreign Equivalent Local Hwange Upgrade Program USS'1000 Zim$*1000 Zim$S1000 Stage I LP turbine retrofit 2689.0 15623.3 100.0 Station air conditioner 427.5 2483.9 2007.0 Stage I burner managem't 8715.7 50638.4 9300.0 Auxilliary cooling water 2991.8 17382.3 19836.0 Stage II boiler feed pumps 45.9 266.5 0.0 Chlorine plant refurbishment 154.1 895.5 609.0 Ash dam water line 342.2 1988.2 3500.0 Stage II purge air system 137.6 799.6 224.0 Stage I auxiliary switchgear 28.4 165.2 0.0 Dust suppression equipt. 654.1 3800.5 99.0 Station transformer 4 678.0 3939.1 472.0 Cooling tower desilting 621.1 3608.7 300.0 Steam/water monitoring 774.3 4498.8 0.0 Condensate polishing 42.2 245.2 14.0 Emergency diesels, transf. etc. 216.5 1258.0 151.0 Stage II sootblower 64.2 373.1 254.0 Cooling tower & 2 CW pumps, 4803.7 27909.8 25110.0 Fire hydrant main 11.0 64.0 109.0 Upgrade consultancy 917.4 5330.4 0.0 Subtotal 24315.1 141270.6 62085.0 Stage I & II HP heaters 140.4 815.5 0.0 Electrical test equipt. 98.2 570.3 0.0 Stage I mills eroslon damage 703.7 4088.4 0.0 Coal plant erroded chutes 66.1 383.8 0.0 Stage I mill rejects handling 61.5 357.1 0.0 Coal analysis & lab equlp'mt 281.7 1636.4 0.0 Stage I condenser protection 58.7 341.1 20.0 Pumphouse instr. upgrade 56.0 325.2 0.0 Cable tunnel fire protection 9.2 53.3 10.0 Hydrogan plant lighting 9.2 53.3 10.0 Stage II deerator retrofit 28.4 165.2 0.0 Off load condenser cleaning 70.6 410.4 0.0 Major overhaul tools 917.4 5325.4 0.0 Performance monitoring equip. 280.7 1631.1 0.0 Cooling towers I & II restack. 596.3 3460.2 3500.0 Ash pump No. 1 refurbishing 55.0 319.8 0.0 Stage I & II drain clean pumps 137.6 799.6 0.0 Stage I fuel oil pump motors 64.2 373.1 0.0 Subtotal I 3634 9 21109.4 3540.0 Total Upgrade 27950.0 162380.0 65625.0 Hwange Stage IlIl Engineering design and bid preparation 1380.0 7990.0 0 "I ZESA funded - 85 - ZIMBABWE ANNEX 3.2 ELECTRICITY SUPPLY AUTHORITY Page 6 of 10 Power IlIl Project Summary of Hwange Base Costs Generating Plant Foreign Local Maior Overhauls US$^1000 Zim$*1000 Zim$*1000 Unit 3 Overhaul spares, turbine 1172.5 6812.2 0.0 Overhaul spares, generator 519.3 3017.0 0.0 Overhaul spares, boiler 1541.3 8955.0 0.0 Overhaul service, turbine 879.8 5111.8 50.0 Overhaul service, boiler 140.4 815.5 50.0 Overhaul service, generator 433.0 2515.9 65.0 Unit 4 Overhaul spares, turbine 1172.5 6812.2 0.0 Overhaul spares, generator 519.3 3017.0 0.0 Overhaul spares, boiler 1541.3 8955.0 0.0 Overhaul service, turbine 879.8 5111.8 50.0 Overhaul service, boiler 140.4 815.5 50.0 Overhaul service, generator 433.0 2515.9 65.0 Unit 1 Overhaul spares, turbine 1172.5 6812.2 0.0 Overhaul spares, generator 519.3 3017.0 0.0 Overhaul spares, boiler 1541.3 8955.0 0.0 Overhaul service, turbine 879.8 5111.8 50.0 Overhaul service, boiler 140.4 815.5 50.0 Overhaul service, generator 433.0 2515.9 65.0 Unit 5 Overhaul service, boiler 688.1 3997.8 120.0 Overhaul service, turbo-gener. 1422.1 8262.4 120.0 Unit 6 ' * Overhaul spares, boiler 2109.6 12256.8 0.0 Overhaul spares, turbine 2291.2 13320.7 0.0 Overhaul service, boiler 688.1 3997.8 120.0 Overhaul service, turbo-gener. 1422.1 8262.2 120.0 Total major overhauls: 22680.1 131780.1 975.0 spares 14100.0 81930.0 I00 services 8580a 0 49850.1 975.0 ' IBRD funded - 86 - ANNEX 3.2 ZIMBABWE Page 7 of 10 ZIMBABWE ELECTRICITY SUPPLY AUTHORFTY POWER lIl PROJECT Base Cost Estimate 1992 for Workshop Equipment ZlmS x 1000 ITEM Quantity Foreign Local Total Cost Cost Cost Magnetic table, lm 1 50 10 60 Cropping machines 2 350 35 385 Tooling for CNC 1 580 180 760 Milling machine. hor. 1 250 25 275 Slotting attachment 1 75 15 90 Dividing head 1 50 5 55 Rotating vices 1 15 2 17 Modular cutter 1 250 20 270 Tooling for CNC lathe 1 420 55 475 Gear cutting machine 1 220 20 240 Shaper 1 180 20 200 Vertical lathe table 1 420 20 440 Spectographic analyser 1 175 10 185 Lathe and copying att. 1 220 30 250 Broaching machine 1 180 20 200 C02 welders 2 80 20 100 Argon welder 1 40 5 45 Spot welders 2 120 40 160 Spark eroder 1 350 50 400 Wire eroder 1 390 55 445 200 OFM compressor 1 230 50 280 150T hydraulic press 1 210 20 230 20T hydraulic press 1 80 10 90 50T electric jack 1 60 10 70 20T eccentric presses 2 75 20 95 Travelling hoist, 2ton 1 40 20 60 sT gantry cranes 2 120 60 180 20T gantry crane 1 150 80 230 1OOT gantry crane 1 600 500 1100 Sand blasting unit 1 50 20 70 Polisher 1 70 10 80 Washing tank 1 10 5 15 Pickling tank 1 25 10 35 Rectifying unit 1 30 15 45 Drying oven, 4CM 1 60 20 80 Roller, 75mm 1 10 5 15 High frequency furnace 1 180 40 220 Auto air feed units 1 95 10 105 Bench and vice 1 0 25 25 Roller feed and trolley 1 0 10 10 Portable tool set 1 20 10 30 Computerized plasma cutter 1 120 60 180 Tempering oven 1 70 35 105 Test generator 1 4700 80 4780 Test transformer 1 1 1400 60 1460 Test transformer 2 1 1470 70 1540 CTtest set 1 500 10 510 VT test set 1 600 15 615 L.A. Test set 1 500 10 510 Ancillary test set 1 400 5 405 Oil filter, 10OOglhr. 1 1250 30 1280 Filter spares - in _ 16 Total 17650 2012 19662 - 87 - ANNEX 3.2 Page 8 of 10 ZIMBABWE ELECTRICITY SUPPLY AUTHORITY Summary of Vehicle 1992 Base Costs in Thousand Zim $ Vehicle Unit Price Total Price Tvoo gtv Forex Loca Forex Local Passenger cars 25 56730 44800 1418250 1120000 1/2 ton pick-up 0 0 0 0 0 1 ton pick-up 48 49000 48160 2352000 2311680 4 wheel drlve p/u 50 112000 95200 5600000 4760000 2-3 ton pick-ups 16 123200 112000 1971200 1792000 2-3 ton 4WD 8 135000 100800 1080000 806400 8 ton spv 10 213000 173600 2130000 1736000 Buses 4 336000 224000 1344000 896000 Auger vehicle 2 233860 145600 467720 291200 20 ton crane 3 1455000 784000 4365000 2352000 Motor cycles 16 12350 10080 197600 161280 30 ton horse truck 0 0 0 0 0 DZ bulldozer 1 1756000 560000 1756000 560000 Total 22681770 16786560 - 88 - ANNEX 3.2 Page 9 of 10 ZIMBABWE ZIMBABWE ELECTRICITY SUPPLY AUTHORITY Power IlIl Project Base Cost Estimate 1992 for MIS ITEM Foreign Foreign Local (US$'1000) (Zim$'1000) (ZimS'1000) Computer hardware and software for: -Generation (old thermals) 309.0 1795.3 840.0 -Transmission 16.0 93.0 45.0 -Self billing offices 641.0 3724.2 224.0 -Development platform 108.0 627.5 280.0 -Depots & fleet management 284.0 1650.0 1344.0 -Disk mirroring 497.0 2883.6 1288.0 -Head office management 23.0 133.6 55.0 -Tape standardization 12.0 69.7 0.0 -Spares 207.0 1202.7 530.0 -Cash receipting 472.0 2742.7 280.0 Subtotal 2569.0 14922.2 4886.0 Expert services and training 271.0 1574.C 0.0 Total MIS 2840.0 16496.7 4886.0 - 89 - ANNEX 3.2 ZIMBABWE Page 10 of 10 ZIMBABWE ELECTRICITY SUPPLY AUTHORITY Power ill Project Base Cost Estimate for institutlonal Support In ZImS DESCRIPTION Estimated Estimated Total ZS Total manweeks unit rate US$ forelan cost local cost TRAININ3: 5.81 TECHNICAL Distribution operation and maintenance 80 400 185920 150000 Cable technology 20 400 46480 100000 Power system control and operation 20 400 46480 60000 Analysis and protection of power systems 20 400 46480 45000 Vibration analysis and unit malntenance 20 400 46480 60000 Computer-aided power system performance monitoring 15 400 34860 100000 T & D network planning operation and control 200 400 464800 100000 Graduate studles mechanical 400 430 999320 60000 electrical 400 430 999320 60000 Project management 100 470 273070 120000 Procurement 100 470 273070 120000 FINANCE & ADMINISTRATION Corporate finacial management 10 400 23240 30000 Investment planning 10 400 23240 30000 Advanced manpower development 20 400 46480 60000 Graduate studies 800 430 1998640 120000 Expertise Support to Tralning Institute plant operation-mechan. 