Document of

FILE COPY The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. P-2034a-EGT

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized TO THE

EXECDTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

EGYPTIAN ELECTRICITY AUTHORITY

Public Disclosure Authorized WITH THE GUARANTEE OF THE

ARAB REPUBLIC OF EGYPT

FOR A

REGIONAL ELECTRIFICATION PROJECT

May 27, 1977 Public Disclosure Authorized

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Official Rate

1 Egyptian Pound (LE) US$2.56 or SDR 2.118

1 US Dollar LE 0.391

Parallel Market Rate

Until February 1976:

1 Egyptian Pound (LE) US$1.70

1 US Dollar LE 0.59

From February to May 1976:

1 Egyptian Pound (LE) US$1.56

1 US Dollar LE 0.64

From May 21, 1976:

1 Egyptian Pound (LE) US$1.47

1 US Dollar LE 0.68

From December 1, 1976:

1 Egyptian Pound (LE) US$1.43

1 US Dollar LE 0.70

GLOSSARY OF ABBREVIATIONS

GODE - Gulf Organization for Development of Egypt M & LT - Medium and Long Term EEA - Egyptian Electricity Authority MEE - Ministry of Electricity and Energy REA - Rural Electrification Authority km - 1 kilometer of 1,000 meters kW - 1 kilowatt or 1,000 watts MW - 1 megawatt or 1,000 kw kWh - 1 kilowatt hour or 1,000 watt hours GWh - 1 gigawatt hour or 1,000,000 kWh kVA - 1 kilovolt ampere or 1,000 volt amperes MVA - 1 megavolt ampere or 1,000 kVA

FISCAL YEAR

January 1 to December 31 ARAB REPUBLIC OF EGYPT FOR OFFICIAL USE ONLY

REGIONAL ELECTRIFICATION PROJECT

Loan and Project Summary

Borrower: Egyptian Electricity Authority (EEA)

Guarantor: Arab Republic of Egypt

Executing Rural Electrification Authority (REA) Agency:

Amount: US$48 million equivalent

Terms: 20 years, including 4-1/2 years of grace, at 8.2 percent interest.

Project The project is to (i) improve and expand, as part of REA's Description: ongoing program, electric power distribution systems in and around the cities of El-Mansoura, El-Fayum, Assyout, Sohag, Fuwa, Damietta, El-Mahalla, Tanta, El-Minya, Aswan, Kafr El-Sheikh, Ras El-Bar, and Kafr El-Dawar and in 19 rural zones; and (ii) assist in building up the institutions of the power sector through technical assistance to EEA and REA and improvement of EEA's training facilities. In detail, the project would consist of:

(a) about 100 km of 66-kV and 33-kV sub-transmission lines; 230 MVA of sub-station and distribution transformer capacity, and 3400 km of 11-kV and 380/220 V distribution lines;

(b) an economic review of REA's program, improvement of its planning and evaluation procedures and detailed engineering and construction supervision of project facilities requiring about 264 man-months of consult- ing services;

(c) improvements of EEA's financial administration and accounting systems, a review of its safety and inspec- tion practices, and a review of electricity tariffs requiring about 132 man-months of consulting services; and

(d) dormitory-type accommodations and audio visual and other didactic material for EEA's Institute of Engineers south of Cairo and its Training Center for Mechanical/ Electrical Skilled Workers and Technicians north of Cairo; 18 man-months of overseas training for teachers of these institutions; a training advisor to EEA, a specialist instructor trainer and a specialist for training in commercial and financial subjects, each for about 3 years. Thi 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. Project Cost: 1/ Local Foreign Total …--- (US$ Million------

1. Sub-station equipment and distribution transformers (installed) 3.4 9.3 12.7 2. Transmission and distribution lines (installed) 8.7 23.5 32.2 3. Consulting Services for REA 0.9 2.2 3.1 4. Consulting Services for EEA 0.6 1.1 1.7 5. Training 0.6 1.1 1.7

Project Cost excluding contingencies 14.2 37.2 51.4

6. Contingencies (physical and price) 6.4 12.8 19.2

Total Project Cost 20.6 50.0 70.6

1/ Based on parallel market exchange rate in November 1976 of about $1.50 = LE 1.

Financing Plan:

Bank Loan - 48.0 48.0 Government 19.0 2.0 21.0 EEA 1.6 - 1.6

Total 20.6 50.0 70.6

Procurement All contracts for equipment and materials and for building Arrangements: works at the training centers would be awarded in accordance with Bank Group guidelines for procurement on the basis of international competitive bidding. For the purpose of comparing foreign and local bids, Egyptian manufacturers who participate would be allowed a margin of preference equal to the existing rate of custom duties applicable to competing imports or 15 percent of CIF price whichever is lower. Audio-visual and other didactic materials (about $50,000) for the training component, because of their specialized nature, and meters, relays, and other electrical equipment not susceptible to international competitive bidding may be purchased on the basis of quotations from 3 suppliers pro- vided that the total value of those contracts does not exceed $1.0 million equivalent. Contracts for installa- tion and erection works will be Government financed and would be awarded under local bidding procedures. - iii -

Disbursement Disbursement would be made on the basis of (i) 100 percent of Arrangement: the foreign expenditures for imported equipment and materials, and 100 percent of ex-factory cost of locally manufactured items; (ii) 100 percent of foreign expenditures for expatriate consultants, advisors and overseas training and 70 percent of the cost of local experts; and (iii) 40 percent of the cost of dormitory type facilities including equipment. Retroactive financing would be provided for the consulting services to REA in an amount not exceeding $150,000 for expenditures incurred after May 1, 1977.

Estimated Disbursements of Bank Loan:

Fiscal 1978 1979 1980 1981 Year ------(US$ Million)------

Annual 8.0 24.0 14.0 2.0 Cumulative 8.0 32.0 46.0 48.0

Consulting A total of 504 man-months of consulting and advisory services Services: would be provided by suitably qualified firms and individuals on terms and conditions satisfactory to the Bank. The foreign costs of these services are estimated to average about $7,800 per man-month. REA has already selected a firm for its con- sulting services under the Project.

Estimated Com- pletion Date: December 31, 1980.

Economic Rate At least 10 percent of Return:

Appraisal Appraisal of a Regional Electrification Project, Egypt Report: (No. 1517a-EGT of May 18, 1977).

INTERNATIONAL BANK FOR RECONSTRUCTION AMID DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EGYPTIAN ELECTRICITY AUTHORITY WITH THE GUARANTEE OF THE ARAB REPUBLIC OF EGYPT

1. I submit the following report and recommendation on a proposed loan for the equivalent of US$48 million to the Egyptian Electricity Authority with the guarantee of the Arab Republic of Egypt to help finance the foreign exchange costs of a regional electrification project. The loan would have a term of 20 years, including 4 1/2 years of grace, with interest at 8.2 percent per annum.

PART I - TIHE ECONOMY 1/

2. An Economic Report on the Arab Republic of Egypt (No. 870a-EGT), dated January 5, 1976, has been distributed to the Executive Directors. A basic economic mission visited Egypt in May/June 1976 and its report is under preparation. Updating missions visited Egypt in October 1976 and January 1977; the findings of these missions are incorporated in this report. Country data sheets are attached as Annex I.

Background

3. From 1960 to 1966 Egypt experienced rapid growth (around 6 percent a year in real terms) under fairly rigid centralized planning and control. This system came under increasing pressure in the second half of the decade follow- ing bad harvests and increased defense expenditures, particularly as a result of the civil war in Yemen. It deteriorated further after the war of 1967, with the loss of the Sinai oil fields, the closure of the Suez Canal, the abandonment of the Canal cities and the cost of resettling the population of about a million, and the virtual cessation of Western economic assistance. With the continuing military confrontation in the Middle East, Egypt further increased defense spending at the expense of other types of consumption and of its development program. Thus, in 1973 the economic picture was one of rigorously curtailed private consumption and inadequate investment, with a deteriorating capital stock of infrastructure and productive facilities. Real GDP growth for 1967-73 averaged only 3.5 percent a year.

4. The changed political situation after October 1973 laid the ground- work for a new "open-door" policy enunciated by President Sadat and approved in a national referendum in May 1974. This policy reflects a major effort to accelerate economic development through modernization and making Egypt's largely publicly owned and centrally controlled economy more market-oriented. Specifically, the policy envisaged (i) decentralization of decision-making in

1/ All currency conversions are at the official rate of $2.56 = LE 1. - 2 - state-owned enterprises, (ii) liberalization of the private sector, (iii) in- centives for private foreign investment, and (iv) expanded economic coopera- tion with Arab countries. Since 1974 Egypt has initiated a number of steps which are expected to lead to a significant restructuring of the economy. In particular, steps have been taken to remove some of the restrictions on private business activities, to decentralize public enterprise management, to encourage foreign private investment, to expand foreign exchange transactions outside the official rate, and to loosen many of the restraints on banking activities.

5. Substantial inflows of external assistance from both Arab countries and Western aid donors and institutions have eased some of the problems of the Egyptian economy in making the transition. However, major structural diffi- culties remain, largely due to the continuing tension in the region and the neglect of investment. These structural difficulties are also linked to the major immediate weaknesses of the economy: the large deficit in the balance of payments, the low level of government savings, and low efficiency in public sector enterprises.

6. The present government was formed in November 1976 following elec- tions to the People's Assembly, which were the first in which a choice of candidates representing diverse political views was offered to the voters. The Cabinet was strengthened on the economic side, and a Deputy Prime Minister for Financial and Economic Affairs was appointed to coordinate economic policy-making, while President Sadat directed that economic questions should be in the forefront of the new Cabinet's tasks.

Recent Economic Developments

7. Growth in National Income. Real growth in GDP (1975 prices) in- creased from less than 3 percent in 1973 to about 3.2 percent in 1974 and an estimated 9.8 percent in 1975 1/; the rise is attributed largely to recovery of industrial activity through the provision of greater aid-financed inputs, increased construction (particularly in the Canal Zone) and growth of trade and services. The high rate of growth for 1975 was in part due to the recovery of the Sinai oil fields (November 1975) and the reopening of the Suez Canal (June 1975). If their effect on growth of the gross domestic product is ex- cluded, the overall growth rate is estimated (by the Ministry of Planning) at 8.0 percent. Preliminary production data for 1976 indicate that the economy continued to expand. The estimated rate of growth of 6.1 percent, however, reflects increasing capacity constraints in some sectors.

8. Investment. Egypt was able to sustain a higher level of investment during 1974 and 1975, largely as a result of generous external assistance from Arab countries. Gross investment increased from $1,373 million in 1973 to $2,867 million in 1975 (in 1975 prices). This included a considerable replenishment of stocks, which had been drawn down in the pre-October 1973 period. During 1976, as a result of shortages of both domestic and foreign resources, investment is estimated at only about $2,300 million (1975 prices).

