World Bank Document · CURRENCY EQUIVALENTS Currency Unit = Kenya pounds (KL) K 1 KSh 20 KL1 = US$...

Report No. 740-KE FlLE COPYAppraisal of aMombasa-Nairobi Oil Products Pipeline ProjectRepublic of KenyaJune 6, 1975

Regional Projects DepartmentEastern Africa Regional Office

Not for Public Use

Document of the International Bank for Reconstruction and DevelopmentInternational Development Association

This report was prepared for offiual use only by the Bank Group. It may notbe published, quoted or cited without Bank Group authorization. The Bank Group doesnot accept responsibiliLy for the accuracy or (ompleteness of the report.

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CURRENCY EQUIVALENTS

Currency Unit = Kenya pounds (KL)K 1 KSh 20KL1 = US$ 2.80US$ 1 = KSh 7.14

WEIGHTS AND MEASURES

1 inch (") 5 2.54 centimeters (cm)1 kilometer (km) 3 0.6214 miles (mi)1 cubic meter (m ) 35.315 cubic feet1 m3 of white oilproducts = approximately 0.804 ton

1 ton (metric) 2,205 lbs

Units are in the Metric System, except pipeline size whichis in the British System.

GLOSSARY OF ABBREVIATIONS

ANSI - American National Standards InstituteAPI - American Petroleum InstituteBPA - British Pipeline AgencyCIF - Cost, Insurance, FreightEAC - East African CommunityEAOR - East African Oil Refinery LimitedEAPT - East African Posts and Telecommunications CorporationEARC - East African Railways CorporationEIU - Economist Intelligence UnitKPC - Kenya Pipeline Company LimitedPMM - Peat, Marwick, Mitchell

FISCAL YEAR

January 1 - December 31

Note: In certain publications of the Government of Kenya, the "KenyaPound" (KL) is used. This is a notional unit which is equivalent totwenty Kenya Shillings. It has no legal validity or significance andis used solely for convenience.

KENYA

APPRAISAL OF MOMBASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS ......................... i-ii

I. INTRODUCTION .................................... 1

II. BACKGROUND ...................................... I

A. The Economy ................................ 1B. Sources of Energy Supply .... ............... 2C. Past Consumption and Forecast

Requirements of White Petroleum Products.. 3D. Transport of Petroleum Products .... ........ 4

III. THE KENYA PIPELINE COMPANY ...................... 4

A. Organization and Administration .... ........ 4B. Staff Recruitment and Training .... ......... 5C. Budget, Accounts, Audit and Insurance ...... 5D. Maintenance ................................ 6E. Operational Arrangements .... ............... 6

IV. THE PROJECT ..................................... 7

A. Description of the Project .... ............. 7B. Cost Estimates ............................. 9C. Design and Engineering Services .... ........ 10D. Procurement, Project Schedule

and Disbursements ........................ 11E. Ecology and Employment .... ................. 11F. Land Acquisition ........................... 12

This report has been prepared by Messrs. D. Ngangmuta and M.S. Parthasarathi(Economists), J. Ristorcelli (Engineer) and B. Rollins (Financial Analyst).

TABLE OF CONTENTS (Continued)

Page No..

V. ECONOMIC EVALUATION ............................. 12

A. Project Benefits and Economic Return ....... 12B. Economic Return under Conservative

Assumptions ...... ........................ 14C. Sensitivity Analysis .................... ... 14D. Determination of Optimum Pipe Size ......... 15E. Impact of Project on EARC . . . 15F. Contribution to Government Finances ........ 16

VI. FINANCIAL EVALUATION ............................ 17

A. Operating Expenses ..... .................... 17B. Tariffs . . ............. 17C. Revenues and Expenses ..... .................. 17D. Cash Flows .................... 19E. Financial Plan . ...................... 20F. Balance Sheet ...... ........................ 22

VII. RECOMMENDATIONS ................................. 23

ANNEXES

1. Design Codes and Standards2. Basis of Economic Benefits Analysis3. Impact of Pipeline on EARC4. Assumptions Used for Financial Forecasts

TABLES

1. Consumption of White Oil Products: Annual Growth Rates2. Kenya: Petroleum Products Consumption During 1969-1973

and Forecast to 19793. Uganda: Petroleum Products Consumption During 1969-1973

and Forecast to 19794. Forecast of Pipeline Traffic5. Estimated Project Capital Costs6. Estimated Schedule of Disbursements7. EARC Locomotive and Wagon Requirements to Carry 50Z of White Oil Traffic8. Cost-Benefit Analysis, with 50:50 Road-Rail Modal Split9. Cost-Benefit Analysis, with Rail Alternative10. Economic Return Sensitivity Analysis11. Estimated Number of Trains Per Day on the Mombasa-Nairobi

Section of EARC12. Projected EARC Income Statement (Without Pipeline in Operation)

TABLE CONTENTS (Continued)

13. Projected EARC Income Statement (With Pipeline in Operation)14. Forecast of Oil Traffic Available to EARC from 1978 Onward

(With Pipeline in Operation)15. Estimate of EARC Revenues from Oil Traffic16. Kenya Pipeline Company Limited - Schedule of Operating Expenses17. Kenya Pipeline Company Limited - Schedule of Total Expenses18. Kenya Pipeline Company Limited - Statement of Costs per Cubic Meter19. Kenya Pipeline Company Limited - Statement of Profit and Loss20. Kenya Pipeline Company Limited - Cash Flow21. Kenya Pipeline Company Limited - Projected Balance Sheets

CHART

1. Kenya Pipeline Company - Organization2. Project Schedule

MAP

1. Transport Network and Proposed Pipeline Route

KENYA

APPRAISAL OF MONBASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT

SUMMARY AND CONCLUSIONS

i. During the past decade Kenya's rapid economic growth has caused aheavy demand for white petroleum products to supply the energy needs of thetransport, agricultural, power and industrial sectors. Agriculture, whichaccounts for a third of the gross domestic product, and tourism, which nowearns more foreign exchange than any single commodity, require a reliableand efficient system of transportation which depends on petroleum for energy.Substantial investments, including 14 transport-related Bank Group loans andcredits to Kenya and the East African Community, have been directed towardsimproving the railways, ports, highways and aviation. All growth trendsindicate increasing demand for white petroleum products since these have noready substitutes as energy sources.

ii. It is the Kenya Government's intention, and the objective of thisproject, to provide for the most efficient, reiiable and least costly meansof transportation for petroleum products from Mombasa to Nairobi which, forthe volumes involved, is provided by a pipeline, not the least because a pipe-line will use far less fuel than alternative modes. By relieving the railwayand the highway of the white oil traffic, the project will enable thesemodes to improve their capacity for handling other traffic which is forecastto increase substantially. It will also allow the railway to carry con-siderable volumes of other traffic (including oil traffic the proposed pipe-line will not serve) which might otherwise have to move by road at much highercost.

iii. The project will provide a 452 km, 14" diameter pipeline fromMombasa to Nairobi, four pump stations initially with3a total of 20,800 hp,additional storage tank facilities of about 100,000 m in the Nairobi area,and automatic and manual telecommunications and control systems.

iv. The total cost of the project, including contingencies, local taxesand interest during construction, is estimated at K1 29.6 million (US$ 82.9million equivalent), of which KU 21.9 million (US$ 61.2 million) will be theforeign exchange component. Most of the contracts are expected to be let toforeign contractors in view of the technical expertise required and lack oflocal experience in pipelines.

v. The Bank loan of US$ 20.0 million represents 24% of the total pro-ject cost and will finance almost 33% of the total foreign exchange cost.The Borrower will be the Government-owned Kenya Pipeline Company (KPC), withthe Government as guarantor. The pipe supply contract to be financed fromthe loan will be awarded on the basis of international competitive bidding.

vi. The average economic cost of transporting petroleum products throughthe pipeline from Mombasa to Nairobi is estimated at KSh 22 per ton over the

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assumed 20-year project period, compared with a rail cost gf about KSh 56 andthe present rail tariff of KSh 119 (equivalent to KSh 95/m ). The KenyaGovernment has indicated its intention not to pass on any part of the trans-pqrt cost savings either to the oil companies or to the consumers, but tomaintain a tariff close to the present rail tariff and to use the budgetaryrqivenues generated by KPC for national development purposes. When KPC goesinto operation, the revenues generated by it annually could amount to KI 0.6million in 1979, rising to Kn 18 million in 1997.

vii. Financial projections indicate that KPC will generate substantialpiofits and cash surpluses. The savings in economic costs yield an economicreturn of more than 30%, even on the assumption that the railway will be ableto achieve operational improvements much faster than is likely in practice.

vi,ii. On the basis of the agreements reached during loan negotiations andsummarized in Chapter VII, the proposed project is suitable for a Bank loanof US$20.0 million to the Kenya Pipeline Company, guaranteed by the Governmentof Kenya, at 8-1/2 interest, for 20 years, including a grace period of fouryears.

KENYA

APPRAISAL OF MOMBASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT

I. INTRODUCTION

1.01 The Kenya Pipeline Company Limited (KPC) has requested a Bank loanof US$ 20 million (KE 7.i4 million equivalent) to help finance constructionof a white oil products pipeline from Mombasa to Nairobi, a distance of about452 km. KPC is a Government-owned corporation recently set up under theKenya Companies Act to construct and operate oil pipeline facilities in Kenya.KPC will only transport white petroleum products through the proposed pipeline,while title and ownership of the products will remain with the individual oilcompanies which distribute them. The total cost of the project, includingcontingencies and interest during construction, is estimated at K1 29.6 million(US$ 82.9 million equivalent).

1.02 The proposed Bank Loan will cover about 24% of the entire projectcost or nearly 33% of the foreign exchange cost, estimated at US$61.2 millionequivalent, including US$ 0.44 million for the overseas training of suitablemanagement and senior technical staff and on-the-job training for other operat-ing staff. To help meet the balance of the foreign costs, the Government hasarranged export financing and/or suppliers' credits amounting to US$35.0 mil-lion equivalent. It will help finance the remaining expenditures of US$27.9million equivalent, partly as equity and partly as loan.

1.03 The Bank loan, which will be guaranteed by the Government of Kenya,will be made to KPC which will implement the project. The loan is on theusual Bank terms with 8-1/2% interest and repayment over 20 years, includingfour years of grace.

1.04 This report is based on a feasibility study carried out for theKenya Government by Pencol Engineering Consultants (U.K.) in associationwith Economist Intelligence Unit (EIU) and Peat, Marwick, Mitchell & Co.(PMM), and the findings of an appraisal mission in June-July 1974 consistingof Messrs. J. Ristorcelli (Engineer), M.S. Parthasarathi and D. Ngangmuta(Economists) and K. Rodley (Financial Analyst). Mr. B. Rollins (FinancialAnalyst) participated in completing the appraisal.

*

II. BACKGROUNI)

A. The Economy

2.01 Although the economy of Kenya is largely based on agriculture,which provides about 30-35% of GDP and about 40% of export earnings, trans-port and industry are of growing importance accounting for 7% and 12% of GDP,respectively. Another important sector is tourism which has grown at an

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annual compound rate of about 20% since 1963 and is the most importantsingle foreign exchange earner; there were about 400,000 foreign visitorsto the country in 1973. Despite the higher fuel prices and world economicuncertainties, Kenya's income from tourism has held up remarkably well, andNairobi airport is being modernized and expanded to handle this increasingtraffic (under Loan 826-KE).

2.02 Like most developing countries, Kenya is highly dependent on for-eign trade. The port of Mombasa, which is the country's only internationaldeep-water port, is administered as a joint East African Community (EAC)service by the East African Harbours Corporation, which also administersall other ports in Kenya and Tanzania. Most exports of primary productsand imports of fuel, equipment, machinery and consumer goods for Kenya aswell as for neighboring Uganda, Rwanda, and parts of Zaire, pass throughMombasa.

2.03 Kenya's major inland transport facilities are concentrated inthe 1,000-km corridor between Mombasa and the border with Uganda, passingthrough Nairobi and the populous southwestern area of the country. The rail-way system (a Community service) consists of about 2,000 km of line in Kenya,1,200 km in Uganda and 2,500 km in Tanzania; the road network in Kenya isabout 47,000 km. The country is also well served by international and domesticair transport.

