Document of

The 'World Bank

FOR OFFICIAL USE ONLY

FILE COPYReport No. 2446-EGT

EGYPT

SHOUBRAH EL KHEIMA. THERMAL POWER PROJECT

STAFF APPRAISAL REPORT

June 5, 1979

Projects DepartmentEurope, Middle East and North AfricaRegional Office

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS(As of January 1, 1979)

Currency Unit = Egyptian Pound (EE)

Official Rate*LE 1 (or 1,000 milliemes) = US$1.44LE 1,000 = US$1,440LE 1,000,000 = US$1.44 millionLE 0.69 = US$1.00

* Unless otherwise indicated all conversions of foreign currencies to EgyptianPounds in this report are based on the Parallel Market Rate of Exchange ofLE 1 = US$1.40 applicable before the fixing of the new official rateon January 1, 1979.

WEIGHTS AND MEASURES

1 kilowatt (kW) = 1,000 watts (103W) 31 Megawatt (MW) = 1,000 kilowatts (10 kW)1 kilowatt hour (kWh) = 1,000 watt hours (103Wh)1 Gigawatt hour (GWh) = 1,000,000 kWh (106kWh)1 kilometer (km) = 1,000 meters (103m)1 kilovolt ampere (kVA) = 1,000 volt amperes (103VA)1 megavolt ampere (MVA) = 1,000 kilovolt amperes (103kVA)1 microgram (ug) = 1 x 10 6 gram1 hertz (Hz) = 1 cycle/second

GLOSSARY OF ABBREVIATIONS

EEA - Egyptian Electricity AuthorityEEC - European Economic CommunityEIB - European Investment BankEdF - Electricite de FranceIDA - International Development AssociationMEE - Ministry of Electricity and EnergyOPEC - Organization of Petroleum Exporting CountriesREA - Rural Electrification AuthorityS&P - Sanderson & Porter, Inc.SWECO - Swedish Consulting GroupUSAID - United States Agency for International DevelopmentWASP - Wien Automatic System Planning Program

EGYPTIAN ELECTRICITY AUTHORITY

FISCAL YEAR

January 1 to December 31

STAFF APPRtAISAL REPORT FOR OFFICIAL USE ONLY

EGYPT

EGYPTIAN ELECTRICITY AUTHORITY

SHOUBRAH EL KHEIMA THERMAL POWER PROJECT

Table of Contents

Page No.

I. THE POWER AND ENERGY SECTOR ......................... 1

Power and Energy Resources .......................... 1Energy Sector Organization .......................... 2Energy Sector Planning .............................. 3Bank Group Participation in the Sector .... .......... 3Access to Electricity ........................ . 4Existing Power Facilities ........................... 5Operating Problems .................................. 5Power Development Program ........................... 5Planning ............................................ 6Rural Electrification ............................... 6Tariff Levels and Structures ........................ 7

II. THE BORROWER/BENEFICIARY ............................. 8

Legal Structure ...................................... 8Organization and Management ......................... 9Employment and Training ........................ ,.10

III. THE PROJECT ......................................... 11

Description .......................................... 11Fuel Supply .......................................... 12Project Cost Estimate ....................... ..... 12Project Financing Plan ....................... ..... 14Environmental Considerations ......................... 15Implementation ........ ............................... 16Procurement .......... ............................... 17Disbursement ......... ............................... 18Risks . .............................................. 18

This report was prepared by Messrs. A. Roa (Engineer), P.A. Cordukes (Finan-cial Analyst), T.B. Russell (Economist), I. Mathai (Financial Analyst) I.I.Elwan (Economist).

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

Table of UUtLbCLILS wuonaLriued) Page No.

IV. FINANCE ............................................. 18

Budget .............................................. 18Accounts ............................................ 19Revaluation of Assets ...... ......................... 20Past Performance and Present Position of theBorrower .......................................... 21

Earnings Review ...... ............................... 21Collection of Electricity Supply Bills ........ ...... 22Interest During Construction ..... ................... 22Liability for Income Tax ..... ....................... 22Financing Plan ...................................... 23Future Performance .................. ................ 25Debt Service Covenant ...... ......................... 26Audit ............................................... 26Insurance ........................................... 27

V. PROJECT JUSTIFICATION ................ .. ............. 28

A. The Power Market ............................... 28

Past Trends .................................... 28Load Forecast .................................. 28

B. Comparison of Alternatives ..... ................ 30C. Return on Investment ........................... 32

VI. AGREEMENTS REACHED AND RECOMMENDATIONS ........ ...... 33

ANNEXES

1.1 MEE Organization Chart1.2 EEA's Available Generating Capacity, 1978-19861.3 EEA's Available Net Generation, 1978-19861.4 Power Sector Development Program, 1978-19861.5 Main Tasks to be Covered in Load Management Study

2.0 EEA Organization Chart

3.1 Project Cost Estimate3.2 Project Implementation Schedule3.3 Tentative Contract List3.4 Estimated Disbursement Schedule, Bank/IDA3.5 Estimated Disbursement Schedule, EEC Special Action Fund

4.1 Income Statements for the Years Ended December 31, 1976-19864.2 Balance Sheets as of December 31, 1976-19864.3 Sources and Applications of Funds4.4 Index of International Inflation, 1955-19904.5 Notes and Assumptions for Financial Forecasts

5.1 Power Sector Statistical Data, 1967-19775.2 Actual and Forecast Sales by Consumer Categories, 1978-19995.3 Projected Sales to Large Industrial Consumers, 1978-1985

Table of Contents (Continued)

5.4 Load Forecasts5.5 Description of WASP Program5.6 Comparison of Alternatives5.7 Comparison of Sites5.8 Return on Investment

6.0 Selected Documents and Data Available in the Project File

MAP - IBRD 14221R- IBRD 14222R

I. THE POWER AND ENERGY SECTOR

Power and Energy Resources

1.01 Apart from relatively small imports of coal for metallurgicalrequirements, Egypt is self-sufficient in energy at present: and is a netexporter of fuel. The principal energy resources are hydrocarbons and hydro-power. Recoverable oil reserves are estimated at about 350 million tons,representing 14 years' supply at the current annual production level of 25million tons. Output from the major oil fields is likely to peak in the earlyeighties, so that exploratory efforts would need to be intensified if Egyptis to remain a net exporter of energy over the next decade.. Associated gasis produced in conjunction with production of oil, currently at the rate ofabout 200 million cubic feet a day. In addition, recoverable reserves ofnon-associated gas from known fields, onshore and offshore, are put at 3.5trillion cubic feet. Current plans to use associated gas and develop non-associated gas would result in the eventual replacement of oil to the extentof 4 million tons per annum.

1.02 The River Nile accounts for virtually all the conventional hydro-power potential. About 80% of the Nile's potential has already been harnessedat the Aswan Dam (345 MW installed capacity) and Aswan High Dam (2,100 MW).Some 350 MW more are expected to be developed by about 1990 by an extensionof the Aswan Dam and the improvement of three existing barrages. There areseveral suitable sites for pumped storage schemes in the vicinity of Cairo andthe Gulf of Suez. The only other potential source of hydropower is the QattaraProject, which would utilize the drop of 60 meters between the Mediterraneanand the Qattara Depression in the Western Desert to channel sea water along an80-km canal for the generation of electricity. This would provide 640 MW offirm power for 12 years while the Depression was filling, and 340 MW thereafterfrom the water flowing into the Depression to replace that lost by evaporation.A feasibility study financed by the Federal Republic of Germany is in progress.

1.03 Other commercial energy resources, actual or potential, are coal,oil shale, solar energy and geothermal energy. Coal reserves in the WesternDesert and Sinai are estimated at around 100 million tons, but economicallyexploitable reserves are put at only 35 million tons, all in Sinai. Theseare too small for power generation and also not of coking quality, so thatblending with up to 75% of imported coal would be necessary for metallurgicalpurposes. Oil shale deposits have been located in Sinai and around the Gulfof Suez, but no estimates of reserves are available and the quality appearsto be too poor to be worth exploiting. The solar energy potential, thoughat present untapped, is vast, since Northern Egypt receives 13% more directsolar radiation than Albuquerque (New Mexico), considered one of the sunniestregions in the USA, and Southern Egypt appreciably more. Geothermal energydata are scarce, but the prospects ior discovering low or intermediatetemperature geothermal waters are considered good. These would not be suit-able for power generation but might meet domestic and commercial requirements.

- 2 -

1.04 Egypt is not well endowed in non-commercial energy sources. Lessthan 3% of the country is under crops, the rest being desert or semi-desert.Consequently, crop residuals and animal wastes are the main non-commercialsources, currently estimated to provide one third of total energy requirements,mostly in the rural areas.

Energy Sector Organization

1.05 Responsibility for the energy sector in Egypt rests with twoministries: The Ministry of Petroleum in charge of oil and gas and theMinistry of Electricity and Energy (MEE) in charge of public electricitysupply. MEE's organization chart is shown in Annex 1.1. Under MEE, theEgyptian Electricity Authority (EEA) is responsible for the bulk supplyof electricity to the whole country and distribution in the Cairo and Alex-andria areas. In the rest of the country Municipal Councils act as EEA'sagents to supply electric service at the retail level. Legislation has beenenacted to supersede this arrangement by creating distribution companies totake over from EEA in Cairo and Alexandria and the Municipal Councils else-where (para 2.04). Another MEE agency, the Rural Electrification Authority(REA) is responsible for implementing the National Rural Electrification Planintended to extend service to outlying areas from EEA's bulk supply at 66-kVsubstations. Transmission and distribution facilities at 66 kV and belowoutside Cairo and Alexandria are planned, designed and built under REA. Oncetested and commissioned all REA-built installations are turned over to EEA foroperation and maintenance and the corresponding assets are reflected in EEA'sbooks.

