Ceylon - Fourth Power Project

Document of The World Bank FILECOPY FOR OFFICIAL USE ONLY Report No. 3710 PROJECT PERFORMANCE AUDIT REPORT SRI LANKA - FOURTH POWER PROJECT (LOAN 636-CE) December 7, 1981 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT SRI LANKA - FOURTH POWER PROJECT (LOAN 636-CE) TABLE OF CONTENTS Page No. Preface ********************.... i Project Performance Audit Basic Data Sheet ........................... ii Highlights ........................................................* iv Project Performance Audit Memorandum ................................. 1 Attachment: Project Completion Report 1. /Summary and Conclusions ...................................... 4 2. Project Preparation and Appraisal ........................... 6 3. Project Implementation, Operation and Cost .......................8 41 Project Justification ..........................................14 5 Operating Performance .......... ......... 18 6. Financial Performance .... .... . ......................... . 20 7. Institutional Performance .................... 25 Appendices: 1. Map - Maskeliya Oya Project .................................... 27 2. Construction Schedule - Actual Vs. Planned ..................... 28 3. Schedule of Cumulative Disbursements ........................... 29 4. Gross Generation by Station .................................... 30 5. Internal Finanancial Rate of Return ............................ 31 6. Number of days on which Mousakelle Reservoir was spilling ...... 32 7. Yearly Rainfall on Mousakelle Catchment (Inches) ............... 34 8. CEB Forecast (1970-74) and Actual (1970-78) Income Statement 35 9. CEB Forecast (1970-78) and Actual (1970-78) Sources and Applications of Funds Statement .............................. 36 10. CEB Forecast (1970-74) and Actual 1970-78) Balance Sheets ........37 11. References . ......................... .... 38 12. Major Contracts ................................................. 39 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJECT PERFORMANCE AUDIT REPORT SRI LANKA - FOURTH POWER PROJECT (LOAN 636-CE) PREFACE This report presents the results of a performance audit of the Sri Lanka Fourth Power Project for which Loan 636-CE of US$21.0 million was made in July 1969 to the Ceylon Electricity Board (CEB), a public stat- utory corporation responsible for power development in the country. An amount of US$4.5 million from the loan was cancelled and the balance fully disbursed and closed by February 1979. The report consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the South Asia Regional Office. In prepar- ing the PCR, the Region took into account the findings of a project completion mission carried out by its project staff in May 1980 and also the information provided in a technical report prepared by CEB. The audit has reviewed the PCR, the Appraisal and the President's Reports, the Borrower's technical report, the loan documents, the Minutes of the Board discussions and other documents in Bank files, and discussed the project with Bank staff. No country visit was undertaken by OED staff for this project. The audit finds that the PCR has covered adequately the main features of the project, including the reasons for deleting certain project components, the delays in project implementation and their effects on energy demand, and the extent of progress on the institutional and financial objec- tives. Furthermore, the audit finds no reason to disagree with the general conclusions of the PCR. Following normal OED procedures, a draft copy of this report was sent to the Government and CEB for comments. However, none were received.  - 11 - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET SRI LANKA - FOURTH POWER PROJECT (LOAN 636-CE) KEY PROJECT DATA Actual or Item Appraisal Current Estimate Total Project Cost (US$ million) 31.49 25.65/a Cost Underrun (%) 25% 7a Loan Amount (US$ million) 21.0 16.5 Disbursed 16.5 lb Cancelled 4.5 Date for Completion of Physical Components 09/72 07/74c Proportion Completed by Appraisal Target Date (%) 50 Proportion of Time Overrun (%) 58 Incremental (Financial) Rate of Return (%) 24 30 Financial Performance SatisfactoryL Institutional Performance Worse Cumulative Estimated and Actual Disbursements (US$ million) June 30: 1971 1972 1973 1974 1975 1976 1977 1978 1979 (i) Appraisal Estimate The Appraisal Report did not provide a disbursement schedule. (ii) Actual 1.2 4.5. 7.6 11.9 13.1 14.5 15.3 15.9 16.5 OTHER PROJECT DATA Original Actual Negotiations n.a. 06/30/69 Board Approval n.a. 07/22/69 Loan Agreement n.a. 07/28/69 Effectiveness Date 11/28/69 01/19/70 Closing Date 09/30/73 02/27/79L.e Borrower Ceylon Electricity Board Executing Agency Ceylon Electricity Board Fiscal Year of Borrower January 1 - December 31 Follow-on Project Fifth Power (Transmission) Project Credit Number 372-CE Amount (US$ million) 6.0 Credit Agreement 04/18/73 Executing Agency Ceylon Electricity Board /a Project was reduced in scope, i.e., the gas turbine unit and a switching station were subsequently deleted from the project (PCR paras. 3.11-3.12). /b US$2.4 million was used to meet a cost overrun on the Fifth power project (Credit 372-CE). /c Except for extension to Polpitiya switching station which was completed in 1978. /d Based on 1980 unaudited accounts. /e To allow completion of Polpitiya switching station and Fifth power project (Credit 372-CE). - iii - MISSION DATA Month/ No. of No. of Date of Year Weeks Persons Total Report Identification 03/67 2 1 2 03/24/67 Preparation 02/68 1 1 1 04/09/68 Appraisal 02/69 2 2 4 07/09/69 7 Supervision I 12/70 1 2 2 01/22/71 Supervision II 11/71 2 2 4 01/14/72 Supervision III 07/72 3 2 6 08/15/72 Supervision IV 10/73 2 2 4 12/17/73 Supervision V 11/74 2 2 4 03/10/75 Supervision VI 03/77 2 2 4 05/06/77 Supervision VII 09/78 2 2 4 11/09/78 2 /a COUNTRY EXCHANGE RATE Name of Currency: Sri Lanka Rupee (Rs) Appraisal Exchange Rate: US$1 = Rs 5.95 Under the Ceylon Electricity Board Act 1969, the Government meets the foreign exchange risk on any foreign currency loan raised by CEB and all foreign currency transactions are recorded by CEB at this fixed exchange rate. /a Effectively 20 man-weeks as from October 1973. Supervision missions for the Fourth and Fifth (Credit 372-CE) projects were combined. - iv - PROJECT PERFORMANCE AUDIT REPORT SRI LANKA - FOURTH POWER PROJECT (LOAN 636-CE) HIGHLIGHTS The project achieved its principal objective of increasing the generating capacity of the Borrower's interconnected system; it also achieved its major institutional objective namely, the creation of a public statutory corporation responsible for power development in the country, even though the corporation has not been given sufficient autonomy (PPAM para. 9). Other institutional objectives were not achieved, mainly. because the utility had difficulty in attracting and retaining suitably qualified senior staff (PPAM para. 10). These issues are being addressed under the latest Bank Group operation in the sector, the Sixth Power Project (Credit 1048-CE). For justifiable reasons the project was reduced in scope (PPAM para. 4). Even though the hydroelectric station was commissioned about two years behind schedule, apparently this did not have adverse effects on supply since growth in energy demand proved less than expected. Since it was commis- sioned, the project has provided valuable fuel cost savings by substituting hydro for thermal generation. The recalculated incremental financial rate of return on the project is about 30% compared to 24% estimated at the time of appraisal on a larger and somewhat different project (PPAM para. 8). Throughout the project period (1970-79), the corporation's rate of return on assets was well below that stipulated in the loan covenant, mainly because of inadequate tariffs and the low growth rate in energy sales, while the improvements in accounts receivable took much longer than expected. However, the net internal cash generation was sufficient to make a satis- factory contribution to the investment program, largely because the delays in project implementation reduced the amount of annual investment necessary. The overall financial performance in 1980 was satisfactory according to unaudited accounts (PPAM para. 7). The following points may be of special interest: - change of consultants between feasibility studies and detailed project design led to project implementation delays but may have contributed to modifications which reduced project costs (PPAM, para. 4; PCR, paras. 3.08-3.10); - other factors e.g., inadequate coordination between contractors, industrial stoppage in a supplier's country and insurrection and shortage of supplies in the host country, also contributed to project implementation delays (PPAM, para. 4; PCR, paras. 