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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT BURUNDI - RWANDA - ZAIRE RUZIZI II REGIONAL HYDROELECTRIC POWER PROJECT May 5, 1983 Report No EAF 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.

2 Currency Equivalents Burundi Franc (FBu) Rwanda Franc (FRw) Zaire (Z) FBu 1 - US$0.01 FRw 1 - US$0.01 Zi - US$0.17 US$1 - FBu 87 US$1 - FRw 87 US$1 - Z5.9 Measurements GWh gigawatt hour - 1,000,000 kilowatt hours kcal kilocalorie British thermal units kv kilovolt - 1,000 volts kva kilovolt ampere - 1,000 volt amperes kw kilowatt - 1,999 watts kwh kilowatt hours - 1,000 watt hours MWh megawatt hour - 1,000 kilowatt hours MW megawatt - 1,000 kilowatts toe ton of oil equivalent - 10,500,000 kilocalories ton metric ton US tons Abbreviations and Acronyms AfDB African Development Bank BDEGL Banque de developpement des Etats des grands lacs BEI Banque europ6enne d'investissement CCCE Caisse centrale de cooperation economique CEPGL Communaute economique des pays des grands lacs DANIDA Danish International Development Association DHER Departement de l'hydraulique et de l1'lectrique rurale EDF Electricite de France EGL Energie des pays des grands lacs ELECTROGAZ Etablissement public de production, de transport et de distribution d'eau, d'electricite et de gaz FED Fonds europeen de developpement FAC Fonds d'aide et de cooperation FAO Food and Agriculture Organization Government Governments of Burundi, Rwanda and Zaire KBO Organization for the Management and Development of the Kagera River Basin KfW Kreditanstalt fur Wiederaufbau ONATOUR Office nationale de la tourbe REGIDESO Regie de distribution d'eau et d'l1ectricit6 SINELAC Socifte internationale d'electricite des pays des grands lacs SNEL Societe nationale d'electricite USAID United States Agency for International Development UNIDO United Nations Industrial Development Organization Financial Year = Calendar Year REGIDESO (Burundi), ELECTROGAZ (Rwanda) and SNEL (Zaire) SINELAC

3 FOR OFFICIAL USE ONLY BURUNDI - RWANDA - ZAIRE RUZIZI II REGIONAL HYDROELECTRIC POWER PROJECT STAFF APPRAISAL REPORT Table of Contents I, THE ENERGY SECTOR Page No. Background... 1 Local Energy Resources......, 1 Energy Balances Burundi.d... 2 Rwanda wanda Zaire (Kivu)... 2 Recommendations to Improve the Energy Sector. 3 Burundi Rwanda... 3 Zaire (Kivu) II. POWER SECTOR BACKGROUND General... 3 International Institutions... 4 Power Supply Entities... 4 Historical Demand for Electric Power. 4 (i) Burundir.,d (ii) Rwanda... 4 (iii) Zaire (Kivu) Existing Generating Facilities... 5 Works in Progress... 5 (i) Burundi... 5 (ii) Rwandaa... 6 (iii) Zaire (Kivu) Rural Electrification... 6 (i) Burundi... 6 (ii) Rwanda and Zaire (Kivu)... 7 Government Strategies in the Power Sectors... 7 (i) Burundi... 7 (ii) Rwanda wa... 7 (iii) Zaire (Kivu)... 8 IDA Strategies in the Power Sectors... 8 Regional Development Plan... 8 (i) Burundi (ii) Rwanda... 9 (iii) Zaire (Kivu)... 9 This report was prepared by J. Boutan, mission leader, and C.H.A Killoran, who visited Burundi, Rwanda and Zaire in July and November, 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.

4 - ii - III. THE PROJECT Background Objectives of the Project.. 11 Main Features Environmental Considerations.. 12 IV. PROJECT COST AND FINANCING Cost Estimates Basis for Estimates Financing Plan..., Implementation Schedule and Status of Engineering.. 15 Procurement Disbursements V. THE BORROWERS AND THE REGIONAL IMPLEMENTING AGENCY The Borrowers SINELAC - The Regional Implementing Agency.. 18 Training Audit.. 19 Budget.. 20 Insurance.. 20 Project Monitoring VI. FINANCIAL ANALYSIS Financing Plan Tariffs..., 23 (i) Burundi: REGIDESO.. 25 (ii) Rwanda: ELECTROGAZ (iii) Zaire (Kivu): SNEL.. 26 Convertibility of Currencies.. 27 SINELAC's Future Operations and Financial Position.. 27 VII. JUSTIFICATION FOR THE PROJECT Power Market (i) Burundi (ii) Rwanda (iii) Zaire (Kivu) (iv) Interconnected System Requirements for the Project Comparison of Alternatives - Least Cost Solution Rate of Return Risks..., 32 VIII. AGREEMENTS REACHED AND RECOMMENDATION Agreements Reached Recommendation

5 - iii - LIST OF ANNEXES Annex 1 Energy Resources in Burundi, Rwanda and Zaire (Kivu) 2 Burundi Commercial Energy Balance Rwanda Commercial Energy Balance Regional Organizations 5 The Three National Electricity Companies: REGIDESO, ELECTROGAZ, SNEL 6 Interconnected System Electricity Sales, Burundi 7 Interconnected System Electricity Sales, Rwanda 8 Interconnected System Electricity Sales in Zaire (Kivu) 9 Generating Facilities, Burundi 10 Generating Facilities, Rwanda 11 Generating Facilities in Zaire (Kivu) 12 Project Description 13 Financing Plan 14 Implementation Schedule 15 Disbursement Schedule 16 SINELAC - Legal and Organizational Framework 17 Project Monitoring 18 SINELAC'S Forecast Income Statements, Funds Flow Statements, Balance Sheets Assumptions in SINELAC's Financial Forecasts 20 Determination of the Minimum Purchase Level from Ruzizi II by REGIDESO, ELECTROGAZ, and SNEL 21 Sales of Ruzizi I and Ruzizi II Facilities in the Period Comparison of the Economic Cost of Electricity Sold to Consumers from Ruzizi I and Ruzizi II 23 REGIDESO's Power Income Statements, Funds Flow Statements, Balance Sheets ELECTROGAZ's Income Statements, Funds Flow Statements, Balance Sheets SNEL's Bukavu - Uvira - Goma (Kivu) Forecast Income Statements, Funds Flow Statements, Fixed Assets Interconnected System Electricity Demand 27 Economic Comparison between the Ruzizi II and Rwegura Projects 28 Diesel Generating Station - Estimate of Cost 29 Least Cost Solution 30 Economic Rate of Return for the Proposed Project 31 Sales of Ruzizi II, with an Annual Rate of Growth of 10% in Regional Demand until Related Documents and Data Available in Project File MAP IBRD Ruzizi II Regional Hydroelectric Power Project

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7 BBURUNDI-RWANDA- ZAIRE RUZIZI II REGIONAL HYDROELECTRIC POWER PROJECT I. THE ENERGY SECTOR Background 1.01 Burundi, Rwanda and Kivu province of Zaire lie just south of the equator in eastern central Africa, and in general have similar geographical features, with mountain peaks (elevation 2,700 m) and high level plateaus. Burundi with an area of 27,800 sq km and a population of 4 million, and Rwanda with an area of 26,338 sq km and a population of 4.9 million, are quite densely populated compared to Kivu with an area of about 257,000 sq km and a population of 4.3 million. The growth rate of the three popuilations, averaging about 2.2% per annum, is low compared to other African countries. Local Energy Resources 1.02 The principal resource in the Great Lakes region 1/, firewood, with its by-product charcoal, is rapidly being depleted in Burundi and Rwanda, and in isolated areas of Kivu. The potential for more hydro-electric development exists in all three countries but is costly due to the sites having low capacity, and being widely scattered. The best hydroelectric resource potential is in the rivers which form the borders of Rwanda with Tanzania and Zaire. There is little potential for oil, although there is a unique potential source of methane in the deep waters of Lake Kivu. Coal is mined at Kalemie, Zaire, about 300 km from Kivu province,and although large deposits of peat have been found in Burundi and Rwanda, the potential has not been fully developed. Hot springs occur in several areas of Burundi and in the northern part of Rwanda, suggesting the possibility of geothermal potential, but to-date this potential has not been fully explored In June 1982 the Bank puliished Report No entitled Burundi: Issues and Options in the Energy Sector, and a second Report No entitled Rwanda: Issues and Options in the Energy Sector. In addition, in December 1981, the Bank prepared an Introductory Energy Sector Review of Zaire. Thus, in view of the considerable data available elsewhere, this section of the report on the energy in the region has been abridged, and a summary of the energy situation may be found in Annex 1. 1/ Throughout this report "the region" refers to Burundi, Rwanda and Kivu province of Zaire.

