Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No. 12607-Zh

STAFF APPRAISALREPORT

ZAMIABT Public Disclosure Authorized

PETROLEUM SECTOR REHABILITATIONPROJECT

NAY 6, 1994 Public Disclosure Authorized

Industry and Energy Operations Southern Africa Department Public Disclosure Authorized

This document has a resticted distribution and may be used by redpient only in the performance of their officall duties. Its contents may not otrwisebe disclosed without World Bank autho0izaion CurrencyEquivalents (AnnualAverage ExchangeRates)

Currencv ZambianKwacha (K)

US$1.00 = K 600 K 1.00 - US$ 0.002

1980 US$1.00 = K .79 1983 US$1.00 K 1.26 1984 US$1.00 = K 1.81 1985 US$1.00 = K 3.14 1986 US$1.00 = K 7.79 1987 US$1.00 = K 8.89 1988 USS1.00 = K 8.82 1989 US$1.00 = K 12.90 1990 US$1.00 = K 28.90 1991 US$1.00 = K 61.70 1992 US$1.00 = K171.00 1993 US$1.00 = K460.00

Currency TanzanianShilline (TSh)

US$1.00 = TSh.499 (exchangerate) TSh.1.00 = US$ 0.002

Weightsand Measures

1 Metric Ton (MT) = 1,000 kilograms(kg) 1 Barrel (Bbl) = 0.159 cubic meters I Metric Ton of Oil (API 30) = 7.19 barrels 1 Ton of Oil Equivalent = 10 million kilocalories(39.7 million Btu) 1 Kilocalorie = 3.97 BritishThermal Units (BTU) 1 Gallon = 3.785 Liters 1 Hectare(ha) = 0.01 squarekilometer (2.47 acres) 1 Liter = 0.26 Gallon FOR OFFICiL USE ONLY

Abbreviations ADB AfricanDevelopment Bank AGIP AgipPetroli API AmecicanPetroleum Insdute BP BP (Zaumbia)Limited bpsd barmlper streamday BZ Bankof Zambia CAPC CentmalAfica Power Corporation BIB EuropeanInvestment Bank BURR EconomicInternal Rate of Return ESMAP Energy Sector ManagementAssi tanc; Progrmme DOE Depautmentof Energy OlD GroupInvestment Dliector GRZ Govenmentof the Republicof Zambia HFO HeavyFuel Oil ICB IntemationalCompetitive Bidding Indeni IndeniPetroleum Company Limited kgIc kdlogramsof oil equivalent MBWD Ministy of Enegy and Wate Development MF Ministryof Fmance NEC NationalEnergy Council OMC Oil MarketingCompanies OMCC Consortiumof Oil MarketingCompanies PIRC Privatizationand IndustrialResrcuing Credit ROW Rightof Way SPM SinglePoint Mooring toe tonsoil equivalent tpa tons per annum Tazama TazamaPipelines Limited ZA-,ICO ZambiaPForetry and PorestIndustries Corporation Limited ZCCM ZambiaConsolidated Copper Mines Limited ZESCO ZambiaElectricity Supply Company Linited ZIMCO ZambiaIndustrial and MiningCorporation Limited Z{MOIL PetroleumProcurement and SupplyDivision of ZIMCO ZOC ZambiaOil Company ZPA ZambiaPrivatization Agency ZR ZambiaRailways Limied

icalYr

Government- January 1 - De¢ember31 ZOC, TAZAMA- April 1 - March31

This documenthas a restricteddistintion and may be usedby reipients only in the pefmae of dteir offlcislduties. Its contts may not otherwie be disclosedwithout World Bnk authorzaion ZAMBIA PEIROLEUMSECTOR REUABILITATION PROJECT

TABLEOF CONTENTS Page CREDITAND PROJECT SUMMARY ...... i-i I. INTRODUCTION...... 1-3

H. THE ENERGY SECTOR ...... 4-15

EectricPower ...... 4 Coal ...... 5 Woo-ifuelsand Charcoal ...... 6 OtherRenewable Energy ...... 7 EnergyEfficiency and Substitution...... 7 SectorOrganization ...... 7 ZambianRegulatory Agencies ...... 8 The PetroleumSubsector ...... 8 HydrocabonPotential ...... 9 PetroleumDemand ...... 9 Pote"t RegionalMarket ...... 11 PetroleumRefining ...... 11 PetroleumDistribution ...... 12 PetroleumProduct Pricing ...... 12 Government'sEnergy Sector Objectives and DevelopmentPlans .13 Role oe the Bank Group in the Energy Sector and Lessonsof Experience...... 14 SystematicClient Consultation .15 m. AGENCIESOPERATING IN THEPETROLEUM SECTOR. 16-20 TheBorrower and the ExecutingAgencies .16 Kmistryof Energyand WaterDevelopment .16 ParastatalEnergy Companies .16 ProposedInstitutional Reforms .17 Staffing: ParastatalEnergy Companies .19 Accounts ...... 20

Thisreport is basedon the findingsof a preappraisalmission which visited Zambia in August1992 and February1993 and an appraisalmission in June 1993. The appraisamission wasled by T.S. Nayar,Pr. ChemicalEngineer ([ENOG), and includedMr. Eric Daffern,Pr. Energy/IndustrialSpecialist (IENOG) Oead adviser), Ms. Yurilo Sakairi,Economist (AF6IE) and Mr. P.K. Subramanian,FinancW Analyst (Consultant). Secretarial support was providedby Mmes.Joyce Chinsenand EthiopiaTaddese (AF6IE). Messrs.David Cook (AF61E) and Stephen Denning(AF6DR) are the managingDivision Chief and DepartnentDirector. IV. THEPROJECT ...... 21-31

Project Objectives ...... 21 Project Descripii ...... 21 Related investmentsto be Financedby the Private Sector ...... 24 Projet Managementand Implementation...... 24 Project Cost Estimates...... 25 Financing Plan ...... 26 Project Scheduleand DisbursementProfile ...... I...... 27 Procurement ...... 28 Allocationand Disbursementof IDA Credit ...... 30 Environmentaland Safety Aspects ...... 30 Project DevelopmentImpact ...... 31 Project Monitoring ...... 31 List of Documentson File ...... 31

V. FINANCLALANALYSIS ...... 32-41

Introduction...... 32 Financial Policiesof Zambia's Parastatals ...... 32 ZIMOL ...... 32 Zambia Oil Company ...... 34 Oil MarketingCompanies Consortium ...... 36 Tazama PipelineLimited ...... 38 Indeni Refery ...... 40

VI. JUSTDFCATION,BENEFrTS AND RISKS ...... 42-44

Project Justification ...... 42 EconomicAnalysis ...... 42 PipelineRehabilitation Economics ...... 42 Rail Loading Expansion...... 43 Indeni Refinery Economics...... 43 Project Risk ...... 44

VII. AGREEMENTSREACHED AND RECOMMENDATIONS.45-46 LIS OF ANNEXES

Annex 1.1 Letter of Sector Policy Annex 2.1 Energy Balance 1992 Annex 3.1 Zimoil OrganizationChart Annex 3.2 Tazama PipelineLimited Organization Chart Annex 4.1 Project Cost Estimates Annex 4.2 ImplementationSchedule Annex 4.3 IDA SupervisionMission Annex 4.4 DisbursementSchedule for IDA Financing Annex 4.5 EnvironmentalIssues Annex 4.6 Project MonitoringIndicators and PerformanceMonitoring Criteria for Tazama PipelinesLimited Annex 4.7 List of Documentson File Annex 4.8 PetroleumExport Market Assessment- Draft Terms of Reference Annex 4.9 Petroleum Sector Capacty Buildingin the Ministryof Energy and Water Development- Terms of Referencefbr the Technical Cell) Annex 5.1 Notes and Assumptionson Financial Projections Annex5.2 ZIMOIL - Income Statement Annex 5.3 ZIMOIL - BalanceSheet Annex 5.4 Zambia Oil Company- Notes and Assumptionson Financial Projections Annex 5.5 Zamnia Oil Company- Income Statement Annex 5.6 Zambia Oil Company- BalanceSheet Amex 5.7 Tazama Pipeline Ltd. - Income Statement 1988-93 Annex 5.8 Tazama Pipeline Ltd. - Balance Sheet 1988-93 Annex 5.9 Tazama PipelineLtd. - Notes and Assumpdonsfor Financial Projections Annex 5.10 Tazama PipelineLtd. - Income Statement Annex 5.11 Tazama PipelineLtd. - BalanceSheet Annex 5.12 Tazama PipelineLtd. - Funds Flow Statement Annex 6.1 EconomicAnalysis of PetroleumDistribution Components Annex 6.2 EconomicAnalysis of Refinery Operationsand Product PipelineOptions TEXT TABLES

Table 2.1 - Electricity Consumptionby Sector ...... S Table 2.2 - Production and Sales of Coal ...... 6 Table 2.3 - Fuels used for Cookingby Households...... 7 Table 2.4 - Sales and Market Shares of Oil MarketingCompanies ...... 9 Table 2.5 - Final Consumptionof PetroleumProducts by Sector in 1992 ...... 10 Table 2.6 - PetroleumConsumption in Zambia ...... 10 Table 2.7 - Demand Forecast for PetroleumProducts ...... 11 Table 2.8 - PetroleumProducts Price Structure as of May 1993 ...... 12 Table 4.1 - Summaryof Project Cost Estimates...... 26 Table 4.2 - PetroleumSector RehabilitationProject FinancingPlan ...... 27 Table 4.3 - IDA DisbursementSchedule ...... 28 Table 4.4 - ProcurementArrangements ...... 29 Table 4.5 - IDA Credit Allocation ...... 30 Table S.1 - ZIMOIL SummaryFinancial Statements 1990-92 ...... 33 Table 5.2 - Zambia Oil CompanyPricing Structure ...... 35 Table 5.3 - Zambia Oil CompanySummary Projected Financial Statement 1995-2000...... 36 Table5.4 - Oil MarketingCompanies Consortium - Pricing Structure ...... 37 Table 5.5 - Tazama SummaryFinancial Statements1990-92 ...... 39 Table 5.6 - Tazama SummaryProjected Financial Statements1993-98 ...... 40 REPUBLIC OF ZAMBIA

PEROLEtUM SECTOR REI:ABILITATION PROJECT

CREDrr AND PROJECTSUMMARY

Borrower: Governmentof the Republicof Zambia

Beneficiaries: Ministryof Energy and Water Development,Tazama PipelineCompany and Zambia Oil Company.

Amount: SDR 21.6 million (US$30million equivalent)

Terms: StandardIDA terms, with 40 years of maturity.

Objectives: The objectivesof the proposed project are: (a) policy developmentthrough encouragingestablishment of satisfactoryregulatory famework, competitiveimports of petroleumand eventualderegulation of market; (b) rehabilitateTazama pipeline as a least cost and reliable means of supplyingpetroleum to Zambia and strengthen Tazama's Institutionalset up; (c) improve infrastructure facilitiesto reduce the deliveredcost of petroleum; and (d) provide a basis for the private sector companieste facilitate exportsto neighboringlandlocked countries, using surplus pipeline capacity, to generate export earnings.

Components: The proposed pro,jet consistsof rehabilitationof Tazama pipeline (repairs and replacementof pipeline from KM 250 to KM 1710), corrosionprotection, overhaulingof 14 pumps and their drives, replacementof 9 generators in the pump stations, improvingtelecommunication system, repairs to existingstorage tan!s and constructionof a new tank in Ndola, purchaseof vehicles, spare parts and project equipment;expansion of Ndola rail loading facilitieswith simultaneousloading of 12 wagons, replacementof loadingpumps and product measuring instruments;and capacitystrengthening in Tazanmaand the Ministryof Energy and Water Development. ii Financing Plan: (miliionsof US Dollars)

Agency Local Foreign Total

IDA 30.0 30.0 EIB - 15.0 15.0 GRZ 3.0 - 3.0

Tosal 3.0 45.0 48.0

EconomicRate of Return: As the pipelinesolution is cheaper in all years than other options, the economicrate of return is over 100%. EIRR is about 15% for improvingpetroleum distributionsystems at Ndola (5% of project costs).

Staff AppraisalReport: Report No. 12607-ZAM

Map: IBRD No. 20145R IBRD No. 25541 ZAMBIA

rPLROLEUMSECTOR REHABILITATIONPROJECT

I. INTRODUCrION

1.1 Zambia is a landlockedcountry in southem central Africa with a land mass of 753,000 km2: i. shares borders with Angola,Botswana, Malawi, Mozambique,Namibia, Tanzania, Zaire and Zimbabwe. The closing of Zambia's southernborder and the impositionof economicsanctions on Rhodesia in 1965 constrainedthe supplyof petroleumfuels. To ensure a steady supplyof petroleumproducts, the constructionof the 1710 km TnzamaPipeline, from Dar- es-Salaam,Tanzania to Ndola, Zambia, was completedin 1968. The pipeline was onvertea into crude oil service in 1973when the Indeni Refinery at Ndola was commissioned. Pipelineleakage due to external and inte corrosionbecame serious in the early 1980s, causingin loss of oil and serious pollution in Tanzania. The Governmentof the Republicof Zambia (GRZ) iniated steps in rehabilitatingthe pipeline as a priority, but this had to be done in stages accordingto priorities because of shortage of funds. The first stage with Zambia Industial and Mining Corporation's (ZIMCO)own financingand the second stage (with EuropeanInvestment Bank (EIB) and Italian Governmentfiancing) are complete:the third stage (with African Development Bank (ADB)financing) is nearing completion.

1.2 The emergencywhich causedthe initialpipeline and the philosophyof the Governmentat that time made it natural for the pipeline and refinery to be publiclyowned. However, Zambia is now committedto using the private sector for business activities, and is seelng to transfer virtually all parastatalsto private ownership. This project seeks to modify Zambi's policies in the petroleumsector so that all activitiescan graduallybe passed to the private sector, and supportsthe completionof the rehabilitationof the Tazama pipeline. It also supportsmodification of the national storagefacilities and the provisionof working capital finance so that private sector oil companiescan take ownershipof the oil as soon as it is offloaded at Dar- es-Salarn. These changesare importantas being the means of maximing private sector activity. Fuil details ar set out in the GRZ's Letter of Petroleum Sector Policy (Annex1.1).

1.3 To make Zambia's systemsuitable for major private sector operators, the rehabilitationof the Tazama pipelinemust be completed. The fourth and final stage of this is under consideration;GRZ has asked IDA for assistancein financingrehabilitation of: O) the unimprovedportions of the Tazama Pipeline; (ii) the facilitiesfor reducing the cost of supplyand distributionof petroleumproducts; and (iii) technicalassistance for improvingthe managerial capacity in Tazama and monitoringand regulatoryfunctions in the Ministry of Energy and Water Development(MEWD). This project will establish a reliable and cost effectivesystem for: (X) transportationof refinery feedstockor required products; and (ii) supplyand distributionof petroleumproduets. To evaluate the scope and to arrive at a comprehensiveand least cost rehabilitation/efficiencyimprovement program, IDA financedthe Tazama PipelineEngineering Project (Cr. 1627-ZA)which evaluatedthe physical conditionof the pipeline and associated facilities, and prepared a comprehensiverehabilitation program Becmaseof severe corrosion, parts of the pipeline required attentioneven before the engineeringstudy was completed. At the time the engineeringstudy was completed,IDA had suspended isbu ts o Zambia, and was unable to proceed. In view of the emergency,Italy, EIB and ADBprovided financial assistance amountingto US$42 million equivalentto implementthe emergencyrehabilitation repairs in three -2

stages. The remainingrehabilitation work for the Tazama pipeline would be addressedin the proposedproject.

1.4 Engineeringstudies, financedunder the Indeni Refinery EngineeringLoan (Loan 2151-ZA), evaluated several options for modernizingthe refinery and conservingenergy. These options includedupgrading the refinery through installingvisbreakers or hydrocrackers. At the then differentialbetween crude oil and petroleumproduct prices, this investmentlooked interestingbut required capital investmentsbeyond the czpabilitiesof Zambia and Indeni. Laer discussionsbetween the Bank and 3RZ reviewedupdated data on operatingcost, fuel consumptionand losses by Indeni refinery and ZIMOILJ/, and concludedthat the refinery operationwas economicallymarginal, and that moderization could not be justified. In consultationwith GRZ and ZIMCO, the economicviability of shutfingdown the refey and convertingthe Tazama pipeline into a product pipelineto reduce the cost of bulk transport of petroleumproducts was found to be the most promisinglong-term option which will also encourageregional exportsof productsimported from Dar-es-Salaam. However, this cannot be started until repairs to the Dar-es-Salaamtanks and rehabilitationof the pipeline itself are completed. This is expectedto take between2 and 3 years. Once the Tazama rehabilitationis complete, Governmentwill review the economicsof usingthe pipelinefor feedstock -nd will then decidewhether to keep the refinery in operationor convert it for the transnort of refined petroleumproducts. Facilitiesfor reducingthe cost of bulk distributionof petroleumproducts within Zambia are includedin the proposedproject.

1.5 There would be three project beneficiaries:(a) Tazama PipelinesLimited (Tazama);(b) a Zambia Oil Company(ZOC), a new companyto be set up to take over some of ZIMOIL's activities(para. 3.9); and (c) MEWD. Tazama is a joint venture between the Governmentsof Zambia and Tanzania and has been operatingfor the past 25 years under an Iernational Conventionsigned in January 1967. The Governmentof Tanzania fMllysupports the project and has reconfirmedits commitmentto the 1967 Conventionthrough the life of the project. AlthoughZambia would be the sole beneficiaryof the proposed project, Tanzaniawill be a signatoryto the recommendationsof the InternationalDevelopment Statutory Committee to be establishedpursuant to section 1(d) of Article V of the Articlesof Agreementof the Association. Tte Zambia Oil Companywill be formed as a parastatal to replaceZIMOIL as the importerof feedstockand (initially)as the owner of the Ndola storage facilities. The remainig responsibilitiesof ZIMOIL, to own the feedstock in the Tazama and Indeni systems,to negotate agreementswith Tazama and Indeni for transport and refining of oil, and to operate the Ndola storage, will be transferred to a Consortiumof Oil Companies.

1.6 Ihe project is estimatedto cost about US$48 million equivalentincluding US$45 million in foreign exchange. The proposedIDA Credit is for US$30million equivalentout of which US$2.8 million will be used for technicalassistance to MEWD: US$25.1million will be onlent to Tazama and US$2.1 million will be onlent to ZOC. The IDA credit would finance67 percentof the foreign exchangecost; the balance of US$15 million equivalentwould be financed in parallel by EIB. The local currency cost of US$3 million equivalentwould be financedby MEWD, Tazama and ZOC.

I/ ZIMOIL is ZIMCO's divisionresponsible for oil procurement,for storage and ewportsto neigboring countries and for arrangingtransport and refining of petroleumproducts. -3-

1.7 The TazamaPipeline is the leastcost andcnly, potentially reliable mode of transportof petroleumfor Zambia. Overthe past ten yearslack of maintenance,extera corrosiondue to failureof the pipelinecoating and the effectof the low resistivity"black-cotton" soil, and internalcorrosion due to persistentincursion of sea waterinto the pipelinefrom the SinglePoint Mooring (SPM) system offshore Dar-es-Salaam haroor, have caused seriouxs deteriorationto the pipelineand its associatedfacilities. The proposedfinal stage of rehabilitation will consolidatethe benefitsof threeprevious stages of rehabilitationand preventcollapse of the pipelinesystem. The cost of rehabilitationis significantlylower than the investmentrequired for the nextbest alternative-theTazara Railway. 1.8 The goal of the Ban:'s strategyfor Zambiais to assistthe Goverunentto achieve sustainableeconomic growth. Thistranslates into a three-prongedstrategy of directassistame aimedat: (a) supportingpolicy reform and providingbalance of paymentssupport through adjustmentoperations; (b) improvingthe enablingenvironment for privatesector growth through projectinvestments in infrastructureand humanresources; and (c) targetingthe poor and vulnerablegroups with programs in agricultureand socialservices and ensuringthat environmnal issuesare addressedpromptly. Theseinterventions are mutuallysupportive and mutuallyreinforcing. The PetroleumRehabilitation Project dird*ty supports improving the enablingenvironment for privatesector growth, and minimizingenvironmental problems. It indirectlysupports poverty alleviationobjectives through improving the reliabilityand efficiency of petroleumsupplies. 1.9 Theproposed project is consistentwith the Government'sfocus on rehabilitatg existng facilitiesand avoidinglarge new investments.The projectprimarily aims to achieve: (a) the restructring of the oil industryin Zambla (b) the enhancedactivity of the privatesector in a commercialmanner; and (c) the reformof the pricingsystem for petroleumproducts. At the sametm it wouldalso address:(i) the issueof least cost petroleumsupply in its entirety;(ii) take remedialmeasures for the pipelinecorrosion and relatedproblems; (iii) deal withthe managementand insttiona aspectsto improveefficiency and preventrecurrence of the problems;(iv) reducethe cost of bulktransportation of products;and (v) increaseenergy conservationand reducecosts of internaldistribution. The projectwas appraised in June, 1993. -4-

H. THE ENERGY SECTOR

2.1 Zambia's considerableindigenous energy resources, especiallywoodfuels, hydropowerand coal satisfy almost90 percent of the country's energy needs. The energy supply consistsof domesticallyproduced hydropower (12.2%), coal (5.2%), fuelwoodand charcoal (70.1%), and importedpetroleum (12.3%). Final domesticenergy consumptionin 1992totalled about 4.6 million tons of oil equivalent(toe), of which householdaccounts for 62.8%, mining 14.2%, industry and commerce 11.5%, transport 6.8%, agricultureand forestry 2% and Goveramentand services 2.6%2/. Of the total energy consumption,commercial energy accouned for 1.4 milliontoe, or about 31.1%, which is high for a low-incomecountry. Per capita annual commercialenergy consumptionof about 379 kilogramsof oil equivalent(kgoe) in 1991 was the fourth from the highest (602 kgoe for China, 594 kgoe for Egypt and 517 kgoe for Zimbabwe)among the low incomecountriesl/. Copper miningis the largest energy consumer, accountingfor 45.7% of total commercialenergy demand, followedby transport 22%, industry and commercial16.2%, and Governmentand services 8.5%. The major sources of commercial energy supply are petroleum (41.7%), electricity (40.9%) and domesticcoal (17.4%).

Eleic Power

2.2 Zambia has amplehydropower potential; the reserves at exploitablehydro sites are estimatd at 4,000 MW. The total installedpower-generating capacity is 1,778 MW, of which 94% is hydro-power. Becauseof the abundanthydro supply, excess capacity (total demand of around 1,500 MW) and the well establishedhigh voltagegrid, the marginalcost of power is low. Virtualy all electricityis suppliedby the Zambia Electricity SupplyCompany (ZESCO), which has an istalled capacityof 1,640 MW4/. The Zambia ConsolidatedCopper Mines (ZCCM) operates four gas turbine generators and a waste heat plant in the Copperbelt,which are on cold standby, and the hydro stationwhich provides electricityfor the mines at Kabwe. ZESCO also transmitsand distributeselectricity direcdy to consumersthrough the network which covers most urban areas. The power system consistsof the main grid and the isolatedsystems. The main grid comprisesthe major power stationsin the south of the countryand the transmissionlines and substationswhich serve the main load centers in the north. The isolated system comprisesthe mini hydro power stations and diesel power stions that serve the rural areas. The power transmissionsystem comprises 6,100 km at 330, 220, 88 and 66 kV, of which 1,900 km of 330 kV lines connectsthe major power stations.

2.3 The Zambianpower system is interconnectedat high voltage with the systemsof Zimbabwe, Zaire and Botswana. Under the axistingpower exchangearrangements, Zambia has reciprocal access to standbycapacity from Zimbabweand Zaire, and exportspower to the

2/ The national energy balancefor 1992 is provided in Annex 2.1.

I/ Ihe commercialenergy consumptionper capita in 1965 was the highest among the low-income countries, at 464 kilogramsof oil equivalent. The consumptiondropped by about 18 percent from 1965to 1991.

&1Out of 1,640 MW, the total insIled capacityof hydro power plants is 1,632 MW: Kafue Gorge Power Station(900 MW), Kariba North Bank (600 MW), VictoriaFalls (108 MW), Lusiwasi (12 MW), Chshimba Falls (6 MW), MusondaFalls (5 MW) and Lunzua (0.75 MW). .5-

northeasternregion of Botswana.Because of the commissioningof a thermalpower station in Zimbabwe,the majorimporter of powerfrom Zambia, the exportsof powerhave declined since 1982when 37% of electricitygenerated was exported. In 1990total exports declined to 657 GWh,accounting for 11%of totalpower generated; exports were badly affectedby the fire at KafueGorge Power Station. i)uring 1992/93,covering a yearof extensivedrought, exports increasedto 921.2GWh. 2.4 In 1992elecuricity consumption in Zambiareached about 6,163 GWh and the peak demandon the systemwas about 993 MW. Annualconsumption growth was maitained at 1.7 percentover ten years(1980-1990). Mining demand for electricityaccounts for 71%, industry and commerce10%, household 9%, governmentand services7% and agricultureand forestry 3%. 2.5 In responseto the seriousdrought, ZESCO imposed seven-hour power blackouts in September1992 for domesticand agriculturalconsumers. Industrial and commercial consumerscould choose between a weeldyration of four daysof full supplyor a full weekof half day supplies. Hospitals,the maize-millingcompanies and ZCCMwere exempt from the supply uts. In Novemberwhen the rain started,the limitfor domesticand agriculturalconsumers was lifted.