3.1-3.5, 3.13-3.17); - a management information system, and financial and accounting systems and procedures devised by the consultants were not implemented effectively because the Borrower had staffing difficulties and also because of lack of interest and awareness by the Borrower's senior management (PPAM, para. 10; PCR, para. 7.3). - standby power sources for operating sluice gates should always be considered to avoid overtopping of dams (PPAM, para. 4; PCR, para. 5.2). PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA - FOURTH POWER PROJECT (LOAN 636-CE) SUMMARY 1. Responsibility for power development in Sri Lanka had been vested in a government department under the Ministry of Land, Irrigation and Power until early 1969. During discussions on the Fourth Power Project and on even earlier Bank-financed power projects, both the Government and the Bank had agreed that the existing institutional arrangements were hampering the development of the country's power sector, and had agreed on the need for creating a national electricity authority. The creation of such an authority was one of the explicit expectations -- which was unfulfilled -- of the Third Power Project (Loan 283-CE of June 1961). As a pre-condition for making Loan 636-CE for the Fourth Power Project, a national authority -- the Ceylon Electricity Board (CEB) -- was created just prior to the signing of the Loan Agreement. 2. In the 1960s, power consumption in Sri Lanka had been growing at an average annual rate of about 13%. This growth rate was expected to be maintained through the mid-1970s, largely due to the emphasis placed by the Government on the development of the industrial sector in order to offset the effects of the rising cost of imports, and the decline in export earnings from the country's key products, namely, tea and coconuts, because of a steady fall in their prices. The energy demand from the industrial sector was expected to account for over 70% of the projected growth rate. 3. The Fourth Power Project, financed by Bank Loan 636-CE, originally comprised a 90 MW hydroelectric station, a 25 MW gas turbine unit and the associated transmission facilities, and was intended to provide the necessary generating capacity to meet the projected growth in energy through 1974. An important project objective, in addition to creating a national electricity authority, was the implementation of several institutional and managerial improvements with the help of management consultants. These improvements included the drawing-up of an organizational structure for the new entity, the introduction of modern utility accounting systems and procedures, improvements in billings and collection procedures, the setting-up of a management informa- tion and reporting system, and the revaluation of assets. 1 4. The major part of the project i.e., the hydroelectric station, was constructed broadly as envisaged at the time of appraisal but the firm of engineering consultants which carried out detailed design made some changes which reduced project costs (PCR paras. 3.08-3.10). The hydroelectric station was commissioned about two years behind schedule due to several reasons, including a change of consultants between feasibility studies and detailed - 2 - design, insurrection and lack of supplies in the host country, lack of coor- dination between suppliers, and industrial stoppage in the equipment sup- pliers' countries (PCR paras. 3.1-3.2, 3.4-3.5, 3.13-3.17). Near the end of the construction period, the dam was overtopped when a power failure prevented the gates being opened in a sudden flood. To avoid a recurrence, a standby power source was installed to operate the gates (PCR, para. 5.2). The gas turbine unit and a switching station were deleted from the project since subsequent energy demand forecasts indicated a lower growth rate than that estimated at the time of appraisal (PCR paras. 3.11, 3.12). 5. The final project cost is estimated to be about 25% lower than the cost of the appraised project (PCR para. 20). The deletion of the two com- ponents and the modification to the remaining part of the project resulted in savings of about US$6.9 million in foreign exchange (PCR para. 3.21). Of this amount US$4.5 million was cancelled from the loan while the balance of US$2.4 million was used to meet the foreign cost overrun on the Fifth Power Project (Credit 372-CE). 6. Growth in energy demand throughout the actual project period (1970- 79) was much lower than the forecast. For example, energy sales in 1975 were lower than those forecast for 1972 and similarly sales in 1978 were lower than those forecast for 1974, the anticipated end of the project period. The shortfall in energy sales was due mainly to a slowdown in the expected growth of the economy, particularly in industrial activity (PCR, paras. 4.1, 4.2). 7. The deletion of the two project components and delays in the imple- mentation of the rest of the project reduced the annual investment require- ments of the utility. Mainly for this reason, over the period 1970-74, the utility's net internal cash generation amounted to about 47% of its investment needs, which is satisfactory and compares with 43% estimated at the time of appraisal on a larger investment program. After 1974, capital investment increased substantially; although the proportion of investment contributed by net internal cash generation started to decline, it rose significantly in 1979 so that for the five-year period (1975-79) as a whole, the proportion was satisfactory. On the other hand, the utility's rate of return on assets was well below 8% even during the years when assets had not been revalued, while the loan covenant had stipulated an 8% return on revalued assets. This unsatisfactory performance was due mainly to inadequate tariffs, and to lower than expected growth in energy sales. Furthermore, accounts receivable, which amounted to about six months' billings at the time of project appraisal, showed only marginal improvement through 1976 largely because government departments and local authorities continued to default. There was consider- able improvement in 1977, when receivables decreased to about three months' billings; however, this level should have been achieved by September 1970 according to the loan covenant. Tariffs were increased in 1978 and in 1980, and the rate of return on revalued assets in 1980 had improved to about 9% according to unaudited accounts (PCR, paras. 6.4-6.6,6.8). -3- 8. The deletion of project components was justified in view of the downward revision in the forecast load growth which took place after appraisal while the delays in project implementation apparently did not have adverse effects since the growth in actual energy demand was much lower than forecast. The project has provided fuel cost savings by substituting hydro for thermal generation (PCR, para. 4.4). The project is the least-cost solution to meeting the growth in energy demand and the sharp increase in fuel prices since late 1973 has enhanced the project's economic superiority over any thermal alternative (PCR, para. 4.6). The recalculated incremental financial rate of return on the project is about 30% compared to 24% estimated at the time of appraisal on a larger and somewhat different project (PCR, para. 4.5). 9. The project achieved a major objective in creating CEB, a public statutory corporation responsible for power development and supply in the country. CEB, however, has been hindered from developing into a strong public utility because it has not been given sufficient autonomy. The Government has retained for itself a significant role in investment, pricing, conditions of service for staff, etc., of CEB, consistent with its policy with respect to other key sectors of the economy. One result of this has been that CEB has found it difficult to attract and retain qualified senior staff since their salaries (despite tax exemption) and other benefits are uncompetitive with those of their counterparts in the private sector (PCR, paras. 7.1, 7.2). 10. As required under the Loan Agreement, the consultants devised an organization structure, implemented a management reporting and information system, and accounting and financial procedures, and revalued the assets in 1970. Because of the turn-over in CEB's key staff and of the difficulty in recruiting and retaining qualified senior staff, and also because of CEB management's lack of interest and awareness, the information systems and the accounting and financial procedures have not been functioning effec- tively. These issues are being addressed under the Sixth Power Project (Credit 1048-CE), (PCR, para. 7.3). 11. . In addition to the construction of the hydroelectric station, the Bank's major contribution under the loan was the creation of CEB. Closer project supervision by the Bank, including more frequent supervision missions, particularly during the years when there was a large turnover of CEB's man- agers, might have helped CEB to improve its managerial and financial perfor- mance (PCR, para.8.1). SRI LANKA: FOURTH POWER PROJECT ATTACHMENT (LOAN 636-CE) PROJECT COMPLETION REPORT 1. SUMMARY AND CONCLUSIONS Background 1.1 At the time of appraisal in 1969 the capacity of CEB's system was 261 MW, of which 125 MW had been constructed with the assistance of three World Bank loans: (a) Loan 101-CE in 1954 for USS19.1 million, of which US$3.2 million was cancelled, for construction of the Castlereagh dam and a 25 MW extension to the Laksapana hydroelectric plant. (b) Loan 209-CE in 1958 for US$7.3 million for a 25 MW oil fired steam station at Kelanitissa in Colombo. (c) Loan 283-CE in 1961 for US$14.1 million for a second 25 MW unit at Kelanitissa, a 50 MW hydro station (Wimalasurendra) at Norton Bridge, and related transmission and distribution lines. All these projects were operating satisfactorily. 