8 -2- Energy Balances Burundi 1.04 The demand for commercial energy grew very little between 1973 and 1977 (Annex 2). However, the general economy of Burundi responded to the efforts of the Government to improve the industrial and commercial sectors to such an extent that there was an overall increase in energy demand in 1978 over 1977 of about 25% in petroleum products, and 15% in electricity. In addition, the use of peat grew from 10 tons of oil equivalent (toe) in 1977 to 510 toe in 1978 following the formation of Office Nationale de la tourbe, ONATOUR, (Annex 1). During 1979, Tanzania and Uganda were at war, which prevented further growth in the region and the total energy requirements were reduced about 5%. The use of petroleum products fell from 28,470 toe to 26,120 toe (about 8%) while the annual demand of electricity rose from 8,914 to 9,370 toe (about 5%). The use of peat became more accepted, and increased 33% from 510 toe to 680 toe. Following the suppressed demand for petroleum products in 1979, there was significant increase from 26,120 toe to 34,790 toe (about 33%) in 1980, while the demand for electricity rose about 24%, and the demand for peat reached 1,020 toe - a 50% increase. The total energy increase of about 31% in 1980 is misleading, because of the suppressed demand in If the period 1977 to 1981 is considered,the increise in total commercial energy requirement rose an average annual rate of about 15% while electricity alone rose at an average annual rate of about 11%. About 75% of commercial energy used in 1981 was in the form of petroleum products, while electricity provided about 22% and peat about 3%. Rwanda 1.05 As in the case of Burundi, the demand for commercial energy in Rwanda in 1979 was influenced by the events in Tanzania and Uganda (Annex 3). There was zero growth in the demand for commercial energy in 1977 over the demand in 1976, while the growth rates were 13% in 1978, 5% in 1979, and 13% in During the period 1976 to 1980 the increase in commercial energy demand rose at an average annual rate of about 7% while electricity alone rose at an average annual rate of about 10%. Zaire (Kivu) 1.06 The growth in demand for energy in Zaire was small prior to 1975, and due to the unfavorable economic climate with the fall in the price of copper, there was virtually zero growth in The internal disturbances during 1977 and 1978 affected Kivu province as it did the remainder of the country, and the demand for energy actually fell because of disruptions to the economy. Data from which a commercial energy balance could be compiled for Kivu is not available although it is known that the use of petroleum products was reduced significantly, because of transportation difficulties from the seaport at Matadi on the Atlantic coast.

9 -3- Recommendations to Improve the Energy Sector Burundi 1.07 The report on energy contains a number of recommendations to improve Burundi's energy sector. Insofar as wood is concerned, attention should be given to training foresters, improving the forestry extension program, the need to introduce conservation methods, and improvement in chlarcoal manufacturing methods. Additional studies are required to promote the sale of peat to industry and the domestic users. With regard to petroleum, in view of the high cost of products from Kenya, the report contains a recommendation to investigate the possibility of purchasing oil on the open market and bringing it in across Tanzania. The principal issue in the electric power sector is the lack of a planning unity to draw up a power sector development plan and to determine priorities on the various alternative sources of potential hydro sites. IDA is presently appraising a third Technical Assistance Credit which would have as a component, assistance to the Ministry of Planning for apropriate energy studies. Rwanda 1.08 Similarly, Rwanda's report on energy contains a number of recommendations to improve the energy sector, in particular, a substantial increase in forestry extension work, improvement in cook stoves and conservation of forests. The need to identify and develop the peat resources of the country was emphasized as a means of reducing the deforestation now becoming a serious problem. As in Burundi, Rwanda must pay a high cost for petroleum products imported from Kenya, and the report suggests that an investigation be made on the possibility of purchasing oil on the open market and shipping it across Tanzania. With regards to electricity, the recommendations cover overall sector planning and the integration of responsibilities now dispersed among several government institutions; - Planning (planning), Natural Resources (identification of hydro sites), Public Works (construction), and ELECTROGAZ (operation and maintenance). Zaire (Kivu) 1.09 The introductory review contained a number of recommendations to improve the energy sector of Zaire. Most of these do not apply to Kivu province, but those that would affect this part of the country are: -- the formation of a national energy policy; the promotion and conservation of wood as an energy resource; generation of electricity by mini-hydro; and the generation of electricity in thermal plants fired by wood in regions remote from major power transmission systems. General II. POWER SECTOR BACKGROUND 2.01 The availability of electric power to consumers in the region is in general limited to the major cities and towns, and it is estimated

10 - 4 - that less than 2% of the total population in the region has access to electricity. International Institutions 2.02 Two organizations coordinate energy matters on a regional basis. The Energie des pays des grands lacs (EGL) which reports to the Communaute gconomique des pays des grands lacs (CEPGL) formed by Burundi, Rwanda, and Zaire, to coordinate energy matters affecting the Great Lakes area; and the Organization for the Management and Development of the Kagera River Basin (KBO) made up of representatives of Burundi, Rwanda, Tanzania and Uganda, to oversee the development of the Kagera River basin which has its source in Burundi and forms the border between Rwanda and Tanzania. A description of these organizations may be found in Annex However, the foregoing organizations were designed and funded to carry out studies, are not designed to construct and operate power facilities. Therefore, in order to develop, own and operate the proposed Ruzizi II Project, it has been agreed by the three countries that a new company, Socifte internationale d'electricite des pays des grands lacs (SINELAC), would be formed to construct the project, and upon completion, to supply electricity to the three power authorities (para ). Power Supply Entities 2.04 The organizations which contribute to the electric power sector in each country are as follows: Burundi - Regie de distribution d'eau et d'electricit6 (REGIDESO), Rwanda - Etablissement public de production, de transport et de distribution d'eau, d'electricite et de gaz (ELECTROGAZ); and the Kivu province of Zaire - the Socifte nationale d'electricite (SNEL). A description of the organizations may be found in Annex 5. Historical Demand for Electric Power (i) Burundi 2.05 The average annual growth in the demand for electricity in Burundi was about 10% during the past four years, even though the load growth in 1979 was only 5% when economic growth reduced due to the hostilities between Tanzania and Uganda which interrupted transportation facilities and slowed commerce to a minimum. The greatest increase was in industry which averaged 15% over the 4-year period, and reached 17% in the past two years. The growth in demand from the domestic sector averaged about 12% annually, with no significant changes over the period. The provision of electricity to public buildings and street lighting has grown at a rate of about 3% annually, and REGIDESO's own needs for lighting and pumping water increased at an average annual rate of about 5%. Results of the first six months operations indicate that this rate may be exceeded in Details are shown in Annex 6. (ii) Rwanda 2.06 The annual increase in the consumption of low voltage electricity in Rwanda grew at almost the same rate as the number of consumers. The number of consumers in this category rose from 2,445 in 1975 to 5,097 in

11 an average annual rate of 13.0% -- while the consumption rose from GWh to 25.9 GWh -- an average annual rate of 13.1%. Growth in high voltage energy (basically industrial) demand was somewhat slower however, with an average annual growth rate of 7.7% raising consumption from 24.3 to 38.0 GWh in the same period. The number of high voltage consumers rose from about 79 to 102, an average annual rate of about 5.2%. Thus, the total demand on the system during the past six years grew at an average annual rate of 9.7% and the number of consumers grew at an average annual rate of about 13.4%. The electricity sales for Rwanda from 1975 to 1980 appear in Annex 7. (iii) Zaire (Kivu) 2.07 Records of electricity sales when the operations were under the responsibilitv of REGIDESO (of Zaire) are not available. However, based on the meagre uiata that was found, growth in sales of electrical energy in the Kivu province of Zaire prior to 1980 has been virtually zero. In view of the high cost and difficulty of providing fuel oil to an existing brewery in Bukavu, an order was placed for electric boilers to replace the existing oil-fired boilers, and these were put into operation at the end of The town of Goma was supplied with diesel generated electricity until December 1980 when a connection was made to the Gisenyi generating plant in Rwanda. The electricity sales in the Kivu province of Zaire are shown in Annex 8. Existing Generating Facilities 2.08 Until recently, the main sources of electricity for the region have been two hydroelectric generating stations constructed. by the Belgian Societe des forces hydroelectriques de l'est du Congo: one at Ruzizi at the outlet of Lake Kivu on the border between Rwanda and Zaire, and another, Ntaruka, in northern Rwanda. The Ruzizi generating station (two 6.3 MW units, 1978 and two 7.8 MW units in 1972) is now owned and operated by Zaire's electricity utility, SNEL, while the Ntaruka generating station (two 3.75 MW units, 1958 and one in 1962) is now owned and operated by ELECTROGAZ. Since then, the Mukungwa hydroelectric generating station, (two units of 6 MW) located at the outlet of Lake Luhondo immediately downstream of the Ntaruka station was completed in February At about the same time, REGIDESO in Burundi commissioned the Mugere hydroelectric generating station (four 2 MW units) about 25 km south of Bujumbura. All of the foregoing plants are interconnected by 110 kv, 70 kv, and 30 kv transmission lines. REGIDESO, ELECTROGAZ and SNEL also operate several diesel-driven electric generating units in scattered locations throughout the country. In summary, the generating capability in the region is as follows: Burundi MW (Annex 9); Rwanda - 30 MW (Annex 10); and Zaire - 50 MW (Annex 11). Works in Progress (i) Burundi 2.09 Burundi imports almost all its electric power. However, to ensure that at least a strategic portion of its needs are under its control, it is contemplating the construction of the Rwegura hydroelectric