1.06 Two other MEE dependencies, the Qattara Depression Authority andthe Nuclear Power Plants Authority, look after hydropower and nuclear powerdevelopment respectively. Under the present organizational structure allcommercial generating facilities developed under these two agencies would beturned over to EEA soon after commissioning in the same manner as is donewith REA-built transmission and distribution.

1.07 The Ministry of Electricity and Energy also has four separatecompanies for specialized construction work. They are the General Companyfor Electrical Projects (ELEJECT), the High Dam Company for Electrical andMechanical Projects (HIDELCO), the General Company for Mechanical and Elec-trical Projects (KHAROMIKA), and the Egyptian Electric Transformer Company(EL-MACO). To strengthen their capabilities the three MEE constructioncompanies have formed joint ventures with foreign contractors. Similarly,the transformer company has made licensing arrangements with foreign manu-facturers.

1.08 MEE relations with the rest of the Government are regulated andcoordinated by the Higher Council for Electric Power made up of the Ministerof Agriculture and Irrigation, the Minister of Industry and Petroleum, inaddition to the Ministry of Electricity and Energy.

-3-

Energy Sector Planning

1.09 A joint assessment of Egypt's energy resources and planning was con-ducted during March-July 1978 by a U'; team of experts under the management ofUS Departmnent of Energy in collaborat:ion with Egyptian management and technicalofficials. The binational team assessed Egypt's energy resources to the year2000 and the energy demand and supply options which are now or will be avail-able to Egypt by that time. A report setting out several major observationsthat can be drawn from the assessment was distributed in De!cember 1978. Majorissues are pricing, the gaps and inconsistencies present in Egypt's currentenergy and related planning,and the Lack of an adequate planning data base.In addition, the report points out the need to strengthen Egypt's currentability to expand its energy supply capacity and Egypt's needs for continuingassistance in establishing a comprehensive energy planning capability and inpreparing and implementing these plans effectively. These issues will beaddressed in studies to be undertaken in conjunction with the Gulf of SuezGas Project which is proposed for Bank financing and is being processed con-currently with this power project. These studies include work on petroleumexploration, petroleum product pricing and the impact of price changes onconsumers, and a gas utilization study designed to prove reserves and recom-mend optimal allocation of these resources among competing uses. Moreover, tofurther advance the development and implementation of adequate energy policiesin Egypt, the Government would also establish not later than December 31,1979, an Inter-Ministerial Coordinating Committee on Energy chaired by theMinister of Electricity and Energy to follow up on the worlk initiated by theEgypt/ United States joint energy assessment team. Specific tasks to beassigned to this new Committee would be:

(a) take the lead responsibility and authority for integrated energyplanning activities in Egypt;

(b) promote the active participation of the other agencies that maybe responsible for planning in individual sectors of the economy;

(c) coordinate the involvement: of economic, finance and budgetagencies in the energy planning activity; and

(d) establish a structured process for policy level reviews of thefinal product.

The new Committee would take over and expand the functions; assigned to theMinisterial Committee on Energy created under Prime Minister Decision No. 252of October 26, 1974.

Bank Group Participation in the Sector

1.10 The Bank has made one loan for power in Egypt, Loan 1453-EGT ($48million) in 1977 for regional electrification. The loan provided for rehab-ilitation and extension of electric power facilities serving a regionalpopulation of about 6 million people in 13 urban centers and 19 rural zones

- 4 -

outside Cairo and Alexandria. The loan also included technical assistance fortraining and studies to strengthen organizational and institutional aspects ofEEA and REA. Progress on the Project can be considered good. Constructionstarted in the first quarter of 1979 and completion of the Project is expectedon schedule at the end 1980. In addition, the Bank was Executing Agency for aUNDP-financed Power Sector Survey carried out in 1976-1978. Under Bank super-vision the Survey identified areas needing immediate attention in relation toplanning, operational, organizational, and institutional improvements in theEgyptian power subsector. Although slowly EEA is making progress in overcomingthese deficiencies through appropriate action guided by Bank-financed technicalassistance under the first power project (e.g., tariff study, strengthening offinancial administration and accounting, safety inspection services, and man-power development and training facilities). Additional technical assistanceto improve system operation and planning is included in the proposed Project.As an extension of the UNDP study, EEA plans to carry out, under Bank supervi-sion, a thermal power plant maintenance project to strengthen EEA's capabili-ties in combustion turbine and boiler technology, operation and maintenance.

1.11 No Bank Group loans have yet been made for oil and gas. The pro-posed gas project (para 1.09) would gather, treat and transport associated gasfrom the Gulf of Suez offshore oil fields to the Suez City area. Gas fromthis pipeline also would be available to the Cairo area through existingpipeline facilities being modified under the gas project. Non-associated gasis available from fields at Abu Qir, Abu Madhi, Abu Gharadig and Amal. A57-km pipeline connects the Abu Qir field with Alexandria, Damanhour and KafrEl Dawar to supply fertilizer production and power generation. Recoverablereserves at Abu Qir are estimated at 1.2 trillion standard cubic feet. TheElf-Aquitaine group has recently found gas shows in this area, but the dis-covery, although promising, is yet to be quantified. Abu Madhi's recover-able reserves are estimated at 0.8 trillion standard cubic feet. Gas fromAbu Madhi is being piped to Talkha and Mahalla El Kubra for fertilizer andtextile production, and power generation. Abu Gharadig gas is supplied toCairo through a 370-km long, 24" pipeline. Available reserves are estimatedat 0.8 trillion standard cubic feet. Finally, the Amal field located offshorein the Gulf of Suez is yet to be exploited. It has recoverable reservesestimated at 0.4 trillion standard cubic feet. More detailed information onEgypt's natural gas supply infrastructure will be given in the Staff AppraisalReport on the Gulf of Suez Gas Project.

Access to Electricity

1.12 Despite vigorous efforts to expand electric service only modestadvances have been achieved. A recent Bank study on electricity services tothe urban poor in Egypt 1/ shows that only 62% of the urban population and

1/ Status of Electricity Service to the Urban Poor in Egypt, ProfessorGoran Bergendahl, January 31, 1979.

- 5 -

19% of the rural dwellers had access to electric service in 1976. These areabout the same figures estimated previously during appraisal of the firstpower project, Loan 1453-EGT. Electricity consumption is liow, per capitaconsumption in 1976 being only about 289 kWh per annum compared with moredeveloped countries such as Portugal and Turkey whose per capita consumptionwas about 1,230 kWh and 462 kWh per annum respectively, but it exceeds that ofmost Northern African countries such as Algeria (267 kWh) and Morocco (187kWh). However, electricity consumption for residential use should rise asliving standards improve, especially in the poorer urban areas and in thevillages. Also, industrial loads are expected to continue growing strongly in1978-1986 as a result of large Government industrial projects (para 5.04).

Existing Power Facilities

1.13 EEA owns and operates 17 generating stations with a total capabilityof 2,721 MW. Of these, 919 MW are in steam electric plants, 236 MW in combus-tion turbines and 1,566 MW in hydro. The figure for hydro capability reflectsthe limitations imposed by the irrigation programs. A detailed plant-by-plantbreakdown of system generating capacity is given in Annexes 1.2 and 1.3.

1.14 The EEA transmission systerm comprises a 500-kV interconnectionbetween the hydro plants in the south (Aswan) with the load centers and thermalplants in the northern part of the country (Cairo and the Nile Delta). A 220-kV network serves the Northern Egypt loads and a 132-kV system, generallyparallelling the 500-kV link, serves the loads in the Nile Valley and nearbyoases. Map IBRD 14221 shows EEA's interconnected system.

1.15 Utilization voltage is 380/220 volts and system frequency is 50 Hz.EEA's general service facilities include general office buildings in Abbassia(Cairo) a high voltage research center and two training institutes also in theCairo area and various other installations all over the country.

Operating Problems

1.16 The most significant problems encountered in operating the EEA inter-connected system are limitation of power flow from the Aswan hydro plants toCairo due to poor performance of the 500-kV transmission link, and inadequategeneration maintenance due to lack of sufficient reserve generating capacityto allow for maintenance outages. Both problems are being addressed vigor-ously by EEA's management. A transmission improvement program is under studywith the help of Swedish Consultants (SWECO) and in an addition to the severalplants under construction (para 1.17), a thermal power plant maintenance proj-ect is expected to start in October 1979 (para 1.10).