2.04 During the past decade, Kenya's economy has maintained a sustainedreal growth of close to 7% per annum. Growth of light industrial productionand of transport sector services has matched the general economic trend, andthe demand for petroleum products 1/ increased from 680,000 tons in 1963 toabout 1.39 million tons in 1973, an average annual growth of 7.5%. Of this,some 300,000 tons and 860,000 tons respectively were white oil products,with an annual growth of 10.5%.

B. Sources of Energy Supply

2.05 Kenya's principal sources of energy, as of 1973, were: petroleumproducts (including oil-based thermal power stations) 45%; hydro-electricity7%; and other fuels (firewood, charcoal, bagasse) 48%. The latter are theprincipal sources of power for people in the rural areas, almost wholly forcooking. Petroleum products and hydro-electricity provide power for themodern sectors of the economy - industry as well as transportation (rail,road and air). A small volume of imported coal is used in cement manufac-ture. A recent "Analysis of the Energy Situation in Kenya" by the Govern-ment concluded that, in the absence of any major hydroelectric potential

1/ Includes (i) motor gasolines, kerosene and diesel oils, known as "white"products; and (ii) fuel oils known as "black" products.

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beyond those already known and with no known domestic crude oil reserves,Kenya would have to depend on hydroelectric power from Uganda and on in-creasing volumes of petroleum imports (mainly crude) to meet her energyrequirements.

2.06 At present the principal source of supply of petroleum productsto Kenya, Uganda, and Rwanda is the East African Oil Refinery (EAOR) atMombasa, which has an annual capacity of 4.3 million tons. The refinery,owned 50% by the Kenya Government and 50% by Shell, B.P., Esso and Caltex,refines imported Arabian crude on behalf of all the oil distributors. Be-cause of the lack of cracking facilities at the refinery, the distributorshave to import certain products in small quantities to supply the marketwhile re-exporting the surplus of some products. EAOR plans to install acracking facility which will help to reduce both the import of finishedproducts needed by the domestic market and the re-export of unwanted heavierfuels. The refinery will then be fully able to meet area demand for severalyears.

C. Past Consumption and Forecast Requirements of White Petroleum Products

2.07 The products to be transported by the proposed pipeline are:motor gasoline (premium and regular), kerosene (including aviation jet fuel),and automotive and industrial diesel oils. The market area includes all ofKenya (except the coastal area, served directly from the refinery), Uganda,Rwanda, eastern Zaire and southern Sudan, with Kenya accounting for about 70%of the market and Uganda for another 20%.

2.08 The consumption of pipeable white products in the market area ofthe proposed pipeline increased from about 350,000 tons in 1963 to about 1.05million tons in 1973. Of the total, about one-fourth is motor gasoline,another two-fifths kerosene (including jet fuel), and the remainder dieseloils.

2.09 For forecasting purposes, the market was divided into three areas:Kenya; Uganda; and other countries. Between 1975 and 1979 consumption isexpected to grow at close to 7% per year in Kenya and Uganda, and at 6% inthe adjacent areas served from the depots in Uganda. These expec-tations arebased on detailed oil company forecasts which provide the basis for theirmarketing operations. Beyond 1979, the appraisal mission expects growth ratesto decline gradually to 5.5% for Kenya and 4.0% for Uganda and the other areas(Table 1). These compare with a cumulative growth of 7% overall forecast bythe consultants in their feasibility study.

2.10 Total annual demand in the areas to be served by the pipeline willincrease from 1.2 million tons in 1975 to almost 4.4 million tons in 1997.Details are given in Tables 2, 3 and 4. The forecast is conservative inrelation to the basic projection of a 7.5% GDP growth rate per year discussed

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in the most recent Basic Economic Report on Kenya (201-KE of 1/15/74) butquite realistic in the light of recent developments on the oil front andtheir probable impact on the economies of Kenya and her neighbors.

D. Transport of Petroleum Products

2.11 Until 1967, the East African Railways Corporation (EARC) carriedalmost all petroleum products from Mombasa to upcountry destinations. Thisnear-monopoly was protected by the poor condition of the Mombasa-Nairobi road.Between 1967 and 1969 the road was paved and the Kenya Government also beganissuing licenses freely for tanker-trucks on this route. Up to 1970 road haul-iers offered competitive rates for this traffic, but in that year EARC re-duced its tariff for petroleum products for the Mombasa-Nairobi trip to aboutKSh 90 per ton, compared with about KSh 120 by truck. However, EARC was unableto carry all the traffic offered, and by 1973 its share of the oil traffic,both white and black products, on this route had settled at about 50%. As aresult, and with growing petroleum traffic, the highway has been carrying farlarger numbers of heavy trucks than it was designed for, resulting in itsrapid deterioration. The riil rate has since been revised to KSh 119 per ton(equivalent to KSh 95 per M ).

2.12 Recent petroleum price increases have pushed up trucking costsmore seriously than rail costs, but EARC is unable to increase its share ofthe oil traffic due to operational shortcomings and shortage of rolling stock.These are compounded by its financial problems and consequent inability toorder purchases and make other investments in time. For the future, althoughthe railway can be expected to achieve operational improvements, it may atbest be able to hold its present share of 50% in forecast oil traffic in theabsence of a pipeline.

III. THE KENYA PIPELINE COMPANY

A. Organization and Administration

3.01 .he Kenya Pipeline Company Limited (KPC) was incorporated onSeptember 15, 1973, under the Companies Act of the Laws of Kenya. The capi-tal of the Company is KSh 1 million divided into 50,000 shares of KSh 20 each.Of this, 49,999 have been taken up by the Permanent Secretary to the Treasuryand one share by the Permanent Secretary to the Ministry of Power and Communi-cations. During loan negotiations, the Government agreed to increase itsparticipation in equity capital to KSh 80 million and not to permit anyprivate equity participation without the agreement of the Bank (para. 6.12).

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3.02 KPC's Articles of Association are almost entirely based upon TableA of the Companies Act, which effectively regulates limited liability companiesin Kenya. There will be not less than three and not more than seven directors.KPC is expected to function on commercial lines and, as implied in its Articles,civil servants on the board will be augmented by directors having appropriatetechnical or business qualifications. The proposed organization structure isgiven in Chart 1. The management team is headed by a Managing Director whois assisted by a Technical Manager and a Finance and Administration Manager.

B. Staff Recruitment and Training

3.03 All three top management positions in KPC, including the post ofManaging Director have been filled. The candidates selected underwent aninitial program of training in the UK organized jointly by Pencol, the BritishPipeline Agency (BPA) and Peat, Marwick, Mitchell (PMM). The candidate forthe post of Operations Superintendent has also completed his training in theUK. Appointees for the remaining supervisory posts and for skilled jobs willundergo training in Kenya and abroad, under a program worked out by the con-sultants and utilizing the facilities of BPA and others in the UK and oftechnical institutions in Kenya. KPC expects to have them trained and inplace before the pipeline goes into operation.

3.04 Semi-skilled and unskilled staff will be recruited later. Theirtraining will include on-the-job training during construction of the projectand at EAOR. All these training schemes are integral parts of the project.

C. Budget, Accounts, Audit and Insurance

3.05 Under their terms of reference, the consultants are to recommendand implement the most suitable financial and accounting systems coveringbudgetary controls, commercial and cost accounting, documentation methods,procedures and internal checks as well as management information systems. Inthis work, close coordination and consultation will be maintained with KPC'sexternal auditors.

3.06 The qualifications of auditors to registered companies are specifiedin the Kenya Accountants (Designations) Ordinance. Their rights and dutieswith regard to limited companies are regulated by the Companies Act. WhinneyMlurray, a firm of chartered accountants, is now responsible for the annualaudit. During negotiations it was agreed that KPC will continue to retain asexternal auditors a qualified and independent auditing firm acceptable to theBank.

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3.07 In their financial forecasts the consultants have not itemizedinsurance premia, but include them under general overhead costs, which arebased upon the past experience of other oil pipeline organizations. Theconsultants are expected to advise KPC on the extent of cover required.It was agreed during negotiations that, before pipeline operationscommence, KPC will arrange insurance for such risks and in such amountsas are consistent with good commercial practice.

D. Maintenance

3.08 Provision has been made in the project for training specializedmaintenance personnel and for purchasing specialized equipment to maintainand repair the facilities. The pipeline right-of-way will be maintained un-der service arrangements with local contractors as this requires standardearth-moving equipment; this is an acceptable arrangement which will resultin minimizing maintenance costs. The project also provides for constructionof two maintenance depots in Mombasa and Nairobi. These will be the head-quarters for the maintenance staff and will house equipment, shops and stores.

E. Operational Arrangements

3.09 As soon as practicable, but in any case not later than six monthsbefore commissioning the project, i.e. March 31, 1977, KPC has undertaken toenter into contracts or make other suitable arrangements *to cover the fol-lowing areas of operation:

(a) Telecommunications - For the lease of the necessary radiochannels from the newly commissioned Mombasa-Nairobi micro-wave link with the East African Posts and TelecommunicationsCorporation (EAPT). KPC should provide reasonable standbyfacilities for radio links between the EAPT towers and thepump stations.

(b) Aircraft Fueling Facilities at Nairobi Airport - For theturnkey operation of the hydrant fueling system being built

the new Nairobi International Airport.

(c) Product Supply - With EAOR covering products receipt, cus-tody transfer, quality, accountability, volumes to be trans-ported, monthly and daily transport forecasts and otheroperational matters.

(d) Pro-!uc: Delivery - With EARC and the oil companies coveringt-ransport and delivery of products at Nairobi, custodyeranstf_, product quality, loss and accountability and othercp at ,'oaI matters.

(e' TLine Fili - With the oil companies for financing the linefill, the cost of which is approximately K7 1.6 million.

3.10 A two-km lateral pipeline will transport jet fuel directly fromthe main pipeline to storage tanks at the new Nairobi International Airport.Suitable instrumentation and valving will insure that only uncontaminated jetfuel is delivered. From the tanks the jet fuel will be pumped into thehydrant fueling system being built at the airport. A modern fueling in-stallation dispensing with road tankers will thus be available to serviceaircraft. Although the fueling 17acilities will be owned by KPC, they arebeing financed separately from the project and will be operated by a spec-ialist organization, probably one of tne oil companies.

3.11 As the different oil products arrive at the Nairobi depot, suit-able instrumentation and valving will direct each type of fuel to segregatedstorage. From the depot storage tanks the products will be pumped into theoil companies' tanks located in depots adjoining the pipeline terminal, fordistribution to Nairobi and upcountry areas .Metering and recording facilitieswill be provided at the terminal to ensure accurate product accountabilityand custody transfer from KPC to the oil companies.

IV. THE PROJECT

A. Description of the Project

4.01 The proposed pipeline will initially transport in uncontaminatedbatches 1.5 million tons of petroleum products per year. It will be ableto handle some 3.0 million tons p.a. without additional investments. Whenthis volume is reached, around 1989, additional pumps and storage tankswill be provided for an ultimate annual capacity of some 5.0 million tons.

4.02 The project includes:

(a) A 452 km pipeline, 14" in diameter, of high strength(API 5Lx52) steel pipe of 0.280"/0.250" wall thick-ness, including cathodic protection, starting at theMombasa refinery and terminating in the industrial

* area southeast of Nairobi.

(b) Four electric powered pump stations, one of whichwill be located in Mombasa and the other three atapproximately equal distances along the pipeline.Each pump station will have two pumping units of2,600 hp each (giving a total installed hp of 20,800)and a building to house the control and electricalequipment. Power will be supplied by the EastAfrican Power and Light Company.

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(c) A 2 km lateral pipeline, 14" in diameter, from themain pipeline to the new Nairobi airport at Embakasi,where a hydrant fueling system (not part of the pro-ject) will be built to service the aircraft fromthe pipeline storage tanks described in (d) below.Although a smaller diameter pipe would suffice here,design, construction and operational conveniencefavor the 14" size.

(d) Storage capacity of about 40,000 m3 for jet fuel atNairobi airport and about 64,000 m3 for gasolines,general purpose kerosene, and diesel oils at theNairobi receiving depot.

(e) Meters and related facilities near pump station No. Iat Mombasa which, together with the refinery tankage,will provide accurate accounting and custody trans-fer of the products from EAOR to KPC.