15 3600 313740 165000 plant operation-electr. 15 3600 313740 165000 system performance 15 3600 313740 165000 maintenance m'gmt 10 3600 209160 165000 stock control 6 3600 125496 165000 organizatlonal 10 3600 209160 175000 Tralning aids LS 50000 290500 0 Total Training 7283416 2215000 STUDIES: 75 3600 1568700 0 Total Institutlonal Support 8852116 2215000 - 90 - ANNEX 3.3 ZIMBABWE ELECTRICITY SUPPLY AUTHORITY Power IlIl Project Summary of Project Implementation Schedule Project Bid Contract Completion ComDOnent Biddina Ovenina Award 1/ Date A. Distribution 12/93 3/94 6/94 6/97 B. Hwange .Operatlons 12193 2/94 5/94 6/97 .Overhauling 12/93 2/94 5/94 6/97 .Upgrading 12193 3194 6/94 6/97 C. Hwange III 1/94 3/94 6/94 10/96 D. E/M Workshops 2194 4/94 7/94 8/95 E. Vehicles 2V94 4/94 7/94 6/95 F. MIS 2V94 4/94 7/94 6/95 G. Institutional Support and training 12/93 Various Various 6/97 1/ Bid evaluation and approval process is assumed to take a maximum of 3 months. Declaration of loan effectiveness Is planned In March, 1994. - 91 - ANNEX 3.4 ZIMBABWE ELECTRICITY SUPPLY AYTHORITY Power III Project IBRD Loan Dlsbursement Schedule IBRD Fiscal Year Ouarterly Cumulative Percent and Quarter Disbursements Disbursements of total FY 94 September 30, 1993 December 31, 1993 March 31, 1994 2.00 2.00 2.22 June 30, 1994 6.00 8.00 8.89 FY 95 September30, 1994 11.50 19.50 21.67 December 31, 1994 15.50 35.00 38.89 March 31, 1995 16.50 51.50 57.22 June 30, 1995 16.50 68.00 75.56 FY 96 September 30, 1995 4.00 72.00 80.00 December 31, 1995 4.50 76.50 85.00 March 31, 1996 4.40 80.90 89.89 June 30, 1996 4.10 85.00 94.44 FY 97 September 30, 1996 1.25 86.25 95.83 December 31, 1996 1.25 87.50 97.22 March 31, 1997 1.25 88.75 98.61 June 30, 1997 1.25 90.00 100.00 The closing date Is December 31, 1997 - 92 - ANNEX 3.5 ZIMBABWE Page I of 2 POWER HI PROJECT MONITORING GUIDELINES AND PERFORMANCE INDICATORS Guidelines for monitoring performance on project implementation have been discussed with ZESA and Government organs. These guidelines include a series of target dates in the Implementation Schedule of the Project (Annex 3.4). Forecasts against actual results would be closely monitored by IBRD for, among others, the following: (a) preparation of TOR, invitation and contract award for consultants; (b) issue of bid documents, bid closing, contract award; (c) progress of construction and installation of equipment; (d) project cost estimates and financing; (e) electricity sales and number of consumers by categories; (f) electricity generation, hydro and thermal; (g) system losses (% of net generation); (h) installed capacity; hydro and thermal; (i) firm capacity and generation capability; 0) periodic forecast for sales and generation; (k) transmission and distribution facilities; (1) planned and unplanned outages and their duration for power plants; transmission and distribution systems; (m) total and specific revenue from electricity sales by category; (n) number of days of receivables; (o) number of employees per consumer; (p) self-generated funds contributed to investment; (q) debt-equity ratio; (r) debt service coverage; (s) audited accounts and annual activity reports. - 93 - ANNEX 3.5 ZIMBABWE ELECTRICITY SUPPLY AUTHORITY Page 2 of 2 POWER III PROJECT SELECTED PERFORMANCE INDICATORS Actual Target 19N8 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Hwange availability factor (percent) 83.0 72.2 86.4 73.1 30.0 80.0 £1.0 a3.0 83.5 83.5 Zimbabwe Supply 8148.6 8587.0 9384.5 893.4 8246.3 Zambia imports U4.2 819.0 305.0 1164.7 2037.7 RSA Imports Mozambique imports Energy sentout S88.8 9406.0 9688.5 10101.1 10283.0 Transmission losses 321.5 301.6 310.1 449.0 399.9 percent of sent out 3.6 3.2 3.2 4.4 3.9 System max. demand 1406.0 1430.0 1838.0 1578.0 14U.0 System load factor 73.1 75.1 71.9 73.1 80.5 Bulk sales 877.3 9104.4 9379.4 9062.1 983.1 Retail ales 8112.9 85.9 8881.8 8992.4 9247.9 8118.0 U529.0 9173.0 9906.0 10402.0 10818.0 Distribution losses 564.4 848.5 527.6 689.7 638.2 percent of sent out 6.3 5.8 5.4 6.5 6.2 Total losses inpercentsentout 9.8 9.0 8.6 11.0 10.1 10.0 10.0 10.0 9.7 9.5 9.3 Number of employees 7615.0 7674.0 7643.0 7U9.0 Number of customers 309423.0 319357.0 328169.0 Customefs per employee 40.6 41.6 42.9 43.7 46.0 46.6 48.0 50.0 51.5 Audited accounts due by. 12/31 12131 12/31 12/31 12/31 12/31 Self financing ratIo 112.0 67.0 84.0 1.0 25.0 25.0 24.0 25.0 29.0 Debt-equity ratio 60.0 66.0 76.0 75.0 73.0 71.0 71.0 87.0 67.0 Debtservicecovwrage 0.9 0.7 0.8 1.3 1.6 1.6 1.3 1.6 1.3 Receivables, days 72.0 74.0 U.0 92.0 75.0 76.0 65.0 60.0 60.0 - 94 - ANNEX 3. Page 1 of 3 ZIMBABWE POWER III PROJECT Supervision Plan IBRD Supervision Input 1. The timing for supervision and the staffweeks indicated in this Annex are tentative and assume the loan will be declared effective in December 1993. They are therefore subject to adjustment depending on the actual date of effectiveness. Normal headquarter activities on procurement are also assumed to be carried out in parallel with the loan processing cycle following the appraisal of the proposed project. The Annex does not include these staffweeks, which are estimated to total at least eight staffweeks during the first year, and seven staffweeks per year during subsequent years up to project completion. Borrower's Supvision lnDt 2. Quarterly reports, prepared in line with the Bank's requirements, are to be submitted by ZESA following the project launch until project completion. Updated project costs, including cost estimates to completion, financial statements and progress and performance data will be prepared by ZESA prior to the arrival of supervision missions, in addition to any specific requests that may be needed by visiting supervision missions. ZESA will, in consultation with the visiting missions, prepare the Project Completion Report within six months of project completion. - 95 - ANNEX 3.6 Page 2 of 3 ZIMBABWE POWER m PROJECT Planned Supervision Input Approximate Dates Staff Input Month/Year Type of Activity Skill Requirements (Staffweeks) 1. 