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RESTRICTED FILECOPY ReportNo. P-400 Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracyor completeness.The report may not be published nor may it be quoted as representing their views. INTERNATIONALBANK FOR RECONSTRUCIION AND DEVELOPMENT Public Disclosure Authorized REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE Public Disclosure Authorized EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CENTRAL AFRICAN POWER CORPORATION OF NORTHERN RHODESIA AND SOUTHERN RHODESIA Public Disclosure Authorized September 23, 1964 FILECOPY REPORTAND RECOMIENDATIONS OF THE PRESIDENT TO TM3EXECtJTIVE DIRECTORS ON A PROPOSED LOANTO TUEECITRALL AFRICAN POWJER CORPORATIOIY OF NORTHERNRHODESIA AND SOUTHERN RHODESIA 1. I submit the following report and recommendations on a proposed loan of $7.7 million to the CentralAfrican Power Corporationfor the Second Kariba project in Northern Rhodesia and Southern Rhodesia. PART I - HISTORICAL 2. In June 1956, the Bank made a loan of $80 million (Loan No. 145 RN) to the FederalPower Boardof the Federation of Rhodesia and Nyasaland for the construction of the Kariba hydroelectricproject (first stage). The loan wiasguaranteed by the Federationof Rhodesia and Nyasaland and the United Kingdom. The project, which was to serve NorthleniRhodesia and Southern Rhodesia,has now been virtually completedand the Bank loan is fully disbursed. When the Federationwas dissolvedat the end of 1963, the Governmentsof NlorthernRhodesia and Southern Rhodesia agreed to operate and develop the Kariba power system under their joint ownership and control. A new Central African Power Corporation (CAPC) was established and the assets and liabilitiesof the Federal Power Board were transferred to it. Under a loan assumption agreenent and guarantee agreements, which were signed with the Bank on December 30, 1963, CAPC has assumed the Federal Power Board's obligations to the Bank and Nqorthern Rhodesia and Southern Rhodesia have each guaranteed a half of the payments due under the Bank loan. The United Kingdom guarantee has remained unchanged (R 63-140, circulated on Decerber 11, 1963). 3. In 1963, before its dissolution,the Federal Power Board had approached the Bank for a loan of $7.7 million to assist in financingthe constructionof a second transmissionline from Kariba to the Copperbelt in Northern Rhodesia and the expansion of existing substations. CAFC sub- sequently confirmed this request and preliminary discussions were held with CAPC representuatives at the Bank in April, 1964. The governments of the United Kingdoim,Noruhern Rhodesia and Southern Rhodesia indicated their willingnessto guarantee the proposed loan on the same basis as their exist- ing Zuaraftees for thle first 7Kariba loan. The Bank's staff visited Northern Rhodesia and Southern Rhodesia in April and May for an appraisal of the proposed project and an examinationof the economic position and prospects of the two countries. The loan negotiations were conducted in Washington in August. 14. The proposed lending would be the Bank's sixth loan in the consti- tuent territories of the former Federation of Rhodesia and Nyasaland. The earlier loans (amounting to $146.6 million), which are guaranteed by the - United Kingdom, are fully disbursed. Of a total outstanding amount of about $121.7 million on August 31, 1964, about $64.3 million is held by the Bank and the remainder is due to participants. The Bank has already made the following loans with the guarantee of the United Kingdom: -2- Amount as of August 31, 1964 (in Year Borrower Purpose U.S, $ m. equivalent) 1952 Colony of Southern Rhodesia Power 28.0 1953 Territory of lIorthernRhodesia Railways 14.0 1955 East Africa High Conumssion- Railways and Harbors 24.0 1956 Federal Power Board (Federa- tion of Rhodesia & Nyasaland) Power 80.0 1958 Federation of Nigeria Railways 28.0 1958 Federation of Rhodesia & Nyasaland Railways 19.0 1960 Federation of Rhodesia & Nyasaland Agriculture 5.6 1960 Colony and Protectorate of Kenya Agriculture and roads 5.6 1961 Uganda Power 8.4 1961 Colony of British Guiana (net of cancellation) Agriculture 0.9 1961 Trinidad and Tobago Electric Power 23.5 1962. Colony and Protectorate of Kenya Agriculture 8.4 1963 State of Singapore Electric Power 15.0 1963 Swaziland Electric Power 4.2 1963 State of Malta Electric Power 7.5 1963 Mauritius Electric Power 7.0 Total (net of cancellation) 279.1 of which has been repaid 35.8 Total now outstanding 243.3 Amount sold 155.7 of which has been repaid 35.3 120.4 Net amount held by thle Bank 122.9 The total amount held by the Bank includes $41.3 million not yet disbursed. There has been no IDA lending in Northern Rhodesia or Southern Rhodesia. PART II - DESCRIPTIONOF THE PROPOSEDLOAN >5. The main characteristics of the loan are as follows: BORRONER: Central African Power Corporation. GUARANTORS: United Kingdom. Northern Rhodesia and Southern Rhodesia will each also