1/ Ministry of Planning. - 3 -

9. Public Finance. Because of the size of the public sector, the bulk of Egypt's domestic financial resources for development is mobilized through the state budget and public sector corporations. Considerable efforts have been made in the past to increase such resources, largely by way of taxation. In 1975 tax revenues were 22 percent of GNP. Public enterprises (although hampered by Government-imposed pricing policies) and social insurance and pension funds contributed an additional 8 percent and 5 percent of GNP, re- spectively. Total public revenues reached 38 percent of GNP, a major effort for a country of Egypt's low per capita income.

10. The high level of Government current expenditures, however, absorbed most of these resources. This was almost entirely due to the level of defense expenditures, and, more recently, to the growth of subsidies, which increased from $480 million (about 5 percent of GNP) in 1973 to $1,830 1/ million (about 15 percent of GNP) in 1975, as the Government endeavored to protect domestic consumers from the sharp increases in the import prices of foodstuffs and other essential commodities. While exact data on defense spending are not available (since a large portion is channelled through a separate account, partly foreign financed--the Emergency Fund) it appears that the defense burden on the budget eased over this period. Although it increased in absolute terms--from $1,100 million in 1973 to $1,485 million in 1976--defense spending, as a proportion of total current expenditures, declined from about 39 percent to about 28 per- cent in this period. Expenditures on economic and social services provided by the Government (education, health, etc.) and other general expenditures have risen at approximately the same rate as GNP.

11. With increased current spending, public savings declined from 4 per- cent to less than 1 percent of GNP between 1973 and 1975. However, preliminary data for 1976 show an increase in public sector savings. As of May 1, 1976, a number of subsidies were abolished, saving $140 million. A decline in inter- national prices also helped cut the actual subsidy bill for 1976 to $1,600 million.

12. Credit expansion in 1976 was 16 percent, a much smaller increase than the 42 percent registered in 1975. Credit policy was more restrictive and the credit needs of public sector companies were reduced because of a running down of inventories and a decline in import commitments. Money and quasi-money expanded by 25 percent compared with 21 percent in 1975. The official consumer price index for the urban population estimated the price index in 1975 at 10 percent, but the real rate was probably much higher. The index for 1976 is not available, but indications are that the rate of infla- tion was comparable to that in 1975.

13. Balance of Payments. Despite an increase in the value of com- modity exports by 56 percent between 1973 and 1975 (largely as a result of improved international prices) export earnings fell well short of imports.

1/ Including direct subsidies and public economic sector deficits. - 4 -

Indeed, the country's import bill almost tripled in this period due to in- creases in quantities imported, and soaring food and other prices. Egypt's export receipts were influenced by declines in the physical production of certain field crops (particularly cotton) due to a shift towards more profit- able cash crops (fruits, vegetables, clover) and increased domestic demand for exportable products. As a result, there was a decline in both the value and quantity of some important exports.

14. The imbalance in Egypt's trade was compensated to some extent by fast-growing earnings from services and from workers' remittances. Never- theless, the overall deficit on the trade and services account reached record levels, increasing from $654 million in 1973 to $2,480 million in 1975.

15. In 1976 the deficit was reduced significantly, although at $1,390 million it was still high. Preliminary estimates show export earnings in- creased by about 16 percent, due mainly to increased receipts from the Suez Canal and to oil exports. Imports of goods and services fell by about 13 percent, in large part due to a decision to abandon the second tranche of the 1976 investment program and to restrict imports of intermediate and capital goods. While there were some reductions in imports of consumer goods as well, the smaller deficit must have been partly purchased at the cost of Egypt's future growth.

16. The large deficits on the goods and services account in 1974-1976 were met mainly through assistance from Arab countries, Iran and the United States. The Arab support comprised grants as well as loans, and deposits in the Central Bank of Egypt. However, in 1974 the deficit could be fully met only by a substantial increase in short-term borrowing, including the use of banking facilities. Higher levels of concessional assistance enabled a re- duction in the use of these facilities in 1975, but lower aid flows in the following year led Egypt to increase the use of this type of credit by over $200 million to a total of $1.45 billion.

Development Problems and Prospects

17. Egypt's rapidly growing population, widespread poverty and dilapi- dated infrastructure require the generation of more resources for investment and a more rigorous determination of the priorities of the projects into which they are channelled. In turn, this implies: (i) greater restraint on the growth of consumption; (ii) the removal of constraints created by inadequate infrastructure (particulary ports, power, transport, and telecommunications); (iii) greater emphasis on quick-yielding projects; (iv) more emphasis on com- pleting ongoing projects than on starting new ones; (v) more active use of prices (including the price of foreign exchange) as indicators of relative scarcities; (vi) streamlining bureaucratic processes; (vii) a vigorous move towards increasing industry's efficiency and making it more export-oriented and employment-generating (which would involve using existing industrial capacity more fully, paying more attention to considerations of quality, and - 5 -

encouraging small-scale industry); and (viii) a strengthened program to curb the growth of population and the articulation of urban and rural strategies which would decentralize the growth of the urban population away from Cairo and Alexandria and create more productive opportunities in smaller towns and the rural areas. These issues will be addressed in the context of a medium- term plan the framework of which has been completed. The plan is presently under preparation.

18. Over the long-run, Egypt's economic potential is considerable. The reasons for this are in brief: (i) the country has a large domestic market, a proficient population, low wages, varied raw materials, and a key geographical location, which makes it a natural base for industries that wish to supply the growing regional market; (ii) Suez Canal revenues are estimated to continue to rise gradually until the Canal expansion program is completed in about 1980-- there is then likely to be a substantial increase in revenues; (iii) Egypt's improved prospects for oil production, which is put (by the oil companies) at one million barrels a day by 1980-82, substantially exceed domestic require- ments; (iv) considerably increased earnings from tourism--these reached an estimated $383 million in 1976; (v) the possibility of using agricultural land more intensely with greater emphasis on high-value crops; and (vi) an increasing flow of remittances ($445 million in 1976) from Egyptians working abroad. 1/

19. However, Egypt's long-term potential also hinges upon a number of factors outside its own control. The most important is a movement towards an equitable and definitive peace settlement in the Middle East. Moreover, Egypt requires the transfer of large amounts of capital from abroad; this, in turn, must be preceded by preparation of a suitable portfolio of projects to which potential investors, whether private or official, foreign or domestic, can contribute. Finally, it requires fundamental changes in economic policies and institutions. Hence, it will probably take 5-10 years to achieve a significant restructuring of the economy.

20. Recent Policy Actions. Beginning in 1976, the Government, in close consultation with the Bank and the IMF, began to undertake a series of policy actions aimed at making more effective use of foreign resources, curbing excess consumption, and improving allocative efficiency. Thus (i) the parallel ex- change market has been successively widened (the last widening took place in March 1977), to comprise all exports except raw cotton, rice and petroleum and all imports except basic mass consumption commodities and also excluding Suez Canal revenues; (ii) the parallel market rate itself was further depreciated to about 56 percent of the official rate; (iii) the attractiveness of the parallel market was increased by establishing a list of items which may be imported through it without exchange restrictions; (iv) parallel market imports were valued for customs duties at the parallel market exchange rate (a measure equivalent to an increase of about 80 percent in the tariff on applicable imports); (v) ceilings on interest rates were removed and interest rates in- creased; and (vi) the "general organizations" that exercised rigid control over public industrial enterprises were dissolved and replaced by "higher

1/ Additional substantial remittances came in the form of "own-exchange" imports. - 6 - councils," which permit somewhat more initiative to the individual enterprises. The Government submitted a letter of intent to the IMF on March 4, proposing to undertake further economic reform. On April 20, 1977, the Fund approved a standby arrangement for the Government authorizing provision up to the equiv- alent of SDR 125 million (approximately $145 million) over the next 12 months. Drawings under the standby arrangement will be closely monitored and depend on Egypt remaining within a series of quarterly credit ceilings designed to limit the increase in the net domestic assets of the banking system to $1,536 million in 1977.

External Assistance

21. In 1967 the substantial amounts of Western external aid which Egypt had been receiving practically ceased, and up to 1974 service payments gen- erally exceeded disbursements. During the period 1968-1973, non-military aid from Eastern countries, estimated to have been in excess of $800 million, financed the bulk of Egypt's development.

22. Since 1973 the substantial deficits on the goods and services ac- count have been financed primarily by official Arab grants, loans and deposits with the Central Bank of Egypt. Western medium- and long-term (M<) capital assistance began to grow after October 1973. However, because of the slow disbursements inherent in the aid process, and the heavy repayments due on past loans, net M< transfers from OECD countries to Egypt were initially small. Commitments from the OECD countries have, however, led to a strong aid pipeline, and it is estimated that there were substantial inflows in 1976 which should continue in 1977.

23. Among western aid donors, the US Government is currently committing about $700 million of project and commodity aid per annum (in addition to about $210 million of food assistance under US Law PL 480). Aid from the other OECD countries, especially France, Germany and Japan, has remained at the increased levels of 1974/75 (i.e., about $235 million per year). The European Community is providing increasing amounts of food aid; moreover, in January 1977 the Community signed a financial protocol with Egypt committing, over a five-year period, $70 million in grants and $119 million in concessional loans.

24. It is estimated that in 1977 Egypt needs to import goods, including capital goods in the order of $5.0 billion, in part to compensate for the severe reductions in imports in 1976. While prospects for increases in re- ceipts from exports are good, a current account deficit of approximately $1.86 billion is forecast; in addition, a reduction in short-term debt of at least $700 million (including paying off $450 million in arrears as of December 31, 1976) is desirable, amortization of M< debt will require $840 million and there will be a reduction in bilateral balances of about $200 million. Thus total foreign exchange requirements will be about $3.6 billion. Taking into - 7 -

account estimated aid disbursements of $1,470 million 1/, and estimated sup- pliers' credits, private transfers and foreign investment of $480 million Egypt would still have a foreign exchange financing gap for 1977 of approxi- mately $1,650 million. A major step towards meeting this gap was accomplished recently. In early April 1977, GODE agreed to provide additional financial support to Egypt in the amount of $1.475 billion to be made available in 1977 as a loan to the Central Bank of Egypt in stages, while Egypt carries out its declared policies to correct its balance of payments disequilibrium.

25. Consultative Group. In July 1976, Egypt requested the Bank to set up a Consultative Group comprising a number of oil-producing Arab countries, Iran, major western countries and Japan and leading international and regional institutions, including the IMF. The first meeting of the Consultative Group was held in Paris on May 11 and 12. At the meeting the major aid-giving countries and institutions discussed in detail the most important problems confronting the Egyptian economy, its prospects over the next few years, and its needs for external assistance. Delegates, while appreciating the magni- tude of the task with which the Egyptian Government was confronted recognized that the structural changes undertaken by the Government would take a number of years to complete. They felt that the Government was taking energetic steps towards accelerating growth and expressed their support of the Govern- ment's statement on its development strategy and of its efforts to direct future development within the framework of an integrated plan to be completed this year. Delegates accepted the World Bank's estimate that Egypt will re- quire disbursements of $3.6 billion in 1977, of which about $1.65 billion will have to come from new commitments. As the result of the commitment by GODE and an increase in the commodity aid portion of US assistance, it is likely that the bulk of the foreign exchange gap in 1977 will be covered. However, current projections of foreign exchange earnings and requirements indicate that in the period 1978-80, Egypt will require external assistance of about $2.8 billion annually in disbursements (compared with $3.6 billion for 1977). About $1.6 to $1.8 billion of disbursements will come from existing commitments leaving a gap of about $1.0 to $1.2 billion to be covered by new commitments. A large part of this aid will be required in quick-disbursing form, i.e., as cash or commodity aid.

