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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE copy R E5RESTRICTED Report No. P-371 This report was prepared for use within the Bonk and its affliated organizations. They do not accept responsibility for its accuratcy or completeness. The rep'ort may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ETHIOPIAN ELECTRIC LIGHT AND POWER AUTHORITY April 30, 1964

INTERhATIONAL BANK FOR RECONSTRUCTION AND DEVELOPiTINT REPORT AND RECOIENDfATIONS OF TIE PRESIDENT TO THE EXECUTIVE DIECTORS CONCER5TING A PROPOSED WLAN FROM THE BANTK TO THE ETHIOPIAN ELECTRIC LIGhT

2 INTERhATIONAL BANK FOR RECONSTRUCTION AND DEVELOPiTINT REPORT AND RECOIENDfATIONS OF TIE PRESIDENT TO THE EXECUTIVE DIECTORS CONCER5TING A PROPOSED WLAN FROM THE BANTK TO THE ETHIOPIAN ELECTRIC LIGhT AND POINER AUTHEORITY 1. I submit herewith the following report and recomnendations on a proposed loan from the Bank in an amount in various currencies equivalent to $23.5 million, to the Etlhiopian Electric Light end Power Authority (EELPQ), to finance the foreign exchange cost of a program for the expansion of MELPA's generating, transmission and distribution facilities. EELPA was established as a corporate body in January 1956 by Imparial Charter and functions with a high degree of autonomy. The proposed loan would be guaranteed by the Empire of Ethiopia. PART I --- ISTORICAL 2. Since 1950, the Barnk has made six loans to Ethiopia and the Association one credit, in February The proposed loan would be the first operation in the power sector and the largest single operation by the Bank or IDA in Ethiopia. The Bank was asked to consider financing the EELPA program in the sumnmer of 19$3 and an appraisal mission went to Ethiopia in August/September 196%3 As a result of the mission's visit, EELPA's expansion program, and in particular the schedule for construction of two hydro-electric plants, was revised and agreement was reached with the prospective borrower on the scope of the program to be considered for financing. 3. Formal negotiations were concluded in Washington on April 22, The Borrower was represented by a delegation from EELPA headed by its C-eneral Manager, The Guarantor was represented by the Ambassador of Ethiopia to the United States. 4. The proposed Bank Loan would increase the Bank's lending to Ethiopia from $28.4 million to $51.9 million net of cancellatiox:s, The status, as of March 31, 1964, of the loans already made is as follows:

3 -2- Amount Year Project or Purpose (U,S. $ million equtvalent) 1950 Highway Rehabilitation Development Bank Telecommunications Highway Construction and Improvement 15.0C 1961 Development Bank Telecommunications 2,9 Total net of cancellations 28.4 of which has been repaid 5.8 Total now outstandinig Amount sold 2,0 of which has been repaid le5 co5 Net amount held by Bank 22,1 j Includes $2.4 million undisbursed. 5. Besides the Bank loans, Ethiopia has received from tho Association a credit of U.S. $13.5 million. PART IV -- DESCRIPTION OF TIE FPOPSSED LOAN 6. The proposed loan would have the followsing chiaracteristics: Borrower: Guarantor: Loan Amount: Purpose: Ethiopian Electric Light and Power Authority. Empire of Ethiopia. Equivalent in various currencies to $23.5 million. To finance the foreign exchange cost of: 64 MI of hydro-electric generating capacity; the expansion of the transmission and distribution facilities of the main EELPA interconnected system; and the provision of about 5.8 rm of diesel generating plant and related distribution facilities,

-3 - Anortization: In 41 semi-annual payments beginning March 1, 1969 and ending M4arch 1, 1989. Each payment of interest and principal taken together would be approximately equal.