Power Development Program

1.17 A balanced, least-cost system expansion program has been developedby EEA with the help of consultants using up-to-date system planning techni-ques, including the Wien Automatic System Planning (WASP) digital computer

- 6 -

programs (para. 5.07). The least-cost development program confirmed the needfor early commissioning of the available Nile hydropower at Aswan and threeexisting barrages (para. 1.02). The Aswan Dam power station would be extendedby 160 MW and 190 MW more would be installed at the three existing barrages(Esna 89 MW, Nag Hammadi 48 MW, and Assyout 53 MW). Nuclear power also hasa place in EEA's program. Although still clouded in uncertainty, nuclearstations are being optimistically scheduled for combined operation with pumpedstorage starting in 1988. Earlier scheduling is precluded by the estimatedlead-time needed for planning and executing nuclear projects in Egypt (9-10years). Similar considerations make it necessary to schedule new hydro genera-tion to come on the line not earlier than 1986. In the meantime, Egypt willhave to fill the growing system needs from oil and gas fired thermal powerstations (para 5.06). New steam electric generating capacity rated 300 MWwill be added to the system by the end of 1984 and 1,200 MW in 1985-1986.Additional combustion turbine capacity committed for 1978-1986 amounts to 411MW. Proportional expansion in transmission and distribution brings the totalestimated construction requirements of the Egyptian power sector for 1978-1986 to LE 7.4 billion (US$10.6 billion), including escalation. The Projectmakes up about 5% of the total construction program. Details of the estimatedconstruction requirements are shown in Annex 1.4.

Planning

1.18 Power sector planning has been improved considerably as a resultof changes made in EEA's organization in line with recommendations of theUNDP-financed Power Sector Survey carried out under Bank supervision in1976-1978 (para 1.10). Additional work is required, however, and EEA hasagreed to engage consultants by December 31, 1979 to carry out feasibilitystudies for the next steps of system expansion in the least-cost developmentprogram (para 1.17), by March 31, 1980 consultants for a load management studysimilar to the one described in Annex 1.5, and a load research study, allunder terms and conditions acceptable to the Bank.

Rural Electrification

1.19 A national rural electrification program to bring electricity tomore than 4,000 villages and some 25,000 hamlets all over the country wasstarted in 1971. About half of the plan's objective has been accomplished.The balance is scheduled to be carried out in 1978-1986. The Bank is partic-ipating in the 1978-1980 portion of the plan through loan 1453-EGT aimed atcovering 13 urban centers and 19 rural zones.

1.20 The Bank financing includes provision for a study to rank theremaining urban centers and rural zones in order of economic merit to estab-lish electrification construction priorities to guide investment decisionsby REA. The ranking study was completed in March 1979, and would provideguidance to REA for scheduling the rest of the National Rural Electrifi-cation Program.

-7-

Tariff Levels and Structures

1.21 The maintenance of stable prices for all essential goods is con-sidered an integral part of the Government's economic and social policies.The list of essentials, however, has varied over time, increasing from a fewconsumer goods (sugar, oil, flour, etc.) in 1952 to include most of the goodsused by the industrial sector such as petroleum products, clement, steel, etc.The cost of stabilizing prices, which is the difference between the marketdetermined prices for these goods and the publicly administered prices,is covered by the Government in the form of financial or economic subsidies.The system of financial subsidies is based on providing a minimum amountof essential foodstuffs and clothes to all consumers (poor and others)at prices that are below their cost to the Government. The deficit was tobe covered by profits from the consumLption of the same goods in amountsgreater than the subsidized level.

1.22 Economic subsidies, on the other hand, prevail at all levels of theEgyptian economy and are passed through the Government's control of domesticprices for goods and services. The subsidy is defined as the differencesbetween the domestic prices of exportable commodities and the price the Gov-ernment could get by selling these commodities in the international market.For example, for fuel oil (mazout) the economic subsidy is US$64.50/ton (thedifference between the current domestic price for fuel oil of about US$10.50/ton and the world market price of US$75/ton). Economic subsidies are alsoextended to all publicly owned enterprises by allowing them to earn a rate ofreturn on assets that is substantially below the opportunity cost of capital,e.g. between 2-4% as compared to an opportunity cost of capital of about 10%.

1.23 Economic subsidy is prevalent in the power subsector because tariffsare set below marginal cost. Under existing tariffs, average prices/kWh are2.562 milliemes (US$0.0036) for Nag liammadi Aluminum Co., 3.354 milliemes(US$0.0047) for Kima Fertilizer Co., and 5.075 milliemes (US$0.0072) for other.large industrials. Smaller industrials pay 6.00 milliemes (US$0.0084)/kWh forsupply at high voltage (220 kV and 132 kV). Industrials with 500 kW or lessinstalled capacity pay 12.55 milliemes (US$0.0176)/kWh, Municipalities andDistribution Companies pay 9.31 milliemes (US$0.0131)/kTWh, and all low voltage(380/220 V) consumers--16 milliemes (US$0.0224)/kWh. These low rates reflectthe controlled price structure in Egypt (Dara 1.21). The bulk of the subsidyaccrues to industry, which accounts for about 65% of total electricity con-sumption. The economic subsidy is borne by the economy through the domesticprice paid by EEA for petroleum products and the low rate of return theutilities are expected to earn on their assets. The proposed pricing study(para 1.09) would aim at evaluating the effect of discrete price increases ofgoods and services in which petroleum products constitute an important inputand is expected to yield guidelines for eliminating subsidies gradually. Inthe case of electricity, this would lead to tariffs based on marginal cost ofsupply. The Government would take prompt action to implement acceptedrecommendations resulting from the study.

1.24 Both the level and structure of the electricity tariffs are inade-quate. The tariff level does not convey to the consumers the true cost ofelectricity and fails to generate sufficient revenue to cover an appropriate

- 8 -

proportion (say, 25%-40%) of the cost of EEA's investment program. The struc-ture of the tariff is not sensitive to the difference in cost between peak andoff-peak (seasonal or daily) and does not differentiate between large andsmall domestic consumers. A tariff study by French consultants (SOFRELEC)financed by the Bank (Loan 1453-EGT) is expected to be completed by May30, 1979. The interim recommendations of the study and proposals for futureneeded work have been submitted to the Government which is in the processof reviewing them. However, the consultant and EEA have expressed the needfor further work on the tariffs for low voltage consumers because data onelectricity consumption of these consumers outside Cairo and Alexandria isinadequate. Consequently, EEA would extend the consultants' contract byAugust 31, 1979, to cover the additional work required.

II. THE BORROWER/BENEFICIARY

2.01 The proposed Bank Loan would be made to the Egyptian ElectricityAuthority (EEA), the Borrower under the first Bank loan for power, and theIDA credit would be made to the Government and onlent to EEA on the sameterms as the Bank loan. The terms and conditions for onlending of the IDAcredit would be the subject of a subsidiary loan agreement. Execution ofthis subsidiary loan agreement would be a condition of credit effectiveness.

Legal Structure

2.02 EBA was established in early 1976 as part of a general reorganiza-tion of the power sector by the Ministry of Electricity and Energy (MEE).It was constituted under Law No. 12 of 1976, which is summarized in Annex 4of the staff appraisal report for the first power project (Report No. 1517a-EGT). Under this law, EEA was made responsible for implementation, manage-ment, operation and maintenance of all electric power facilities in Egypt,and it became financially autonomous from Government to the extent that itwas able to prepare its own annual budget and 5-year plan subject to Govern-ment approval, retain any surplus revenues for its development and contractloans from both local and foreign sources. By-laws have since been enactedprescribing such matters as personnel policy, salaries and wages, recruit-ment, and procurement procedures. In personnel matters EEA has virtually noautonomy since it is required to conform strictly to Government policy in thisarea. One of the key aims of the re-organization in 1976 was to give the EEAmore autonomy from Government and subsequently, following implementation ofits by-laws, to increase efficiency. This move towards increased autonomy hasbeen slow and is hampered by the traditions of the past and the cumbersomebureaucratic procedures still retained by Government. Another major modifica-tion to EEA's legal structure pertains to the transfer of all distributionactivities to seven distribution companies effective January 1, 1979 (para2.04).

-9-

Organization and Management

2.03 EEA is a Government-owned enterprise regulated by the Ministry

of Electricity and Energy. It is managed by the Chairman of the Board ofDirectors assisted by two Deputy Chairmen, one for System Operations, and

the other for Financial and Administrative Affairs. So far the Board ofDirectors has included the Heads of EEA's five regional of:Eices, representa-tives of the Ministries of Electricity and Energy, Finance and Planning and

the Chairman of the Rural Electrification Authority (REA) (see Annex 2.0 forEEA's organization chart). However, with the establishment of the distribu-tion companies (para 2.04), it is not known whether the Board would continuein its present form.

2.04 Since the first power loan in 1977, the organizational structureof EEA has been changed to include the seven distribution companies createdas subsidiaries of EEA under a Cabinet Decree (No. 220 of 1978) signed bythe Prime Minister on March 6, 1978. These companies are formed to take overdistribution (at 11 kV and below) of electricity from the Cairo and Alexandriazones and from the municipalities in the other zones. Shares in the newcompanies are to be held 70% by EEA,, 15% by the Governorates or municipalitiesand 15% by the public including employees of the companies. However, so far,only the EEA's shares have been issued in exchange for assets acquired fromEEA. Each company will prepare its own budget for approval of the prescribedauthority and be able to retain any revenue surpluses, receive budget alloca-tions from Government and contract 'Loans. Each company is to be run by theChairman of its own separate Board of Directors to be appointed by the PrimeMinister. The Boards of Directors have been established, organizationalcharts have been approved, personneL are being transferrecl from the munici-palities and from EEA, and the compianies have commenced operations with effectfrom January 1, 1979. It was originally envisaged that af-ter the transfer offunctions was completed, EEA would still be responsible for provision ofcertain specific services to the companies, including research, training,foreign procurement, foreign borrowing, major maintenance, approval of workstandards and specifications and long-range planning, to be provided on areimbursable basis.