External Debt and Creditworthiness

26. Egypt's non-military medium- and long-term debt outstanding and dis- bursed at December 31, 1975 was estimated at $5,101 million. This was almost double the amount at end-1974 of $2,760 million. During the first nine months of 1976 the debt rose to $5,670 million. Of this, official M< loans amounted

1/ This amount includes among others disbursements from (i) a $250 million cash loan made in 1976 by the Gulf Organization for Development in Egypt (GODE), which is a $2.0 billion fund created by Saudi Arabia, Kuwait, UAE and Qatar to participate in financing Egypt's development program; (ii) a Eurodollar loan of $250 million from a consortium of American and European banks, guaranteed by the Gulf Organization; and (iii) M< project aid estimated $435 million (including $185 million from bila- teral agreement countries). It excludes the additional assistance to be provided by the Gulf Organization mentioned at the end of paragraph 24. - 8 - to $3,043 million (of which $731 million was in clearing currencies). Another $1,942 million was in convertible currency deposits and $685 million in sup- pliers credits. Major creditors were Saudi Arabia, Kuwait, USSR, USA, Abu Dhabi and Iran. IBRD/IDA debt comprised about 2.7 percent of the total. Debt service on medium- and long-term debt was estimated to amount to $680 million in 1975, giving a debt service ratio of 26 percent. No reliable estimates of military debt are available; Egypt is still making efforts to obtain resched- uling of service payments on such debt.

27. While the bulk of external assistance to Egypt was obtained on con- cessional terms, the continued high level of short-term indebtedness continued to be a cause of serious concern. Commercial bankers' credit facilities out- standing (including undisbursed) amounted to $2,297 million at the end of December 1976 of which $1,447 million were disbursed. The liquidity require- ments of this type of indebtedness created severe problems for Egypt in 1976 when arrears in repayments were reported.

28. The Government's recent policy actions (discussed in paragraph 20 above) have initiated the structural adjustments required by Egypt's economic situation and international environment. The situation however requires con- tinuing review and further action. At the Government's request, the Bank has arranged to review developments in the economy by economic missions three or four times a year.

29. If progress towards curbing the increase of both consumption expend- itures and imports is maintained and the country's export earnings potential realized, Egypt's foreign capital inflow requirements are estimated at about $2.8 billion per annum for the remainder of the decade. The required capital inflows are large--but if they are available on the terms expected, Egypt would have the debt servicing capacity to borrow the amounts envisaged, includ- ing a limited amount on harder terms. The burden of servicing M< debt as a percentage of total foreign exchange earnings is estimated at 25 percent in 1976 and is expected to decline to 19 percent in 1980. In these circumstances Egypt may be considered creditworthy for a limited amount of Bank lending in addition to the IDA assistance which Eygpt merits on the ground of its poverty and difficult balance of payments position.

PART II - BANK GROUP OPERATIONS IN EGYPT

30. The proposed loan would be the World Bank's twenty-eighth lending operation in Egypt 1/ and the first in the power sector. It would bring Bank and IDA commitments made since 1970 to $794.5 million. Annex II contains a Summary of Bank loans and IDA credits as of April 30, 1977, and notes on the execution of ongoing projects.

1/ Assuming the loan for this project will be considered by the Executive Directors after the credit of $27 million and loans of $27 million and $12 million for the Second Nile Delta Drainage Project. - 9 -

31. The principal objective of the Bank/IDA lending program in Egypt is to provide foreign exchange in support of its development program and through this lending increase utilization of available productive capacity. This included (i) those projects which would lead to increased production and foreign exchange earnings, (ii) those aimed at rehabilitating and expanding infrastructure necessary to facilitate development, and (iii) selected social sectors, namely population and education. The impact of Bank/IDA participation in projects has been widened by attracting additional foreign exchange from other donors for many of these projects and by important institution building. Besides the technical assistance included under Bank/IDA projects, the Bank is Executing Agent for the national Power Sector Survey (para. 36) and the Master Plan for Water Resource Development and Use (para. 37), both partly financed by UNDP.

32. The projects financed in recent years have been in support of the strategy outlined in the preceding paragraph. Preparation of projects for future lending follows the same line. A Second Industrial Imports Project, an Iron Ore Engineering Project, and a project for the expansion of the Suez Canal have been appraised and will be presented to the Executive Directors shortly. A pipeline of projects for possible future lending is being developed, comprising additional projects in the water supply and sewerage, education and power sectors, in agriculture including drainage, and industry. Projects under study in new fields include urban and rural development and the tourism sector.

33. Bank Group disbursements continued in 1976 to represent about 5 percent of Egypt's overall capital inflow. The Bank/IDA share of total external debt outstanding and disbursed was about 3 percent at the end of 1976. For the future, the Bank/IDA share of total external debt outstanding and disbursed (excluding military debts) is estimated to reach about 7 percent in 1980, of which the Bank share would be about 4 percent. It is estimated that in 1980, debt service payments due to the Bank and IDA will represent about 3 percent of service payments due on Egypt's external debt.

34. The first IFC participation and lending, for a ceramics project, was approved by the Executive Directors in April 1976. IFC is also discuss- ing several other private sector and joint venture projects.

PART III - THE ELECTRIC POWER SECTOR 1/

General

35. The Minister of Electricity and Energy determines policies in the power sector. The Higher Council for the Electricity Sector, which in addi- tion to the Minister of Electricity includes the Ministers of Agriculture, Irrigation, Industry and Petroleum, coordinates power development with other

1/ All currency conversions are at parallel market exchange rate of November 1976 of about $1.50 = LE 1. - 10 - sectors. The dominant agency in the sector is the Egyptian Electricity Authority (EEA) which is responsible for implementation, management, opera- tion and maintenance of power facilities throughout Egypt. The Rural Elec- trification Authority (REA) is a special implementation agency responsible for planning and constructing the facilities of the Government's National Rural Electrification Plan and for upgrading existing distribution systems (66-KV and below) outside Cairo, Alexandria and the Suez Canal Zone. Upon completion, REA transfers its works to EEA for operation.

36. The Bank's association with the energy sector in Egypt began with a sector review mission in December 1974. Since then, the Bank has assumed a coordinating role in the Government's various efforts to improve operational policies and build-up the institutions in the sector. The sector review led to a Power Sector Survey, which is being carried out by the consulting firm Sanderson and Porter, Inc./US under UNDP-financing with the Bank acting as executing agency. Its objective was to integrate planning in the power sector with overall economic planning and to identify changes that might be required in EEA's institutional and organizational structure, its operations and devel- opment program. Phase I of the Survey which was completed in November 1976, recommended changes in energy policy, organization and management, accounting and finance and system operation. Under Phase II, the consultants are now assisting EEA in implementing the key recommendations. However, recent constraints on UNDP funds have made limitations of the scope of the Survey necessary. To allow the survey to be completed, further assistance would be provided under this project. This would include: (i) financial consultants to help EEA resolve the problems in its accounting and finance systems (para. 45) as identified by the Survey and (ii) a training component would help in manpower planning and in the rehabilitation of EEA's training centers (paras. 43 and 55). In line with recommendations of the Survey and of Bank staff, EEA has also requested that a study on electricity tariffs (para. 44) and a review of EEA's safety and inspection practices (para. 47) be included under the project. Finally, REA proposed and the Bank agreed that Harza Engineering Co. (US) who are carrying out a USAID financed feasibility study for EEA for a program to rehabilitate and expand power distribution systems in Cairo, Alexandria and other cities (para. 40), be asked to do the engineering and other related studies of the distribution systems under this project.

Energy Resources

37. Egypt is relatively well endowed with energy resources. They consist of hydropower from the Nile, natural gas deposits along the Mediterranean coast, and natural gas and petroleum deposits on the Red Sea. Through the Aswan Dam and the Aswan High Dam, about two thirds of the Nile's hydro-energy potential has been harnessed, providing about 55 percent of available electricity genera- tion. To establish a rational basis for the use of water resources for elec- tricity generation, and other purposes, the Government has recently initiated a water master plan study to be carried out under Bank supervision with the support of foreign experts and with financial assistance from the UNDP and IDA under the proposed Second Nile Delta Drainage Project. As a possible alternative source for hydropower for the future, the Government is studying - 11 -

with the assistance from the Federal Republic of Germany, the viability of diverting Mediterranean sea water into the Qattara depression in the Western desert. Natural gas reserves of some 71.3 billion m3 are presently being developed for use by new petrochemical and heavy industries. However, because of delays in establishing these industries, the related underutilization of the new gas pipeline systems and the prospects for a tripling of reserves by 1980, gas is becoming available as a fuel for thermal generating plants to substitute economically for oil which is being exported. Gas found in asso- ciation with oil in the Gulf of Suez is still being flared and could be utilized for industry and power generation in the future. Consequently, EEA has started converting its thermal plants from oil to gas.

Unified Power System

38. Since 1970, all major hydro and thermal generating stations in Egypt have been interconnected through EEA's unified power system--see IBRD Map 12674. The system has a total installed generating capacity of 2,445 MW of hydro in the South--345 MW at the Aswan Dam station, and 2,100 MW at the High Dam station--and 1,370 MW of steam and gas-turbine units, mostly in the Delta. A 500-kV, double-circuit transmission line, 838-km long, connects the Aswan stations to the Delta Region and is the backbone of the interconnected system. Further interconnection is accomplished through 2,400 km of 220-kV and 3,550 km of 132-kV transmission. Subtransmission at 66-kV (2,600 km) and 33-kV (1,600 km) supplies 11-kV, 6.6-kV, and 3-kV distribution in the entire service area. Present system configuration and voltage ratings are adequate to meet short-term needs, compatible with long-range system development. Because of excessive outages during the early operation, the maximum load assigned to the 500-kV system was restricted and full utilization of avail- able High Dam generation delayed. However, EEA is taking steps to reduce the causes for the outages and to gradually increase the load on the 500-kV system. Although load growth averaged 17 percent p.a. during 1974-1976, and is estimated at 13 percent p.a. average for 1976-1980, existing generation and transmission capacity and committed construction are ample to serve these needs if expected improvements in system operation are realized.

Distribution System

39. Distribution facilities in most of Egypt are run-down and over- loaded. 40 percent of the population have access to electricity, but in the rural areas the figure is only 20 percent. Two major efforts are in progress to correct deficiencies and provide adequate service: one, under EEA, covers Cairo and Alexandria and the Canal Zone; the other, under REA, covers about 120 urban centers, 4,000 villages and 25,000 hamlets in the 80 zones of National Rural Electrification Plan. The REA construction program started in 1971. To date, REA has electrified some 2,000 villages, and reinforced and expanded the systems of 84 urban centers, covering in all 28 zones. The remaining 52 zones are scheduled for completion during 1976-80.

