Ceylon - Granpass Thermal Power Project

R E S T R I C T E D Report NO.TO-174a This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT GRANDPASS THERMAL POWER PROTECT CEYLON Tune 30, 1958 Department of Technical Operations  CURRENCY EQUIVALENTS (rounded figures) 1 US $ - 4.8 Ceylonese Rupees (official rate 4.762) 1 Rupee a 21 Cents (US) US $ 1 million - Rs. 4,800,000 Rs. 1 million - US $ 210,000  C O N T E N T S Page Number Summary i - ii I. INTRODUCTION II. DGEU 1 Present Facilities 1 Financial Position 2 Past Earnings Record 2 Organization and Nanagement 3 III. PROGRESS ON PRETVIO-US LQAN 4 IV. POWER PAR=ET 5 V. THE PROJECT 6 Status of the Project 6 Coza,truction Schedule 6 V2 COST FSTflATE CF PROJFCT 7 Solarces of Funds 8 Cost of Power 8 VII. EC01TOMIC ASPECTS OF T7Ih PROJTCT 8 VIII. FINAETCIAL ASPECTS 9 Power Rates 9 Financial Forecasts 9 Net Earnings 9 Surplus Revenues Available for Construction 10 Future Financial Position 10 Debt Service Requirements 11 Debt Service Coverage 11 IX. CONCLUSIONS AND RECONiNENDATIONS 12 Annexes 1 through 10 End of Report hap Following Annexes  GRANDPASS THERMAL POWER 7ROJECT CEYLON S UJ 'I 1'PiA R Y The Government of Ceylon has asked the Bank to consider a loan of 07.4. million to finance the foreign exchange cost of an expansion of the power sys- tem operated by the Department of Electrical Undertakings (DGEU). The project concists of a 25 ThW thermal plant with associated tranEmission lines and distri- bution facilities. ii. LGEU now operates one hydro and two thermal plants, with a total instal- led capacity of 77 MW. and a transmission grid which supplies power to the south western part of Ceylon including the city of Colombo. About half of Ceylonts population lives in this area. iii. DGEU is a part of the linistry of Transport and Works and as such is subject to a very detailed control and supervision by this and other iiinistries. The present organization makes it increasingly difficult for DGEU to operate its system efficiently and in accordance with sound public utility practices. The responsibilities of DGEU for distribution and generation of pcwer should therefore be transferred to an autonomous organization. The Goverrnnernl is now considering this step and in addition intends to retain the services cf foreign experLs to advise on technical, financial and organizational problems. This, together with an exp&nded program of training of staff, both in Cevlon and other countries, should improve the organization and ensure an efficient oporation of the power sysLem. iv. The Departmentts fixed assets as of September 30 1957, shown at origi- nal cost, amounted to Rs. 185.5 Lillion (US$39.0 million5. Total long-term debt amounted to Rs. 151.3 million (US$31.5 million). Earnings in recent years have been satisfactory. v. The Bank made in July 1954 a loan of 419.11 million to the Government of Ceylon to finance the foreign exchange cost of the previous expansion program carried out by DGEU. The main parts of this project including the addition of 25 1IW of generating capacity in the Laksapana hydro plant, have been completed and put into operation. vi. The market for power in the area served has grown rapidly. By the middle of 1960 the present capacity in the system will no longer be sufficient to meet the demand and load restrictions will be required until new capacity can be brought into operation in December 1961. vii. The project proposed for Bank financing consists of the 25 FM Grandpass thermal plant, the extensions to the 132 kv and 33 kv transmission system and the expansion of the distribution system in Colombo. The total cost of the thermal project is estimated at the equivalent of $11.10 million of which $7.4 million will be recquired in foreign exchange. The 25 h4W of new capacity is estimated to be absorbed by the middle of 1962.  ii viii. The local currency cost of the project would be financed by long-term Government loans and to a smaller extent from revenues earned by D2GEU. iv. The average rate of return on the investment for the 6-year period 1958/9 to 1962/3 would amount to about 5%, Total debt service would be fully covered, although with narrow margins. x. The thermal plant project is suitable as a basis for a Bank loan of $7.4 million with a term of 20 years. A grace period of up to 3i years would be appropriate.  