(f) A receiving and transfer depot in the industrialarea of Nairobi adjacent to the oil companies'distribution depots. This will comprise: (i) meter-ing and related facilities for proper accounting(in conjunction with the storage tanks) and custodytransfer from KPC to the oil companies, (ii) pumpsand connecting pipelines to deliver products to theadjoining oil company depots, and (iii) an officebuilding which will accommodate the administrative andNairobi operating staffs.

(g) Two maintenance depots, one at the Mombasa pumpstation and one at the Nairobi depot, which willaccommodate maintenance staff, spares, workshopsand maintenance equipment.

(h) Living quarters for operating staff at pump sta-tions 3, 5 and 7 since they will be located somedistance from populated areas.

k-) A supervisory control and telecommunica _ io_systemwhich will provide operational control from Nairobiand will use exclusive radio frequency channels pro-vided by EAPT's newly commissioned micro-wave system.

(j) Staff training (para 3.04).

4.03 The proj ect will require constructio-n of ad- izinal storagecapacity and suction booster pumps within the EADR compoun;d to move theproducts from Z.-L. tanks to the first pump staLt.on on :Ue pipeline. These

facilities are estimated to cost Kfi 300,000 and will be operated by EAOR.The Government, as 50% shareholder, has already instructed EAOR to financeand carry out these works.

B. Cost Estimates

4.04 The total cost of the project, including contingencies, local taxesand interest during construction, is estimated at KE 29.6 million, or US$82.9million equivalent, in 1974 prices. Of this amount, Kb 21.9 million (US$61.2million equivalent), or 74%, is the foreign exchange component. Local taxesare estimated at Kb 2.5 million (US$7.0 million equivalent). Interestduring construction will amount to Kb 2.5 million (US$7.0 million).

4.05 A physical contingency allowance of 7% has been provided on allitems in the project except for pipe on which a contingency of only 1% hasbeen allowed, since detailed route surveys have already been carried out.The price contingency amounts to 36% of the basic project cost, excludingpipe cost, and is calculated by applying the following percentages ofescalation:

Year Construction Costs Material Costs

1974 18 14

1975 15 11

1976 12 7.5

1977 12 7.5

4.06 A large item in the total cost which poses price uncertainties isline pipe. In early 1973 it was selling at approximately US$ 200-300 perton in world markets; by May 1974 the price had risen to about US$ 1,000but has tended to fall somewhat since then. Under competitive biddingpipe is currently available in world markets at prices ranging from US$600to 700 per ton, CIF. The project will require some 26,000 tons of pipe anda price of US$650/ton CIF Mombasa is used in the estimate, with a 6% pro-vision for price escalation. An increase in the price of pipe to, say, evenUS$1,000/ton would increase the cost of the project by only about 15% andwould not basically affect the justification for the project. (See alsoChapter V, Section C).

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4.07 A breakdown of project costs is shown below. Further details aregiven in Table 5.

KL Million US$ Mlll.onForeign Foreign %

Local Exchange Local Exchange of BasicCost Cost Total Cost Qost total Estimate

Materials for:

Pipeline 2.09 6.84 8.93 5.86 19.14 25.00 43.7Other Items 0.95 2.35 3.30 2.67 6_58 9.25 16.1

Civil Works 1.79 4.81 6.60 5.00 13.47 18.47 32.3

Training 0.34 0.16 0.50 0.94 0.44 1.38 2.4

Consultants 0.32 0.80 1.12 0.91 2,25 3.16 5.5

Sub-total: BasicEstimate 5.49 14.96 20.45 15.38 41.88 57.26 100.0

Contingencies:

Physical 0.31 0.74 1.05 0.87 2.06 2.93 5.1Price 1.39 4.21 5.60 3.89 11.80 L5.69 27.4

Total Cost*(includingcontingencies) 7.19 19.91 27.10 20.14 55.74 7-5.88 132.5

Interest DuringConstruction 0.55 1.96 2.51 1.54 5.50 7.04 12.3

Total ProjectCost 7.74 21.87 29.61 21.68 61.24 82.92 144.8

* Includes Kb 2.52 million (US$7.05 million) of local taxes.

C. Design and Engineering Services

4.08 In late 1973 the Kenya Government appointed Pencol EngineeringConsultants (U.K.) to prepare technical, economic and financial studiesan the project. The studies were completed in May 1974 and provided thebasis for the appraisal. The Bank reviewed the designs proposed by Pencoland found them to be sound. The codes and standards to which the pipelinewill be designed are listed in Annex 1.

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4.09 KPC has also appointed Pencol to provide complete project manage-ment, engineering, accounting and training services for implementing theproject and during the initial operating stage. The services to be providedby the consultants comprise: pipeline route selection and survey, preparationof detailed designs and specifications, issue of tenders, prequalificationof contractors, recommendation on contract awards, inspection of equipmentat suppliers' plants, inspection and supervision of construction, and super-vision of commissioning of the facilities. The consultants will also adviseon staff recruitment, training, company organization, and setting up andoperating financial controls and accounting systems until KPC staff is ade-quately trained and the facilities are fully operational. These arrangementsare satisfactory.

D. Procurement, Project Schedule and Disbursements

4.10 Procurement of line pipe and related materials will be by inter-national competitive bidding in accordance with Bank guidelines, and theproposed Bank loan of US$ 20.0 million will finance 100% of the CIF Mombasacost or 90% of ex-factory cost in the case of contracts won by local bidders.Procurement of the other materials such as pumps and storage tanks, as wellas award of the main construction contract, will be by competitive biddinglimited to firms from countries which offer financing.

4.11 A tentative schedule of project implementation is given in Chart 2.The main construction contract is expected to be awarded in December 1975.Construction could commence in February 1976 and be completed by April-May1977. It should then be possible to have the facilities in commercial opera-tion by October 1977, in any case no later than January 1978. The timing ofother activities such as recruitment and training is not critical and can beplanned to suit the construction schedule.

4.12 Disbursements under the loan will be on the basis of 100% of theCIF Mombasa cost of line pipe. Table 6 shows the estimated schedule ofdisbursements based on award of contract in October 1975 and completion ofdelivery by December 1976. Any funds remaining undisbursed on completion ofthe project will be cancelled.

E. Ecology and Employment

4.13 The pipeline will reduce air pollution as it will reduce transportfuel consumption by some 425,000 tons over 20 years when compared to a 50/50road/rail modal split. Further, the pump stations will be powered electric-ally, thus transferring the air pollution problem to large power generatingstations where ft can be dealt with more effectively than in locomotives orroad vehicles.

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4.14 Since the pipeline will be buried, and will follow the naturalcontour of the ground, it will not create drainage or animal migration,problems. It will be a silent, nearly invisible and clean means of over-land transport. The only visible signs of the pipeline will be its storagetank farms and pump stations, and the former are required in any case byroad and rail systems while the latter will be noiseless, clean and unob-trusive. The pipeline will cross the Tsavo National Park through a servicecorridor largely alongside the existing highway, railway, power line andwater pipeline; it will also cross the Nairobi National Park for a shortdistance at a point very near the northeast Park boundary. There are onlytwo relatively minor river crossings and here, as in other smaller watercourses, the pipeline will be buried a safe depth under the river-bed.

4.15 During construction the project will provide direct employment for.some 700 persons. When completed it will employ some 120 persons in 1977Tising to 150 when the four additional pumping stations are set up around1989. These numbers are, of course, smaller than those needed by EARC forwhite oil products transport from Mombasa to Nairobi. However, the employ-maent that could be generated by developmental projects financed from theadditional Government revenues could certainly be more significant than theemployment foregone on EARC (para 5.15).

F. Land Acquisition

4.16 The pipeline route traverses private, Government and Trust land.Negotiations are underway for the purchase of private land with the mediationdf the Commissioner of Lands. Some of the Trust and Government land is atpresent being farmed with the approval of the Ministry of Agriculture andcompensation for possible crop loss is being negotiated; the easements throughthese lands will be granted by the Commissioner of Lands. The Government hasgiven assurances that no delays to the project will result from thesenegotiations.

V. ECONOMIC EVALUATION

A. Project Benefits and Economic Return

5.01 When the proposed pipeline goes into operation it will providea much less expensive and more reliable means of transporting most white oil'products which now move by rail or road from Mombasa to Nairobi at consider-ably greater cost. The long-run economic cost of moving one ton of white oilproducts from Mombasa to Nairobi by pipeline has been estimated at onlyKSh 22, compared with about KSh 56 by rail and KSh 140 by road. The pipelinewill also release substantial rail capacity on the Mombasa-Nairobi section forthe carriage of other traffic whose volume is expected to continue to grow.

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5.02 Due to the general inadequacies of EARC and the present limitedcapacity on the Mombasa-Nairobi section, the two competing modes - road andrail - each carry about 50% of the white oil traffic. Substantial invest-ments will be needed to increase EARC's capacity to a level at which it couldcontinue to carry its 50% share of the forecast oil traffic. These include:

(i) completion of the dieselisation program alreadyunderway;

(ii) lengthening of passing loops to enable the runningof longer trains, also partly underway;

(iii) strengthening of wagon couplings essential to theoperation of longer trains, at a cost of aboutKi 6 million;

(iv) introduction of centralized traffic control at theappropriate time at a minimum cost of about KE 3million;

(v) purchase of tank wagons and locomotives in stepwith traffic growth (Table 7); and

(vi) construction of more storage tanks than would beneeded with a pipeline.

Item (i) will increase daily line capacity on the Mombasa-Nairobi sectionfrom the present 26 trains (13 in each direction) to 32. Items (ii) and (iii)will help increase average train sizes from the present 1,200 tons trailingload to 1,600 tons for general freight trains and 1,900 tons for oil tank-wagontrains. Item (iv) will raise daily capacity further to about 56 trains.

5.03 To enable the Mombasa-Nairobi road to carry its 50% share of theoil traffic, a major program of reconstruction would be necessary, and pro-vision would also have to be made for improved highway maintenance.

5.04 The pipeline will allow elimination or deferment of all these itemsof road and rail investment, and the substantial savings thus achieved repre-sent economic benefits resulting from its construction. These, together withsavings in operating costs, yield a return of 37% on the economic costs ofthe project over the 20-year forecast period (Annex 2 and Table 8).

5.05 The costs considered for purposes of estimating the return are theeconomic costs, including physical contingencies, but excluding all taxes andduties as well as the contingency provision for price escalation and the costof land (since most of the pipeline route traverses land with little alterna-tive economic use). Also included are essential investments inside the EAORcompound in Mombasa (para 4.03). Foreign exchange costs have been shadowpriced at 130% and labor at 75% of actual costs. It must be emphasized that

- 14 -

the cost-benefit comparison makes optimistic assumptions about EARC's abilityto achieve operational improvements, as otherwise many of the investmentswould be needed even earlier to enable it to continue to carry the whiteproducts traffic (para 5.11); in that case, the return on the pipeline projectwould be even higher.

5.06 Approximately 30% of the pipeline traffic will be for destinationsoutside Kenya, with about 20% going to Uganda and the balance of 10% to Zaire,Rwanda, etc. In the event that the Kenya Government were to pass on to thesecountries all of the transport cost savings on their white oil traffic, theeconomic return to Kenya could drop to 26%, although the economic viabilityof the project will be unaffected.

B. Economic Return under Conservative Assumptions

5.07 If EARC could overcome its deficiencies and provide adequate capa-city in, say, five or six years' time and attract all the white oil trafficon the Mombasa-Nairobi section by about 1982, to carry the oil traffic offeredfrom then on, it would have to make even larger investments in new locomotivesand tank wagons, as well as undertake signalling and other improvements ear-lier. Construction of the pipeline would either relieve EARC of the need tomake some of these investments or help to defer their timing to a later datewhen general traffic growth necessitates such improvements. In addition itwould eliminate the direct rail operating costs of the oil traffic transferringto the pipeline. During the period up to 1982 it would also help to avoidroad transport costs involved in moving white oil traffic which the railwaywill be unable to handle. These volumes are assumed to decline graduallyfrom 50% in 1978 to nil in 1982 (Table 9). The benefits, in terms of allthese avoidable costs, would yield an economic return of 31% on the proposedpipeline project.