2.05 Under the first power loan, the Government agreed to ensure thatdecisions with respect to establishment of the distribution companies wouldinclude provisions satisfactory to the Bank for the management, ownership,operation and maintenance of the assets, audit of the consolidated accountsof EFA and performance of EEA's obligations under the financial covenants,which apply to the consolidated results. This undertaking was considerednecessary because the distribution companies were expected to eventually ownand operate the assets financed by the first Bank loan. During appraisal ofthis Project, EEA requested, and the Bank agreed, that consultants be appointedand financed under the first power loan to advise and assist it in the estab-lishment of the distribution companies. The Bank also proposed to EEA andGovernment that the companies begin operation one at a time since it wasapparent that arrangements for simultaneous start-up of all the companies wereinadequate. This, however was not done, and all the distribution companieshave commenced operations simultaneously on January 1, 1979 (para 2.04). The

- 10 -

companies in Cairo and Alexandria should not face serious problems since they

have operated for many years as part of the existing zones; however, the other

five companies are likely to have difficulties at least during the first fewyears of operations. Some of the problems they face include inadequate customer

records maintained by the municipalities, and billing and collection problemsespecially in rural areas where consumers have traditionally not paid forelectricity service. Furthermore, except for Cairo and Alexandria, the com-

panies do not expect to be financially viable if existing retail electricityrates are not increased substantially. Therefore, to ensure that the obliga-tions of the consolidated sector (i.e., formerly EEA only, but now EEA and thedistribution companies over which EEA has management control) under the first

loan will be met and that the financial and accounting systems of EEA and thenew distribution companies are adequate, EEA would appoint consultants satis-

factory to the Bank by October 31, 1979, under terms and conditions alsosatisfactory to the Bank, with a view to establishing uniform utility account-ing systems and procedures and management information systems for EEA and theseven distribution companies; including procedures for consolidation of EEA's

financial accounts and management information reports with those of thedistribution companies. These services would be financed under Loan 1453-EGT.

2.06 Apart from the formation of the distribution companies in 1978, EEAcreated a new position of Deputy Chairman, Finance and Administration. The

other Deputy Chairman retained responsibility for operations and dispatch.The Presidents of the five zones and Directors of the Projects Administration,and Studies and Research Departments continue to report to the Chairman.These changes do little to reduce the centralized control exercised by EEA'stop management. The administrative system remains cumbersome because thereis little delegation of authority, and little coordination between technicaland commercial staff. Although this position will not change rapidly,efforts have been, and are being, made to effect improvements, e.g., theOverseas Advisory Associates (Detroit, USA) have carried out in 1978 a seriesof training seminars for top level management under USAID financing which havebeen very well received by the participants from EEA. Follow-up courses areto include middle-level managers.

2.07 In November 1978, there were several changes made at the Ministeriallevel of the Government. Among these changes was the appointment of a newMinister of Power and Energy. Further consequent management changes weremade, and this reorganization is likely to continue through the end of 1979.This change in management is at least partly responsible for delays in imple-

menting some of the agreements reached in connection with Loan 1453-EGT (paras2.05, 4.09 and 4.10).

Employment and Training

2.08 The EEA had about 48,000 employees at the end of 1977 compared with

about 35,000 in 1973. Of the 48,000, about 30% were in the Upper Egypt zone,25% in Lower Egypt, 30% in Cairo (including Head Office) and the remainderwere in the Alexandria and Canal zones. About 64% were classified as techni-

cal staff and the rest were in administrative, financial and services depart-ments. The fundamental staffing problems identified in the first power loan

- it -

remain. There is still considerable overstaffing and a severe shortage ofmiddle and top management level executives. Experienced and well qualifiedEgyptians continue to be attracted to neighboring oil-rich countries by highersalaries. EEA has been able to increase its salaries and bonuses about 20-30%in the last 2 years but not enough to be competitive with Egypt's wealthierneighbors. EEA has addressed the training needs of its top management throughthe Overseas Advisory Services courses and these are expected to be extendedto middle level staff in the next phase. EEA reports that it is no longercompelled to employ additional new graduates and ex-servicemen and hasactually achieved some reduction in staff from the maximum number of bud-geted employees for 1977 of 50,000. In the future, EEA plans to increasethe productivity of its staff through retraining of existing employees. Thefirst power loan provides for technical assistance, training materials anddormitory accommodation at EEA's two training centers near Cairo. EEA hassigned an agreement with the International Labor Organization (ILO) for theservices of a high-caliber advisor to be financed under the Bank loan andrecruited from Electricite de France (EDF). EEA is expected to follow upthis aopointment with two training specialists, one for Cairo North and theother for Cairo South traininR center.

2.09 In the meantime, EdF has carried out a study of the vocational train-ing needs of EEA, capable of being met through the Cairo North and Cairo Southtraining centers. In the EdF study, it recommended the setting up of a dis-tribution training center near Gizah. The Bank has proposed that the nextstep should be aimed at improving the overall manpower management capabilityof the Authority by assisting EEA to combine the functions of manpower plan-ning, recruitment, manpower information assessment, training, career develop-ment and Labor relations under one organization. At present, many of thesefunctions are either weak, non-existent or are located within the organiza-tion where they provide minimal assistance to management. As part of theongoing Bank-assisted manpower development program (para 1.10) EEA would trainstaff overseas in preparation for working with consultants on load managementand load research studies (para 1.18:).

III. THE PROJECT

Description

3.01 The Shoubrah El Kheima Thermal Power Project comprises:

(a) a thermal power station with two 300-MW, oil/gas-fired unitsto be connected to EEA's interconnected system as the firststage of a 900-MW plant (3x300 MW) ultimately planned forthis site;

(b) a loop of about 4 km of three double-circuit 220--kV overheadand underground transmission lines connecting the full 900-MWShoubrah El Kheima capacity to the Cairo North-Cairo Westsection of the Cairo 220-kV ring, plus reinforcing of about

- 12 -

5 km of the 220-kV ring and replacement of circuit breakersat the Cairo North substation; and

(c) about 240 man-months of technical assistance to carry out loadresearch and load management studies and feasibility studiesfor generation and transmission expansion.

3.02 The proposed plant would be located on the Nile just north of Cairo,at the site of an old, retired EEA steam electric generating station (Map IBRD14222).

Fuel Supply

3.03 The Project would be capable of burning heavy fuel oil (mazout) ornatural gas. Fuel requirements would amount to approximately 1.0 milliontons/a of mazout or an equivalent 100 million cubic feet per day of gas forthe first two units, reaching 1.6 million tons/a of mazout or an equivalent150 million cubic feet per day of gas once the site is fully developed (3x300MW) after 1986.

3.04 Mazout would be supplied via pipeline by the Egyptian GeneralPetroleum Company (EGPC) from refineries at Suez and Mostorod (near Cairo).Current and anticipated levels of oil production and refining capacity indi-cate no problems in supplying Project's mazout requirements and, subject tofinal allocation of available natural gas (para 3.05), sufficient gas fuelcould be assigned to the Project from existing fields (para 1.11). However,existing pipeline capacity is not capable of handling the whole of Shoubra ElKheima's fuel requirement. EGPC will eventually need to build additionalpipeline capacity. The Government would assure adequate supply of fuel (oiland/or gas) and provide for building the additional pipeline facilities asrequired to supply Shoubrah El Kheima.

3.05 Government would take prompt action to allocate available associatedand non-associated natural gas in line with priorities recommended in the gasutilization study to be carried out under the Gulf of Suez Gas Project (para1.09). It is expected that this action will result in the building of gastrunk lines that would ensure adequate supply of gas fuel to the Cairo area,including the Project, on a long-term basis.

Project Cost Estimate

3.06 The following is a summary of the Project cost estimate:

- 13 -

US$ Million-----Million LE ------ -- Equivalent-----

Local Foreign Total Local Foreign Total

(a) Thermal Power Station(2x300 MW), base cost /1 25,.5 180.4 205.9 35.6 252.6 288.2

ContingenciesPhysical 1.9 13.5 15.4 2.7 18.9 21.6Price 25.3 71.3 96.6 35.5 99.9 135.4

Subtotal 52.7 265.2 317.9 73.8 371.4 445.2

(b) Transmission(4 km, 220-kV loop plusa reinforcement ofexisting facilities,base cost /1 0.9 6.5 7.4 1.2 9.2 10.4

ContingenciesPhysical 0.1 0.6 0.7 0.1 0.9 1.0Price 1.0 2.7 3.7 1.4 3.8 5.2

Subtotal 2.0 9.8 11.8 2.7 13.9 16.6

(c) Technical Assistance(Studies, Research andTraining) base cost /1 0.7 1.4 2.1 1.0 2.0 3.0

ContingenciesPhysical /2 - - - - - -Price 0.4 0.4 0.8 0.6 0.5 1.1

Subtotal 1.1 1.8 2.9 1.6 2.5 4.1

TOTAL ESTIMATEDPROJECT COST 55.8 276.8 332.6 78.1 387.8 465.9

/1 At 1978 prices./2 Consolidated into price contingency figures for ease in rounding off.