40. Some preliminary engineering was completed by REA with the help of Soviet consultants in 1971-73 at the start of the National Rural Electrifica- tion Plan. A great deal of the information then developed needs to be updated - 12 - and upgraded. Under a first phase of their feasibility study for EEA, Harza is to review current Egyptian distribution practices and recommend suitable planning, design and construction standards. Harza's contract originally was confined to Cairo, Alexandria and two provincial cities. Upon the Bank's re- quest and in order to adopt uniform standards country-wide, the Study was ex- tended later to cover the urban centers which are included in this project. This Study will provide the basis for the design of the project facilities.

41. The present decentralized distribution of power through municipali- ties who buy power in bulk from EEA and sell it to low voltage consumers has hindered collection of comprehensive statistical data on load patterns, total investment costs and operating expenses for the areas already electrified. Data of this kind are indispensable for planning future rural distribution systems and the overall development of electricity supply in Egypt. EEA under- took to adopt an agreed system of key indicators to monitor its technical and financial performance and to submit these data to the Bank every year, start- ing March 31, 1978 (Section 3.05 of draft Loan Agreement), and REA to develop by September 30, 1978 a system to monitor the National Rural Electrification Plan (Section 2.08 of draft Project Agreement).

Egyptian Electricity Authority

42. EEA was established as a Government-owned authority in early 1976, replacing the Government's General Egyptian Electricity Corporation. Al- though a main objective of the reorganization was to give EEA more autonomy for developing its own manpower and budgetary policies and financial and accounting practices, progress toward this objective so far has been slow. EEA had a payroll of 43,000 employees in 1976, including some 3,000 veterans and university graduates who were allocated to EEA by Government but could not be fully employed in established positions. New By-Laws for EEA have been put into effect by Government on April 26, 1977. They would, inter alia, enable EEA to increase salaries and benefits, to provide incentives through reward of above average performance, and to dismiss staff in accordance with its own procedures where circumstances warrant it.

43. Partly as a result of the Government's salary policies and the oppor- tunities offered in neighboring Arab countries, EEA has a severe shortage of experienced middle and top management executives. EEA is well aware of these problems and conscious of the continued need for upgrading existing staff through training which seems to be the only solution in the short-term. It has two training centers: one south of Cairo for training and re-training of engineers and the other north of Cairo for technicians and skilled workers. However, both facilities are underutilized since they lack adequate accommoda- tion facilities and instructors. No training for commercial and financial staff is being provided at present. The project training component is ad- dressed to these needs (para. 55).

44. EEA's current tariffs do not reflect the cost of electricity supply since they are based on outdated (pre-1973) fuel prices. Industries are effectively subsidized by EEA through preferential rates. EEA has already - 13 - started to establish a fair basis for calculating the cost data on which a tariff structure could be formulated and requested that a comprehensive tariff study by consultants be included under the project. Taking into account EEA's previous work and the relevant findings of the Power Sector Survey, the con- sultants would review existing tariffs and formulate an appropriate tariff structure and rates.

45. Neither EEA nor its predecessor have earned a profit since 1972. EEA's financial performance is distorted by previous years adjustments, in- complete valuation of fixed assets and problems which were identified by the auditors' reports and which have not been corrected. Since financial consul- tants to help EEA overcome some of these problems could not be included under the Power Sector Survey because of constraints on UNDP funds, they would be provided under the project. The consultants would in particular assist EEA to update its fixed asset records, to establish a formula for their periodic revaluation, and to modify its accounting system (para. 63). The Government agreed to take all steps to have the fixed assets of EEA separated from those of REA (Section 3.02 of draft Guarantee Agreement).

46. Unpaid electricity accounts amounted to about $76 million at the end of 1975, representing 8 months sales of electricity; overdue accounts are estimated at $90 million as of the end of 1976. Nearly all unpaid accounts are owed by the public sector: municipal councils, public utilities, govern- ment buildings and industrial companies. In some cases, failure to pay is due to inadequate budget provision, in others it is due to refusal to accept a 20 percent tariff increase which was introduced in January 1975. EEA's future financial performance will depend on its ability to collect overdue electricity accounts and reduce the volume of funds tied up in working capital. Government agreed to take all measures necessary on its part to enable EEA to reduce its accounts receivable to not more than the equivalent of six months sales by March 31, 1978 and to not more than the equivalent of three months sales by December 31, 1978 (Section 3.04 of the draft Guarantee Agreement).

47. EEA is essentially self-insured; it has only limited insurance coverage from a Government-owned insurance corporation, e.g. for stores and materials, goods in transit, and motor vehicles. Risks in its operations are widespread and needed replacements and/or repairs can be and are financed from EEA's operating revenue. In the event of possible catastrophic losses, EEA would rely on the Government for the replacement of destroyed assets. In order to rationalize EEA's self-insurance arrangements and to achieve possible economies, a review by suitable experts of existing safety and inspection practices for the operation and maintenance of power equipment and facilities is included under the project.

48. The Government is considering the formation of seven new distribu- tion companies to take over all distribution assets, operate and maintain them, and to undertake the customer billing function. The precise form of the companies will be determined by legislation yet to be enacted, but they are expected to be subsidiary companies of EEA. The Government undertook to ensure in the event a decision was made to establish these companies that the - 14 -

arrangements for the management, ownership, operation, and maintenance of the assets financed under the proposed Bank loan, for the audit of EEA's consoli- dated accounts, and for EEA's financial performance under the Loan Agreement would be satisfactory to the Bank (Section 3.03 of draft Guarantee Agreement).

Rural Electrification Authority

49. REA was established in 1971 to implement the National Rural Electri- fication Plan, and was reconstituted in 1976. It has about 5,000 permanent staff and engages at least another 20 percent more on a temporary basis to meet construction needs. Like EEA, REA is overstaffed but short of capable senior and middle level staff and would benefit from the project's training component.

50. REA's only sources of funds to carry out its construction tasks are budget appropriations for rural electrification, foreign loans and suppliers' credits. It keeps records of the direct costs of its construction works to which at year end the proportionate shares of overhead and indirect costs are added. All its expenses, including interest on loans, are being capitalized. So far REA has not transferred financially any completed work to EEA but was expected to do so annually from 1976 onward. All loan and debt service obliga- tions would be transferred to EEA together with the fixed assets (see para. 63).

51. REA is to spend about $400 million excluding interest during con- struction during the 1976-80 period of which about 40 percent would be in foreign costs. Firm sources of foreign financing arranged so far will provide only about $15 million, half of which is expected to be for equipment purchases from USSR. REA is actively seeking other foreign funds in the form of sup- pliers' credits and loans from bilateral sources on concessionary terms. The Government is giving high priority to rural electrification, and all local costs are expected to be provided for in the Government budget. However, the availability of foreign funds will clearly determine the extent to which the REA electrification program can be achieved.

52. As mentioned above (para. 17), curbing of population growth and a balanced urban rural strategy which would decentralize urban population growth away from Cairo and Alexandria and create more productive opportunities in smaller towns and rural areas are important aspects of the medium-term plan which the Government is preparing to deal with Egypt's development strategy. The National Rural Electrification Plan will help to achieve these objectives by complementing the Government's ongoing health, agricultural and educational programs which the Bank and IDA are already assisting. The improved living conditions electricity will create in rural areas would help to make the family planning program more effective and is also expected to help stem the increas- ing flow of people to the large cities. - 15 -

PART IV - THE PROJECT 1/

Project History

53. The project was identified during a Bank mission which visited Egypt in August 1976 and prepared by staff of the REA for appraisal in October/ November 1976. The appraisal information was supplemented by further Bank missions in December 1976 and in February 1977. Negotiations were held in Washington from April 25 to 29, 1977. EEA was represented by Mr. Kamal Nabih, REA by Mr. Abdel Fattah El-Kadi and the Arab Republic of Egypt by Mr. Samir Koraiem of the Ministry of Economy and Economic Cooperation. A report entitled nAppraisal of a Regional Electrificaion Project, Egypt" (No. 1517a-EGT), dated May 18, 1977 is being distributed separately. Supplementary project data are provided in Annex III.

Project Description

54. The Project which is the Bank Group's first investment in the power sector, is to improve and expand electric power distribution systems in second- ary urban centers and rural zones in Upper and Lower Egypt as part of the National Rural Electrification Plan and to assist in institution building in the power sector through technical assistance to the two main operating agen- cies, EEA and REA, and through improvement of training facilities. The project would provide for (i) procurement and installation of about 100 km of 66-kV and 33-kV subtransmission lines, 230 MVA of substation and distribution trans- former capacity, and 3,400 km of 11-kV and 380/220 V overhead and underground distribution lines; (ii) consulting services to REA to review its program, improve its planning and evaluation procedures, and prepare the detailed design and supervise construction of project facilities; (iii) consulting services to EEA to improve financial administration and accounting, to review its safety and inspection practices, and to review electricity tariffs; and (iv) dormitory-type accommodations, audio-visual and other didactic material, and technical assistance for EEA's two training centers.

55. The project would constitute about 18 percent of the investment and cover about 60 percent of the zones planned for electrification in REA's 1976- 1980 program. The project facilities would represent the first phase of the power system rehabilitation and expansion in each area and, in total, would meet urgent needs for electricity of some 6 million people. They would be located in five secondary urban centers in Upper Egypt and eight in Lower Egypt which have already been agreed, and in addition in 19 rural zones. Fourteen rural zones were appraised and 11 were subsequently proposed. Final selection of the 19 to be included under the project will be made in agreement with the Bank and in accordance with specified financial and economic criteria. The consulting services to EEA under the project are to complement the tech- nical assistance being financed by the UNDP under the Power Sector Survey.

1/ All currency conversions are at parallel market exchange rate of November 1976 of about $1.50 = LE 1. - 16 -

The project's training component would enable EEA's two training institutes to function effectively and to contribute to the requirements for trained manpower of EEA and REA in the future (para. 43). An adviser, two training specialists and overseas training would be provided to assist EEA in estab- lishing a manpower development plan and suitable recruitment and training practices in improving the relevance of existing courses at the institutes, in increasing the number and quality of instructors, and in introducing courses in financial and commercial subjects.

Project Execution

56. REA with the assistance of its engineering consultants would be responsible for the implementation of the electrification works. To coordinate the work of REA's different divisions concerned, a Project Unit has been set up. The Project Manager participated in loan negotiations. Staffing, func- tions, and responsibilities of the unit are satisfactory. To ensure quick project implementation, Harza Engineering Company would start their work under the project as soon as their ongoing study on general planning, design and construction standards for electricity distribution (para. 40) permits. This is expected in May.

57. As part of the engineering preparation of the project works, REA's consultants would develop construction schedules and suitable indicators to monitor and control progress. In accordance with standard reporting require- ments under Bank-financed projects, both EEA and REA would submit schedules and plans for the implementation of their respective project components for Bank review (Section 3.04(a) of draft Loan Agreement and Section 2.05(a) of draft Project Agreement). Upon completion, REA would transfer all assets generated by the Project to EEA (Section 3.01(b) of draft Loan Agreement).