4 -3 - Anortization: In 41 semi-annual payments beginning March 1, 1969 and ending M4arch 1, Each payment of interest and principal taken together would be approximately equal. Interest Rate: 5-1/2 per annum 0 Commitment Charge: 3/4 of 1% per arnum. PART III - LEGAL INSTRUMENTS 7. Attached are a draft Loan Agreement (Electric Power Project) between the Ethiopian Electric Light and Power Authority and the Bank (No. 1), a draft of a Guarantee Agreement between the Empire of Ethiopia and the Bank (No. 2) and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank (No. 3). 8. The draft Loan Agreement and Guarantee Agreement are substantially in the form normally used for public utility projects. PART IV -- APPFRISAL OF TIE PROPOSED LOAN 9. A detailed appraisal of the project (TO-413a) is attached (No. 4). 10. The project proposed for Bank financing consists of the second and third stages of the Awash river hydro-electric development, each with an installed capacity of 32 MT., the expansion of the transmission and distribution facilities of the main BELPA interconnaected systems and the installation of about of diesel generating plant and the expansion of distribution facilities in 18 self-contained systems. ill The first stage of the Awash river hydro-electric development, the Koka scheme, with a firm capacity of 23 ld and an average yearly output of 110 million KWH, was completed in 1960C The second and third stages (Awash II and III) will be located about 125 kmsa southeast of Addis Ababa, some 25 kms. and 28 kms, downstream of the Koka scheme. Awash II will have a concrete gravity dam about 16 meters high and 110 meters long and a reservoir with a capacity of some 6 million cubic meters. Awash III will have a concrete gravity dam about 20 meters high and about 130 meters long and a reservoir with a capacity of about 0.8 million cubic mieters. Each scheme will have two 16 N9i generating units and an output during a year of average rainfall of 182 million MIN. Awash II is scheduled for completion in 1966 and Awash III in June The most economical way of utilizing the power potential of this particular section of the Awash river is to carry out the development in two stages and by constructing these two stages as one project, as now planned.

5 - U In addition to the hydro plants at Awash II and III, 22 diesel units (one 1,000 VIN set, eleven 300 Rlrt sets and ten 1>5O KI sets) with a total generating capacity of 5.8 PT4 will be installed at various places in Ethiopia now being served by self-contained systems. Transmission and distriibution facilities will be expanded and strergthened to meet the increased power supply and demand. 13. After Awash I1I is commissioned, sufficient firm hydro-clectric capacity and productive capability should be availa!jle to meet the require.mants until 1971; when EETJPA plans to have another hydro-electric scheme, Awash IV, with a capacity of about 40 IN, in operation. i4. Sales by EELPA during the past five years have increased at an average rate of 30% per year, and tne total number of its consuaevrs has risen from about 28,000 in 1959 to about 50,000 in EELPA forecasts an average rate of increase in sales of 20% per year for the years through 197'. In view of the present extremely low consumption per capita of about 5 kwh per annum and the indusbrial expansion which is taking place, these estimates in MELPAts service area are considered realistic and acceptable. 15. Assuming that present tariffs are maintained (as intended by BELPP), it is estimated that the rate of return on average net fixed assets in operation will increase from 6.6% in 1963 to 0.2% in 1964, then fall to 8,4% as a result of bringing Awash II into operation. Thereafter it should increase to 12.1% in 1970/71. This would be satisfactory and should enable EELPA to finance during this period more than 40% of its expansion program out of revenues. 16. The total cost of the project is estimated at $34-9 million, out of which $23.5 million. will be in foreign exchange and be provided by the proposed Bank loan. The Borrower has undertaken and should be able to provide out of itr earnings the local currency expenditures of the project, except for about $1 million in 1965 that will be provided by an overdraft from the Commercial Bank of Ethiopia, 17. EELPA is responsible for all public electricity supply in Ethiopia, with the exception of Asmara in Eritrea. It is well managed and operated, and its organization, which has been built up over the past seven years, is sound. Cn the basis of its past performance EELPA, with the assistance of its consulting engineers, is considered capable of carrying out the construction of the project and operating it efficiently after it is completed. Procurement 18. The Boxrower intends to procure all major items of equipment and su.pplies and to award contracts on the basis of international competitive biddingu

-5 - Economic Situation 19. A report on "The Economy of Ethiopia" (R63-117) was distributed on October 1, 1963.