1.2 Sri Lanka"s GNP grew from 1960-1966 at an average rate of 3.5% per year. In 1967 the rate of growth increased to 7% and in 1968 it was over 8%, mainly because of expansion in manufacturing industry. Load forecasts available in 1969 indicated that existing firm energy and peaking capacity would be sufficient only until the end of 1971. Additional generation was urgently needed. 1.3 It was calculated that the 90 MW Maskeliya Oya Stage II development (New Laksapana power station) was the least cost solution to meeting the need, being more economical than the alternative oil fired gas turbine plant at discount rates up to 15%. Because a new hydro station could not be completed before late 1972, it was decided that a 25 14W gas turbine should be installed in time to meet the predicted shortage in 1971. The Project 1.4 The project was intended mainly to supply the needed additional generating capacity at the least cost. An additional objective was the establishment of the Ceylon Electricity Board as a public corporation (para 7.1), superseding the Department of Government Electrical Undertakings which had not been suitably organised for commercial operation. 1.5 The project at appraisal consisted of the 90 MW New Laksapana hydro- electric generating scheme (Maskeliya Oya Stage II), a double circuit 132 kV transmission line 5 miles long to deliver power from New Laksapana into the grid, a 25 MW gas turbine at Kelanitissa, and a 132 kV switching station at Eriyagama. (For details see para 3.7). The gas turbine would have been -5- necessary to meet the load growth projected at appraisal averaging 13% p.a. for six years. However, this forecast was reduced, and the gas turbine was cancelled. The hydro alone proved sufficient (para 3.11). Eriyagama sub- station was also found unnecessary (para 3.12). Bank loan 636-CE of US$21.0 million equivalent for a term of 25 years, including a grace period of 5 years, was intended to cover the foreign cost of major civil works, CIF cost of mechanical and electrical equipment, engineering and management consultants, and interest during construction of the Maskeliya Oya Stage II development. It was approved by the Board on July 22, 1969 and signed on July 28, 1969. Project Cost 1.6 The appraisal estimate indicated a total cost of US$31.49 million. The actual cost recorded was US$25.65 million equivalent. This was after eliminating the gas turbine and the Eriyagama substation, and included US$2.41 million applied to the fifth power project (paras 3.20 to 3.23). Project Schedule 1.7 The first of the two generators was commissioned in February 1974 and the second in July 1974, twenty-two months later than the appraisal target date, and a year behind the revised date get when construction was started. Changing consultants between the feasibility and implementation stages caused delays. Thereafter the project was constructed in reasonable time considering the prevailing conditions.(paras 3.1 to 3,6). Conclusions 1.8 The project was well conceived at the outset and it was well constructed. As it progressed, a number of circumstances changed, and the project was modified appropriately (paras 3.10 to 3.12). 1.9 The decision to build the New Laksapana hydroelectric scheme was a good one. It was built at low cost and waa approaching completion at the time of the oil crisis of late 1973. Subsequent increases in costs, particu- larly the real cost of fuel oils, have rendered the investment in thisa.project a particularly fortunate one. - 6- 2. PROJECT PREPARATION AND APPRAISAL 2.1 Power Development on the Maskeliya Oya was first studied in detail by engineering consultants under a contract between the International Coopera- tion Administration (ICA) and the Ceylon Government; the report was dated May 1960. The study started by investigating a single stage project known as Seven Virgins, but concluded that a three stage development would be more economical. .2.2 The Stage I developmentcommissioned in 1969, comprised a dam on the Maskeliya Oya forming the Mousakelle reservoir to provide storage, a tunnel nearly 5 miles long from the tail pond of the existing Laksapana power station to Polpitiya, and a 75 MW power station. (See Map Annex 1). 2.3 The Stage II development (the main component of the fourth power project), was to take advantage 6f part of the unused head between Mousakelle and the Laksapana tail pond. The ICA report had proposed a dam at Theberton and a tunnel from there to Laksapana, but the Department of Government Electrical Undertakings (DGEU), the forerunner of Ceylon Electricity Board (CEB), recom- mended that the Canyon dam site also be investigated. Canyon offered 300 feet more head and 20% more power at lower unit cost, and was preferred. The proposed Stage III development is a minor one and it is unlikely that it will be built until the 1990s. 2.4 DGEU retained engineering consultants in 1967 to perform a feasibility study on Stage II, and their report was submitted in 1968. In November 1968 the Government of Ceylon formally requested financing from IDA. A mission appraised in February 1969 and the loan documents were signed on July 28, 1969. 2.5 CEB decided not to continue with the engineering consultants who had performed the feasibility studies, but to appoint new ones for detailed design and supervision of construction. Appointment of engineering consultants was a condition of effectiveness of the loan, and changing consultants delayed it by three months, to January 19, 1970. Covenants 2.6 Non-standard covenants under the Project were as follows: Loan Agreement Section Comments 5.01(b) CEB to employ competent Performance was satisfactory. and experienced (i) engin- eering consultants (a condition of effectiveness) and (ii) accounting and management con- sultants by not later than February 28, 1970. 5.04(e) CEB's audited accounts to be CEB was unable to achieve submitted within 4 months of fiscal this deadline in any year year-end. (paragraph 6.7) 5.05 CEB to establish adequate insur- Satisfactory - Insurance ance arrangements in accordance Fund established (paragraph with sound public utility 6.9). practices. 5.07 CEB not to incur additional debt Satisfactory without Bank approval should its net revenues at the time be less than 1.5 times the future maximum debt service requirements. 5.08 CEB to ensure sufficient revenues (a) prior to completion of asset Satisfactory performance. valuation study, to cover operating expenses (excluding depreciation), debt service, adequate working capital, 25% capital expenditure for two years to September 30, 1971 and any dividend on equity capital. a/ (b) thereafter, to produce at least CEB failed to achieve this an 8% rate of return on the current target in any year from value of its net fixed assets. FY 1972.1/ 5.09 CEB's consumer receivables CEB did not meet this target (excluding disputed amounts under but progressive improvements CEB Act 1969 s 55.) by September since made to collection 30S 1970 not to exceedathe procedures.2/ aggregate billings in the three months preceding September 30, 1970. Project Completion Report 2.7 CEB produced a Final (technical) Report in February 1976, soon after the major part of the Project was completed. It described the design, con- struction, testing and coamissioning of the hydroelectric development in detail. In March 1980 CEB produced project completion reports for both the Fourth and Fifth Projects, combined into one volume; these were compiled at the Bank's request and, while generally helpful to the preparation of the PCR, final project cost data proved to be inaccurate. The report was discussed by a Bank mission in May 1980. Further project cost data was subsequently pre- pared by CEB from the accounting records and forwarded in June 1980. 1/ Despite representations by IDA, CEB reached rates of return of only 4.2% to 7r between 1972 and 1976, and returns dropped further to about 2.5% in 1977 and 1978. GOSL introduced an 80% tariff increase in December 1978 which arrested the downward trend in CEB's rate of return, and another average increase of 65% is a condition of effectiveness of the Sixth Power project. According to present projections this increase will permit CEB to achieve the 8% return target on revalued average net fixed assets in operation (para 6.4). 2/ CEB did not meet this target. However it was able to improve its collection record to a pointwherd in December 9977 its receivables barely exceeded the three- months billing level covenanted in Credit 372-CE (para 6.8). a/ This covenant was superseded by the corresponding covenant in the Fifth Power Project (Cr.372-CE). See PPAR on Fifth Power Project, PCR para. 2.4. -8- 3. PROJECT IMPLEMENTATION, OPERATION AND'COST Schedule 3.1 At the time of appraisal it was intended that the New Laksapana power station would be commissioned by September 1972. CEB called tenders for the three major contracts (para 3.13) in November 1969. However, it was not until January 1970 that consultants were appointed for the construction of the project, and since they were not the ones who had done the previous study, they reviewed and revised the specifications and contract conditions. Changing consultants thus is not to be undertaken lightly as it will almost certainly re- sult in a delay to the project. The three contracts conforming to the revised documents were eventually awarded in February 1971. A revised construction schedule (Annex 2) was produced showing work commencing in February 1971 and the generators coming on line in July 1973. 