12 power generating station (18 MW), to be financed by the Federal Republic of Germany through Kreditanstalt fur Wiederaufbau (KfW), Caisse centrale de cooperation 'conomique (CCCE), Fonds europeen de developpement (FED), and the Kuwait fund. IDA was requested to consider providing part of the funds required for the financing of this project, and a mission was sent to Burundi (May 1981) to appraise the project. Following appraisal, it was found that the proposed Ruzizi II hydroelectric power generating station (the now proposed project) was the least cost solution for the provision of electrical energy to the region, because it could provide about three times the amount of energy at about the same capital cost, and IDA therefore withdrew its interest in Rwegura (para 2.16, 2.17 and 7.12). There are no other capital works underway in Burundi, except the projects described under the rural electrification program (paras ). (ii) Rwanda 2.10 While there are no active generation projects in Rwanda, several transmission line projects at 70 kv, 30 kv and 15 kv are being constructed or will be started shortly. The second Gisenyi hydroelectric project (1.1 MW) financed by KfW has not yet started, but the transmission line linking the nearby Ghira site to Ruhengeri is expected to be completed by The Federal Republic of Germany through KfW will also fund repairs to the distribution system in Gisenyi, Kibuyi and Nyanza. Belgium has provided BFr 25 million for the construction of a line running north from Rwinkwavu and in the vicinity of Kibungo, for which completion is expected in July Switzerland has provided a grant of SwFr 12 million for the construction of a transmission line running north from Kibuye, to be completed by the end of In addition to the above, FED has provided funds for the following transmission line projects to be finished by the end of 1984: Rwamagana south-east to Rusumo on the Burundi border; and Ntaruka north-west to the Uganda border. (iii) Zaire (Kivu) 2.11 The only active power project in Kivu at this time is a 110 kv transmission line from Katana to Goma, which is being financed and constructed by Yugoslavia. Completion is expected at the end of At the same time, Yugoslavia will upgrade the line from Ruzizi I to Katana now operated at 70 kv, to 110 kv (Map IBRD 15919). Rural Electrification (i) Burundi 2.12 Rural electrification is the responsibility of the Departement de l'hydraulique et de l1'lectrification rurale (DRER). DHER is presently studying sites at Busiga, Bubanza, Ruyigi, Kigwena and at three other sites, for the construction of mini-hydro schemes (100 kw to 150 kw), but the selection of proposed sites and the order of priority is in general determined by the various lending agencies, some of which are encouraging the replacement of petroleum and wood products by electricity No consideration has been given to the maintenance and operation of these projects, nor have administrative and financial procedures been

13 set up to ensure successful operation of the projects. More appropriately, responsibility for these projects should be that of REGIDESO, which has the technical competence to ensure successful operation, and the managerial and financial capability to integrate these new projects into the broad general planning of the electrification of the country as a whole Two engineers financed by Belgium, are presently preparing preliminary studies of ten potential hydropower sites in addition to those identified by the Federal Republic of Germany through KfW and FED (Annex 1). The Japanese Government is now providing ten l00-kw, thirty-four 45-kW, and ten 17-kW diesel generating sets to provide electrical energy to hospitals, missions, and other agencies in the public sector. Although REGIDESO has made the necessary arrangements for shipment and installation, operation and maintenance will be the responsibility of the individual recipients, and because no energy will be sold, REGIDESO will have no further involvement with these units. (ii) Rwanda and Zaire (Kivu) 2.15 Rwanda and Kivu have no rural electrification programs equivalent to those being carried out in Burundi. Government Strategies in the Power Sector (i) Burundi 2.16 The Burundian Government has given top priority to the development of the Rwegura hydroelectric power project in view of the overall importance of the electricity sector to the economic development of Burundi. The expected growth in demand for electricity in the neighboring countries of Burundi, Rwanda and Zaire which are supplied from the same generating station at Ruzizi, requires the immediate development of new facilities so that income-earning opportunities may continue to expand, and serve the basic needs of the population. Although Burundi lacks a comprehensive energy development plan, the Government is well aware of its overdependency on imported energy and wishes to replace this drain on the economy by means of indigenous energy sources. The creation of ONATOUR (Annex 1) was a major step in developing its peat resources, and the proposed Rwegura project (para 2.09) is another stage in the attempt to reduce its dependency on foreign sources for the supply of energy, which it regards as being vital to the economy and security of Burundi The Government is well aware of the problems involved in the development of its own hydroelectric power potential and of the Rwegura project in particular. The complex nature of the Rwegura project with its 50m high rock-fill dam and 2200m long tunnel may result in significant delay in the scheduled completion. Even after completion, Burundi will continue to be dependent on the importation of electric power from Zaire. Thus, in order to meet its growing demand for electricity, Burundi has recognized that the Ruzizi II Project is needed, and has therefore joined with Rwanda and Zaire to develop it.

14 -8- (ii) Rwanda 2.18 The Rwandan Government also gives extremely high priority to the development of the Ruzizi II hydroelectric project in view of its expected increase in demand for electricity, necessary for the economic development of Rwanda. It is therefore concentrating its efforts on the development of the proposed project. (iii) Zaire (Kivu) 2.19 Kivu province is relatively cut off by distance from Kinshasa and, in the past, the Zairian Government has not been active in respect to Kivu's energy problem. However, it now recognizes the need for additional electrical power generating facilities in the region, and has joined with Burundi and Rwanda in the promotion of the Ruzizi II project. IDA Strategies in the Power Sector 2.20 IDA has not extended credits to the power sectors of either Burundi or Rwanda, but in April 1982, IDA made a Credit No ZR for the Shaba Power System Rehabilitation Project in south-east Zaire. IDA recognizes the importance of maintaining an adequate supply of electrical energy from an indigenous source to the domestic and industrial sectors of the Great Lakes region, and it is aware that the supply of electricity will become insufficient, as the demand in the region increases. It also recognizes that the rapid rise in the cost of oil during the past few years has taxed the financial resources of the governments in the region. Therefore, by providing a reliable supply of hydroelectric energy, IDA expects to foster the growth in the economy of the region, by facilitating industrial expansion, (i.e. glass factory, para. 7.04) which, in turn, will provide new sources of income and employment IDA has also assisted in meeting the projected energy shortages in the region through forestry projects in Burundi and Rwanda (Annex 1). IDA's continued lending in the sector would assist in funding the region's requirement for energy, for technical assistance and training to develop local expertise to fill middle and senior management positions. Regional Development Plan 2.22 Although EGL has been in operation since 1976, it has not developed an overall long-term development plan to supply electricity to the region, and has concentrated all of its efforts on a short-term plan, namely the construction of Ruzizi II hydroelectric power project. After both the Rwegura and the Ruzizi II power projects have been completed, no additional generating capacity is expected to be necessary in the region until after Thus the task facing each of the three electricity authorities will be the extension of distribution to potential new consumers, by the construction of new substations and transmission facilities. (i) Burundi 2.23 With regard to the foregoing, IDA received and subsequently approved a request from the Government of Burundi for a PPF in the amount of US$400,000 to finance the following:

15 (ii) Rwanda - a study to examine the need, to prepare an estimate of cost and a schedule for the construction of a 110 kv transmission line from the Ruzizi II generating station, either to Rwegura from which power would be transmitted to Bujumbura over the proposed Rwegura-Bujumbura line, or alternately to Bujumbu-a directly; - a study of the economic location, cost and schedule of proposed lines interconnecting Cibitoke, Bubanza, Rugombo and Muzinda to the national grid; - a study of the tariff structure of REGIDESO; - the services of an accountant to assist REGIDESO for about one year IDA received and subsequently approved a request from the Government of Rwanda for a PPF in the amount of US$440,000 to finance the following: (iii) Zaire (Kivu) - a study to determine the estimated cost of rehabilitating the transmission system and carry out the recommendations contained in a report now under preparation, funded by the Government of Switzerland; - a study to determine the technical and economic feasibility of rehabilitating the Ntaruka hydroelectric power project, built in 1958; - a study of the cost to provide a supply of day-to-day consumables for ELECTROGAZ. - a study to determine the technical and economic feasibility of enlarging the interconnected grid by extending eight 15 kv and 30 kv transmission lines to serve an additional 18 towns. - a revaluation of the assets of ELECTROGAZ. - a study of the tariff structure of ELECTROGAZ IDA received and subsequently approved a request from the Government of Zaire for a PPF in the amount of US$440,000 which they feel necessary to carry out works in the Kivu province of Zaire as follows: - a study of the technical and economical feasibility of the rehabilitation of the Ruzizi I hydroelectric plant (built in 1958), together with an estimated cost of providing a supply of spare parts and consumables. - a study of the rehabilitation of the transmission and distribution systems in Bukavu, Goma and Uvira;

16 a study of the economic and technical feasibility of replacing the existing 15 kv transmission line from Bujumbura to Uvira with a new 30 kv line. - a study of the technical and economic feasibility of constructing a 6 MW thermal electric generating plant fueled by wood, including a study and recommendations on the necessary forest reserves for the facility The Governments feel that their requests for studies to enlarge their distribution systems and to rehabilitate the existing facilities, are urgently needed. These, together with the studies of training needs which form a component of this project would provide a reasonable degree of security for their electricity services. The Governments expect that the work based on these studies would be carried out in parallel with the construction of the Ruzizi II project, so that when the power from Ruzizi II becomes available, new consumers in the area would receive immediate benefits, and receive a more reliable electric power supply. IDA believes that certain items of work are essential to the project. Thus during negotiations, agreement was reached with the three Governments that the various tasks for which PPFs were requested and approved (paras 2.23, 2.24 and 2.25) would be carried out before the commissioning of the Ruzizi II project. Background III. THE PROJECT 3.01 The expected growth in demand for electrical energy led the three governments to form Energie des pays des grands lacs (EGL) in 1974 (para. 2.02) whose prime responsibility was to plan the least cost method of providing electricity to the Great Lakes region. As a result, FED was requested to provide funds for a study of a possible hydro development on the Ruzizi River to supply the future needs of the region. Tractionel (Belgium), was retained to perform this study, and their 1977 report proposed the development of 120 MW on the Ruzizi River. IDA reviewed the report and when it was found that the region did not require such a large increase in the supply of electricity, IDA advised EGL that the project was too large, and that further studies on a smaller and less costly project should be made. In 1979, EGL requested Tractionel to review their previous studies, and a new study financed again by FED, covering the Ruzizi II Project (40 MW) which developed only a portion of the head at the site, was completed in The detailed feasibility study confirms that the Ruzizi II hydroelectric project was the least costly means of providing electric power to the region by As a result, the Governments of Burundi, Rwanda and Zaire requested IDA to give consideration to providing part of the funds necessary to construct the Ruzizi II hydroelectric generating station. Objectives of the Project 3.03 The main objective of the project is to provide an additional supply of electrical energy to Burundi, Rwanda and Zaire, by early 1987, so as to sustain the economic growth of the industrial, commercial and