Project Cost and Financing

58. The total cost of the project is estimated at $70.6 million of which the foreign exchange component would be $50.0 million (71 percent). The pro- posed loan of $48 million to EEA would finance all foreign costs of the proj- ect except for the foreign cost of about $2.0 million of installation and erec- tion works. EEA would finance the local cost of its consultants and of the project's training component, and the Government all other local costs and the foreign cost of installation and erection works. The Government would also finance $7.6 million of interest during construction on the portion of the proposed loan for items to be carried out by REA (Section 2.02(c) of draft Guarantee Agreement); EEA would finance the remaining interest during con- struction of $0.4 million. EEA would make $41.4 million of the proceeds of the loan available to REA, under a subsidiary agreement acceptable to the Bank, for the implementation of the electrification works and related consulting services (Section 3.01(b) of draft Loan Agreement). Execution of this sub- sidiary agreement would be a condition of loan effectiveness (Section 7.01(b) of draft Loan Agreement). - 17 -

59. To ensure the timely allocation of local counterpart funds, the Government agreed to establish a special fund under this project to provide local funds for the project components to be carried out by REA (Section 2.02(b) of draft Guarantee Agreement). The Government would replenish the special fund at monthly intervals to a level equivalent to the estimated local expenditures during the following three month period. The establishment of such a special fund would be a condition of loan effectiveness (Section 7.01(c) of draft Loan Agreement).

Procurement

60. All contracts for equipment and materials and for building works at the training centers would be awarded in accordance with Bank Group guidelines for procurement on the basis of international competitive bidding. For the purpose of comparing foreign and local bids, Egyptian manufacturers who par- ticipate would be allowed a margin of preference equal to the existing rate of custom duties applicable to competing imports or 15 percent of CIF price whichever is lower. However, in view of their high manufacturing costs and large backlog of orders, successful bids are not expected from local manufac- turers. Audio-visual and other didactic materials (about $50,000) for the training component, because of their specialized nature, and meters, relays and other electrical equipment not susceptible to international competitive bidding may be purchased on the basis of quotations from 3 suppliers, provided that the total value of those contracts does not exceed $1.0 million equivalent. Contracts for installation and erection works will be Government financed and would be awarded under local bidding procedures.

Disbursement

61. Disbursement would be made on the basis of (i) 100 percent of the foreign expenditures for imported equipment and materials and 100 percent of ex-factory cost of locally manufactured items; (ii) 100 percent of foreign expenditures for expatriate consultants, advisors and overseas training and 70 percent of the cost of local experts; and (iii) 40 percent of the cost of dormitory type facilities including equipment. Retroactive financing would be provided for the consulting services to REA in an amount not exceeding $150,000 for expenditures incurred after May 1, 1977.

Financial Forecasts

62. EEA's 1977-80 investment program will require about US$1.4 billion. This is expected to be financed as follows: 26 percent from internal sources, 26 percent from contributions from Government and grants from USAID; and 48 percent from borrowing. Arrangements for foreign financing are well advanced but the Government may find it difficult to provide its share of the total fund requirement. However, a short-fall in the Government's contribution to EEA would not affect the project, since it is being financed separately through REA, nor is the project specifically dependent on timely completion of plant in EEA's program since the incremental demand arising from it, would be only a small fraction of the increase in demand for Egypt as a whole. - 18 -

63. EEA has undertaken, under a Loan Agreement with USAID 1/, to achieve a 9 percent rate of return on average net fixed assets in service, appro- priately valued and revalued from time to time. Whether it is possible for EEA to meet this target in 1979 will have to be reviewed in the light of its financial position and forecasts at the end of 1978. By then, the cost savings from converting oil-fueled thermal plant to natural gas and from improved usage of the plant capacity at Aswan and of the 500 kV transmission system would be measurable. EEA agreed to submit to the Bank not later than December 31, 1978 a plan with proposed measures, to achieve the 9 percent return on its revalued assets in 1979 (Sections 5.04(a) and 5.05(b) of draft Loan Agreement); thereafter, EEA would submit to the Bank each year a suitable financial plan for meeting the rate of return in the following year (Section 5.04(b) of draft Loan Agreement). To establish an appropriate basis for calculating these rates of return, EEA undertook (i) to value its assets after separation from those of REA and transfer of the facilities constructed by REA up to December 31, 1976, and to establish the value of the Aswan High Dam and the associated 500-kV transmission system; and (ii) to agree with the Bank on the principles for the periodic revaluation of its assets, both by June 30, 1978 (Section 5.05(a) of draft Loan Agreement).

64. To ensure that EEA's debt to equity ratio continues to improve and that borrowing does not exceed prudent levels, EEA would obtain the Bank's consent to any borrowing it plans to undertake whenever its internal cash generation is not sufficient to cover its debt service at least 1 1/2 times in any future year. (Section 5.06 of draft Loan Agreement); EEA also agreed to modify by December 31, 1978 its accounting system to fulfill EEA's needs as a public utility and provide better cost control and management informaton (Section 5.05(b) of draft Loan Agreement), to revalue its foreign debts at the end of each year in accordance with the current rates of exchange, (Section 5.07 of draft Loan Agreement), to submit to the Bank annual financial state- ments audited by the Central Auditing Organization or other independent auditors satisfactory to the Bank within six months of the end of each fiscal year, and to take appropriate action each year with respect to the matters identified in the auditor's reports (Section 5.02 of draft Loan Agreement). Similarly, REA would submit audited accounts within six months of the end of each year (Section 4.02 of draft Project Agreement).

Project Justification

65. With the completion of the Aswan High Dam hydro-electric complex and the associated transmission system some 6 years ago, abundant electricity generating capacity became available. However, the existing dilapidated and overloaded power distribution system prevented the benefits of this huge investment from reaching much of the population. The National Rural Elec- trification Plan is designed to rectify this situation but is making only slow progress, largely because of inadequate financing. Meanwhile, partly stimulated by the Government's other efforts to improve economic and living

1/ Loan Agreement of July 31, 1976 for Helwan-Talkha Gas-Turbine Project. - 19 -

conditions in rural areas and secondary cities, a large unsatisfied demand for electricity has developed. The project which covers about 18 percent of REA 1976-1980 work program and about 60 percent of zones that remain to be elec- trified under the National Rural Electrification Plan would benefit some 6 million people, about a third of which would be receiving electricity for the first time.

66. Electricity supply from the EEA's unified power system constitutes the least cost solution for all project zones. Economic return calculations were made for 9 urban centers and 14 rural zones that were originally proposed and were considered representative for all project areas. Economic benefits that could be quantified are (i) the net incremental revenues accruing to the municipalities and EEA and (ii) resource cost savings through substitution of kerosene by electricity. On this basis--using the opportunity cost of fuel and valuing unskilled labor at half of going wage rates to reflect substantial underemployment in the project areas--the economic rate of return over a 25 year service life is estimated to be 12 percent for the electrification works in the urban centers and 4 percent for the works in the rural zone. The average economic rate of return on the urban and rural project components combined, which together account for 94 percent of total project cost, is 10 percent; the aggregate rate of return excludes the technical assistance to EEA and the training component for which no meaningful rate of return could be estimated. Increases in electricity tariffs, if implemented, would not be expected to significantly affect demand and would result in higher rates of return. Therefore, and since important benefits, particularly in the rural zones, could not be quantified, the rates of return are minimum figures. Benefits that could not be evaluated are: (i) cost savings and increases in productivity in existing agricultural, industrial and service activities that will be achieved through replacing diesel-engines and bullock drives by clean and efficient electric motors and through introducing additional power tools and equipment; (ii) development benefits in terms of new economic activities in small shops and industries that will be generated through the availability of power at reasonable cost; (iii) economic and social benefits which will result from extending the productive day of people into the cool hours of the evening, stimulating economic, social and community activities and promoting educational and family planning programs; and (iv) general social benefits in terms of increased safety, security and ease of movement in the villages after dark through street lighting.

67. In addition to the physical improvements, the project will contri- bute to the Government's objective of decentralizing management by building up institutions. Complementing the assistance being provided by the UNDP under the ongoing Power Sector Survey, the project's technical assistance component wfll strengthen financial management of EEA and investment planning of both EEA and REA; its training component will help meet urgent needs of both institutions for qualified technical and financial staff. - 20 -

Risks

68. There are no special risks involved in the physical implementation of this project, and because of the importance the Government attaches to rural electrification and of REA's dependence on the project to carry out a substantial part of its 1978-80 work program, the project investment should have a less than average risk. The factors which are considered critical to its proper execution have been addressed positively as follows: REA has experience with projects of this kind and its technical and managerial capa- bilities are being strengthened through consultants under the Project. MEE's contracting companies 1/ and private local contractors are expected to carry out the installation and erection works under the project. However, through EEA's parallel program for the improving of the distribution systems of Cairo, Alexandria and the Canal Zone, their workload is heavy. To avoid related delays, cost increases, and other problems, EEA's consultants (para. 40) are studying how the capacity of the electrical contracting industry can be expanded and the efficiency of works be improved through changes in design and construction practices. The Government is aware of the magnitude of local funds required for the project and special commitments have been obtained to ensure that shortage of local counterpart funds will not hinder project execution.

69. In contrast to the good prospects for the physical part of the project, there is a risk that achievement of the project's financial objective for EEA may be delayed. In addition to operational management, and policy improvements, substantial increases in electricity tariffs will be required if EEA is to achieve the agreed 9 percent financial return. Although there is full agreement on the importance of reaching the agreed financial targets, Egypt's difficult circumstances make for considerable uncertainty as to the pace at which this can be accomplished.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

70. The draft Loan Agreement between the Bank and the Egyptian Elec- tricity Authority, the draft Project Agreement between the Bank and the Rural Electrification Authority, the draft Guarantee Agreement between the Arab Republic of Egypt and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of the draft resolution approving the proposed loan are being distributed to the Executive Directors, separately.

71. Features of the draft Loan, Project, and Guarantee Agreements of special interest are referred to in paras. 41, 42, 45, 46, 48, 57 through 59, 63 and 64 and are listed in Section III of Annex III.

1/ There are three Government-owned contracting companies which are spe- cialized in construction of power facilities. They report to MEE. - 21 -

72. Special conditions of loan effectiveness are the execution of a subsidiary agreement between EEA and REA (Section 7.01(b) of draft Loan Agreement), and the establishment of a special fund for the project by the Government (Section 7.01(c) of draft Loan Agreement).

73. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.

PART VI - RECOMMENDATION

74. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamara President

Attachments Washington, D.C. May 27, 1977

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Unless othewvise noted, data for 1960 refer to any year between 1959 wan 1961. for 1970 between 1968 anad 1970, and for Most Recent Estimate between 1973 and 1975. me SpaLin's sfuccessful diversification of its economic structure, degree of induatrialisation and development of tourieni makes It an appropriate '-objective" country. Ean 1960 /. 1950-55; /b Eluding population of ssafl agsgl.erationa in the frontier districts; /at Pigstreo relate to parsons six years and over, exoloding nasad population; /jl 1964-65; /a 1962; a Including assistant nurare and midwivesa; La 1960-621 La Urban only. im2 /a 1966; /b Relates to 12-64. years of age; /c Registered, nat all rracticing;in the country. MOSTgROUT UTULThs /a as percentage of employment; a May 1973; /_c 1972; Ld Registered, not all practicing in the country; /e 197; /f 1969-71 avernge; L 1976, porcentage of population.