Table2.1 Electricy Consumptionby Sectr (n GVwh)

t987 1988 1989 1290 122I 1922

Agiouture and Foresry 149 175 186 179 187 245 Commercaandlndustry 778 703 703 619 623 627 Minkng 4,709 4,637 4,626 4,498 4,128 4,274 Transpot 12 6 9 10 10 14 Households 536 411 494 581 599 616 Govemnientand Services 33 428 460 467 476 387 Total 6,521 6,359 6,342 6,355 6,024 6,163

Sourc Depautmentof Energy,Ministy of Energy and WaterDevelopmentk Energy Statiss Buletn 1974-1990, January 1992;ZESCO: AnmualRepoits 1991 and 1992

Coal

2.6 Coalproduction at MaambaColliery in the mid-Zambezibasin has falen graduallyfrom a peakof 790,000tons in 1975to 377,000tons in 1990. The declinein productionstarted around 1980 mainly because of inadequaterepair and maintenanceof plantand equipmentand poor minedesign. Productionfell short of domesticdemand in FY84requiring 58,000tons of coalto be importedfrom Zimbabwe. A rehabilitationprogram in FY86restored productioncapacity and increasedproduction by 53,000tons. Sincethe rehabilitation,the market demandfor coalhas fallenand Maambahas beenunab!e to sellthe produciblecapacity. Maamba Collieryestimates that proved and probablereserves total about91 milliontons of whichproved reservesamount to around58 milliontons of coal witha high ashcontend/, andthat proved openpit reservesof saleablecoal total at least 13 milliontons, sufficientfor 25 yearsproduction at a productionrate of around500,000 tons. The majorconsumers are coppermines, accounting

I/ Ihe calorificvalue of oneton of Maambacoal is estimatedat 0.6 toe. - 6. for about 50% of total domesticcoal sales. Coal consumptionin the copper mines has declined rfiecting the shift to fuel oil in the 1970s.

2.7 The cost of producing Coa is high, in part due to lack of foreign exchangeto purchase necessaryparts to replace and maintainequipment. The railway systemfor delivering coal from the Collieryto the main trunk line and to the copper mines at Ndola is inefficient. From time to time coal has to rely on road transport, raising costs substantially.

Table 2.2 Froductionand Saks of Coal Cutthousand tons)

Domestic Total Pioducdon Saldo xo Salea 1975 790 742 21 763 1980 570 618 0 618 1985 Si1 471 7 477 1986 552 522 22 543 1987 463 442 53 495 1988 524 S03 44 547 1989 411 469 40 509 1990 377 375 65 440 1991 345 369 23 392 1992 422 359 14 373

Source: Depaitmn of Energy, Mimistryof Energy and Waw DeNmen: nergYSttisti Bullen 1974-1990,January 1992; MsanabaCoLiry: MaambaCoal Sals 1991-1992.

Woodfuels and Charcoal

2.8 The woodlandsand forests, covering about 50 millionha (66 percent of Zambia's total land area), yield over 20 million cubic meters of wood annually,which satisfies70 percent of tie nation's total energy needs. About 87 percent of woodfuelsare consumedby households; in rural areas, fuel consumptionis in the form of firewood; in urban areas mainly in the form of chwcoal.

2.9 Charcoaland fdelwoodaccount for more than 95% of householdenergy requirments. About 75% of urban householdsdepend totally on charcoal for cookingand water and space heating, consuming1,370 kg annually. In 1992, Zambian urban householdsconsumed about 667,000 tons of charcoal.

2.10 Per capita annual consumptionof fuelwoodwas about 730 kg and of charcoal about 100 kg. The total national wood consumptionis estimatedat 15.7 million m3 (11 milion tons), of which 14.4 millionmi is consumedby houseboldsas fuelwoodand 1.3 million m' as roundwoodand sawnwood.

2.11 The esdmatedcurrent sustainableyield of forests and sawn woodlands(19-24 million in) and the current consumptionof woodfuelsand sawn wood (16-17 million ni) suggest that wwoodfteldemand is not causing generaldeforestation. However, deforestationlocally could be in prowspectbecause of Ci)regional imbalancesbetween woodfuel supply and demand, and (ii) agcultural land clearing. Thereis localizeddeforestaion causedby woodfuelgathering along the line of ran. -7 -

Table 23 Pues used for Cookingby Households

Percnt of Households EMI InA Rni Uda Electricily 8.8 4.1 18.0 LPG/Kerosene 2.8 2.4 3.5 Wood, Charcoaland Coal 87.5 92.2 78.4 Othr 1.3 0.1 Total 100.0 100.0 100.0

Source: Departmentof Energy,Ministry of Eneg and Water Developmenet Energy Satstics Buletin 1974-1990,January 1992.

Other Renewable Energy

2.12 Involvementwith new and renewablesources of energy has been limited. Ihe potential applicationsof solar energy (for cooling,water heating and fish and vegetabledrying), wind energy (for water pumping),biomass and geothermalenergy have been reviewed. Solar energy through photovoltaictechnology is being used in a small way in remote areas for lighting, refrigerationand water pumping.

Energ EMcency and Substitution

2.13 The Governmentseeks to promote energy efficiencyand fuel substitution, specificallya reduction in oil consumption. In 1983the Departmentof Energy (DOE) launched the nationalenergy conservationand managementprogram for the uc industry, the miningindustry and the service and commercialindustry to identifyenergy conservationand substitutionopportunities. From the series of energy surveys at 30 industa plants, DOE concludedthat managementof the plants could reduce expenditureof energy by between 7 and 33 percent In 1986, Kafue Textiles replaced a fuel oil boiler with an electric boiler at the cost of US$1.1 million; this reduced annual energy costs by US$869,000. Between 1986and 1987, at Kapiri Glass Products,because of low cost energy savinginvestments, the productionrate rose by 50 percent whfle the total energy cost fell by 22 percent.

2.14 The energy audits carried out up to 1990 estimatedthat about 330 MW of electricitywould be required to substitutefor diesel and light fuel oil consumedin non-mining industries. However, the analysisdid not establishthe investmentrequired in new electricity supply facilitiesto satisfy increasedpower demand. The ZCCM consumptionof fuel oil is essnial to balancethe refinery product slate, and any switch from fuel oil demand will constrain the refinery's ability to produce white products. ZCCM has looked into the possibilityof using more coal and found it to be uneconomicunder the present circumstances.

Sector Organition

2.15 In the energy sector, there are three types of institution: (i) the Central Govnment; (ii) Public Enterprises;and (iii) a private sector more efficientthan the public sector, but not highly competitivewith each other. The Central Governmentis responsiblefor energy policy and plang. In 1991,the new Governmentconsolidated the responsibilityfor energy under a single portfolio in the newly-ceted MEWD, which consistsof five separate units: the Zambezi River Authority(jointly-owned by the ZimbabweanGovernment, 50/50), the Departmnt of Water Affairs, the Water Board, the NationalEnergy Council (NEC) and the -8-

Departmentof Energy (DOE). The energy componentis handled by NEC and DOE. NEC acts as policy adviser to the Ministry and is responsiblefor integratingthe plans of the various sectoral institutions,while DOE concentrateson technical/administrativeadvisory services. Both units are weak in technical and analyticalcapacities and require recruitingmore qualffiedcandidates and providingsuitable training. MEWD is responsiblefor providing energy policy guidelinesto the ZIMCO group companies;Indeni, ZIMOIL, Tazama and ZESCO.

2.16 The HydrocarbonUnit, which regulatesexploration activities, is under the GeologicalSurvey Departmentof Ministryof Mines and MineralsDevelopment. The Department is responsiblefor licensingcoal explorationand production. The Departm of Forestry under the Ministry of Environmentand Natural Resourcesis responsiblefor forestry management includingthe availabilityof woodfuel. Althoughcoal and charcoal are importantenergy sources in the country, MEWD is not responsiblefor the productionpolicy of these fuels.

Za ian Regulatory Agendes

2.17 During 1994 Zambia will establish a systemfor regulatingprices and performance of the public utilities. The Governmentwill establish an autonomousEnergy RegulatoryBoard. Zambia will also establish a MonopoliesCommission to monitor and investigateanti-competitive practices. Until these agenciesare established,a separate divisionwithin ZIMCO will take care of the udlities and the operationsof the three strategic companiesin the petroleum sector, acing as the initialregulator. Except for their toll services, Tazama and Indeni are likely to be regulatedby contract. Each utility, togetherwith ZIMOIL, Tazama and Indeni has prepared proposals for periodic price adjustmentto reflect changesin costs and exchangerate; a systemfor each entity is now operational.

The PetroleumSubsector

2.18 Under ZIMCO, the holding company,several energy parastatas operate: ZESCO, Maamba Colliery, Tazama, Indeni, ZIMOIL, as do partnershipsbetween ZIMCO and two multinationaloil companiesinvolved in petroleumdistribution (BP and AGIP)6/. In the petroleumsubsector, most policy decisionssuch as pricing, tariffs and investmentare initated by the energy parastatals.

2.19 The public sector is concentratedmainly in activitiesthat have limitedscope for competitionand require large investments,such as pipeline, storage and wholesale supply facilities. The Indeni refinery is jointly owned by Government(50%) and by the private sector (50% AGIP) which manages its operations. The product distributionand retail sales are handled exclusivelyby the five private and joinly-owned oil marketing companieswho own and opert storage depots. The sales and individualmarket shares of 1992 are:

{/ AGIP (ambia) and BP (Zambia)are 50/50joint ventureswith the Government. e9 -

Table 2.4 The Sales and Market Sharm of Oil MarketingCompanies

Sales (tons) lb= BP 367,782 (53.4%) AGIP 149,434 (21.7%) CALTEX 67,961 (9.9%) TOTAL 55,683 (8.1%) mBIL 48.113 (7.0%) Total 688,973 (100.0%)

Source: BP Zambia, 1992.

The retail outlets are owned by local privatebusinessmen as dealershipsand the road transport is contractedto public and private transport companies. The rail tank wagonsused by the marketing companiesare owned and operatedby Zambia Railways(ZR). Tazara Railwaysdoes not transport refined petroleumproducts in Zambia. Petroleumproducts not producedby Indeni (mostlylubricants, greases and specialtyproducts) are importedby the marketing companies directly.

Hydrocarbon Potential

2.20 Zambia has four sedimentarybasins. The Western Zambia Basin is the largest: it covers 180,000 km2 of Western Zambia and extendsto Botswanaand Angola. Under Petroleum ExplorationPromotion Project (Ln. 2152-ZA)funded by the World Bank, an aeromagneticsurvey over the country and a limitedgravity survey were conducted. The countrywidegeological work identifiedtwo prospectiveareas: the LuangwaValley and part of the Western Zambia Basin. Two companies(Placid Oil Companyand Mobil Oil Company)eventually entered into agreements with the Governmentfor exploration. Havinghad no positive result from exploration,both companiesrelinquished the explorationacreage by mid-1988. Placid and Mobil expressedan interest in the north of Lake Kariba, which was not includedin the initialoffering from the Government,but Placid did not pursue this matter further. Mobil still possessesa concessionon the Zimbabweanand Zambian sides of the Zambezi River.

2.21 The LuangwaBasin7/ is still perceived to be promisingfor oil and gas; however, consideringthe country's sluggisheconomy, the lack of foreign exchangeand the high risk of the investments,publicly-finded petroleum exploration should not be a priority.

Petroleum Demand

2.22 Domesticpetroleum demand dependson the level of activityin the miningsector. The total sales of petroleumproducts reached a peak of 818,565 tons in 1976/77. In the next ten years, the total sales declinedby over 35.4% to 528,858 tons in 1986/87. The petroleum consumptionprofile, as in most developingcountries, is dominatedby middle distillates (kerosene,jet fuel and diesel). The share of middle distillateswas 52.4% in 1984 and around 60% during 1991-93.

1/The LuangwaValley, part of the Rift Valley has shown some potential. - 10-

Tablis2.5 Final Consumptionof PetroleumProducts by Sector in 1992 (in tons)

Gasoline Diese msen Jet fuc Fuel oil LPG TIbIl

Agriulturo and Forestry 2,359 7,374 0 0 0 0 9,733 Commercialand Industry 15,332 58,991 2,306 0 28,981 1,812 107,422 Households/others 0 0 20,758 0 0 9 20,767 Mining 11,794 34,411 5,766 0 87,130 0 139,101 Transpot 88.455 145.019 0 53.606 _ O _ 0 287.08

Total 117,940 245,795 28,830 53,606 116,111 1,821 564,103

Source: ZIMOIL: Sectoral Classificationof Major PetroleumFuels, 1992.

Table 2.6 PetroleumConsumption in Zambia (in tons) ProductslYea 19 86/87 1X7/88 1988/89 1989/90 1990/91 199112 LPG 2,160 1,644 2,033 2,032 2,175 2,169 Gasoline 96,393 99,378 :19,030 122,656 118,082 113,772 Kersn 26,294 31,186 38,729 38,643 31,726 29,406 Jet Fuel 16,949 35,878 62,124 63,772 45 217 26,403 Diesel 266,643 248,978 270,258 283,702 267,396 258,874 Fuel Oil 91,005 83,806 88,764 94,304 91,519 77,796 Bitimen 29.406 3211 27.143 2S42 20.3 19.1S1 Total 528,858 530,011 608,081 630,951 576,153 527,521

Source: BP Zambia, 1993; ZIMOIL: SectoralClassification of Major PetroleumFuels, 1992.

2.23 The domesticdemand growth scenario and the consumptionpattern are unlikelyto change significanly in the medium-termbecause: (a) restrictionson Government expendituresand scarcity of external resources for investmentsare expectedto continuefor some time; and (b) copper production is expectedto decline. Because of the Government's implementationof structural adjustmentprogram, total petroleumproduct demand over the next ten years is predictedto grow at about 2.2 percentper annumfrom 532,000 tons in 1993 to 646,000 tons in 2002. - 11 -

Table 2.7 DemandForecst for PetroleumProducs (in Thounsadtons)

Ftodu 1993 1994 199* 1996 1997 1998 1992 2000 2001 2002 LPG 3 3 3 4 4 4 5 5 5 5 Gasoline 120 128 129 131 132 133 135 136 137 139 Kerosene 30 33 33 34 34 34 35 35 35 36 Jet Fuel 25 26 26 27 27 28 28 29 29 30 Diesel 260 280 286 291 297 303 309 315 325 335 FuelOil 84 84 84 84 84 84 84 84 90 90 Bitumen IQ 12 1Q 1Q 10 IQ 12 IQ 12 12 Total 532 S64 571 580 588 59 606 614 634 646

Source: MDAmission esdimats

Potential RegionalMarket

2.24 The amount of fuel oil and bitumendemand (103,769 tons including5,200 tons of bitumen in 1992/93,of which 77,870 tons of fuel oil is for the miningsector and 20,699 tons for industries)detennines the maximumfeedstock mix throughputthat the refinery can process withoutgenerating excess fuel oil which cannotbe sold. The present demand level limits refining capacityto about 700,000 tons. As long as the refinery is operated, for geographicaland cost reasons the exports will be dimltedat around 75,000 tons per anmnm(tpa) of white productsmainly to the Shabaarea of Zaire. Competitionin the SouthernZambia market is expectedfrom the neighboringregion by competitivepricing especiallyby SouthAfrica. Competitionin supplyingthe Malawimcrket results from moving products from Dar-es-Salaamto Malawiby rail through the new Tanzanianfacilities. Inefficient operationof the Zambianrail system impedesexport promotion.

PetroleumRefinng

2.25 The Indeni Refinery at Ndola was commissionedin 1973. Its design capacity is 25,000 barrels per stream day (bpsd) or about 1.1 miUiontpa of feedstock. It was designed to process Iranian Light crude with a flexibilityof spikingproducts up to 25 percent of the throughput. Since the refinery is a simplehydroskimming plant, the product yield mix can be changed only by alteringthe quantityof products spiked in the feedstock. At present the level of reduced crude in the mix is limitedby the demand for fuel ofl and bitumen. Becauseof the high percentageof light products in the feedstock, the refinery's capacity is constrainedat about 750,000 tpa. Any sigmficantincrease in light products spikingat this capacitylevel would result in poor product separaion and deteriorationof product quality. Being designed before the 1973 increasein oil prices, the refinery fuel consumptionand loss is on the high side (7 to 8% against the current industrynorm of about 4% for such straight-runcrude oil refineries). To improve fuel efficiencythrough energy conservationand increasedistillation capacity, the refinery managementhas developedvarious proposals costing in the range of US$1.0 million. Optionsfor the future of Indeni include conversionto a bulk terminal, and keepingIndeni operatingas now but with improved efficiency. - 12 -

Petroeum Distribution

2.26 The refinery feed-stockreceived at the terminal in Dar-es-Salaamis transportedto Ndolaby the Tazama Pipeline. Apart from the storage capacityat the terminal (6 tanks of 38,000 cubic meter-about 30,000 metric tons-capacity each), the pipeline itself has a holding capacityof about 117,000cubic meters of-92,000 metric tons-feedstock. ZIMOILpurchases the crude and owns it until required productsfrom it are sold to the distributors. This modus operandihas prevailed over the last two decades, and therefore during that period the private sector distributorshave not used the pipeline for "own imports". The refined products (exceptfuel oil, LPG, and some bitumen)are transferred to the adjacent terminal, owned by ZIMOIL, by interconnectedpipelines. ZIMOIL sells all the products in bulk to the oil marketingcompanies for distributionthroughout the county. Nearly 90 percent of the refined productsare transportedfrom the ZIMOIL terminal by road: the rest are sent by rail. The road system, althoughexpensive, is widely used because the railway is inefficientand has limitedrail load/unloadingfacilities. 15 engineswere added in 1992and 50 new tank wagonsto be added in 1986. Nevertheless,turn-around remains poor. This is attributableto the absenceof full-trainloading at Ndola and unloadingfacilities at Lusaka and in the Southernregis.

Peoleum Product Pridng

2.27 Wholesaleprices for all petroleumproducts are fixed by ZIMOIL allowingfor procurementcost, Tazaa's transport charges, the refinery processingfee and storage costs. The Governmentlevies duties on most products. The marketers' margins and inlandtransport costs have been negotiatedwith the Governmentfrom time-to-timeto adjust for changes in the cost of operations and to ensure an agreed return on investment. Prices were not linked to intenational prices, and until recently have not been regularlyupdated. The new pricing system now in place is part of the parastatal reformsunder the Privatizationand Industrial Reform AdjustmentCredit (PIRC), intendedto ensure that prices are adjustedpromptly product by product to reflect importcosts. To be assured of a sound petroleumproducts pricing policy, Government agreed that GRZ/ZOC would review petroleum product prices at least monthly, and would adjust prices as required to reflect all domestic and foreign costs, includingthose caused by devaluation of the Kwacha. IDA will review the level and structre of petroleumprices with the Governmentat least twice yearly. Current wholesaleex-Ndola terminal and Lusaka ex-pumpprices are shownin Table 2.8. Table 2.8 Petroleum ProductsPrice Sure as of May 1993 (convened to US$ at the average exchange rate for 1993, K4601S)

Cbsoinc ~~Dieu Bwoen Wholsale prce 378.26 347.83 239.13 Termndalfee 1.40 1.40 1.40 EBcise duty 113.48 97.39 35.87 Transportto Lusaka 58.82 58.82 58.82 maretnrs'and deale's muain 41.40 37.91 25.14 Ex-pMp pric 637.86 584.10 387.39

E-pump price (itr) 0.64 0.58 0.39 - 13 -

2.28 The (weighted)composite price for bulk sales (based on the white products) at the Ndola terminal Is about 138percent of the sum of the average feedstockprice CIF Dar-es- Salaamprice (US$165.94/ton),plus cost of pipelinetransport (US$22/ton),refining (US$23/ton),Ndola terminal fee (US$0.94/ton),and financingcost (1% of CIF Dar-es- Salaam). Until December 1992 the full cost of imports was passed on to customers, but price controls were reintroducedwith the devaluationat the beginningof 1993. The Goverment then increasedthe prices to be comparablewith import parity prices by the end of June 1993. Subjectto ZOC operatingefficiently, the current objective is to recover the losses incured before June 1993 throughthe pridng system, before December 31, 1994. Government confirmed this at negotiations. The next stage in developmentof pricing policy is to define a mechanismfor seting and revising margins, and for adjustingfor changesin transport costs. The Governmentengaged a consultantand confimed that a report would be and be forwardedto IDA in September1994. Implementation of the first stage of recommendations,as agreed with IDA, will be a conditionof effectiveness.

Government's Energy Sector Objectives and DevelopmentPlans

2.29 The investmentframework in the energy sector continuesto stress the maintenanceand rehabilitationof infrastructureand completionof projects already started rather than the conceptionof new projects. Over the last few years, the Governmentmade it a priority to completePhase Im of the Kafue Gorge Rehabilitation,the VictoriaFalls Power StationRehabilitation, the Lusaka ReinforcementPower Project, the Taama Pipeline Rehabilitationand the Indeni Oil Refinery Rehabilitation. Out of US$2.1 billion, the total investmentprogram for the period 1993-1995,the Govermmentplans to invest US$131 million (6.2%) in the sector. Priority investmentfor the period also includes reinforcementof the distributionnetworks in Lusaka and around the Copperbelttowns, the electrificationof the Mkushi Farm Block and rehabilitationof the Tazama Pipeline.

2.30 To improve the efficiencyand reduce the cost of the labor employed,the workforcemust be reduced. While ZIMOIL and Indeni managementagree in principle on reducing the workforce,no time-boundaction program is availableyet. Tazama submitteda proposalto reduce the workforceby 123 personnel(21%) and has implementedit. The others are still submittingsuch proposals. The Bank recommendscreating a competitive environmentthrough contractualperformance standards for Tazama and the Indeni refinery and petroleumproduct pricing reforms includingwholesale and retail margins, as a step toward full deregulation.

2.31 The economicbenefits can be maximizedif the existingpipeline is converted to transport refined petroleumproducts and the refinery operationsare suspended. The pipeline would operate by carrying sequentialbatches, gasoline, kerosene and diesel; these could be tapped off at points along the pipeline. The product line with depots along the line would allow efficient and less costly distributionto the country's easte regions and to neighboringcountries. Conversionrequires investment,but this can be justified If product exports to neighboringcountries are vigorouslypursued. As long as the refinery exists, the pipelineshould provide open-accessto any importer(private companiesshould be alUowedto procure feedstockInternaionally and use the pipelinefor transportingit to the refinery). ZIMOIL is prepared to consider proposalsfrom the oil marketingcompanies to use the suplus capacity availablein the facilitiesof Tazama and the Indeni refnery and has informed - 14- the oil companiesto this effect. The Governmenthas confirmedthat imports of petroleum products are deregulated,subject to paymentof appropriatetaxes. Tazama and Indeni have implementedtoll tariffs for their services. Government has agreed to end controls on retail prices before the end of 1996.

Role of the Bank Group In the Energy Sector and Lessons of Experience

2.32 The Bank's previouslending for energy in Zambia has focussed on the developmentof hydropowergeneration, includingexpansion of the transmissionnetwork. The Bank helped the Governmentprepare to rehabilitatethe coal industry and to evaluate options for modifyingthe country's only refinery. Bank assistancehas especiallyhelped to strengthenthe managementand planning of key institutionsin the energy sector, notably ZESCO, ZIMCO, the Central Africa Power Corporation(CAPC, which the Bank helped establishto encouragejoint energy developmentbetween Zambia and Zimbabwe);the coal industry;the energy planningfunction of the former Ministryof Power, Transport and Communications;and the oil explorationpromotion capacity of the HydrocarbonUnit of the Ministry of Mines. Technicalassistance rendered under the UNDP/WorldBank Energy Sector ManagementAssistance Programme recommended institutional restructuring and other improvementsto enhanceenergy planning and coordination. The Bank's first loan (Loan 145- RN, June 1956) was made before Zambia's independence,to assist with constructionof the Kariba Dam and the SouthBank power station. The secondloan (Loan 392-RN, October 1964)-the first to independentZambia-helped to financea 330 Kv high-tensiontransmission line, the third (Loan 701-ZA, July 1970) was for the Kariba North Power Station. A fourth operation(Loan 919-ZA, July 1973) helped to constructthe Kafue Stage II hydroelectric project and was followedby a supplementaryloan for Kariba North in 1974. In 1982 an engineeringproject was approved (Loan 2151-ZA,June 1982) to study the technical and economicfeasibility of modifyingthe Indeni Refinery. The Bank also funded (throughLoan 2152-ZA, June 1982) detailedgeologic, aeromagnetic and gravity surveys to gather and organizedata for promotingexploration of hydrocarbonsby foreign oil companies. In 1983 it financed an engineeringproject (Credit 1333-ZA)to prepare for the rehabilitationof the Maamba Colliery. An engineeringcredit (Credit 1627-ZA)supported a project to assess the rehabilitationrequirements of the Tazama pipeline.

2.33 Focussingon the problems identifiedby the studiesunder the IDA financed engineeringcredit, a pipeline rehabilitationproject was prepared and a Credit was negotiated in July 1987. However, disbursementsto Zambia were ..ispended from late 1987 to early 1991 and again from September1991 to January 1992, and all IDA-financedassistance was halted during these periods. Someof the most urgent parts of the project were carried out by ADB and EIB. The proposed project completesthe renaining rehabilitationwork. It builds on the Energy Sector Strategy prepared in 1988. The proposed project is consistentwith overall Bank strategy in the country in Its focus on strengtheningbasic infrastructureand in its attentionto environmentalissues. Through dialoguewith the Government,the Bank has identifiedthe followingissues: (a) encouragementof private sector participation;(b) review of the work of state-ownedsector entities;(c) introductionof a competitiveenvironment to the supplyof petroleum; (d) reform and subsequentderegulation of petroleum retail prices; and (e) improvementin the efficiencyof petroleumsupply organizations througih performance contractswith well defined targets. These issues and concernswill be addressedthrough the proposedproject. - 15- identifiedthe followingissues: (a) encouragementof private sector participation;(b) review of the work of state-ownedsector entities; (c) introductior.of a competitiveenvironment to the supplyof petroleum; (d) reform and subsequentderegulation of petroleum retail prices; and (e) improvementin the efficiencyof petroleumsupply organizations through performance contracts with well defined targets. These issues and concernswill be addressedthrough the proposed project.