17 domestic sectors of the country, and the proposed project is the least costly means of meeting this objective. To achieve the above, the project has set up a new international company, SINELAC, which will produce and sell power to the local electrical utilities. Other objectives are to train managerial and technical staff with the help of financial and technical advisers provided under the technical assistance component of the project, and to determine the type and scope of training needed to ensure continued reliable service. Main Features 3.04 The main features of the project may be found in Annex 12, and are summarized as follows: - a dam 11 m high; - an overflow spillway and two 8 m x 6.5 m sluice gates; - a 500 m tunnel 6 m in diameter; - a 50 m steel penstock; - a powerhouse; - two 13.3 MW hydroelectric generating units with space for a third similar unit; - a switching station; - 15 km of 110 kv transmission line; - local access roads; - staff housing; - consulting engineering; - a management team; - a panel of experts; - a study of training needs; and - consultants for a tariff study for SINELAC A concrete gravity dam would be constructed at the head of a series of rapids on the Ruzizi River to regulate the river flow for the generation of electric power. The main river control is at the Ruzizi I generating station at the outlet of Lake Kivu about 15 km upstream, where with the large area of the lake, maximum regulation may be obtained with a fluctuation in water level of about one meter. Thus, only daily pondage would be provided at Ruzizi II, and the maximum water level would exceed the historical maximum water level at the site by about 2.2 m. A free overflow section and 2 sluice-gates would be incorporated in the dam with sufficient capacity to pass the maximum expected flood flow. An intake, with trash racks and gates would control the flow through a 6 m diameter tunnel 500 m long to a conventional above ground powerhouse located near the foot of the rapids. Two 13.3 MW generating units, driven by Francis turbines designed to operate under an average head of 30 m would be installed in the powerhouse, together with all necessary control and protection equipment. Space would be provided for a third similar unit to be erected at some future date when the demand for electricity warrants its installation (about 1993). The initial two-unit installation would provide about 140 GWh of electrical energy and about 200 GWh with the third unit, in an average water year. Three single-phase transformers and one spare transformer would be located in an outdoor switching station adjacent to the powerhouse, raising the power produced to 110 kv for transmission to

18 Rwanda and Zaire via the Mururu sub-station, adjacent to Ruzizi I. Provision would be made in the switching station for the addition of facilities to transmit power to Burundi, when the transmission line has been completed (para. 2.26) In addition, the project would include a technical assistance component, as well as consultants for the detailed design and supervision of the project. The technical assistance would comprise the provision of technical and financial management assistance during the construction of the project, and after commissioning, to assist SINELAC in the operation and maintenance of the facility. The services of a panel of experts would also be required to advise on technical aspects of the dam. The project also includes a study of training needs and the preparation of a suitable training program for the three electricity authorities. Environmental Considerations 3.07 The dam and generating station would have little effect on the daily lives of the inhabitants. in the immediate vicinity of the proposed site, because the river water upstream of the dam would be raised only about 2 m above its present maximum level during a peak flood. Compensation would be paid for the removal of about 30 dwellings housing 200 persons, which require relocation to provide space for construction activities and access roads. All water diverted into the powerhouse to drive the turbines, would be returned to the river about 600 m downstream, unadulterated. A fish ladder would be incorporated in the facility to permit the passage of fish around the powerhouse and dam during the migration season During negotiations, agreement was reached with SINELAC that after completion of the project, the dam would be inspected periodically by a panel of experts and the reports on their findings would be submitted to IDA for comment The project would be located on an international inland waterway. Therefore, the downstream states have been informed of the project, and they have expressed no objections. The Governments of Zaire and Rwanda have also agreed not to act or allow any action to be taken which would affect the availability of the flow from Lake Kivu which is essential to the project. Cost Estimates IV. PROJECT COST AND FINANCING 4.01 The total project cost is estimated to be US$84.9 million equivalent, not including duties and taxes which the three Governments have agreed would not be levied on the project. The project foreign exchange component is estimated to be US$72.7 million equivalent, about 86% of total project cost, not including interest during construction. The estimated cost of the principal features of the project are shown in a table on the following page.

19 Estimate of Project Costs (US$ thousands) Foreign as % of Local Foreign Total Total Civil Works 5,000 31,300 36, Hydraulic Equipment 200 2,800 3, Turbines 200 4,700 4, Generators 200 4,200 4, Powerhouse Electrical 200 2,000 2, Switching Station and Transmission Line 700 2,900 3, Roads and Housing , Engineering 500 3,500 4, Technical Assistance 2,100 3,000 5, BASE COST 9,600 55,300 64, (September 30, 1982 prices) Contingencies Physical 1,000 6,800 7, Price 1,600 10,600 12, TOTAL PROJECT COST 12,200 72,700 84, INTEREST DURING CONSTRUCTION (Capitalized) 46,000-46,000 0 TOTAL FINANCING REQUIRED 58,200 72, , Note: 1) No contingencies assumed on technical assistance. Physical contingencies of 15% added to civil works and roads and housing; 10% on other works. Price contingencies were added to base cost plus physical contingencies as follows: 1982 and %; %; %; %. 2) Duties and taxes would not be levied on the project. 3) Technical assistance includes management team, panel of experts, study of need for a training school, SINELAC's audit during construction period, and PPF of US$195,000, and working capital of US$1.2 million (equivalent). 4) The estimates of cost have not been presented in local currency because of the frequent and steep devaluations of the zaire relative to the US Dollar, resulting from the country's economic condition.

20 Basis for Estimates 4.02 Project cost estimates were prepared by the consultant Tractionel of Belgium, on the basis of costs in mid In view of the significant size of this investment relative to the economy of the area, there was a need to verify the accuracy of the cost estimates, and in order to obtain a second opinion, IDA requested EGL to retain consultants to review and update the cost to September 1982 prices. Upon completion, these revised cost estimates by Lahmeyer of Germany were reviewed by IDA, and were found to be reasonable. Physical contingencies of 15% were applied to the cost of the civil works and roads and housing, because of the possible large variation in quantities due to foundation and structural conditions. Physical contingencies of 10% were applied to all other items. Except for the technical assistance component, price contingencies of 8% in 1983; 7.5% in 1984; 7% in 1985; and 6% in 1986 and 1987 were applied to the consulting engineer's base cost plus physical contingencies to obtain the total project cost of US$84.9 million. Interest during construction would be capitalized, and would amount to US$46.0 million over the eight-year grace period for the onlending of the IDA credit, and the ten-year grace period for the FED credit. Financing Plan 4.03 The proposed IDA credits of US$ 45.0 million would finance 53% of the estimated project cost (US$84.9 million) and 62% of the estimated foreign component of the project (US$72.7 million), in both cases excluding interest during construction. It would be used to finance: a) 87% of the total expenditure for the civil works contract; and b) 100% of the foreign cost of technical assistance and repayment of the three PPFs of US$65,000 (US$195,000) A proposed loan of US$1.9 million equivalent from the Banque de developpement des Etats des grands lacs (BDEGL) would be used to finance 100% of the cost of the road and housing contract A proposed loan of US$16.8 million equivalent and a grant of US$3.7 equivalent from FED would be used to finance: a) 100% of the cost of the hydraulic equipment; b) 100% of the cost of the turbines; c) 100% of the cost of the external electrical equipment; and d) 100% of the cost of engineering design and supervision A proposed grant from the Italian Government in the amount of US$8.5 million equivalent would be used as follows: a) 100% of the cost of the generators; and b) 100% of the cost of the powerhouse electrical equipment.