3.07 The estimated Project cost is based on figures developed by consul-tants (Sanderson & Porter, Inc. - US) at the feasibility stage and subse-quently adjusted by the mission to reflect current price contingency projec-tions corresponding to expected conditions in Egypt as fo:Llows:

- 14 -

Equipment and Local Labor

Other Imports and Materials

1979 6.5% 15%

1980 6.0% 15%

1981 6.0% 14%

1982 6.0% 13.5%

1983-1986 6.0% 13.0%

Physical contingencies are included at 7.5% for the power station portion

and 10% for the transmission line to reflect the favorable site conditions

including demolition and clearing of existing power station and underground

cable installation at the station end. The item costs include an allowance

for engineering. Technical assistance cost estimates--US$8,330/man-month

in foreign exchange to cover consultants' salaries, overhead, fixed fees and

international travel expenses; and US$4,170/man-month in local currency to

cover consultants' living allowance, support staff and other local expendi-

tures--reflect current costs of power sector consultancy services in Egypt.

Details of the Project cost estimates are shown in Annex 3.1.

3.08 The resulting unit cost for the power station, LE 530/kW (US$742/kW),

is reasonable on the basis of expected cost of similar ongoing construction

in Egypt - e.g. Abu Qir (4x150 MW), LE 418/kW (US$586/kW); and Suez (2x150 MW),

LE 630 kW (US$882/kW). Similarly, costs shown for the transmission portion

are reasonable considering expected construction difficulties. EEA being tax-

exempt by law, the above Project cost estimates do not include taxes or duties.

Project Financing Plan

3.09 The proposed Project would be financed from the following sources:

…-----US$ Million------Local Foreign Total

IBRD - 102.0 102.0

IDA - 37.0 37.0

USAID - 100.0 100.0

EIB - 35.0 35.0

EEC - 35.0 35.0

OPEC - 10.0 10.0

OECF (Japan) - 25.0 25.0

Government of Egypt 78.1 43.8 121.9

Total Project Financing 78.1 387.8 465.9

The Bank/IDA financing would cover about 36% of the foreign costs of the

Project and about 30% of the total cost of the Project. It has been assumed

that the Bank loan would be for 20 years including a 5-year period of grace;

the IDA credit would be subject to normal IDA terms and be repayable over

- 15 -

50 years including a 10-year period of grace. The IDA credit would be dis-bursed first, ahead of the Bank loan (para 3.19). The USAID contributionwould be a grant to EEA through the Government. It would be tied to U.S.procurement and is expected to be processed after negotiations on the BankGroup funding. Appropriate cross effectiveness conditions are proposed in therespective loan/credit documents pertaining to the funds from IBRD/IDA, USAID,

ETB and EEC. This would ensure about 80% of the foreign funlds neededand is considered to be satisfactory assurance that the Project funds aresecured. Agreement has been reached with major co-financiers on a draft LoanAdministration Agreement that would provide for mutual cooperation duringexecution and supervision of the Project. Cross default clauses are alsoenvisaged with co-financiers with a view to assuring a reasonably completefinancing plan for the Project at all times. Funds provided by EIB, the OPECSpecial Fund and Japan would be untied. The EEC funds designated as theSpecial Action Funds will be administered by the Bank and be tied to procure-ment from the nine countries of the European Community and a few countrieseligible for EEC funding, including Egypt. The OPEC Specia:L Fund loan, willbe administered by the Bank and be used to finance goods procured under theBank's procurement guidelines. The Government would provide, as necessary, allfunds required to close the foreign exchange gap.

3.10 All local loans will be furnished to EEA by the Government subjectto interest at 5%/a and repayable over 12 years after a 3-year grace period.Since the Project is ir Egypt's 1978-82 5-year plan, the Government wouldprovide for the local costs in its annual budgets. However, to ensure avail-ability of local counterpart funds when needed, Government would establish as acondition of loan effectiveness a special account (to be replenished monthly)with a balance equal to at least three months' expenditures on the Project, asdeterminecl from time to time, and frcom which EEA may draw without restrictionfunds to meet local expenditures. Also, the Government would provide EEA withfunds to meet interest during construction on various loans and the servicecharges oni the IDA credit estimated to be about US$20 million and to cover anypossible cost overrun on the Project. EEA would bear the foreign exchangerisk on the proposed Bank loan and oni the subsidiary loans related to the IDAand EEC credits.

Environmental Considerations

3.11 Plant design provides for individual 100m stacks for each of thethree 300-MW units. An environmenta-L impact statement prepared by the feasi-bility study consultants taking account of wind velocities and frequency timedistribution indicates that operation of Shoubrah El Kheima at full plantcapacity (900 MW) should offer no environmental problems provided that no morethan two units (600 MW) are operated on mazout of no more than 3.5% sulphur atany one time. Within these limitatiDns, the resultant ground level concentra-tion of sulphur dioxide (SO 2) would be within the 1,000 ug/'m3 24-hour maximumand 100 ug/m3 annual average (arithematic mean) upper limits recommended by theBank. Average sulphur content of mazout currently supplied by EGPC from domesticrefineries is about 2.8%. No difficulties are foreseen in meeting the qualityof mazout required by the Project (3.5% maximum). To confirm the Project'sproposed operating criteria regarding air pollution limitations, the Projectconsultants would carry out an in-depth review of the envi:ronmental impact of

- 16 -

the plant, particularly in relation to So emissions and their probable ground

level concentration. In addition, all indications are that there will be

enough natural gas from existing supplies to serve the third unit by reallo-

cating from other power users with less concentrated generating capacity and,

therefore, less severe pollution problems. No need is foreseen for restricted

operation of Shoubrah El Kheima on account of sulphur content of mazout or

lack of natural gas fuel.

3.12 Air quality index readings including S02 concentration would be part

of the information to be submitted to the Bank as part of the Project's report-

ing requirements. EEA would install appropriate air quality measuring equip-

ment to monitor ground level SO2 concentration attributable to the Project.

In addition, the Government has confirmed that the SO2 concentration levels

expected from the proposed operation of the Project do not exceed allowable

levels under Egyptian regulations.

3.13 The Project includes facilities for cleaning up waste waters from the

plant so that the only remaining water pollutant to consider is the heat dis-

charged from the plant condensers into the Nile river. The condenser discharge

would form a thermal plume with a surface temperature of about 3 C above the

ambient water temperature in about 1,600 sq. meters immediately adjacent to

the condenser discharge. Due to the effect of the plume mixing with the river

water the 30C rise area would be only 311 sq meters at a depth of 3 meters

below the surface. At a depth of 6 meters, the plume area would be insigni-

ficant. The depth of the river adjacent to the proposed site is about 10

meters.

3.14 According to the consultants' feasibility report (para 3.11), the

Department of Aquatic Life of the Ministry of Agriculture has indicated that

there would be no adverse effect to river fish life as a result of the condenser

discharge from the proposed Project within the thermal pollution figures given

above. The Government has confirmed this information.

Implementation

3.15 EEA is engaging consultants, expected to be financed by USAID, to

carry out detailed design, prepare bidding documents and specifications, and

procure and manage all supply and construction contracts on behalf of EEA.

During the initial stages of their work the consultants would carry out

a definitive study to confirm the basic design developed in the feasibility

report. The consultants would also recommend as part of their initial work

suitable bid lots to accommodate the proposed procurement arrangements (para

3.18) with due regard to project timing and cost. Engagement of consultants

would be a condition of loan effectiveness. The consultants' scope of work

- IL7 -

would include design engineering and bidding documents not cinly for the firsttwo units of Shoubrah (the Project), but also for the third unit (Phase II)to facilitate timely development of the site's full capability (3x300 MW).Implementation of Phase II, however, would be contingent on EEA's arrangingfor suitable additional financing.

3.16 Unless specific action is taken by EEA to expedite decision-makingconnected with management of the Project, construction delays are a distinctpossibility on account of EEA's still cumbersome administrative procedures(para 2.02). Therefore, EEA would delegate responsibility for Projectimplementation to the Project consultants. The consultants would be fullyresponsible for coordinating all work to ensure timely completion in spite ofprobable difficulties that may arise due to the nature and magnitude of con-struction capability required by the Project. Prequalification of the civilworks and mechanical and electrical erection bidders would be required.

3.17 Bidding and award of contracts for all parts of the Project wouldbe completed by early 1980. Field work, beginning with demolition of existingstructures and site clearing, would start in mid-1980. The first unit wouldbe placed in commercial operation at the end of 1984, and the second unitsix months later. An estimated Project implementation schedule is shown inAnnex 3.2. EEA would make suitable Project monitoring arrangements acceptableto the Bank and the other co-financiers.