12/93 Project Launch -Introducing the project -Reviewing implementation Task Manager schedule Power Engineer 4 -Contract packages -Procurement guidelines -Reporting requirements -Project management -Project completion report 2. 5/94 Interim Review -Review progress with power policy reform and draft FY95 Task Manager ZESA Operations Plan Financial Analyst 6 -Review project progress and Power Engineer status of procurement. -Review accounts, power investment program and compliance with legal covenants. 3. 11/94 Supervision -Review procurement contract Task Manager status, implementation schedules, Power Engineer 4 cost estimates and financing plan 4. 5/95 -Mid-term review to assess; achievement of project objectives Economist and consider if any change is Financial Analyst 6 needed in project design. Power Engineer -Compliance with covenants. S. 11/95 Supervision -Review physical progress and Task Manager 2 implementation schedule. 6. S196 Supervision -Review progress, IPPS, demand Economist growth, audited accounts, cost Financial Analyst 4 estimate and financing plan. Power Engineer Compliance with covenants. - 96 - ANNEX 3.6 Page 3 of 3 ZIMBABWE POWER m PROJECT Planned Supervision Input Approximate Dates Staff Input Month/Year Type of Activity Skill Requirements (Staffweeks) 7. 11/96 Supervision -Supervision mission to review Task Manager all aspects of project Power Engineer 2 implementation. 8. 6/97 Supervision -Last supervision mission to Task Manager review overall achievement of Power Engineer 4 project objectives, compliance to Financial Analyst covenants and advise ZESA on preparation of PCR. - 97 - ZIMBABWE ELECTRICITY SUPPLY AUTHORITY ANNEX 4.1 FINANCIAL INDICATORS FOR THE YEARS ENDING JUNE 30 --------- Actual----- -----------Projected------------------ 1990 1991 1992 1993 1994 1995 1996 1997 1998 ELECTRICITY SALES GWh 8,925 9,021 9,253 8,118 8,629 9,173 9,906 10,402 10,818 INCREASE IN ELECTRICI% 1.1 2.6 (12.3) 6.3 6.3 8.0 5.0 4.0 AVERAGE TARIFF ZClkWh 5.67 6.63 9.16 17.53 26.23 32.13 32.13 40.64 41.46 AVERAGE TARIFF USC/kWh 2.51 2.51 1.81 3.34 3.50 3.86 3.47 3.86 3.47 DATE OF PROPOSED TARIFF INCREASE Sept 1 ,93July 1,94 July 1,96 July 1,97 INCREASE IN AVERAGE TARIFF: DUE TO REAL TARIFF IN% 0.0 14.5 29.4 50.7 33.0 22.5 0.0 26.5 2.0 DUE TO OTHER FACTOF% 3.4 2.5 8.7 40.7 16.6 OVERALLINCREASE % 3.4 17.0 38.1 91.5 49.6 22.5 0.0 26.5 2.0 ACTUAL TARIFF INCREASES: DURING YEAR % 54.1 76.2 33.0 22.5 0.0 26.5 2.0 CUMULATIVE SINCE 7/1% 54.1 171.6 261.2 342.5 342.5 459.7 470.9 OPERATING EXPENSES PURCHASED ELECTRICZC/kWh 0.17 0.40 1.04 1.08 3.81 7.99 10.08 11.05 11.13 GENERATION ZC/kWh 1.80 2.32 2.87 4.69 5.34 5.23 4.64 4.10 4.78 TRANSMISSION & DISTFZC/kWh 1.04 1.52 1.49 2.29 2.65 3.02 3.27 3.64 4.09 ADMINISTRATION & OVZC/kWh 0.52 0.47 0.82 1.19 1.34 1.52 1.60 1.82 2.02 DEPRECIATION ZClkWh 0.73 0.96 1.24 1.74 2.12 2.68 3.09 3.72 5.31 EXCHANGE LOSSES ZClkWh 0.50 0.04 0.08 0.22 0.32 0.36 0.37 0.39 0.41 TOTAL ZC/kWh 4.76 5.71 7.54 11.20 15.59 20.78 23.05 24.72 27.75 OPERATING INCOME ZC/kWh 1.07 1.46 2.88 .8.27 12.89 13.90 11.85 19.01 17.18 NET INCOME ZC/kWh (0.02) (0.18) 0.33 3.81 7.77 8.41 5.82 11.08 8.84 RATEOFRETIJRN/b % 8.2 9.7 15.2 27.1 31.0 27.1 19.9 23.8 17.5 DEBT SERVICE RATIO Times 0.94 0.74 0.78 1.33 1.63 1.57 1.28 1.63 1.25 SELF FINANCING RATIO% (112) (67) (84) 1 25 25 24 25 29 DEBTIEQUITY RATIO % 6o 66 76 75 73 71 71 67 67 RECEIVABLES Days 72 74 85 92 75 75 65 60 60 CURRENTRATIO Times 1.0 1.0 1.1 1.5 1.5 1.6 1.3 1.5 1.4 NETASSETS (EQUITY) ZS Mln 599 585 61s 924 1.595 2,366 2,942 4,095 5,051 NET BORROWING Z$ Min 1,108 1,376 2,287 3,091 4,693 6,240 7,755 9,259 10,935 /a Other factors include: (a) impact of previous year's tariff increases implemented other than on July 1, and (b) changes in mix of sales. /b On partly revalued fixed assets In service. - 98 - ZIMBABWE ELECTRICITY SUPPLY AUTHORITY ANNEX 4.2 INCOME STATEMENTS FOR THE YEARS ENDING JUNE 30 ZS Million ------AcU -…-- Projected --- ----- …-------------- 1990 1991 1992 1993 1994 1995 1996 1997 1998 EL.ECTRICITY SALES (GWh) 8,925 9,021 9,253 8,118 8,629 9,173 9,906 10,402 10,818 AVERAGETARIFF(ZCensuikWh) 5.67 6.63 9.16 17.53 26.23 32.13 32.13 40.64 41.46 AVERAGE TARIFF (USCenul1cWh) 2.51 2.51 1.81 3.34 3.50 3.86 3.47 3.86 3.47 SALES REVENUE 505.9 598.3 847.3 1,423.3 2,263.3 2,947.3 3,182.8 4227.9 4,484.9 OTHER OPERATING REVENUE 14.5 48.7 116.5 157.3 193.5 234.2 274.0 320.6 375.1 TOTAL OPERATING REVENUE 520.4 647.0 963.9 1,580.6 2,456.8 3,181.5 3,456.8 4,548.4 4,860.0 OPERATING EXPENSES PURCHASED ELECTRICITY 15.2 36.5 96.3 88.0 328.8 732.7 998.1 1,149.6 1,204.4 GENERATION 160.5 209.2 265.3 380.4 461.0 480.1 459.9 426.0 517.5 TRANSMISSION & DISTRIBUTION 92.5 137.1 137.7 185.8 228.6 276.6 323.6 378.6 443.0 ADMINISTRATION & GENERAL 13.5 8.3 23.4 25.3 28.2 34.0 34.3 44.1 48.5 OVERHEADS 33.1 33.8 52.7 71.1 87.4 105.8 123.8 144.8 169.5 DEPRECIATION 65.1 86. 114.9 140.9 183.3 244.2 306.5 387.3 574.1 EXCHANGE LOSSES 45.0 38 7.0 17.6 27.6 32.7 36.8 40.6 44.8 TOTAL OPERATING EXPENSES 424.9 515.2 697.2 909.1 1,345.0 1,906.1 2,282.9 2,571.0 3,001.8 OPERATING INCOME 95.5 131.8 266.7 671.5 1,111.8 1,275.4 1,173.9 1,977.4 1,858.2 FINANCE CHARGES 97.1 147.7 236.4 362.5 441.1 504.2 597.8 824.7 902.4 NET' INCOME (1.6) (15.9) 30.2 309.1 670.7 771.2 576.1 1,152.7 955.8 - 99 - ZIMBABWE ELECTRICITY SUPPLY AUTHORITY ANNEX 4.3 BALANCE SHEETS FOR THE YEARS ENDING JUNE 30 Z$ Million ------ --Actual----- -----------Projected…----------------- 1990 1991 1992 1993 1994 1995 1996 1997 1998 EMPLOYMENT OF FUNDS FIXED ASSETS ASSETS IN SERVICE 1,518.4 1,977.6 2,511.8 3,683.1 5,037.0 6,351.4 7,976.4 11,836.0 13,646.7 DEPRECIATION 346.8 432.9 546.3 687.2 870.5 1,114.7 1,421.2 1,808.5 2,382.6 NETASSETS IN SERVICE 1,171.6 1,544.7 1,965.5 2,995.9 4,166.5 5,236.7 6,555.2 10,027.5 11,264.1 DEFERRED EXCHANGE LOSSES 248.