21 The Governments of Burundi, Rwanda and Zaire would each provide a sum equivalent to US$3.0 million to cover the local cost for the civil works and the technical assistance component xternal financing, US$75.9 million, would cover 100% of the foreign exchange and 26% of local costs equivalent to 90% of the estimated project cost, excluding interest during construction. The IDA credit to each of the governments would be on standard terms of 50 years including a 10-year grace period with an annual service charge of 3/4% on the principal withdrawn plus a commitment charge of 1/2% on the principal not withdrawn. A condition of effectiveness would be the fulfillment of all conditions precedent to disbursement of cofinancier's funds. Funds from FED would be in two parts: a grant of US$3.7 million equivalent, and a loan of US$16.8 million equivalent on the basis of 1% per annum for 40 years, with a 10-year grace period. The BDEGL loan would be at a rate of 7.5% per annum for thirteen years including a three-year grace period, and the Italian funding is a grant. The project cost borne by the governments would be financed from the electric energy sold by REGIDESO, ELECTROGAZ and SNEL. A summary of the financing plan, as detailed in Annex 13, follows. Summary of Financing US$ millions) Local Foreign Total IDA BDEGL FED Italy Burundi Rwanda Zaire SINELAC Implementation Schedule and Status of Engineering 4.09 The implementation schedule is based on full commercial operation of the two generating units by March 31, All three governments are anxious that the schedule be maintained because of the potential power shortages which may occur during the dry season of 1986 (July-September), and which, with additional load growth, undoubtedly would be more severe during the dry season of There is a good possibility of adhering to the project construction schedule, because the civil works are relatively simple, and the underground works are not extensive. The main source of delay might be due to the fact that the site is land-locked, and the difficulties of transportation from Mombasa to the site. Details of the schedule are given in Annex 13.

22 A feasibility study for the proposed Ruzizi II project was completed by Tractionel of Belgium in February of 1980, with funds provided by FED, and since that time, Tractionel has completed the preliminary design and prepared and issued the contract documents. The cost of engineering services, travel and living expenses, including an allowance for the analysis of bids, is estimated to be US$370,000. Based on 39 man-months of service, the average cost for engineering would be about US$9,500 per man-month. EGL, acting for SINELAC, has decided that the Tractionel contract would be terminated after assisting in bid evaluation, and that new consultants would be retained to take part in the analysis of tenders and to provide all further design and supervision of construction until commissioning of the facility. EGL has been informed that the new consultants would have to be acceptable to IDA. Of the total of about 300 man-months which would be required by the consultants for the design and supervision of this project, approximately 170 man-months would be expended in the Great Lakes region and the remainder in the consultant's home offices. The total cost of the engineering contract (including preliminary design and contract documents) is estimated to be US$4.0 million, of which US$3.5 million would be in foreign exchange. The average cost per man-month including the services, travel and miscellaneous expenses is estimated to be US$13, At IDA's request, EGL requested Tractionel to provide additional engineering services, including the redesign of the switching station and the design of a fish ladder, at an estimated cost of US$80,000 based on services at US$9,100 per man-month. EGL also engaged the services of Lahmeyer, for a lump sum cost of DM 72,000 (US$32,000), to review the design criteria and assumptions so as to ensure that the various components ofl the project would be capable of carrying out the desired functions and that a successful project would ensue. This consultant also prepared a new estimate of capital cost for the project for a fee of DM 88,000 (US$40,000). This work has now been completed and the comments, where appropriate, would be incorporated into the design of the project. Cost of the foregoing work by Tractionel and Lahmeyer, and the cost of a legal adviser to provide advice and draft the agreement among the Governments to form SINELAC, the by-laws of SINELAC (para. 5.02) and the sales contracts (para. 6.06), have been provided by three PPFs issued by IDA in the amount of US$65,000 to each country In accordance with IDA requirements, SINELAC agreed during negotiations to retain the services of a management team to continuously review the technical and financial aspects of the project, and to provide advice on construction and design problems during various stages of the project (para. 5.05). It is estimated that the 12 man-years of technical assistance which would be required during the implementation of the project, and the additional six man-years of technical assistance during the first two years of operation would require foreign funds of about US$2.4 million and local funds of about US$650,000 - an average rate of about US$14,000 per man-month for consulting services, travel and living expenses In accordance with IDA practice, the design and general conception of the dam has been reviewed by a separate consultant (para. 4.11). In addition, during negotiations SINELAC agreed to retain a panel

23 of experts who would make periodic inspections of the dam during construction and afterwards, so as to ensure that all safety precautions have been undertaken. The total cost for these services is estimated to be about US$200,000 or US$12,000 per man-month IDA has estimated that a study of the training needs of the region, and the possibility of constructing a school and training facilities would require from 8 to 12 man-months and is estimated to cost US$100,000 or about US$8,500 per man-month including services, travel and living expenses. Procurement 4.15 Procurement for work and material to be financed under the IDA Credit would be limited to the civil works contract and the technical assistance component of the project. Tenders for the civil works contract have been called from prequalified contractors, who have responded to a published notice in accordance with IDA guidelines for international competitive bidding. Tenders for the civil works contract have been received and although a full analysis has not been completed, preliminary indications are that the estimate of cost for this component of the project financed by IDA, would not be exceeded. Procurement for mechanical and electrical equipment for the project would be in accordance with the individual lenders' requirements. The technical experts funded under the technical assistance component, would be selected in accordance with IDA guidelines on the use of consultants by the Bank and its borrowers. Disbursements 4.16 The proceeds of the three credits would be disbursed over six years on the following basis: 87% of the total expenditure for the civil works, and 100% of the foreign cost of technical assistance. The remaining costs would be disbursed from BDEGL, FED and Italian funds and from the three Governments (para ). All expenditures would be fully documented by SINELAC. The closing date for the credits would be September 30, 1989 and any savings which may accrue due to lower purchase prices, or if all of the contingency funds are not utilized, would be cancelled. The disbursement schedule, found in Annex 15, differs from the average power project and Zaire project disbursement profiles, because IDA would be providing funds for only the civil works, which would be below the total project cost,and the technical assistance component would be spread more or less evenly over several years (paras ).

24 The Borrowers V. THE BORROWERS AND THE REGIONAL IMPLEMENTING AGENCY 5.01 The borrowers would be the Republic of Burundi, the Republic of Rwanda and the Republic of Zaire, which would receive from IDA SDR 13.8 million (US$15 million) each and would onlend the SDR 41.4 million (US$45 million) to SINELAC. SINELAC - The Regional Implementing Agency 5.02 On July 9, 1982 in Brussels, after a thorough review by EGL and the co-lenders including IDA, the Ministers of Energy of Burundi, Rwanda and Zaire approved a draft agreement among the three Governments to form the international company, SINELAC, with a view to the construction and operation of the Ruzizi II hydroelectric power generating facilities. They further agreed to obtain formal ratification of the final agreement and SINELAC's by-laws by the three Governments. During negotiations it was agreed that SINELAC would take all necessary steps to acquire land and rights in respect of land needed for carrying out the project and operating the Ruzizi II facilities. Evidence of the transfer of such land and rights to SINELAC would be a condition of effectiveness of the project as well as the presentation of an "accord de siage" concluded between the host countries, i.e the Republics of Zaire and Rwanda, and SINELAC. The general legal organizational framework of SINELAC is given in Annex SINELAC, with its head office in Bukavu, Zaire, would be an international public company established for a 50-year renewable period, and the three Governments of Burundi, Rwanda and Zaire would contribute equally to its capital. Although SINELAC would be formed initially for the Ruzizi II project, it could acquire and manage other electric power installations. SINELAC would be governed by the rules of the agreement and its own by-laws, and for cases that are not covered by these rules and regulations by the Investment Code of the Communaute economique des pays des grands lacs (CEPGL), and by the laws of the country of its headquarters, Zaire. SINELAC would operate as a commercial entity with financial objectives defined initially in relation to the project and its electricity tariffs would be established at a level which would produce a satisfactory rate of return for the project (para. 6.04) SINELAC would be governed by a General Assembly consisting of the three Ministers of Energy. This General Assembly would meet once a year and its responsibility would be to appoint or dismiss the directors, the general manager, the account controllers (commissaires aux comptes) and the auditors, and to discuss the financial statements of each previous year. The Board of Directors would consist of six members, two from each country. A three member management committee would be in charge of SINELAC's day-to-day operations. SINELAC's General Manager would be appointed by the General Assembly and the Board of Directors would have the responsibility of appointing and removing the other two members of the management committee. The three members of the committee would be from different countries. During negotiations it was agreed that SINELAC would consult with IDA before appointing a new general manager, a technical

25 director or a financial and administrative director. Appointment of a general manager satisfactory to IDA would be a condition of effectiveness of the proposed project EGL Is now in charge of the preparation of the proposed Ruzizi II project, and FED has suggested that for continuity, the present general manager of EGL (a Zairian) be appointed general manager of SINELAC. This is acceptable to the borrowers and the lenders, including IDA, and the first General Assembly of SINELAC would confirm his appointment. During negotiations SINELAC provided assurances that it would employ consultants satisfactory to IDA to carry out the project. FED has already funded and recruited an administrative and financial assistant to EGL's general manager, who would be employed eventually by SINELAC. However additional management expertise is required during the construction period and for the first two years of operation of Ruzizi II. Therefore additional assistance to the general manager would be provided by expatriates financed by IDA (para. 3.06). It was agreed at negotiations that a management team composed of one civil and one mechanical and electrical engineer, and a chief accountant, all with appropriate experience from an internationally known utility company, would be retained by SINELAC to supervise the work of the consultants (para 4.10) in its dealings with the contractors, to monitor the construction and advise and assist in the initial operation of the facility. The civil engineer would be appointed by December 31, 1983, the chief accountant by June 30, 1984, and the mechanical and electrical engineer no later than December 31, The last two experts would remain employed for at least two years after the commissioning date. Upon commissioning, about 60 staff would be required. About one-third would be semi-skilled technical and administrative assistants and during negotiations, assurances were obtained that the three national electricity companies would second appropriate personnel to SINELAC Training - Each expatriate on the management assistance team recruited by SINELAC, would have terms of reference which would specify responsibility for training one or two local counterparts for five years to assist and eventually replace him before March, Assurances were obtained during negotiations that suitably qualified and experienced personnel would be assigned by REGIDESO, ELECTROGAZ and SNEL to SINELAC to work as counterparts as and when needed As there is no technical training facility in Burundi and Rwanda, and SNEL's training school at Sanga in Bas Zaire is 1,500 km distant from the Ruzizi II site, adequate facilities would be necessary for the training of personnel for the Ruzizi II plant and for the three national electricity companies, i.e. REGIDESO, ELECTROGAZ, SNEL's Eastern region and SINELAC. However, because the detailed requirements for the three regions are unknown, IDA agreed to include only studies for training facilities in this project. Thus a component of this project would be a study, carried out by consultants acceptable to IDA and selected before December 31, 1983, as agreed at negotiations, to define the scope and the size of the training school, the training program, the number of instructors and training aids, its location, and the funds required to operate and maintain it (para. 4.14). The establishment of the school would be carried out separately from the Ruzizi II project.

