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Document of The World Bank FOR OFFICIAt USE ONLY Public Disclosure Authorized s'j 3/03 - r ReportNo. 6641-EGT Public Disclosure Authorized STAFF APPRAISAL REPORT ARAB REPUBLIC OF EGYPT FOURTHPOWER PROJECT MAY30, 1989 Public Disclosure Authorized Public Disclosure Authorized Industryand EnergyOperations Division CountryDepartment III Europe,Middle East and North AfricaRegional Office Thisdocument has a retrcteddistibtion and may be usedby reeipIenonly in the performance of theirofficid dudes. Its contents may nototherwise be disclosed wthout Wodd Bank*uthiohaid. CURRENCY EQUIVALENTS Currency Unit = Egyptian Pound (LE) LE 1.00 = 1000 Milliemes = US$0.42 (Average FY88) US$1.00 = LE 2.41 (Average FY88-89) LE 1.00 = 100 Piastres (PT) FISCAL YEAR July 1 - June 30 WEIGHTS AND MEASURES MVA = Megavolt ampere (thousandkilovolt amperes = 103kVA) MW = Megawatt (thousandkilowatts - kW) kWh = Kilowatt hour (= 860.42 kcal) GWh = Gigawatt hour (million kilowatt hours) TWh = Terawatt hour (thousandGWh) kcals = Ki.localories(1 kcal = 3.97 Btu) m = Meter (3.281 feet) km = Kilometer (0.62 miles) ton = Tonne (1.1 short ton) TOE = Tons oil equivalent (10.415 x l'6 kcal) MTOE = Million TOE kV = Kilovolt (1,000 volts) Hz = Herz (cycle/second) sec = second 1 _ Liter (61.024 cubic inches) Nm3 = Normal m3 (35.31 cubic feet) rpm = Revolution per minute pf = Power factor I barrel (bbl) = 158.987 liters bar = bar (14.50 pounds/squareinch) m2 = Square meter (10.7b square feet) Ppm = parts per million PRINCIPAL ABBREvIATIONS AND ACRONYMS USED ADB = African Development Bank API = American PetroleumsInstitute BOD = Biological Oxygen Demand (ppm) COD = Chemical Oxygen Demand (ppm) EDA = Electricity DistributionAuthority EDC = Electricity DistributionCompany EEA = Egyptian ElectricityAuthority (Borrower) EGPC = Egyptian General Petroleum C.rporation EPS = Electric Power Systems of Egypt ESB = Electricity Supply Board of Ireland ISO = InternationalStandards Organization (Geneva) LPG = Liquefied Petroleum Gas MEE = Ministry of Electricityand Energv MUV = ManufacturingUnit Value Indcx OBI = Overseas Bechtei Incorporated of USA OEP = Organizationof Energy Planning PPC = Petroleum Pipeline Corporation ROR = Financial Rate of Return SW = Stone and Webster of USA FOR OFmFCIALUSE ONLY EGYPT FOIrRIlH POWER PROJECT STAFF APPRAISAL REPORT Table of Contents I. THE ENERGY SECTOR . ...................................I Introduction....... 1 ............ *1 Resource Base and Development Prospects .2.......... 2 ErnergySector Institutions .2 Energy Demand and Supply ........... ... 3 Energy Sector Policy ........... 6 Energy Prices 6................6 H. THE POWER SUBSECTOR .9............9 InstitutionialFramework ........................... 9 Egyptian ElectricityAuthority .. 9 Electricity DistributionAuthority .. 10 ExistitigPower Facilities .. 11 Electricity Consumption .. 11 Electticity Demand Forecast ..... .............. 11 ElectricityTariffs . .......................... 12 Power System Planning and I.'vestmentProgram . .13 Roleof IDA/Bank ....... ..... 14 Sector Issues and Bank Strategy . .14 111. THE PROJECT........................... 16 objectives and Rationale for Bank Financing .. 16 Project Description .. 16 Project Cost .... ...............................................18 Project Financing .. 20 Procurement .. 1 Disbursementsand Special Accounts .. 25 Project Implementation. 26 Environment .. 28 This report is based on the findings of a reappraisalmission to Egypt in April 1989, comprising Ms. R. Vedavalli, Senior Economist (Mission Leader), Meesrs. K.N. Sheorey, Senior Power Engineer, J. Maweni, Financial Analyst, and S. Hossain (Consultant). Secretarialsupport was provided by Mrs. E. Dennis. This document has a restricted distribution and may be used by recipientsonly in the performance of their officialduties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. -iii- Table of Conitents (Cont'd.) Page No. IV. FINANCIAL ASPECTS.................................. ............... 30 Accounting and Management InformationSystems ....................30 Audit ................0 ................. 0 ................. 0............ 30 Insurance. .*.. .*.. .. .. .... ... .. 31 Past Financial Performance ....... ...... ............ .......... 31 Future Financial Performance ............ ....... ....... 34 Sources of Finance .... .. ......... ......................... ......... *.. 36 V. PROJECT JJUSTIFICATION....................... .. .... .... .. 38 Load Forecast ................................ ... ......... 38 Least Cost Analysis ............................................... # ...... 38 Return on Investment ........................................ ..... .......... 