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Domia of The World Bank FOR OMCIL USE ONLY Public Disclosure Authorized Report No. P-4323-PNG REPORTAND RECOMMENDATION OF TlIE Public Disclosure Authorized PRESIDENT OF THE INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVEDIRECTORS ON A PROPOSEDLOAN IN AN AMOUNTEQUIVALENT TO US$28.5 MILLION Public Disclosure Authorized TO THE INDEPENDENTSTATE OF PAPUA NEWGUINEA FOR A YONKI HYDROELECTRICPROJECT May 21, 1986 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. CURRENCYEQUIVALENTS Currency Unit = Kina (K) = 100 toea (t) Average 1985 December 1985 US$1 = K 1 US$1 = K 1 K 1 = US$1 K I = US$1 FISCAL YEAR July 1 to June 30 through 1977 January 1 to December 31 beginning in 1978 WEIGHTS AND MEASURES m = meter (3.281 feet) m3 cubic meter (35.31 cubic feet) m3s = cubic meter per second (35.315 cubic feet per second) km kilometer (0.62 miles) km2 = square kilometer (0.386 square miles) kWh = kilowatt hour (860-42 keals) GWh = gigawatt hour (1,000,000kilowatt hours) kW = kilowatt (1,000 watts) MW = Megawatt (1,000 kilowatts) kV kilovolt (1,000 volts) KVA = kilovolt-ampere(1,000 volt-amperes) TCF trillion cubic feet (0.283 x 10 cu m) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ADAB - Australian Development Assistance Bureau ADB - Asian Development Bank BCL - Bougainville Copper Limited CIF - Cost, Insurance, Freight EIB - European Investment Bank ELCOM - Electricity Commission EPU - Energy Planning Unit MME - Ministry of Minerals and Energy NDS - National Development Strategy OECF - Overseas Economic Cooperation Fund PNG - Papua New Guinea SMEC - Snowy Mountains Engineering Corporation of Australia UNDP - United Nations Development Program FOR OFFCIAL USE ONLY PAPUANEW GUINEA YONKI HYDROELECTRICPROJECT Loan and Project Summary Borrower: Independent State of Papua New Guinea (PNG) Beneficiary: The Electricity Commission (ELCOM) Amount: US$28.5 million Terms: 20 years, including 5 years of grace on repayment of principal, at the standard variable interest rate. Relending: The Government will onlend the proceeds of this loan to ELCOM at its applicable rate for power projects (currently llX) or at the prevailing Bank rate, whichever is higher, for the same term as the proposed Bank loan. ELCOM will assume the foreign exchange risk. Project Description: The project comprises: (a) constructionof a 60 m high earth- fill dam on the Ramu River with a total embankmentvolume of about 1.8 million cu m, a spillway system and outlet struc- ture, and associated works; (b) installationof two additional 15 MW generating units together with step-up transformers at the existing Ramu I power station; (c) relocation of a part of the Highlands highway and local access roads, together totalling 22 km; (d) engineeringand consulting services; (e) a training program; (f) technicalassistance for institutionalsupport; and (g) a rural electrification component. Benefits: The proposed loan supports a major hydroelectricpower development which would reduce ELCOM's dependence on costly imported oil and replace it with indigenoushydro resources. The project would also provide adequate training and institu- tional support to assist ELCOM's development of local staff resources, and develop an institutionaland policy framework for a future rural electrificationprogram. Risks: The project faces no special risks. ELCOM has endeavored to minimize the project risks during constructionparticularly with respect to the treatment of the embankment foundation. A grout curtain has been designed to fill cavities in the con- glomerates with cement and possible sand lenses with chemical grout. The design is satisfactory. ELCOM has also acted promptly in prepariza-to upgrade the operating voltage for the transmission lines to 132 Kv in readiness for the commissioning of the power station. This document has a restricted distribution and may be used by recipientsonly in the performance of their officialdutiea Its contents maynot otherwise be disclosedwithout World Bank authoriatdon. - ii - Estimated Costs: Local Foreign Total - -- US$ million -- Civil works 14.0 21.0 35.0 Electrical and mechanical 2.0 5.0 7.0 Engineering and consuLting services /a 3.0 5.6 8.6 Construction-relatedestablishment expenses 5.5 - 5.5 Training and institutional development 9.4 5.1 14.5 Rural electrification 1.2 2.4 3.6 Base Cost /b 35.1 39.1 74.2 Contingencies Physical 4.2 5.0 9.2 Price 7.7 8.5 16.2 Total Project Cost 47.0 52.6 99.6 Interest during construction 7.3 10.5 17.8 Total financing required 54.3 63.1 117.4 Financing Plan: Local Foreign Total --- US$ million -- IBRD loan 12.7 15.8 28.5 ADAB grant - 1.0 1.0 EIB loan 7.0 9.0 16.0 OECF loan 11.2 26.8 38.0 ELCON internal cash generation 23.4 10.5 33.9 Total 54.3 63.1 117.4 Estimated Disbursement: Bank FY 1987 1988 1989 1990 1991 1992 …---- -- US$ Lnillion------- Annual 1.4 3.1 6.0 8.0 8.6 1.4 Cumulative 1.4 4.5 10.5 18.5 27.1 28.5 Economic Rate of Return: 