Fon Omcm, Use ONLY Public Disclosure Authorized Repert No
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Docwumt of The World Bank Fon oMcm, usE ONLY Public Disclosure Authorized Repert No. P4118-ZA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE Public Disclosure Authorized INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 3.0 MILLION Public Disclosure Authorized TO THE REPUBLIC OF ZAMBIA FOR A TAZAMA PIPELINE REHABILITATION ENGINEERING PROJECT August 30, 1985 Public Disclosure Authorized This de.a Ia a SdS disriblem ad may be usd by rediulems ely la the performace of their edlal ale. Its cmt may et thrwis be disdue=e withou Wedd Bak atherwlino. CURREW EqUI S Currency Unit Zambian Kwacha (K) US$ 1.00 - K 2.34 K 1.00 - US$ 0.43 The Zambian Kwacha is officially valued in terms of a basket of currencies, for which the US dollar is the intervention currency. Since July 1983, the Government has followed a flexible exchange rate policy, making periodic adjustments in the official value of the Kwacha. The rates expressed above are as of March 31, 1985. The following are average annual exchange rates for recent years. 1980 US$ 1.00 = K 0.7885 1981 US$ 1.00 = K 0.8684 1982 US$ 1.00 = K 0.9282 1983 US$ 1.00 = K 1.2506 1984 US$ 1.00 = K 1.7943 WEICBTS AND MKASURES I kilometer (km) = 0.62 miles 1 sq kilometer (km2 ) = 0.386 sq miles 1 metric ton (tonne) = 1,000 kg - 2,204.6 pounds ABBREVIATIONS DOE - Department of Energy (of the Ministry of Power, Transport and Comunications) EIB - European Investment Bank MPTC - Ministry of Power, Transport and Communications NEC - National Energy Council NOSCO - Ndola Oil Storage Company TOE - Tons of Oil Equivalent ZCCM - Zambia Consolidated Copper Mines ZESCO - Zambia Electricity Supply Corporation ZIMCO - Zambia Industrial and Mining Corporation, Ltd. FOR OFFICIAL USE ONLY REPUBLIC OF ZAMBIA TAZAMA PIPELINE REHABILITATION ENGINEERING PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Zambia. Beneficiary: Tazama Pipelines Limited. Amount: SDR 3.0 million (US$3.1 million). Terms: Standard. Onlending: For 20 years, including 5 years grace, at an interest rate of 9 percent; the beneficiary bearing the foreign exchange risk. Purpose: The project would carry out a magnetic (or intelligence pig) survey of the 1,700 km Tazama Pipeline between Dar es Salaam.port and Ndola in Zambia to determine the extent of damage caused by corrosion. Progressive development of serious leaks threatens the pipeline's continued operation as the sole means of transporting feedstock to Zambia's INDENI Refinery. Apart from the survey, the project would: (a) examine various aspects of the pipeline's operations and management; (b) recommend initial measures to meet urgent operational and maintenance needs; and (c) carry out an engineering investigation and prepare an implementation program and cost estimates for the pipeline's rehabilitation. Benefits and Risks: The project's systematic approach to preparing the pipeline's rehabilitation and the proposals for putting the pipeline company on a sounder operational and management footing will help safeguard the vital supply of feedstock to Zambia's only refinery at a time when continued supply of petroleum imports is essential to the economy. If the pipeline ceased to operate, the economy would be burdened with an additional annual freight cost of US$24 million. The continued viability of the pipeline operation is also important in terms of employment of a significant nuiber of Zambians and Tanzanians, duties and service charges paid at the port of Dar es Salaam, and the potential supply of the final refined products to Malawi, Zaire and Zimbabwe. A risk that the cleaning and surveying of the pipeline will aggravate the This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - leakage and cause environmental damar . will be mitigated by the close monitoring o: "ach stage of the pipeline being worked on. There is also a risk that the project will be delayed by a delay in the delivery of oil, which is required to propel the various survey devices through the pipeline. Purchase and delivery schedules will be agreed with the Government before the credit becomes effective. Estimated Cost US$ Thousand Local Foreign Total 1. Pipeline and Tank Cleaning 50 80 130 2. Pipeline Modifications for Intelligence Pig Survey 50 90 140 3. Intelligence Pig Survey 60 1,883 1,943 4. Comprehensive Study of Pipeline, Pump Station, Tank Farm, Telecommunications and Operations; Training Needs - 905 905 5. Tank Drainage 50 90 140 6. Technical Assistance 50 170 220 7. Spare Parts and Equipment - 100 100 Base Cost 260 3,318 3,578 8. Physical Contingencies 26 322 348 9. Price Contingencies 14 160 174 Total Project Cost 300 3,800 4,100 (Taxes and Duties Exempt) US$ Thousand Financing Plan Local Foreign Total IDA - 3,100 3,100 EIB - 370 370 Tazama Pipelines Ltd. 300 330 630 Total 300 3,800 4,100 Estimated Disbursements: IDA Fiscal Year 86 87 88 Annual 2,000 1,050 50 Cumulative 2,000 3,050 3,100 Economic Rate of Return: Not applicable. Appraisal Report: None. IBRD No. 16844. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ZAMBIA FOR A TAZAMA PIPELINE REHABILITATION ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Zambia of SDR 3.0 million (approximately US$3.1 million equivalent) on standard terms to help finance the Tazama Pipeline Rehabilitation Engineering Project. Proceeds would be onlent to Tazama Pipelines Limited. Cofinancing of 500,000 ECUs (about US$370,000) is expected from the European Investment Bank. PART I - THE ECONOMY 2. A Country Economic Memorandum on Zambia (Report No. 5000-ZA) was distributed to the Executive Directors on April 24, 1984. This part is based on that report's findings and on subsequent information received from the Zambian authorities. Country data sheets are attached as Annex I. 3. Zambia's economy is heavily dependent on external trade and on government activity. Imports and exports range between 30 and 40 percent of GDP. Government expenditures amount to about 35 percent of GDP, and the Government owns a majority share of mining and most manufacturing enterprises. Copper mining provides over 90 percent of foreign exchange earnings and 15 percent of gross value added. Much economic activity is dependent on expatriate technical, managerial, and administrative skills. Current Economic Situation 4. Zambia is currently in an acute stage of economic and financial crisis. Production has declined steadily for three consecutive years in most sectors due to reductions in import volumes. External trade has moved to a cash basis, because of the refusal of banks to open new letters of credit without reducing existing ones. Due in part to continued declines in the copper price, scheduled external debt service obligations amount to over 70 percent of export earnings. Debt rescheduling is required for the third year in a row, but the prospects for rescheduling are problematical in view of large arrears that have accumulated to members of the Paris Club and the INF. Disbursements of external loans have fallen sharply due to reductions in capital expenditure by both the Government and many public enterprises. As a result, a multi-faceted foreign exchange constraint now grips the country and threatens to override the positive effects of the Government's economic recovery program initiated in 1983. To avoid this, a major coordinated effort of debt restructuring and renewed financial flows is required for the Government's program to succeed. - 2 - 5. Zambia's economic and financial problems were initiated by a sharp decline in the copper price in 1975. Zambia's terms of trade have deteriorated steadily since then, and by 1984, were 70 percent below the average for the early 1970s. In 1982, and again in 1984, copper prices reached their lowest level in real terms during the post-World War II era. Real GDP has been in a general downward trend since 1975, declining on an average by about 1.5 percent per year. With population growing by 3.1 percent per annum, real GDP per capita is 25 percent lower than in 1974. GNP per capita was estimated at US$580 in 1983, using the World Bank Atlas methodology, but is now much lower as a result of major devaluations of the Kwacha in 1983 and 1984. 6. The balance of payments has been in chronic disequilibrium since 1975, with current account deficits climbing to an average of 19 percent of GDP in 1980-82. Nevertheless, the volume of imp-rts declined steadily and is now 50 percent below its level in 1980 and 75 percent below its level in 1974. This has resulted in an economy-wide problem of severe underutilization of capacity and, especially in' the mining sector, a large backlog of maintenance and rehabilitation expenditure that has contributed directly to a declining trend in copper production and exports. In 1984, copper exports fell to their lowest level (525,000 tonnes) since Zambia's independence. The current level of imports is now inadequate to sustain copper production and to provide a critical minimum for the rest of the economy to function efficiently. The large current account deficits have also led directly to Zambia's high level of external indebtedness. At the end of 1984, Zambia's total external liabilities stood at US$4.4 billion, including drawings from the IMF (US$740 million) and US$500 million in overdue commercial payments. By comparison, exports of goods and services amounted to somewhat over US$900 million.