Procurement

3.18 Together with the funds of the other co-financiers (para 3.09) theproceeds of the proposed Bank loan would cover the foreign exchange cost ofthe Project. All contracts to be finLanced from the Bank loan and IDA creditwould be awarded under international competitive bidding procedures inaccordance with Bank Group's "Guidelines for Procurement", except that minorcontracts for which there are only a limited number of suppliers could beprocured under international or local shopping procedures. It is expectedthat up to US$250,000 per contract and US$2,500,000 total would be sufficientto cover these exceptions. The Bank has reached agreement in principle withthe major co-financiers that to the extent practicable, all contracts forthe Project would be bid under the Bank Group's guidelines and contracts orsubcontracts awarded to suppliers in the member countries of the EEC or theUS would be financed out of the EEC and USAID credits until the EEC and USAIDcredits would have been fully committed, and other contracts would be financedjointly from the Bank loan and IDA credit and other joint financing. Provided,however, that should it become evident that the EEC and USAID credits wouldnot be fully utilized under this procedure, the Bank and the other co-financierswould, whenever necessary, agree that bids be invited only from suppliers inthe EEC or the US, to ensure that the proceeds of the EEC and USAID creditswould be fully committed. No major power station equipment is manufactured inEgypt and possible contracts for iteras like low voltage switchgear, smallpower transformers, and wire and cable are unlikely to be won by local manu-facturers due to their lack of competitiveness as shown in recent biddings forthe first power project (Loan 1453-EGT). However, in the case of equipment

- 18 -

contracts awarded under international competitive bidding procedure, a domestic

preference of 15% or the applicable customs duty, whichever is the lesser,

would be granted to participating Egyptian manufacturers.

Disbursements

3.19 Bank Group funds would be disbursed against the foreign exchange

cost of each contract awarded under Bank Group procurement Guidelines in

the same proportion to the total amount of joint financing allocated to the

contract as the available Bank Group funds are to the total available joint

financing, provided, however, that small contracts may be financed exclu-

sively from the Bank loan/credit, or other sources, to facilitate loan

administration. Since the goods to be financed by each source will depend on

the outcome of bidding it is not possible to indicate what items would be

financed by the Bank loan/credit; however, a possible allocation is shown in

Annex 3.3. Subject to specific allocation of contracts, the EEC credit would

be disbursed ahead of the IDA credit, and disbursement of the IDA credit would

have priority over the Bank's funds. Disbursement of other concessional funds

being administered by the Bank, e.g. OPEC, would also be assigned priority

disbursement ahead of the Bank loan. Assuming no parallel financing funds are

allocated to other than the Turbine Island Contract, the expected Bank Group

disbursements are shown in Annex 3.4, corresponding to about 55% of the

foreign exchange costs of contracts awarded under joint financing and 36% of

the foreign exchange cost of the Project (para 3.09). Estimated disbursements

from the EEC Special Action Fund are shown in Annex 3.5. The closing date

would be December 31, 1985.

Risks

3.20 Due to scarcity of local construction capability and EEA's cumber-

some administrative procedures, long delays are being experienced in similar

EEA thermal power plant projects currently under construction. To reduce the

possibility of similar delays appearing in the project, EEA would delegate

responsibility for Project implementation to the Project consultants

(para 3.16). In addition, prequalification of civil works and installation

contractors will contribute to reducing the possibility of delays attri-

butable to inadequate contractor performance. Other major risks are (i)

non-compliance with the rate of return covenant on account of difficulties

in implementing required tariff increases, (ii) recurring inefficient use of

available manpower and difficulties in cutting down persistent overstaffing,

(iii) chronic weakness in financial administration, accounting, billing and

collecting, and (iv) delays in construction of fuel supply infrastructure.

The Project includes reasonable provisions to guard against these risks.

IV. FINANCE

Budget

4.01 Since its formation in 1976, EEA has prepared its own annual budget

and 5-year plans which are submitted through the Minister of Electricity for

- 19 -

approval by Parliament. With the formation of the seven new distributioncompanies, EEA's budget is prepared separately from those of the distributioncompanies; however, they will be consolidated for the Bank's purposes. EEA's5-year plan (the current one for 1979--83) is now updated each year by droppingoff the current year and adding a further year. Inclusion of a project inthe 5-year plan represents Government's approval and agreement to commit fundsover the 5-year plan period without prescribing specific amounts for each yearof the plan.

Accounts

4.02 Although EEA planned to establish its own chart of accounts when itwas formed, it still follows and is bound by the chart of accounts and theaccounting principles described in the Government's "Standar-dized AccountingSystem". This system does not serve EEA's needs as a utility and is gearedmore to furnishing statistical information for Government. Some of its moreserious weaknesses are:

(a) poor property accounting characterized by an inaccurate deter-mination of work in progress, completed works and depreciation.In fact the valuation of some of EEA's fixed assets is not yetcomplete;

(b) poor control of zonal accounting practices and non-reconciliationof accounts with the zones leading both to poor quality of accountsand delays in their preparation;

(c) improper accrual of revenues and expenses leading to distortionson account of a previous year's adjustments being recorded in asubsequent year;

(d) unsatisfactory cost and budgetary control; and

(e) lack of a proper management information system to meet the needsof the operating management.

The deficiencies in the accounting system were pointed out in the 1976 UNDPPower Sector Survey report by Sanderson & Porter (S&P) Inc., New York (para1.10). To remedy these deficiencies, the Bank suggested to EEA that the S&Pteam be supplemented during the implementation phase by 6 additional man-yearsof financial management services to be financed under the first power loan.These services commenced in August of 1977 and are due to end in August 1979.

4.03 S&P has also been developing the management information system(MIS) concept within EEA with the full support of EEA's management. However,with its contract expiring in August 1979, it is unlikely that a new systemwould be introduced by then. EEA has asked S&P to prepare specific recom-mendations for implementation of the MIS system and outline the scope of workto be undertaken in the remaining period of its contract. To continue thiswork, EEA has agreed to engage consultants for modification of the exist-ing accounting system and the establishment of a management information system(para 2.05).

- 20 -

4.04 Following up on the work of S&P, EEA is carrying out a joint study

with REA of their combined needs for a commercial computer. The study is

being conducted by Harza Engineering Company International (consultants to REA

under the first power loan) and provides for about 17 man-months of consulting

services with a foreign cost of about $165,000 to be financed under the first

power loan.

Revaluation of Assets

4.05 EEA's fixed assets have been valued at historical costs; the valua-tion has also been incomplete with respect to the High Dam Project assets.Loan 1453-EGT required that EEA complete the valuation of its existing assets

and establish a formula acceptable to the Bank for revaluation of its existingassets to reflect price changes. S&P, the consultants appointed by EEA for

this purpose, completed its study in December 1978. S&P has recommended thevaluation of EEA's gross fixed assets at about LE 601 million as of December

31, 1977 as against the historical cost of LE 492 million, which represents an

increase of about 22% in the recorded values. The valuation of LE 601 million(US$864 million) for a system with a total effective generating capacity of2,721 MW (919 MW in steam electric plants, 236 MW in combustion turbines and1,566 MW in hydro) along with associated transmission and distributionfacilities appears rather modest, even allowing for a reduced use of the HighDam facilities and is significantly below S&P's own estimation of the replace-

ment value of the system in November 1976 as US$4 billion. Since the attemptin the proposed revaluation exercise would not be to compute the replacement

value of the assets but rather to restate the historical cost to reflect the

price level changes, a 22% increase need not necessarily be inadequate. Sincemany of the assets are new and the old ones have been retired, and the val-

uation is based on the consultants' in-depth study, the valuation would seemto be an acceptable starting point. Furthermore, considering the magnitude ofthe assets that will be brought into service in future compared to the exist-ing assets, establishment of appropriate principles for revaluation in future

would be relatively more important than a precise determination of existing

values. Before taking a final decision on the valuation of EEA's assets asof December 31, 1977, EEA would review with the Bank the proposed revaluationprocedures.

4.06 In view of the difficulty of having a single index reflecting priceinflation of all capital goods (both imported equipment as well as local con-

struction costs), it would be appropriate to use two different indices forvaluing foreign and local expenditures. The consultants recommended that forrevaluing the local cost component, the Construction Material Cost Index as

periodically issued by the Egyptian Center for Mobilization and Statistics beused. For revaluing the foreign cost component an index for the prices of

machinery and equipment exported by developed countries such as the onepublished by the United Nations (Annex 4.4) or another suitable index as may

be agreed between the Bank and EEA will be used. Using such index for foreign

cost and the Construction Material Cost Index referred to above for local cost,EEA would revalue its fixed assets and those of the distribution companiesbeginning with the fiscal year 1978 and every year thereafter. Pending anacceptable determination of foreign and local costs from 1978, the assets

shown in the financial forecast in Annex 4.2 have been revalued through 1986

- :21 -

using the valuation established by the consultants for the assets at the endof December 1977 and assuming an average annual price increase of 7.5%,

Past Performance and Present Position of the Borrower

4.07 The income statements and balance sheets of EEA for the years 1976-1986 are given in Annexes 4.1 and 4.2. In 1976, EEA's first year of operationas an independent electricity authority, it earned a modest profit of LE 3.6million (Annex 4.1). The 1977 accounts show a further improvement in netincome to LE 11.9 million. These results produced rates of return of 8.6% in1976 and 10.0% in 1977 on unrevalued assets. In 1978, EEA is estimated tohave earned a return of 4.7% on revalued assets. EEA's internal cash genera-tion, which is a better measure of performance considering the valuation ofits assets, was 11% of expansion requirements in 1976 and 2% in 1978 but nonein 1977.