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 WORKSINPROGRESS 106.4 181.0 504.8 397.7 1,355.2 2,438.1 3,166.3 1,826.1 3,114.6 INVESTMENTS 3.2 7.0 18.3 18.3 18.3 18.3 18.3 18.3 18.3 CURRENT ASSETS CASH & BANK 0.2 0.1 2.1 2.8 3.5 4.2 4.9 5.8 6.8 FUNDS ON DEPOSIT 18.9 11.7 22.0 31.0 35.0 38.8 43.6 49.5 56.3 TRADE DEBTORS 99.6 121.6 196.5 358.7 465.1 605.6 566.8 695.0 737.2 OTHER DEBTORS 22.6 35.3 94.1 125.5 149.2 171.8 193.0 214.6 238.7 STORES AND MATERIALS 191.1 282.8 375.7 449.4 583.3 733.1 917.7 1,403.9 1,577.0 TOTAL 332.4 451.5 690.4 967.4 1,236.0 1,553.6 1,726.1 2,368.7 2,616.0 CURRENT UABIUTIES BANK OVERDRAFT/NOTES PAYAJ 97.6 133.2 92.3 38.4 49.4 49.4 55.9 70.2 85.6 CURRENT PORTION OF LONG TE 125.5 133.3 309.7 297.4 339.4 373.1 595.5 751.0 875.0 TRADE CREDITORS 65.0 96.6 106.5 125.1 189.0 271.5 323.3 357.2 397.1 ACCRUED INTEREST 26.0 38.6 59.8 91.0 119.2 153.3 190.8 228.6 274.1 PROVISIONS 5.5 9.4 11.8 15.9 19.6 23.7 27.7 32.5 38.0 OTHER 24.0 48.3 50.9 68.7 84.5 102.3 119.7 140.0 163.8 TOTAL 343.6 459.4 631.0 636.5 801.1 973.3 1,312.9 1,579.4 1,833.7 NET CURRENT ASSETS/(UABIUTI (11.2) (7.9) 59.4 330.9 434.9 580.3 413.2 789.3 782.3 TOTAL FUNDS EMPLOYED 1,518.6 1,724.8 2,548.0 3,742.8 5,974.9 8,273.5 10,153.0 12,661.2 15,179.3 FUNDS EMPLOYED EQUITY 599.3 584.9 615.3 924.4 1,595.1 2,366.3 2,942.4 4,095.1 5,050.9 LONG TERM DEBT 904.4 1,121.4 1,908.8 2,788.6 4,342.5 5,860.5 7,152.3 8,493.2 10,037.3 CONSUMER DEPOSITS 14.9 18.5 23.9 29.9 37.3 46.7 58.3 72.9 91.2 TOTAL FUNDS EMPLOYED 1,518.6 1,724.8 2,548.0 3,742.8 5,974.9 8,273.5 10,153.0 12,661.2 15,179.3 - 100- ZIMBABWE ELECTRICrrY SUPPLY AUTHORITY ANNEX 4.4 STATEMENTS OF SOURCE AND APPLICATION OP FUNDS FOR THE YEARS ENDINO JUNE 30 Z S Mmon Total ---Aaiasl…----------- Projoced …------ - …---- - 1990 1991 1992 1993 1994 1995 1996 1997 1998 94-9S SOURCE OP FUNDS GENERAnIONFROM OPERATIONS OPERATING INCOME 95.5 131.8 266.7 671.5 1,111.8 1.275.4 1,173.9 1,977.4 1,858.2 7,396.8 DEPRECIATION 65.1 86.5 114.9 140.9 183.3 244.2 306.5 387.3 574.1 1,695.4 EXCHANGE LOSSES/(GAINS) 45.0 0.0 (14.6) (9.0) (4.0) (3.9) (4.8) (5.9) (6.8) (25.3) TOTAL 205.6 218.3 367.0 803.5 1,291.2 1/515.7 1,475.6 2,358.1 2,425.5 9,066.9 CONSUMER DEPOSITS 2.8 3.6 5.4 6.0 7.5 9.3 11.7 14.6 18.2 61.3 CAPrTAL CONTRIBUTION 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 SALE OF INVESTMENTS 22.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 LOANS 182.7 215.3 640.8 626.8 1,619.8 1,518.2 1,353.7 1,286.7 1,645.0 7,423.4 TOTAL SOURCE OF FUNDS 413.6 437.2 1,013.2 1,436.2 2,918.5 3,043.2 2,41.0 3,660.1 4,088.8 16,551.6 ____. ...... ..... ... .... ... ... ..... ..... .......__ APPLICATION OF FUNDS CAPITAL INVESTMENT CONSTRUCllON 30L1 5S2.5 1,984.4 1.8W.6 1,636.1 1,689.7 2,041.3 9.25L1 IDC 13.5 1.4 35.7 108.8 165.5 89.6 194.2 593.8 TlOTAL INVESTMENT 130.3 129.4 314.6 583.9 2,020.1 2,00S.4 1,801.6 1,779.3 2,235 9,844.9 DEBT SERVICE REPAYMENr 121.8 145.5 223.2 239.6 315.2 355.4 391.1 530.4 840.6 2,432.7 INTIEREST 97.1 147.7 236.4 362.5 441.1 504.2 597.8 824.7 902.4 3,270.3 TOTAL 218.9 293.2 459.6 602.1 756.3 859.6 98S.9 1,355.1 1,743.0 5,703.0 PURCHASE OF INVESTMENTS 4.2 3.8 11.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 INCREASE/(DECREASE) IN WORKaNG CAPITAL OTHER THAN NET LIQUID FUNDS 148.9 54.0 190.5 195.6 152.4 174.5 56.2 539.1 124.7 1,047.0 OTHER APPLICATIONSI(SOURCES) (1.4) (0.3) (1.5) 0.0 0.0 (0.0) 0.0 (0.0) 0.0 (0.0) TOTALAPPLICATIONOPFUNDS 500.9 480.1 974.6 1,381.6 2,928.8 3,042.6 2,846.7 3,673.6 4,103.2 16,594.9 INCREASE(DECREASE) IN NEr LIQUID FUNDS (873) (42.9) 386 54.7 (10.3) 0.7 (5.7) (13.5) (14.4) (43.3) ......... ..... ..... ......... ... .... ..._... - 101 - ANNEX 4.5 Page 1 of 3 ZIMBABWE POWER III PROJECT ZIMBABWE ELECTRICITY SUPPLY AUTHORITY (ZESA) NOTES AND ASSUMPTIONS FOR THE FINANCIAL PROJECTIONS 1992/93 - 1997/98 1. Inflation and Exchange Rates. The following forecast inflation and exchange rates have been used wherever stated in this annex. Year ending June 30: 1993 1994 1995 1996 1997 1998 international Inflation-% 5.0 5.0 5.0 5.0 5.0 50 Domestic Inflation-% 35.0 23.0 21.0 17.0 17.0 170 Exchange rate-lUS$=Z$: - Mid year 5.2500 7.5000 8.3333 9.2593 10.5219 117 - Year end 6.9889 7.8849 8.7609 9.8325 11.1733 1269 2. Sales and Revenues. Sales projections are based on load forecasts as per ZESA's System Development Plan. Sales are forecast to decline in 1992/93 by 12.3% over the previous year; and thereafter the annual growth is estimated at 6.3% in 1993/94 and 1994/95, 8.0% in 1995/96, 5.0% in 1996/97, and 4.0% in 1997/98. Sales revenue for 1992/93 is projected on the basis of existing tariffs. Sales revenues for future years are based on increases in average tariff of 33% on September 1, 1993, 22.5% on July 1, 1994, 26.5% on July 1, 1996, and 2% on July 1, 1997. "Other" operating revenue is assumed to increase in line with domestic inflation. 3. Operating Expenses. Energy requirements, purchased and generated, are based on ZESA's Generation Production Model within the overall System Development Plan. Cost of purchased energy is provided on present agreed terms. Coal and diesel consumption for thermal generation is estimated for each plant on the basis of forecast electricity output and the present average consumption rate per unit of output. For Hwange, the consumption rate is scaled downwards from 1996/97 to take account of anticipated efficiency gains resulting from planned upgrading and overhauls. Coal price is assumed to increase in line with local inflation. The revised pricing structure, as notified by the Wankie Colliery Company, for coal deliveries to Hwange has been applied from March 1, 1993. Diesel price is assumed to increase in line with local and international inflation differential. Cost of chemicals and maintenance and spares for power plants is forecast in total on the basis of 1991/92 actual cost per unit of output, increased in line with local inflation, and future output. Provision for bad debts is maintained throughout at 2.5% of closing trade debtors, in conformity with the policy adopted in 1991/92 financial statements. All other operating costs, excluding depreciation and exchange losses, are assumed to increase in line with local inflation. - 102 - ANNEX 4.5 Page 2 of 3 4. Deprecfiatin Depreciation is provided in two parts: (a) historical cost is depreciated at 4.48% of the opening historical cost of fixed assets in service, in line with past historical average, and (b) capitalised exchange losses arising on long term loans are depreciated over the remaining useful lives of existing plants in service and over 25 years for new assets. 5. Exchange Losses/Gains. Exchange losses arising on long term loans relating to the acquisition of fixed assets are added/capitalised to work in progress or fixed assets on the basis that the continuing depreciation,as forecast, of the Zimbabwe dollar is significant and considered to be permanent and unlikely to be reversed. Such capitalised losses are depreciated as described above. Exchange losses on trading transactions are projected to increase by Z$5 million each year. These losses, less exchange gains arising on foreign currency deposits, are charged to income. 