3.2 The project was hampered when an insurrection took place in April 1971 and Government restricted the use of explosives and imposed a curfew limiting working hours. A shortage of explosives was again experienced in 1972 when a foreign ship carrying them was seized and interned in another country. The penstock contract was slowed by shortages of experienced men, disappearance and failures of erection equipment, and delays in delivery of material due to strikes. A washout of part of the penstock grade in 1972 dislocated the erection work. In 1973 a serious shortage of food in the country reduced the efficiency of the labour forces. CEB made arrangements for special rations of rice and flour to be issued to workmen on all three contracts, but the shortage caused serious absenteeism in the work force well into 1974. 3.3 Time as well as money was saved on construction of the tunnel when it was decided that it was unnecessary to concrete the full length. 3.4 The project included a 5 mile long 132 kV double circuit line from the New Laksapana station to the switching station at Polpitiya. It was taken out of the civil works contract and was constructed by CEB's own staff, being completed at the end of 1974. The delay was not important as this line was not immediately required to carry the output from the new station which was within the -capacity of the existing lines from the old station. 3.5 The extension of the Polpitiya switching station was delayed when CEB wished to award the contract to the second lowest bidder because of the lowest bidder's alleged lack of experience, but the Bank was unable to agree. New tenders were called and the work was eventually started in mid 1977 and com- pleted in 1978. As in the case of the line to Popitiya, the delay did not prevent delivery of power from the new station. 3.6 The hydro electric scheme was constructed in 3-3 years from the letting of the contracts, an accomplishment under the prevailing conditions that reflected credit on CEB and its consultants. The first machine was actually commissioned in February 1974 and the second in July 1974, in time to avoid heavy thermal generation which would otherwise have been necessary because of a drought that year. -9- Changes in Design and Scope 3.7 The project as appraised consisted of:- (a) A concrete gravity diversion dam on the Maskeliya Oya at Canyon, a tunnel about 18,500 ft. long, twin penstocks each about 6,200 ft. long, the New Laksapana power station containing two 45 MW hydroelectric generator sets and auxiliaries, and an associated 132 kV switchyard. (b) A 132 kV double circuit transmission line about 5 miles long from New Laksapana to the existing 132 kV network at Polpitiya and a two bay extension to that station. (c) A 132 kV switching station at Eriyagama. (d) A 25 MW gas turbo generator set at the Grandpass (Kelanitissa) thermal station in Colombo. 3.8 The major hydraulic works were built substantially as they were originally planned. The Canyon dam is 92 feet high and has a crest length of 595 feet. The tunnel is 17,876 feet long and the penstocks are each 5,940 feet long. It was originally planned to line the full length of the tunnel with concrete, but it was found that much of the rock was sound; lining was provided only where necessary, thus saving cost and enabling earlier commissioning of the generators. 3.9 The turbines installed have a full load rating of 51,474 KW each at the minimum net head of 1,704 feet. The generators are rated at 62,500 kVA each. 3.10 The switchyard was originally planned to be on the bank of the river opposite to the power station, but it was in fact built on the same side. The switchyard had to be terraced to suit its new site, and.there were difficult problems of design and construction as the rock was weak. The advantages that justified the change were savings from a shorter link between the power station and its switchyard, easier terminations for the 132 kV lines, and the elimina- tion of a bridge. Design changes of this nature are not unusual when more site information becomes available as field work progresses, particularly after a change of consultants. 3.11 The proposed 25 MW gas turbine extension to the Kelanitissa steam station was cancelled in 1970 by the Government on receipt of a new demand forecast predicting a reduced rate of load growth because the economy was stagnating. In doing this the Government was risking power shortages, but the new hydro station, even though two years later than envisaged, came on line in time to avert load shedding. 3.12 It was planned to finance under this loan the foreign components of a new 132 kV substation at Eriyagama. The substation was to feed large loads anticipated from a new textile mill and an industrial estate. These loads turned out to be much smaller than estimated and so were fed from the existing 66 kV substation. The Eriyagama 132 kV substation was cancelled. - 10 - Performance of Contractors 3.13 Three major contracts and one minor one were awarded (Annex 12). The major ones were : - (a) General Civil Works and Construction of Transmission Tie Line; (b) Supply and Erection of Penstocks; (c) Supply and Erection of Electrical and Mechanical Equipment. The three contractors proved to be generally competent, provided satisfactory material and equipment and produced good work. However, whilst some construc- tion delays were caused by events outside their control, the responsibility for overrunning the revised schedule by 10 months was theirs. 3.14 The contractor for the general civil works was Sri Lankan, and he encountered procedural difficulties at first in using the advance payments available to him, causing delays in the import of construction equipment. His progress was later hampered by the insurrection and lack of explosives, and shortages from time to time of food, cement, steel and timber. This contractor did not maintain good progress with his work, falling far behind schedule. He had to be given substantial support by CEB in the form of materials, transport and facilities to complete the work when he did. Completion of details lingered for several months after the generators were on the line. 3.15 The penstock contractor made poor progress throughout 1972 and his supervisory personnel had to be replaced. A washout of the penstock grade disrupted his work; equipment was stolen from his winch house, and the winch motor burned out; the factory from overseas supplying him with components of the penstocks suffered a number of strikes which delayed deliveries. The civil contractor and the penstock contractor were dependent upon each other. One was responsible for the civil works on the penstocks,. the customs clearance procedures and transport to site of the penstock materials. The other was responsible for the supply and erection of the penstocks and the construction of the haulage way. There were disagreements between them that caused delays until CEB intervened at the Bank's prompting. The penstock contractor was nevertheless the first on the project to finish his work. 3.16 The contract for the supply and erection of the mechanical and electrical plant was executedwell except for delays, one of which arose from a six weeks' strike at the turbine manufacturer's factory. Difficulties arose when goods from sub-contractors did not always comply with specifications, and variations had to be approved or rejected. Equipment was often shipped late from the factories. Erection proceeded slowly and considerable pressure had to be applied to increase the field staff. 