Fourth and kureimat power project Report No: ; Type: Report/Evaluation Memorandum ; Country: Egypt; Region: Middle East And North Africa; Sector: Thermal; Major Sector: Electric Power & Other Energy; ProjectID: P005097 The Egypt Fourth and Kureimat Power Projects were supported by Loans 3103-EGT and 3441-EGT for US$165.0 million equivalent and US$220.0 million equivalent, respectively, and were approved in FY89 and FY92. In July 1994, the Bank suspended disbursements against the two loans because the Borrower, had failed to comply with the projects’ main financial covenants for three years. Loan 3441 was closed in March 1995, after cancellation of US$200.0 million. Loan 3103 was closed on time in December 1995, and US$25.1 million was canceled in April 1996. The main cofinanciers of the Fourth Power Project were the African Development Bank (ADB), the Arab Fund for Economic Development (AF), and the European Investment Bank (EIB), which provided, respectively, US$127 million, US$121 million, and US$57 million. For the Kureimat Project ADB, AF, USAID, and Saudi Arabia provided US$350 million, US$125 million, US$194 million, and US$50 million, respectively. The Implementation Completion Report (ICR) was prepared by the Middle East and North Africa Regional Office. The Borrower did not provide its own evaluation but commented on the Bank’s in an annex. The cofinanciers neither contributed to, nor commented on the ICR. The objectives of the Fourth Power Project were to: (i) alleviate power shortages; (ii) help the Egyptian Electricity Authority (EEA) develop expertise in the technology of combined cycle power plants; (iii) improve EEA’s management tools; and (iv) support the Government in addressing issues such as energy pricing, power load management, and protection of the environment. The Kureimat Project pursued similar objectives and emphasized the use of economic prices for petroleum, natural gas, and electricity by FY95. The projects included the installation of generating plants (1,218 MW of combined cycle capacity under the Fourth Power Project, and 1,200 MW of dual fired steam plant under the Kureimat project), associated gas pipelines and power transmission facilities, as well as technical assistance for, inter alia, a computerized management information system, load management, electricity pricing, and environmental activities. The Fourth Power Project met its physical objectives, albeit 20 months late because of the Gulf War. It also funded two unplanned changes in the plants converted to combined cycle (an overhaul of the gas turbines and an increase in capacity of the steam units). Completion of the Kureimat Project is expected by September 1997. When the Bank discontinued its support, the expected costs of the Kureimat project had dropped to 52 percent of the appraisal estimate, mainly because intense competition among suppliers allowed EEA to sign advantageous contracts. The funding secured on the basis of the original unit cost estimate proved sufficient for the cofinanciers to fund the project without the Bank loan. By 1996, environmental objectives had not been fully achieved and improvements were needed in the discharge of wastewater at individual plants and in the training program for the staff of EEA’s newly created Environmental Management Unit. The economic rate of return (ERR) of EEA’s investment program was about 10 percent at appraisal. This return declined during project implementation because power tariffs have not increased as expected. It recovered somewhat when large gas discoveries, made after loan cancellation resulted in a substantial decline in the economic opportunity cost of the gas used in the project power plants, but not to the point where the ERR exceeds 10 percent and the return on EEA’s assets can be deemed acceptable. The Fourth Power Project addressed EEA’s financial performance, and the Kureimat Project focused on this issue even more emphatically in the context of broad energy pricing adjustments tackled by a SAL in 1992. The results were unsatisfactory: net internal cash generation was negative during the entire project period, except 1993; the debt service coverage ratio was persistently below 1.5 and accounts receivable were at, or in excess of, six months’ billings. These failures led to the loan cancellations described above. The other institutional strengthening objectives of the Fourth Power Project were by and large achieved, and those of the Kureimat Project are likely to be achieved. In view of the importance given to physical objectives by the Fourth Power project, OED rates its outcome as marginally satisfactory. The outcome of the Kureimat project, is rated unsatisfactory because it did not achieve its key objective of reforming electricity tariffs. Sustainability of both projects is rated as unlikely because EEA finances continues to be poor and require large infusions of government funds. OED rates institutional development impact as modest for the Fourth Power project and negligible for the Kureimat project. Bank’s performance is rated as satisfactory. These ratings are consistent with those in the ICR. A key lesson is that in projects where cofinanciers play a large role, the Bank should agree with them as well as the guarantor and the borrower on a common strategy to tackle key policy issues such as cost recovery. The quality of the ICR is satisfactory. In particular, it presents a concise and complete account of the events that led to loans cancellation. No audit is planned.