26 Audit - SINELAC's accounts would be audited by independent auditors acceptable to IDA. During negotiations agreement was reached that audited accounts and the auditors' report would be made available to IDA not later than six months after the end of each financial year SINELAC's administrative and financial assistant would prepare SINELAC's budget each year with the chief accountant and their local counterparts and before September 30 of each year would furnish it to IDA for its review. This was agreed at negotiations The three national electricity companies, REGIDESO, ELECTROGAZ and SNEL, would be the sole customers of SINELAC. They would participate in the financing of SINELAC through their respective Governments of Burundi, Rwanda, and Zaire (para 6.03). Because of the essential part they play in the proposed project, a detailed description of these three companies is given in Annex Because of the previously mentioned close financial relationship among REGIDESO, ELECTROGAZ, SNEL on the one hand, and SINELAC on the other, management covenants for these companies were agreed upon during negotiations of the proposed project so that: Insurance - REGIDESO would continue to provide separate annual financial statements for its electricity and water operations, and an annual revaluation of its fixed assets, continue to have its accounts audited each year by a firm acceptable to IDA, and submit to IDA financial statements and auditor's report no later than six months after the end of the financial year; - ELECTROGAZ would have its annual accounts audited by independent auditors acceptable to IDA and submit them within six months of the end of each financial year; and - SNEL would prepare yearly financial statements for the Kivu interconnected system as part of the accounting of SNEL's Eastern Region, and, as in the Shaba project (IDA Credit 1224-ZR), SNEL's accounts including Kivu's annual accounts would be audited by external auditors acceptable to IDA, and audit reports and copies of the accounts would be forwarded to IDA within six months of the end of the financial year, and its fixed assets would be revalued each year to determine their economic value. - In addition the borrowers undertook to advise IDA whenever other expenditures are proposed for their respective power sectors During negotiations, agreement was reached that SINELAC would maintain sufficient coverage against loss through fire, machinery breakdown, special perils (such as earthquakes) as well as against consequential loss, in addition to coverage for such things as their motor vehicle fleet, workmen's compensation, personal accidents, third party liability, etc., which would be satisfactory to IDA.

27 Project Monitoring 5.13 During negotiations SINELAC agreed to the project monitoring system (Annex 17), and to IDA's completion report requirements. VI. FINANCIAL ANALYSIS 6.01 In Brussels on July 9, 1982, the three Ministers of Energy of Burundi, Rwanda and Zaire agreed to form SINELAC (para. 5.02) and to have the treaty and its by-laws ratified by the three Governments. Ratification of the treaty and by-laws by the three respective legislative authorities is scheduled to take place by mid-july 1983 at the latest. In order to ensure that the project execution agency is established prior to commitment of IDA funds, ratification would be a condition of Credit signing. SINELAC's opening balance sheet would date from mid-1983 (Annex 18) and the first financial year would end on December 31, Financing Plan 6.02 SINELAC's annual financial statements would be expressed in Special Drawing Rights (SDR) because of its international context and because it is the currency referred to in the statutes of BDEGL. However, for practical purposes SINELAC's financial projection and assumptions (Annexes 18 and 19) have been prepared in US$ with escalation based on international rates of inflation used in para The financing plan for the construction of the proposed project covering the six calendar years 1983 through 1988 is summarized on the following page Three IDA Credits of US$15 million would be made available to each of the three Governments. The proceeds of each credit would be onlent to SINELAC by the three governments under three subsidiary loan agreements at 10.97% rate of interest, with a repayment period of 25 years, including an eight-year grace period to reduce obligations from the three Governments under the minimum payment agreement (para. 6.06). Interest during the eight-year grace period would be capitalized. The subsidiary loan agreements would be respectively expressed in the currencies of each of the three onlending countries, i.e. the Burundi franc, the Rwanda franc and the zaire, and SINELAC would assume the foreign exchange risk. The following would be conditions of effectiveness of the proposed Credits for the financing of the project: a) the execution of the subsidiary loan agreements between the Governments of Burundi, Rwanda and Zaire and SINELAC; b) the fulfillment of all conditions to initial disbursement of the funds made available to the three Governments by the FED (SDR 15.5 million or US$16.8 million equivalent loan at a 1% interest rate, with a repayment period of forty years, including a ten-year grace period, and SDR 3.4 million or US$3.7 million equivalent grant).

28 SINELAC'S Financing Plan (US$ million) Applications of Funds Percentage of total Construction expenditures Proposed project 83.7 a/ 77 Interest capitalized during grace period 22.6 b/c/ Increase in working capital Debt Service Total Applications Sources of Funds Internal sources Operating income -0.8 Depreciation 7.1 Total Loans and Grants IDA credit FED loan FED grant Italian Government BDEGL Governments' grants Construction expenditures 7.8 Working capital Interest during grace period added to IDA onlent credit 17.5 b/ 16 Total Total Sources a/ Total project cost of US$84.9 million is made of US$83.7 million in construction expenditures and US$1.2 million in working capital. b/ The difference between interest capitalized during grace period and interest during grace period added to IDA onlent credits (US$5.1 million) would be made of payments to the Governments (i) for the service charge on the IDA credits and interest during grace period on the FED funds, and (ii) to reduce the amount of accrued interest during the grace period (para. 6.05). c/ Total capitalized interest during grace period is US$46.0 million, as it extends until 1991 (para and Annex 18).

29 c) the fulfillment of all conditions for initial disbursement of funds to be lent to SINELAC by BDEGL (SDR 1.7 million or US$ 1.9 million equivalent loan at a 7.5% rate, with a repayment period of thirteen years, including a three-year grace period); and d) the fulfillment of all conditions for initial disbursement of funds to be made available for the project by the Government of Italy (SDR 7.8 million or US$8.5 million equivalent grant. The balance of the local project cost including working capital would be financed by three government grants in local currency each equivalent to SDR 2.8 million (US$3.0 million). Total Government contributions to the proposed project amounting to US$9.0 million (Annex 18) would be paid-in capital to SINELAC. During the period of construction ending in March 1987, the three Governments would pay IDA's commitment charge of 0.50% on the amount of undisbursed credit and service charge of 0.75% on withdrawn funds, and FED's interest, totaling about US$1.5 million, or US$0.5 million each. Each of the three national electricity companies, REGIDESO, ELECTROGAZ and SNEL, would supply their respective Governments with the funds needed for the local components of the project, service charges and interest, i.e., US$3.5 million, which they would obtain from their customers through tariffs. The Governments would permit the national companies to adjust their tariffs to meet their obligations. In the event that funds available to SINELAC would be inadequate for its operations and to meet its commitments, the Governments would provide it with the needed funds. The above arrangements were confirmed during negotiations. The payment of $100,000 equivalent to SINELAC by each of the Governments of Burundi, Rwanda and Zaire, for its working capital requirements during the first year of construction would be a condition of effectiveness of the proposed credits. Tariffs 6.04 Draft documents for the creation of SINELAC provide for a 10% financial rate of return for the project. Computation of the average tariff of SINELAC would be based on the cost of the project and the forecast sales from the Ruzizi II facilities. The cost of the project has been taken from the consultants' engineering studies (para. 4.02), and the calculation of Ruzizi II sales takes account of: - the commissioning of the Ruzizi II project in March 1987 and the Rwegura project in March 1989 (para. 7.12) and the commissioning of the third unit of Ruzizi II in 1993 (para. 3.05); - the total demand of the interconnected system in the three countries (Annex 21); - the competition among hydroelectric facilities as long as they are not fully utilized: Ruzizi I, in operation since 1959, Rwegura and Ruzizi II (Annex 22); and - the minimum payment obligation agreed in principle in Brussels and confirmed during negotiations, would require the three