3.17 The contract for the extension to the switching station at Polpitiya, when it eventually was awarded, was satisfactorily executed. - 11 - Engineering Consultants 3.18 The engineering consultants' performance was entirely satisfactory. Design changes were introduced when field conditions proved savings to be possible and construction progress was expedited as far as possible. Hand- ling of bids followed IDA's guidelines and the supervision of the contracts was performed in the best interests of CEB. Most of the design work was done in Colombo and opportunities for local engineers to gain experience were maximised (para 3.28). Relationships between CEB, the consultants and the contractors were good. Management Consultants 3.19 As part of the project, expatriate Management Consultants were engaged by CEB to design an appropriate organizational structure together with comprehensive management information and reporting systems and a commercial accounting and budgeting system. They were also required to revalue CEB's fixed assets on a current replacement cost basis. The assignment was extended through no fault of the consultants whose per- formance was satisfactory. Their recommendations were largely accepted and implemented by CEB but, while initially successful, in recent years the. systems have not been used effectively by CEB senior managers (para 7.3). Under the Sixth Power Project CEB proposes to recall the consultants to review the reasons for the present unsatisfactory position. Project Cost 3.20 The project estimate at the time of appraisal was a total of US$31.49 million, made up of $10.49 million of local costs and $21.00 million in foreign costs. The appraisal estimate and,the final costs are compared in the table below. The variations of the actual costs from the estimate cannot be explained more fully than is done in para- graphs 3.21 and 3.23 below because the project cost accounting details are not available in CEB's records. Project officers should ensure that, in future, cost accounts -.with adequate explanations are retained until after the PCR has been prepared. LSS Million Foreign Local Total Appraisal Actual Appraisal Actual Appraisal Aetual (Estimated) Civil Worke 5.09 2.74 4.76 7.28 9.85 10.02 Penstocks 3.28 2.17 0.92 0.51 4.20 2.68 Generating Plant 3.11 5.50 0.50 1.32 3.61 7.26 Substations, lines etc. 0.55 0.44 0.17 (0.72 ( Engineering and Administration 1.38 1.04 0.74 0.0al 2.12 1.08 Interest during construction 2.82 2.20 - - 2.82 2.20 Contingencies 1.29 - 0.69 - 1.98 - 17.52 14.09 7.78 9.15 25.30 23.24 Gas Turbine 2.98 - 0.34 - 3.32 - Eriyagama substatio=2 0.50 - 0.17 - 0.67 - 5th Power Project - 2.41 -2-4 21.00 16.50 8.29 9.15 29.29 25.65 Customs duties . 2.20 - 2.20 _ 21.00 16.50 10.49 9.15 31.49 25.65 If Coot of office quarters only; local administration and engineering costs were distributed pro rata over preceding items. 2/ The gas turbine was deleted in October 1970. T/ Eriyagama substation was deleted in December 1971. r/ Customs duties were waived for this project. - 12 - Foreign Costs 3.21 The foreign cost estimate was reduced by $2.9 million in October 1970 when the gas turbine was deleted from the project, and by a further $1.1 million in February 1971 after contracts had been let. It was again reduced, by $0.5 million, in December 1971 when the Eriyagama substation was cancelled. This brought the total foreign cost estimate to $16.5 million. By-late 1973 it was evident that additional savings of more than.$2million, bringing the foreign costs down to about $14.1 million, would be made on the project, arising from the decision to leave 90% of the tunnel unlined, and from savings due to CEB's constructing the five miles of 132 kV line using their own forces instead of having the general contractor do it. 3.22 Since the Fifth Power Project was overrunning the funds available from Credit 372-CE, the description of the Fourth Project was amended to permit funds to be disbursed from Loan 636-CE for the expansion of 132 kV and 33 kV transmission networks and procurement of construction equipment. The balance of the $16.5 million Bank loan was used in this way. Local Costs 3.23 Local costs were estimated at appraisal at US$10.49 million equiva- lent. Without the gas turbine, the Eriyagama substation, and the customs duties, this would have been about $7.78 million. The actual cost recorded was $9.15 million, greater by about 18%. Major fac.ors changing the scope of work covered by the actual local cost were the deletion of most of the concrete lining of the tunnel, the change in the location of the New Laksapana substation and the construction of the 5 miles of transmission line by CEB's own forces instead of the general civil contractor. - 13 - Procurement 3.25 The supply and erection of all plant and equipment were covered by 3 major contracts awarded at the start of the project, and a fourth, smaller, one for the Polpitiya switching station awarded much later. All were the subject of international competitive bidding in accordance with Bank procedures. More than six months elapsed between the receipt of tenders for the three main contracts in July 1970 and their award in February 1971. Disbursements 3.26 Disbursements were made later than originally expected because of the delays to the project (Annex 3). The closing date of the loan was extended several times from the original September 1973, eventually to February 1979, to permit disbursements against the Fifth Power Project (para 3.22). The description of the project was amended accordingly. Staff and Training 3.27 At the height of activity on the project the contractors' employees on site totalled nearly 1,700, about half of them semi-skilled or unskilled. About 150 of CEB's personnel contributed directly to the project. 3.28 Detailed design of the project was carried out in a CEB project office in Colombo. The work was done by Sri Lankan engineers with the guidance and advice of two expatriates from the engineering consultants, backed up by assistance from their head office when required. This-arrangement permitted Sri Lankan engineers to build up their experience by designing a hydro project - an opportunity not previously presented. Regrettably, most of this exper- ience was soon lost to the country by emigration, even before this hydro development was completed. Most of the experienced engineers had departed for higher rewards overseas and their absence was causing difficulties in the design office. Project Financing Plan 3.29 The Bank financed all foreign exchange costs. The original Bank loan of US$ 21.0 million was reduced to US$ 16.5 million as the scope of the project was reduced. The loan was for 25 years including a 5 year grace period, with interest at 6.5% p.a. and a commitment charge of 0.75% on the undisbursed part of the loan. Local costs were met by internally generated funds. - 14 - 4. PROJECT JUSTIFICATION Load Growth 4.1 CEB's actual peak demand and energy sales are compared with the appraisal forecast in the table below. The load growth over the years 1968 to 1974 was only 8%, compared with 13.3% forecast at appraisal. The lower growth reflected the depressed economy. It saved the lateness of the New Laksapana plant from causing capacity and energy shortages in 1973 (paras 4.2 and 4.3). NW Peak GWh Sold Total Appraisal Appraisal Forecast Actual Forecast Actual Consumers 1965 89 360 1966 105 424 1967 122 489 1968 135 556 1969 154 147 612 604 1970 175 163 722 662 1971 204 173 871 722 70,900 1972 230 200 984 823 84,300 1973 251 199 1,081 855 92,300 1974 274 215 1,178 892 99,600 1975 219 965 106,300 1976 240 996 114,700 1977 261 1,042 126,400 1978 291 1,161 144,900 Rate of increase 1968/1974 12.5% 8.1% 13.3% 8.2% - 15 - Need for the Project 4.2 The following table shows how the energy available without the New Laksapana station compared with GWh demanded: GWh available 1973 1974 1975 1976 Generated 977 1012 1079 1133 Hydro energy available without New Laksapana 696 780 800 917 Thermal available 281 280 280 280 Total available 977 1060 1080 1197 Surplus 0 48 1 64 From this it appears that because the load growth was less than expected,the energy actually demanded in this period might just have been met without New Laksapana. It would however have needed greater availability from the Kelanitissa steam plant than wasusually experienced, and also would rely on water years no worse than average. 4.3 The following table shows how peak power demand compared with plant available:- Peak Demand MW 1972 1973 1974 1975 1976 Forecast System Demand 230 251 274 Reserve requirement 37 45 45 Total requirement 267 296 319 Actual System Demand 200 199 215 219 240 Reserve requirement1- 37 37 37 37 37 Total requirement 237 236 252 256 277 Available without New Laksapana 237 237 237 237 237 Surplus (Deficit) 0 1 (15) (19) (40) 1/ Largest machine on the system without New Laksapana. - 16 - It is clear that despite lower load growth than expected, the load in 1974 could not have been carried without the New Laksapana plant, even assuming the barest safety margin.of1only one machine out of service. Moreover, the nominal capacity of 237 M- without New Laksapana would have required some of the other stations to produce levels of performance beyond their actual abilities. Fuel Savings 4.4 2/ The New Laksapana station saved substantial costs of imported fuel oil:r from when it was commissioned in 1974 until the first Mahaweli station, Ukuwela, came on line in 1976. On the other hand, New3 }aksapana's failure to start up on time caused heavy fuel consumption in 1973;r In 1976 the thermal station generated about 24 G"h4/but this was because Kelanitissa was run for some time when it was not actually needed to meet the load, so as to provide added security of supply during the conference of the non-aligned nations in Colombo. The following table summarizes the way the energy demanded was act- ually generated in the years 1973 - 1977 (Annex 4 gives details). GWh generated 1973 1974 1975 1976 1977 New Laksapana - 273 387 376 364 Previous Hydro 696 725 691 636 665 Ukuwela - - - 97 186 Thermal ..281 14 1 .24 2 Total 977 1012 1079 1133 1217 Rate of Return 4.5 The internal financial rate of return on the Project has been reestima- ted with the benefit of actual figures through 1978 (Annex 5), and comes to about 30%. The rate of return estimated at the time of appraisal was 24%, but the figures are not directly comparable as the content of the Project was changed (paras 3.11 and 3.12). 