4.08 While the rates of return achieved appear to be reasonable, theyhave been obtained in a period when EEA has reaped the benefits of cheap Aswanhydro power, and subsidized fuel oil at LE 7.50 a ton (US$10.50/ton) com-pared to the recent world market price of fuel oil of about $75 a ton (November1978). In addition, salaries and wages have been very low averaging aboutLE 380 per annum per employee (US$530 equivalent), although this advantageis offset by the considerable overstaffing (para 2.08). With the growth indemand for electric energy to be met in the next 5-6 years from fossil-fueledplants, the possibility of Government: reducing the fuel oil subsidy and thelikelihood of large increases in salaries and wages (e.g., 1978 salary andwage increase of 30%), the future outlook is for much higher electricityrates. The last increase in electricity rates, namely, 20% in 1975, had metwith strong resistance from the large Government-owned industrial consumerswho use about 60% of all electricity sold and it was only in January 1978 thatthe increase was ratified. (Domestic rates were unchanged.) Disputes overthe legality of the increase helped increase the total unpaid electricityaccounts to LE 60 million (US$84 milLion equivalent) as of August 31, 1978;the disputes have since been resolved.

Earnings Review

4.09 Agreement under the first loan provided for review by December 31,1978 of the timing of tariff action and other measures necessary to achievethe rate of return objective. This review was to take place as part of ageneral review of provisions related to EEA's financial performance agreedwith the Bank and other aid donors. EEA was not able to furnish this planbecause of the uncertainties in the sector following the establishment of thedistribution companies and delays in the ongoing tariff study (para 1.24).The financial forecasts assume that EEA's obligations under the loan covenantwould remain unchanged as a result of establishment of the distributioncompanies and that EEA including the distribution companies would reachthe required 9% return in 1983.

- 22 -

Collection of Electricity Supply Bills

4.10 EEA has always had difficulties in collecting its electricity supply

bills from entities in the public sector such as municipalities, publicutilities, Government buildings and Government industrial companies. In thecase of Government industrial companies, the failure to pay is often the

result of a genuine lack of funds on account of the prices of their goods andservices being controlled by the Government (para 1.22). To remedy EEA'scollection problem, Government agreed under Loan 1453-EGT to take all measures

necessary on its part to enable EEA to reduce its accounts receivable to notmore than the equivalent of 6 months' sales by March 31, 1978 and not more

than 3 months' sales by December 31, 1978. Although Government and EEA havebeen taking action to move towards this objective, the above-mentioned specifictargets were not achieved; in fact, the overdue accounts which amounted to

about LE 51 million at the end of 1975 rose to about LE 54.8 million at1977-end and about LE 60 million at the end of August 1978. However as aresult of vigorous action taken by the Government and EEA, the arrears duefrom Government industrial companies in 1975, 1976 and 1977 on account of adispute over the applicable tariffs have since been settled; Government has

also authorized the settlement of about LE 5.71 million due from municipalities,Government buildings and public utilities for 1976 and 1977. With the settle-ment of further amounts relating to 1978, the outstandings to date have beenreduced to a little less than the equivalent of three months' sales as agreed

under Loan 1453-EGT. However, since this is likely to be a continuing problemwith implications for its liquidity, EEA would ensure that its accountsreceivable for the sale of electricity will at no time exceed the equivalentof three months' sales of electricity. Government would also take all measuresnecessary on its part to enable EEA to achieve this and in particular willcause its agencies at all times to pay EEA all amounts for electricity salesthat are outstanding for more than three months.

Interest During Construction

4.11 In 1976 and 1977, EEA did not charge interest to construction but

charged the total interest expense against revenues. However, EEA has nowdecided that, in future years, it will capitalize interest on funds borrowedfor new investments.

Liability for Income Tax

4.12 EEA has prepared its income statements assuming that it is notliable for income taxes. However, Government has claimed that EEA and thedistribution companies should pay taxes on their profits. If it is finally

determined that income taxes are payable by EEA including the distributioncompanies, EEA has agreed to include the taxes in operating expenses fordetermining its rate of return under Loan 1453-EGT and the proposed loan.

4.13 EEA's debt equity ratio improved marginally from 74/26 at 1976-endto 72/28 at 1977-end based on its historical balance sheet figures. With therevaluation of assets as of December 31, 1977 resulting in the creation of arevaluation reserve, the debt/equity ratio would have improved to 68/32 at the

- 23 -

end of 1978. However, long-term debt has not been valued to reflect currentrates of exchange. EEA has agreed in Loan 1453-EGT to revalue its debt eachyear on the basis of current exchange rates. This current value would berecorded in a footnote to its balance sheet. EEA's debt/equity ratio may beexpected to strengthen further in the short-term as it makes use of grantfunds from USAID and the Ministry of Housing and Reconstruction and revaluesits gross fixed assets and depreciatiLon. The majority (90%) of EEA's exist-ing long-term debt is owed to Governmaent and is repayable over 12 year subjectto annual interest of 5%. The remaining 10% or about LE 42 million comprisesLE 27 million repayable over the nexl: 5 years on USSR loans for the Aswanproject and LE 15 million in short-term suppliers' credit.

4.14 EEA's debt service coverage in 1977 was only about 0.7 due mainlyto the abnormally high repayments made on its loans to Government. However,the debt service coverage for 1978 w.as estimated at 1.1 times the net revenuesfor that year. The current ratio which was 1.3 in 1977 fell to 1.0 in 1978reflecting an increasingly tight liquidity position.

Financing Plan

4.15 The forecast of sources and applications of funds of EEA for theperiod 1978-86 assuming the tariff increases indicated in para 4.18 is givenin Annex 4.3. A condensed version for the same period is given below:

- 24 -

1978-1986 % ofAmount (Thousands) CapitalLE US$ Expenditure

Capital Expenditure Requirements(Including Interest during Construction)The Project 383,708 552,540 5Other Construction 7,002,813 10,084,050 95

Total 7,386,521 10,636,590 100

Sources of FundsInternal Cash Generation 2,228,708 3,209,339Less: Debt Service (753,813) (1,085,490)

1,474,895 2,123,849 20

Less: Working Capital Increase (718,743) (1,034,990) (10)Net Internal Cash Generation 756,152 1,088,859 10

GrantsUSAID 88,734 127,777 1Government 2,027,366 2,919,407 28Total Grants 2,116,100 3,047,184 29

BorrowingsForeign - Proposed IBRD/IDA

Loan/Credit 96,528 139,000 1EIB 24,306 35,000 -EEC 24,306 35,000 -Others 3,876,585 5,582,284 53Total Foreign 4,021,725 5,791,284 54

Local 488,011 702,736 7Total Borrowings 4,509,736 6,494,020 61

Others Sources 4,533 6,527 -

Total Sources 7,386,521 10,636,590 100

4.16 It will be seen from the above table that EEA's investment programfor 1978-86 will require about LE 7,387 million (US$10,637 million) which is

expected to be financed 10% from net internal cash generation, 29% from grants

from USAID and Government, and 61% from borrowing. After allowing for debtservice but before providing for working capital increase, the internal cashgeneration would be about 20%, which is adequate considering that the annualcash generation during part of the period (1978-81) ranges from nil to only11% in view of the assumption regarding a gradual raising of tariffs toreach the required 9% return. Since the bulk of the borrowings of LE 4,510

million (US$6,494 million) have not been arranged, the financing plan is

- 25 -

subject to uncertainty. Although firm financing arrangements are reasonably

assured for the Project itself (paras 3.09 and 3.10), it would be unrealistic

to expect EEA to furnish a satisfactory financing plan at this stage for thetotal program with assured funding. Since Egypt has in the past secured allfinancing necessary for its power sector investments, it would be reasonable

to accept the planning assumptions underlying the investment program.

Future Performance

4.17 On the basis that Government- wishes to establish EEA as a finan-

cially viable entity with a level of esarnings which will provide some of its

future expansion needs from internal resources after meeting its operating

expenses and debt service obligations, Loan 1453-EGT requires EEA to earna rate of return of at least 9% on average net fixed assets in operationas revalued from time to time. This followed a similar covenant agreedearlier (July, 1976) by EEA with USAID in the loan agreement for the Helwan-

Talkha combustion turbine projects. A review of EEA's earniLngs during 1979

(see estimated income statements for 1979-1986 in Annex 4.1, and the assump-tions underlying the financial statements in Annex 4.5) shows that EEA cannot

earn the required 9% return in 1979 without an unconscionably high quantum oftariff increase (110% if effective July 1, 1979). When Loan 1453-EGT was

approved, it was envisaged that the plan to be submitted by EEA at the end of1978 would afford all parties an opportunity to exchange views on the targetfor 1979. Considering the environment in which EEA operates, it would berealistic to prepare a plan for reaching the required 9% return gradually overa period of time, intermediate targets being fixed for the interim for moni-toring EEA's progress towards achieving the final objective of 9% return. EEA

has requested that the appropriate time for any tariff action would be afterGovernment and EEA have had time to review the recomendations of the tariffstudy, which would be around September 1979. Any tariff action would, there-

fore, be effective for all practical purposes only from the beginning of 1980.Accordingly, EEA would implement the following plan, with which USAID and

other co-financiers are in broad agreement, the objective being for the wholesector (EEA and the distribution companies) to generate internally a reasonableproportion, say around 25%, of its capital expansion requirements:

(a) EEA to achieve a minimum return of 5% in 1980, 6% in1981, 8% in 1982 and 9% in 1983 and thereafter;

(b) as a condition of loan effectiveness, Government and EEAwould agree with the Bank on the measures to be taken,including their timing, fo-r achieving the proposed minimum5% return in 1980; and

(c) as required under Loan 1453-EGT, EEA would submil to the Bankby the end of November eachn year a suitable financial planfor meeting the agreed rate of return in the folLowing year.