2.34 The policy of limitingnew public sector investmentsto strictly essentialitems will be exemplifiedby the proposed project. Before completion of the Project, Government will not permit Indeni, Tazama and ZOC to undertake any new capital investment In excess of US$5 million beyond those Included in the Project without first consultng with IMA. The Bank's involvementwas instrumentalin rationalizingthe managementstructure of the agenciesoperating in the petroleum sector and in establishingtraining programsaiming (i) at preventingthe recurrenceof maintenanceproblems which caused the current deterioration of the facilities and (ii) at ensuringreliability of supplyfor Zambia and its neighbors.

SystematicClient Consultation

2.35 The project will make serious efforts to listen to the beneficiariesof the credit and to adjust project componentsbased upon feedbackreceived. The primary beneficiariesof the project are the MEWD, Tazama, ZOC and the oil marketing companies. Secondary beneficiariesare the customersof the OMCs, but as the project is designedto prevent serious problems arising, it is impracticalto measure the results against the performancethat was likely to happen in the absenceof the project.

2.36 There has already been extensivediscussion with the MEWD, Tazama, ZOC and OMC. We are preparing a baselineassessment of current performance,against which future performancecan be measured. Governmentis also setting up a mechanismfor regular consultationwith the projectbeneficiaries, to ensureprompt feedbackand correctionsto the project componentsas needed. It will be importantto ensure that the training program is implementedas planned, to ensure a thoroughskills improvementand transfer of knowledge, and to review this at the mid-term review. In this way the project implementationwill be monitoredand corrected to take accountof the concernsof the beneficiariesand to meet the overall needs. - 16 -

MI. THE AGENCIESOPERATING IN THE PEIOLEUM SECTOR

The Borrowerand the Exec-utingAgencies

3.1 GRZ would be the borrower of the US$30million Credit. The proceeds of the Credit would be onlent to Tazama (US$25.1million) and ZOC (US$2.1 million)as executingagencies and the Governmentwould retain US$2.8 million for MEWD. The onlending terms (in US dollars) would be for 20 years includinga grace period of five years at an interest rate of 8% (equal to 1.1 timesthe prevailingIBRD interest rate). Tazama is a majority-ownedsubsidiary of ZIMCO on behalf of GRZ, the minorityshare being owned by the Governmentof Tanzarma. Execution of a subsidiary loan agreenent with Tazama will be a condition of effectiveness. A separateentity, Zambia Oil Company(ZOC), will be formed to manage the procurementof feedstockand to own the ZIMOIL bulk storage. ZOC will replace ZIMOIL, currentlya Divisionof ZIMCO. Incorporation of ZOC and execution of a subsidiary loan agreement will be among the conditions of disbursement for the ZOC component.

Ministryof Energyand Water Development(MEWD)

3.2 The petroleumsupply in the country is within the portfolioof MEWD, which is responsiblefor identifying,analyzing and formulatingappropriate policies and strategiesto address current and emergingenergy issues such as pricing reform and restructuringof sector organzations. The Ministerfor Energy and Water Developmentis responsiblefor coordinatingall aspectsof energy sector developmentin the country, including(a) overseeing the preparation and implementationof the nationalenergy strategy, the annual energy plan and the rolling five year investmentplan; (b) reviewingand advisingon all significantenergy capital expenditures;and (c) advising on all energy policy issues, includingprice levels and structures. The Ministryis inadequatelystaffed meet these responsibilitiesfully. ESMAPhas identifiedthe technicalassistance components needed to overcomethis deficiencyand develop the Kmistry's policy function over the next year. The proposed project includes a component for implementingthis support.

3.3 The energy componentof the MEWD's portfolio will be handled by the DOE. Ihis Department's functionsinclude (a) review of energy sector investmentproposals for consistencywith the national energy strategy; (b) prioritizationof potential investmentsby financial and economicviability and contributionto the achievementof sector strategic objectives; (c) maintenanceof an energy data bank; (d) provisionof technicaladvice; and (e) analysis of energy prices in relationto economicefficiency. At present the Departme --lacks staff with the qualificationsand experienceto carry out any of these functionsto the extent needed.

Prastatal Energy Companies

3.4 ZIMCO was convertedto an investmentholding companyfrom April 1, 1993 as part of the reorganizationand privatizationprogram of the Government. The ZIMCO companiesscheduled for privatizationemploy about 67,000 staff (approximaty 45% out of ZIMCO's total employmentof approx 150,000). In principle, all other ZIMCO companies are aso to be privatized. ZIMCO itself is to be phasedout during 1994 and 1995. The present privatizationprogram shows no Governmentplan for the sale of the three parastatal - 17 - utilities, ZIMOIL (and ZOC, its replacement),Tazama and Indeni. Except as initiatedas part of the proposed project, the privatizationprogram will not affect ZOC, Tazama and Indeni in the immediatefuture.

3.5 ZIMOIL is currentlyresponsible for procurement,ownership and bulk storage of feedstock, and for supervisingtransportation, processing and marketingof petroleum products in Zambia. The ZIMOIL tasks will be divided betweenZOC (for oil procurement) and the Consortiumof Oil MarketingCompanies (OMCC) (ZIMOIL's remainingfunctions). Petroleumproducts are importedby ZIMOIL on a competitivebasis, which has alreadyled to significantcost savings. In its Letter of SectorPolicy Governmenthas confirmedthat ZOC would use internationalcompetitive bidding proceduresfor petroleumprocurement. Because of the need for stocks in Dar-es-Salaamas well as Ndola, and the time taken to pump feedstockto Zambia, ZIMOIL typically owned the crude/productsfor 16 weeks before paymentby the distributors-an exceptionallyfavorable and low risk operatingenvironment for distributors. Successfuloil importationdepends on managingthis financingproblem. As discussedbelow, the areas for improvementin ZIMOIL's operations are manpowerlevels, time taken for loading of rail tankers and improvedoil procurement.

3.6 Transportation Tazama's costs of bulk transportation(Dar-es-Salam to Ndola) are low because of the age of the pipelinesystem and the use of historic cost for depreciation. Losses are high and environmentaldamage has been significantat times. Moreover, the exposedparts of the pipeline are at risk. Recurring leakagesin the pipeline have brought down the pressure for pumping. Tazama's pumping capacityis 1.1 million tpa but is not fully used because of lack of Zambiandemand and the pipelineleaks whichwould follow higher pumpingpressures. The major issues connectedwith Tazama are the need for better performance,implementation of an improvedpricing system, and whether the pipeline should transport feedstockor products.

3.7 The Refinery at Indeni has been maintainedin reasonablecondition, but was designed in an era of lower energy costs and lower expectationsof efficiency. The major issues connectedwith Indeni are the need for better performance, implementationof an improvedpricing system, and the long term role of Indeni.

3.8 Marketing is done mainly through the followingfive oil marketing companies,BP Zambia Ltd., AGIP Zambia Ltd., Caltex Zambia Ltd., Mobil Zambia Ltd. and Total Zambia Ltd. The major issues connectedwith the marketingcompanies are the need to reform the pricing mechanismsand redeterminationof the role of the companiesin relation to feedstockprocurement. Althoughsales to large customersare competitive,in retail marketingprice competitionIs not keen.

Proposed Institutional Reforms

3.9 The Ministry of Energy and Water Developmenthas obtainedCabinet endorsementof a fundamentalreform of the energy sector. In relation to the petroleumsub- sector the focus of the reform is to take Governmentout of the sector, and to liberalizein an orderly manner. MEWD has discussedthe changeswith the oil marketingcompanies and they have all expressedclear support. - 18 -

3.10 In relation to the oil procurementrole of ZIMOIL, the Governmentwill establish Zambia Oil Company(ZOC) as a replacementcompany to undertake international procurementof refinery feedstock. Governmentwill have a 'golden share' but to the extent possible the shareholdingwill be in oil company and private ownership. Incorporationof ZOC and executionof the ZOC SubsidiaryLoan AgreementwiUl be a conditionof disbursementof funds allocatedto ZOC. ZOC wouldengage a petroleumprocurement expert to supervisefeedstock procurement, and wouldhave a procurementsupervisory committee to ensure transparency. Procurementof feedstock will be through internationalcompetitive bidding processes.

3.11 The Governmentobjective is for ZOC to sell the feedstockto a consortiumof the oil marketingcompanies (OMCC) at the Dar-es-Salaamterminal as soon as it has arrived. Arrangementshave to be made for the consortiumto financethe purchaseof the linefill (the oil in the tanks and pipeline, about $30 million). Government will take all measures necear for the establishment of OMCC by not later than December 31, 1994, and ZOC will implement agreed steps for OMCC to take over ownership of feedstock/petroleum products by March 31, 1995. A timetablefor implementationof these arrangements,satisfactory to IDA, will be agreed.

3.12 OMCC would negotiate a transport contract with Tazama by March 31, 1995 which would have progressively tighter performance standards on operating efciency and physical losses, recopizing the exchange adjustments in the tariff structr

3.13 By March 31, 1995 the OMCC would negotiate a processingagreement with Indeni with progressively tighter performance standards with respect to operating efficiency, physical losses and operatingcosts, automaticallytaking into account exchangerate adjustmentsin the processingfee. Privatizationof Indeni is currentlybeing studied, but is not feasibleuntil the pricing system has been reformed and a decision is taken on the longer term role of the pipeline. Privatizationof Tazama, if feasible, will be pursued late in the national prvatization program, and after gaining experienceof managementthrough the performance- based managementcontract.

3.14 Managementof the Ndola storage terminal is to be pased to the OMCC, prior to effectivenessof this credit. It is expectedthat ZIMCO will transfer ownershipof the terminal to ZOC, and initiallyZOC will lease the facilitiesto OMCC for a two year period, with OMCChaving full responsibilityfor operationsand maintenanceon a contract managementbasis. ZPA has commissioneda study on the Ndola terminal with a view to decidingon whether in the medium-termto lease or sell the assets, recognizingthe need to protect the national interest, particularly,and the need to provide access to this facility for newcomerslicensed to market productsin the country. ZOC will, for the initialtwo years, retain responsibilityfor new investmentsincluding the proposed ZOC componentof this project.

3.15 OMCswould constructfacilities at their Lusaka terminalsto use the railways for bulk transport of petroleumproducts to Lusaka (and possiblybeyond) and negotiatea transport contract with ZR with tight performancestandards on travel time, wagon return time, and physical losses. ZR will confirm its acceptance In principle of these standards as a condition for disbursement for ZOC's Ndola component. In light of the proposed - 19 - modificationsto the marketingcompanies' Lusaka facilitiesto allow full train unloading facilitiesfor all OMCs, any companiesmaking investmentsthat would benefitother OMCs would negotiate a throughputagreement fee with other OMCs.

Staffing: Parastatal Energy Companies

3.16 The ZIMCO holding companyrole has been reduced to providing a chairman for each company (a Group InvestmentDirector) and to financial controls and group legal services. The energy companiesfall under the Director for Utilitiesand Services. This same director is responsiblefor the interim regulatorysystem. The longer term arrangements resulting from the phasingout of ZIMCO have not yet been determined.

ZIMOIL

3.17 The ZIMOIL Division employs75 operatingand administrativestaff members @ighfor the turnover handled)at Lusaka and Ndola as follows: Senior Middle Operatingand Management Management Administration Staff Lusaka 4 2 11 Ndola 4 1 64 Total 8 10 75

The Division is headed by the Group InvestmentDirector (UtilitiesSecretariat and Services) based in the corporateoffices in Lusaka, having overall charge of all the operationsof ZIMOIL. The present organizationchart of ZIMOIL is given in Annex 3.1. All positions are fiiled by local recruitment. The ZIMOIL terminal has prepared a proposalfor reducing its workforceby replacing existingsecurity personnelby hiring a private security service to do the work on a contractbasis. This proposal, which is expectedto save about 8.5 million Kwachaper year, is yet to be approved by the management. Under the proposed project, the managementof the bulk storage will be passed to OMCC, and the OMCCwil determinethe performancestandards. Tnese will be revised and (as appropriate)incorporated into the regulatorysystem.

Tazama Pipelines Ltd. (Tazama)

3.18 The 586 personnelworking in Tazama earlier had been reduced to 474 as of June 14, 1993, resulting in a net saving of 97 millionkwacha per year. The organization chart is given in Annex 3.2. While not eliminatingovermanning, this action goes far towards achievingthe appropriatelevel. Tazama has entered into a performancecontract with ZIMOIL, and in due course will enter one with OMCC, settingout the standardsto be achieved.

Indeni Petroleum Refinery Company Ltd. (Indeni)

3.19 Indeni currentlyemploys 402 personnel, equallyspread between engineering, production and finance/administration.There are six expatriates-five AGIP secondedstaff - 20 - and one other non-Zambian. Indeni is also reducing Its manpowerbut has yet to present a concreteproposal showingthe plan and its associatedcompensation costs. An action plan is at the draft stage. ZIMOIL has entered into a performancecontract with Indeni, and (in due course) the OMCC will enter into a performancecontract settingout the standardsto be achievedby Indeni.

Acounts

ZIMOIL/Zambia Oil Company

3.20 ZIMOIL maintainedseparate accountswhich are regularly audited(as part of the ZIMCO audit) by a private firm of charteredaccountants. The auditedstatement was incorporatedinto the consolidatedaccounts of ZIMCO. The quality of audits is acceptable. After ZIMOIL is reorganizedinto discrete procurementand storage companies,a separate fuil-tiedged auditedreport will be availablefor each entity. It was agreed that ZOC annual accoumtsshowing both activities, together with the auditor's reports, should be submitted to IDA not later than six monthsafter the end of the fiscal year.

TazamaPipelines UImited

3.21 Tazama's accountsare acceptableand up-to-date. The annual accounts are auditedby an acceptableprivate accountingfirm, and are satisfactory. The audit is normally completedwithin four monthsof the close of the financialyear. It was agreed that Tazama's annual awcounts,together with the auditor's reports, should be submitted to IDA not later than six monthsafter the end of the fiscal year.

Indeni PetroleumRefinery CompanyLimited

3.22 indeni's accountingand managementinformation systems are well established. The company's accountsare auditedby an acceptableprivate firm of chartered accountants and submittedto the shareholderswithin six monthsafter the close of the financial year. The qualityof the accounts and audits is acceptableand the books are up-to-date. As the project does not support Indeni, IDA will not seek submissionof Indeni's accounts.

Mistry of Energy and Water Development

3.23 The Ministrywill maintain Project Accounts to summarizethe expenditure in relation to those parts of the project for whichthe Ministry is the implementingagency. These accounts wlll be audited annually by an independent auditor and be submitted to WlAnot later than six months after the end of the fiscal year. - 21 -

IV. TBE PROJECT

Project Objectives

4.1 The main objectivesof the proposed project are to:

(i) restructurethe petroleum industryto become more competitiveand cost effective;

(ii) develop policy through encouragingestablishment of a satisfactoryregulatory framework and effective competitionin petroleumimportation and marketing;

(iii) rehabilitatethe Tazama Pipelineas a least cost, reliable means of transporting oil to Zambia;

(iv) strengthen Tazama's operationaland financial managementto ensure ta the pipeline stays in satisfactoryoperational condition;

(v) improve infrastructurefacilities to reduce the cost of petroleumproduct transport and distribution;and

(vi) provide a basis for the private sector companiesto facilitate exports by using surplus pipeline capacity.

Pec Description

4.2 Capacity Strengthening of MEWD MEWD is responsiblefor identifying and formulatingpolicies and strategiesto address current and emergingenergy issues such as pricing reform and restructuringthe sector organization. A TechnicalCell will be established in MEWD to frame regulatorymeasures concerningenergy sector issues and to monitor and maintainrecords with respect to petroleum(Annex 4.9). The Ministryis inadequatelystaffed for these tasks. ESMAPhas identifiedthe technicalassistance components needed to overcomethis deficiency in the Ministry. The proposed project includesa componentfor capacitybuilding in the Ministry and for policy support (pricing, petroleumproducts export potentialand Ndola terminal leasing arrangements). Studieson pricing and on terminal leasing are in progress; the study for petroleun exports will be completed by December 31,1999 prior to completion of the rehabilitation of the pipeline. Draft TORs are in Annex 4.8.

4.3 Tazama Pipeline Rehabilitation The Tazama pipeline was originally designedto transport a full range of petroleumproducts. It was later converted into a crude oil line when the Indeni Refinery was commissioned.With the modificationsand additions includedin the proposed project, the pipeline could be put back into product service for a limitedperiod. However, for long-termproduct pumpingcertain changes in the single point mooringfacilities and a second submarinepipeline are required (costingabout US$12million) for as long as the TIPER refinery in Dar-es-Salaamcontinues to unload crude oil through the existng system. Provisionof an independentSPM for Tazama would significantlyenhance Zambia's security of supply. However, in view of the SPM's reliabilityrecord, its low usage (ess dt 33%), and the options for replacementin the event of damage, decisionson -22 - replacementof the SPM shouldbe deferred until the Governmentagain reviewsthe refinery, or until Tanzania needs to change its own use of the SPM.

4.4 To evaluatethe extent of damage and assess the scope of the proposed rehabilitation,a detailed survey using intelligentpigs with sensors (a mechanicaldevice that senses and measurespipeline defects while travelling inside the pipeline) was conductedwith IDA finascing (Cr. 1627-ZA). A reliable assessmentof the corroded sectionswas thus made possible, and the cost of repairs and replacementwas accuratelyestimated. The survey showed that the pipeline developedsevere external corrosionbecause of (a) failure of the pipeline outside coating; and (b) the effects of the low resistivity"black cotton" soil in which the pipeline is buried. Althoughusual cathodicprotection methods had been employed,their effectivenesshas been limited becauseof (i) inadequatepreventive maintenance; and (ii) widespreadcoating separation. Persistentincursion of sea water into the pipeline after each cargo delivery at the Dar-es-Salaamoffshore SPM has caused internal corrosion(concentrated In the initial 250 km section). This pipelineportion was repaired/replacedin 1988and 1990 using fumdsfrom the Italian Governmentand EIB. The leaks which occurred in the Ruvu river basin (close to the pumpingstation that suppliesdrinking water to Dar-es-Salaam)have alreadybeen repaired (5 km betweenKM 74 and KM 79) using Tazama's own funds in 1987. As a result of these repairs, the unaccounted-forpipeline losses have decreasedfrom 15,219 tons in FY88 (CIF cost US$3 million)to about 6,146 tons in FY90. These losses in FY91 and FY92 were 3,788 tons and 1,295 tons, respectively. Since then an increasein product leaks amountedin FY93 to 6,436 tons, presumablybecause of increasedcorrosion in unrepaired areas of the pipeline. Problemscaused by corrosion and inadequatelytrained personnel persist. Two of the river crossingspose a physical risk. There is extensive pollution at the various oil storage depots, where new operatingpractices will have to be instituted. To maintainthe mechanicalintegrity and safe operationof the whole system, repairs and replacementsare urgently required for the storage tank-farm in Dar-esSalaam, for main and booster pump stations, for the cathodicprotection, for the telecommunication network and for transport vehicles.

4.5 Project Subcomponents The proposedproject envisagesrepairs where feasible and replacementwhere repairs cannot suffice. The project wouldrehabilitate the remainingweak portionsof the pipelineand all its auxiliarysystems: the entire systemwould then operate reliably. To prevent entry of salt water into the pipelinesystem, one of the tanks at the Dar-es-Salaamtank farm will be dedicatedto receivingoil contaminatedby seawater. In this tank, sufficientsettling time will allow for the water to be separatedand drained out before the oil is transferred to the pipeline system. A new tank has been constructedto ensure this even when one or more tanks are under repair. Suitable interphasedetectors and necessarymodifications in the piping arrangementshave been installedat the tank farm. This scheme (coupled with the injectionof corrosioninhibitors in the pipeline)would guarntee preventionof internal corrosion. The cost of pipelinerehabilitation with other related items is estimatedat US$48million (detailedcost break-downin Annex 4.1). The following subcomponentsare proposed:

(i) Pipeline Rehabilitationfrom KM 250 to KM 1710which includes50 sleeve repairs and 30 km of line pipe replacementon the 8-inch line, and 40 sleeve repairs and 3 km of line pipe replacementon the 12-inchline. Strengthening of the pipeline supportat river crossings is necessary. - 23 -

(ii) Corrosion Protection The cathodic facilitieswhich protect the pipeline from external corrosionwill be strengthenedwith the addidon of 6 new AC cathodicprotection stationswith deep well ground beds and ten solar cathodic protectionstations with horizontalground beds.

(iii) Mechanical Becausethe pump stations have been without major repairs since they were commissioned,14 pumpsand enginesmust be overhauled.

(iv) Electricaland Istrumentation Replacementof 9 existingstation generators and provisionof new instrumentsfor pumpingunits.

(v) Telecommunications Eight sets of new HF radio systemsto include telemetry,HF and VHF support and telephonepatch-up are required.

(vi) Tank Farm The rehabilitationwork related to the storage facilitiesat Dar-es- Salaam will includereplacement of bottomplates for tanks T4, TS and T6, repairs to the roof of five tanks, and constructionof one new tank. This work will minimizepollution through oil leaks from the tanks and prevent recurrent incursionof salt water from the floatinghose at the SPM into the pipeline system. A 40,000 mntank at Ndola will be constructedfor receiving feedstock.

(vii) Vehicles, Spare Parts and Project Equipment To permit Tazama's operation (and project implementation)to functionefficiently, the project will provide a motorboat,vehicles, project equipment(tractors, 20-ton crane, excavators,bulldozer), spare parts, computers,and office equipment.

(viii) Environmental New operatingpractices are to be introducedto minimize environmentaldamage, and new methodsof waste disposalwill be presented. Engines at the pumping stationswill be modifiedfor more efficient combustionof fuel.

(ix) Comultancy and Project Management The subcomponentincludes consultingservices to assist Tazama in the detailed engineeringdesign for items (i) through (vi), in procurementof materialand services including preparation of tender documents,evaluation of proposals, and in the supervision,monitoring and qualitycontrol of construction/installationwork.

4.6 Institutional Strengthening of Tazama An importantcomponent of the project is technical assistanceto Tazama to improve its efficiencyand environmental awareness. Experiencedmanagers are to be engagedto bring Tazama up to international standard in operations, maintenanceand finance, and to give on-the-jobtraining to Tazama staff. The project provides US$3.3 millionin foreign exchange,for hiring three qualified people to fill the posts of key managersfor 2 years; hiring one experiencedproject manager, to be sharedby Tazama and ZOC, required for the Project ImplementationUnit for three years(see para. 4.10); and financingthe trainlngrequirements of Tazama. The appointment of three qualifiedpersons to fiff the posts of key managers for 2 years by April 1, 1995 and the appointment of an experienced company to manage the pipeline based on a performancecontract by not later than April 1, 1997 have been agreed. - 24 -

4.7 Rail Loading Facility Expansion At present 90% of the products from ZIMOIL's termina at Ndola are transportedby road tankers. The financial transport cost could be reduced by about US$1.4million p.a. (US$8per ton based on ZR's tariff as of June 1993) if the long distancebulk transportof productswere done by unit trains using the existingrail system. Withoutadequate rail loading facilitiesunit train loadingat Ndola is not feasible. Sufficientstorage tanks and unloadingfacilities at the receivingpoints are also needed. The proposedproject will expand the rail loading facilitiesat Ndolato include loading facilitiesfor 12 wagonsat a time (enablingloading of unit trains of 24 wagons in two placements),six loadingpumps will be replaced, tank meters will be installed, and computerizedproduct loading facilitiesand product flow meters will be developedand used. The proposed expansionof facilitiesat Ndola would also facilitate exportingsurplus products to the Shaba region of Zaire. A satisfactorytransport contract between OMCs and Zambia Railways is essentialto achievingthe distributionbenefits, and confirmationby ZR of the principlesof such a contract will be a conditionof disbursement. A possiblecoordinating arrangementand draft transport contract is in the project files.

RelatedInvestments to be Flnanced by the Private Sector

4.8 Indeni Refinery The refinery's operationis marginalbecause of its poor product yield pattern, high consumptionand loss of hydrocarbons. The Governmentwishes to keep its only refinery in operation,but considersit inappropriateto investpublic money in what shouldbe a commercialventure, and has requested AGIP to undertakethe investment merited by the economicsof the refinery. AGIP has a study underwayto consider potential investments. To improve fuel efficiencythrough energy conservationand increasedistillation capacity, the refinery managementhas developedvarious proposals costing in the range of US$1.0 million.

4.9 LusakaBulk Storage To complementthe improvedtrain loadingfacility at Ndola it will be necessaryto improve the unloadingcapability at Lusaka to enable a unit train to be unloaded in not more than two placements. The private sector oil marketingcompanies will undertakethis investmentafter agreeingamong themselvesthe facilitiesto be expanded. As the pricing system will be based on rail use and road use will becometoo expensive,the companieshave a strong incentiveto have these facilitiesready on time. There is no need for an implementationagreement with them on this issue.

Project Managementand Implementation

4.10 Project implementationwould be the responsibilityof MEWD, Tazama and ZOC. The rail loading facility expansionwould be implementedby ZOC, the technical assistancecomponent to develop an efficient monitoringunit by MEWD, and the pipeline componentby Tazama. Tazama and ZOC would be responsiblefor coordinatingactivities concerningappointment of consultantsand contractors,procurement, project programming and budgetingfor their respectiveportions of the project. A project implementationteam will be establishedwithin the engineeringdepartment of Tazama. The Tazama Project Manager, who will be an experiencedpipeline engineerwith experiencein project implementation, would lead the pipeline project team. The Project Manager'sjob descriptionhas been agreed between Tazama and the Association. Appointment is a condition of effectiveness. - 25 -

4.11 Of the three beneficiariesof the proposedproject, two beneficiaries,Tazama and ZOC, would require assistancefrom qualifiedand experiencedengineering consultants. Tazama would require the assistanceof experiencedengineering consultants for design, engineering,preparation of project specificationsand tender documents,bid evaluationand constructionsupervision. Tazama has given IDA a short list of engineeringconsultants satisfactoryto IDA and has set out the selectioncriteria. Appointment of the engineering consultant is a condition of credit effectiveness.