PHIUPINES 1~7 A Ais percentage of employment;t b Inside.

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DEcPmTIONS OF SOCIAL INDICATORS

Le-d Area_Lthos as) Popsiation mer .roscoLspersoc - Fopolatiwo dividod by ouche of pracitiog Total -Total suf-c area -pri.iog tand arcs sod inland w.aters,1 o atssd f- a grodat curse.-- -r-i-d" or cetfe ues,and Utirt. M..ost-renr estiate of sgric-ltsrs1 sr- osd rtmpororily or Psros- auxiliary pers.oso1 with training or ptic. mostly fsr crops, pa-tre, saner h kitoboc gardeos or lo Its faillw. Pspclsriosc Par hospiro1 hod - Populatioc divided by musher of hospital beds -viishls in public sod priv-te cgsorsI andl spsctiissd hospital acd GNPinrst cpita (US$) - cGiPper capita -oti.tautt -toremtosrbet pricos, rshbailitstoicc..mterm,.. molidos -oringhome sod estsbihiiesmt .. fur ceictalted by sous o-ovrsior sthod as World fanto ktlss (1973-75 boats),. ostodisi sod pr-vstiv- oars. 1960, 1970sod 1975 dets. Per capita oopply of caltoiss ft of rotroms-ts) - Compsced fr-m e-egy squtoateo of met food supplies -v1itbts io ...uctry par tapita per dey, rosu1atiom sod oitistaoteimooastic ia bi supplims _opriss dacositc prod-ctlo, imports less emporim. aod toealatioo loid-vsur tiliom) Mu of July first' if sot -vilble, uv-rge chscgms to mooc, inst supplies motlude amisil feed, semdo, q-oitimo usd of tw mod-ysar eslae,1'60, 1970 umd 1975 dote, to food proceosiog and Imeses to dittribciwm, meqoitremts -ere osti-eted by Ff0 base.dme physiotogicu1 used, for -ora activiy asd health os-id- Poculatime desitry - Persquare us - iid-y-ar popoistime pot sqssre kilmter ering -siromoselrtop-rtl,r, body weights, age sod ems dierribhuotme of (100 hecturos) of total ares popsiattoc, sod s11ioio 107 for wate or household 1s-e Pseulstime desity -rPer square 1oof .stic land - Copu-d as above for Per -,itrasupoly of Protein (crccaret day) - Proteio umetemt of Pee -opita asiutrlland mely. cot supply of food psr day: op sspply of food is defioed as above. requo- amots for all usmetries estoshithed by US06 fuEonmic RO..earch ISrties fita scatimticst- provide for s oniotos silusoce of 60 grams of octal proteio per dey, snd Crudehirib rote pee thosesod. --mae - Aossu live bitrthuper ohossood of 20 grass of aeos1 sod poIse proteio, of which 10 grso should be sobs1 aid-pot.o.. tlo tem-yesr stithsetit averge- sdiog im 1960 sod 1970, proreis, the.emstemdecdmar lower thou those of 75 gram of totai protist sod fito-year aesensding-g is 1975 far cost retest em tfost.. and 23 sp-n of smimal proroin us so s-rage for the world, propomed by Ff0 Crude death rate peri ....am.dsv-rsoe - fAm..I deaths per th-o...odof uid-yssr to the Thied World Food iSroy p.pulatiost,rem-year ariolstfticavrge .. ending in 1960 sod 190 sod five- Pert-pito erteto uiyfo or ansd pals - Protetn sopply of food year avrage eudiog in 1975 for .ost recestes.tisae- derived from Iniaiais sod paloet J Stmr Per day tofonrmortality rtet 1/thou) - u.ousi deathc of iofsnts u,cdr ome year of sc Duth rote1/thou) aget 1-4 - Aocual dea thu per thouo-d to age group 1-4 per tho..u.odlive births..yas to childrms is this age grasp,..sggemtmd as am iodtcator of Lifesome.ttuoy em birth (yr.) Afotage -ubor of yoer of life rsoatntog at aloatritie.n birih. usualy fiv-yea s--rg.m endtng ic 1960. 1970 cod 1975 for develop- tog oanmirte. Educatime GiruoreProductiso ra te -vetage -abrof Ive- daughoers a wI s w ill bsar fd(stedsoroi11snt rtios - plnary cuhosi - Eurolloemi of sli sges as pe- to her noru1 rprodautio- period if ohs eopertsrn- pr-eut age-spotific c-ctags of potoary mchosi-aft popolettonm;lludos child r- aged b-Il vests fr,itlity rare,, osuly.. fioe-yost ovregos ending it 1960, 1970 sod 1975 hut odjoted fot differeont length of prima.ry do...rime;for -etrles with for doveopiag -twotrts. umiversa d-ctiso, sooiereyso.ted 10% since som pupils are bel1e Poptattiom gtrothrsts (t)- total - Compouod ecnual grthst rates of aid-year or chw ihe official school age. pupuisrioc for 1950-60, 1960-70 sod 1970-75. Adiustedecroilant ratio -scemedury erhovi - Computsd as shav, -eondotv foesItaimegrowth rate (. -urbuc - compared likb groth rac of total mdo...rimetequiros at lesot foot yearm of sppr-vd priasry ioaircttioo popultaiom, difforeer deftoitioss of urbo ...stoa y affectttmpaability of provides ge..etal,vo..atioea1 or is-eb- rosimiog testrucotocs far pupils data sasog coctties af 12 to 17 yssrs of ago; -crrepondeoc.cars are ge...rslly emuluded. Urbam pposistionIt of tate1) - Rtart of rban to total pepoistime; differeot Yeses of ohonltasa provdd(is-o smdloll-Ttlpaso defisitiema of urhee steps ma fetcmeaiiyo as50 mcre.sbeig nsosdr leve, msoteal Losotatime ay he pertistly or eusplsetly ...clsdd. Agsstructure (prerto) - Czhtldrmo(0-14 yeara), workiog-age (15-64 years), omeaisonalmortlneor dr)-tofsc milmea Imorci lcclcde and rmftr-d (65 yeare aod ove) sa pe -ceraoe of eid-yesr populatime. teohmical, Isd-atrtel or sobherprograms which operate todepedeotly or 5 ufe depsede-co rati - Ractio of pepule-ime udr 05 sod 65 sod over to thoom dopartoustIo f atmmdat to-tit-itocs of ages 11 through 6t Adultliteracy rare)y.) - Lcitmrat odu1it (able to red and writs) as Per- icocmicdeeodecy ati -Ratio of Ppuplation voder 15 a,d 65 sod -vrto -marage of total adult .poplattotaged 15 years sod suer. the. labor forco ic age gtroop of 15-hi years Foun alaoPIt-m - accptors ,,to)hcmlcv - C-muloi-o -ub- of u-cprors H.. Inutg of bt-corldevices nedoraupioeu of catiova1 fasily pioon-g prograo Persum pe roo (urbaul- Aerago cober of Percovo Pot roo iv occpted oltue iroptimen. ovototdeilinogm in -ebao -ars,dwelllngc moc ld0000-pm---t facIy-user pacoto ftof mrrid woool- Perc.. iagso of sr,ied c-us of utcto'te so.1du..ucupiod ports child -hatog age (l5-44ess who eas b th-cootrro1d-ict. to all marriod Occupieddwmllom without pipedwater1- Occpied c or lvldasit-gs osoce -r sam ago group. to urbec and rtota areas itihout tside or outside pIped wale facIlIties E.Pl-t~ ~ ~~~~~~~~~~~~~~~~sPerrec~ ~ tags of all -ropied d-alliogs csestosloorricty (%afall dw-11-oi) - Conv-o--Ia dw-11-ga oich Is0LsoiArI-. (th..... Total ~ d) lab-~ fcEomicalty~~ ~ actIve~ ~ pertoe ~ ,~ -loldlog~ ~ ar,sd~ ~ ~ ~ electricity to lioiog quater as perceo of total d-ellieg - burhansd forces sod ucmplayed but cluIdlog housowio-, oudeors, etc., dofioitio-o ru- aes to cst u ou teriesare met comparbte. uRat1dwrllieo omce t lcrcr (7) - Computed as aboor for rurl Laborftst siacr.% -AOgritultIt-1 labor forum (to faruieg, focemiry. duelligs mely hutlng sod fishing) as peroestage of total IbOr- fatom. tsmpsyd1%oflao frc)- c-plyaed are usualy defioed as persoca who.aomrm arm blesodilug t tas ajob, ou fajb me a gi-e dawy, rosatod out Radtsrecivers fint thousee) - Alt tyPem of receivers far radIo hruadot. of a Job, sod smekleg woth for aseufied'atimom: period cot --ceeiog amto ge..rs-Ipublic per thouseed of populatitme,roclod-o ociosomed recivorm wesk, my mat be romparsbl eth ...ee.e.utrits due to differeor dafiftlctm to couotrisa asd to years whemrotosoo of radio sets was Jm efosur, of omaplayed sod -owre of dats, e.g. , moploymot office -stertati , eampi dais for rece..ryears may sot hm tomparsbls otoc cost ou..tries bho1tahed survys, -opolsory suespleymelloosoe li-soatg. PI'sosr sr (et9hu op - Ps..eoger cars comprise autar cars smarting Inrma dietriboti-o- Paro...tsge of prirstc incoma (both is sash sod kiod) ls osoeight persons -ecldss h.b..o,sos .. acd allitaty received by richest 5%, rirbha 20%., Fastest- 20%, aed pooreor 40% of house- rahiriss. holds. Eleriteitiyfbkh/yr peresel - fomu-1 ucom-ptio of todustrial.umscil publir sod prti-ts eleetricOty im bilowstt hours Per capits, geesrally Distribotisnof landaseserhipe- Pert...tsgea of laod osed by weltbhimor 10% base.d me prodmetise dots, without alleesoc. for io..... im grids hat sio-- sod poorest 107%of Isod a'er.log for impernssod exports of electricity. Newp,iot (ks/yr Per -pt) - Per caPita a-..sI tme-~ptim in bilogreos Hsslthsod Nictritime y.brfP-iig.timated es. from domotir preduotioc plus met imports of -sePriot phpytisi.. qualified from a aedlea1 sobol at aiv_rsicy level ANNEXI Page 3 of 4

EGYPT ECONOHIC DEVELOPMEZ1TDATA (Amounts in millions of US dollars)

Actual Rat. Projected 1973- 1975- 1973 1974 1975 1976 1980 1975 1980 1973 1975 1980 NATIONAL ACCOUNTSl/ (Constant 1975 Prices) Average Annual Grovth Rates As Percent of GDY Gross Domestic Product 10,517 10,849 11,912 12,636 16,288 6.3 6.4 99 100 99 Gains from Terms of Trade (F) 57 365 . 82 113 .. -. +1 .. +1 Gross Donstic Incoe 10,574 11,214 11,912 12,718 16,401 6.1 6.6 100 100 100