These measures would result in net internal cash generation of 4% in 1980, 11%in 1982 and 23-27% in 1983 through 1986. Over the total period of 1978-86,

EEA's net internal cash generation would be around 20% excluding the require-ments of working capital increase.

-- 26 -

4.18 Average tariff increases of 40% effective January 1, 1980, 30%effective January 1, 1981, 25% effective January 1, 1982 and 25% effectiveJanuary 1, 1983 were assumed in the financial forecasts to yield the agreedrates of return. These forecasts do not allow for any increase in the priceof petroleum products which may result from the pricing study (para 1.09)or for the difficult process of implementing general tariff increases,particularly those affecting the middle and lower income residential con-sumers under the prevailing socio-economic conditions in Egypt. Both EEA andGovernment are aware that attaining EEA's financial objectives will requiresustained, patient efforts. Selective tariff increases aimed at large indus-trial consumers followed by careful adjustments in general tariffs areexpected as part of a nationwide effort being undertaken by the Governmentto eliminate subsidies. A fuel-adjustment clause in the new tariff wouldprovide for an automatic adjustment to reflect changes in prices paid by EEAfor fuel. Cost reductions through more efficient operation of EEA's thermalpower stations, rehabilitation of transmission and distribution to cut downline losses, and improvement of administrative procedures would complementany tariff action toward fulfilling EEA's financial objectives. With thetariff increases assumed in the financial forecasts, revaluation surplusesand the provision of LE 2,091 million as grants from both USAID and Governmentduring the period 1978-86, EEA's debt equity ratio would steadily improve from68/32 at the end of 1978 to 42/58 at the end of 1983. Thereafter, it wouldrise to 49/51 at the end of 1986. The current ratio which is expected to bearound 0.7 in 1979 reflecting an extremely tight liquidity position is expectedto rise steadily to 1.4 in 1981, 1.5 in 1982, around 1.8 in 1983-85 and acomfortable 2.1 in 1986.

Debt Service Covenant

4.19 Under Loan 1453-EGT, EEA agreed to obtain the Bank's prior consentto any borrowing it plans to undertake whenever its internal cash generationis not sufficient to cover its debt service at least 1.5 times in any futureyear. In calculating amortization of long-term debt, EEA agreed that itwould revalue all foreign debts at the end of each year in accordance withthe current rate of exchange obtainable by the borrower. This covenant wouldbe extended also to the proposed loan so that EEA and the Bank could keepunder review EEA's assumption of debt liabilities.

Audit

4.20 EEA's accounts are audited by the Government's Central AuditingOrganization. The audits are comprehensive and thorough. However, timelycompletion of the auditors' report has been a problem due mainly to delays instock-taking and to difficulties in reaching agreement between EEA and theauditors on actions required by the latter before finalizing the report. Theaudit reports contain much criticism of EEA's accounting records and proce-dures, many of them on defects which have been continuing uncorrected for along time. In fact the auditors have not been prepared to give an unqualifiedopinion on the accounts since 1975. Problems which are referred to in theauditor's reports include:

- 27 -

(a) lack of coordination between technical and financial departmentswhich affects stock, work in progress, and fixed assets accounts;

(b) the costing system does not enable control of work in progress,stock and in-transit items;

(c) irregularities in stock records;

(d) accounts with the zones not reconciled;

(e) incomplete inventory of fixed assets;

(f) lack of details of projects transferred from REA to EEA;

(g) improper accrual of revenues and expenses; and

(h) delay in determining the capital of EEA.

EEA is given the opportunity after it receives the auditors' report to respondto the criticism made and to indicate the corrective action it considersnecessary. However, there have been serious delays in the past on the part ofEEA in complying with the Audit Comments. In order to ensure action within anaccepted time frame, EEA would initiate by October 31, 1979, and thereafterpromptly complete, corrective action on the Audit Report for 1977 in accordancewith a plan of action prepared in consultation with the auditors. With theexpected improvement in its inventory management and accounting, EEA considersthat the past delays in the submission of the audited financial statements andAudit Report to the Bank would be eliminated within about three years. Accord-ingly, as under Loan 1453-EGT, EEA would submit to the Bank EEA's auditedfinancial statements and Audit Report for a fiscal year within six months ofthe close of the year. This would apply to the years commencing with thefiscal year 1981. For the years 1978 and 1979, EEA would submit the audited.accounts and audit report to the Bank within 9 months, and for the year 1980within 7 months.

Insurance

4.21 EEA insures through a Government-owned insurance corporation tocover business risks normally covered by Government and public authoritiesin Egypt e.g. motor vehicles and stores and materials. It does not, however,provide insurance coverage against certain business risks normally coveredby public utilities e.g. fire, machinery breakdown and public liability.The Government and EEA explained that the risks in EEA's operations arewidespread and that provision is made in EEA's annual budgets to meet normallosses arising from exposure to these risks. In the event of catastrophiclosses EEA, being a 100% Government-owned authority, relies on the Governmentto meet major losses. Also, as agreed under Loan 1453-EGT, EEA has appointedconsultants (Hartford Boiler Insurance Co. of the USA) to undertake a reviewof existing safety and inspection practices for operation and maintenance ofpower equipment and facilities on terms and conditions satisfactory to theBank. The work commenced in January 1979 and is scheduled for completion

- 28 -

in January 1981. EEA would exchange views with the Bank on EEA's proposalsfor safety and inspection practices based on the recommendations of theconsultants and would thereafter establish such practices not later thanSeptember 30, 1981.

V. PROJECT JUSTIFICATION

A. The Power Market

Past Trends

5.01 The Project forms part of the proposed development program to meetthe future demand for electricity on the EEA system. The past trend of demandon the system is shown in Annex 5.1. Maximum demand rose from 872 MW in1967 to 2,238 MW in 1977 (9.9% p.a.) and sales from 4,756 GWh to 11,429 GWh(9.2% p.a.). The average growth rates for the whole ten-year period concealvery divergent trends within the period. As shown by the detailed figuresin Annex 5.1, the annual growth rates followed a markedly downward trend inthe first half of the period, declining from 10.1% in 1968 to -0.8% in 1972for sales, and from 6.7% to 1.4% for maximum demand, the average annual growthrates over the five-year period being 5.4% and 6.2% respectively. Theselow growth rates reflected the relatively lackluster performance of the economyin these years, during which the growth of GNP averaged only 4.3% p.a. Since1972 there has been a sharp reversal of these trends, with economic growth of7% p.a. and power demand growing at over 13% p.a.

5.02 The key factor in the much higher growth rate of power market overthe last five years has been the demand of five major industrial consumers,three of which began operations during this period. These together accountedfor over 54% of total incremental sales between 1973 and 1977, during whichperiod sales to these large industrial consumers grew at over 34%/a (Annex5.2). Sales to other consumer categories grew much less rapidly, ranging from17% p.a. for residential/commercial consumers to 1.4% p.a. for irrigation/agriculture. As a result the share of industrial in total electricity salesrose from 54% to 63%. This high proportion of industrial sales also accountsfor the relatively high load factor (65% in 1977).

Load Forecast

5.03 Although the Project is intended to meet load growth in 1984/85, theload forecast was not limited to this period since in power system planning itis necessary to ensure that proposed short and medium-term expansion programsare consistent with optimum long-term system development. Consequently, EEA'sconsultants extended the forecast to the end of the century (1999), which wasconsidered adequate for this purpose.

5.04 The method adopted by EEA and its consultants in projecting futuredemand was to make separate forecasts for each consumer category, as describedbelow:

- 29 -

(a) Industry. In view of the importance of major consumersin industrial electricity consumption, this category wasdivided into two subcategories, viz. "Industrial -- LargeConsumers" and "Industrial - General". The forecast forthe first subcategory was based on the identificationof individual major industrial consumers, existing orprojected to 1985, for which specific information regard-ing their power requirements could be obtained, eitherfrom the industries themselves (where they already existed),or from the agencies responsible for their construction (inthe case of new industrial projects). This resulted in theidentification of 36 major industrial consumers, as listed inAnnex 5.3, which shows their projected power requirements,based on the most up-to-date information available on thestatus of the expansion plaLns of the industries concerned.It was further assumed that: additional major industrial loadswould emerge in the latter part of the period to 1985 such asto maintain the annual growth rate for this subcategory atthe same level as that projected for "Industrial - General"(i.e. 9.5% p.a. - see below). Recent experience indicatesthat implementation of major industrial projects lags behindschedule, resulting in actual power demands less than thoseprojected. Thus, in the last three years, actual annualsales to large industrial ,consumers have been between about50% and 70% of forecast saLes. For the purpose of the loadforecast, therefore, the consultants assumed, as a measure ofcaution, that actual annual sales to large consumer