C. Sensitivity Analysis

5.08 Several tests of the sensitivity of the economic return to changesin the key variables indicate that the return could be as high as 44% underfavorable conditions, but could drop to as low as 24% under unfavorableassumptions. If the foreign exchange and labor costs and benefits are notshadow priced, the return would be even higher at 46%. The most importantvariable is the volume of traffic: if the actual volume of traffic is only75% of forecast levels, the return would drop to about 28%. Details of thesensitivity analysis results are shown in Table 10.

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D. Determination of Optimum Pipe Size

5.09 The consultants considered various pipeline sizes ranging from10" to 20" in order to design an optimum project. On the basis of prelim-inary analyses, they narrowed the choice to 12" vs. 14" pipe. The formerwould involve slightly lower initial investment costs than the latter, buthigher operating costs and add.itional investments in pumping stations inlater years to handle the growing traffic. To determine the optimum pipe size,the investment and operating cost streams for the two alternatives were dis-counted at 10%, 12% and 15%, which showed that a 14" pipeline is more economic.

E. Impact of Project on EARC

5.10 Construction of the proposed pipeline will have an impact on EARCoperations on this section, its tank wagon requirements, and its overallfinances and operations. These are discussed in turn below:

(i) Operations on Mombasa-Nairobi Section

5.11 On the assumption that EARC could quickly complete its dieselizationprogram, lengthen passing loops on the Mombasa-Nairobi section, and strengthenwagon couplings (para 5.02), Table 11 shows the estimated volume of trafficand the number of trains per day on the section from 1977 onward. If EARCcontinues to carry its 50% share of white oil traffic, even with all theimprovements, the line capacity will be inadequate beyond 1991, when central-ized traffic control will be needed to cope with the growing traffic. If, onthe other hand, EARC were to carry all white oil traffic, centralized trafficcontrol would be needed even earlier, by1985. In either situation, the pipe-line project will help avoid substantial investments and, at the same time,release capacity on the Mombasa-Nairobi section for the carriage of generaltraffic, which will be to the overall benefit of the region. Otherwise, partof the other traffic will have to move by road at higher cost, involving muchhigher levels of fuel consumption.

(ii) Tank Wagon Requirements

5.12 On the assumption that it will carry little white oil traffic onthe Mombasa-Nairobi section from 1977, EARC's tank wagon requirements forall petroleum products traffic on the Kenya-Uganda route are estimated atabout 400 in 1978, rising to 480 wagons in 1981. EARC's present fleet inoperation on this section numbers about 460 tank wagons. This means thatthere will be a small temporary surplus in 1978 which normal traffic growthwill eliminate by about 1980. If, as expected, EARC attracts additional non-pipeline oil traffic from road, the surplus will disappear even earlier.

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(iii) EARC Finances

5.13 The proposed pipeline will mean a considerable loss of profitabletraffic to EARC on the Mombasa-Nairobi section. Tables 12 and 13 indicatethe forecast income and expenditure position with and without the white oiltraffic on this section. Although the loss of this traffic will result insavings in operating costs, the loss in revenue is considerably larger.EARC should be able to carry all the black oil products on this section which,including the 250,000 tons or so going by trucks at present, would amount tosome 600,000 tons per year. Also, as the demand for black oil products growsin Kenya and Uganda (Tables 2 and 3), the volume of black oil traffic availableto EARC will continue to increase, with volumes on the Mombasa-Nairobi sectionsurpassing present EARC oil traffic levels by around 1985. Meanwhile, volumesof all oil traffic on EARC beyond Nairobi will increase steadily (even if thepresent modal split continues ) (Table 14).

5.14 With the expected operational improvements and the rolling stockthat will be released by the pipeline, EARC should be able to capture mostof the long-distance non-pipeline oil traffic now going by road, particularlyin view of the recent fuel price increases which have affected road trans-portation costs more seriously than the railway. This would enable it, with-out any further change in tariffs, to break even by 1982, compared with thepossibility of breaking even from 1977 onwards if the pipeline were not built.

(iv) Overall Operations

5.15 The above analysis of the financial impact has some important impli-cations for EARC's overall operations. The Mombasa-Nairobi section is theheaviest traffic section of EARC, with a freight traffic volume of about 3.5million tons in 1972, compared with 2.6 million tons on the second mostheavily used Nairobi-Nakuru section. Profits on the Mombasa-Nairobi linehave in the past helped the railway to offset undetermined losses on someother sections and services of the system, and to maintain relatively lowtariffs on low-value bulk commodities which have benefited all three PartnerStates of the Community. Construction of the proposed pipeline will reduceEARC's ability to continue to provide such services, without either an increasein tariffs to reflect relative costs more closely and/or offsetting subsidiesfrom the governments concerned once losses are determined. (See also Annex 3)

F. Contribution to Government Finances

5.16 The proposed project will make an important contribution to theKenya Government's budgetary resources. The Government will be able toobtain Kh 0.6 million in 1979, rising to Kh 18 million in 1997, in the formof income tax on and dividend payments by KPC, which it can use to financeother development projects.

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VI. FINANCIAL EVALUATION

A. Operating Expenses

6.01 Estimated operating expenses for tqe project are shown in detailin Table 16. For determining the cost per m of throughput, operating ex-penses are divided among the three activities: (1) the basic Mombasa-Nairobi pipeline, (2) the delivery from Nairobi storage tanks into adjoiningoil company depots for delivery, in turn, to road or rail tankers for onwardshipment, and (3) the airport storage/hydrant system at Embakasi. Provisionfor depreciation of capital assets and interest on long term debt is addedto arrive at the total costs (Table3l7), which are divided by the estimatedthroughput to obtain the cost per m (Table 18).

6.02 Total costs for the basic pipeline and the road/rail terminaltend to decrease through to 1986 as the interest on long term debt de-creases at a greater rate than the increase in operating expenses. Theplanned investments in 1990 to handle the growing traffic result in highercharges for depreciation as well as increased operating expenses from thatyear.

B. Tariffs

6.03 The average financial cost of transporti3g white petroleum pro-ducts is estimated at KSh 25 per ton (KSh 20 per m ) over the project periodincluding depreciation and interest, compared with the present rail tariffof KSh 119 per ton, equivalent to KSh 95 per ml. (See Table 18).

6.04 An important consideration in deciding the level of the pipelinetariff is the Kenya Government's expressed intention not to allow the retailprice of white oil products to be reduced to reflect the saving in transportcosts when the pipeline goes into operation. At the same time, KPC shouldso fix its tariffs as to ensure its own financial viability. During loannegotiations the Governmeni and KPC gave assurances that the tariff will benot less than KSH 90 per m , including any development surcharge or other 3levies. For the purpose of financial evaluation, a tariff of KSH 90 per m ,to be retained by KPC, has been used.

C. Revenues and Expenses

6.05 The projected statements of profit and loss for KPC for the years1978 to 1997 are set out in Table 19. The results for 1978 to 1982 sum-marized below, indicate that, even in the very first year of operation, thereturn on net fixed assets would be 18Z.

- 18 -

KE '0001978 1979 1980 1981 1982

Revenue 7,916 8,496 8,987 9,567 10,184

Expenses 852 889 932 977 1,025

Operating surplus 7,064 7,607 8,055 8,590 9,159

Depreciation 1,008 1,007 1,006 1,014 1,016Amortization 743 743 742 741 135

Operating income 5,313 5,857 6,307 6,835 8,008

Interest 2,365 2,488 2,276 2,038 1,777Income tax 625 1,122 1,296 1,762 2,482

Net profit after tax 2,323 2,247 2,735 3,035 3,749

Rate of return aftertax on net fixedassets (%) 18.1 19.0 21.0 22.0 24.9

6.06 Provision for depreciation has been calculated on a straight-linebasis. Approximately 80% of the capital costs are depreciated over theirestimated economic life of 30 years; the remainder over periods rangingfrom four years to twenty years. Provision for depreciation begins in the yearof acquisition.

6.07 KPC is subject to corporate income tax, currentlv at the rate of45% of taxable income. To arrive at taxable income, the profit before pro-vision for depreciation and amortization of preliminary expenses is reducedby capital cost allowances. These are 25% for vehicles, 2 1/2% for buildingsand 12 1/2% for the remainder, and are calculated using the reducing balancemethod. Use of this method results in high charges to income for tax purposes.,and consequently low taxes, during the early years of the life of an asset,and lower charges with resultant higher taxes during the later years. (Taxablelosses, if incurred, may be carried forward indefinitely to offset future profits).

- 19 -

D. Cash Flows

6.08 Details of projected cash flows are set out in Table 20 andsummarized below for the years 1978-1982:

Kb' 0001978 1979 1980 1981 1982

Cash from Operations

Operating surplus 7,064 7,607 8,055 8,590 9,159Deduct:Debtors lesscreditors 643 47 39 46 50

Income tax - 625 1,122 1,296 1L76

Total from operations 6,421 6,935 6,894 7,248 7,347

Application

Capital expenditures 202 - - 225 170

Loans - principal 1,802 2,091 2,412 2,650 2,911interest 2,365 2,488 2,276 2,038 1,777

Total application 4,369 4,579 4,688 4,913 4,858

Annual surplus 2,052 2,356 2,206 2,335 2,489Opening balance 365 2,417 4,773 6,979 9,314

Closing balance 2,417 4,773 6,979 9,314 11,803

6.09 KPC's operations will provide sufficient internally generated fundsto finance new capital investments as needed, pay interest on and amortizelong term loans and debts, and provide for dividends. Profits exceed thedebt service coverage requirement of 1.5 times (para. 6.14) in 1985 andthereafter dividends have been calculated at the maximum amount (para. 6.15).

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E. Financial Plan

6.10 To finance the cost of the pipeline project estimated to beKL29.6 million, including interest during construction (para. 4.04), thetotal cash requirements are as follows:

Ki'000 US$'000Local Foreign Total Total

i) Pipeline project 7,192 19,908 27,100 75,880

ii) Interest duringconstruction on (i) 553 1,962 2,515 7,042

iii) Working capital 163 - 163 456

Sub-total 7,908 21,870 29,778 83,378

iv) Less equity capital 4,000 - 4,000 11,200

33, 908 21,870 25,778 72,178

v) Airport hydrantsystem 1,776 4,973

vi) Interest duringconstruction on (v) 199 557

Total cash required 27,753 77,708

6.11 The main airport hydrant system itself is being financed separatelyfrom the pipeline project by the Government of Kenya. It is proposed that theremainder of KL 25.778 million (US$72.178 million) for the pipeline be financedas shown below:

K'000 US$'000

Export and/or suppliers' credits 12,518 35,050

IBRD 7,143 20,000

Local/other borrowings 6,117 17,128

25,778 72,178

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Of the local/other borrowings, the Government agreed during negotiations toarrange to provide Kn 6.0 million on terms comparable to those on export!suppliers' credits, with the balance to be borrowed by KPC from a local bankto meet working capital requirements.

6.12 The present equity of KPC is KE 50,000. As already stated inpara. 3.01, the Government agreed during negotiations to increase its equityin share capital to KE 4 million. KPC's capital structure will then be asfollows:

K1'000 US$'000 %

Export and/orsuppliers' credits 12,518 35,050 39.42

IBRD 7,143 20,000 22.50

Other loans 8,092 22,658 25.48

Total debt 27,753 77,708 87.40

Equity 4,000 11,200 12.60

Total capital 31,753 88,908 100.00

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F. Balance Sheet

6.13 The details of the projected balance sheets are set out in Table21 and summarized below:

KM'0001977 1978 1979 1980

Assets

Current assets:Cash 365 2,417 4,773 6,979Debtors - 660 708 749

365 3,077 5,481 7,728

Fixed assets:Pipeline and equipment 26,447 26,447 26,447 26,447Accumulated depreciation - 1,003 2,015 3,021

Net fixed assets 26,447 25,439 24,432 23,426Preliminary expenses 4,941 4,400 3,657 2,915

Total assets 31,753 32,916 33,570 34,069

Liabilities and Equity

Current liabilities:Payables -17 18 20Income tax payable - 625 1,122 1,296Long-term debt-current 1,802 2,091 2,412 _2,650

1,802 2,733 3,552 3,966

Long-term debt 25,951 23,860 21,448 18,798

Equity:Share capital 4,000 4,000 4,000 4,000Retained earnings - 2,343 4,570 7,305

Total equity 4,000 __L32 8,570 11,305

Total liabilities and equity 31,753 32,916 33,570 34,069

Debt/equity ratio 87:13 79:21 71:29 62:38

Debt service coverage - 1.54 1.42 1.44

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6.14 As can be seen, the debt/equity ratio, which is high in 1978, thefirst year of operation, rapidly improves and, by 1982, equity is largerthan debt. It was agreed during negotiations that KPC will incur no furtherdebt financing unless the net profit after tax, but excluding depreciation,amortization and interest charges, is 1.5 times the debt service requirements.