4.12 ZOC, In consultationwith Tazama and under arrangementssatisfactory to the Association,would use the services of the same consultantsfor design, engineering, preparation of tender documents,bid evaluationand constructionsupervision.

4.i± Tazama and ZOC would use the services of an experiencedContract Legal Advisor for all contractsfinanced from the project funds includingthe technical assistance component. The ContractLegal Advisor, whose charges wouldbe financedfrom the proposed IDA Credit, wouldbe hired by Tazama and ZOC on terms and conditions satisfactoryto the Association.

Project Cost Estimates

4.14 Project base costs have been estimatedat January 1993prices. No taxes or duties are levied on project goods. The total project cost, includingcontingency, is estimated at US$48 million equivalent. This includes US$42.3million equivalentfor Tazama, US$2.6 million equivalentfor ZOC and US$3.1 million equivalentfor capacitybuilding to MEWD includingUS$0.2 millionfor training. Of the estimatedUS$6.2 million for technical assistanceexcluding contingencies, US$2.2 million is for policydevelopment, US$3.2 million for capacity strengthening,and the balance for project implementation.Foreign exchange costs wouldbe equivalentto US$45 million, or about 94 percent of the total. The costs to be incurredin Tanzania are includedamong foreign expenditurecosts. The physical contingency is estimatedseparately for each project component: the average is about 12.5% of the base cost Price contingencieshave been includedon the internationalcomponent of equipment, materials and other suppliesat 3.4% for 1994, 2.9% for 1995,3.0% for 1996, 2.7% for 1997, 2.7% for 1998and 2.5% for 1999, and the Zambianlocal componentof civil works and materialswas calculatedin US dollars. It is assumedthat Zambianinflation will continue to be promptlyreflected in the exchangerate. Price contingenciestotal in aggregate 11% of base cost. A summaryof project cost estimatesis shownin Table 4.1. - 26 -

Table 4.1 ZAMBIA- Summaryof Project Cost Estimates

Project Component Local Foreig Total Local Foreign Total

- (USS MilLion)- -(Million Z. Kwacha*)-

Pipline Rehabiliation 1.4 30.1 31.5 840.0 18,060.0 18,900.0 TaPma ProjectManagement 0.1 0.6 0.7 60.0 360.0 420.0 TazamaInstitutional Strengthening 0.2 2.5 2.7 120.0 1,500.0 1,620.0 SubTotal 1.7 33.2 34.9 1,020.0 19,920.0 20,940.0 Contingency 0.5 6.9 7.4 300.0 4,140.0 4,440.0 Total For Tazama ; 40.1 42.3 1,320.0 24.060.0 25.380. ZOC 0.3 1.7 2.0 180.0 1,020.0 1,200.0 Contingency 0.2 0.4 0.6 120.0 240.0 360.0 Total for ZOC O S 2.1 I. 300.0 1260.0 1S60.0 ME"P 0.2 2.3 2.5 120.0 1,380.0 1,500.0 Contingency 0.1 0.5 0.6 60.0 300.0 360.0 Total for MEWD 0.3 2.8 3.1 180.0 1.680.0 1.860.0 Total Project Cost ; Q 2&82.80 aBased on k 600/S, an averageexchange rate for 1994 (projection).

Fnandng Plan

4.15 The total project requirementof US$48 million equivalentwould be financed by IDA (US$30million equivalent),EIB (US$15million equivalent),and Tazama/ZOClMEWD(US$3 million). IDA and EEBwould financeUS$45 million equivalent In parallel to cover the entire foreign exchangerequirement of the project. Governmenthas confirmedEIB's agreementin principle to this financestructure. Execution of an agreement with EIB, including fulfilling condidons precedent to effectiveness, would be a condition for IDA credit effectiveness. The proposed IDA Credit of US$30 million equivalentwould meet about 67 percent of the foreign exchangeand about 63 percent of the total financing required. The proposed Credit would be made to the Government. Of the total IDACredit of US$30 million equivalent,US$2.8 million equivalentwould be used to develop an efficient monitoringunit in MEWD, US$25.1 million equivalentwould be onlent to Tazama and US$2.1 million equivalentwould go to ZOC. The onlendingterms (in US dollars) would be for 20 years includinga grace period of five years at an interest rate of about 8%, or equal to 1.1 timesthe prevailingIBRD interestrate. The foreign exchangerisks would be borne by the beneficiariesup to the time they discharge their debt obligation. Tazama and ZOC would finance the local costs from internal cash generation. The proposedfiancing plan is summardzedin Table 4.2. - 27 -

Table 4.2 ZAMBIA- PetroleumSector Rehabilitation Project FunancingPlan (USS Millionequivalent) Comoonalt ~~~Sourco ljocal EoreQn Toa S of Sub- Toal

Tazama IDA - 25.1 25.1 60 EIB - 15.0 15.0 35 Local 22 a Sub-Total 2.2 40.1 42.3 100 Supplyand Distr. (ZOC) IDA - 2.1 2.1 81 Local Q, JO 19 Sub-Total 0.5 2.1 2.6 100 MonitoringUnit in IDA 2.8 2.8 90 MEWD Local 0.3 -A Sub-Total 0.3 2.8 3.1 100 Total IDA - 30.0 30.0 63 BEB - 15.0 15.0 31 ocal 3.0 3.0 6 Total 3.0 45.0 48.0 100

ProjectSchedule and Disbursement Profile

4.16 Completion of the project is estimated to require 40 months from the start of physical work. However, in recognition of delays generally experienced in Zambia, the project disbursements are forecast to take 60 months. On this basis the Project is expected to be completed by December 31, 1999. The Credit closing date will be June 30, 2000. Ihe implementation schedule for the various components is shown in Annex 4.2. A nid-term review is planned for June 1996. From this review, the Government will prepare (and witl cause Tazama and ZOC to prepare) an action plan acceptable to IDA, for furter institutional refrm, and will cause Tazama and ZOC to implement that action plan. The tentative supervision plan for IDA is shown in Annex 4.3. The proposed disbursement profile is based on a realistic implementation schedule for individual project components and the implementation profile for various petroleum sector and technical assistance projects. The profile recognizes that the proposed project is a continuation of rehabilitation work being completed using EEB and ADB financing, and using experienced engineering consultants for project management. The disbursement schedule for IDA financing is summarized in Table 4.3 and is shown more fully in Annex 4.4. - 28 -

Table4.3 ZAMBIA- IDA DisbursementSchedule

IDA Disbursements

{:onpoonents 1994/95 1995/96 1996197 1997/98 1998/99 Totl Tazama 1.7 2.0 4.8 8.7 7.9 25.1 ZOC 0.1 0.3 0.4 0.7 0.6 2.1 MEWD 0.2 0.2 0.4 10 1+ ?J Totl 2.0 2.5 5.6 10.4 9.5 30.0 (%) 7.0 8.0 19.0 35.0 31.0 100.0

Prourement 4.17 The procurementarrangements to be usedfor variouscategories of equipment, materialsand servicesto be financedby IDA are itemizedin Table4.4. International competitivebidding (ICB) in accordancewith Bank guidelines, totalling US$20.1 million, wouldinclude US$18.9 million for Tazama(bid packagesfor linepipe,pipelaying, rehabilitationof tanks,telecommunications, generators) and US$1.2million for ZOC. Ihe Bank'sStandard Bidding/Contract Document for goods,works and consultingservices shall be used. For fixedprice contractsthe bid documentswill provide for the bidder'sbid to be increasedby referenceto two predisclosedcorrection factors for foreignand localcomponents of the bid price respectively.To coverthe cost of proprietaryspare parts and other componentsfor existingequipment and machines,IDA would finance up to US$1million on a sole sourcebasis. For specializedequipment for whichonly a limitednumber of suppliers are available,Limited International Bidding procedures up to an aggregateamount of US$1million will be adopted. Smallitems or groupsof items(including office equipment and vehicles)costing up to US$100,000per contractfor Tazama,and up to US$50,000per contractfor ZOCwould be procuredunder contracts awarded after Internationaland Local Shoppingprocedures by obtainingat leastthree quotationsfrom reliable suppliers, or alternativelyusing IAPSO up to an aggregateamount of US$1million. The aggregateamount of non-ICBprocurement is US$3million. The majorconsultancy contracts are the Engineeringservices for the designand supervisionof the Project(see paras. 4.6 and 4.1014.11)and the strengtheningof Tazama'soperations through incorporating three experiencedline managersinto Tazama'sstructure (para. 3.10). Engineeringconsultancy servicesamounting to US$0.6million (40m/m) for Tazamaand US$0.2million for ZOC (lSm/m),and servicesfor institutionalstrengthening of Tazama(250m/m) and the MEWD (lSOm/m)for US$3.3million and US$2.6million respectively, would be awardedin accordancewith Bank Guidelines for Consultants.US$500,000 for Tazamawill be allocated fromthe capacitystrengthening budget and US$0.2million is providedin the creditfor MEWDfor shortand medium-termjob-related training, seminars and courses. Training programswith an annualtimetable have been agreed upon. The institutionalstrengthening of MEWDhas beenreviewed by ESMAPand appropriatemeasures have been suggested(para. 4.2). -29 -

Table4.4: Zambia: Summayof ProposedProcurement Arrangements (US$mfllion equivalent) Proourentl Methd PfoieotElements ICB LCB Othe 12 1. Work

Tazma - IDA 5.9 - - 5.9 Othor Finance 15.0 - - 15.0

ZOC 0.6 - - 0.6 2. Goods (upent and Matdals) Tazama 13.0 - 2.1 15.1

ZOC 0.6 - 0.9 1.S 3. Consultncies Tara - - 3.6 3.6

MEWD - - 2.6 2.6 4. Trining

Tazam - 0.5 0.5

ME - -u

Total inoludin cofinanin 35.1 - 9.9 4S.0 for IDA 20.1 - 9.9 30.0

All the figu unles otherise notedwill be finanted by IDA. IDA finncing figuresare contractsnet of taxes and will b finaed 100% for forcin expenditu and 90% for local expenditure.

Procureae of goods and works will be canriedout as per Bank's ProcurementGuidelnes (May 1992). lhe ivations to bid, biddingdocuments, bid evaluationand final contractshould be subject to IDA'sprior reviewfor all procurementfor goodsand worksexceeding US$150,000. Contractsbelow $150,000 would be subjectto IDA's post-reviewon a selectivebasis (onein four). Consultancycontracts for firmswould be subjectto IDAprior reviewfor contracts exceedingUS$75,000; all contractsbelow $75,000 will be subjectto IDA's selectivepost review. Contractswith individuals will be awardedaccording to Part V of the Bank's ConsultantGuidelines (1981). Suchcontracts above $50,000 will be subjectto the Bank's prior review. Procurementinformation will be collectedand recordedthrough prompt reportingof contractaward information by the implementingagencies, and comprehensive quaterly reportsto the Associationby the implementingagencies, indicating revised cost estimatesfor individualcontracts and the totalproject cost, including best estimatesfor physicaland price contingency;revised timing of procurementactions, including advertising, bidding,contract award, and completiontime for individualcontracts; and complianceof aggregatelimits on specifiedmethods of procurement. - 30 -

Allocationand Disbursanentof IMACredit

4.18 The allocationof the proposed IDA Credit is summarizedin Table 4.5. Special Accounts(one each for MEWD, Tazama and ZOC) would be establishedin commercialbanks and operatedon terms and conditionsacceptable to IDA. These accounts would receive advancesin amountsof US$1.5 million for Tazama, US$100,000for ZOC and US$150,000for MEWD, and would be replenishedperiodically in accordancewith applicable IDA procedures. Disbursementswould be made against full supportingdocuments, exceptfor payments against contractsfor goods and works costing less than US$150,000equivalent, and for individualtraining programs. Supportingdocuments associated with SOE claims would be retained in a central locationby the relevant implementingagency, suitablycross-referenced to the withdrawal application,and made availableon request for review by visiting supervisionmissions. As part of the annual audit for each implementingagency, the independentauditors would give an opinion with respect to the SpecialAccounts and to the amounts withdrawnon the basis of SOEs. The estimateddisbursement schedule for the proposed IDA Credit, shown in Table 4.3, has been based on the implementationschedules for individualproject componentsand is discussedin para. 4.16.

Table 4.5: Zambia - IDACredit Allocation (UYS$million equivalent)

MLYD TAZAMA ZOC TOTAL DISBURSEMENT

Equipmentand - 11.3 1.2 12.S 1009%of foreign Materials expenditures,90% of local expeadtu Civil Works and 4.8 0.5 5.3 100% of foreign Eretion expenditur, 90% of local expenditure

Engineeringand - 0.6 - 0.6 100% of foreign Project Managent expenditures Trining and 2.3 2.8 - 5.1 100%of total Institutional cxpenditumes Stengdening Contingencies Q.5 5.6 0.4 6.5 Total 2. 30.0 Envinmental and Safety Aspects

4.19 The project Is classified as Category B. The environmentalreview, undertakenby a Canadianconsulting group, and inarized in Annex 4.6, identifiedtwo river crossings where the pipeline is exposedand vulnerable,and three other locationswhere the pipeline is exposed. A numberof operationalsites were noted where the exhaust emissionsfrom pumps are severe and where changes in operationalpractices or machineryare requred. Operationshave not been well managedand leaks have been extensive,with the result that minor strucural modificationsare needed at a number of operationsites to prevent spillage affectingthe soil. Some clearing up is needed for areas already damaged. The - 31 - operators will be trained in environmentalawareness. In relation to the rehabilitationof the Tazama pipeline and the expandedrail loading and unloadingfacilities, the consultant identified no specW problems, and pointed out that once the work is completethe environmentalimpact shouldbe much improved. However, the consultantrecommended the developmentfor Tazama and ZIMOIL/ZOCof environmentalstandards, preparation of an enmironmentalprotection plan, installationof hard standingsand devices for containingand collectingoil spills, and for ensuringthe proper functioningof the cathodicprotection system. A simple emergencyplan will be developedto deal with a serious oil spill or a fire. Basic equipmenttO stop a serious leakageor a fire will be availableat places along the pipeline and at the terinals. Operatorswill be trained how to handle emergencysituations.

4.20 Tazama and the Government(on behalf of ZOC) have agreed on the environmentalmeasures to be implementedin conjunctionwith the constructionprogram, substanly as outlinedhere and summarizedmore fully in Annex 4.5.

Project Development Impact

4.21 The goal of the Bank's strategy for Zambia is to assist the Governmentto achievesustnable economicgrowth and to reduce poverty. The proposed project is an integal part of selectedinitiatives important to the support of IDA's country strategy: promoting economicgrowth by focussingon strengtheningbasic infrastructurewhile recognizingrelated environmentalissues, reviewingthe role of state-ownedsector entities, promotingcompetition in petroleumsupply arrangements, supporting deregulation of petroleum retail prices and the improvementof petroleumsupply organizations'efficiency through performancecontracts. The rehabilitatedsystem would supplypetroleum fuels in an environmentallyand economicallysustainable manner. The technicalassistance to Tazama, includedin the Project, would help to improve its operationalefficiency and its project management. The proposed restructuringof ZIMOIL and its arrangementfor early custody trnfer of petroleumto an Oil CompanyConsortium would enhancethe financial commitmentand presence of private sector companiesin the importationand distributionof petroleum fuels in the country.

Project Monitoring

4.22 MEWD, Tazama and ZOC, for their respectivecomponents, will implement the proposed project in accordancewith the indicatorsshown in Annex 4.6. The indicators would establish whetherthe project is perceivedas importingand distributingthe oil successfullyand economically. These indicatorswould be includedin the requirementsfor quarterlyprogress reports from these organizationsto IDA. Agreementwas reached that within six monthsafter the completionof the project, the companiesconcerned would prepare implementationcompletion reports using an outlineto be agreed with IDA.

Listof Documentson File

4.23 The proposed project and its componentswere defined and appraised as a result of specializedengineering inspection of the facilitiesand consultarts' reports. Various documentsrelated to these inspectionsand studies are listed in Annex 4.7. - 32 -

V. FINANCIAL ANALYSIS

Introduction

5.1 The financial analysishas been made on the basis of the auditedstatements submittedby the companiesand the projectionsare on the basis of the notes and assumptions explainedin Annex 5.1.

Flnancial Policies of Zambia's Parastatals

5.2 Each parastatalhas full authorityon pricing as well as staffing, salaries, and other managementissues. Parastatalsare to be managedas profit centers. There are to be no subsidiesfrom Governmentor from the holding company, and no loan guaranteesexcept for public utilities. The Governmentwill not be involved in parastatalpricing. This policy was not followed in the first part of 1993: in a number ef parastatalspolitical involvementin pricing has been extensive.

5.3 Governmenthas set a mandatorydividend policy of 10% on revaluednet assets. Althoughrevaluations have been normal at ZCCM and most of the Indeco companies, this is not the case elsewhere: at this stage full implementationof this policy is impracticable. Asset revaluationshave been commissionedfor the major public utilitiesbut not for companiesscheduled for early privatization,except as needed in conjunctionwith the privatizationprogram. In implementingthe dividendpolicy, the companiesare finding significantprice resistance, and it may be impossibleto achievethe dividendtargets.

5.4 Overall financialpolicies commonto most parastatalsinclude the need for each compauyto achieve a growth of at least 10% in the volume of productionreflected by a correspondingincrease in productivitymeasured by the productionper employeeratio. The policy envisagesa foreign exchangesaving of 10% In real terms on forex utilizationand an increaseof 10% on forex earnings. In capital expenditureprojects the need to yield an internal rate of return of 20% after providingfor borrowing costs and mandatorydividend on the inflation-adjustedGoverment equity (share capital+ accumulatedearnings+ revaluation reserves) has been prescribed.

ZIMOIL

FSnancdalImplications of ZIMOIL Operations

5.5 In the pre-1994arrangement, ZIMOIL imports and owns the crude and uses the services of Tazama and Indeni on a cost plus basis. ZIMOIL invoicesthe buyers (the oil marketingcompanies). This arrangementhas resulted in high costs of operationbecause of excess manpowerand the consequentestablishment expenses for each company. There is little or no accountabilityamong the companiesfor these higher than necessarycosts of operation. There are no set standardsfor measuringefficiency. All costs and operationsneed tD be better monitoredto ensure conformityto internationalstandards. Since early 1994 Zimoil has moved away from cost plus to negotiatedcontracts including some performance standards. - 33 -

Financial Performance

5.6 ZIMOIL's operatingresults and financialposition for the period 1990-92are shown in the audited incomestatements and balance sheets in Annexes5.2 and 5.3 and summarizedin Table 5. 1. The figures reflect ZIMOIL's policy to set sales prices of petroleumproducts so as to recover: (a) the cost of procurlig refiuery feedstock and shipping it to Dar-es-Salaam;(b) harbor and storage costs in Dar-es-Salaam;(c) financialcharges for procuring feedstock;(d) Tazama's fees (e) Indeni's refining fees includingfuel consumption and loss; and (f) Ndola terminal costs.

Table S.l ZAMBIA - ZIMOIL Summary Fuiancial Statment 1990-92 (n curnt million Kwacha)

1989190 1990/91 1991

Saks mooa 0)

Domestic 615 533 S1S

Expoet 13 22 IncomeStatemet Itm

sales 2,638 8,529 IS,491

OdherIncome 82 m

Total Income 2,720 8,534 16,412 opacting Costa

Cost of impoted oil 2,146 6,094 11,318

Tazt and Jldeni Fees 361 567 1,203

Other Costs 1 729 1.174

ToWalCosa 2.?.390 13.695 TaxableIncome 5. 4 ,2.717

Sam heet1

CuffentActa 1,725 8,185 11,407

Fixd asos 16 52 60 Total Assets zL LA.UM

Currten LlAoliles 1,627 7,122 7,641

LonsTea Debt 53 154 341

Reseres 961 3.48S

Total Uabities and Equity 11.741 27 7.

5.7 During late 1992and the first part of 1993, ZIMOIL was not allowed to change its prices in response to the depreciationof the Kwacha. This resulted in accumulated arrears of n;arly 19 billion Kwacha (approximatelyUS$35 million). The prices have since been revised and current prices reasonablyreflect current costs and adequatelycover the arrs. It will take until end-1994to fully recover the accumulatedarrears of exchange - 34 - losses. Earlier, ZIMOIL borrowed through expensiveinternational credit facilitiesto finance the procurementof feedstock. Becauseof this credit system, ZIMOIL was bearing the cost of exchangefluctuations for 180 days-long after its ability to pass these on to marketershad lapsed. ZIMOIL is now working on a cash basis by carefullypooling the petroleum product sales proceeds in a separate accountreserved for procurementof feedstock. These proceeds are used to buy foreign exchangeon a weeklybasis. This procedureneeds to be continued very strictly for paymentfor feedstockto avoid ZIMOlL/ZOCbearing the cost of exchange fluctuations.The Cuneo study identifiedZIMOIL's procurementpractices and Letter of Credit costs as two areas for major cost savings. Procurementis now being conductedusing internationalcompetitive bidding. The adoptionof a cash system for oil purchasesand the openingof a separateforeign exchangeaccount for oil procurementhas gone a long way to minimizingLetter of Credit costs and should avoid losses due to exchangefluctuations, providedthat prices continuesto reflect the costs incurred.

inanclalProjections

5.8 The financial projectionshave been prepared on the assumptionthat a new Zambia Oil Company(ZOC) will be set up to procure feedstockand that bulk distribution will be managedby a consortiumof oil marketingcompanies (OMCC).

Zambia Oil Company (ZOC)

5.9 Under the proposed arrangement,ZOC will be responsiblefor procuring feedstock, transportingit to Dar-es-Salaamand deliveringit to OMCC in Dar-es-Salaam. The price structure of ZOC will be worked out as in the schedule given in Table 5.2. - 35 -

Table 5.2 ZAMBIA- Pricing Structurefor ZOC for Importof Feedstock/ PetroleumProducts (Dollar,per ton) With BZ Fund WithoutBZ Fund Fegdt Product* Feodsl Prduct FOB GulfPostings 150.00 150.00

OceanFreight 13.00 - 13.00

Insurance - --- 00 CIF Cost 150.00 164.00 150.00 164.00 HarborDues 0 1.5% CIF 2.25 2.46 2.25 2.46 OoeanLoss 0 0.3% CIF 0.45 0.60 0.45 0.60 Inspection/Demurrage@ 0.25% CIF 0.38 0.41 0.38 QA LANDEDDAR 153.08 167.47 153.08 167.47 Financ Charge @ 1% CIF 1.50 1.64 1.50 1.64

BZ Fund 90.00 90.00 - - LonsesFund 5S% CIF 75_0 8.20 7.50 8.20 COMPOSrrEEX-DAR 252.08 267.31 162.08 177.31 Iapor's Margin@ S1 per ton 1.00 1.00 1.00 1.00

insomeTax Q 40% (on BZ fund) 36.00 3.- SELLINGPRICE Ex-DAR 28X.08 304.31 163.08 weaihtedaverage, asumiU facilitiesexit for productimports

5.10 Given the current state of the Zambian economy,no significantgrowth in domesticdemand is forecast. Local sales are assumedto increaseby 6.6% over a period of five years (1995 to 2000). Export sales are assumedto be constant at 75,000 tons- substantialy above the current level. Financingcost is assumedat 1% of CIF cost. Harbor dues are levied at 1.5% of CIF value. Ocean loss is allowed @ 0.3% of CIF value. Ihe key assumptionis that sales prices are set by OMCs at a level to cover the losses acceptableby internationalnorms for pipeline transport,refining and storage. The Bank of Zambia (BZ) fimd is to provide funds for repaymentof loans to BZ to the tune of 19 billion Kwacha. It is expectedthat these arrears togetherwith the accumulatedinterest will be completelypaid back by December 31, 1994. A loss fund has been set up to compensatefor any abnormallosses (over and above the internationalstandards) which are likely to experienceduntil the rehabilitationprogram is completed. Thereafter, performancewill be strictly monitoredto perform competitivelyand any loss above normallyacceptable international standards will be borne by the entites concerned. The detailedassumptions are given in Annex 5.4 and the projected incomestatement and balance sheet are given in Annexes 5.5 and 5.6. The summaryof the projectionsof ZOC is given in Table 5.3. ZOC will adopt an appropriate price adjustmentsystem for timely and prompt adjustmentsto prices to reflect currency fluctuationsand changesin internationaloil prices. - 36 -

Table S.3 ZAMBIA - ZOC Sumary Projeote FnnialStatenmnt 199S-2000 (in 1993constant million Kwacha) Ail" 1995 12 1997 1998 1999 2000 Quanlity(00tons) 702 712 721 729 740 749 Ptieper ton(I) 173,400 97800 97800 97800 97800 97800 nome Sam Sales-Oil 121,727 69,634 70,S14 71,296 72,372 73,2s2 OCherIncome W47 2.746 2.264 Lt iR 818 Totd Income 12623 72 .778 73.078 73.62 74.070 opt.Coats - OHl 63,199 64,099 64,909 65,630 66,620 67,430 Other cods 234S8 7.805 729m 6.970 §IS71 6X

Tota COS 86.657 71.904 72.301 72.600 3.191 73.588

NetIxxome =7 _ 287

CumrenAssets S7,538 37,169 31,564 25,699 20,050 14,491 Fxedass .42 S.0 S94 L1. I.S L5 Total Assets &010 42.269 1 26.81 Q 2 .610 CufrenLiabiities 22,950 7,41S 8,3S6 7,977 7,794 7,617 Lov,gTem Debt and ProjectLoas 28,416 22,925 17,494 12,242 6,931 1,260

Equity and Reeves 1LM4 11.29 6.0 .S gm8 z4 Toal Liabies and Equity 42.69 &W "2 0 L2U

Oil Marketing Companies Consortium (OMCC)

5.11 Under the proposed new arrangement, OMCCwill own and take deliveryof the crude from Dar-es-Salam and use the Tazama pipeline to pump the crude to the Indeni Refinery. The crude will be refined at Indeni and the finishedproducts wil be stored at the Ndola terminal facilitiesof the present ZIMOIL. Tazama and Indeni will be paid their pumping and refining fee by the OMCCat a contractedrate. Internationallyaccepted normal losses will be taken ino account in fixing the tariffs for Indeni aad Tazama, any cost over and above the normal standardswill have to be borne by the entities concerned. Until completion of the rehabilitation,the specialloss fund to be maintainedby ZOC will be used for meeting extra losses up to the amount in the fund. After rehabilitationis completed,all these units will be monitoredto very strict standardsof efficiencyand performance. The facilitiesat Ndola terminal will be leased out to OMCCfor a contractedfee pending a decisionto lease or sell. The break-downof the proposedpricing structure for OMCC is given in Table 5.4. - 37 -

Table 5.4 ZAMBIA- Pricing Stnuctuefor Bulk Distributonby OMCC (Dollarsper ton) With BZ Pund Without BZ Fund Feedstock Product Product Cost of CnutdPioductat Dar 289.08 304.31 163.08 178.31 PunVingFPes 0 $22 per ton 22.00 22.00 22.00 22.00

Rarioad Fee for blak oils - 20.00 - 20.00 Tazuaa Lss 0 0.25% of Cos 72 0t91 0t41 cohMEsrri EX-Tazama 311.80 347.23 185.48 220.85

RefiningPees a $23per tan 23.00 - 23.00

Refinaeyand Cons.Loss i 7.5% Ex-Tazana 23.38 - L I3 . COIP

5.12 The 'producta cost exceeds the 'crude' cost by less than the notionalrailroad fee, which representsthe weightedaverage cost of transportingblack productsby rail if the pipeline were convertedto a white productspipeline. In practice, alternativearrangements would avoid much of this cost by substitutingalternative fuels; and there is no material difference in cost betweenthe options if allowancesare made for at least 75,000 tons per annum of exports.