6. Fixed Assets and Work in Progress. Capital investment is provided as per ZESA's investment program. Provision is made for inflation and 10% physical contingency. The foreign cost component is converted to Z$ at the appropriate mid year exchange rates for the US$. Capital costs, together with related interest during construction (DC) and capitalised exchange losses, are transferred from work in progress to fixed assets in the year of commissioning of specific projects; and in the case of on-going general distribution and transmission, capital costs are transferred in the year in which incurred. 7. Investments. Quoted investments and other investments, as discounted, are maintained at the June 30, 1992 level throughout. 8. Current Assets, Operating cash and bank balance is assumed to increase in line with local inflation. Funds on deposit (all in foreign currency) are maintained at the June 30, 1992 level, and adjusted for movements in year end exchange rates. Trade debtors are estimated at the present levels of 92 days' sales for 1992/93, 75 days' sales for 1993/94 and 1994/95, 65 days' sales for 1995/96, and 60 days' sales thereafter. Other debtors are assumed to increase in line with local inflation. Stores and materials are assumed at 15% for 1992/93 and 14% thereafter of closing net book value of fixed assets. 9. Current Liabilities. Bank overdraft and notes payable represent the financing gap which is maintained at a reasonable level and set not to exceed Z$90 million (the balance at June 30, 1992). Trade creditors are taken at two months' operating expenses, excluding depreciation and exchange losses. Accrued interest is provided at three months' total interest. Provisions and other creditors are assumed to increase in line with local inflation. 10. Consumer Deposits. Consumer deposits are assumed to increase by 25% each year. 11. Long Term Debt and Interest. Borrowing, repayments and interest on foreign currency loans are translated at mid year exchange rates, and closing balances are stated at year end rates. The following borrowing policy has been adopted for new capital investment for which financing is not in place: (a) Foreign currency requirements will be financed entirely by borrowing on normal IBRD terms of repayments over 15 years, including 5 years' grace, with interest at 8 % per annum. The grace period is reduced to the construction period of a project if it is of less than five years' duration. - 103 - ANNEX 4.5 Page 3 of 3 (b) Borrowing for local currency requirements for each project is restricted each year to 70% to 80% of total (foreign and local) capital cost less the Z$ value of borrowing secured for foreign currency costs. The level of local currency borrowing each year is determined by the overall financing gap. Local borrowing is assumed to be secured over medium term of 7 years, including 5 years' grace, with variable interest rates, as forecast by ZESA, of 32.5% for 1992/93, 28% for 1993/94, 24.5% for 1994/95, 20.5% for 1995/96, and 18% thereafter. Funding for capital projects with financing in place has been provided in accordance with agreed terms. Interest during construction (IDC) is capitalised and added to work in progress, from which it is transferred to fixed assets on project commissioning. IDC is only calculated on specific project related loans. Interest is not capitalised on borrowing for on-going work, such as general distribution and transmission, and provision for support services such as motor vehicles. Interest on bank overdraft, notes payable and discounted investments is provided at ZESA's forecast rates for commercial bank rates of 27% for 1992/93 and 1993/94, 22.5% for 1994/95, 17.5% for 1995/96, and 15% thereafter. Interest income on foreign currency deposits is provided at the present rate of 4.375% throughout. Local interest income is assumed to increase in line with local inflation. Fixed interest income on investments is maintained at the 1991/92 level throughout. Interest income is deducted from interest charges in the income statement. -104- Annex 5.1 Page 1 of 2 ZIMBABWE POWER III PROJECT Economic Justification for the Hwange Power Station Upgrade Program 1. MethQox The output and reliability of Hwange Power Station have both be'en reduced by design weaknesses that the Upgrade Program is designed to correct. To assess the comim benefits of the Program, alternative availability rates for the power station (availability being the percentage of the year the station's capacity is either generating or available, but in reserve) were estimated for "with" and "without' program cases, based on a technical judgement of the station's capability in the two situations. In the "with program' case, it was hypothesized that the station's availability would be 73% in 1994 (the same as 1992) and would rise by 3% in 1995 and 4% in 1996 to a level of 80% and stabilize at this level through 2005, when the analysis was terminated. In the "without program" case, it was hypothesized that availability would be the same as in the *with programn case in 1994, then deteriorate by 2% per year over the remainder of the period. Assuming the least-cost system development program is implemented, ZESA's System Production Costing Model, which optimally despatches available supply to meet forecast demand, was run over the period 1994-2005 for each of the two hypothetical availability rates to estimate the actual output of Hwarge Power Station under the two availability scenarios. The resulting 'without program" output of the station is shown in the first column of the table, the "with program" output in the- second column and the net or differential output between the two scenarios in the third column. The incremental output that the system requires from Hwange and can be achieved with the improved availability is'771 GWh in 1995, when power supply is still constrained, then falls marginally in 1996 and sharply in 1997, by when both of the interconnector projects are scheduled to be in service. It then fluctuates at around 500 GWh/year until 2003, when it rises sharply again as the supply situation becomes increasingly constrained. The incremental power supply that will reach the consumer, and which constitutes the program benefits, is the incremental output minus projected transmission and distribution losses. These are shown in column four of the table. The analysis is conservatively terminated in 2005, although the benefits will continue to be felt for many years beyond this. 2. The benefits are valued at the most conservative measure of consumer willingness- to-pay, the 1992/93 average tariff, which is Zcl7.5/kWh. At certain times, particularly in the early years when supply is constrained and incremental output from Hwange will reduce unserved energy demand, the value of the benefits will be a multiple of several times the tariff. 