6.15 It was also agreed during negotiations that dividends shall bedeclared only if (i) the debt service coverage will not be less than 1.5and, (ii) after the payment of such dividend, the current assets of KPCwill be at least 1.5 times the current liabilities.

VII. RECOMMENDATIONS

7.01 During loan negotiations, agreement was reached with the Govern-ment and/or KPC, as the case may be, that satisfactory arrangements will bemade or continue to be made on the following matters:

(a) equity capital of KPC (paras. 3.01 and 6.12);

(b) audit (para 3.06);

(c) insurance (para 3.07);

(d) telecommunications facilities for KPC (para 3.09(a));

(e) aircraft fueling facilities at Nairobi airport (para3.09(b));

(f) product supply (para 3.09(c));

(g) product delivery (para 3.09(d));

(h) line fill (para 3.09(e));

(i) land acquisition (para 4.16);

(j) pipeline tariff (para 6.04);

(k) balance of costs of the project (para 6.11);

(l) future debt financing (para 6.14); and

(m) declaration of dividends (para 6.15).

7.02 On the basis of the above, the proposed project is suitable for

a Bank loan of US$20 million to KPC at 8-1/2% interest for 20 years, in-cluding four years of grace, with the Kenya Government as guarantor.

ANNEX 1

KENYA

MONBASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT

KENYA PIPELINE COMPANY

Design Codes and Standards

ANSI B31-4-1971 Liquid Petroleum TransportationPipeline Systems.

API Std 5LX or 5LS Specifications for Line Pipe.Specification 27th Edition, March 1973.

API Std 650 Welded Steel Tanks for OilStorage. Fifth Edition, 1973.

API Std 1102 Liquid Petroleum Pipelines Cross-ing Railways and 'Highways. ThirdEdition, 1957.

API Std 1104 Standard for Welding Pipelines andRelated Facilities.

BS:CP1021 : 1973 British Standard Code of Practicesfor Cathodic Protection.

Source: Pencol

ANNEX 2Page 1

KENYA

MOMBASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT

Basis of Economic Benefits Analysis

1. At present all white petroleum products traffic from Mombasa toinland destinations is shared equally by railway and road. Table 4 showsthe anticipated future traffic volume to be transported from Mombasa.

2. In the economic evaluation (Chapter V), it has been assumed thatthe best that EARC can expect is to hold its present share of white productstraffic. To carry even this traffic, the railway will have to undertake theinvestments listed in para 5.02.

3. Thus the economic benefits attributable to the pipeline are theavoidable railway investments, direct rail operating costs associated withthe transportation of white oil products, truck operating costs and additionalroad maintenance costs (Table 8). The additional numbers of locomotives andtank wagons needed by EARC to carry the white oil traffic on the Mombasa-Nairobi section have been determined on the basis of incremental traffic,the average tank-wagon capacity and the average train load and average turn-around time. An average double-headed train is assumed to haul 1,900 tonstrailing load (35 tank-wagons, each of 35 tons capacity), compared with thepresent 1,200 tons. Turnaround time is assumed to be two days for locomotivesand three days for wagons, compared with three days and four days respective-ly at present.

4. Table 7 shows the numbers of locomotives and tank-wagons required(based on the above criteria) for each year for EARC to carry 50% of thewhite products traffic. To carry all the traffic, the investments neededwill be approximately double. Straight-line depreciation was applied todetermine the residual value of both locomotives and tank-wagons at the endof the assumed project life of 20 years. Provision is made for equipmentwrite-off and/or replacement at the end of their useful life based on theage of existing and new equipment. Thus the replacement cost of old tank-wagons is shown as benefits, since these too are avoidable if the pipelineis built. Wagon couplings need to be strengthened around 1979-80 to enablethe running of longer trains than at present, but a pipeline would postponethis investment for over ten years. Investment in centralized traffic controlis also necessary when the number of trains per day reaches 32 as well as inadditional storage tanks periodically to handle the growing traffic.

5. All these railway costs, together with the truck operating and partof the road maintenance costs, are avoidable with the pipeline in operationand have been regarded as the economic benefits of the project. The economicreturn in Chapter V - Section A has been calculated on this basis.

ANNEX 2Page 2

6. The rail only situation, discussed in Chapter V - Section B, willrequire, advancing of investments to strengthen wagon couplings and cen-tralized traffic control and additional outlays for tank wagons and loco-motives and for storage tanks at the Nairobi rail terminal (Table 9).

ANNEX 3Page 1

KENYA


Impact of Pipeline on EARC

1. Under the Loan Agreements relating to Loans 425-EA (in 1965) and674-EA (in 1970), EARC is expected to "maintain its financial position inaccordance with sound financial and business principles and practices" andto generate "revenues sufficient to produce an annual rate of return of notless than 6% for fiscal year 1976 and thereafter, on the value of the netfixed assets in operation". The East African Railway Act also requires EARCto conduct its business according to commercial principles and secure areturn on investment.

2. Under Loan 674-EA, EARC has also agreed to:

"a) Take all necessary steps within its power to revise itstariff and rate structure in accordance with sound economicand commercial principles for railway operations. To thatend, all rates for the Borrower's services shall be set:

(i) at least equal to the short-run marginal costs ofproviding such services; and

(ii) to provide a contribution toward covering the fullcost of providing such services, taking into account theelasticity of demand for transport of the commodity usingsuch services; provided, however, no rates shall be setabove that level which is generally competitive with efficientroad transport on paved roads, or where no such road has beenconstructed, would be generally competitive if such construc-tion had taken place.

"b) Establish a cost accounting system to determine the relevantcosts of the services provided by the Borrower"

3. EARC's actual financial position since 1970 has been as follows:

AX1NNEX 3Page 2

(KE' 000)

OperatingOperating Expenses Net Op. Interest 'Jet

Year Revenues (incl. depreciation) Revenue Payments Losses

1970 28,700 25,700 3,000 3,700 -700

1971 30,000 27,100 2,900 3,700 -800

1972 28,800 28,600 200 3,900 -3,700

1973 30,000 29,700 300 4,000 -3,700

The EARC rate structure which prevailed until the late 1960's was largelybased on cross-subsidization, in that low-rated bulk commodities weretransported below movement costs, while high-rated goods such as petroleumproducts paid substantially higher rates above movement costs, enabling EARCto remain viable overall. But in recent years, due to growing competitionfrom road haulers, the supluses from the latter group have not been adequateto cover the deficits of the former.

4. Since that time, however, many tariff reductions have been intro-duced in an effort to meet road competition. In early 1972, the managementof EARC also submitted to its Board and to the East African CommunicationsCouncil detailed proposals for selective tariff increases based on itscost studies, but due to problems within the Community, the tariff increaseswere not approved until May 1974, by which time costs had escalated further.A further increase primarily to take into account fuel cost increases sinceOctober 1973 was approved in October 1974. In a full year, these increaseswill yield an additional revenue of about 30%, that is, K+ 10 million peryear (see also Table 13). However, since recent worldwide price increaseshave added about KE 7 million annually to operating costs, EARC will con-tinue to incur operating deficits until at least 1982, whereas, without thepipeline, it is expected to show surpluses from 1977 onwards (see para. 5and Tables 12 and 13).

5. At 1973 traffic levels, EARC is estimated to have derived a netoperating income of KE 1.5 million per year from its 50% share of the whiteoil traffic between Mombasa and Nairobi. With the construction of thepipeline this contribution will cease to be available.

6. To help meet this situation, EARC can:

(i) utilize the rolling stock rleased by construction of thepipeline to carry all black oil traffic on the Mombasa-Nairobisection and more oil traffic of all categories beyond Nairobi.This should be possible since surplus rolling stock will beinitially available, and in the last 15 months road costs have

ANNEX 3Page 3

risen even more than rail costs. It is assumed that such move-ments will in fact occur and that, in particular, EARC willcapture the 250,000 tons or so of black oil products going bytruck between Mombasa and Nairobi annually at present;

(ii) utilize spare line capacity between Mombada and Nairobiafter the loss of white oil traffic to carry an increasingshare of other commercial traffic now being carried by road;

(iii) seek further selective tariff increases, particularly onservices and sections which do not cover costs. This shouldbe based on continually updating the costing study alreadycompleted which formed the basis of the 1974 tariff increases;

(iv) request specific subsidies from the Governments of the PartnerStates concerned, in the event that the latter feel that aloss-making service or section should continue; and

(v) seek to reduce operating expenses by greater efficiency,including increased staff productivity.

7. Present thinking within the Partner States is that the railway'scurrent operational and financial problems can only be solved by decentraliz-ing its managerial structure, to the extent that the regional management ineach Partner State is fundamentally responsible for t'ne operation and finaaecsof its own region. In this event the impact of the pipeline, and the need forthe measures listed in paragraph 6 above, may well be confined to the KenyaRegion of EARC.

AINNEX 4

KENYA

MOMBASA-NAIROBI OIIL PRODUCTS PIPELINE PROJECT

Assumptions Used for Financial Forecasts

1. Interest charges during the construction period are capitalizedand amortized over the twenty year projection period.

2. Staff training costs and initial consultants fees are capitalizedand amortized over the first four years of operations.

33. The tariff for the pipeline has been assumed at KSII 90 per m,close to the existing rail tariff from Mombasa to Nairobi.

4. Capital expenditures, revenues and operating expense have beencalculated using a constant monetary unit (at 1974 prices).

5. Provision has been made in the cash requirements for initialworking capital of K6 163,000 which represents ten weeks' operating expenses.

6. Revenues are assumed to be collected one month after billing dateand expenses paid currently with the exception of rentals and power where aone-month payment period has been allowed.

TABLE 1

KENYA


Consumption of White Oil Products: Annual Growth Rates

( % )

1969-73 1975-79 1979-86 1986-91 1991-96

Kenya 11.9 6.8 6.5 6.0 5.5

Uganda 0.7 7.6 6.0 5.0 4.0

Other areas 6.2 6.0 5.0 4.0

Total 7.0 6.3 5.7 5 0

Source: Mission estimates

May 1975

KENYA

MOMBA SA-NkIROBI OIL PRODUCTS PIPELINE PROJECT

Kerya: Petroleum Products Consumption During 1969-1973 and Forecast to 1979C'I 6000toiis)

Esti-Actuals mate Forecast

1E 1970 l9i~ 2~~711222 129 i 2 E2F-3

A. White oil products

Motor gasoline 154 171 192 213 229 - 256 271 286 303 318

Aviation turbine fuel 161 174 190 220 270 - 276 294 301 313 338

Kerosene 41 42 47 52 56 - 60 61 63 65 66Diesel oils 193 209 250 280 308 - 352 397 436 _85 -08

549 596 679 765 863 900 944 1,023 1,086 1,166 1,230

B. Other white oil products 12 14 14 16 19 - 22 24 26 28 29

C. Black oil productsl/ 436 476 516 5 508 - 487 480 499 519 53

Total 997 1,086 1,209 1,298 1,390 1,420 1,453 1,527 1,611 1,713 1,812

1/ Decline from 1972 to 1976 partly due to substitution of heavy fuel oils with diesel oil,

principally by EARC.

