RESTRICTED FILE COPY Report No. P-575 This report was prepared for use within the Bank and its affilioted organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CENTRAL ELECTRICITY AND WATER CORPORATION IN THE REPUBLIC OF THE SUDAN December 28, 1967 REPORT AND RECONMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CENTRAL ELECTRICITY AND WATER CORPORATION IN THE REPUBLIC OF THE SUDAN 1. I submit the following report and recommendation on a proposed loan in various currencies equivalent to $24 million to the Central Electricity and Water Corporation (CEWC) for its power expansion program for the period 1968-1973. PART I - HISTORICAL 2. When the Roseires irrigation project was assisted in 1961 by Bank Loan 284 SU, IDA Credit 2 SU and a loan from the Kreditanstalt fuer Wiederaufbau (KFW), it was envisaged that electric power would eventually be generated at the site of the large storage dam to be constructed at Roseires. A UN Special Fund Power Survey in 1963, for which the Bank was executing agency, concluded that the installation of generating units at the Roseires dam would be the best means of meeting the Sudan's growfing power needs. In 1964 the lenders agreed to modify the description of the Roseires irrigation project to provide the substructure for a powerhouse. The project now proposed would include, inter alia, the completion of the powerhouse and the installation of three generating units at the Roseires dam. 3. The power project was first studied by the Bank in 1965 but was deferred for later appraisal because of weakness in the organization and accounts of the Central Electricity and Water Authority (CEWA), which was then a department of the Ministry of Works. In 1966 the Central Electricity and Water Corporation (CEWC) was established as an autonomous government- owned corporation, successor to CEWA, and some improvements in organization and accounting have subsequently been made. 4. The proposed loan would be the fifth by the Bank in the Sudan. It was negotiated by a delegation headed by Mr. M. A. Ghallander, General Manager, Central Electricity and Wiater Corporation (CEWC), for the Borrower. Mr. Mahdi Ahmed, Assistant Under Secretary in the Ministry of Finance represented the Government. They were accompanied by Mr. Abbas Imam, Office of the Attorney General, Mr. Sid Ahmad Abdalla, Chief Financial Officer, CEWC, and Mr. Abdul Rezak, Assistant Chief Engineer, CEWC. Negotiations were completed on November 9, 1967. 5. The following is a summary statement of Bank Loans and IDA Credits to the Sudan as at lomvember 30, 1967: -2- Summar Statement of Loans and Credits to Sudan Amount (US $ Million) Loan or Bank IDA Credit No. Year Borrower Purpose Loans Credit Undisbursed Loan 202 1958 Sudan Sudan Railways 39.0 Loan 258 1960 Sudan Managil Irrigation 15.5 Loan 284 1961 Sudan Roseires Irrigation 19.5 3.1 Credit 2 1961 Sudan Roseires Irrigation 13.0 1.5 Loan 440 1965 Sudan Sudan Railways 31.0 18.0 Total 105.0 13.0 of which has been repaid to Bank and others 13.5 Total now outstanding 91.5 Amount sold: 5.8 of which has been repaid 4.1 1.7 Total now held by Barnk and IDA 89.8 13.0 Total undisbursed 21.1 1.5 22.6 Performance on all of these projects has been satisfactory. The closing date of the 1961 loan and credit for the Roseires irrigation project is June 30, 1968, which may have to be postponed for a short period. Savings of between two and three million doUars are expected on this loan and credit. In April, 19641, IFC made an investment in the Khartoum Spinning and Weaving Company Limited consisting of a loan in the principal amounts of $247,000 and L35,000 and a subscription at par for 12,000 shares valued at $344,383 equivalent. -3- 6. Three other projects in the Sudan are under various stages of consideration. A mission visited the Sudan in November 1967, to re- appraise for Bank lending a project for mechanized agriculture in the Gedaref region after the site of the project was changed at the request of the Government. Another mission has been in the Sudan in early December to collect information necessary to complete the appraisal of an education project. 7. The Rahad irrigation project is in a more preliminary stage. This project would require at least $80 million in foreign exchange. In view of the Sudan's economic situation and given the size of the project, its financing is, to a great extent, dependent upon IDA replenishment and upon some arrangements being made for the participation of other possible lenders. Agricultural policies, which were the subject of a number of recommendations by the Gezira study mission in 1965/1966, must be reviewed further in conjunction with the preparation for this project. A thorough review of the economic performance and creditworthiness of the Sudan would have to precede the financing of such a large project. PART II - DESCRIPTION OF THE PROJECT 8. Borrower: Central Electricity and Water Corporation. Guarantor: Republic of the Sudan. Amount: The equivalent in various currencies of US $21 million. Purpose: To assist in financing the foreign ex- change cost of the Borrower's po-er expansion program. Amortization: 25 years including 5 years of grace; semi-annual installments from January 1, 1973 to January 1, 1993. Interest: Commitment Charge: 3/4 of 1% per annum. PART III - THE PROJECT 9. A detailed appraisal of the project (TO-608(b)) is attached (No.1). 10. The project, which forms part of a major expansion program planned by CEWC, will consist of the construction of a superstructure on the existing foundation of a powerhouse and the installation of three 30 MW water turbine generating units at the Roseires dam; the construction of 490 km 220 kv and 16 km 110 kv transmission lines, including associated substations, principally to connect the Roseires station with Khartoum; the installation of a 15 MW gas turbine generating unit at Khartoum; and the provision of consulting services to assist in the improvement of the organization and management of the Borrower. It is expected that it will be completed by the middle of 1971. 