3. The economic costs of the Upgrade Program are its estimated capital costs, with the foreign costs adjusted for the scarcity value of foreign exchange by use of a 25% premium, plus the incremental variable costs of producing the increased output, which include all scheduled maintenance and overhauls and full provision of consumable inputs and spares. 4. Based on these assumptions, the estimated economic rate of return of the Hwange Upgrade Program is 13.5%. Given that the benefit valuation methodology certainly understates the average value of the program benefits, the ex-post rate of return is likely to be substantially higher. ZIMBABWE POWER III PROJECT ECONOMIC RATE OF RETURN OF THE HWANGE UPGRADE PROGRAM HWANGE OUTPUT INCREMENTAL ESTIMATED CAPITAL VARIABLE TOTAL FISCAL INCREMENTAL DEUVERED BENEFITS COST COST OF CAPITAL NET YEAR OUTPUT SUPPlY * 1992 UPGRADES INCREMENTAL AND BENEFITS W/o WITH IMWH) IMWh) TARIFF (Z$O0O'S) GENERATION VARIABLE MZ'OODS) UPGRADE UPGRADE IZ$OOO'sg) @Zc7iwh COST _____ (MWrI) IMWH) (Z$000's) (Z*OO0'$I 1994 4.304,614 4,304.614 0 0 0 i39,190 0 139,190 1139,190) 1995 4,326.351 5,096,947 770,596 693,536 121,368 150,811 53,941 204.752 (83.384) 1996 3.162,045 3,784,058 622,013 501,677 98,293 69.610 43,941 113,551 (15,058) 1997 2.438,807 2.615,671 176,864 160,062 28,011 15,453 12,380 27,833 178 1998 2,680,780 2,992,712 311,932 282,922 49,511 0 21,835 21.835 27,676 1999 2.490,480 2,998.063 507,583 461,901 80,833 0 35,530 35,530 45,303 2000 1.993.726 2,437.237 443,511 403,395 70,594 0 31,045 31,045 39,549 2001 1.715,495 2.173,953 458,458 417,197 73,010 0 32,092 32,092 40,918 2002 1.952.214 2,467,815 515.601 469,197 82,109 0 36,092 36,092 46,017 2003 2,524.814 3.577,366 1,052,552 957,822 167,619 0 73.678 73,678 93,941 2004 2,842.088 4,570,669 1.728,581 1,573,009 275,276 0 121,000 121,000 154,276 2005 3.049,137 5,655,109 2,605,972 2,371,435 415,001 0 182,418 182,418 232,583 ECONOMIC RATE OF RETURN 13.5% (I ~~~~~~~~~~~~~~~~~~~~~~ - 106- Annex 5.2 Page 1 of 3 ZIMBABWE POWER III PROJECT Economic Justification of the Distribution Investments Methodology 1. The eleven distribution reinforcement/extension schemes included in the project were selected from over forty candidate schemes designed and proposed by ZESA's Area Offices, which are responsible for the operation and maintenance of the distribution system and for proposing major investments in its rehabilitation, re-enforcement and extension in their respective service areas. The candidate schemes were subjected to an economic screening test by ZESA and Bank staff to identify those to be included in the project. The economic benefit/cost ratio of each of the candidate schemes was estimated, using a discount rate of 10%, over an assumed 15 year economic life of the new assets. Only schemes with an estimated benefit/cost ratio greater than unity were selected. The economic rate of return of each of the selected schemes was also estimated using the same cost and benefit assumptions as in the benefit/cost ratio analysis. In the following paragraphs, the methodology and assumptions used in the economic analysis are outlined and the results summarized in the attached tables. Year-by-year estimates of the economic costs and benefits of each individual distribution scheme are available on the project file. Economic Costs 2. The economic costs of each distribution scheme evaluated consist of the initial capital costs of the investments and the yearly operations and maintenance costs. The design of each candidate scheme was first optimized technically and the equipment to be installed was specified. The equipment was then costed, either from recent tenders for the same equipment or manufacturers' quotations. The financial cost of the foreign portion of the equipment was then inflated by a standard conversion factor (scf) of 1.25, the estimated shadow value of foreign exchange. The scf was derived from the current average premium for foreign exchange on the secondary market that has been established as part of the Export Retention Scheme. Operations and maintenance costs were estimated at 2% of capital costs. Economic Benefits 3. The economic benefits of each scheme consist of: (a) reduced distribution losses due to the elimination of capacity constraints on the existing system; and (b) incremental load growth projected for the relevant section of the distribution system which could not be satisfied without the proposed investment. The kilowatthours currently being lost due to inadequate capacity on the existing distribution system were calculated, based on the technical characteristics of the system and existing demand data. The losses were then valued at the existing tariff, on the basis that the costs of generating and transmitting the lost power are sunk and its value to the consumer is at least equal to the tariff. The incremental load on each of the distribution feeders in which investment was proposed was forecast based on the average projected system load growth and any firm major new loads for which applications had been received. These incremental sales were assumed to begin no sooner than 1996, when the supply constraint will be alleviated, and were valued at Zc7/kWh, the difference between - 107 - Annex 5.2 Page 2 of 3 the current average tariff and average bulk supply cost. These benefits were projected over 15 years, the average economic life of the assets. Results of the Analysis 4. The summary inputs and results of the analysis for the schemes that qualified for inclusion in the project are shown in the following table. The individual schemes are grouped into the ZESA Distribution Areas in which they are located. All the selected schemes have estimated benefit/cost ratios of 1.1 or greater at a 10% discount rate and economic rates of return in excess of 12%. DEVELOPMENT OF DISTRIBUTION PROJECT BENEF[TS 1992 CONSTANT Z$ BENEFIT/COST RATIOS & ECONOMIC RATE OF RETURN (000'S ZS) NORTHERN PROJECTS no. CAPITAL COSTS 0 & M TOTAL TOTAL NPV B/C ERR FOREX LOCAL COSTS BENEFITS COSTS BENEFITS RATIO I Guruve Nl $1,053 $506 $678 $2,237 $6,802 $1,418 $2,364 1.67 20.49% Centenary North N2 $1,053 $506 $678 $2,237 $8,543 $1,418 $3,007 2.12 27.08% Battlefield N3 $2,629 $1,103 $1,623 $5,355 $17,382 $3,397 $5,718 1.68 19.55% Chakari-Golden Valley N10 $394 $12 $177 $582 $20,683 $373 $6,860 18.39 140.79% capacitors & reinforcement Kadoma, Chegutu, Norton N15 $657 $388 $455 $1,500 $73,602 $948 $27,998 29.52 356.93% 33 kv lines NORTHERN TOTALS N/A $5,785 $2,516 $3,611 $11,912 $127,012 $7,553 $45,947 6.08 79.37% WESTERN PROJECTS no. o Shangani 132/11 Wi $26,563 $5,750 $14,056 $46,368 $99,867 $29,546 $35,187 1.19 13.34% Plumtree Capacitors W2 $967 $105 $466 $1,539 $8,373 $983 $2,868 2.92 34.78% Beitbridge-Mazunga Network W3 $572 $363 $407 $1,341 $9,110 $848 $3,134 3.70 45.03% Uprating Gwanda-Colleen Bawn W4 $1,701 $736 $1,060 $3,497 $92,002 $2,218 $34,997 15.78 210.59% 33kv Lines WESTERN TOTALS N/A $29,803 $6,953 $15,989 $52,745 $209,352 $33,595 $76,186 2.27 30.24% SOUTHERN PROJECTS no. Gweru network rehab S4 $1,532 $405 $843 $2,780 $37,284 $1,769 $11,677 6.60 54.78% Gwenora Dam S1o $383 $8 $170 $560 $10,067 $359 $3,816 10.62 134.47% SOUTHERN TOTALS N/A $1,915 $413 $1,013 $3,341 $47,351 $2,129 $15,493 7.28 67.39% DISTRIBUTION PROJECT TOTALS 37,503 $9,882 $20,612[ $67,998 $383,7161 $43,2771 $137.626[ 3.18T 41.52% 10t CAPITAL COST EXPENDITURES (ECONOMIC COSTS) POWER PLAN III 1992 Z$ PROJECTS 1992:93 1993/94 . 1994/95 1995/96 1996/97 1997/98 TOTALS 1992/98 FEC LOCAL FEC LOCAL FEC LOCAL FEC LOCAL FEC LOCAL FEC LOCAL FEC LOCAL MATIMBA BASE COST 0 0 106,311 26,058 183,628 45,008 32,215 7,897 0 0 0 0 322,154 78,963 PHY.CONT 0 0 10,631 2,606 18,363 4,501 3222 790 0 0 0 0 32,215 7,896 TOTAL 0 0 116,942 28,664 201,991 49,509 35,437 8,686 0 0 0 0 354,370 86,859 CAHORA BASSA BASE COST 0 0 86,903 15,412 236,569 41,956 159,322 28,256 0 0 0 0 482,794 85,624 PHY.CONT 0 0 8,690 1,541 23,657 4,196 15,932 2,826 0 0 0 0 48,279 8,562 TOTAL 0 0 95,594 16,953 260,226 46,151 175.254 31,082 0 0 0 0 531,073 94,186 HWANGE UPGRADE BASE COST 0 0 77,372 46,365 90,431 44,927 44,796 9,361 0 0 0 0 212,599 100,653 PHY.CONT 0 0 0 0 0 0 0 0 0 0 0 0 0 0 TOTAL 0 0 77,372 46,365 90,431 44,927 44,796 9,361 0 0 0 0 212.599 100,653 OVERHAULS,ETC. BASE COST 0 0 7,490 6,558 7,490 6,558 7,490 6,558 7,490 6,558 7,490 6.558 37,452 32,792 PHY.CONT 0 0 749 656 749 656 749 656 749 656 749 656 3,745 3,279 TOTAL 0 0 8,239 7,214 8,239 7,214 8,239 7,214 8,239 7,214 8,239 7,214 41,197 36,071 DISTRIBUTION BASE COST 0 0 0 0 9,001 0 31,502 5,929 4,500 3,953 0 0 45,003 9,882 PHY.CONT 0 0 0 0 900 0 3,150 593 450 395 0 0 4,500 988 TOTAL 0 0 0 0 9,901 0 34,652 6,522 4,950 4,348 0 0 49,503 10,870 TOTAL CAPITAL COST 0 0 298,147 99,196 570,788 147,801 298,378 62,865 13,189 11,562 8,239 7,214 1,188,743 328,640 FEC INFLATION 1.05 LOCAL INFLATION 1.45 SHADOW EXCHANGE 125 - 110- Annex 5.4 Page 1 of 4 ZIMBABWE POWER HII PROJECT Economic Rate of Return to the Power Plan III Investment Program Methodogy 1. The Power HI Project forms part of ZESA's larger Power Plan III, a package of integrated investments to be made over the period 1994-98 that will expand the power system to meet future demand for electricity at minimum economic cost. The Project, like the Power Plan III Program, comprises a number of mutually-supportive components, which when combined together and with the other elements of the Program, will allow the future demand for power to be met reliably and at least cost. Although it is possible to identify accurately the costs of the IBRD project that will contribute to Power Plan Im, it is not possible to accurately disaggregate the benefits attributable to the IBRD project from those of the overall system development program. The economic rate of return (ERR) analysis has therefore been performed for the Power Plan III Program in its entirety. Period of Analysis 2. The economic rate of return is thus computed for a specific time slice of the power investment program. The period begins with 1994, the year in which the first Power Plan III investments will be made. Most of the capital costs of Power Plan III are projected to be made in 1994, 1995 and 1996, but a few minor investments will spill over into 1997 and 1998. In order to capture both the short and medium-term benefits of the Program, the benefit flows are estimated up to 2005. This is a conservative period, relative to the life of the assets, but the benefits stream gets increasingly hard to estimate accurately in the longer term. The year 2005 was selected as an appropriate cut-off point largely because it is the approximate commissioning date of the next large-scale hydro-electric facility likely to be added to the Zimbabwean system, which will have major impact on use of the facilities to be constructed under Power Plan III. Economic Costs 3. The economic costs used for computing the economic rate of return are the sum of the capital costs of the Power Plan III investments, measured in economic terms, and the operating and maintenance costs of the incremental supply of power that those investments will contribute to the system over the period of analysis. The capital costs are those summarized in Annex 5.3. They are based on the estimated financial costs of the Power Plan Im investments, converted into economic costs by use of a standard conversion factor of 1.25, the average premium for foreign exchange on the secondary foreign exchange market at the time of appraisal. The operations and maintenance costs were derived from ZESA's System Production Costing Model, which is a model that was developed by ZESA's system planning consultants to compare the economic cost of alternative development programs. The model does this by simulating the despatch of the existing generating stations and import supplies and alternative new sources of supply to meet the forecast demand for power at minumum economic cost. Having first established that Power Plan III is the least cost option for the next phase of system expansion, as described in Annex 2.5, the model identifies the output required from each power station or interconnection, including those to be financed by Power - 111 - Annex 5.4 Page 2 of 4 Plan Ill, and estimates the operations and maintenance cost of the supply from each individual source. The operations and maintenance costs used in the ERR analysis are those of the two interconnectors and the incremental output of Hwange Power Station that the project will permit to be achieved. All costs are expressed in 1992 prices. Economic Benefits 4. The economic benefits are the incremental demands for power that will be met by the investments included in the Power Plan III development program valued at the economic worth of that incremental demand. In 1994 and 1995, and perhaps for part of 1996, until the first of the planned interconnectors with South Africa and Mozainbique is in service, that incremental demand will be supplied from Hwange Power Station. Without the higher Hwange availability and capacity benefits of the project, much of this incremental demand would be unserved, at high economic cost to Zimbabwe. From 1996, and until Hwange Stage III or an alternative new source of supply is available, which is projected to be the early years of next century, the incremental demand will be met largely by the two interconnectors. Hwange III will then share that role until the planned Batoka hydro-electric scheme is in service, which is projected to be 2004. Should Hwange III and/or Batoka or be delayed, which is very probable, the roles of Hwange I and II and the two interconnectors in meeting demand will be correspondingly greater than projected and the benefits stream consequently larger. 