Source: Oil company and Mission estimates

May 1975

KENYA


Uanda: Petroleum Productsg Consumpton During_ 1969-173 and Forecast t 1979('000 tOWNS-)

Esti-Actuals mate Forecast

196 1970 iM 1972 1973 1974 1975 1976 1977 1978 1979

A. White ol products

Motor gasoline 89 96 99 104 103 - 103 105 107 110 112Aviation turbine fuel 58 73 77 67 37 - 36 40 45 50 55Kerosene 27 29 29 35 39 - 44 48 51 55 59Diesel oils 71 84 87 82 73 - 76 84 91 96 101

245 282 292 288 252 250 259 277 294 311 327

B. Other0witeoilproducts 3 3 4 3 3 - 3 3 3 3 4

C~Black~~~8 42 i 60 72 66 - 68 72 J 7 80

Total 290 343 356 363 321 310 330 352 372 392 411

Source: Oil company and Mission estimates

May 1975

TABLE4

KENYA


Forecast of Pipeline Traffic(1000 tons)

Year Kenya Uganda Other Areas Total

1978 1,0049 311 135 i,4951979 1,107 327 141 1,5751980 1,180 350 150 1,6801981 1,260 370 160 1,7901982 1,34o 4.00 170 1,9101983 1,420 4430 180 2,0301984 1,520 460 190 2,1701985 1,620 490 210 2,3201986 1,720 520 230 2,4701987 1,820 550 240 2,6101988 1,930 580 250 2,7601989 2,050 610 260 2,9201990 2,170 64o 280 3,0901991 2,300 670 290 3,2601992 2,430 690 300 3,14201993 2,560 720 310 3,5901994 2,700 750 330 3,7801995 2,850 780 340 3,9701996 3,010 810 350 4,1701997 3,170 840 360 4,370


May 1975

.TE.ffA

KENYA PIPELINE COMPANY


Estimated Project Capital Costs

----------- in K '000 ---- ---------in US $ '000-----Local Foreign Total Local Foreign % of BasicCurrency Exchange Cost Currency Exchange Total Project Cost

1. Materials:Pipeline 2,091 6,836 8,927 5,855 19,141 24,996 43.7Nairobi Terminals 288 982 1,270 806 2,750 3,556 6.2Pump Stations 627 1,197 1,824 1,756 3,351 5,107 8.9Telecommunications - 76 76 - 212 212 0.4Vehicles and Equipment 38 94 132 106 26)4 370 0.6

Sub-total: Materials 3,044 9,185 12,229 8,523 25,718 34,2)41 59.8

2. Civil Works:Pipeline 906 3,674 4,580 2,537 10,287 12,824 22.4Nairobi Terminals 555 344 899 1,554 963 2,517 4.4Pump Stations 325 792 1,117 910 2,218 3,128 5.5

Sub-total: Civil Works 1,786 4,810 6,596 5,001 13;468 18,469 32.3

3. Training 336 159 495 941 445 1,386 2.44. Consultants Services 325 804 1,129 910 2,251 3,161 5.5

5. Basic Project Costl/ 5,491 14,958 20,449 15,375 41,882 57,257 100.06. Contingencies:

Physical2/ 312 736 1,048 874 2,061 2,935 5.1Price 4,214 5,604 3,892 11,799 15,691 27.4

Sub-total: Contingencies 1,702 4,950 6,652 4,766 13,860 18,626 32.5

7. Total Cost-' 7,193 19,908 27,101 20,1l 55,742 75,883 132.

1/ Local cost includes KE 2.069 million for local taxes. 3/ Local cost includes KL 2.517 million for local taxes2/ 1% on pipe and about 8% on other costs.


May 1975

TABLE 6

KENYA


Kenya Pipeline Company Limited

Estimated Schedule of Disbursements

IBRD Fiscal Cumulative DisbursementsYear and Quarter at end of Quarter

u s$ ' 000

1975/76

September 30, 1975 1,800

December 31, 1975 2,000

March 31, 1976 2,200

June 30, 1976 7,000

1976/77

September 30, 1976 12,000

December 31, 1976 16,000

March 31, 1977 18,000

June 30, 1977 18,h00

1977/78

September 30, 1977 19,200

December 31, 1977 19,200

March 31, 1978 20,000


May 1975

KENYA

MOI4BASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT_ . - ~~~~~~~~~~~~1/EARC Wdagon and Locomotive Requirements to Carry 50% of White Oil Traffic

(for Mombasa-Nairobi Section)

Addi tional 2/ 3/74hite Oi1 No. of Wagons Additional Number Needed Locomotives Cost of- Cost of- Total

Year Traffic Needed Replacement New Purchises Total Needed TKIagons Locomotives Cost('000 tons) KLItOO0 (KE '000) (KE'OOO)

1978 750 235 0 10 10 10 125 2,000 2,1251979 790 248 16 13 29 0 362 0 3621980 845 265 3 17 20 1 250 200 4501981 900 282 0 17 17 1 212 200 4121982 955 299 0 17 17 0 212 0 2121983 1,015 318 36 19 55 1 238 200 4381984 1,085 340 0 22 22 1 275 200 4751985 1,160 364 17 24 41 1 512 200 7121986 1,235 387 1 23 24 1 300 200 5001987 1,305 409 0 22 22 1 275 200 4751988 1,380 432 4 23 27 1 288 200 4881989 1,460 458 28 26 54 1 675 200 8751990 1,545 484 21 26 47 1 588 200 7881991 1,630 511 105 27 132 1 1,650 200 1,8501992 1,710 536 0 25 25 1 312 200 5121993 1,795 562 0 26 26 1 325 200 5251994 1,890 592 0 30 30 1 375 200 5751995 1,985 622 0 30 30 1 375 200 5751996 2,085 653 27 31 58 2 725 400 1,1251997 2,185 685 0 32 32 1 400 200 600

1/ If the railway were to carry all the white oil traffic, wagon and locomotive requirements would beapproximately twice the estimates shown.

2/ KE 12,500 each.3/ KE 200,000 each.


May 1975

KENYA

MOMBASA-NAIROBT OIL PRODUCTS PIPELINE PROJECT

Cost-Benefit Analysis, with 50:50 Road-Rail Modal Split(in Kf '000)

Costs BenefitsCapital ODerating Avoidable rail Avoidable road Avoidable rolling Other avoidable

Year costs costs op. costs costs I/ stock purchases investments

1974 122 0 0 0 0 0

1975 3,560 0 0 0 0 01976 9,550 0 0 0 0 0

1977 10,638 100 0 0 0 200 2/

1978 1,964 654 506 7,622 2,826 0

1979 0 681 685 8,053 481 3.900 3/

1980 0 707 854 8,578 598 3,900 3/

1981 112 736 931 9,127 548 0 a1982 0 769 1,060 9,681 282 233 2/

1983 0 814 1,125 10,284 582 0

1984 0 856 1,202 10,986 632 0

1985 112 915 1,279 11,635 945 0

1986 0 975 1,362 12,384 665 01987 31 1,046 1,446 13,092 632 246 2/

1988 0 1,122 1,530 13,841 649 01989 5,332 1,211 1,619 14,644 1,164 1,950 4/1990 0 1,321 1,714 15,499 1,048 1,950 /1991 167 1,426 1,806 16,343 2,460 0

1992 1,228 1,583 1,903 17,151 681 186 2/

1993 112 1,755 1,998 18,007 698 -5,850 /

1994 0 1,952 2,105 18,951 765 -5,8501995 0 2,177 2,210 19,912 765 0

1996 0 2,200 2,310 19,972 1,496 0

1997 0 2,220 2,41.0 20,032 798 0

(1998) (O) (0) (0) (0) (-8,999) (O)

Economic Return = 35%

1/ 32-ton tanker-trailer, with empty backhaul 4/ For centralized traffic control. This is a serious m

2/ Additional storage underestimate if metal sleepers also have to be

3/ For strengthening wagon couplings replaced by non-conducting sleepers simultaneously- before they are due for renewal

Source: Avoided investments in centralized traffic controlMaYu1975 Mission estimates and strengthening wagon couplings

WMV YA


Cost-Benefit Analysis, with Rail Alternative(in Kf tOOO)

Costs BenefitsCapital Operating Avoidable rail Avoidable road Avoidable rolling Other avoidable

Year costs costs op. costs costs 1/ stock purchases investments

1974 122 0 0 0 0 0 01975 3,560 0 0 0 0 01976 9,550 0 0 0 0 3,900 3/1977 10,638 100 0 0 0 3,900 3/1978 1,965 654 506 7,450 2,826 390 2/1979 0 681 856 5,670 1,811 0 -1980 0 707 1,281 3,890 2,095 01981 112 736 1,721 2,060 2,410 01982 0 769 2,120 0 2,527 466 2/1983 0 814 2,251 0 3,008 1,950 T/1984 0 856 2,405 0 1,266 1,950 7/1985 112 914 2,558 0 1,596 01986 0 975 2,727 0 1,330 01987 31 1,o46 2,891 0 1,264 485 2/1988 0 1,122 3,o60 0 1,381 01989 5,332 1,211 3,239 0 1,829 01990 0 1,321 3,428 0 1,762 01991 167 1,426 3,612 0 3,176 01992 1,228 1,583 3,807 0 1,363 372 2/1993 112 1,755 3,996 0 1,412 -5,850 7/1994 0 1,952 4,210 0 1,780 -5,850 §/1995 0 2,177 4,420 0 1,530 01996 0 2,200 4,620 0 2,284 01997 0 2,220 4, 840 o 1,580 0(1998). (0) (o) (0) (0) (-17,070) (0) 3

Economic Return = 32%

1/ 32-ton tanker-trailer, with empty backhaul 4/ For centralized traffic control. This is a serious2/ Additional storage underestimate if metal sleepers also have to be3/ For strengthening wagon couplings replaced by non-conducting sleepers simultaneously

before they are due for renewalSource: Mission estimates 5/ Avoided investments in centralized traffic control

May 1975 and strengthening wagon couplings

TABLE 10

KENYA


Economic Return Sensitivity Analysis

Parameters Return (%)

1. Most probable return 37

2. Construction costover-run of 15% 30

3. Operating costover-run of 25% 36

4.. Benefit increase of 25% 44

5. Benefit decrease of 25% 28

6. Benefits confined to Kenya traffic 26

7. With "rail only" alternative 31

8. tt market prices 46

* Based on shadow pricing foreign exchange at 130%of official rate and labor costs at 75% of actualwages


May 1975

KENYA

MOMBASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT1/

Estimated Number of Trains Per Bay on the Mombasa-Nairobi Section of EARC

l.clite Oil No. of Black Oil No. of General No. of Total No. No. of TrainsTraffic 1/ Trains 2/ Traffic Trains 2/ Down Traffio rain Other of Trains Per Day Without

__':-. r (CO") tonsT er Da( '000 tons) Da tons) Per Day- Trains- Per DaZ 6/ WIite Oil Traffic

1978 750 2.08 666 1.85 1,288 4.88 1.53 20.68 16.521979 790 2.19 707 1.96 1,333 5. c5 1.56 21.52 17.141980 845 2.35 739 2.05 1,379 5.22 1.59 2P.42 17.721981 900 2.50 769 2.14 1,427 5.4o 1.62 23.32 18.321982 955 2.65 8214 2.29 1,477 5.59 1.66 24.38 19.081983 1,015 2.82 855 ?.37 1,529 5.79 1.69 25.34 19.70

)84 1,085 3.01 881 2.45 1,583 6..o 1.72 26.36 20.341;8, i,160 3.22 907 2.52 1,638 6.20 1.76 27.40 20.96

198 6 1,235 3.43 932 2.59 1,695 6.42 1.79 28.46 21.601987 1,305 3.63 963 2.68 1,755 6.65 1.83 29.58 22.321988 1,380 3.83 987 2.74 1,816 6.88 1.86 30.62 22.961989 1,460 4.o6 1,013 2.81 1,880 7.12 1.90 31.78 23.661990 1,545 4.29 1,040 2.89 1,946 7.37 1.94 32.98 24.401901 1,630 4.53 1,066 2.96 2,014 7.63 1.98 34.20 25.141992 1,71c0 14 .75 1,093 3.04 2,084 7.89 2.02 35.40 25.901°93 1,795 4.99 1,119 3.11 2,157 8.17 2.o6 36.66 26.681994 1,890 5.25 1,146 3.18 2,233 8.146 2.10 37.98 27.481995 1,985 5.51 1,170 3.25 2,311 8.75 2.14 39.30 28.281996 2,085 5.79 1,180 3.28 2,392 9.06 2.18 40.62 29.041997 2,185 6.06 1,200 3.33 2,450 9.28 2.22 41.78 29.66

1/ Only hplf the total upcountry traffic assumed to move by train, with remainder going by road 300 days per year.2/ 1,900 tons trailing load, or about 1,2CO tons of freight per train.3/ General traffic is heavier in the down direction and determines the total number of trains in both directions.TT/ 1,600 tons trailing load, or about 880 tons of freight per train. F

§. A 2% annual growth assumed.'/ Tw4ce the number of trains in the predominant direction.