guarantee one-half of the payments in connection with the loan. AIDTJNT: The equivalent in various currencies of $7.7 million. -3- PURPOSE: To assist the Central African Power Corporation in financing the construction of a second transmission line from Kariba to the Copperbelt in Northern Rhodesia and the expansion of existing substations. AMORTIZATION: In 44 semi-annual instalments beginning on M4arch 1, 1968 and ending on September 1, 1989. DITEREST RATE: 5i 5Jper annum. COIITIENT CHARGE: 3/8 of 1% per annum. PAYMEINTDATES: March 1 and September 1. PART III - LEGALINSTR'NTITS AND LEGALAUTHORITY 6. A draft Loan Agreement between CAPC and the Bank and three draft Guarantee Agreements, one betwkeen Northern Rhodesia and the Bank, one bet,ween Southern Rhodesia and the Bank, and one between the rJited Kingdom and the Bank, are attached (Nos. 1, 2, 3 and 4). The Toan Agreement 7. The draft Loan Agreement is substantially similar to the loan agree- ment dated June 21, 1956 between the Ban'1 and the Federal Power Board in connectionwith the original Kariba Project, as amended by the Loan Assumption Agreement dated December 30, 1963 between CAPC, the Bank and the United Kingdom. A number of changes to the Loan Regulations have been necessary to adapt them for use with three guarantors and to reflect the relationship between thie United Kingdom and Northern and Southlern Rhodesia. These changes are embodied in Schedule 3 to the draft Loan Agreement. Attention is also drawn to the following provisions in the draft Loan Agreement: (a) the Borrower undertakesto carry out Stage 2 of the program (as defined in Section 1.02) in pace with the growth of power demand; and, before completion of the program, to undertakoeany other power project only with the prior agreementof the Bank (Section 5.08); (b) the Borrower undertakes to maintain prices for the sale of electricity at a level which will cover operating expenses and debt service and produce a reasonable surplus (Section 5.09); (c) the Borrower undertakes (unless otherwise agreed with the Bank) to r.2intain rates at levels calculated to provide surplus cufficient to finance at loaot be-f of the coat 9,C $tzgp 2 of the pro2re.;;, Er not to borro ,;orothan half the cost of Stage 2 (Section 5.10); (d) the Borrower undertakes (unless otherwise agreed with the Bank) not to incur long-terra indebtedness after the completion of Stage 2 of the program if its net revenues for any twelve consecutive months out of the fifteen- month period last preceding the date of incurrence of such indebtedness would amount to less than one-and-tlhree- tenths times the maximumdebt service requirements in any future year on this and other long-term indebtedness (Section 5.11). The Guarantee Agreements 8. The draft G-arantee Agreement to be entered into betw,een the United Kingdom and the Bank is in substantially the same form as the BankTs guarantee agreements with the United Kingdom in connection with the original Kariba Projectand with other loans to UTnited Kingdom dependent territories. The United Kingdom will, as usual, give the Bank a letter confirming the inter- pretation to be given to Section 2.02 of the Guarantee Agreement (No. 5)a 9. The draft Guarantee Agreements to be entered into between Northern Rhodesia and the Bank and Southern Rhodesia and the Bank are substantially similar to each other and to the guarantee agreements in connection with the original Kariba loan entered into with each of these territories at the time of the dissolution of the Federation of Rhodesia and Nyasaland. Each territory guarantees one-half of the payrments due under the Loan Agree- ment and the Bonds (Section2.01). Section2.02 of each of theseGuarantee Agreementsprovides that the territoryinvolved will take all actionon its part necessary or desirable to assure the punctual performance of all the other covenants and agreements of tileBorrower as set forth in the Loan Agreement and in the Bonds and agrees to refrain from taking any action which will interfere with the punctual performance of any of such covenants and agreements. Section 2.03 of each of these Guarantee Agreements provides that, if additional funds are needed for carrying out the project, each territory will make arrangements in conjunction with the other territory, satisfactoryto the Bank, to provide such funds. In addition,in side letters similar to those in connection with the original Kariba project which wiere signedat the time of the dissolutionof the Federation,Morthern and Southern Rhodesiawill agreeto obtainthe approvalof the Bank beforemaking any change in the legislation or IntergovernmXental Agreement establishing CAPC whichwould substantiallyalter the organization,powers, responsibilities or immunitiesof CAPC (No.6 and No. 7). 10. The Reportof the Committeeprovided for in ArticleIII, Section4 (iii)of the Articlesof Agreementof the Bank is attached(No. 8). PART rI - APFRAISALOF TIM PROPOSEDLOAN The Project 11.