Imports(incl. non-factor services) -2,864 -4,052 -4,989 -3,904 -5,970 32.0 3.6 27 42 36 Exports (incl. non-factor services) 1.950 2.230 2.198 2.512 4.226 6.2 14.0 18 19 26 Resource Gap -914 -1,822 -2,791 -1,392 -1,744 75.0 -9.0 9 23 LO

Consuption Expenditures 10,115 10,887 11,836 11,806 14,179 8.2 3.7 96 99 86 Investment Expenditures (incl. stocks) 1,373 2,149 2,867 2,304 3,966 44.0 6.7 13 24 24

Domestic Savings 459 327 76 912 2,222 -60.0 95.0 4 1 14

HERCRANDISE TRADE Annual Data at Current Prices As Percent of Total

Imports Capital Goods 291 480 728 550 17 17 Fuels and intermediate goods 633 1,655 2,057 1,566 38 48 CoZsumotion Goods 740 1.340 1 544 1.349 45 35 Total Merchandise Imports (c.i.f.) 1,664 3,475 4.329 3,465 100 100

Exports Agricultural Products 423 657 522 490 42 33 Industrial Goods 580 617 1.046 1.115 58 67 Total Merchandise Exports (f.o.b.) 1,003 1,674 1,568 1,605 100 100 Travel 156 266 332 383 Suez Canal . 85 308

Merchandlse Trade Indices Averase 1975 - 100 Export Price Index 68 122 100 109 Import Price Index 67 95 100 105 Terms of Trade Index 101 128 100 103 Exports Volume Index 94 88 100 114

VALUE ADDEDBY SECTOR As Percent of Total

Agriculture 33 34 33 31 Industry, Electricity &Construction 24 26 28 28 Services 43 40 39 41 Total 100 100 100 100

PUBLIC FINANCE 1977 Current Prices Budgeted As Percent of GDP Current Receipts 3,142 3,648 4,593 5,673 7,821 30 39 Current Expenditures 2.786 3.487 5.056 5,238 6.121 26 42 Budgetary Savingzs 356 161 -463 435 1,7D0 4 -3 Public Sector Investment 1,141 1,446 2,337 2,196 3,502 11 20

US $ million CURRENTEXPENDITUES DETAILS Actual Prelim. DETAIL ON At 1975 P and ER (A 7.of Total Current Expenditures) 1973 1974 1975 1976 PUBLIC SECTOR Draft Plan Defense 283V31 24 9.72 INVESTMENT PROGRAM (1976-80) X of Total Defense 39.1 24.8 lS.7 ^' 28.3-' Subsidies 17.1 35.8 36.2 30.5 Agriculture 1,997 10 General Services 19.6 17.6 16.6 21.3 Industry and Mining 4,792 24 Economic Services 24.2 21.8 17.5 19.8 Services 3,993 20 Total Current Expenditures 100.0 100.0 100.0 100.0 Transport and com- muuications (Inc. Suez) 5,191 26 Other 3.993 20 SELECTED INDICATORS 1973- 1975- Total Expenditures 19,966 10 1975 1980 Average ICOR 2.08 3.6631 Import Elasticity 3.81 0.75-

LABORFORCE AND OUTPUTPER WORKER Total Labor Force Value Added Per Worker (Current Prices) In Millions X of Total In US Dollars X of Average 1973 1975 1973 1975 0 1973 1975 1973 1975

Agriculture 4.2 4.2 47 44.2 624 858 67 66.8 Industry 1.2 1.2 13 12.6 1,557 2,087 167 167.4 Service 4/ 3.6 4.1 40 43.2 615 1.374 66 110.2 Total 9.0 9.5 100 100.0 932 1,247 100 100.0

I/ Incorporating revised GDP estimates by the Kinistry of Planning December 1976. i/ Includes reconstruction expenditures. 3/ Import elasticity for 1975-80 low because of decrease in imports experienced in 1976. For the period 1977-80, import elasticity is estimated at 1.00. 4/ Includes distribution, electricity and ccnstruction sectors. ANNEX I EGYPT Page 4 of 4 BALANCE OF PAY4MENTS. EXTERNAL ASSISTANCE AND DEBT (amounts in millions of US dollars at current prices)

Actual Est. 1973 1974 1975 1976

SUMMARY BALANCE OF PAYMENTS Export of Goods, f.o.b. 1,003 1,674 1,568 1,605 Import of Goods, c.i.f.iJ -1,664 -3,475 -4.329 -3,465 Trade Balance -661 -1,801 -2,761 -1,860 Service Receiptsl/ 421 710 1,082 1,480 Service Payments -414 -541 -801 -1,010 Service Balance 7 169 281 470

A. Deficit on Goods and Services -654 -1,632 -2.480 -1,390

B. Amortization of LMT Debt -407 -631 -568 -545

(of which suppliers' credits) (277) (-285) (-280) (-300)

C. Net Reduction in Short-term Debt -- -- -264 --

D. Reductions of Balances on Bilateral Accounts -113 -28 -241 -200

E. Foreign Exchange Requirements -1.174 -2,291 -3,55 -2,135

F. Supply of Funds 1,290 2,119 3,573 2,135

Private unrequited transfers 6 42 91 65 Official grants 725 1,264 988 635 Gulf Organization for Development in Egypt ------Other MLT loans 170 199 583 665 Suppliers' credits 160 273 363 420 MLT deposits/loans CBE -- 5 1,580 470 Foreign investment -- 7 20 50 Net increase in short-term commercial bank credits 352 585 -- 235 Other monetary movements, net 2/ -123 -256 -52 -405

G. Changes in Reserves 116 172 20 n.a.

GRANT AND LOAN COMMITMENTS Official Grants and Grant-like 725 1,264 988 635

Public MLT Loans IBRD -- 85 77 157 IDA 75 55 55 40 Other Multilateral -- 6 100 100 Governments 290 595 2,507 1,375 Suppliers/Commercial 160 273 363 420 Total Public MLT Loans 525 1,014 3,102 2,092

DEBT AND DEBT SERVICE, MLT (Public Debt Outstanding & Disbursed)

Interest on Public Debt 79 95 111 231 Repayments on Public Debt 407 631 569 545 Total Public Debt Service 486 726 680 776

Burden on Exchange Earnings (%) Public Debt Service 34.1 30.5 25.7 25.2

EXTERNAL DEBT Actual Debt Outstanding on September 30, 1976 Disbursed Only Percent World Bank/IDA 154.5 2.7 Governments and Arab Dev. Funds 4,604.4 81.2 Suppliers 685.9 12.1 Other MLT 226.0 4.0 Total Public MLT Debt 5,670.3 100.0

Short-term Debt (disb. only) 1,380.7

2/ Excludes "own-exchange" imports 2/ Includes errors and omissions ANNEX II Page 1 of 6

THE STATUS OF BANK GROUP OPERATIONS IN EGYPT

A. STATEMENT OF BANK LOANS AND IDA CREDITS

(as of April 30, 1977)

Amount in million US dollars Loan/Credit Less cancellations Numbers Year Borrower Purpose Bank IDA Undisbursed

Ln 243-UAR 1959 SCA Suez Canal Expansion 56.5 -- -- Cr 181-UAR 1970 UAR Nile Delta Drainage -- 26.0 8.3 Cr 284-UAR 1972 ARE Railways -- 30.0 1.9 Cr S-13-UAR 1/ 1972 ARE Cotton Ginning Engineering -- 0.2 -- Cr 393-UAR 1973 ARE Upper Egypt Drainage -- 36.0 18.7

Cr 412-UAR 1973 ARE Development Industrial Bank 2/ -- 15.0 2.1 Cr 423-UAR 1973 ARE Cotton Ginning Rehabilitation -- 18.5 6.2 Cr 437-UAR 1973 ARE Population -- 5.0 3.9 Cr S-15-UAR3/ 1973 ARE Talkha Engineering -- 0.4 -- Cr 484-UAR 1974 ARE Talkha Fertilizer -- 20.0 10.0

Cr 524-EGT 1974 ARE Ag/Ind Imports -- 35.0 2.9 Ln 1062-EGT 1974 ARE Ag/Ind Imports 35.0 -- 4.9 Ln 1064-EGT 1974 SCA Suez Canal Rehabilitation 50.0 -- 42.1 Ln 1085-EGT 1975 ARE Tourah Cement 40.0 -- 26.0 Ln 1098-EGT 1975 ER Railways II 37.0 -- 24.8

Cr 548-EGT 1975 ARE Telecommunications -- 30.0 27.0 Cr 576-EGT 1975 ARE DIB II 2/ -- 25.0 23.3 Ln 1239-EGT 1976 APA Alexandria Port 45.0 -- 45.0 Ln 1276-EGT 4/ 1976 ARE Fruit and Vegetable Dev. 50.0 -- 50.0

Cr 637-EGT 1977 ARE Upper Egypt Drainage II -- 40.0 40.0 Ln 1285-EGT 1977 ARE Upper Egypt Drainage II 10.0 -- 10.0 Ln 1292-EGT 1977 ARE Textile Rehabilitation 52.0 -- 52.0 Ln 1369-EGT 5/ 1977 AWA Alexandria Water Supply 56.0 -- 56.0 Cr 681-EGT 6/ 1977 ARE Education -- 25.0 25.0

Totals 431.5 306.1 480.1 Of which has been repaid 56.5 0.6 Total now outstanding 375.0 305.5 Amount sold 7.6 Of which has been repaid 6.0 1.6 Total now held by Bank and IDA 5/ 373.4 305.5 480.1

B. STATEMENT OF IFC INVESTMENTS (amount in US$ million) Year Obligor Type of Business Loan Equity Total

1976 Arab Ceramic Company Ceramic Industry 4.25 .75 5.0 (plus .635 contingency (5.635) commitment) 1/ 'Refinanced under Credit 423-UAR 2/ Formerly Bank of Alexandria 3/ Refinanced under Credit 484-UAR 4/ Third Window Loan 5/ Not yet effective 6/ Excluding exchange adjustments ANNEX II Page 2 of 6

C. PROJECTS IN EXECUTION I/

Cr. No. 181-UAR - Nile Delta Drainage I Project; US$26 million Credit of April 17, 1970; Effective Date: December 22, 1970; Closing Date: September 30, 1978

At present, about 65 percent of the project is completed; full com- pletion is expected by end-1979, i.e., 2-1/2 years behind schedule. However, procurement is proceeding satisfactorily and it is expected that the whole of the credit will have been committed by December 1977, and that disbursement will be completed by mid-1978. Due to inflation the local cost of the project has increased by 90 percent, from $116 million to $220 million. There is no foreign exchange cost overrun. Progress in project implementation during 1976 was satisfactory and, for the first time, the project reached the established annual target. Government has allocated the required local funds for the year 1977 for the implementation of the ongoing Bank/IDA financed drainage projects. It has also agreed that local funds required in the future would be included in the medium-term development plan.

Cr. No. 284-UAR - Egyptian Railway Project; US$30 million Credit of February 9, 1972; Effective Date: July 17, 1972; Closing Dates: (i) March 31, 1977, for track materials, locomotives and spare parts; and (ii) December 31, 1977, for signalling and telecommunications equipment and installation.