May 1975

KENYA

MOMBASA-NAIROBT OTL FRODUCTS PIELINE PROJECT

Projected EARC Income StatementWithout Pieline in O02erationj(in U. 000, at 1974 prices)

1971 1972 1973 1975 1977 1978 1979 1980 1981 1982

A. Operating Revenues

Passengers 1,700 1,900 2,300 2,400 2,500 2,600 2,700 2,800 2,900 3,000

Other coaching 600 600 600 600 600 600 600 600 600 600

Goods traffic 24,500 23,600 24,100 25,000 26,800 27,950 29,150 30,400 31,750 33,050Livestock 400 500 500 500 500 500 500 500 500 500

Catering 400 500 500 500 500 500 550 550 550 600Water transport 400 400 500 500 500 500 500 500 500 500

Road services 1,100 1,000 900 1,000 1,000 1,000 1,000 1,000 1,000 1,-000Miscellaneous 900 300 600 500 500 500 500 500 500 500

30,000 28,800 30,009 31,000 32,930 34,150 35,500 36,850 38,300 39,750

Tarifi increasesin 1974 - - - 9,800 j 350 10,750 11,150 11,600 12,050 12,500

Total revenues 30,000 28,800 30,000 40,800 43,250 44,900 46,650 48,450 50,350 52,250

B. OpetratLing Expe nses~

Operating &Maintenance 22,300 23,800 24,800 26,250 27,100 28,250 29,350 30,550 31,700 32,950

Depreciation 4,800 4 800 4,900 5,000 5,000 5,100 5,200 5,300 5 00 5,50027,100 28,600 29,700 31,250 32,100 33,350 34,550 35,850 37,100 38,450

Cost increasesin 1974 - - - 6,500 6750 7L050 7,3 7 650 7,930 8,250 m

Total expenses 27,100 28,600 29,700 37,750 38,850 40,400 41,900 43,500 45,050 46,700

C. Net Ope0 tipg_ Income 2,900 200 300 3,050 4,400 450 4,75 4,950 5,300 5,550

Interest charges 3,700 3,900 4,000 4,000 4,100 4,200 4,300 4,400 4,500 4,600

D. Net income (loss) (800) (3,700) (3,700) (950) 300 300 450 550 800 950


May 1975

KEN'TYA

M0MBASA-NAf1R0BI OIL PRODUCTS PIPELINE PROJECT

Projected EARC Income Statement(With Pipeline in Operation)

(in KE '000, at 1974 prices)

1971 1972 1973 1975 1977 1978 1979 1980 1981 1982

A. Operating Revenues

Passengers 1,700 1,900 2,300 2,400 2,500 2,600 2,700 2,800 2,900 3,000Other coaching 600 600 600 600 600 600 600 600 600 600Goods traffic 24,500 23,600 24,100 25,000 26,800 24,850 25,850 26,900 28,000 29,100Livestock 400 500 500 500 500 500 500 500 500 500

Catering 400 500 500 500 500 500 550 550 550 600Water transport 400 400 500 500 500 500 500 500 500 500

Road services 1,100 1,000 900 1,000 1,000 1,000 1,000 1,000 1,000 1,000Miscellaneous 900 300 600 500 500 500 500 500 500 500

30,000 28,800 30,000 31,000 32,900 31,050 32,200 33,350 34,550 35,800

Tariff increasesin 1974 - - - _9,800 10,350 9,30 9,650 10,000 10,3 0 10,750

Total revenues 30,000 28,800 30,000 40,800 43,250 40,350 41,850 43,350 44,900 46,550

B. Operating Expenses

Operating &Maintenance 22,300 23,800 24,800 26,250 27,100 27,800 28,650 29,650 30,750 31,850

Depreciation 4,800 4,800 4,900 5,000 5,00 _ 5,000 5,000 5,000 5,00027,100 28,600 29,700 31,250 32,100 32,800 33,650 34,650 35,750 36,850

Cost increases in1973/74 - - -_ 6L5 00 6,750 7,000 7,150 7,350 7,650 _7,00

Total expenses 27,100 28,600 29,700 37,750 38,850 39,800 40,800 42,000 43,400 44,750

C. Net Operating Income 2,900 200 300 3,050 4,4oo 550 1,050 1,350 ,500 _1,800

Interest charges 3,700 3,900 4,000 4,000 4,100 4,100 4,100 4,100 4,100 4,100

D. Net Income (loss) (800) (3,700) (3,700 (950 300 (3,550) 3,050) (2,750) (2,600) 0)Net revenue from addi-tional oil traffic j/ - - - - - 2,016 2,141 2,238 2,333 2,435

E. Net income (loss) (800) (3,700) (3,700) (950) 300 (1,534) (909) (512) (262) 135

1/ See Tables 14 and 15

Source: Fission estimates

May 1975

KENYA


Forecast of Oil Traffic Available to EARC from 1978 Onward(With Pipeline in Operation)

('000 tons)

3/nya _ Uganda Other Areas All Areas

White Products White Products White ProductsFrom 1 7rom Black 2 /From l/ From From From Black -

Year Morobasa -Nairobi Products5 Mombasf Nairobi Products Products Mombasa Nairobi Products Total

1978 21 378 519 3 327 82 45 24 705 646 1,3751979 22 399 553 4 348 85 48 26 747 686 1,4591980 23 425 575 4 370 87 50 27 795 712 1,5341981 24 450 600 4 390 89 52 28 840 741 1,6091982 25 470 625 4 410 91 54 29 880 770 1,6791983 33 500 650 5 440 93 56 38 940 799 1,7771984 34 530 670 5 470 95 58 39 1,000 823 1,8621985 35 570 690 5 490 97 60 40 1,060 847 1,9471986 36 600 710 6 520 100 62 42 1,120 872 2,0341987 37 630 730 6 550 102 64 43 1,180 897 2,1201988 38 660 750 6 580 105 66 44 1,240 921 2,2051989 39 700 770 7 610 107 68 46 1,310 945 2,2911990 40 740 790 7 640 110 70 47 1,380 970 2,3971991 b1 770 810 8 670 112 72 49 1,440 994 2,4831992 42 800 830 8 690 115 74 50 1,490 1,019 2,5591993 44 840 850 9 720 117 76 53 1,560 1,043 2,6561994 46 900 870 9 750 120 78 55 1,650 1,068 2,7931995 48 940 890 10 780 120 80 58 1,720 1,090 2,8681996 50 1,000 900 10 810 120 80 60 1,810 1,100 2,9701997 5c 1,050 910 10 840 120 80 60 1,890 1,120 3,070

1/ Aviation fuel for propeller aircraft, liquified gas, etc., whose volumes are too small for transportationby pipeline.

2/ Includes EARC's own needs of about 140,000 tons in 1978, rising to about 200,000 tons by 1997.3/ White product volumes are included under Uganda.i/ Includes bitumen.


Ma,y 1975

KENYA


Estimate of EARC Revenues from Oil Traffic(KS '000)

Kenya Uganda Other AreasWhite Products White Products Total Additional

From 1/ From 2/ Black 31 From 4/From 5/Black 6/Black 7/ Total Net 8/ NetYear Mombasa- Nairobi- ProductR Mombasa- Nairobi- Products- Products- Gross (50%) Revenues 9/

1978 147 378 2,653 40 2,371 1,066 765 7,420 3,710 1,855

1979 i5s 399 2,891 53 2,523 1,105 816 7,941 3,970 1,985

1P80 161 425 3,025 53 2,682 1,131 850 8,307 h,17h 2,087

1981 168 h5O 3,220 53 2,828 1,157 884 8,760 4,380 2,190

1982 175 470 3,370 53 2,972 1,183 918 9,141 4,570 2,285

1983 231 500 3,545 66 3,190 1,209 952 9,693 h,846 2,423

1984 238 530 3,685 66 3,h08 1,235 986 i0,1tP8 5,07h 2,537w

1985 2h5 570 3,710 66 3,552 1,261 1,020 10,52h 5,262 2,631

1986 252 600 3,860 80 3,770 1,300 1,054 10,906 5,L53 2,727

1987 259 630 4,OlO 80 3,988 1,326 1,088 11,381 5,690 2,845

1/ 1hO KSh/ton 6/ 260 KSh/ton2/ 20 KSh/ton 7/ 340 KSh/ton3/ 140 KSh/ton 8/ Allowing for costs estimated at 50%.TV 265 KSh/ton 9/ ssuming half the traffic will be additional traffic.P/ 145 KSh/ton

Source: Mission estimatesMay 1975

KENYA


Kenya Pipeline Company LimitedSchedule of Operating Expenses

(KE '000)

Year Ended Admini- Mainte- Product Inhi- Wayleave Total

December 31 Salaries stration nance Rentals Losses biin Power Charges Eene

1978 213 101 55 48 67 4 159 205 852

1979 213 101 55 48 71 5 175 221 1839

L980 213 101 55 48 78 239 92

1981 - 214 101 55 48 82 5 213 25°

1982 214 101 55 48 85 6 237 279 1,025

1963 21)4 101 55 48 90 6 264 301 1,079

1984 214 101 55 48 98 7 297 324 1,144

1985 214 101 55 48 103 7 333 350 1,211

1986 215 101 56 48 111 8 377 377 1,293

1987 215 101 56 48 119 8 427 407 1,381

1988 215 101 57 48 126 9 486 438 1,430

1989 232 101 61 48 135 9 533 473 1,592

1990 232 101 61 48 145 11 610 510 1i T,8

1991 233 101 62 48 152 12 701 550 1,8591992 233 101 62 48 162 12 809 594 2,021

1993 233 101 62 48 173 13 937 635 2,202

1994 233 101 62 48 184 14 1,093 685 2,420

1995 233 101 62 48 198 15 1,270 739 2,666

1996 233 101 62 48 211 16 1,477 798 2,946

1997 233 101 62 48 211 16 1,477 798 2,946

1/ The mitigation of internal corrosion in the pipeline.I-i0%

Sotirce: Feasibility Study and Mission estimates.