16.52 Staff Appraisal Report: No. 6029-PNG, April 21, 1986. Map: IBRD No. 19385 /a Includes US$1 million Project Preparation Facility from the Bank, which will be refinanced from the proposed Bank loan, and US$1 million equivalent grant from ADAB. /b Includes import duties and taxes of about US$1.2 million equivalent. REPORT AND RECOMMENDATIONOF THE PRESIDENT OF THE INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVEDIRECTORS ON A PROPOSEDLOAN TO THE INDEPENDENTSTATE OF PAPUA NEWGUINEA FOR A YONKI HYDROELECTRICPROJECT 1. I submitthe followingreport and recommendationon a proposedloan to the IndependentState of Papua New Guinea (PNG) for the equivalentof US$28.5million, to help financea Yonki HydroelectricProject. The loan will have a term of 20 years, including5 years of grace,at the standardvariable rate. The Governmentwill onlend the proceedsof the proposedloan to the ElectricityCommission (ELCOM) at its applicablerate for power projects(cur- rently llZ)or at the prevailingBank rate, whicheveris higher,with the same term and grace periodas the proposedBank loan. ELCOM will assume the foreignexchange risk. The OverseasEconomic Cooperation Fund (OECF)of Japan,and the EuropeanInvestment Bank (EIB)will cofinancethis project, providingabout US$38.0million and US$16.0miLlion, respectively. The OECF fundswill be at an annual interestrate of 4% for 30 years,including 10 years grace. The EIE funds will be at 5.8Z interestfor 20 years, including5 years'grace. The AustralianDevelopment Assistance Bureau has providedabout US$1.0million of grant funds for projectpreparation. PART I - THE ECONOMY 2. The last economicreport, "Papua New Guinea: DevelopmentPolicies and Prospectsfor the 1980s"(Report No. 3544a-PNC),was distributedto the ExecutiveDirectors in December1981. This sectionreflects the findingsof subsequenteconomic missions and draws upon variouscountry documents and recentIMF work. A CountryEconomic Memorandum for Papua New Guineais now under preparation.Details of recenteconomic data can be found in Annex I. Structureand Performanceof the Economy 3. Papua New Guinea is a land of numerous,widely scattered islands, ruggedand sometimesimpenetrable mountains, and rich valleysand coastal plains. It is favoredwith abundantrainfall, considerable mineral resources, and forestryand fisheryresourcer of good commercialpotential. The capital city, Port Moresby,with a populationof about 134,000,is an enclave,with no road links to other parts of the country,and is the largesturban settlement in what remainsan overwhelminglyrural society. Per capitaGNP in 1984 was estimatedat US$760. Despitethis relativelyhigh figure,Papua New Guinea remainsan e_ceedinglypoor country,where the majorityof the multitribal societylives at a level of, or scarcelyabove, subsistence. The figuresfor monetaryincomes are biasedupwards by the inclusionof the incomesof expatriates,and thus give a misleadingindication of the incomelevel of the nationals. The populationin 1984 is officiallyestimated at 3.3 million, spreadamong 19 provinces(with populationsranging from 26,000to 310,000), each with its own assemblyand separateadministrative apparatus. - 2 - 4. The modern sector of the economy is dominated by the enclave sector, particularlycopper mining and associated investments,and by the public sector. In the late 1970s copper, mined by Bougainville Copper, Ltd. (BCL), accounted for about 15Z of GDP; by 1982 this had fallen to 7.8% as prices declined sharply and as the more productive veins were being exhausted. However, new investments in 1982, together with some improvementsin copper and gold prices, stabilized BCL's contribution to CDP in 1983. With declining ore grades and prices, average performance was considerably lower in 1984-85 (about 5%). Construction of the new Ok Tedi mine generated about 12Z of GDP in 1983 (largely through capitaL investments representing roughly 45% of PNG's total investments),thus more than compensatingfor the decline in BCL. Since gold production came onstream in June 1984, Ok Tedi's contribution to value- added in the mining sector has grown to a point where, together with new copper production, it should reach about 12.5% of GDP in 1987. Nonmining industry accounts for about 9Z of GDP (low for a country of PNG's per capita income), while government services, heavily dominated by expatriates in the upper ranks, account for about one quarter of the total. Strikingly, the pri- mary sector, which empLoys about 85% of the labor force, contributes only about 35% of GDP, a large portion of which is in the subsistence sector. 5. PNG's growth record has been quite mixed; for the decade of the 1970s as a whole, real per capita growth was negative at -0.2% p.a. despite the strong growth in copper exports. The latter half of the decade was even worse in per capita income terms (-0.5% p.a.), despite some good years, particularly 1978-79. The terms of trade effects on GDP during the 1970s were roughly neutral.