1/ Chunnakam (diesels) 10 Laksapana 50 Kelanitissa (sream) 50 Wimalasurendra 50 Udawalawe 2 Polpitiya 75 Total 237 MW 2/ Estimated for 1974, Rs 69.2m; 1975, Re 72.8m; 1976 Rs.39.2m 3/ Rs. 27.3m 4/ At a fuel cost of about Rs. 8.7m - 17 - Least Cost Solution 4.6 At appraisal the project was compared with the best available alterna- tive, namely two 25 14 oil fired gas turbines at Kelanitissa, and it was con- cluded that the project was the more economic at discount rates up to 15%. The actual cost of the hydro station was much as estimated and, at US$236 per kilowatt installed for a 47% load factor, the station was inexpensive. The large increases in the price of fuel since 1973 leave no doubt that the hydro station was the least cost solution. - 18 - 5. OPERATING PERFORMANCE 5.1 At the time of appraisal the economic size of the New Laksapana dev- elopment had been put at 90 MW. The,two turbines actually installed were rated at 50 MW each, and on test they separately developed up to 58.5 MW each.and when run in parallel developed 57 MW each; all mechanical and electrical tests were passed successfully. The firm energy capability estimated at appraisal was 337 GWh per year, with 411 GWh expected to be available in an average year. Actual production has been as follows:- 1974 1975 -1976 1977 1978 1979 GWh 2731 387 376 364 381 470 The stationts performance has come up to expectation. It has exceeded its estimated firm energy production every year, and now that the load on the system has grown and there is more available for New Laksapana, it can be expected to spill less and achieve its expected average production. Annex 6 shows how many days in each year water was spilling at Canyon dam, while Annex 7 gives the rainfall in the catchment for each year. 5.2 Near the end of the construction period the dam was overtopped to a depth of about four feet when a power failure prevented the gates being opened in a sudden flood. There was provision for hand cranking but this took about 12 hours and the head pond was small and rose rapidly. This was not a danger- ous incident as the dam is concrete with excellent abutments in a granite canyon. To avoid a recurremea diesel engine was installed as a standby power source to operate the gates. 5.3 The station has given satisfactory service. There were no serious problems or unplanned outages in its first three years. Slight cavitation attack on the runners was found but the problem was quickly solved. Latterly, recurrent troubles have been experienced with leaks from the generator guide bearing oil tanks, which are difficult to repair permanently without extensive dismantling of the machines. In April 1980 a flashover of unknown cause in No. 1 generator stator disabled the machine for seven weeks. 1 Part year - 19 - 5.4 Operating Statistics The following statistics provide an overall picture of CEB's technical operations in the past five years. 1975 1976 1977 1978 .1979-' 1980 Sales: Domestic GWh 91 95 103 119 134 Small Industry " 252 252 254 289 315 Large Industry " 268 261 263 300 365 Commercial 130 137 151 163 169 Local Authorities " 224 251 267 290 311 Total Sales " 965 996 1,042 1,161 1,294 1,396 Energy Generated " 1,079 1,133 1,217 1,382 1,540 1,668 Losses % 10.6 12.1 14.4 16.0 16.0 16.3 Installed Capacity MW 361 398 398 398 398 Maximum Demand MW 219 240 - 261 291 325 369 Load factor % 56 54 53 54 54 52 2/ Number of consumers 106,100 114,500 126,200 144,600 155,500-/ 207,500 Number of employees 8,180 8,486 9,376 9,723 9,948 10,513 1/ Estimated 2/ The local authorities retail to about 204,000 consumers, making the total consumers served about 360,000. - 20 - 6, FINANCIAL PERFORMANCE 6.1 The establishment of CEB as a public corporation was a condition of effectiveness for Loan 636-CE. Consultants were appointed to prepare appro- priate commercial-style accounting systems and to undertake a current valuation of CEB's assets. These tasks were completed satisfactorily by 1973 but staffing difficulties in recent years have led to problems in maintaining the prescribed accounting and financial reporting systems. A further study of CEB's accounting problems is being undertaken in connection with the Sixth Power Project. 6.2 CEB was formally established on November 1, 1969 and its balance sheet at that date, as compared with that forecast at appraisal, is summarized below. While the position was generally satisfactory (the current ratio was 2.75 and the debt equity ratio was 24/76), CEB experienced considerable diffi- culty in recovering a large part of the consumer receivables transferred to it (para 6.8). CEB Balance Sheet at November 1, 1969 (Rupees million) ASSETS: FORECAST ACTUAL Net Fixed Assets 679 745 Current Assets 47 66 Less Current Liabilities 39 8 24 42 Total 687 787 which were represented by: LIABILITIES: GSL Initial Equity 377 379 Accumulated Surplus 90 467 220 599 Loan Debt 220 188 Total 687 787 6.3 CEB's audited income statements, sources and application of funds statements and balance sheets for the period FY 1970 through 1978 are shown in Annexes 8, 9 and 10 and are compared with those forecast for FY 1970 through 1974 at the time of appraisal. Key financial indicators are summarized in the following table and major features of CEB's financial performance are discussed in paragraphs 6.4 through 6.9. SRI LANKA FOURTH POWER PROJECT COMPLETION REPORT Table: KEY FINANCIAL INDICATORS 1970 1971a. 1972 1973 1974 1975 1976 1977 a/ 19782a/ 1979 EST. ACTUAL EST. ACTUAL ST. ACTUAL EST. ACTUAL ST. ACTUAL A C T U A L 1. Energy Sales (GWh) 722 817 871 722 984 823 1081 855 1178 892 965 996 1042 1161 .11298 (% annual increase) 2. Sales Revenue/KWh Sold 0.14 0.14 0.14 0.14 0.14 0.15 0.14 0.16 0.13 0.16 0.16 0.16 0.16 0.18 0.30 (Rupees) 3. Cost/KWh sold (Rupees) 0.07 0.07 0.07 0.08 0.07 0.10 0.06 0.13 0.06 0.10 0.11 0.12 0.14 0.17 0.20 4. Operating Ratio 50% 54% 51% 55% 54% 69% 45% 80% 45% 63% 65% 74% 87% 94% 59% 5. Rate of retum on average 7.5% 7.0% 8.2% 6.0% 8.1% 5.3% 9.3% 4.2% 8.6% 7.0% 6.5% 5.6% 2.6% 2.3% 6.8% net fixed assets 6. Debt Service Coverage 1.8 2.4 1.8 2.4 1.7 2.0 2.1 1.9 2.3 2.5 2.2 1.9 2.1 1.8 - 7. Current Ratio 0.9 1.6 1.1 1.5 1.2 1.7 1.4 1.6 1.6 2.4 3.2 2.6 1.8 2.0 - 8. Debt/Equity Ratio 34/66 27/33 37/63 23/77 37/63 23/79 34/66 20AO) 3W66 18/82 19/81 21/79 15/85 24/7 - 9. Contribution to Investment TOTAL ESTIMATED 43 % 41% 32% 39% 13% 67% TOTAL ACTUAL 47 % 10. Consumer Receivables as % Billings 23% 49% 24% 38% 24% 44% 23% 36% 24% 40% 33% 38% 24% 28% 25% 1/ Covers 14 months frqm 11/1/69 to 12/31/70 a/ Assets were revalued. - 22 - Earnings 6.4 CEB's earnings in the period FY 1970 through 1978 were adversely affected by the much slower growth in energy sales than forecast and by the impact of inflation on operating costs. The forecast level of energy sales in 1974 was not achieved until 1978 because of the slow growth in economic activ ty in Sri Lanka while utility costs rose by some 50% between 1970 and 1978!!. Although CEB's tariffs were increased in April 1972 by about 16% CEB failed to meet the covenanted 8% rate of return on net fixed assets in operation in every year from 1972 onwards. Further tariff increases were withheld by the government and by 1978 the rate of return fell to 2.3% of net fixed assets. While, between 1972 and 1978, CEB's average revenue remained at Rs. 0.16/KWh the average energy cost rose from Rs.0.10 to Rs.0.17/KWh sold. After discussions between GOSL and IDA, CEB was authorized to increase tariffs by about 80% in December 1978 in order to improve its financial position 2. Fixed Asset Revaluation 6.5 A current valuation of fixed assets undertaken by CEB's consultants was incorporated in CEB's balance sheet at December 31, 1971. It was agreed with the Association that local indices would be used for subsequent revalua- tions. Fixed assets were revalued in 1977 and again in 1978 using the agreed indices. Between 1972 and 1976 no adjustment was made to fixed asset values and the rate of return on net fixed assets in those years is, in consequence, somewhat overstated l/. Contribution to Investment 6.6 CEB's financing plan forecast at the time of appraisal and actual for the period 1970 through 1974 are set out below. Despite CEB's inability to meet the covenanted 8% rate of return on net fixed assets, CEB's contri- bution to investment was satisfactoryL/ (47% as against 43% forecast at appraisal) mainly because capital investment, and hence borrowing and debt service, fell below the forecast level. After 1974, capital investment increased substantially but CEB's percentage contribution to investment declined from 41% in 1975 to 13% in 1978 because of the inability to increase tariffs. 1/ Sri Lanka: Key Development Issues in the 1980's. Volume I (Table 2.0), May 20, 1980. 2/ A further tariff increase was introduced in October 1980. The rate of return was about 9% in 1980 (according to unaudited accounts) and is expected to be about 11% in 1981. 3/ Fixed assets were revalued in 1979 and 1980. 