11. The demand for electric power in the Blue Nile grid, which is the main system served by CEWC, has been growing at a rate exceeding 19% per year during the past five years and is expected to continue growing at about 15% per year during the next six years. The consultants who made the power survey for the UN Special Fund concluded in 1963 that the installation of generating units at the Roseires dam would be the most economic means of meeting this demand, and this judgment has been con- firmed by the Bank's staff as reflected in the attached appraisal report. Construction of the project at this time is necessary to supply the demand as forecast. The project would also permit significant savings in foreign exchange which would otherwise be spent on imports of fuel oil. 12. The total cost of the project is estimated at $41.7 million equivalent with a foreign exchange component of $27.7 million equivalent, most of which would be covered by the proposed Bank loan. Except for consulting services and some items of standardized equipment, all contracts would be awarded on the basis of international competition. Bids for most equipment have been received. The Bank loan would be disbursed for the foreign currency costs of expenditures on civil works, imported equipment and consulting services, made subsequent to the date of the loan agreement. 13. The CEWC Act of 1966 provides for a seven-member Board of Directors, six of whom, including the General Manager ex officio, are appointed by the Council of Ministers and the other is a representative of the Ministry of Finance and Economy. The General Manager is appointed for a five-year term on the recommendation of the Minister of Works after consultation with the Board. The Board has resolved to delegate full administrative powers to the General Manager and it has been agreed during negotiations that his duties should, in due course, be specified in the Act. 14. As a result of various past changes in the organization of the electricity undertaking and the Sudanization of the staff of CEWA in 1964, CEWC needs considerable strengthening in management and organization. There is a shortage of experienced staff at all levels; the accounting system and the statistical records generally have been poorly maintained in the past and the financial position was impaired by an arbitrary reduction of rates ordered by the Government in 1963. Fortunately, recent experience has been more encouraging. The General Manager has strengthened the staff, and management consultants have already submitted a report on the organization and management structure. The same consultants would be retained under the project. -5- 15. About two-thirds of the financial requirements of the CEW,1C program are expected to be covered by internal cash generation and rates are, therefore, particularly important. New tariffs went into effect on August 1, 1967, which would provide overall annual returns ranging from 8% in 1969 to nearly 12% in 1973. CEWC and the Government have agreed not to lower these tariffs until after the project is completed. There- after, CEW4C has agreed to earn a reasonable return on its total net fixed assets and that a rate lower than 8% would not be reasonable. The actual rate would be determined from time to time after consultation with the Bank. The return from water operations has been lower than that from power, but CEINC has agreed to maintain a minimum return of 4% and to raise this if possible to the level of power. In order to provide additional funds for the project during the construction period, the Government has agreed to permit during the period 1968-70 the capitali- zation of interest on its previous advances. CEWC has very little long- term debt outstanding at present, and the ratio of long-term debt to equity is not expected to exceed 17/83 during the forecast period. Long-term debt service would be covered about three times. The loan agreement between the Bank and CEWC places a limit upon the additional long-term indebtedness which the borrower could incur. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft loan agreement between the Bank and Central Electricity and Water Corporation, the draft guarantee agreement between the Republic of the Sudan and the Bank and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being circulated to the Executive Directors separately. 17. The draft loan and guarantee agreements conform to the normal pattern for Bank loans to public power corporations. 18. The guarantee agreement will be subject to ratification by the Constituent Assembly in the Sudan. PART V - THE ECONOMY 19. A report on "Current Economic Position and Prospects of the Republic of the Sudan" (AF-49a) was issued on January 30, 1967 and had covered the situation in the Sudan to the change in government in July 1966. In May 1967 there was another change in government and a few days later the hostilities in the Middle East occurred. The attached updating memorandum (No. 2), on "Recent Economic Developments in the Republic of the Sudan" dated November 24, 1967 analyzes developments since the last report and evaluates the Government's economic policy and the future of the economy. It is based in part on a visit by a member of the Bank's staff with a Fund mission to the Sudan in July. - 6 - 20. A full analysis of creditworthiness is not possible at this time because the difficulties following the recent hostilities in the Middle East and the closure of the Suez Canal have limited the consideration which the new Government has been able to devote to longer term policies. However the economic performance in the last year has not been discourag- ing and the updating memorandum reaffirms the conclusion of the earlier report that the Sudan is creditworthy for a limited amount of borrowing on conventional terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 21. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 22. I recommend that the Executive Directors adopt the following Resolution: RESOIUTION NO. Approval of Loan to Central Electricity and Water Corporation, to be guaranteed by the Republic of the Sudan, in an amount in various currencies equivalent to US $24 Million. RESOLVED: THAT the Bank shall grant a loan to Central Electricity and Water Corporation to be guaranteed by the Republic of the Sudan, in an amount in various currencies equivalent to twenty-four million United States dollars (us $24,000,000), to mature on and prior to January 1, 1993, to bear interest at the rate of six and one-quarter percent (6 V),per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Power Project) between the Bank and Central Electricity and Water Corporation and the form of Guarantee Agreement (Power Project) between the Republic of the Sudan and the Bank, which have been presented to this meeting. Attachments Washington, D.C. George D. Woods December 28, 1967 President