The project generally is being implemented satisfactorily. All procurement contracts have been awarded, and the credit has been fully com- mitted. To allow the remaining balance to be utilized, the Closing Date for the part of the Credit allocated to signalling and telecommunications items was extended from September 30, 1976, the original date, to December 31, 1977; the Closing Date for the other parts of the Credit, originally December 31, 1973, was extended for a fourth time to March 31, 1977.

Cr. No. S-13-UAR - Cotton Ginning Rehabilitation Engineering Project; US$175,000 Credit of November 17, 1972; Effective Date: June 15, 1973; Closing Date: November 30, 1973.

This credit was fully disbursed and subsequently refinanced under Cr. 423 below.

1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any prob- lems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 3 of 6

Cr. No. 393-UAR - Upper Egypt Drainage I Project; US$36 million Credit of June 8, 1973; Effective Date: November 28, 1973; Closing Date: December 31, 1979.

At present, about 30 percent of the project is completed; full com- pletion is expected by end-1980, i.e., 6 months behind schedule. About 50 percent of the contracts for equipment have been awarded. Foreign exchange costs have risen by about 14 percent almost entirely due to price increases of chemicals for bilharzia control. The foreign cost overrun of the bilharzia control program is being financed under the Upper Egypt Drainage II project (Loan No. 1285-EGT and Credit No. 637-EGT).

Cr. No. 412-UAR - Development Industrial Bank (formerly Bank of Alexandria) Project; US$15 million Credit of June 29, 1973; Effective Date: November 29, 1973; Closing Date: September 30, 1977.

The entire amount of the credit has been committed to subprojects. As of March 31, 1977, $12.9 million had been disbursed. The transfer of responsibility for this project to the newly established Development Indus- trial Bank became effective on March 28, 1977.

Cr. No. 423-UAR - Cotton Ginning Rehabilitation Project; US$18.5 million Credit of July 30, 1973; Effective Date: February 15, 1974; Closing Date: June 30, 1978.

The scaled-down project financed by IDA is estimated to be completed in June 1979 and the remainder of the full project financed by a loan from the Saudi Fund for Development, which became effective in July 1976, is expected to be completed by June 1981. The foreign cost of the project ($34.3 million) are now firm as all procurement has been completed but the local component continues to escalate mainly due to steady increase in the cost of civil works. By Presidential Decree of 1977 the Project Implementation Unit has been upgraded to the status of a General Authority for Rehabilitation of Ginneries which should give the management more freedom regarding financial and administrative matters.

Cr. No. 437-UAR - Population Project; US$5.0 million Credit of November 6, 1973; Effective Date: March 25, 1974; Closing Date: December 31, 1977.

The project had been greatly delayed by a shortage of local funds and by administrative problems. It is now being carried out with a reduced scope but substantially in accordance with a revised schedule.

Cr. No. S-15-UAR - Talkha Urea Fertilizer Engineering Project; US$400,000 Credit of November 20, 1973; Effective Date: April 24, 1974; Closing Date: March 31, 1975.

The credit was refinanced under Cr. 484 below. ANNEX II Page 4 of 6

Cr. No. 484-UAR - Talkha II Fertilizer Project; US$20 million Credit of June 24, 1974; Effective Date: January 22, 1975; Closing Date: April 1, 1979.

The project is proceeding well and mechanical completion by mid- 1978 appears feasible. Additional foreign exchange financing to cover a 32 percent cost overrun has been secured from the Arab co-lenders under the project.

Cr. No. 524-EGT and Ln. No. 1062-EGT - Agricultural and Industrial Imports Project; US$35 million Credit and US$35 million Loan of December 20, 1974; Effective Date: March 19, 1975; Closing Date: December 31, 1977.

The bulk of the procurement actions has been completed and dis- bursements are well advanced. One of the six surveys of industrial sub- sectors has been completed and the five others are expected to be completed by end-1977.

Ln. No. 1064-EGT - Suez Canal Rehabilitation Project; US$50 million Loan of December 20, 1974; Effective Date: April 21, 1975; Closing Date: June 30, 1978.

Disbursement of Bank funds has now begun, the Canal Authority having first used lower interest funds from other sources. Progress to date on project implementation has been good, and procurement on other items to be financed by the Bank is well advanced. A new project for the enlargement of the canal has been appraised and is expected to be presented to the Executive Directors early in FY78. The financial situation of the Borrower is sound; canal traffic and revenues are both higher than expected at appraisal.

Ln. No. 1085-EGT - Tourah Cement Expansion Project; US$40 million Loan of February 10, 1975; Effective Date: June 9, 1975; Closing Date: June 30, 1979.

Contracts have been awarded for all equipment packages, and disburse- ments are proceeding. Construction of civil works is under way but at a slow rate and is about six months behind schedule. Consultants which assisted in bid evaluation are now assisting in supervision of project execution and improvement of the existing plant.

Ln. No. 1098-EGT - Railways II Project; US$37 million Loan of April 2, 1975; Effective Date: August 20, 1975; Closing Date: December 31, 1978.

Progress on physical investment items under the project is generally satisfactory. However, the Egyptian Railways (ER) are experiencing opera- tional difficulties with a large number of locomotives out of service because of inadequate maintenance largely due to lack of spare parts. A program to remedy this situation is being discussed with Government and ER. Also, declining traffic and rising costs resulted in a worsening of ER's financial position. Government is considering an increase in rail tariffs proposed by ER. ANNEX II Page 5 of 6

Cr. No. 548-EGT - Telecommunications Project; US$30 million Credit of May 16, 1975; Effective Date: August 14, 1975; Closing Date: September 30, 1978.

Project works are about two years behind schedule, primarily because of initial delays in building construction. Construction has, however, now accelerated and is expected to proceed satisfactorily. Contract awards for cables have been largely completed and bids for telex equipment are being evaluated, both several months behind schedule.

Cr. No. 576-EGT - Second Development Industrial Bank (formerly Bank of Alexandria) Project; US$25 million Credit of July 30, 1975; Effective Date: February 19, 1976; Closing Date: October 31, 1979.

As of March 31, 1977, about $12.7 million had been committed under the project and $1.6 million had been disbursed. The transfer of respon- sibility for this project to the newly established Development Industrial Bank became effective on March 28, 1977.

Ln. No. 1239-EGT - Alexandria Port Project; US$45 million Loan of April 19, 1976; Effective Date: August 17, 1976; Closing Date: December 31, 1980.

Project implementation is slower than expected. Civil engineering consultants have completed the first phase of their work; proposals from management consultants have been invited. Prequalification of contractors for dredging and construction works has started. Tender documents for floating cranes are being prepared.

Ln. No. 1276-EGT - Fruit and Vegetable Development Project; US$50 million Third Window Loan of June 11, 1976; Effective Date: December 20, 1976; Closing Date: December 31, 1982.

The Project became effective December 12, 1976, two months behind schedule. In view of the complexity of the Project and the uncertainty caused by delay in approval of GOE 1977 budget containing necessary alloca- tions progress is generally satisfactory. This latter problem now appears to be resolved auguring improved future progress. Consultants have started their work with the Drainage Authority, as well as with Bank Misr, and the consultants for Nubariya Seed Production Company are being procured. About 75 percent of Nubariya Seed Company farm is presently cultivated. The new Agricultural Development Lending Unit in Bank Misr is rapidly coming to grips with its tasks and ensuring that the various agroindustrial sub- borrowers are proceeding as planned with their respective investments.

Ln. No. 1285-EGT and Cr. 637-EGT - Upper Egypt Drainage II Project; US$10 million Loan and US$40 million Credit, both of June 11, 1976. Effective Date: January 31, 1977; Closing Date: June 30, 1983.

This loan and credit were declared effective on January 31, 1977 and project implementation has commenced. ANNEX II Page 6 of 6

Ln. No. 1292-EGT - Textile Project; US$52 million Loan of September 20, 1976. Effective Date: February 20, 1977; Closing Date: June 30, 1980.

This loan has been declared effective on February 16, 1977 and project implementation has commenced. The two beneficiary companies have established effective project implementation units. About 75 percent of engineering drawings have been completed and contracts with contractors have been signed. Prequalification of the equipment suppliers has been completed and tender documents are expected to be issued shortly.

Ln. No. 1369-EGT - Alexandria Water Supply Project; US$56 million Loan of March 7, 1977; Effective Date: July 7, 1977; Closing Date: June 30, 1982.

Action on effectiveness conditions is being initiated.

Cr. No. 681-EGT - Education Project; US$25 million Credit of March 7, 1977; Effective Date: July 6, 1977; Closing Date: June 30, 1979.

Action on effectiveness conditions is being initiated. ANNEX III Page 1 of 2

ARAB REPUBLIC OF EGYPT

REGIONAL ELECTRIFICATION PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Project first identified: August 1976

(b) Time taken by REA to prepare project: Two months (August to October 1976)

(c) Date of First Bank Mission to consider Project (Appraisal Mission): October 20, 1976

(d) Date of completion of negotiations: April 29, 1977

(e) Planned date of effectiveness: October 1977

Section II: Special Bank Implementation Actions

None

Section III: Special Conditions

1. Special conditions of loan effectiveness are that:

(a) EEA and REA would execute a subsidiary agreement acceptable to the Bank (para. 58); and

(b) Government would set up a Special Fund for the project (para. 59).

2. Other special conditions are that:

(a) EEA would adopt an agreed system of key indicators to monitor its technical and financial performance and REA develop a system to monitor the National Rural Electrification Plan (para. 41);

(b) Government would take steps as necessary to separate EEA's fixed assets from those of REA (para. 45);

(c) Government would take steps as necessary to enable EEA to collect overdue electricity accounts and reduce its accounts receivable to the equivalent of 6 months sales of electricity by March 31, 1978 and to the equivalent of 3 months sales by December 31, 1978 (para. 46); ANNEX III Page 2 of 2

(d) Government would ensure that the arrangements for management and operation of project assets by and for the financial performance of distribution companies, if established, are satisfactory to the Bank (para. 48);

(e) EEA and REA would submit plans and schedules for the imple- mentation of their respective project components for Bank review (para. 57);

(f) Government would finance interest during construction on the part of the proposed loan for project items to be carried out by REA (para 58);

(g) EEA would establish the value of its assets and agree with the Bank on the principles for periodic asset revaluation by June 30, 1978 (para. 63);

(h) EEA would submit at the end of 1978 its plans to achieve a 9 percent financial return in 1979 and thereafter, every year, of financial plan for meeting this target rate of return in the following year; also, by the end of 1978, EEA would im- plement modifications in its accounting system (para. 63);

(i) EEA would submit for Bank agreement its plans to borrow, when- ever its internal cash generation would not be sufficient to cover its debt service at least 1-1/2 times in any future year, and revalue its foreign debts each year in accordance with current rates of exchange; REA would submit audited financial statements and REA audited accounts within six months of the end of each fiscal year (para. 64). ' Q A T T A R A A I I~~~~~~~~~~~~~~~~~~I fA5tr4A I EPRESSION E PR OJECT

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