6 -5 - Economic Situation 19. A report on "The Economy of Ethiopia" (R63-117) was distributed on October 1, There have been no adverse changes in the financial and economic position of the country since that time. The immediate prospects are good because of the unexpected recovery of coffee prices, commencing in the last quarter of The pattern of commodity exports and imports has not changed appreciably since 1962, although there has been an increase in imports of equipment such as building materials, electrical equipment, machinery and tools. Coffee, hides and skins, cereals and oil seeds account for about 80% of the exports. Coffee remains the major export commodity, accounting for 50% of the total. Ethiopia is operating under a quota in accordance with the International Coffee Agreement; the quality of the coffee has improved considerably in recent years and Ethiopia is a relatively low cost producer was the last year in which the Ethiopian trade balance showed a surplus. During the last decade the value of imports has increased steadily by about 8% a year while the value of exports has fluctuated considerably, primarily with variations in coffee prices, but has grown by around 4% per year. In 1963 the value of exports ($92 million) was about 10% higher and the value of imports ($97 million) about 6% lowqer than in Thle total foreign exchange reserves of the country at the end of 1963 stood at the same level as at the end of 1962 or about $65 million, equal to about 8 months imports in The second five-year plan of Ethiopia, wqhich started in September 1962, calls for total public and private investment of about $680 million equivalent, twice the size of the first five-year plan. It sets as its target a growth rate of 4.3% a year as against 3.4% estimated to have been realized during the preceding plan. It is assumed that the contribution of foreign sources to the financial requirements of the plan would be about 45%. While during the first plan the emphasis was supposed to be on infrastructure, in the second plan directly productive investments were to receive priority, The plan, however, is somewhat unrealistic and in the last two years investment expenditure although increasing has been on a more modest scale. The estimated level of total gross investment of about $70 million equivalent in the last three years (or around 8% of G2P) has been twice the level of About three-fourths of public investment, which is under half of the total, has been financed from external sources. 23, The external debt of Ethiopia at December 31, 1963 was $81 million equivalent of which a large proportiona remaans u2disbursed. The Bank has been the major creditor. Ethiopia has a large open line

7 -6- of credit with the Soviet bloc countries (USSR, US $100 million equivalent; Czechoslovakia, US $9.8 million equivalent; and Yugoslavia, US $10 million equivalent), of w-hich a minor part has been allocated to projects and is included in the figurne of total external debt first given, So far, from the USSR line of credit which was signed in 1959; three loans have been signed, one for an agricultural program, one for an oil refinery and one for import of tractors. By December 31, 1963, the total allocation to projects amounted to $l3.4 million, of which $1.7 million had been disbursed. 24. Debt service on the existirg debt is not excessive. It amolnts to US $7-8 million a year over the next few years, or about 8% of the present export earnings. The proposed loan would cause debt ser-vice to rise to $10 million in Altlhough the low per capita income of Ethiopia, her moderate growth prospects and rather good performance justify some aid on non-conventional terms, her present external debt and foreign exchange position, as well as excellent debt servicing record, also permit her to incur some additional debt on conventional terms. PART LV-- COMPLIANCE WI1TH ARTICLES OF AGRZETEIYP 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI -- RECOMTEVDATIOQHS 26. I recommend that the Bank make a loan to the Ethiopian Electric Light and Power Authority in an amount in various currencies equivalcnt to $235 million for a term of 25 years, at an interest rate of 5-1/2% per annum (including commission) and on such other terms as are specified in the attached draft Loan Agreement and the draft Guarantee Agreement and that the Executive Directors of the Bank adopt a Resolution to that effect in the form attached (No. 5). George D. Woods President By: Attachments J. Burke Knapp Washington, D.C. April 30, 1964

FILE COPY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PRESIDENT. Report No. P-819 REPORT AND RECOMMENDATION OF THE TO THE

FILE COPY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PRESIDENT. Report No. P-819 REPORT AND RECOMMENDATION OF THE TO THE Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY RESTRICTED Report No. P-819 This report was prepared for use within the Bank