5.13 The pumpingfee of US$22per ton for Tazama and the refining fee of US$23 per ton for Indeni have been based on the present tariff paid by ZIMOIL. These fees would be adjusted as a result of the rehabilitationprogram and in responseto changesin the throughputrate. The bulk sellingprices will also be adjustedto recognizethe revised tariffs from these companies. OMCC will enter into separatecontracts with each entity involvedin the process to set tariff rates as well as the standardsto be achievedin the operations. Exports have been assumedto be 75,000 tons per year for the purpose of these projections. Exports have been priced at US$20 above the domesticprice.

5.14 OMCC wiU need an appropriateprice adjustmentsystem for timely and prompt adjustmentsto pnces to reflect changesin internationaloil prices and currency fluctations. It is expectedthat this will closely mirror the ZOC system. A study on this critical concern is to be financedunder the project. Subjectto this, the OMCC financial position is expectedto be fully satisfactory. - 38 -

Tazama Pipelines Limited

Financial Implicationsof Tazama's Operation

5.15 Tazama, which was establishedin 1968, is operatingunder the terms of a 1967 conventionbetween the two governments. Tazama owns and operates the crude oil pipeline from Dar-es-Salaamto Ndola, with an annual transportationcapacity of 1.1 million metric tons. The lack of demand (due to a depressedZambian economy) means that the pipeline's pumpingcapacity is not fully used. Tazama has only one customer(ZIMOIL) and accordinglycannot adopt a satisfactorilycompetitive pricing policy. Althoughmanning levels have been reduced by about 20%, there is still room for further manpowersavings. Because of the monopolythere is no scope for directly measuringthe efficiencyof operations. All costs are passed on to the consumer. Althoughcomparison with pipeline operationsin developingcountries shows that Tazama is better than average, it falls short of the best performanceachieved elsewhere. Previous attempts to gain efficiencyby restructuringthe budget led to lack of maintenance,and eventuallythe need to seek a performancecontrt (see Chapter 3).

Financial Performance

5.16 The Conventionprovides that Tazama operate on a cost recovery basis and periodicallyset the tariff that it charges ZIMOIL, to ensure that the companymeets all its financial obligationsfrom current revenues. In view of Zambiapaying all costs but Tanzania shaing the dividends, a cost recovery basis with nominalprofits is appropriate. Tazama acts as a carrier of oil but does not own the oil at any stage. Until recently it has borne no responsibilityfor losses. Tazama's operatingresults and financial informationfor the period 1988-93are shown in the audited incomestatements and balance sheets summarizedin Annexes 5.7 and 5.8. A summaryof fimancialresults is shownin Table S.S. Tazama's financial performancein 1992 and 1993 was unsatisfactory,mainly because of the unexpectedlylow volumestransported, the high inflationand exchangerate movements,and the delays of recognizingthese changesby adjustmentsto the price structure. Tazama has set up a separate fund and an accountfor monitoringthe debt paymentby transferringthe debt servicing portion in the pumpingtariff to this fund. - 39 -

Table 5.5 ZAMBIA - Tazama Summay Fmancial Statements 1991-93 (in nmllion current Kwacha)

1221 19 1993

h!FMe Statement Rtems Strvice Fee 312 387 2,475

Other Inome 4 9 15

Total Revenue 316 396 2490

opeaX Cost 268 837 2649

Net Income 48 "44(1

Blhnce Sheet Items

Cutrent Asse 191 219 1,709

Fude Amu 1.445 4.319 1939

Totl Asst 1.636

Curent Liabitltes 212 882 3,892

lqozg-Tern Debt 1,282 3,955 20,215

Paid in Capital 9 9 9

Reserves133 (308) (468

otl Liabilities and Equity 1463i' 438 am

Fianca Projections

5.17 The summaryfinancial projections are presented in Table 5.6. The detailed notes and assumptionsare in Annex 5.9 and the income statements,balance sheet and finds flow statementsare in Annexes5.10 through 5.12. Tazama's tariff is set annuallyat a level sufficientto recover all estimatedcosts, includingdebt service, on the basis of the projected throughputof the pipeline. The key assumptionsfor the soundnessof the position shownby the projectionsare that prices will be revised regularlyto recognizeexchange rate movements and inflation. The new tariff for 1994/95will be set mostly in dollars so that exchangerate movementsare fully recognized. Subjectto this, the constantprice projectionsfairly represent the position likely to be achieved. The projectedtariff takes into accountproision for an expandedlevel of maintenanceequivalent to US$1 million per annum. - 40 -

Table 5.6 ZAMBIA- TazamaSununary Projected Financia Statemens 1993-98 (n million1993 constant Kwacha) 19994 S 15 996 1997 1998 1999 IncomeStatement Items ServiceFee 8,144 7,423 7,444 7,483 7,513 7,544 7,574 Other Icome 30 30 30 0 3Q IQ 30 Toall Revenue 8,174 7,453 7,474 7,S13 7,S43 7,574 7,604

opeatin costs 2.93L 2.994 3.015 Id 0 3.4 L5 Net Income(aRer 3.563 3.71 LUI 3 .271 Int.and Depra.)

BalanceSheet Items Cment Awets 3,292 4,756 5,288 6,478 7,994 9,426 10,207 Fxed and Other Ase 24.871 27276 30.72 36.409 45.720 5421 5SA3 Total Asse .163 032 Q 4288 53644 7 g.42

Curret liabilities 1,450 1,992 1,407 1,375 1,261 1,279 1,219 LongTerm Debt 23,246 23,302 24,624 28,232 35,902 42,546 41,330 Pid in Capital 9 9 9 9 9 9 9

Reserves 34 6.729 10 000 IL1 16.S4 12JL3 23.QL4 Toal Liabiities and Equity 32.0323 42.887 63.64M

5.18 Tariffsare currentlyset in dollarsat a levelpermitting financial viability. It was agreed that by no later than March31, 1995,the tariff levelswould be establshed and maintainedat a levelsuffcient to permit the fnancialviability of Tazamaand would be on a basis that would continuouslyreflect all costs and provide adequate maintenance. This could includesetting tariffs in dollars, or adjustingmonthly to cover devaluationsof the Kwachaand debt service. Tazama shall arrange to revalue the assets periodicallyso that these are representedat replacementvalue in the financialstatements, the first being due during 1994. Tazama shall submit the first revaluationreport of the auditors (which is in progress) to IDA within a month of its receipt.

Indeni Refinery FinancialImplications of IndeniOperations

5.19 Indeni now refines a mix of semi-finishedpetroleum products. The financial positionof Indeni is dependentsolely on the processingagreement with ZIMOIL, and need bear no relation to Indeni's economicjustification. While in principle Indeni will also process oil transportedby Tazama for other companies,the high cost of Indeni's operationis unlikely to auract many customers. The operaing cost of the refinery amountsto US$23 per ton over and above 7 to 8 percent fuel consumptionand losses. This is 50% higher than in similar refineries in other developingcountries. The path toward resolvingthis is through a - 41 - progressivelytighter performancestandard and fee (para. 5.16), and through constrction of tanks at Dar-es-Salasmso that product imports becomepossible (para. 4.3), and through negotiationswith AGIP (para. 3.14).

Fb da l Performance

5.20 The refinery operates on a commercialbasis, with the processingfee being a negotiatedfixed amount per ton of throughputprocessed. Indeni has been showingan increase In net income. But all its operatingcosts are being fully reimbursedby ZIMOIL. So net incomecannot be taken as indicatingthe unit's efficiencyuntil the processingfee is fixed on a more realistic basis to measure Indeni's effectiveness.

5.21 Since Indeni is not a proposedbeneficiary of the Credit, no financial covenantsare recommended. - 42 -

VI. JUSTIFICATION, BENEFTIS AND RISKS

Project Justification

6.1 The proposed project representsthe core investmentrequirement in the petroleumsector. It would rehabilitatethe pipeline and improvethe rail loading facilitiesat Ndola. (The private sector oil companieswill be responsiblefor improvingthe unloading facilitiesat Lusaka.) It would remove the environmentalthreat in Zambia and Tanzania from feedstockleakage. The pipeline's rehabilitationneeds have accumulatedover the years because of institutionaland technicalweaknesses. The project would provide adequate technicalsupport, training and institutionalstrengthening so that the beneficiariescan operate efficientlyand avoid the managementand maintenanceproblems of the past.

Economic Analysis

6.2 The economicanalysis for each project componentwas conductedseparately: rehabilitationof Tazama pipelineand improvementof existingrail loading/unloadingfacilities at Ndola and Lusaka. For improvingloading/unloading facilities, the investmentcosts were comparedto the next least-costalternative, distributing petroleum by road. For Tazama pipelinerehabilitation, the investmentcosts have been comparedto the alternativeof shutting down the pipeline and using the next least-costalternative, the Tazara Railway.

PipelineRehabilitation Econondes

6.3 Investmentcosts have been comparedto the next least-costalternative of supplyingZambia (and its land-lockedneighbors) with petroleumproducts. Withoutthe Tazama pipeline the region's least-ost access to the sea would be by the Tazara railway system, which runs parallel to the pipelinefrom Dar-es-Salaam. Tazara connects with the Zambia Railway System at Kapiri Mposhi. Tazara's gauge is common with the railway system in Zambia, Zaire, Malawi, Zimbabwe,Botswana, Angola, Mozambiqueand South Africa. If access to the sea via Mozambiqueand SouthAfrica were denied, the Tazara railway would also provide alternativeaccess to the traffic from the land-lockedCentral African countries.

6.4 Tazara carries most Zambian imports (mostlyfertilizer and wheat) and exports (copper and other metals)through interchangeof wagons with ZR. It currentlycarries around one million net tons of traffic a year, but has a design capacityof 5 million tons. Under current conditionsof efficiencyand locomotiveavailability, the optimumturn around time between Dar-es-Salaamand Ndola for a dedicatedunit train is 9 to 10 days but averages 30 days. With improved maintenance(and availabilityof the existinglocomotives), Tazara can handle a traffic volume up to 2 million tpa. The turn around time on the system would increasebecause of longer average lead time, delays at the ports and congestionon the system. To supply the petroleumrequirements of the country at 550,000 tpa increasingto 800,000 tpa by FY2002, three dedicatedtrains a day would be needed initially,increasing to about five a day. This would require an initial stock of 450 new tank wagons and 28 locomotivesat a cost estimatedat US$99million. About US$3 million would be required for additionalmaintenance facilities and US$13 million for loading/unloadingfacilities, bringing the initial investmentto about US$115million. Once importsreach about 800,000 tpa, the number of tank wagonsneeded would increaseto 670 (assuminga 90% availabilityfactor) - 43 - and locomotivesneeded would increaseto 42. This level of rolling stock would require a total investmentof US$84 million for locomotives,about US$64 million for tank wagons and about US$15 million in loading and unloadingfacilities (excluding tankage). The total incrementalinvestment for the railway option (underthe most probable scenario) would be around US$163million. This option would also increase the environmentalrisk compared with the rehabilitatedpipeline.

6.5 Againstthe alternativesof movingpetroleum feedstock by the Tazara System, or through the more expensiveSouthern African Railways carrying productsfrom Durban, the continuedoperation of the pipeline with investmentof US$31.3 million in core rehabilitation, and a later investmentof US$14 million (in its 10th year of operation)for non-coreneeds, is the least-costoption. As the "with pipeline"solution is less costly than the rail option in all years, the economicbenefit from the pipeline rehabilitationcomponent is estimatedat over 100%.

Rail Loading Facility Expansion

6.6 The investmentcosts to improvethe rail loading of petroleumproducts include: extendingthe facilitiesat Ndola to load 12 wagons at a time and modernizingthe rail unloadingfacilities of oil companydepots in Lusaka. At both Ndola and Lusaka, sidings connect the rail stations and depots. The loading facilitiesfor tank wagons in Ndola are limitedto 6 to 8 wagons a day. Althoughthe train systemand loading/unloadingfacilities exist at Lusaka, 80 percent of the petroleumtransported from Ndola to Lusaka currently must depend on road conveyancemainly becauseof the inefficiencyof the rail facilitiesand tank wagon turn around times.

6.7 The refined petroleumproduct is distributedby road and rail through the depot located next to the Indeni refinery in Ndola. The loading capacityof the facilitiesat the Ndola depot limits loading to only two rail tank wagons simultaneously,permitting 6 to 8 tank wagons a day. The unloadingcapacity at the BP depot in Lusaka (the biggest depot) can handle up to 16 rail tank wagons simultaneously. In Lusaka, each OMC has its own depot- the OMC's depots are adjacent-and there are several possible configurationsof this component. About 20% of the total demand for gasoline, keroseneand diesel in the Lusaka area is now transported by rail.

6.8 The major benefits from the distributioncomponent would be a reductionIn transport costs from a shift from road haulageto the improvedrailway transportaton system. The increase in demand to be expectedwould be fumishedthrough a more efficientand less expensivesystem. EIRR for improvingthe distributionsystem of petroleumby upgrading facilities at Ndola and Lusaka with the base demand case was 14.9% (See Annex 6.1). This modest rate of return is due to the smallvolume of productslikely to be transported and the relativelypoor performanceof the ZR.

Indeni Refinery Economics

6.9 The refinery operatingeconomics were evaluatedon two cases: energy efficiencyimprovement in the existingrefinery, and mothballingthe processingfacilities in the refinery and using the remainingfacilities for a bulk products terminal to be suppliedby the Tazama pipeline operatingas a multi-productline. Those options were analyzedusing -44- three assumptionsof the demand:domestic demand only; domesticdemand together with exports of 75,000 tons; and domesticdemand togetherwith maximumexports with the fiul pipeline capacity used. The least-costoption to satisfythe demand (domesticand exports) would be mothballingof the refinery together with conversionof the pipeline to a product line (See Annex 6.2). However, the economiccase for closure does not prove that closure should be immediate,and consultantshave recommendedthat closure wait until major expenditureat the refinery is needed.

Project Risk

6.10 In Tazama there has been a long history of inadeqpateinspection and mintenance resulting in extensivepipeline leaks which causedproduct losses and downtime. This risk is mitigatedby the proposed managementcontracts and on-the-jobtraining. Poor operationand neglectedmaintenance of the modernizedfacilities at Ndola and Lusaka would be less likely to happen, since managementwould rest with the private oil distributors. But the cost differentialbetween road and rail may change, especily in view of weak performanceby ZR. There is some risk that ZR will never accept responsibilityfor losses of product under its care, and that the Ndola rail loading componentwould not proceed. It is normal practice in OECD countriesfor the railroad to accept responsibilityfor product losses and to protect itself trough Insurance.

6.11 Convertingthe pipelineto a product line (not part of the project at this stage) would improve the reliabilityand flexibilityof the oil supply system. The transport of products would enhancethe likelihoodof theft and would lead to need for stronger surveillance. However, the success lies primarily in the capacityof Zambia to reduce operatingcosts and losses by mobilizingthe commercialand technicalexpertise of the oil marketingcompanies to its best advantage. In addition, internationalrefinery margins could be expectedto change, which could enhanceor reduce the benefits of refinery closure. - 45 -

VII. AGREEMENTSREACHED AND RtECOMMMATIONS

A. Agreements

7.1 Before credit effectiveness:

(a) Governmentwil executesubsidiary loan agreementswith Tazam (para. 3.1);

(b) Governmentwill executeagreement with EIB, includingfulfilling EIB's conditionsof effectiveness(para. 4.15);

(c) Governmentwill implementthe first stage of pricing reforms as agreed with IDA (para 2.28);

(d) Tazama will appoint Project Manager(pan. 4.10) and engineeringconsultant for project engineeringand supervision(para. 4.11 and 4.12); and

(e) ZIMCO (or ZOC, if by then it is the owner of Ndola terminal) will contract to transfer managementand operationof Ndola terminal to OMCC (para 3.14).

7.2 As conditionsof disbursementfor allocationof funds to ZOC:

(a) Theincorporation of ZOC and executionof SubsidiaryLoan Agreement between ZOC and Government(para. 3.1); and

(b) Zambia Railwayswill confirm its acceptancein principle of performance standardson travel time, wagon return time and physical loss (para. 3.15).

7.3 Other agreements:

(a) Governmentwil ensure that petroleumproduct prices will be reviewed at least monthlyand adjustedas required to reflect all foreign and local currency costs, includingthese causedby devaluationof the Kwacha (pamr 2.27) and wiUlbe set at a level so as to permit ZOC to recover the losses incurred pror to June 1993, throughthe pricing system, before December31, 1994 (para. 2.28);

(b) Governmentwill remove controlson retail prices before the end of 1996 (par. 2.28);

(c) Prior to the completionof the Project, Governmentwill not permit Indeni, Tazama and ZOC to undertakeany new capital investmentin excess of US$5 million beyondthose includedin the Project withoutprior consultationwith IDA (para. 2.34); - 46 -

(d) Governmentwill cause OMCCand Tazama to negotiatea transport contract which would have progressivelytighter performancestandards on operating efficiencyand physical losses, recognizingthe exchangeadjustments in the tariff structure to be implementedby March 31, 1995. The Governmentwill cause OMCC and Indeni to negotiate a correspondingcontract by March 31, 1995. A timetablefor implementationof these arrangements,satisfactory to IDA, will be agreed. (paras. 3.12 and 3.13);

(e) MEWD, Tazama and ZOC will submitto IDA audited accountstogether with auditors report, as appropriate,not later than six monthsafter the end of the year (para. 3.20, 3.21, 3.23 and 4.18);

(D) Establishmentand incorporationof OMCC by not later than December31, 1994 (para. 3.11);

(g) By no later than March 31, 1995, Tazama will establishand maintain tariffs at a level sufficientto permit its financialviability and will be on a basis that continuouslyreflects all costs and providesadequate funds for maintenance (para. 5.18);

(h) Tazama will appointthree qualifiedpersonnel in line managementfor mnanagementpositions in operation,maintenance and financialaffairs for 2 years by April 1, 1995and appoint an engineeringcompany to managethe pipelinebased on a performancecontract by not late, than April 1, 1997 (para. 4.6);

(-i) ZOC will implementagreed steps for OMCCto take over ownershipof feedstock/petroleumproducts by March 31, 1995. A timetablefor implementationof these arrangements,satisfactory to IDA, will be agreed (para. 3.11);

GI) IDA and Governmentwill undertakea mid-termreview in June 1996. Based on the review, the Governmentwill prepare, and will cause Tazamaand ZOC to prepare, an action plan acceptableto IDA, for further institutionalreform, and will cause Tazama and ZOC to implementsuch an action plan. (para. 4.16); and

(r) Governmentwill completea study of petroleumexports by December 31, 1999 (para 4.2).

B. Recommendations

With the above agreementsand assurances,the proposedproject constitutesa suitable basis for an IDA credit of SDR 21.6 millionto the Govemmentof Zambiaon the IDA standard terms.

May6, 1994 ANNEXES -47 - Annex1.1 Page 1 of 4

OmCE OF THIEMINISTER MINISTRY OF ENERGY AND WATER DEVELOPMENT P.O. BOX3609 LUSAKA

5 May, 1994

w De%"~Cook, reff ME WDI71121/1 DivisionChif(Inuhtaby and EswrMyOerations), SoudtherAfiica Deparuuiat, WorldBank lIl#HSftv0eN.W. WaslnSgtanD.C. 20433

Dea Mr. Cook,

RE: Lo ww OF PEzROLEum swwTR 1~jm

With rfvac. t doI. receBadnugotistdes holdin W&ahskintD.C. taxn 4th to 6th Apti 1994 reSwdingdi. peirohm SeCOWReabblgitatn pa&jca,I hav the ploasw. to subi the Zambia. Gommuins Ltte OfPMtOIsUM SecOr Policyu asrolown: 1. Govenmmeastratsu for the secto Thm sttes of die Gavenmnaft in 13wpwaolem subsector is to amcouge effiGial pouvnment, Irnprai. rcalg ItIuinad consumption Of P*UoheWand/or potolsum pxOduct in dwe OoankYTO achiev &ii. utiltie and odiv entiftis n ghesub-secto wal be encowVed to operat at list coug,and more emphasiswil be laid on toe pawtcipatio of the prfivateseto tro of competitionin al aspectsoDf thedkA pero miniiduy and hibrlm nion of pricig and maa*tingtrutrs 2. Rok of ovwnmont Th role of Gowunnntodin tW u,.Cr s be*to 61= ia the pehtrem nust i pro1994 wrth an opmm R_vIh t fow pwiv vauna ad ploi decisons This wil be achlevedbyv providIn an appropriatejVlegLvlfdt*Wo and pokiy ftasnewoz to ncoua Gcospi o andprovide Pnf poliy pda to sb-sector in wi* Goverme objective for do eFh sect a a whalg and thee econmny._k bhl aso be Guvoinuafa ra, t ar as possbl pemit dh nonal vvorkingof marD -48- PageAmex1.1 2 of 4

fore4a in h sub-scclor, and whine nocessiy to instpb sequired suctura an to _intItAtonal,pciGy, lega ad oweloiy Iament tat maybe in exisence at any SWen tw. Govenmnwt wi so be repaonsble_duct foc MAia4 contct with Govemen r%wading ntemadonal s may he requed withi the sub-sector.

Another impount rsu for Govenunet in th sector is to ensur tatwdre are adegquatest&ft*o reres of petolen produc-to ume swourty of aSply and sustain ntional con_uMpto in dme whe disuptions to nonnal supply occiw.

3. Roe of the Reulatorly system

As Gowvmnwat movs swa fom diect participation n the coammaci operqt of the sub-soctor, it is imporan t at a suitable reguatoy sysem is put in place to ense that private is in ih, mxwr uporat on commercial tns and ar wcll ma This wl rqure tdie usetg and fihctivw m ntaio of pesfomace standards dia will deine the parametcn of operation and pwvidr ldc basis for prcing deciions in tho ect-. The rcgulatoy ysm should Aso be ale to monitor and enfrc teclmka shaards to ensure t opas_ of firm wthi th idusty coform to intena auqulreinautsand promoto olncy endW st cost of suppy.

In dw Naiona Enez Po&-y ad4pped by Cabint in January, 1994 there is a prvisio for the eablshment of an Enwa Replatory Board whih shal be respw_sble for te Qepeeulan of all er tr nticns al8g hc 1 mentioned abovc. 4. Role of the ZIMCO Group

In the ikem7, ZIMCO will pWvidche wseawarut fr uilities in the bector, and auue ta thY operapt poftbl an lin with th _uAMe polcy of gm oavrment. P_ a£gthe n r of7Zamba il Company (ZOCX)0oL Divso of ZfCO wvl continue to mpor pecm f_ took for tho couny a has bw the practico in tw pasL Upon the foton of th oil MA*oting Compais Cuvaoium (OMCC), ZMOIL and aUbsequenflY ZOC s wRel feedtock to Ihe OMCC 'A Dar-a-Salaam. TAZAMA Ppens shl nter into a businss Wationstip wih th OMCC, as dual tDENt rfiney. 'be ZLMOIL tel Somnul at Mdola N cun¶od under study, nd depndg on t recomm is of th consult hrd to undeake dw sty, it shall bewsld or l d to the 0C.

hI v*w of wommatesdesire to divht its rol hen th day to day oportions of the poleum sub-setor, and th economy as a whole, a working grup of Govnuu..i offic has been, onstictd and a cosutt wa be auitd dewincdie modaie of ZIMCOs A dudy i alo nderway to deom_in how bost utiltes i dt ZIMCO Group can be related. Ouvennt will work owt the modali of di_vsg shcas in cnear parastatals Pending discusionx with th differen akeodor inhldin th Zabia Pudatio Aseny (ZPA). - 49 - Annex1.1 Page3 of 4

S. Sector Ulberalzaton OGv Owcdominance of Govenment paricipation dhat has characteuizedthe setor in th past, it ts GovnnfS inbtntion to esucturt th petoleum ndustay in Zambia 6 openit up to widerpartcipation by Oa pivate setr. As a dat, Govarment inend. to ncurAage dtc fonnationof an Oil Matdetig CompanieConxoium (OMCC) hat wVA optmize the patipon of the prvat Oil Marktin Companies in th unilpg of di _iduy. The Govrrmn aball alsopemit the prvattssector to undak A1commedal l"esm ihesub-seckor and apart fmn regulatoryactivit, it shll haveno i _nemntin theoperaten of the ol industry.Now e.ntr*Ptio the indWustrYshafl be ouraged, and all umoopolitictendncie shall be reviewedand appropriatecorroai acin takento eawre free and fa cmpeaiton M all sags In he indusy. The nw ent will be alowedfbl accessto nainal storageand othercommon facliti in thosub-ector.