May 1975

KENYA


Kenya Pipeline Company LimitedSchedule of Total Expenses

AirportYe.ar Ended Operating Total Basic Road/Rail HydrantDocurneber 31 Exfpenses Depreciation Interest Expenses Pipeline Terminal S2yste Total

1978 852 1,008 !2,365 4,225 3,661 69 55 4,2251979 889 1,007 i2,488 4,384 3,773 1 550 4,384119f0 932 1,006 2,276 4,214 3,638 57 519 4,2141981 977 1,014 2,038 4,029 3,441 55 533 L,02911982 1,025 1,016 1,777 3,818 3,229 53 536 3,81811983 1,079 1,016 1,468 3,583 2,992 51 540 3,583t9811 i,144 1,015 1,173 3,332 2,739 49 5)4= 3,332J ,;85 1,211 1,016 827 3,054 2,461 46 547 3, 9541986 1,211 1,016 4L3 2,761 2,157 45 559 2,76J1987 1,381 1,025 h49 2,815 2,181 45 589 2, 31511988 1,48o 1,025 373 2,878 2,214 46 618 2,8781939 1,592 1,035 335 2,962 2,251 47 664 2,96Z1990 1,718 1,352 293 3,363 2,610 52 701 3,3631991 1,859 1,391 245 3,495 2,661 53 781 3,49i1992 2,021 1,390 195 3,606 2,729 54 823 3,60d1.993 2,202 1,390 139 3,731 2,815 54 862 3,73i 1994 2,4202 1,390 80 3,891 2,926 55 910 3,891995 2,466 1,391 17 4,o74 3 ,054 56 964 1,0741996 2,666 1,391 - 4,336 3,254 57 1,025 4,33 6i19976 2,946 1,390 _ 4,336 3,254 57 1,025 4,336

Source: Feasibility Study and Mission estimates

May 1975

KENYA

MOMBNSA-NAIfOBI OIL PRODUCTS PIPELINE PROJECT

Kenya Pipeline Company LimitedStatement of Costs per Cubic M4eter

(KE '000)

Basic Pieline Road/Rail Terminal Airport Rydrant_SystemTotal Through- Cost! Total Through- Cost/ Total Through- Cost/

Year Ended Costs put c.m. Costs put c.m. Costs put c.m.December 31 ( '000) (l C*M.) (KSh) (KS '000) (o03c.m.) (KSh L _00) (l 3c.m.) h

1978 3,661 1,759 41.6 59 711 1.7 505 485 20.81979 3,773 1,888 40.0 61 756 1.6 550 526 20.91980 3,638 1,997 36.4 57 794 1.4 519 561 18.51981 3,441 2,126 32.2 55 840 1.2 533 604 17.61982 3,229 2,263 28.4 53 887 1.0 536 647 16.61983 2,992 2,399 24.8 51 934 1.0 540 692 15.61984 2,739 2,548 21.4 h9 986 0.8 544 740 14.71985 2,461 2,723 18.0 46 1,045 0.8 547 797 13.71986 2,157 2,884 14.8 45 1,104 o.8 559 851 13.11987 2,181 3,071 14.2 45 1,164 o.6 589 917 12.81988 2,214 3,245 13.6 46 1,220 0.6 618 976 12.71989 2,251 3,431 13.0 47 1,281 0.6 664 1,041 12.81990 2,610 3,630 14.2 52 1,346 0.6 701 1,108 12.71991 2,661 3,841 13.8 53 1,413 o.6 781 1,184 13.21992 2,729 4,053 13.4 54 1,482 0.6 823 1,259 13.11993 2,815 4,252 13.2 54 1,554 0.6 862 1,320 13.11994 2,926 4,463 13.0 55 1,612 0.6 910 1,398 13.01995 3,054 4,699 12.8 56 1,692 o.6 964 1,484 13.01996 3,254 4,935 13.0 57 1,766 0.6 1,025 1,571 13.01997 3,254 5,184 12.4 57 1,855 o.6 1,025 1,651 12.4


May 1975

KENYA

MOMBAS A-NAIROBI OIL PRODUCTS PIPELINE PROJECT

Kenya Pipeline Company LimitedStatement of Profit and loss

(Kr, 000)

Year Ended Operating Operating Depre- Amorti- Operating Interest Income NotDecember 31 Revenue Expenses Surplus ciation zation Income Expnse Tax Profit

1978 7,916 852 7,064 1,008 743 5,313 2,365 625 2,3231979 8,496 889 7,607 1,007 743 5,857 2,488 1,122 2,2471980 8,987 932 8,055 1,006 742 6,307 2,276 1,296 2,735198 1 9,567 977 8,590 1,014 741 6,835 2,038 1,762 3,0351982 10,184 1,025 9,159' 1,016 135 8,008 1,777 2,482 3,7491983 10,796 1,079 9,717 1,016 135 8,566 1,488 2,969 4,1091984 11,466 1,144 10,322 1,015 136 9,171 1,173 3,475 4,5231986 12,254 1,211 11,043 1,016 136 9,891 827 4,035 5,029198 6 12,978 1,293 11,685 1,025 136 10,524 443 4,533 5,5481987 13,820 1,381 12,439 1,025 136 11,278 409 4,955 5,9141988 14,603 1,480 13,123 1,025 136 11,962 373 5,334 6,2551989 15,440 1,592 13,848i 1,035 136 12,677 335 5,695 6,6471990 16,335 1,718 14,617 1,352 136 13,129 293 5,798 7,0381991 17,285 1,859 15,426 1,391 136 13,899 245 6,199 7,4551992 18,239 2,021 16,218 1,390 136 14,692 195 6,648 7,8491993 19,134 2,202 16,9321 1,390 136 15,406 139 6,987 8,2801994 20,084 2,420 17,664 1,391 136 16,137 80 7,394 8,6631995 21,146 2,666 18,480 1,391 136 16,953 17 7,855 9,0811996 22,208 2,946 19,2627 1,390 136 17,736 - 8,271 9,4651997 23,328 2,946 20,3821 1,390 136 18,856 - 8,824 10,032

Source: Feasibility Study and Mission Estimates.

May 1975

KENYA


Kenya Pipeline Company LimitedCash Flow

( KE '000 )

Source of Funds Application of Funds

Debtors ! Income Cash AnnualYear Ended Operating Less Tax from Capital Loans Cash * Opening Closing

December 31 Surplus Creditors, Payments Operations Payments Principal Interest Dividends Total Surplus Balance Balance

1978 7,064 643 - 6,421 202 1,802 2,365 - 4,369 2,052 365 2,4171979 7,607 47 625 6,935 - 2,091 2, 8 - 4,579 2,356 2,417 4,7731980 8,055 39 1,122 6,894 - 2,412 2,276 - 4,689 2,206 4,773 6,9791981 8,590 46 1,296 7,248 225 2,650 2,038 - 4,913 2,335 6,979 9,3141982 9,159 50 1,762 7,347 170 2,911 1,777 - 4,858 2,489 9,314 11,803

1983 9,717 49 2,482 7,186 - 3,200 1,488 - 4,688 2,498 11,803 14,301

1984 10,322 52 2,969 7,301 - 3,515 1,173 - ,,688 2,613 14,301 16,9141985 11,043 63 3,475 7,505 - 3,866 827 - 4,693 2,812 i6,914 19,7261986 11,685 57 4,035 7,593 410 382 443 15,034 16,269 (8,676) 19,726 11,0501987 12,439 66 4,533 7,840 - 416 409 5,616 6,441 1,399 11,050 12,4491988 13,123 60 4,955 8,108 41 452 373 6,391 7,257 851 12,449 13,3001989 13,848 67 5,334 8,447 329 490 335 6,674 7,828 619 13,300 13,919

1990 14,617 67 5,695 8,855 6,602 532 293 6,754 14,181 (5,326) 13,919 8,5931991 15,426 72 5,798 9,556 1,174 580 245 1,265 3,264 6,292 8,593 14,8851992 16,218 71 6,199 9,948 133 630 195 6,949 7,907 2,041 14,885 16,926 .- 3

1993 16,932 63 6,648 13,221 1,361 686 139 8,299 10,k85 ( 264) L6,926 16,662 >

1994 17,664 67 6,987 1),610 170 745 80 7,496 8,491 2,119 16,662 18,781 S

1995 18,480 73 7,394 11,013 - 393 17 9,593 10,003 1,010 18,781 19,7911996 19,262 72 7,855 11,335 -- - 10,566 10,566 769 19,791 20,560 °

1997 20,382 93 8,271 12,018 - _ .10,775 10,775 1,243 20,560 21,803

* Deficits are shown in brackets


May 1975

K6NYA

MXMSA-NAIROBI OIL PRODUCTS PIPELINE PROJECT

Kenra Pipeline Comwany LimitedPra.jected Balance Sheets

(KS 'o000)

Year ihded Deceeoerj3 318k 1972 19980 19bl 1982 1983 196 1986 1987 1988 1989 1990

Current Assets:Cash 2,417 4,773 6,979 9,314 11,803 14,301 16,914 19,726 11,050 12,149 13,300 13,919 8,593Debtors Q 6708 749 797 84 900 955 1.021 1.081 1.152 1.217 1.2B7 1.361

3,077 5,4831 7,728 10,111 12,652 15,201 17,869 20,747 12,131 13,601 14,517 15,206 9,954

Fixed AssetsPipeline and equipment 26,447 26,447 26,447 26,672 26,672 26,672 26,672 26,672 26,912 26,912 26,912 27,241 33,290Accumulated depreciation i,o3 0 2,015 3,021 5 L8b 5b97 6,912 7,928 8.763 9.808 10, 792 11.827 12.626

Net fixed assetA 25,439 24,432 23,426 22,637 21,791 20,775 19,760 lb,744 18,129 17,104 16,120 15,414 20,664

Preliminary Exnenes 4,400 3,657 2,915 2,174 2,039 1,904 1,768 1,632 1,496 1,360 1,224 1,088 952

Total Assets 3 -916 33.L7 ik!S2 34.L922 36t482 37 880 39,397 41,123 31,756 32,065 31,861 31,708 31,570

Liabilities and EouityCurrent Liabilitie_:

Payables 17 18 20 22 24 26 29 32 35 40 45 48 55Income tax payable 625 1,122 1,296 1,762 2,482 2,969 3,475 4,035 4,533 4,955 5,334 5,695 5,798Dividends payable - - - - - - - 15,034 5,616 6,391 6,674 6,754 1,265Long-term debt - current 2,091 2,412 2.650 2.911 3.200 3.S15 3.866 382 U6 4.52 490 532 .80

2,733 3,552 3,966 4,695 5,706 6,510 7,370 19,483 10,600 11,838 12,543 13,029 7,698

Lonz-Terrm Deb 23,86o 21,448 18,7Yo 15,867 12,687 9,172 5,306 4,924 4,508 4,u56 3,566 3,034 2,454

Euitv:Share Capital .000 4.000 4,000 _4. 4.000 4.000 4.000 4.000 4.0Q0 LOW L4.QO X)Ow Jh.oooRetained earnings:

Opening - 2,3?3 4,570 7,305 10,340 i.4,o89 18,190 22,721 12,716 12,648 12,171 11,752 11,645Prolit 2,323 2,247 2,735 3,035 3,749 4,109 4,523 5,029 5,548 5,914 6;255 6,647 7,038Divinends --- - - - 1.5,034 ', 6vh 6.391 6 ,6 7)s 6,754 I,265Closinrg 2, 323 4,570 7,305 10,340 14,0B9 18,198 22,721 12,716 1264171 11752 11,645 17,418

I Equitv. t6.32 8.570 11.305 14,340 18,089 22,198 26,721 16,716 16, 16171 15,752 15,645 21,418

Total Liabilities and Eouitv 2 33,570 34,069 34,922 36,482 37,80 39,397 41,123 31,756 2,65 31,708 31,57

Debt equity ratio 79/21 71/29 62/38 53/A7 41/59 29/71 17/83 23/77 21/79 20/80 18/82 16/84 10/90Debt service coverage 1.54 1.42 1.44 1.45 1.42 1.43 1.46 1.49 8.67 9.07 9.44 9.88 10.69Rate of return after tax on

net fixed assets (%) 18.1 19.0 21.0 22.0 24.9 26.3 28.1 30.4 32.5 35.9 39.9 44.3 40.6

Source: Feasibilit5 Study and Mission

Nay 1975

KENYAMOMBASA-NAIROBI OIL PRODUCTS PIPELINE PROJECT

KENYA PIPELINE COMPANYORGANIZATION CHART

| BOARD OF lDIRECTORS

DRCTOR ll

| __ § ~~~~~~~~~~~~~~~~~FINANCIALMACNIAGER ADMINISTRATION

MANAGER | 1\4~~~~~~~~~~~~~ANAGER

Worrld Bank 92191R)

MaY 1975

KENYA

MOMBASA- NA1:OBT OII, PRIDDUCTS PIPELINE PROJECT

Proj;ect Schedule

_ 1 975 1976 1977

1 QTR 2QTR 3QTR 4QTR 1 QTR 2QTR 3QTR LQTR 1 QTR 2QTR 3QTR )4QTR

Te:; gn, Procurement, Tnspection r2'o-r, ii,.sion _____ ___ _ __._- _.____

Pi Jeline Materials _ _ | _ D

PLi eline Construction

Nairobi Te minals, Matel-ials

f 1ai.f1 bhi Teirlinals, Construction

Puwnm Stations, Materials ___ --- ---

Purnp 2tations, Construction

TelecuurYmnications & Control, AMaterials ______

Training -

A= Contract Award

D = Delivery at Site

May 1975

D r 'S U' V D'iNn ;g''[kC!

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World Bank Document · CURRENCY EQUIVALENTS Currency Unit = Kenya pounds (KL) K 1 KSh 20 KL1 = US$...

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Transcript of World Bank Document · CURRENCY EQUIVALENTS Currency Unit = Kenya pounds (KL) K 1 KSh 20 KL1 = US$...