4/ Loan Agreement (Section 5.08a) required an average 25% contribution to capital expenditure for the two year period ending September 30, 1971; CEB subsequently adopted a calendar year basis for accounting purposes and in the two years 1970-71 achieved an average of 44%. - 23 - CEB Financing Plan 1970 - 1974 R9 (million) FORECAST ACTUAL Requirements: % % Capital Expenditure 496 98 369 83 Working Capital 12 2 73 17 508 100 .442 100 Sources of Funds: Internal Cash Generation 484 401 Less Debt Service (247) (180) GSL Dividend ( 19) ( 12) Contribution to Investment 218 43 209 47 Consumer Contributions 2 15 3 Loans 288 57 154 35 GSL Grants - - 22 5 Prior Year Adjustments - - 42 10 508 100 .442 100 6.7 In other respects CEB's financial position from FY 1970 onwards was satisfactory - debt service coverage and the current ratio generally exceeded the forecast levels while the debt/equity ratio was very conservative, following the revaluation of fixed assets in 1971 and the creation of a "revaluation reserve". Continuing difficulty was experienced however, in achieving the timely submission of CEB's audited accounts. Insufficient allowance was made for the status of CEB's accounting development and the local statutory timetable which allows four months from the year-end for the preparation of accounts for audit by the Auditor General and a further six months for completion of the audit and submission of his report to the Sri Lanka House of Representatives. The rec- ently approved Sixth Power Project requires the submission of unaudited accounts within four months and an audit report within ten months of CEB's year-end. Consumer Receivables 6.8 CEB covenanted to ensure that consumer receivables were reduced by September 30, 1970 to no more than the equivalent of the billings for the three months ending on that date. CEB was unable to achieve this target, partic- ularly as receivables transferred on November 1, 1969 (Rs 45.5 million) included considerable amounts of bills disputed by local authority licensees and govern- ment departments and represented about eight months' billings at that time. Following the introduction of improved billing and collection methods CEB had some success in reducing the level of receivables to the equivalent of about - 24 - four months billings by the end of 1973. Eventually it was necessary for CEB to write-off some Rs 12 million of the original Rs 45.5 million consumer receivables as bad debts. The total amount written off by CEB between 1969-1979 (including the Rs 12 million) represents less than 1 .1/2% of the revenues during the same period. This is a very satisfactory record. While CEB continued to experience some difficulty in recovering amounts due from local authority licensees, consumer receivables had been reduced to a little over the equivalent of three months billings by the end of 1978. The local authority receivables will be settled following the transfer of the local authority distribution systems to CEB in 1980. Insurance Arrangements 6.9 CEB established an internal Insurance Fund to which is transferred an annual amount equivalent to 1/10 % of gross fixed assets in operation. This arrangement is adequate to cover most risks except "catastrophe", for which public corporations in Sri Lanka rely upon the government for assistance. - 25 - 7. INSTITUTIONAL PERFORMANCE 7.1 The establishment and development of CEB as a public corporation was a major objective under the project. The vesting, in CEB, of the property, rights, obligations and liabilities of the Department of Government Electrical Undertakings (DGEU) was a condition of effectiveness of Loan 636-CE. Management and accounting consultants were appointed in 1971 to recommend an appropriate organizational structure and management and accounting systems suitable for public utility operations (para 3.19). 7.2 CEB is not endowed with fully autonomous powers, since government has reserved to itself a substantial role in important policy matters and in particular tariff fixing, capital investment, borrowing and staff conditions of service. This has hindered CEB's development as a strong public utility. The inability to offer competitive salaries to engineers and accountants has adversely affected recruitment and has limited its ability to retain experienced staff. Other public corporations in Sri Lanka have faced similar difficulties and salaries of public servants recently were made tax-free in an effort to reduce differentials with the private sector. 7.3 The accounting and management reporting systems introduced in 1973 following the consultants' study were appropriate to CEB's requirements. In recent years, however, management has failed to make use of the systems. Records, including accounting records, have fallen behind and regular formal reporting within CEB has become inadequate. Much of the problem stems from staffing difficulties but in part it arises from a lack of awareness and interest by CEB's senior management, who have exclusively an engineering background, in management aspects such as financial control. In order to improve management performance the management consultants will be recalled, under the Sixth Power Project, to review the present status and make recommendations for improvements. The possibility of using expatriate advisers to CEB will be considered as part of this review. - 26 - 8. BANK PERFORMANCE Working relationships between CEB and the Bank were satisfactory, but the early years of the project coincided with a period of strained rela- tions between GOSL and the Bank, during which the Bank limited the frequency of its missions to the country. Later, a sudden increase in work load (due to an upsurge of activity in Indonesia), combined with staff constraints in the division concerned, resulted in a period of further reduced supervision of this project. Bank staff made only seven visits in nearly nine years, and no visit was made between Nuvember 1974 and March 1977. Closer supervision at half yearly intervals would have facilitated regular discussions with CEB, especially at times when managers were being succeeded by new ones, and might have led to closer compliance with the terms of the loan and better control of CEB's operations and finances. South Asia Regional Office September 1980 MAP 2 CEYLON MASKELIYA OYA PROJECT GENERAL ARRANGEMENT ANGA Reservoirs and dams m Power plants -m Pipe lines 0 Surge chambors L A ---- Tunnels POWER PLANT Main roads 75M \ \ CMASKELIYA OYA-STAGE 1) ---------- secondary roads \. .......... Access to estates PROJECT SHOWN IN COLOR MILES LAKSAPANA POWER PLANT OMW NOPTON e*, RESER VOIR NEW LAKSAPANA NORTON POWER PLANT ' \ POWER PLANT 90MW '---- 50MW (MASKELIYA OYA-STAGE II) \ Cony,on Diversi on Oom CAST7EREARGH RESERVOIR ApPracherød dan it. SNORTON/ >Left Bank Road RIght Bank Road ,OIftPROFILE ALONG KEHkELGAMU OYA........ New M yTSAPANA PROELE M OYA E L M0USAKELLE RESRVOIR c(MASKELIYA OA STAGE 1) an.,,ln 000 000 *.. P0LPITIYA APNo T96a IBRD-254 IoIer410 - - .ta. 6.a* A P Rre!.L P R FILE9A O N K E E L G M U YA ... ..  SRI LANKA FOURTH POWER PROJECT 1/ Construction Schedule - Actual Vs Planned- - 1971 1972 1973 1974 1975 1976 1977 1978 Canyon Dam -- Penstocks & Valve Chambers I- Tunnel & Surge Shaft ' - Laksapana Powerhouse I - Main machinery Laksapana Switchyard OD Transmission Line - Polpitiya Switchyard LEGEND: Planned I Actual 1/ Planned schedule shown here is the one adopted after consulting engineers were appointed in January 1970. -29 - ANNEX 3 SRI LANKA CEYLON ELECTRICITY BOARD Fourth Power Project (Loan 636-CE) Schedule of Cumulative Disbursements (use million) Actual as a IBRD Percentage of Fiscal Year Appraisal Appraisal and Semester Estimate Actual Estimate (not detailed in SAR) % 1971 1st - - 2nd - 1.2 1972 1st - 3.6 2nd - 4.5 1973 1st 5.8 2nd - 7.6 1974 1st 16.5 10.1 61 2nd 11.9 72 1975 1st 12.5 76 2nd 13.1 79 1976 1st 14.0 85 2nd 14.5 88 1977 1st 15.0 91 2nd 15.3 93 1978 1st 15.3 93 2nd 15.9 96 1979 1st 16.0 97 2nd 16.5 100 Closing Date 9/30/73 2/27/79 SRI LANKA FOURTH POWER PROJECT COMPLETION REPORT Gross Generation By Station (GWh) HYDRO 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 Laksapana 246 270 262 221 220 223 216 235 243 262 New Laksapana - - - - 273 387 376 364 381 470 Wimalasurendra 72 105 100 83 92 86 71 86 112 112 Samanala 375 396 442 356 363 353 313 328 389 399 Inginiyagala 42 51 35 24 31 18 28 8 22 17 Udawalawe 5 4 8 12 18 10 9 7 12 8 1 Ukuwela - - - -- - - 96 186 203 193 C Total 740 826 847 696 997 1,077 1,109 1,214 1,362 1,461 1 STEAM Kelanitissa 2 18 88 261 13 1 24 2 14 58 Pettah - - - - - - - - - - Total 2 18 88 261 13 1 24 2 14 58 DIESEL Pettah - 1 2 5 1 - - - 4 1 Chunnakam 43 5 8 15 1 1 - 1 2 5 Total 43 6 10 20 2 1 - 1 6 6 GRAND TOTAL 785 850 945 977 1,012 1,079 1,133 1,217 1,382 1,525 - 31- ANNEX 5 SRI LANKA FOURTH POWER PROJECT COMPLETION REPORT Internal Financial Rate of Return COSTS-" BENEFITS Thermal Incremental Value Value Incremental Generation Project2/ Associah d Opera ng Incre"ntal Fuel 7/ Year Sales Saved Capita Capital- Costa- Sal Savings- GWh GWh Ra (M) Ra (M) Ra (M) Re (M) Re OM) 1971 15.6 1972 41.3 1973 35.0 1974 27 247 43.1 24.4 2.1 4.6 73.A 1975 100 260 3.0 24.4 7.7 16.0 72.8 1976 131 140 5.5 24.3 10.0 20.7 42.9 1977 177 0.8 24.3 13.5 27.6 1978 296 4.1 22.6 46.4 1979 395 0.3 30.2 86.1 1980 345 26.4 76.2 1981/ 2023 355 27.2 116.1 IFRR = 30.4% 1/ Costs and benefits are expressed in 1975 Rupees using index of consumer prices from In.. --national Statistics through 1979; for 1980 further 15% and 1981 further 12% assumed. 