5. Procurement n lin witht Govennmentpolicy of hbalizhion and transpart naret and pricing mechaua8l procuremet and importationof petroleumand petrolnumprodu_t shal be conducted on dte basd of iniaonay a"pta biddng praotces for oi Procuement.

7. Pring Policy Pticig poiW will be encouagpdto retee th ful cos of effmiintyop&rtW eitean thc seotor,in ohe to panit haGmc waY and pro*de a rMason profit -n hWeatnIt in d1e peum y.ust in case of stae wher a natuw monepoy edsts. fuly trnpant piing forinlA£-wM be put in place to su tht all vaiable that fuincI puicric decisiono m tak it account and tt pnicn decsons am not d vwgtp but mad. objcdvey. Gov n hall not makemy p decisionsbut dsal makefull ue ofthe orguatymeebam to nr tat prices tne sectorrecove Al cos", allow a easonab profit and are equitableto Allstakehodlr in th sector. AUl atd priesan tarnff (such as those fr Irndni and Tazuam) will be pub0ied.

L s StrengthenIng In sAogutko of the maltude of structuraland o ianal chawe that willbe noeessitatedby the of gm National*I Policy and 8ea librlzaion of Ihe ube tor,theo nnt iWtnda to VisuOrwYpum X. eQhcningof Institutinal capaGay at boo pohey and opeqtina levls to a a _sttutios in th sdb-ectoram capableof perfomangthk rols in dienow _asna nL At thopolicy level, the Ministy of 1a and Watr Devopmen reqies tho & ad a to efftively mnitor deloment of the subct, an dknct -50- Page4 of 4

pdua for publc b_ulit ne petu emor. fAluMeiN&M alo a requ tdl cpaciy to cma stuctual chnp in th sectorwhn rquird to do so, And to *&eUy p1@Wdpobcy uidanceto thesctor as a whoe. Al Omqouaia lewi, oWrcni s and fhind thAtwil main gm pubic darn for seow time sqe utiarna st thenngoto ence mAnaid ghl and _chau pwfonuancesW d- Bc_ of peifonrmncecaiwna a be set witi the wualatozy systm for such .. atep to onm== dit awwmmu naped -Wo_&standards are naind. I taL Ihcabaoc snffnientlyaddrsem my Gov _maWsintention in the petrlem scw, and lookfoward to waig with Dank in es repad.

Yas Snc4rly,

UdItb 7 Nawakwrl UP cc: HorH.Roald -D.S. Peaza, LP UmbtaroafFtance, .iam cc: Mr. Gideon Nko$o, Rasw Rre a, World Rank ZAMBIA

PETROLEUM SECTOR REHABILITATIONI PROJECT

ENERGY BALANCE 1002

UF('c"%7.t SOURCES AND FORMS OF ENERGY

PPRIVARY ENEROY SECONDARY ENEORY

t 2 8 4 6 4 * 0 *0 tO tt 60 14 Is I0 17

SP1 NYHo. TOTAL-- 89 OTJL PLOWOfMy CRUM ILCY. "Swo amOU CRON FUEL G.T- 8000AR O CM WOW W000 SR sum Rem" tSf FUIL ROEB t Utit 0M0 RIY CHARCOAL SOURESe 10MAL

Xt^t wn 4tW2 I 009460110PROOMPION 274. 40164 "SIS. 4487 40 2 t0_ 04.4 0* . .0 . 0 * VA6g*pt4 -.121.1 t.. -16. -10 4 TTMSIWPLY Ult IIL0 004 SM. 44T to6 . 4?.? s SamoTS .0 0.1 S 00 0.0 1.1 totW 0 00 460 UPPLY 5j. 4 "M. 40 4.0 4t -. 4.1 4 6.2 46O0.7

" "ERIES 413.1 461.1 94.0 O 76. .0 04 "A4 LT w.t 4" * WIUCIYUIul 47.4 .427.4 -1.t 7.4 66. 73. * I594 400.7 -my. 610. 61.1 .47. 10 IT.RMIORMAI1N 4610.tl r.604-m. -20072 "A 3.0 *7. gas 0.4 ? OVA 610. W7 440.t Oki~~~~~~~~~~~J

N 06T.Jm LOam6m am ge if ESI £2K 2V * r~~~~~~~~~~~~~~~~~~~~~"O4K100C _ 1.

t4 MRICULtURADPORSM 0" o2n ttU .4 O.0 71.1 Kr 0. a-10 1610 16. 6.1 1.2 1. .9* 7.0 6.0 6.1 A0 UPS to ow. 6.0 1t OWOO NIDCOMWICI l18* 212.4 W" 7.1 0.7 24t 0* 1# Sao no t7 41v""WIEVe t. 7. OA ?9 I titt tl9 Is -RA so.?.as70 07. 6.4 0816 11* $110.6 tS 71JP407 40.7 10.6 1071 #84 e.o t.2 611.4 011.4 ______.. i wj : :: ::jl u

n* DDJiJtIS 0.0 4 -22 r .0 -1.0 0 -7 e4. -10* 646. 72 46.2 DOJTUN0oPUI4.0040 6.0 -. 4.1 2.2 -4.0 10.0 -4. -. 6.e -0. n0 .0 0* *.0 -4.5 -tJ~

Spoiflc Hea Spocifio Ht PtodS ~ Qm~auk Cote wt1 PdUl° 1O Arabia Ligh 0.8580 42.62 LFO 0.9395 40.95 Napth 0.6970 42.71 HFO 0.9490 40.32 Coadnd_t 0.7800 42.71 Bitumen 0.°300 42.'71, W.10 0.5450 45.43 Pwoodt . 35.50 Petolu (Rglas) 0.WO3 43.13 Carcoa - 32.60 Petroleum(Premm)" 0.7470 42.92 Colt - 2.7.21 Ker.A. 0.7960 43.34 Ebtdt-W. (3AW) - 3.60 AbiaIo Pad 0.7965 43.34 t to0 - 41.90 DNeb&a 0.649S 42.71 -52- Annx 3.1 Page 1 of 1