38 Risks . ..............................................................39 VI. AGREEMENTS REACHED AND RECOMMENDATION ..................40 Recommendation.... ... ............ ..... 41 0 S6 911 - iv - ANNEXES 1.1 History of Domestic Fuel Prices 2.1 EEA OrganizationChart (IBRD 30867:2) 2.2 EDA OrganizationChart (IBRD 30867:1) 2.3 Variot.sData for Steam Turbine Power Stations, Various Data for Combustion Turbines, and Selected Data on Hydropower Stations 2.4 Electricity Demand 2.5 Electricity Tariffs 2.6 Power Subsector Investment Program 3.1 Project Description 3.2 Project Cost Tables 3.3 DisbursementSchedule 3.4 Project ImplementationSchedule 3.5 Project Monitoring Guidelines 3.6 EnvironmentalAspects 4.1 EEA: Actual and Projected Income Statements 4.2 EEA: Actual and Projected Balance Sheets 4.3 EEA: Actual and Projected Statement of Sources and Applicationsof Funds 4.4 EDCs: Actual and Projected Income Statements 4.5 EDCs: Actual and Projected Balance Sheets 4.6 EDCs: Actual and Projected Statement of Sources and Applicationsof Funds 4.7 Assumptions Underlying Financial Projections 5.1 Rate of Return Analysis 6.1 Selected Docuients and Data Available in Project File MAP IBRD 19891R - Egyptian InterconnectedPower System I) 6 911 EGYPT STAFF APPRAISAL REPORT FOURTH POWER PROJECT I. THE ENERGY SECTOR Introduction 1.01 Egypt is a net oil exporter and its energy sector, in particular, its petroleum subsector, plays a key role in Egypt's development. Even with declining oil prices since 1985-86, the petroleum seccor at present accounts for 5.4h of total GDP, 37% of total merchandise exports and continues to be a major source of external earnings. Despite the Government of Egypt's (GOE) energy policy goal to maintain the current level of oil production at 44 MTOE per year in the current plan period to 1991-92, GOE faces a number of serious problems in the energy sector that are causing severe strains on the economy and threateningEgypt's prospects for economic development. Some of these problems such as low world oil prices are outside Egypt's control, while others, such as rapid growth in energy demand and inefficienciesin energy use result from low level of domestic energy prices. Since world oil prices are a moving target, domestic energy prices as percenta-e of world market prices continue to vary with changes in internationaloil prices. With world oil prices averaging around $18 per barrel at present, the weighted average of domestic petroleum product prices in Egypt is about 36%. Electricity tariffs average about 24% of the long-run marginal cost (LRMC). Low energy prices have encouraged rapid growth in demand and wasteful use of energy; promoted questionable industrial investmentsbecause artificiallylow energy prices conceal the true economic costs of investments;placed a severe strain on Governmenitfinances, and finally, diverted potential petroleum exports to the domestic market with adverse impact on the balance of payments and the economy. There is, therefore,an urgent need to address the major issues facing the sector and develop a coherent energy sector strategy. The energy sector issues include: energy pricing, demand management and conservation, investment strategy and resource development,in particular gas development, institutionalreforms and operational efficiency. 1.02 Over the last five years, energy policy dialogue between the Bank and the GOE have focussed on the issues outlined above (Para 1.01) and emphasized the need for the adoption by the Government of a comprehensive long-term energy policy, includinga program to adjust domestic prices to economic levels. In 1987, the Bank and the Government mutually agreed to the 0-OE's objective of raising energy prices to economic levels latest by the end of fiscal year 1994-95, as part of a medium term economic reform program. As a OS6 9M -2 - first step, the GOE increased petroleum product prices by an average of 66% and electricity tariffs by 29% with effect from May 1, 1987. Subsequent to the May 1987 comprehensive increases, gasoline prices were increased by about 40% in May 1988. Again with effect from March 24, 1989, GOE increased gas oil prices by 44b, kerosene prices by 40b, fuel oil and natural gas prices by 252 and raised electricity tariffs by an average of 31b. In addition, in May 1989 the GOE has reaffirmed its official medium-term energy sector strategy which includes three major objectives: (a) to adjust energy prices to reach the level of internationalprices by June 30. 1995; (b) to encourage efficient use of energy through demand management and energy conservationmeasures; and (c) to provide economic and diversified domestic energy supplies and increase exportable oil surplusesby implementingan effective natural gas development strategy. Resource Base and Development Prospects 1.03 Egypt's main energy resources