2/ Excludes interest during construction. 3/ Exchange rate US$1.00 = Ra 5.95. 4/ In 1975 generation comprised about 55% of fixed assets; therefore Rs 1.0 spent on generation required Ra 0.82 to be spent on transmission, distribution and other fixed assets. 5/ Includes all operation, maintenance and administration costs. 6/ Average revenue was Re 0.16 per kWh for 1974-77, 0.18 in 1978 and is estimated before correction for consumer price index as 0.30 in 1979, 0.35 in 1980 and 0.58 in 1981. 7/ Fuel savings evaluated on 13.5 kWh per Imp. gallon costing Re 3.737, the 1975 price to CEB. 8/ No benefit from fuel savings taken after advent of Ukuwela hydro station in 1976. 32- ANNEX 6 Page 1 of 2 SRI LANKA FOURTH POWER PROJECT COMPLETION REPORT Number of days on which Mousakelle Reservoir was spilling DAYS SPILLING 1974 June 16 July 20 August 13 September 19 October 15 83 1975 June 4 July 5 August 13 September 15 October 18 November 30 December 11 96 1976 Nil 1977 June 11 July 21 August 11 September 7 October 18 November 16 84 ANNEX 6 Page 2 cf 2 - 33 - 1978 May 2 June 11 July 11 August 22 September 4 October 3 November 5 Cyclone December 1 59 1979 July 4 August 15 September 11 October 31 November 30 December 17 108 ANNEX 7 - 34 - SRI LANKA FOURTH POWER PROJECT COMPLETION REPORT Yearly Rainfall On Mousakelle Catchment (Inches) Station 1973 1974 1975 1976 1977 1978 Luccombe 111 123 222 98 145 197 Mousakelle 119 n/a 214 133 142 175 Theberton 157 245 273 136 162 225 Murray n/a n/a 183 95 158 191 Adam's Peak 91 136 143 85 168 144 Maskeliya 78 119 132 77 147 130 Laksapana n/a n/a 192 95 120 194 Fairlawn 85 66 114 65 120 150 Cartmore 91 105 201 73 124 181 Average 186 95 143 176 SEI LA~K FMURTH Pa*WRJ PROJECT (L~a 636 CB) S.L. Rupee. (cIllon) CEB FORECAST (1970-74) AnD ACtVj. (1970-78) INCG~E SMSLRp (lln 1970 1971 1972 1973 1974 1975 1976 197 1978 Year Ending December 31 Apr. Apr. Apr. Apr. Apr. Estiate Actual E.timate Actual Etmate Actual Estimate Actal Esttonte Actual ABt.t Actual Acul Actnal Energy Sales (OVh) 722 817 871 722 984 823 1081 855 1178 8w 965 996 102 1161 Average Revenne (Rupees) per KWb sold 0.145 0.144 0.14o 0.143 0.137 0.152 0.135 0.158 0.130 0.160 0.161 o.6 0.164 0.177 Operating Revenues: Sele. 104.5 10.0 122.3 108.6 134.5 122.9 145.8 135.4 153.1 142.4 155.3 161.3 170-8 205.3 Operating Expenses: Generation - Fuel 5.0 2.1 10.6 2.6 16.9 6.6 4.6 27.3 1.0 3.1 0.3 4.6 1.1 7.4 - Other 2.7 6.6 2.9 4.5 3.1 6.3 3.3 6.0 3.4 8.8 8.0 9.1 9.8 13.3 Trans-i..ion 3.5 7.2 3.7 6.8 3.9 5.0 h.2 6.1 8.4 5.4 6.6 6.8 5.5 7.6 Distributton 3.9 8.0 4.2 7.5 4.4 9.8 4.6 13.4 4.8 14.3 20.6 26.0 24.8 35.2 Administration 17.0 17.8 18.2 21.4 19.6 23.7 21.1 23.4 22.9 26.1 31.2 37.1 38.5 46.0 Depreciation 19.7 17.2 23.1 17.2 24.7 32.3 27.7 32.1 31.7 32.2 34.8 36.1 68.4 83.3 51.8 58.9 62.7 60.0 72.6 t3.7 65.5 10b.3 th.2 9.9 101.5 119.7 . 146.1 -w. Operating surplus 52.7 51.1 59.6 48.6 61.9 39.2 80.3 27.1 84.9 52.5 53.8 41.6 22.7 12.5 Other Inc=e 3.1 4.3 3.3 6.5 • 3.5 12.1 3.7 12.4 3.8 15.9 - 13.4 16.9 25.9 36.5 mat b~ 55.8 55.4 62.9 55.1 65.4 51.3 84.0 39.5 88.7 68.4 67.2 58.5 48.6 49.0 Intereat (net) (12.3) (12.9) (14.5Y (12.4) (34.2) (11.5) (15.2) (8.5) (22.5) ( 8.7) (15.2) (15.9) (24.7) ( 27.8) Dividend on Goernent Equity - (1.3) - ( 5.0) - ( 5.0) - - (18.8) - ( 3.9), - - - Net Surplus 43.5 41.2 48.4 37.7 51.2 34.8 68.8 3X.0 47.4 59.7 48.1 42.6 23.9 212 Rate of Return on Average Net Fixed Assets 7.5 % 7.0% 8.2 1 6.0% 8.1 % 5.3% 9.3% 4.2% 8.6% 7.0% 6.5 % 5.6 % 2.61 2.3 % in Operatin 1/ Covers a period of 14 month fros CEB's fo~matin at 11/1/69 through 12/31/70/ SF: LANKA FOUHTH P0EF PRNECT (LcAN 636 CE) 7EB FORECAST (1970-1974) AND ACTMAL (1970-78) SMRCES AD APPLICATICIS CF ~1U1DS STAEMENT .L. Rupees (mIllion) 1970 1971 1972 - 1973 1974 1975 1976 1977 1978 SApr. Apr. Apr. Apr. Apro. Estimate AetA.1 cttutt. ActuAc tuatil Atu.1 uit. AltIal A.tual Actual Actual SORCE : Internal Cash Generation Net Ince 55.8 55.4 62.9 55.1 65.4 51.3 84.0 39.5 88.7 68.4 67.2 58.5 48.6 49-0 Depreciation 19.7 17.2 - 23.1 17.2 24.7 32.3 27.7 32.1 31.7 32.2 34.8 36.1 68.4 83.3 Totl ICOG 75.5 72.6 86.0 72.3 90.1 83.6 in1.7 71.6 120.4 100.6 102.0 94.6 117.0 132.3 Less Debt Seice: ¯ Amrtization 24.4 17.1 27.5 17.9 28.5 30.7 28.8 28.8 29.0 31.6 31.2 34.5 32.0 '46.2 Int.re.t 17.3 12.9 19.5 12.4 24.2 11.5 24.2 8.5 23.9 8,7 15.2 15.9 24.7 27.8 41.7 30.0 47.0 30.3 52.7 42.2 53.0 37.3 52.9 40- 46.4 50.4 56.7 74.0 Contributio tD Inveatnt 33.8 42.6 39.0 42.0 37.4 41.4 58.7 34.3 67.5 60.3 55.6 44.2 60.3 58.3 1-ons 73.5 62.2 85.2 20.0 72.0 20.1 17.5 31.2 40.0 21.0 66.6 77.7 84.6 339.1 Goerment Grants (Equity) - - - - - - - 12.0 - 10.0 10.0 15.0 5.0 17.7' ConMer Contributions 0.5 3.8 0.5 2.0 0.5 5.9 0.5 1.6 0.5 1.6 1.9 1.5 4.0 11.6 TOAL SOURCES 107.8 108.6 124.7 64.0 109.9 67.4 76.7 79.1 108.0 92.9 134.1 138.4 153.9 426.7 APPLICATIMS: Capitai Expenie 15,7 122,6 117.0 56.0 107.7 57.1 66.2 78.3 89.3 55.3 88.9 121.2 141.1 354.5 DividGedonrovernment Equity - 1.3 - 5.0 - 5.0 - - 18.8 - 3.9 - - - WorkIng Capital Variation ( 7,9) (15.3) ( 7.7) 6.7 2.2 22.8 10.5 10.3 ( 0.1) 48.8 37.8 15.8 15.4. 794 Prior Year Adjuet-et - - - (3.7) - (17.5) - (9.5) - (1.2) 3.5 1.4 (2.6) (6.8) 107.8 108.6 124.7 64.0 . 109.9. 67.4 76.7 79.1 100.0 92.9 134.1 130.4 153.9 426.7 Debt Serve Coverage 1.8 2.4 1.8 2.4 1.7 2.0 2.1 1.9 2.3 2.5 2.2 1.9 2.1 1.8 Ctri onibution tnestment (lnc. working capital) < -smTD4 41% *32% 39% 135 SRI LAIA FOURT1H POWER PROJECT (:mna 636 cE) CEB FORECAST (1970-74) AND ACIIAL (19q0-78) ALARCE SHEETS S.L. Rupees (millan) Yes- Ending s- 11970 1971 1972 1973 1974 1975 1976 1977 1978 Apro. Apr. Apr. Apr. . Apr. Estimate Actual_ Esimate Astual Astiate Actual Estimate Aetual Ratiente Antnal Actual Actual Acual Actual Fixed Assets. Gross Fixed Assets 81.1 867.9 966.1 1231.0 1010.3 1236.9 1204.9 1242.4 1330.6 1381.8 1437.8 1481.6 2604.8 3126.5 Less Depr"ciation (143.3) (17.2) (166.4) (245.6) (191.1) (277.9) (218.8) (309.7) (250.5) (341.8) (376.6) (412.6) (732.9) (905.6) Conumer Contributionds ( 2.6) (4.5) ( 3.1) ( 6.5) ( 3.6) ( 12.4) ( 4.1) ( 14.0) ( 4.6) ( 15.6) ( 17.5) (19.0) ( 23.0) ( 25.2) Net Fixed Asseta 735.2 846.2 796.6 978.9 815.6 964.6 982.0 918.7 1075.5 1984.4 1043.7 1050.0 1849 a l".7 Work In Progress 43.9 - 80.9 25.5 154.4 78.7 35.0 149.5 - 65.4 98.3 175.7 274.1 4K2 779.1 846.2 877.5 1004.4 970.0 1023.3 1017.0 1068.2 1075.5 1089.8 1142.0 1225.7 2123.0 36f1.9 CURRENT ASSES: -Invntories 7.0 9.8 7.5 22.2 8.0 40.3 8.3 54.9 8.6 57.0 81.1 95.7 134.2 159.5 - Receivables :Consuer 24.0 54.0 29.0 41.1 32.0 53.5 34.0 49.2 36.5 57.6 51.2 52.5 41.4 56.5 - Other 1.3 8.3 1.5 22.5 1.7 -34.3 2.0 59.4 2.3 67.8 85.4 126.1 216.0 236.0 Cash 7.2 6.0 8.1 27.3 6.4 19.6 13.9 13.9 10.7 20.0 10.0 6.7 17.3 7.8 39.5 78.1 46.1 113.1 48.1 147.7 58.2 177.4 5U.1 2d.4 227.[ 21.0 40B.9 7g0m. AssMs 818.6 924.3 923.6 1117.5 1018.1 1171.0 1075.2 1245.6 1133.6 1292.2 1369.7 1506.7 2531.9 3M.J LIABILITIES: Equity and Refeves : Government Equity 377.1 379.2 377.1 379.2 377.1 379.2 377.1 391.2 377.1 431.9 463.9 478.9 483.9 501.6 Insurauce Reserve - - - 2.5 - 3.6 - 4.9 - 6.2 7.7 9.2 11.8 14.9 fev,lbation Reserve -- - - 121.4 - 121.4 - 121.4 - 80.3 68.2 68.3 896.9 U46.8 Other Reserves ina. Aceuo,ulated Surplus) 133.5 264.0 181.9 302.9 233.1 * 354.1 301.9 393.6 349.3 463.7 506.9 546.6 570.5 604.8 510.6 643.2 559.o 060 610.2 583 679.0 91-1.1 726.4 992.1 1046.7 113.05 1963. 1 2260.1 Long Term Debt (I.Supplier Credits) 266.2 232.7 322.9 234.8 366.1 224.2 354.6 226.6 371.5 216.0 251.4 296.6 347.2 640. Current Liabilities 41.8 48.4 41.7 76.7 41.8 88.5 61.6 107.9 35.7 84.1 71.6 109.1 221.6 259.5 TOTAL LIABILITIES 818.6 924.3 923.6 1117.5 1018.1 1171.0 1075.2 1245.6 1133.6 1292.2 1369.7 15 7 2531.9 310.7 Debt/Equity Ratio 34/66 27/73 37/63 23/TI 37/63 21/79 34/66 20/80 34/66 18/28 19/81 21/79 15/85 24/76 Current Ratio 0.9 1.6 1.1 1.5 1.2 1.f 1,4 1.6 1.6 2.4 3.2 2.6 1.8 2.0 1/ Incorporating Revalued Fixed Assets 38 ANNEX 11 SRI LANKA FOURTH POWER PROJECT (Loan 636-CE) COMPLETION REPORT References 1. Appraisal Report No. PU-17a dated July 9, 1969 2r Project Files in Records Centre 3. Quarterly Progress Reports 4. Reports on Engineering Services (monthly) 5. Maskeliya Oya Project Stage II-Final Report - CEB. February 1976 6. Maskeliya Oya Project Stage II - Project Completion Report - CEB March 1980 SRI LANKA FOURTHj7POWER PROJECT COMPLETION REPORT Major Contracts Contract Contract Contract Contract Price Final Price No. Description Awarded Completed Foreign Local Foreign Local 1. General Civil Works and Con- struction ot Transmission Tie Line Feb. 1971 end 1974 Rsl8.Om Rs25.5m Rsl8.9m Rs25.3m 2. Supply and Erection of Penstocks Feb. 1971 Jan 1974 S.F.6.8m Rsl.5m S.F.7.Om Rsl.5m 3. Supply and Erection of Electrical and Mechanical Equip- ment Feb. 1971 end 1974 FF25.2m Rs2.4m FF25.9m Rs2.6m 4. Extension of Polpitiya Sub- station April 1975 Aug 1978 FF1.1m RsO.6m FF1.0m RsO.2m