ZAMBIA

PEItOLEUM SECTOR REHABILITATIONPROJECT

ZAMBIA - ZIMQILDIVIS1ON ORGANIZATION CHART

tDIRECTOR GENERAL

GROUP INVESTMENT DIRECTOR

DEPUTY GROUP INVESTMENT DIRECtOR

M r gRMIANAL CHIEF ;>Utim) TA~~~~~-T|MANAGER | ACCUNTANT | = =*rF--X

rPERSONNELTERMINAL OFFICER ACCOUNTAN4T

MEMBERS ACCOUNTMNSS

OPERATIONS STAFF MANAGERSAFFAFF

w i ~~~~~~STAFF I STAFF BMER l MEMBERS_ TUnzamMiDcliin IJLmicd n RCAN I S A T I O 11 C n A R T

~~~~~oa~~~~ow

_ _ ~ _ _ _ _ , I~~~~~~~~~II~~~~~~~ 4 ls 1pwwa v~f I., oAM

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Uh~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ * I IfWii"M I

I .A 0 EProtcoltAAI to trt offic

| NWA fLanc l Aconant iUAZ

M0Cts m Inomto Sevie M |l>s tis _1r HA --[Oanagemn - Ileureen AcutantL CIa 1~ ~--- !E ;E

S S A 1 -l SeniorFSyateme Anaulys -!0btw"5S

S P A 0Senior Protoco.Ana inistrivOfce

Chief Engr. F. Opera Clief Engineer- Field Operations CHief Engr. Telecom- Chief EngineerHIlafreatoBH - "Teleca.munictiona. Hcnaonen Srvle Hn.1Kr -54 Annex 4.1 Page 1 of 1

ZANMIA

PETROLEUM SECTOR REHABILITATION PROJECT

PROJECT COST ESTIMATES

Foreign Local Total (US$ Million equivalent) A. TAZAMA PIPELINE Mech. & Electricals 2.60 0.10 2.70 Telecommunications 2.20 - 2.20 Dar Tank Repairs (T4, TS, T6) 2.20 0.20 2.40 Dar tankroof Repairs (5 Nos) 2.20 0.20 2.40 Pipeline Rehab. (Km 250-1710) 9.30 0.20 9.50 Cathodic Protection 5.00 0.20 5.20 Vehicles, Tugboat, Computer 1.80 0.05 1.85 New Tank at Ndola (40,000 in) 4.00 0.45 4.45 Proj. Mag. & Cons. Supn. 0.60 0.10 0.70 Tech. Asst. & Training 3.30 0.20 3.50 Base Cost 33.20 1.70 34.90 Physical Contingency 3.25 0.20 3.45 Price Contingency 3.65 0.30 3.95 Sub-Total 40.10 2.20 42.30 B. ZOC Ndola Terminal Modern.* 1.70 0.30 2.00 Physical Contingency 0.20 0.10 0.30 Price Contingency 0.20 0.10 0.30 Sub-Total 2.10 0.50 2.60 C. MEWD Tech. Asst. to MEWD 2.30 0.20 2.50 Physical Contingency 0.30 0.05 0.35 Price Contingency 0.20 0.05 0.25 Sub-Total 2.80 0.30 3.10 TOTAL PROJECT COST 45.00 3.00 48.00 includes molifications to the rail iitirplacement of s loading pumps, insallaton of tank meters, computerized product loading facilities and product flow meters. ZAMBIA PETROLEUMSECTOR REHABBITATION PROJE hIplementation Schedule

|~~~~~~~ _ 8* O M.J t *" -t0t|14 m ASNJM9 ITatIEA JA80NDJ FMAMJJNASW J F MAM JJ A8 SODJ FPUAMJJ AMAN' J MA*JJ A80NC J F MAUJ

ems -rTPR_ F.IF,rn' -EST P"m _l bWM r_ P- ---- JFE_TST&

IbwTnJc6tN"drt~~~~~~~~~~~~ TP T_} FE.TEST&C _ _

1TkTP N----_w b- &doI_ Meohand Eb.ot_I__ Oa#WoloFVtotelcn -c, - ITP AO

Vddd@e,Tech. TCMtJg ~TP1 Ankwm T AC P a.NoTfnacdeIaIWnt ZIMOIL h - h _s~ _ _ ------_ _

raMlUnloaMIngFanUs - _ _

I"DT AC I

E *Engelg ,TP -TenderPbepmtn.T-Todeitg,AC Aw ofContrmtF Fa PakTIm, Tlta*apoaotanERan, T mft*LnbT*. TE8T*T_sni0M .OImn*ulankg, P- Pmoreew_t~* hwtalU Ilpsmnta _~~~~~~~~~~~~~~1 - 56 -

Annex 43 Page 1 of 1

ZAMBIA

PETROLEUM SECTOR REHABILITATION PROJECr

IDA SUPERVISIONPLAN

APPROXIMATE ACTIVITY SKILL STAFF DATES REQUIREMENTS INPUT (SW) 8/94 Reviowof Pricing Study Policy 2 in Economics Washington 9/94 Project Launch Mission Engineering 6 Institutional Economics 9/94 Reviewof Ndols terminalstudy, review Engineering 3 of instiutionalreforms Economics Institional 1/95 Reviewof role of new managers, Engineering 3 project team, etc. Reviewof bid Economics processesand proposedawards 5/95 Reviewof institutionalreforms Institutional 2 10/95 Further review of instiutionalrefonns. Institutional 1 Traininginterim review Engineering 1 6t96 Mid-termreview Policy 4 FY96 Regular supervisionmissions twice 8/yr yearly PY96 Specialreview of developmentof price 2 system and deregudaon plan FY2000 Supervisionmission to include PCR 10 preparation - 57 - AWMAA Page 1 of 1

PetroleumSector RehablUtadon Project Project Disbursment kb§bid

Quart-y cumulative (U.S. Dolars Minion) Fiscal 1994/95 Quartr 1.75 1.75 Quarterfl 0.1 1.85 Qutfm 0.1 1.9S QuarterIV 0.05 2.0 Fi 19922S Quarter Q0.7 2.7 Quarter I 0.7 3.4 Quaotr m 0.3 3.7 QuarterIV 0.8 4.S tFiwal 1996/97 QuarterI 1.4 5.9 Quarer ll 1.2 7.1 Quaem 1.4 8.5 QuarterIV 1.6 10.1 Piso 1997/98 Quuter 2.6 12.7 Quar II 2.6 15.3 QuaterM 2.6 17.9 QuarterIV 2.6 20.5 1998499Qiscal QuarterH 2.4 22.9 QuarterI 2.4 27.3 Q Xm 2.4 27.7 QuadT"lTVa Total - 58 -

Aiex 4.,S Page 1 of 5

ZAMBIA

PETROLEUMSECTOR REUABITATION PROJECT

Environmental Issues

Ihe summaryof the consultant'sreport is attched. Themitigation plan for presenly existingenvironmental issues is as follows: Pipeline 1. Implementan extenal controlprogram. Rewrapthe pipewherever it is exposed (e.g., duringrepairs). Rehabilitatethe cathodicprotection system. 2. Instituteregular surveillance of the pipeline,improve vegetaton control. 3. Improveriver crossingswhere pipeline is exposedwith a viewto minimizing environmentalrisk. 4. Clearaway or break up damagedsoil and encouragerevegetation.

Pipeline Statons 1. Removeor breakup damagessoil and encouragerevegetation. 2. Installdrums to collectoil spillage. 3. Reviewpump operations and improvemaintenance. If necessary,replace worn out parts. Shouldthis not resolvethe emissionsproblem, alternatives will be reviewed and the mostcost-effective environmentally satisfactory scheme will be adopted.

Tenminals 1. Line floorsof the area whererail tank cars and roadtankers are loadedlunoadedso as to preventleakage into the soil. Increasethe containmentarea dyke wall. 2. Removedamaged soil and treat, or 'landform". In relationto the proposedproject, the mitigationplan is: 1. Prepareenvironmental standards, practice and proceduresand operationsand maintenaceguidelines. - 59 -

Annex4.5 Page 2 of 5 2. Preparean environmentalprotection plan for pipelineroute selection (where rerouting is necessary),construction and operation. 3. Ensurethat constructionis in accordancewith the environmentalprotection plan. 4. Usethe opportunitycreated by the rehabilitationto remedyenvironmental problems. 5. Installdrums, hard standings, improved containment walls and similarmeasures, as relevant,for all new construction. 6. Ensurethat the pipelinecathodic protection system functions properly. SU1MARYOF CONSULTANT'SREPORT TanzaniaPipeUne FaciUties Row Vegetation The reviewof the pipelinerevealed that the majorityof the ROWwas well vegetated withnative grasses and bush. In areassuch as MikumiNational Park and MakataPlains, the ROWwas not visiblebeing covered with substantial growth of grassesand bush. Through the sectionsof hilly and mountainoustopography, the ROWwas clearof woodlandsand was coveredin grassesto reducethe potentialfor slopeerosion. In someareas of the pipeline, such as ElphonsPass, vegetationgrowth was denserestricting access to the ROW. Regularsurveillance of the pipelineROW is requiredfor: pipelineleak detection; for maintenanceand repairoperations; and to assesspotential ROW encroachment by agricultural, commercialand industrialdevelopments. Overgrown vegetation on the ROWinhibits surveillanceactivities, detection of pipelineand equipmentleaks and mayrestricted access to the pipelinefor maintenanceand repair. It is recommendedthat an enhancedannual brush controlprogram be implementedto controlvegetaion growth, a'igment vegetation to increase wildlifehabitat and reinforcepipeline monitoring operations. River Crossings The pipelineROW crossed numerous permanent and intermittentrivers, streamsand low-lyingswamp areas. The majorityof the river crossingsdid not exhibitany river slope movementor erosionand wererestored with good vegetative cover. As indicatedin Section 4.1, pipelineexposures were noted in fivelocations with only two river crossings,the Songwe Riverand the crossingeast of Iringa,that will requireextensive reconstruction or the selectionof new pipelineroutes. Noneof the pipelineexposures were an immediatethreat to waterresources or associatedriverine habitat. At river crossingrepair locations, it is recommendedthat the pipe be placedbelow the river bed at sufficientdepth to avoidexposure due to river bed erosion. Ihe pipe shouldbe coatedwith concreteto counteractbuoyant forces and holdthe pipelinein place. Pipeline sagbendsshould be extendedinto both banics to providea factorof safetyagainst pipe - 60 -

Annex 4.5 Page 3 of S exposurebecause of lateral bank erosion. Final engineeringdesign of scour depths and bank erosion shouldaccount for 1:100 flood conditionsand changesto the river course over the operatinglife of the pipeline. The river banks shouldbe regrated and revegetatedfollowing constructionto pre-ent bank erosion and siltationof the river.

Pipeline Repair Locations and Pig Traps

Most of the pipeline failure and leak locationshad been restored to surrounding vegetatedconditions within a few years of repair. There were a few locationswhere vegetativerecovery was impededdue to petroleumresidue remainingon the ground.

At pig trap sites and pipeline locationswhich have experiencedcrude oil and petroleumproduct spills in the past, it is recommendedthat operatingpersonnel remove or breakupthe petroleum residue on the ground coveringthe sites, use implementsto work the remnants into the soil and add soil amendments,such as fertilizers, to assist in the bio- degradationof the hydrocarbonsand the restorationof the sites.

Althoughwastes from pigging operationshave been routed by piping to burningpits adjacentto pig traps, or slop tranks at pump stations, pig waste remnantsin the trap receivers and launchers were routinelydumped to the ground surface. Over time, the pig waste accumulateson the ground and forms a residue or crust that inhibitsvegetation growth and restorationof the site. Petroleumresidues also may percolate into the soil and contaminate groundwateraquifers. To minimizethis situation,it is recommendedthat drums (200L or greater) be installedbelow each pig trap door to catch and retain the pig waste remnants as the doors are opened. With drum installation,the pig waste will not interfere with operating personneland the wastes may be removed from the site at a more convenienttime.

Facility additionsare planned to completethe NPS 12 pipeline loops and abandonthe NPS 8 pipeline. The pipeline leak locationsrepaired with sleeves and clamps were considered temporaryrepairs. These repairs, and any new corrosionpoints identifiedduring the 1993 pipeline internal inspectionprogram, are planned to be excavatedand replaced with new pipe. Pipelineconstruction and replacementalong the existingROW will have minimalimpact on the surroundingenvironment due to existingdisturbance from current pipeline operations. In areas where pipeline alignmentsare to be modifiedand new pipeline routes selected, it is recommendedthat route selection and engineeringdesign incorporateenvironmental protection proceduresto mitigateenvironmental impacts from constructionand operation activities.

Pipeline Corrosion Protection

Tazama Pipelineofficials stated that the cathodicprotection system was functioning. However, during the pipelinefield inspection,test lead terminals for monitoringthe cathodic protection impressedon the pipeline were either missingor destroyed. At pipeline excavation and exposurelocations, external pipeline coatingsystems were damagedor absent. It is recommendedthat an external corrosion control programbe implemented. The program should investigatethe cathodicprotection power supplylocations for the impressedcurrent installations,the isolationof the marine and cross-countrypipelines from each other, the ground bed Illaions, and includerepairs to the cathodicprotection test lead terminals. In - 61 -

Annex 4.5 Page 4 of 5 addition, each pipeline repair location, the pipes shouldbe cleaned, inspected,hand wrapped and coated with a suitablecoating materialto prevent the flow of corrosive electrical current from the pipeline to the surroundingsoil.

Pipeline Station Pumps

At the Tazama PipelinesPump Stations, crude oil is used as a fuel for the pump drivers. As a result, the driver exhaustsemit dense black smoke containingparticulate that impingeon the station operatingareas and surroundingenvironment. The constant exposure to this exhaust add a continuouspollution source to equipmentand grounds; augment contaminationstress to the natural environment;and, may be a contributoryfactor to health problems of stationemployees. It is recommendedthat Tazama Pipelinesinvestigate the conversionof the pipeline pump drivers from crude oil to the continueduse of diesel fuel. As example,the pump stationelectrical generatordrivers are run on diesel fuel which do not emit black particulateexhaust. With the potential conversionof the pipeline from crude oil to utasport of petroleum (products,supply of diesel fuel to the stations by pipeline would reduce iansportationand storage costs. In addition, the pump driver exhauststacks should be reviewedfor exhaustheight to modifythe point of ground impingement.

Pipeline Terminals, Tank Farms And Depots

Under the PetroleumSector RehabilitationProject, planned additionsand odifications include: additionaltankage of Kigamboni,Ndola and Lusaka; improvementsto rail car loading facilitiesat Kigamboni,Ndola and Lusaka; and, improvementsto petroleum measurementand computerization. The planned facility additionsby Tazama, ZIMOIL and British Petroleum at the terminals, tank farms and depots in Kigamboni,Ndola and Lusaka are located at their existingfacilities within establishedindustrial areas. The additionsare designedto enhanceoperating capability, capacity and control of petroleumproduct handling. The modificationsalso will have the effect of reducing, and in some cases, eliminating petroleumoperations that currentlyare adversely affectingthe surroundingenvironment, such as capturingpetroleum product spills and surface water in API separators.

Tank Containment Areas

The terminals, tank farms and fuel depots were well equippedand staff trained to prevent petroleumspills. All had the capabilityto control and clean up spills when they occurred. However, small spills of petroleumproducts transpiredfrom fuel loading and overflowsat tank and truck locationsor from corrodedequipment.

At spill locations,pump stations and petroleumterminals and tank farms, large quantitiesof petroleumcontaminated soils are generated. These soils may be left in place to acumulae and eventuallycreate future disposal and groundwaterproblems. The soils can be excavatedand removed off-site at considerableexpense, or they can be treated in a landfarm environment. Althoughnot applicableto all types of soils and petroleumproducts, landfarms are a proven cost effective method of treating most petroleumwastes. It is recommendedthat Tazama Pipelinesand ZIMCO investigatethe applicationof landfarmingfor the clean-up, treatment and disposalof petroleumwastes at their operatingfacilities. - 62 -

Annex4.5 Page5 of 5 Exceptfor the KigamboniTerminal, the tank containmentarea dykesat the terminals, tank fms and fuel depotswere not large enoughto containthe tank volumes. Ihe containmentarea floorswere unlined and allowedthe infiltrationof crudeoil and petroleum productsinto the underlyingsoils. Considerationshould be givento increasingthe containmentarea dykewall and constructingcontainment floor liners to avoidsoil and groundwatercontamination and the lossof petroleumproduct. In addition,containment areas shouldbe constructedfor drumstorage areas at eachTazama Pump Station to containleaks and spills. ENVIRONMENTALPROTECTION PLANNING Basedon the environmentalreview of the proposedpipeline rehabilitation program and facilityadditions at the terminals,tank farms and fueldepots, the plannedactivities can be constructedand operatedwith minimal impact to the environment.Any significantimpacts can be mitigatedby designdetails and the implementationof operationalprocedures. It is recommendedthat an environmentalprotection plan (EPP)for pipelineroute selection, constructionand operationshould be prepared. The EPP canform the environmentalbaseline for fiuturefacility additions and modifications.The EPP shouldinclude the preparationof environmetalstandards, practice and procedures and operationsand maintenanceguidelines. SAFETYASPECr The operatorsof the pipelinewill be trainedin environmentalawareness. A simple emergencyplan will be developedin caseof a seriousoil spillor a fire. Basicequipments to stop a seriousleakage or a fire willbe availableat someplaces along the pipelineand at the terminals.Operators will be trainedhow to handleemergency situations. - 63 -

Anlux 4.6 Page 1 of 2

ZAMBIA

PEIROLEUM SECTOR REHABILITATION PROJECT

PROJECTMONITORING INDICATORS Duringnegotiations, indicators pertinent to the projectimplementation and efficientoperation of the Tazama and Ndola oil terminal facilities,and arrangementsfor petroleumimport and bulk distributionwould agreed upon with the entities involvedas the basis for establishingan agreed project monitoringsystem. The main indicatorswould be drafted along the lines outlinedbelow.

1. THE MINISTRYOF ENERGYAND WATERDEVELOPMENT (a) Preparationof quarterlyand annual reports by the Technical Cell, createdunder the proposedproject, on progress in the implementationof covenantsregarding institutionalrestructuring and privatization,petroleum imports, exportsfrom Zambia, CIF price paid, Tazama pipelinetariff, Indeni refining cost, export price realized and movementof petroleumproduct prices to reflect all foreign and local currency costs, includingthe effects of devaluationof the Kwacha, summaryof regulatorymeasures undertaken during the period, and capital investmentplans by various agenciesin the petroleumsector under consideration;and

(b) Preparationof quarterlyand annual reports on the progress of training personnelin the TechnicalCell and performanceof the consultantsin preparing monitoringand regulatorystandards and their implementation.

2. TAZAMAPIPELINE: (a) Preparationof quarterlyand annual financial statementsfor IDA review;

(b) Preparationof quarterly and annual reports on the physical and financialprogress of the project, the status of procurementand the contractingand disbursementschedule;

(c) Preparationof half-yearlyreports on the physical conditionand maintenancehistory of the pipeline, Dar-esSalaam storage tanks and associatedfacilities, cathodicprotection facilities and pump station equipment,number of leaks, quantityof oil leaked, actions taken to clean up the oil leaked, and oil losses incurred in the pipelineoperation; and

(d) Preparation of quarterly reportson organizationaldevelopment and progress of the training program.

3. NDOLA OIL TERMINAL: (a) Preparationof quarterlyand annual reports on operation and maintenanceof the terminal facilities, highlightingquantity of each grade of oil delivered through the facility, quantityof each product deliveredby rail and road, operatingcost of the terminal, quantityof oil lost in the terminal; and (b) Preparationof quarterlyand annualreports on the physicaland finacial progressof the project implemention, and the status of procurementand contractingand disbursement. - 64 -

Annex 4.6 Page 2 of 2

ZAMBIA

PETROLEUM SECTOR REHABILITATION PROJECT

PERFlORMANCEMONrIORING CRITERIA FOR

TAZAMA PIPELINES LIMITIED

PERFORMANCE CRITERIA

1 OperationalEfficiency: When sufficientquantities of stock are available,the pipeline should operate at its maximumrated capacityfor not less than 345 days per year (The rated capacityshoud be establishedby trial runs after rehabilitationis completed).

2 OperationalLosses: After rehabilitationof the storage tanks and the pipelinesystem, hydrocarbonlosses shouldnot exceed0.3% of the total quantityhandled through the system.

3 Consumptionof Fuels and Lubricants: After the rehabilitation,realistic consumptionof fuels and lubricantsin all pump stationsshould be established,and actual consumptionshould not exceed by 10%.

4 Cost of ManpowerEmployed: Tazama has discharged 125 employees. This has generated substantialsavings in labor costs. However, there is room for further review.

5 Demurrage Paymentto Tankers: There shouldbe no paymentof demurrageto tankers since the mooring facilitiesare used only once or twice a month and demurrageis paid only when the planning and schedulingare inefficient.

6 MaintenanceCost: Annual maintenancecost and its relationshipwith the total cost of operation shouldbe monitored;unusual increasesshould be subjectto inspection and verification.

RECORD OF PERFORMANCE MONiTORING

Item to be monitored Reason Present Level Post Rehab.Level

1. OperationalEfficiency, + + 345 (Pumpingrate and operatingdays) 2. OperationalLosses, + + 0.5% % of throughput 3. Consumptionof Fuels and Lubricants + + + 4. Cost of ManpowerEmployed + + + 5. Tanker Demurrage + + 0 6. Cost of Maintenance + + + - 65 -

Annex41 Page 1 of 1

ZAMBLA

PETROLEUM SECTOR REHABILITATION PROJECT

LgSr OF DOCUMENTISON FILE

1. Report of VETCO Pipeline Services,Houston, on Tazama Pipeline corrosion.

2. Report of the Consultants,Cuneo e Associatiof Italy, on PetroleumSupply and Distributionin Sub-SaharanAfrica, July 1992.

3. Report of Consultants,HBT Agra Limited,Canada, on environmentalassessment.

4. Report of the Consultant,Jens Larsen, on petroleumproduct transportation.

S. NationalEnergy Balanceof Zambia for 1991prepared by the Ministry of Energy and Water Development.

6. Draft Railway Contractand Terms of Referencefor Railways CoordinationCommittee (RCC). - 66 -

Annex4.8 Page 1 of 3

ZAMBIA

PETROLEUMSECTOR REHABILlTATION PROJECT

PETROLEUMEXPORT MARKET ASSESSMENT DRAFTTERMS OF REFERENCE

1. BACKGROUND:Zambia is a landlockedcountry in southerncentral Africa sharing borders wifth Angola,Botswana, Malawi, Mozambique, Namibia, Tanzania, Zaire and Zimbabwe. To ensurea steady supplyof petroleumproducts, a 1710km pipelinewas constructedfrom Dar-es-Salaam(Tanzania) to Ndola(Zambia) in 1968. Thepipeline with about 1 milliontons per year capacityis the least-costand onlyreliable supply source of petroleumfor Zambia. Thepipeline transports a mixtureof crudeoil and productsto the refineryin Ndolawhere it is refinedinto finished products (LPG, gasoline, kerosene, diesel,fuel oil and bitumen)mostly to meetZambia's domestic product requirement. Small quantities of dieselare exportedto Zaire and bitumenand LPG are exportedto Zimbabwe.

2. Domesticdemand for petroleumdepends on the levelof activityin the miningsector. Thetotal salesof petroleumproducts reached a peakof 818,565tons in 1976/77.In the next 10 years,the sales declinedover 35.4% to 528,858tons in 1986/87. Thedomestic demand for petroleumproducts and the consumptionpattern are not expectedto changesignificandy in the medium-termbecause of restrictions on Governmentexpenditures, scarcity of externalresources and declinein copperproduction.

3. Sincethe Indenirefinery at Ndola,commissioned in 1973,is a simplehydroskimming operation, the productyield mix canbe changedonly by alteringthe quantityof productsspiked in the feedstock The level of reducedcrude in the mix is limitedby the level of demandfor fuel oil and bitumen amountingto about 15% of the feed mix. Becauseof the high percentageof the light productsin the mix, the refinery'scapacity is deratedto about750,000 tons per year. Anysignificant increase in light productsspiking at this capacitylevel would result in poorproduct separation. As it wasdesigned before the 1973oil crisisand the resultantincrease in oil prices,the fuel consumptionand lossesare highat 7 to 8% of throughput. Under these circumstances,the operationof the refinery is economically unattractive,apart fromthe fact thatthe pipelinecapacity is not fullyutilized ., the organizationin charge of petroleumimport and bulk sale of products,intends to evaluatethe economicmerits of convertingthe pipelineinto a productpipeline and using its surpluscapacity for exportof productsinto the neighboringcountries.

4. To establishthe realisticpotential for exportof petroleumproducts into the neighboringcountries (particularlyMalawi, Tanzania, Burundi, Eastern Zaire andthe Shabaregion of Zaire),and evaluatethe economicadvantage of such exports...... intendsto appointa consultantto conducta surveyand evaluatethe consumptionof variouspetroleum products in theseareas. For the purposeof this study, - 67 -

Annex 4.8 Page 2 of 3 it is asued t the pipelinewill be convertedinto a productline. The proposedstudy wil be fnaced by unds from the World Bank.

5. OBJECTIVESAND SCOPE OF WORK:The main objectivesof the proposedmarket survey are to explore the neighboringcountries' market for petroleumproducts, establish Zambia's export potential, and evaluatethe relative advantagein the delivered cost of products supplied at these export locations throughZambia's Tazamapipeline as againstproducts supplied from other possiblesources in the region. The soope of work will include,but not be limitedto, the following:

(a) review the consumptionof petroleum products (gasoline, kerosene, diesel, fuel oil, bitumen and LPG) in Zambia and the Government'sdemand forecast for the next ten years and modify as necessary taking into account present economic conditionsand possible improvements;

(b) review the consumptionof petroleumproducts in the neighboring countries (Malawi, Tanzaniaaround Makambakoand Mbeya, Burundi,Eastern Zaire around Uvira, and the Shaba region of Zaire) for the past five years and make realistic demand forecasts for these areas;

(c) review the current modes of transportationof petroleumproducts to these neighboring countries and establishthe costs;

(d) review the current operating cost of the Tazama pipeline and esdmate the expected pipeline tariff in the next ten years in consultationwith Tazama;

(e) estimatethe rail tariff to transport bulk bitumenand bulk LPG to Lusaka from the least- cost source (Dar-es-Salaamor Durban);

(f) study the Tazama pipelineroute from Dar-es-Salaamto Ndola from availablemaps and other technical information and recommend suitable product tap-off points for the neighboringcountries;

(g) review the Tazama pipeline capacity, as a product pipeline (current and in the future, taking into accountits modernizion program) and estimatethe potentialproduct export capacityavailable with economicadvantage to Zambiaunder the scenarioemerging from the preceding findingsand estimates;and

(h) review the current operation of Tazama and the marketing companies operating in Zambiaand the petroleumproduct pricing mechanismcurrently in effect at the wholesale (ex-deport level), evaluate the options availableto Zambia and (takdngaccount of the - 68 -

Annex41 Page3 of 3

need for the importingcountry to sharein the benefit),recommend on the conmnercial arrangementsmost likely to obtainsustainable benefits to Zambiashould the predicted volumeof exportsbe reached.

6. QUALIFICATIONSAND EXPEREENCE.: The selectedconsultant should have a minimumof ten yearsexperience in conductingsimilar petroleum products demand surveys and evaluationsof the relave economicadvantages of differentmodes of bulk transportation.Experience in dealingwith Govrmen officis andmajor intenational oil companieson all aspectsof petroleumproduct marketing in land-ockedcountries, especially product pricing, marketing and dealersmargins, bulk portaton costs,eport/import, inter-companyhospitalities and settlementof bills is essential.

7. SCHEDULEOF WORK:The proposedmarket survey should be startedin the field withinitial briefingmeetings with the officialsof ...... and Tazanmawithin 15 days after the contractbecomes effective. The consultantis expectedto producea draft reportwithin 4 weeksthereafter which will be Jointlyreviewed by the officialsfrom ., Tazama,the WorldBank and the consultant.The consultant willprepare the finalreport within 2 weeksthereafter, taking into account the modificationsand additions agreedupon during the joit review. Thetotal services from the consultantsare esdmatedto takeabout two manont.

8. REPORTPRESENTATION: The final report should contain all datacollected during the survey and reviewthe technicaland commercWdata, bothto be assembledand tabulatedin a mannerthat will be usefil for future reference. The report shouldindicate the basis and assumptionsused for all aluations and estimationsmade. Sourcesof datacollected should be indicatedas footnotesto the tables and charts. The reasonsfor selectingor rejectinga particularoption should be clearlyjustified. The report shouldcontain specific recommendations with respectto each aspectstudied. A list of key personnelmet duringthe surveyand studyshould be appended. - 69 - A x 4,2 Page 1 of 2

ZAMBIA: PETROLEUM SECTOR REHABILITATION PROJECT

PE.ROLEUM SECTOR CAPACITY BUILDING IN THE MINISTRYOF ENERGY AND WATER DEVELOPMENT

(TERMSOF REFERENCEFOR THETECHNICAL CELL)

1. BACKGROUND

1.1 Ihe petroleumsupply and distributionin the country is within the portfolio of the Ministryof Energy and Water Development(MEWD) which is responsiblefor identifying, analyzingand formulatingpolicies and strategiesto addresscurrent and emergingenergy issuessuch as pricingreform, removal of supplyconstraints, restructuring of sector organizationsand enforcementof environmentaland safetymeasures. The Ministryis also responsiblefor coordinatingall aspectsof energysector development in the country,including the nationalenergy strategy, the annualenergy plan and the rollingfive-year investment plan and advisingon capitalexpenditures. The Ministryand the Departmentof Energywithin the Ministryare nowinadequately staffed to fulfilthese functions satisfactorily. To overcome this deficiency,MEWD intends to establisha TechnicalCell of suitablyqualified persomel and providethem withorientation and on-the-job training, as part of the proposedIDA- financedPetroleum Sector Rehabilitation. Initially the TechnicalCell is expectedto be organizedwith consultants who will be assisted,in the day-to-daywork, by suitablyqualified Ministrystaff. The consultantswho willbe on contractfor carryingout the work initially, willtrain the Ministrystaff while providing operational service, on a timeboundprogram, so that the Governmentstff couldtake overthe responsibilitieswithin a specifiedtimetable. 2. JOBSPECIFICATION FOR THE TECHNICAL CELL 2.1 The mainobjective of the proposedTechnical Cell is to build capacityin the MEWD to frameregulatory measures concerning energy sector issues, and monitoringand maintaini recordswith respect to petroleumproduct consumption, sources of supply,energy conservation,international prices, ocean tanker rates, domesticpricing of petroleumproducts, stockposition in the country,tariff levied by variousmodes of transportationin the country (pipeline,rail and road),review and adviseon investmentpriorities in the sector,and develop exportearning potential using the country'sinfrastructure and environmentaland safety measuresin the sector. Thejob specificationfor the TechnicalCell will include,among others,the following: (a) reviewconsumption of eachpetroleum product (gasoline, kero/jet, diesel, fuel oil for industryand mining, bitumen, LPG, lubeoil and otherspecialty oil products)in eachsector (industry, mining, agriculture, transport, commercia establishmentsand household)and recordthe figuresfor referencefor at least the past ten years; (b) prepareforecasts of consumptionfor the nextfive yearsand keepthese -70- Anex 4.9 Page 2 of 2

updated every year on a rolling basis; (c) review areas where petroleumis consumedin large quantitiesand evaluate options for conservationwizh costs and benefits thereof; (d) monitorthe internationalsituation for supplyingpetroleum products on a continuousbasis and prepare cost-effectiveoptions for the country from time- to-time (includingoperation of the Indeni refinery); (e) review the stock position for petroleumfuels in the country on a continuous basis and advise MEWDon imports, timing and foreign exchange requirements; (t) monitor petroleumproduct prices in the country, their reasonablenesswith respect to internationalprices, ocean transport, foreign exchangevariations and inflation, and advise MEWD on price revisions; (g) monitorpetroleum product prices in the neighboringcountries on a continuous basis with a view to check unauthorizedborder trade and evaluate export potentialusing Zambian infrastructure; (h) monitorthe tariff levied by various transportmeans (pipeline,rail and road), review operationof :he transport facilitiesand advise MEWD on revisions/modificationsrequired; (D review all investmentproposals in the public sector, evaluatetechnical and commercialmerits and these proposalsfor investmentdecisions by MEWD; and (3) review environmentaland safety measures in all operations in the sector and advise MEWD of the corrections/modificationsrequired. (k) ensure healthy competitionamong the petroleumdistributing companies operating in the country. (I) superviseprocurement arrangements for petroleum imports.