30 national electricity companies REGIDESO, ELECTROGAZ and SNEL to provide SINELAC with the funds needed to cover at least its yearly cash expenses for operations, maintenance and debt service (Annexes 20 through 22); each of the three companies could then use the quantity of electricity corresponding to the minimum payment under the prevailing tariffs Interest on the subsidiary loans onlent from the IDA credits would be capitalized during the eight-year grace period and consequently would reduce SINELAC's cash expenses and bring the minimum payment obligations and the corresponding quantitities of electricity that could be purchased in line with the initial requirements of the three national companies. Payment of the service charge by SINELAC on the IDA credits from 1987 to 1991 and any payments that SINELAC could make during that period which were estimated to be about US$15 million (Annex 18) would come in deduction of the accrued interest. During the period, SINELAC would also pay the committment fee on the outstanding amount of the Bank loan, the interest on FED's loan, and service BDEGL's debt Each company would provide SINELAC with budgeted minimum payments quarterly. In the case where needs of an electricity company exceeded the quantity which the minimum payments could purchase, the excess would be debited by SINELAC against the minimum payment of the other companies. The minimum payment agreement would be part of the sales contracts between SINELAC and each of the three national electricity companies which would be discussed during negotiations. The signature of final sales contracts between each electricity company and SINELAC would be a condition of effectiveness of the proposed credit Based on the foregoing, the estimated total minimum annual payment requirements would stay below the value of the estimated purchases of electricity from Ruzizi II by the three national companies (Annex 21). The selling price of Ruzizi II electricity to the national companies before transmission losses is estimated to be US 7.3/kWh, expressed in 1982 prices, to meet the objective of a 10% financial rate of return for the proposed project (Annex 22). Based on international inflation indices used in para. 4.02, Ruzizi II's bulk electricity supply prices would be: USJ/kWh in current prices in constant 1982 prices a/ a/ this is equivalent to US48.4/kWh after transmission and distribution losses, in constant 1982 prices. Assurances were obtained during negotiations that near the completion of the project, when the cost of construction is well established, and no later than three months before the planned date for commissioning of the project, SINELAC would have received the report of a consultant acceptable to IDA containing a new calculation of the average tariff based on an

31 updated demand forecast for electricity, that would obtain a 10% financial rate of return for the proposed project. The Governments gave assurances that they would take all measures necessary to permit SINELAC to set its tariffs averaging at the required level. To maintain its value in constant terms, such average tariff would be updated each year using the United Nations "Unit value index of manufactured exports from iadustrial to developing countries." Before September 30 of each year after commissioning, SINELAC would review with IDA the basis for the tariff calculation, as agreed during negotiations. The level of earnings are estimated to be sufficient to finance the local costs of the third Ruzizi II unit to be commissioned in 1993 (para. 3.05) The tariffs presented are based on average revenue. The tariff, structured to differentiate time of day and season of utilization by the consultant who would calculate the average tariff (para. 6.07), would be incorporated in the sales contract (para. 6.06) and would be effective upon commissioning in SINELAC's by-laws (para. 5.02) provide that, if the covenanted level of tariffs enables it to accumulate cash in excess of its foreseen requirements, the Board of Directors could decide to distribute dividends to the partners of SINELAC. In the three following paragraphs, retail average tariffs derived from the accounts of the three national electricity companies are discussed to determine whether they are consistent with a spread estimated to be US 3/kWh for transmission and distribution above SINELAC's USf8.4/kWh bulk tariffs after losses. (i) Burundi: REGIDESO 6.09 On July 1, 1980, REGIDESO increased its electricity tariffs by 70% to an average of 7.6 FBu/kWh (7.9 FBu/kWh or US49. in 1981) so that electricity income statements would break even in 1982 through 1984 (Annex 21). To finance the Government's contribution to the proposed project, of SDR 3.2 million (US$3.0 million in construction expenditures and US$ 0.5 million in paid-up interest and charges during construction, para. 6.03), and. to finance the expected needs of the country in construction expenditures, notably for the Rwegura project and the next project for complementary works to Ruzizi (para. 2.26), REGIDESO would have to increase its average tariffs, which have been estimated as shown in the following table (Annex 24). In 1987, they would reach a level consistent with the estimated average retail tariff (para. 6.08) FBu/kWh a/ Tariffs in current prices Increases in % Tariffs in 1982 const. prices b/ Tariffs in 1982 const. US a/ a/ US$1 = FBu 87 in b/ The rates of inflation in Burundi are estimated to be 12% from 1983 through 1985 and 10% in 1986 and thereafter.

32 (ii) Rwanda: ELECTROGAZ 6.10 ELECTROGAZ's fixed assets have not been revalued, and it is therefore impossible to compute appropriate rates of return. Thus, in preparation for the next project for complementary works to Ruzizi II to be carried out in Rwanda, the Rwandese Government has requested IDA to grant a PPF that will cover the cost of evaluation of ELECTROGAZ's fixed assets (para. 2.24). An appropriate rate of return covenant would be drafted at the time of the preparation of the project for complementary works to Ruzizi II (para. 2.26). On January 1, 1982, ELECTROGAZ almost doubled its electricity tariffs, which should enable it to fulfill the earnings covenant of the proposed IDA financed water project (Annex 5, para. 20) until 1984: as a result, ELECTROGAZ would generate annually from internal sources funds equivalent to 25% of construction expenditures averaged over the previous, current, and following year. However, to finance the SDR 3.2 million (US$3.0 million in construction expenditures and US$0.5 million in paid-up interest and charges during construction, para. 6.03) Government's contribution to the proposed Ruzizi II project and complementary works to Ruzizi and for future construction expenditures, the above earnings covenant would require the tariffs shown in the following table (Annex 24). In 1987 they would reach a level consistent with the estimated average retail tariff (para. 6.08) FRw/kWh a/ Tariffs in current prices Increases in % b/ Tariffs in 1982 const. prices Tariffs in 1982 const. US a/ a/ US$1 = Rw 87 in b/ The rates of inflation in Rwanda are estimated to be 12% from 1983 through 1985 and 10% in 1986 and thereafter. (iii) Zaire (Kivu): SNEL 6.11 Forecasts have been prepared for the interconnected system of the Kivu province, the cities of Bukavu and Uvira which are already part of it, and Goma, after it is linked in 1985 (para. 2.11). SNEL's assets will be revalued under a provision of Credit 1224-ZR (para. 2.20), and an appropriate rate of return covenant would be drafted at the time of the preparation of the project for complementary works to Ruzizi II (para. 2.26). However, in Annex 22, the value of Ruzizi I assets has been estimated on the same basis as that of Ruzizi II and a selling price in 1987, the year of commissioning of Ruzizi II, has been determined on the same basis as that of Ruzizi II to render the comparisons meaningful. Bulk prices of the Ruzizi I electricity sold to Burundi and Rwanda would be increased progressively from their present level to reach the calculated price in On March 1, 1982, SNEL's domestic prices were doubled as a

33 condition of Board presentation of Credit 1224-ZR and the foregoing increases are needed to finance the SDR 3.2 million (US$3.0 million in construction expenditures and US$0.5 million in paid-up interest and charges during construction, para. 6.03) Government's contribution to the proposed Ruzizi II project and complementary works to Ruzizi (para. 2.26) and for future construction expenditures. Because bulk sales from Ruzizi I at a lower price would represent, in 1987, about half of sales from the Kivu interconnected system (Annex 25), the latter's average tariffs would be below the level consistent with the estimated average retail tariff (para. 6.08) US /kwh a/ Average tariffs in current prices Increase in % Tariffs in constant 1982 prices a/ a/ See rates of international inflation, table of para Convertibility of Currencies 6.12 The free convertibility of local currencies is provided in the agreement called "Arrangement monetaire entre les banques centrales des Etats membres de la Communaute economique des pays des grands lacs" among the three central banks of Burundi, Rwanda and Zaire, dated June 7, Free convertibility among the Burundi franc, the Rwanda franc and the zaire would be necessary for all operating activities of the Ruzizi II facilities. For example, revenue, debt services and dividends would be expressed in the three currencies, and it is assumed at present that most local salaries would be paid in zaires. During negotiations, agreement was reached that the three central banks would guarantee to clear SINELAC's accounts in the three currencies every three months. Furthermore, it was agreed at negotiations that each of the three central banks would provide SINELAC with one-third of the foreign exchange requirements for maintenance and renewal work and for external auditors. SINELAC's Future Operations and Financial Position 6.13 On the basis of estimated forecasts for SINELAC's financial position, maintaining the average bulk tariff before losses at US 7.3/kWh in constant 1982 prices would accumulate a large amount of working capital. Therefore from 1988 to 1991, funds above SINELAC's needs to cover yearly debt service, operating and maintenance expenses would be paid to reduce the capitalized interest during grace period, and from 1992 onwards as dividends to the three Governments and leave a satisfactory working capital position (Annex 18). Assurances were obtained during negotiations that SINELAC would require IDA's approval before incurring debts of an amount larger than US$500,000 equivalent.