5. The value of the economic benefits is based on the most conservative method of estimating consumers willingness-to-pay for electricity, which is the atual tariff. The FY92193 average tariff of Zcl7/kWh (about USc3/kWh) is used in the computation. The true willingness to pay is certainly higher than the tariff, for large commercial consumers, considerably higher. This valuation methodology therefore certainly understates the actual economic benefits of the Power Plan III Investment Program. Using this valuation method, the estimated economic rate of return of the power investment program is 26.7%. A summary of the data used in reaching this estimate is given in the attached table. Risk Analysis 6. There is a risk that this rate of return will not be realized. However, given that most of the capital equipment to be installed under the program is of a standard type and the installation engineering required is relatively simple, the risk that the capital costs of the program have been significantly understated is considered to be negligible. Similarly, given that that the incremental operating and maintenance costs are derived from ZESA's production costing model, the risk that they are seriously over or under-estimated is also considered to be slight. There is a risk that the growth in demand, and hence the incremental demand that the program will satisfy, have been over-estimated, as has occurred with a significant proportion of power projects in the past. This risk is reduced by the relatively conservative demand growth rate projection used, which is marginally below the historical average; by the fact that there is considerable suppressed demand for power, which a major transmission and distribution expansion program is presently helping to alleviate; and by the fact that the ESAP is well advanced and its benefits should be felt strongly over the reference period. Potentially counterbalancing these positive factors, at least to some degree, power tariffs have recently been increased in real terms and will increase further as full economic pricing is introduced. Consumers have also been forced to re-assess their consumption of power over the past year - 112 - Annex 5.4 Page 3 of 4 due to the drought-induced shortage of supply. Given the uncertainty over the demand forecast, the switching value for projected demand at which the ERR would fall to 10%, the estimated opportunity cost of capital, was calculated. This analysis showed that the demand projection would need to over-estimate demand growth by 53% for the ERR to fall to 10%. This outcome would requiring a major and sustained economic collapse and average economic growth in the 1990s well below the modest rate of 3% achieved in the 1980s. It is considered that the probability of this outcome is extremely low, and that the project is therefore economically justified under all probable conditions. - 113 - Annex 5.4 Page 4 of 4 ECONOMIC RATE OF RETURN OF DEVELOPMENT PROGRAM (POWER PLAN 1II) @ ESTIMATED LEVEL OF ENERGY PROVIDED CONSTANT 1992 Z$ TOTAL TOTAL ENERGY TOTAL NET FISCAL CAPITAL O & M ECONOMIC PROVIDED BENEFITS BENEFITS YEARS COST COSTS COSTS (MWH) 1992 0 0 0 0 0 0 1993 0 0 0 0 0 0 1994 397,344 0 397,344 0 0 (397,344 1995 718,590 204,242 922,832 1,516,927 242,708 (680,123 1996 361,243 269,538 630,781 2,951,519 472,243 (158,538 1997 24,752 225,008 249,760 4,531,619 725,059 475,299 1998 15,454 238,940 254,394 4,694,336 751,094 496,700 1999 251,749 251,749 4,891,017 782,563 530,814 2000 251,155 251,155 4,793,768 767,003 515,848 2001 253,424 253,424 4,810,777 769,724 516,300 2002 257,407 257,407 4,874,474 779,916 522,509 2003 273,348 273,348 5,536,450 885,832 612,484 2004 321,780 321,780 4,995,397 799,264 477,483 2005 237,981 237,981 3,651,975 584,316 346,335 2006 0 0 0 0 0 2007 0 0 0 0 0 2008 0 0 0 0 0 2009 0 0 0 0 0 2010 0 0 0 0 0 TOTALS $1,517,382 $2,784,572 $4,301,954 47,248,259 $7,559,721 $3,257,767 ECONOMIC RATE OF RETURN 26.73% @ 1992 TARIFF LEVEL - 114- Annex 6.1 ZIMBABWE POWER III PROJECT DOCUMENTS ON THE PROJECT FILE National Electricity Supply Crisis: Immediate, Short, Medium and Long-Term Options: ZESA Corporate Planning Unit, August 1992. ESMAP Electricity Demand Management Technical Assistance mission to Zimbabwe, August 31- September 18, 1993 Aide-Memoire. Report on the Electrical Energy Situation in Zimbabwe for the Zimbabwe Association of Business Organizations. Power Plan Consultants, 1992. SADC Energy Project AAA 3.8: Regional Generation and Transmission Capacities, including Inter-regional Pricing Policies, Phase II. Final Technical Report, April 1993. EPD Consultants. Hwange Power Station: Phase II Upgrade Projects: Design Report, March 1993. TA Consultants/Electrowatt. Hwange Power Plant: Towards an Action Plan for Improvement. Delcon (Zimbabwe), 1992. Cahora Bassa - Zimbabwe Interconnection: General Presentation of Project. EDF International, November 1991. Matimba-Insukamini 400kV Interconnection, Eskom/ZESA, February 1993. IBRD 22659 , z 1. 286 30 32 ZIMBABWE POWER SECTOR INFRASTRUCTURE . (j 4 M O Z A M B I Q U E -1 6 - 4oL. JMSJAAJ-, ~~_ ,w~~~~~~ .-__ S i ~~~~~~~~~~N O R T FjltiR,-N _ _~~~~~_ wt s wej ~~~~~~~~~~Z O N E = f7- Z A M B INOT- A'~ -~~~A/ - -- - F. - - -- - ':,.~ NAMIBIA V Rni W~~~~~ N T R>~ A ZE 0 N E N E '- 20 20~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -20. E.ii,hnq Power Focilit.., In 20-- 330 kV Trnn,issmion Lines B. Other Main Tranisnu,,on Lines and Mcio, ubstations - S ,' More Than One Circuit - - Electrification Zone Boundories E= 1Area Consred by Distribution Systen. 132 kVTronsnission Lines (UndleConsianutic.) L,. WE Hydro Plant (Rehobilitation\ _2. - - Internationcl Boundories 22- -22- BOTSWANA M ( - Beltbrldg. d-= S sO 100 IO KILOMETERS I__ .__._tS_OU_TH_AF_R________ MILES r SO T A RI(_ ° 26- 5 28 r 30- '32 SEPTEMBER 1990