3. All informationto be recorded for reference and future use, shouldbe collectedand tored In computers. All personnelemployed in the TechnicalCell should be computer- sklled. - 71 -

Atmx 5.1 Page 1 of 1

ZAMBIA

PETROLEUM SECTOR REHABILUTATIONPROJECT

Notes and Assumptionson tnandalProjections

1. It is assumedthat the present ZIMOIL will be replaced as the Zambia Oil Company(ZOC). All the assets and liabilitiesof ZIMOIL will be taken over by ZOC. ZOC wfll be in chage of procurementof feedstockonly. The bulk distributionwill be separatedfrom ZOC.

2. A separate company(OMCC) will be responsiblefor the bulk distributionof products. OMCC will take deliveryand own the feedstockfrom Dar-es-Salaamafter ZOC passes it on to them.

3. ZOC wil continueto own the facilitiesfor the first two years after the formationof the new companiesand wiUllease the facilitiesto OMCCat a mutuallyagreed fee. After two years, OMCC wiUllease or purchasethe facilities. For projectionpurposes, OMCC will have to buy the facilitiesfrom ZOC.

4. Tazama wiUlcontinue to offer its facilitiesto OMCC. The pumping facilitieswil also be open to other oil companiesapproved by the Government.

S. ZOC and OMCC will adopt the pricing structure described in Table 5.2 and 5.4 respectively. They wiUlrevise the prices to reflect exchangefluctuations and internationaloil price movements. ZAMBIA PE!ROLBU14SroR RBBAILITATION PROJECT ZIMOIL- INCOMESTATEMENT (1988-93) - (In millionof currtnt Kwacha) _ ~~~~~1987-881988-89 1989-90 1990-91 1991-92 1992-973 Tumover Dom. Quanitity(000 Ton) 615 533 515 559 Export Quantity(000 Ton) 25 13 22 2 Revenuelton (Kwacha) .. N. Domestic Sales _*7 Export Sales 175 152 637 148 Sales Revenue a ,6 3 ;321 g; W Other Income 43 0 81 6 921 873 _ow . M M I19a Cost of Products 796 932 2,146 6,094 11,318 23,399 PERATINGCOSIS Harbour Dues& Oceanfreight/Insurance 31 15 47 106 336 504 PipelineThruput Cost 43 52 120 188 387 2,187 RefiningCost 44 50 241 379 816 2,399 FinancingCost 88 51 59 260 247 461 ExchangeAdjustment 2 12 21 133 227 361 Demurrage 0 0 2 37 8 13 Export Costs 4 3 5 1 3 2 Terminal Costs 0 3 8 6 64 122 OtherOverhead Costs 9 28 19 185 289 319 Toa Opedatg Co 221 214 522 1295 2,377 6,369 Interest 0 0 0 0 0 0 Depreciation 0 0 0 0 0 0

PROFITBEFORETAX 131 109 51 1,145 2,717 (248) IncomeTax 0 0 473 1,112 13

I_PINC=&IE 8 _~; ______%,~. ","",y~~ Mmii PETROLEUM SECTOR R3EABILITATION PROJECT

ZIMOIL - BALANCESHEET (1968-93) - (In million of curentKwacha) - 1987-8 1988-89 1989-90 I1990-91 1991I92 1992 -93 ______Provisional CwmentAssets Cash& Bank 519 450 651 2,367 3,618 3,441 Stock in brade& in transit 290 267 666 4,096 5,193 13,680 AccountsReceivables 207 106 408 1,722 2,596 3,320

Net Fixed Assets 3 12 16 52 60 83

LABSTESMR crentLAhUAtfes Trade Creditors 863 443 1,383 6,793 6,181 15,407 Other Creditors 0 8 244 329 1,460 890 ------Long-TermDeM 21 207 53 154 341 656 Own Fud Equity Capita 0 0 0 0 0 0 Reserves 135 177 61 961 3,485 3,571 TotwlEq 135 77 _3410-MMI-A_ IN,P, -- A 9611W-M . MI3,485 3,571

4~~~~~~~~~~~~~~~~~ V. - 74 -

Anxec 5.4 Page 1 of 2 ZAMBIA PEROLEUM SECTOR REHABILITATIONPROJECr

Zambia Oil Company

Notes and Assumptions on Fnandal Projectiom

All figures have been expressedin 1993 constant millionKwacha. The excnge rate assumedis 600 Kwachasper one U.S. dolla.

Income Statemnt

1. Sellingprices have been based on the price structure describedin Table 5.2. Two computationshave been shown-one with BZ fund: the other withoutthe BZ fund. The BZ fund relates to the arrears of 19 billionKwacha (as . 6115193)payable to the Bank of Zambia by ZIMOIL. This is being paid in installm.-atsand it is expectedta the entre debit balance will be clearedby the end of fiscal year 1994-95. Ihe sellingprice has been accordingy reduced to the ext of the BZ fund and the related tax effect (from US$289per ton in 1994-95to US$163per ton for later periods).

2. The CIF cost of feedstock is assumed0 US$150per ton, based on the average price for 1993. It is estimatedthatafeedstock of 1.09039tons wL be required to obtain one ton of finishedproduct

3. The Landed Dar-es-Salaamcost includes:

(a) Harbor dues @ 1.5% of CIF (b) Normal ocean loss 0 0.3% of CIF (c) Inspection/Demurrage0 0.25% of CIP

4. Finance charges have been assumed@ 1% of C]F

5. Interest on BZ fund relates to the interestpayable on the arrears due to the Bank of Zambia from Zimoil.

6. t is assumedtat ZOC wll advancefunds on a defered paymentbasis to OMCC for its working capital requme. Interest on these funds has been assmed a 8.5 % per year.

7. Abnormalloss has been costed a 5% of CIF. Any surplus in this accountabove the actual abnormallosses irred (over and above the internationallyaccepted standards) will be transferredto a special wLossFund" to be used in future need. This Fund will exist only during the rehabiliation process. Once the rehabilitationis complete,the units will have to meet to intemationalstandards. In the projections,the provisionfor abnormalloss has been made unti the year 2000.

8. Adminie costshave been provided 0 US$1 per ton. - 75 -

AnexLS.4 Page 2 of 2 BalanceSheet

1. Stodck: On an average, one shipmentof stock is alwaysexpected to be in transit or in the Dar-es-Salaamstorage tanks. This has been priced 0 US$150per ton for 90,000 tons.

2. Accounts Recdvables: This representsthe amountsadvanced to OMCC. It is assumedthat ZOC will have to grant credit to OMCCfor the fuil amount of stock held in the Dar-es- Salaamstorage tanks and in the pipeline (a total of approximately180,000 tons 0 cost for OMCC [US$289per ton for 94-95 and US$163per ton from 95-96J)and in the Indeadand the terminal tanks at Ndola (approximatelyUS$29.13 million for 1994-95and US$17.91 million later, estimatedon the basis of the averagestock held during Oct.and Nov.92 and Feb.93). This will be graduallyreduced over five years fom 1996-97.

3. Plant and Equipment: Assets have been valued at the estimatedreplacement value of US$10 million. It is expectedthat OMCC will buy these facilitiesby the end of 1996-97.

4. DepreIation: 10% on a straight line basis assumingten years of life.

5. Work In Progres: The proposed project loan amountshave been accountedas work in progress until the completionof the project.

6. Long-Term Debt: Ihe funds proposedto be advancedby ZOC to OMCC for financing working capital requirementsare treated as long-termborrowing for ZOC to be repaid by the year 2000. The amount payablewithin a year is shownas shortterm debt.

7. Project Leans: ProposedWorld Bankloan of US$2.1 million to be disbursed in stages.

8. Asset Reluon Reserre: Diffce betweenthe book value and the revaluedreplacemen value. [6,000-93 = 5,907 million Kwachas] PXTROLEUm SECTORRERaBILITATION PROJECT

ZAMBIAOIL COMPANY-INCOME STATEMENT (In mMlamof 1993estM Kwacba) $=600 Kwadias 0-0X- 0 1 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Quantity(000 Tons) 702 712 721 729 740 749 Priceper ton (k) 173,400 97,800 97,800 97,800 97,800 97,800 (@US$289for 94-95 and US$163later) Sates* 7E- 77§ 7Renu7 Interest from OMCC 4,139 2,410 1,928 1,446 964 482 Other Income 336 336 336 336 336 336

CIF cost 0 US$150per ton * 63,199 64,099 64,909 65,630 66,620 67,430 Harbour dues 0 1.5% CIF 948 961 974 984 999 1,011 Inspection& Demurrage@ 0.25% CIF 158 160 162 164 167 169 DAD,R &,30,53-- -- '----- r ; ww-- ;_7 -WT -h Finance charges @1 % CIF 632 641 649 656 666 674 Administrativecosts @US$S/ton 421 427 433 437 444 449 Interest on BZ fund 14,000 0 0 0 0 0 Interest on credit to OMCC 4,139 2,410 1,928 1,446 964 482 Abnormallosses @ 5% CIF 3,160 3,205 3,245 3,281 3,331 3,372 _ ' g0 'Sw. PROFITBEFORETAX 0747 479 - 4T 48T Transfer to BZ fund 18,000 0 0 0 0 0 IncomeTax @ 40% on PBT 15,818 190 191 192 192 193 ~43~SVOMF~~\' XIK. "''al -0w1 -- w -k Quantitypurcluhsed assuming 0.3% ocean loss (000 tons) 704 714 723 731 742 751

.0or ZAMBIA PETROLlMS SECTOR REHBILITATION PROJECT ZAMBIAOIL COMPANY - BALANCE SHEET In _mef M1993cet Kwacba) ______iWSyb YiXM 1 Wi>ii9 2i Cuffent Asst Cash & Bank 742 713 779 585 608 720 Stocks(90,000 tons@US$150) 8,100 8,100 8,100 8,100 8,100 8,100 AccountsReceivables 48,696 28,356 22,685 17,014 11,342 5,671

FixedAsseX Pat & Equip. in Serv. 6,000 6,000 0 0 0 0 AccumulatedDepreciation (600) (1,200) 0 0 0 0 Work in Progress 72 300 594 1,116 1,560 1,560 NetPixed Assets -;7I 3T#i?F. ( 1W -3 1d*w

LIABILITIES Cuffent Liabilities Short term loans 20,340 5,671 5,671 5,671 5,671 5,671 Other Creditors 2,610 1,744 2,685 2,306 2,123 1,946

Project Loans 60 240 480 900 1,260 1,260 Long-TermDebt 28,356 22,685 17,014 11,342 5,671 0 F!munds Asset RevaluationReserves 5,907 5,907 0 0 0 0 EquityCapital 10 10 10 10 10 10 Reserves 5,727 6,012 6,298 6,586 6,874 7,164 Totl Equhy & Reseresr7 ;7 *-m- 77J

~siw.vx~nmiriun~v .~ ______

ft J4 ZAMBIA PnTROLEUM SECTOR REABILITATION PROJECT TAZAMA PIPELINES LIMITED INCOME STATEMENT 1988-93 (In millions of current Kwcha 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 Turnovet _ Unit Volume (000 ton) 635 708 663 649 550 634 Service Fee (K/ton) __94__ 73 _ 8 481, 04 3 Service Income 60 52 120 312 387 2,187 other Income2 3 4 9 15

OPERATING COST Labor Costs 5 6 22 81 285 353 Technical Services Fee 1 1 6 11 7 43 Fuel & Power 9 9 12 26 31 356 Maintnce & Repair 1 1 3 7 11 35 Tank Farm Operation 0 0 0 0 0 1 cc Stock Obsolescence 0 0 0 0 0 0 Admin. Salaries 2 3 8 27 95 151 Vehicle Expenses .3 4 13 24 49 91 Travel & Mess Expenses 2 4 6 10 25 49 Property Maintenance 1 1 4 9 5 11 Misc. Off. Expenses 4 7 10 14 60 83 Exchange Adjustment(Gain)/Loss 3 (1) (2) 5 84 687 Insurance 2 3 4 9 13 25 Exceptnl. Items/Ass.Repl. (6) (8) 0 0 0 0 Maintenance Reserve 0 0 0 - °- O 0 rotal OperatIng Costa 27 30 St 223 665 1,885 Interest Depreciation 75 14 ______7______45 97 100 Ra_ E ,Mis ~~~~~~~~~~~~~~~~~~

.~~~~~~~~~~~E ZAMBIA ...... PBTROLEUMSECTOR REUILITATION PROECT .. . . SAMh PIPELINES LTD.- BALANCE SHEET 1988-93 (In millions of current Kwiacha) 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 Current Assets Cash & Bank 9 9 59 54 8 109 Stocks Accounts Receivables 32 7 13 42 69 Inventories 850 9 16 49 95 141 446

Fixed Assets Pipeline, Plant & Equip. 19 25 165 674 1,508 1,467 Leasehold Land & Bldge. 9 9 11 11 11 10 Investments Capital in z Work Progress 34 184 148 759 2,801 17,995

NNUMNg2'5e Nggl 45- W______*35______A_____ LIABrkLsTEs Current Liabilities Trade Creditors 38 10 34 lie 595 1,557 Dividend I 1 1 0 Short Term Loans 0 4i928633

Long-Term Debt 23 168 301 1,282 3,955 19,383 Own Funds Equity Capital 9 9 9 9 9 9 Reserves 42 59 85 133 (308 10 Total Equity 51 68 94 142 (299) (96) '.*;iQlTS'FX!l>ALtLTh YZE8 44 E • E E4,53 ______~ 2 O . 7 ? _fiI - 80 - Annex 5.9 Page 1 of 5

ZAMBIA PETROLEUM SECTOR REHABILITATION PROJECT

Tazana PipelinesLimited (Tazama)

1. GeneralNotes on AccountingPrinciples (Historical)

Fbied Assets.

1.1 Fixed assets includeall capital items.

ShortlLong-TermIndebtedness

1.2 Short-term indebtednesscomprises installments repayable within a year on long-term indebtedness.

Stocks

1.3 Stocks consistmainly of machineryspares, fuel and lubricantsand are stated at the lower of cost and net realizablevalue. In general, cost is determinedon a weighted averagebasis by referenceto the actual landed cost of each consignment.

Depredation

1.4 Depreciationis calculatedso as to write-off the cost of fixed assets on a straight line basis over the expectedeconomic life of the assets. The principalannual rates used for this purpose, which are consistentwith those of the previous years, are:

Capital work in progress Nil Leaseholdland and buildings 2.5% Pipeline and tank farms 5% Plant, earth moving equipment and office furniture 10% Cars, trucks, cffice equipment and residentialfurniture 25% Bush vehicles 48% Loosetools 33.33%

Foreign Currencies

1.5 Assetsand liabilitiesdenominated in foreign currenciesare translated to Zambian Kwacha at the rates of exchangeruling at the balance sheet date. Net exchangegains and losses on the translationof assets and short-term liabilitiesare recognized in the profit and loss account in the period in which they arise. Exchangelosses, interest, and other charges on pipelinedamounts are recognizedon a cash basis.

1.6 Net exchangegains and losses relatingto the translation of long-termborrowing are deferred for recognitionin the profit and loss accountover the period of (and in - 81 - Annex 5. Page 2 of 5

proportionto) the repaymentof the loans to which they relate. To the extent that exchangelosses arise from a major depreciationof the Kwachaagainst the currencies of borrowingsincurred for fixed assets recendy acquiredor not yet commissioned, these are capitalisedas part of the cost of those assets.

1.7 All transactionsof a revenue nature expressedin Tanzanianshillings are convertedto the Zambian Kwachaat an average rate throughoutthe year.

Cost of Borrowings

1.8 Interest on borrowingsin respect of capital projects is capitalisedtogether with other borrowing costs. The rate of capitalizationis the actual rate payable on identifiable borrrowingsfor specificprojects.

Taxation

1.9 By a conventionbetween the governmentsof the Republicof Zambia and the United Republicof Tanzania, the company is exemptfrom taxation.

Foreign ExchangePipeline

1.10 From 1978 to October3, 1985, Kwachacover paid to the Bank of Zambia for the settlementof foreign liabilitieswas placed in the foreign exchangepipeline awaiting allocationof foreign currency. At the date of depositingthe Kwacha cover, the foreign liabilitywas treated as setfled and both deposit and liabilityexcluded from the balance sheet. Since October 3, 1985, no further depositshave been placed in the foreign exchangepipeline and foreign liabilitieshave been incurred only when the availabilityof foreign currency for repaymentshas been ascertained.

Inflation Adjustnents

1.11 The companyhas not yet compliedwith InternationalAccounting Standard Number 29 (AS29), "Accountingin HyperinflationaryEconomies". No definitivestatement has yet been issued by the Zambia Instituteof Certified Accountants,the body responsible for the regulationof accountingstandards in Zambia. -82- Annex .9 Page 3 of 5

2. Projections

Notesand Assumptionson FinancialProjecions Ihe financialprojections are basedon historicalaccounts. The projectionsare madein 1993 constantKwacha ($=600 Kwachas),without considering inflation and exchangerate detioraon. As Tazamais a subsidiaryof ZIMCO,ZIMCO confirms that it willcontiue to provideadequate support of workingcapital to enablethe companyto maintainits operations as a goingconcern for the durationof the project

A. InoomeStatement

Turnover

2.1 Afterproviding for variouslosses, the volumeof throughputfor eachyear i assumed to be the following:

1993-94 - 650 1994-95 - 702 1995-96 - 712 1996-97 - 721 1997-98 - 729 1998-99 - 740 1999-2000 - 749

Tariff Rates

2.2 Tariffis determinedfor the wholeyear in advanceon a cost plusbasis, afer taking into account:

(a) routineoperating expenses (b) minorcapital expenditure (c) debtservicing (d) machineryspares (e) sinkingfind (t) rehabilitaionexpenses (g) staff loans (h) expansionfund equivalent to US $1 millionper annum. The tariff willbe set mainlyin dollarsto obviatethe needfor exchangerate adjustment.

Abor Cots

2.3 No separateTanzanian and Zambianinflation rates are used to detrmine labor costs. The companyhas reducedits workforcefrom the originalauthorized establisment of 623 to the new authorizedestablishment of 498. 112people have been released - 83 - Annex S2 Page 4 of 5

during 1992-93and the numberof actual workforcenow Is 474. Annual savings to the tune of 96.878 million Kwachais expectedfrom this measure. This staffing level figure is assumedto be constant for the forecast period.

Technical ServicesFee

2.4 There is no foreign currency element in this head. This consistsof payments made to local companiesfor maintainingoffice machmesand equipment.

Fuel and Power

2.5 Ihe average fuel consumptionto pump a metric ton of crude is 9 liters. The cost of one liter of fuel is 32 Kwachas.

Administraive Salaries

2.6 This consistsof salaries paid to management,engineering staff and clerical staff at the Head Office.

Vicle Expn

2.7 This consistsof expensesfor fuel, lubrication, service and repairs.

Travd and Mess Expenses

2.8 The companyprovides mess facilitiesalong the line and at the two bases (Ndola and Dar-s-Salaam).

;i aneous Expense

2.9 The componentsof miscellaneousexpenses are typicall items such as stationery, telephone,telex, postage, cleaningmaterials, coffee and tea.

Excange Adjustmnt

2.10 Only one exchangerate is used throughout the projectionperiod.

Depredation

2.11 Depreciationhas been projected at fixed rate and provisionhas not been made for the proposed capital expenditurefinanced by the World Bank since the project is expected to be operationalonly after the year 2000. inome Tax

2.12 Tazama is exempt from al taxation. - 84 - Amex 5.9 Page5 of 5

B. BALANCESHEUT

Stodks

2.13 The major componentsof stocks are fuel, lubricants,and machineryspares. All stocks are assumedto be in good conditionand likely to be used within three years.

AccountsRecelvables

2.14 This is calculatedat one month's pumpingfee receivablefrom ZIMOIL.

Plant and Equipment In Su-vice

2.15 These includeland and building,pipeline, plant and machinery,motor vehicles, office and householdfurniture and equipments. Additionsinclude capital expenditurefrom own resources and capital projects out of borrowedfunds from the World Bank, EIB and ADB. Work4n-Progress

2.16 This is composedof capital projects includingpipeline rehabilitation still in process.

Other Credtors

2.17 They include:

(a) Leave and retirementbenefits provisionsfor serving employees. (b) Personal tax borne in March, but paid in April of the followingfinancial year. (c) Employees' contributionto pensionand provident fund deductedfrom March salaries but remitted in April of the followingfinancial year. (d) Expensesaccrued but not paid by 31st March.

Log-term Debt

2.18 This is made up of balancesdue to the World Bank, EB, ADB and the Italian Government.

C. FUNDS FLOW SIATEMENTS

Project IAas Recived

2.19 These are loans receivablefrom the World Bank, EIB U, and ADB during the year. InstitutionalStrengthenlng

2.20 This relates to the fundingproposed to be made by the World Bank to strengthenthe managementof Tazama. ZAMBIA - .- ;- . PPTROL3UM 8BCTOR RBIiILITATION PROJECT . TAZAMA PIPELINES LTD. INCOME STATEMENT(In millons of 1993constat Kwadaa) $=600 Kwachas 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 Turnover . . Unit Volume (000 ton) 6s0 702 712 721 729 740 749 Tariff (K/ton) 12,529 10,574 10,455 10,379 10,306 10,194 10,112 Pumping Fee 8,144 7,423 7,444 7,483 7,513 7,544 7,574 Other Income 30 30 30 30 30 30 30

OPERATING COSTS Labor Costs 732 743 755 766 777 78B 800 Technical Services Fee 38 38 38 38 38 38 38 Fuel & Power 751 763 774 786 797 809 820 Maintenance & Repair 483 491 489 506 513 521 528 Tank Farm Operation 8 8 8 8 8 8 8 Stock Obsolescence 0 0 0 0 0 0 0 Administrative Salaries 305 305 305 305 305 305 305 Vehicle Expenses 234 234 234 234 234 234 234 Travel & Mess Expenses 97 97 97 97 97 97 97 Property Maintenance 28 28 28 28 28 28 28 Miscellaneous Office Expens 234 234 234 234 234 234 234 Exchange Adjustment 0 0 0 0 0 0 0 Insurance 53 53 53 53 53 53 53 ,.,= .~.- har ___ ... l4$ Interest 1479 1019 1,019 1,019 1,019 1,019 1,019 Depreciation 169 169 169 169 169 169 169

3~~~ 3

' ... , ..- 1 _ E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I. o o5 1K PETROLEUM SECTOR REIIaJILIThTION PROJECT TAsAs PIPELiNze LTD. BILaxCI HsEET 16s6-93 (In iillions of current Iwacba) ______| 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93

Current ssets Cash & Bank 9 9 59 54 8 109 Stocks Accounts Receivables 32 7 13 42 69 850 inventories 91 99 4 4

Fixed-Assets Plpeline, Plant & Equip. 19 25 165 674 1,508 1,467 Leasehold Land 6 Bldgq. 9 9 11 11 11 10 Investmenta Capital Work in Progress 34 184 148 759 2,801 17,995 *

current Liabilities Trade Credltore 38 10 34 11 595 1,557 Dividends 1 1 I Short Term Loans O 4 is 92 286 33

Long-Term Debt 23 168 301 1,282 3,955 19,383 Own Funds Stuity Capital 9 9 9 9 9 9 Reserves 42 59 as 133 _105__e__ (308_ Tocal Equity 51 68 94 142 (299) (96i 4 A5=11WiN M-~"',~R ",7777MM"___' 3 E g `iQ Z iIo_ ZAMIwA PBTIOLUMl SECTOR REHABILITATION PROJECT TAZAMAPIPELINES LIMITED FUNDS FLOW STATEMENT (in miliomsof 193 constantKwacha) $=600 Kwachas- ~1993X94 T1994 95 19959 199697 1 99899 19992 SOURCIES OF FlNDS -. Intemal SouMe Net Income 3,563 3,271 3,271 3,271 3,271 3,271 3,271 Depreciation 169 169 169 169 169 169 169 Intereston Longterm Debt 1,479 1,019 1,019 1,019 1,019 1,019 1,019 Borrowings: ProjectLoans Received 4,785 1,230 2,574 4,590 8,370 7,530 0 LocalBorrowings O 66 132 252 462 408 O

______~ .1-A 91 1 37 4*~*9-

APPLICATIONSOF FUNDS CapitalExenditure: ProposedProject 0 1,191 2,496 4,443 8,097 7,287 0 OtherCapital Expenditure 6,446 283 283 283 283 283 283 _111,1 DebtService: Intereston Longterm Debt 1,479 1,019 1,019 1,019 1,019 1,019 1,019 Repaymentof Loans 1,754 1,216 1,216 1,216 1,216 1,216 1,216

InstitutionalStrengffiening O 105 210 399 735 651 0 Changesin WorkingCapital 317 1,941 1,941 1,941 1,941 1,941 1,941 W s~9r t147 ~W - 88 - Annex 6.1 Page 1 of 3

ZAMBIA

PETROLEUMSECTOR REHABILITATIONPROJECT

EconomicAnalysis of the DistributionComponents

Assumtion

1. Demand for the petroleumproducts in Lusaka was based on the actual consumption which represents 32% of Zambiandemand for petroleumin Lusaka.

2. Capital investmentswere estimatedat $2.4 million for Lusaka.

3. Economiccosts of transportingpetroleum products by rail and road were estimatedas folluws:

From Ndolato Lusaka

Rail (in Kwacha/ton/km) Costs before ProposedInvestment Costs after ProposedInvestment Lusaka 3.16 2.51

Road (n Kwachal.ton/km)

Lusaka 4.8 ZAMBIA -PETROLEUMREHABILITATION PROJECT- EconomicAnalysis of PetroleumProducts Distribution Rehabilitationof LoadinglunloadingFacilitles at Ndola and Lusaka

BASE 2% TRAFFIC 6% TRAFFIC 10% TRAFFIC Economic Incremental SCENARIO GENERATION GENERATION GENERATION Investment O & M Net Net Net Net Year Cots Costs Benefit Benefit Benefit Benefit 1992 716 (3) (795) (796) (797) (789) 1993 1,192 2 (1,279) (1,280) (1,281) (1,283) 1994 477 28 (697) (S98) (599) (602) 1996 0 23 613 518 526 540 1996 0 23 522 527 635 649 1997 0 23 531 536 546 568 1998 0 23 540 545 564 56e 1999 0 23 649 555 563 678 2000 0 23 659 664 673 688 2001 0 23 672 678 587 602 2002 0 23 658 692 601 16e 2003 0 23 600 w0e e6s 6a1 2004 0 23 614 621 630 648 2005 0 23 629 636 645 662 2006 0 23 a44 661 e8l 678 2007 0 23 660 667 677 6894 EIRR: 14.9% 15.1% 15.3% 16.7% ZAMBIA -PETROLEUMREHABILITATION PROJECT- Economic, nalysis of PetroleumProducts Distribution Rehabilitationof Loading/unloadingFacilities at Ndolaand Lusaka With 10% Costs Over-run

BASE 2% TRAFFIC S% TRAFFIC 10% TRAFFIC Economic Incremental SCENARIO GENERATION GENERATION GENERATION Investment O & M Net Net Net Net Year Costs Costs Benefit Benefit Benefit Benefit 1992 786 (2) (867) (868) (869) (871) 1993 1,311 3 (1,400) (1,400) (1,402) (1.404) 1994 624 32 (648) (649) (651) (663) 1996 0 27 510 515 523 537 1996 0 27 518 524 532 546 1997 0 27 527 533 541 555 1998 0 27 537 542 551 56S 1899 0 27 546 561 560 574 2000 0 27 555 S61 570 684 2001 0 27 569 575 583 598 2002 0 27 582 588 588 613 2003 0 27 596 603 612 628 2004 0 27 611 617 627 643 2006 0 27 626 632 642 658 2006 0 27 641 648 658 674 2007 0 27 657 664 674 691 EIRR: 13.3% 13.65o 13.7% 14.1%

IIB -91 - . s Page 1 of 7

ZAMBIA

PEMTOLEUMSECTOR BEIIABUXTATIONPROJECT

Economic Analysis of Refinery Operations and Product Pipeline Options

AsLumptionsfor the Economic Analysis

1. Consumptionof productsin Zambia was assumedas in Table 1 of Annex 6.2. Forecast demand agreed with the Zambian Governmentduring the pre-appraisal missionswas based on growth in GDP. The demand for fuel oil was based on consumptionin the miningsector.

2. Crude and product prices were estimatedon the basis of averageMarch 1992 Middle East prices as follows:

FOB (US$/ton) Crude 127 LPG 106 Gasoline 193 Jet fuel 182 Naphtha 150 Kerosene 170 Diesel 151 Fuel Oil 70 Bitumen 85 VGO 120

Prices were kept constant duringthe project life.

3. Crude and Product blends will be transportedto Dar-es-SalaamSBM in 90,000-ton tankers, and white products in 45,000-tonclean tankers. Ihe estimatedfreight costs per ton were US$6 for 90,000-tontankers and US$8 for the clean tankers (except LPG and Bitumen). Freight costs per ton for LPG were estimatedat US$150and Bitumenat US$300.

4. In the products option, products wiUlbe unloadedthrough a separatesubmarine and on-shore pipeline connectedto the SBM. Two additional storage tanks will be provided at the Dar-es-Salaamterminal to segregateeach product.

5. Pipelineuse until fully rehabilitatedis assumedto be 800,000 tons/year (1,000,000 tonslyear afterwards).

6. Refinery capacityto achieve7% fuel consumptionand loss is assumedto be 750,000 tons per year and 8% at lower capacity. After installingthe preflash tower, refinery capacity is assumedto be 1,000,000tons per year, and after installingthe energy - 92 - Annex 6.2 Page 2 of 7

conservationmeasure the Iuel consumptionand loss is assumedto improve by 1%.

7. In the Product Line Case, two tap-off points at Makambakoand Mbeya in Tanzania and one at Kalonji in Zambia were envisaged. The fuel oil requirementof the mining sector will be met by diesel suppliedat the price of fuel oil initially. Using experiencegained during the first year of operation,a cheaperproduct of vacuum gas oil (VGO) transportedby the pipelinewill be provided. Jet fael will be transported by rail from Dar-es-SaWaminitially, and after the first year of operation, it will be transported in the pipeline as Duel Purpose Kerosene(DPK).

8. The constructionperiod for all facilitieswas assumedto be three years.

9. In the Refinery Cases, exportswill be limitedto the Shaba region of Zaire and are expectedto be 75,000 tons per year under normal circumstances. In the Product Line Case, exports to Shaba as well as to other countriesfrom the pipelinewere assumed. The potential export markets assumedwere: Shaba (Zaire) = 75,000 tons; Tanzania = 60,000 tons; and South of Livingstone= 50,000 tons.

10. The operatingcosts of the refinery and the pipeline were estimatedon the basis of current financialstatements of Indeni and Tazama. Table 1 ZAMBIA-PETROLEUMREHABTATION PRWOJWT Deanwd Forsat for Pleum Products aInThos tons)

ProducXt 1002 100 1004 10 1900 1007 1008 10 2000 2001 202 200S 2004 2005 2 2007 (Actal

LP? 2 3 3 3 4 4 4 5 5 6 S 6 6 5 6 6 Gasdlne(s) 117 120 128 120 131 132 133 1ta 1se ts7 1t0 140 141 143 144 146 Kersw*s) 29 30 2 3Ss 34 34 34 38 88 36 36 36 3* 37 37 se JetFuI 21 26 26 26 27 27 28 2a 20 20 30 S0 31 32 82 33 GusON(s) 261 20 280 28 201 297 303 300 st5 325 3s5 346 355 3S0 377 388 FuielON(s) 73 84 8 84 84 84 84 84 84 so o0 00 00 90 90 90 Biumen(s) 4 10 10 10 10 10 10 10 10 12 12 12 12 12 1. 12

TOW 407 832 564 671 580 588 a6n 6oe 614 634 646 a6n 671 684 an 711

u .. 94 - ~~~~~~Annext6.2 Page 4 of 7

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e | j| 3S1b°oSa°°°°°°°° - - - Zamba -Ptroeum Sector RehablItatlon Projt- Currnt lneywh EMleno Impvments (poftOon) (unit US$ houand)

bw*nent Code Operng cost Ne Pewmathdle Transpost eitfwy A/nnad youe DX2I,P I C mds CO*W1 PIndW PWRoad 2M 0 1902 1,900 6.700 1.800 23s16 67.141 6,402 8$.Sl 8,211 0 113.22 1 1063 2,600 10,050 2o800 29,074 86,O6 5,8 6,164 8790 0 124.877 2 1994 1,660 11,725 2,000 290074 62,49 ,l2s 95,706 0,310 0 132*40 3 1008 0 8,026 0 29,074 62,33 6.142 C,M 6S3AO 0 122.060 4 tIM 0 0 0 2S.074 64,143 6.37 69*92 0,481 0 118lk7 5 1067 o 0 0 2s,074 56650 6,323 10,130 s,612 0 120,047 * 10o6 5,000 0 0 29.074 e6ss6 6,411 10M70 6.7A 0 127,3s 7 1sss 0 0 0 29.074 66.482 6.811 10,430 CM06 0 124.36 8 2000 0 0 0 29,074 60,622 6O62 10,7 10.034 0 126206 6 2001 0 0 0 31,646 70,311 6.14 10t,15 1o0,37 0 126 10 2002 0 0 0 31,649 72,363 6,944 11,123 1o,5 0 132,1 t1 2003 6,000 0 0 1,6546 74,466 7.077 M1 10,768 0 140,167 12 2004 0 0 0 31546 76.631 7,213 I1.56 10,064 0 137,912 13 2006 0 0 0 31A146 76,680 7a364 11.780 11.177 0 140,710 "o 14 200 0 0 0 SI1M6 81,129 7,406 12,011 11,9 0 143,80 Cos 16 2007 0 0 0 31,540 82,102 7,64 12,248 11,40s 0 146,010 1,61.134

FIL Zambla -PetroleumRehabliltation Project- Conmeronto ProductPipellne (Futl Expon (unle US$thousand)

Invetment Costs OperatIngCosts Net Refinery Terminas Pipeline Tranqeaon Annual Year Conversion Pletlne Depots & Tnaks Conversion Cmude Products Plieline RaiURoad O&M Code 0 1902 0 6,700 1,600 000 2,400 23.816 60.040 6.217 8,6e1 9,450 16.5265 1t3,s6 1 1093 0 10,060 2,600 2,800 3,600 2s.074 69,715 6,6s08 s,t4 10.02S 1s.526 128,005 2 1904 2,000 11,725 2,000 2,600 4.200 29,074 75.148 8,B40 9.706 10.64S 15.626 138,318 3 1006 0 6,026 0 800 1,80 0 161,617 8,000 13,630 1.600 71,004 110,378 4 1098 0 0 0 0 0 0 178,251 10,000 11,3s6 1.600 112.476 88.813 6 1007 0 0 0 0 0 0 178.630 10.000 1167 1,500 110,86 80,023 a 1008 0 0 0 0 0 0 179,018 10,000 1122 1,800 109,27 93.070 7 1000 0 ^0 0 0 0 179,672 10,000 12077 1.50 107,630 96.619 8 2000 0 0 0 0 0 0 180,081 10,000 12226 1,500 106.084 97,843 0 2001 0 0 0 0 0 181,086 10,000 12.756 1,600 102,11O 103230 10 2002 0 0 0 0 0 0 181.144 10.000 12,09 1,o5 09,23 106,379 11 2003 0 0 0 0 0 0 1t1,129 10,000 13,1e8 1,600 06,214 100.603 12 2004 0 0 0 0 0 0 181,112 10.000 13,414 1,600 93,110 112,015 13 2006 0 0 0 0 0 0 181,094 10,000 13.646 1.600 89.924 116,316 NPVof 14 2006 0 0 0 0 0 0 180,927 10,000 13,882 1,600 86,506 119,804 Cods 15 2007 a 0 0 0 0 0 180.786 10,000 14,128 1'00 82.094 123,387 845,J80

0% | Zambia -Peroleum RehabilitationProet- Convesion to ProductPipeline (Fuii iot fromYr a) (unit.US$ thousand)

InvetsmentCot OperaingCosts t Refinery Terminals Pipeline Transporaln Annual Year Conversion Pipeline i wos & Tnaks Conversion Crude Produts Piolne Rail/Road O i ExpottW Costs 0 1982 0 6,700 1,600 000 2,400 23,816 67,141 6,402 8,561 8,211 0 114,632 1 1903 0 10,060 2,600 2,800 3,60o 29,074 68,916 6,783 9.164 8,790 0 128,677 2 1094 2,000 11,726 2,000 2,600 4,00 2' 62,340 6,126 9,706 9.310 0 138,990 3 1096 0 5,026 0 800 1,800 0 161,617 8,000 13,630 1,600 71,994 110,378 4 10986 0 0 0 0 0 178,261 10,000 11.636 1,6-0 112,476 88.813 6 1097 0 0 0 0 0 0 178,630 10,000 11,678 1,500 110.886 90.623 6 1098 0 0 0 0 0 0 179,018 10,000 11,22 1,600 109,270 03,070 7 19S9 0 0 0 0 0 0 179,672 10,000 12,077 1,500 1,97,630 05,619 8 2000 0 0 0 0 0 0 180,081 10,000 12,22 1,600 106.964 97,843 9 2001 0 0 0 0 0 0 181.086 10,000 12.76B 1,600 102,110 103230 10 2002 0 0 0 0 0 0 181,144 10,000 12,099 1,600 09,38 106.376 11 2003 0 0 0 0 0 0 181,129 10,000 13,189 1,60o 90,214 109.03 '.0 12 2004 0 0 0 0 0 0 181,112 10,000 13,414 1,500 03,110 112,915 13 2006 0 0 0 0 0 0 181,094 10,000 13.646 1.600 89.024 116,8315 NPVot 14 2006 0 0 0 0 0 0 180.927 10.000 13,882 1,60 86.605 119.804 Costs 16 2007 0 0 0 0 0 0 180.766 10,000 14.126 1,600 82,804 123,387 947.736 ISRO20145 U5t G AND A > t ' U0 A0 ,,0A ) I- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,-j + 8000 KENYA

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PETROLEUMSUPPLY FACIUlTIES

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ZAMBIA/TANZANIA 2_ - PETROLEUMSUPPLY FACILIMES J / Kanalb.Boys u T A N Z A N I A CoalDeposit Areas TAZAMAPipeline OILDEPOTrAN( te Roads 0 ExistingOil Depots Meor aSe Rcilroads ak Existin Pup Sttions927 Rivers O ExisfingCofhodic Protection Stions Swamps 927 LorationIdentification Noational Capital PlannedCathodic Pratection Stations provinceP Capitals Kd,o.oefes 0 50 100 150 200 250

-+ -Province Boundaries MO1 -Interncional *Boundaries - ' T H E I i

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