34 VII. JUSTIFICATION FOR THE PROJECT Power Market 7.01 The main supply of electricity for the Great Lakes region is the existing Ruzizi generating station in Kivu province, Zaire, at the outlet of Lake Kivu. Thus all discussion on the availability of electrical energy and the needs of the region must consider the supply by the interconnected system to Burundi, Rwanda, and the eastern part of Kivu province, Zaire IDA reviewed the forecast of demand for energy and power for the interconnected system which was prepared by the consultant to EGL, Tractionel, the forecast prepared for Gesellschaft fur technische Zusammenarbeit (GTZ) for a proposed hydroelectric scheme near Gisenyi, Rwanda, and a UNDP report entitled "Planification a long terme des besoins d'6nergie 6lectrique et des chantiers des ouvrages de production," dated April 1982, and found these forecasts to be somewhat optimistic. Following a detailed discussion of the need for electrical energy with the various parties concerned, IDA prepared the detailed forecasts for Burundi, Rwanda and Zaire shown on Annexes 6, 7 and 8 respectively. The combined demand on the interconnected system was prepared from these forecasts, and the results are shown in tabular form and graphically in Annex 26. The historical growth and the forecasts for each of the countries are discussed below. (i) Burundi 7.03 Burundi's actual electricity sales 1976 to 1981 and those forecast to 1990 are shown in tabular form in Annex 6. It will be noted that in the past four years the domestic sector has grown at an average rate of about 12%. However, in view of the general decline in economic activity, and because of the larger base in the future, it has been assumed that the growth rate in this sector would be at a somewhat lower pace, and growth for the ensuing period has been calculated at a rate of 10% Growth of electricity demand in the industrial sector has been quite rapid. As is shown in the tabulation, growth rates exceeding 20% occurred in 1977 and 1978, and 1980 and 1981 had rates of 17%. However, the rate of growth in the future is less certain, and therefore, in order to be conservative, the growth rate for general industry was assumed to decrease in later years until 1989, when a rate of 8% has been used. Nevertheless, a significant demand will materialize at the end of 1983, i.e. the commissioning of a glass bottle factory with a planned load of 3 MW. However, full operation may not begin immediately, either due to start-up troubles, or due to lack of market. Therefore, to make the forecasts conservative, IDA has assumed that the demand would be 5 GWh in 1984, rising to 10 GWh in 1986, which is well below the annual demand of 17 GWh forecast by the owners. The decision to reduce the expected demand for electricity was based on the experience with the textile mill (planned load 2.5 MW), where after several years of operation, the output is only one-third of capacity, i.e. annual demand of about 5 GWh instead of about 15 GWh. This low requirement for energy is due primarily to a lack of markets for the manufactured goods. The supply of electricity to public buildings and lighting has varied somewhat during the last years and for

35 the purposes of this report it has been assumed that this sector would increase at a rate of about 5% per annum. Also included in this category is REGIDESO's electrical needs for pumping and internal uses which have varied during the past few years. It is forecast that the demand for water will increase at a rate of about 9% per annum but this does not translate directly into pumping requirements, since there are a number of fixed loads which do not vary with growth and, therefore, a growth rate of 7% has been assumed for the sector. The average growth for the public sector is therefore assumed to be about 6% per year for the interconnected system Based on the knowledge that there is a suppressed demand and the assumption that the interconnected system would be extended as requested by the Government (para. 2.26) and also taking into account the foregoing factors, IDA has calculated a rate of growth for the interconnected system in Burundi of 11 % in 1982 and 1983, 20% in 1984, 15% in 1985, 12% in 1986, and 9% in 1987 and 1988 and 8% in 1989 and (ii) Rwanda 7.06 It will be noted in Annex 7 that there has been a significant increase in the demand for electrical energy from the domestic sector during the past few years, which, since 1977, has resulted in an annual average growth of 25% due primarily to the completion of the 110 kv line from Ruzizi I to Kigali. IDA feels that this high rate of growth cannot be maintained, and has conservatively assumed that the growth rate in the domestic sector in would be about 16%, falling to 11% in the period. A new transmission line is expected to join Gisenyi to Ruhengeri by 1986, and its demand of 5 GWh after it joins the interconnected system is reflected by the 31% increase in Significant growth has also been experienced in the demand for energy in the commercial sector, which since 1977, has had an average annual growth of about 20%. This rate is not expected to continue and a more prudent assumption for a growth rate of 14% for 1982 and 1983, falling to 11% in 1989 and 1990, was used. These growth rates have been offset to some extent by the reduced demand from the mining industry. Discussions with various parties in Rwanda have resulted in reducing demand projections about 12 GWh in 1981 to about 9 GWh in A large foreign radio installation in Rwanda consumes a significant amount of electrical energy (about 12% in 1981), but virtually no growth is expected to take place during the ensuing years As a result of the foregoing, IDA has concluded that in Rwanda, even though some of the suppressed demand has been satisfied with the construction of the 110 kv transmission line from Ruzizi (para. 7.06), much of the country remains to be served. Thus with the extensions proposed by the Government (para. 2.26) it is forecast that electricity sales would increase as follows: 8% in ; 10% in 1985; 15% in 1986, and 9% in (iii) Zaire (Kivu) 7.09 The lack of funds to extend the transmission network has resulted in a suppressed demand for electricity in the past, and virtually no growth

36 is expected for Bukavu and its environs before 1984 (Annex 8). However, before Ruzizi II is commissioned in 1987, some of the projects involving the rehabilitation and extension of service to new consumers would have been completed to satisfy this demand (para. 2.26), and a growth rate of 6% has been assumed for 1985, 8% for , falling to 6% in The construction of the transmission line from Katana to Goma is now under way and is expected to be completed by the end of 1984 (para. 2.11). Thus the growth of 33% in 1985 has been based on the assumption that Goma would require about 5 GWh, rising slowly to 8.8 GWh in The brewery in Bukavu has become a new major consumer of electrical energy with the switch-over from oil to electric furnaces (5 MW) in December of IDA was advised that the brewery is now working at about 25% capacity due to the scarcity of raw materials, and that by 1984 the circumstances would be such that it may operate at about 50% capacity. Thus, in preparing the forecast, it has been assumed that the 1982 demand of 5 GWh would rise to 10 GWh by 1984,with a slow growth to 12.5 GWh during the period. The rehabilitation and upgrading of the transmission lines to Uvira, Ngweshe and Nyangezi, from 15 kw to 30 kw would provide additional energy to industrial plants which to date has been suppressed due to the lack of material to extend services From the foregoing, growth rates varying from 33% to 8% annually have been assumed for the electricity sales in Kivu. Although these rates appear high, it should be recognized that the forecast base is at a very low level, and expansion has been prevented due to the lack of funds. (iv) Interconnected System 7.11 When the results of the individual forecasts were added together (Annex 26), it was found that the average annual rate of growth for the interconnected system during the period would be about 11%, an amount which is not unreasonable considering the complementary works prepared by studies financed by PPFs (paras ) would be undertaken in each of the three countries to tap potential demand that has been suppressed by lack of funds to service new consumers, and improve the reliability to existing consumers. This 11% rate of growth is assumed to be conservative, bearing in mind the assumed reduced demand for the three largest consumers - the bottle factory and textile mill (para. 7.04) and the brewery (para. 7.09). Requirements for the Project 7.12 The expected growth in demand for electrical energy in the interconnected system thus implies that by 1986 the existing generating facilities would be inadequate. During the dry season, in particular, the output of the Mugere hydroelectric generating station would be curtailed considerably because there is no reservoir to store water for release during the low river flow seasons. The Ruzizi I generating station has considerable storage upstream in Lake Kivu, and its output is not significantly affected by fluctuations in river flow due to seasonal variations in rainfall. Although there are sufficient generating facilities in the region to meet instantaneous peak demands, if neither the Rwegura nor Ruzizi II developments are constructed there would be a seasonal deficiency of 27 GWh in 1987 which would grow annually at the rate

37 of about 30 GWh per year. The Burundian Government has scheduled the Rwegura project to be in service early in However, IDA is of the opinion that due to the extensive civil works involving a 50 m high rock-fill dam, 2,200 m of tunnelling, and a 1,800 m penstock, the scheduled completion date is optimistic, and therefore for the purposes of this report, a more realistic completion date of early 1989 has been assumed for the Rwegura project. The difficulty facing EGL at present is to devise a plan to develop its resources, whereby the possibility of a deficiency in electrical energy from 1987 onwards is minimized. For this reason, therefore, the proposed Ruzizi II project has been scheduled to be completed in March Comparison of Alternatives - Least Cost Solution 7.13 IDA estimates that if either the Ruzizi II or Rwegura plants were to be in operation alone in 1987, the average bulk tariffs required to produce a 10% financial rate of return would be US 6.4/kWh and 15.3/kWh respectively, indicating that the Ruzizi II project is the lesser cost solution and that building the Rwegura project, before the Ruzizi II capability is fully utilized, would cause the selling price of Ruzizi II energy to be increased by more than 10% from US t6.4/kwh to 7.3/kWh (Annex 27) The construction of the Rusumo Falls hydroelectric project on the Kagera River which forms the border between Rwanda and Tanzania is the only viable alternative to the construction of the Ruzizi II project. The high cost of fuel oil precludes the consideration of conventional steam generating stations and the general lack of transportation and handling facilities eliminates the possibility of using coal from the Kalemie coal fields, about 300 km south of Bujumbura on Lake Tanganyika. As there is little data to determine if other mini-hydro sites could be commissioned in time to satisfy the expected demand, there remains therefore the possibility of developing the Rusumo Falls site at an estimated cost of US$160 million. Thus, the proposed project was compared to the alternative of construction of the Rusumo Falls on the following basis: The Rwegura hydroelectric project (18 MW) to be commissioned early in 1989 would be followed by the commissioning of the Rusumo Falls development (80 MW) in There would be a deficiency in energy from 1986 to 1990 inclusive and the cost of a 10 MW diesel plant, for generation of electricity during the period, is included. Details of the computations may be found in Annexes 28 and The least cost solution was found to be the Ruzizi II project at discount rates up to 35% (Annex 29). Rate of Return 7.16 Given the 1987 US 7.3/kWh average bulk tariff expressed in 1982 prices, to achieve a 10% rate of return (para. 6.07) the sensitivity analysis shows that with an increase in construction costs of 10%, the financial rate of return would be 9.2%; with a reduction in annual growth of the regional demand in the period , from 11.1% down to 10%