GRANDPASS THERYAL PO4ER PROJECT CEYLON I. INTRODUCTION 1. The Bank has received a request from the Government of Ceylon for a loan of -7.4 million to cover the foreign exchange cost of an expansion of the power system operated by the Department of Government Electric Undertakings (IGEU). The project consists of a 25 MW thermal plant, with associated trans- mission lines and distribution facilities, and forms part of the program known as Aberdeen-Laksapana Stage II B. 2. This report covers an appraisal of the project. It is based on a report prepared by the Consulting Engineers, Preece, Cardew and Rider of London, and on information obtained by Bank staff during a visit to Ceylon in blarch, 1958. IT. DGEU Fres- t Facilities 3. DGEU was formed in 1927 to take over the operation of a small private power supply system, which was purchased by the Government. Power was origin- ally supplied only to the city of Colombo, but the area covered has been gradually e:'tended and amounts at present to some 3,500 square miles or about 15% of the 4otal area of Ceylon (see map). The population in this area amounts to about 4 million or half of the total population of the island. 4. The generating capacity of the integrated system is at present 77,000 kw of which 50,000 kw is hydro capacity, 12,000 kw steam and 15,000 kw diesel capacity; hydro capacity of 25,000 kw came into operation in February 1958. 5. The steam thermal units which are installed in the Stanley and Pettah power stations in Colombo are of small size and operate under low steam con- ditions (240 p.s.i.). They have been in service for more than 20 years and, while well maintained, are close to the end of their useful life. The hydro capacity has been installed during the last eight years in the Laksapana power house. 6. The transmission system consists of 180 miles of 132 kv and 66 kv high tension lines and 917 miles of 33 kv and 11 kv distribution lines. 7. IGEU distributes power in the city of Colombo, which is by far the most important load center, and the four towns Nuwara Eliya, Peradeniya, Kurungela and Diyatalawa. Most small towns in the DGPU system are, however, supplied with bulk power for distribution by local authorities, 8. DGEU also operates a number of individual diesel plants not connected to the transmission system. These also mostly supply power in bulk to local  2 authorities. For the city of Jaffna in the north, DGEU purchases power from the Kankesanturai cement factory. Financial Position 9. A condensed balance sheet showing the Department's financial position as at September 30, 1957 is given in Annex 1. 10. The fixed assets are shown at original cost and total Rs. 185.5 million, including construction work in progress. Total investments during the last 5 years amounted to some Rs. 110 million. 11. DGTEUts total loan liabilities as of September 30, 1957, amounted to Rs. 151.3 million, of which Rs. 35.8 million represented withdrawals as of this date on the IBRD Ican made in July 1954. This loan has a term of 25 years. The balance consisted of gove-nment loans with terms ranging from 25 to 50 years and with interest rates varyikg from 32 to 5%. Recent loans have been made at 3 3/4%b. A detailed list of the loan liabilities is given in Annex 2. 12. Reserves and surplus totalled about Rs. 49 million2/accumu]ated from retained ear-i:ngs during past years. Past EarniSnes Re or' 13. EGEUW6 earnings record for the past six years (1951/2 - 1956/7) is shown in Annex 3. This annex has been prepared in a form which conforms to the way in whireh the DepartLent cal';ulates its net income, and requires the f ollow- ing commentE:. 14. The Department has to meet all debt service, including amortization, out of operating revenues and in the Department's revenue accounts, this debt service is shown as a charge to income, but no allowance is made for depreciatioi 15. Although the Department is not liable for income taxes, it has to make equivalent payments to the Treasury as a contribution to Government revenues. These payments are shown in the Departmentts revenue accounts as "payments in lieu of income taxes"2./. During the last three years these payments totalled about Rs. 10 million. 16. The earnings record shows that after these payments and after deduction of debt service payments, annual net revenues remained varying from Rs. 3.5 million to Rs, 7.3 million, totalling Rs. 31.8 million over the six year period 1951/2 - 1956/7. i/ Before any deduction of accumulated depreciation on plant in operation; no depreciation has been recorded in past years. 2/ These payments are calculated in the same way as income taxes are cal- culated for corporations. The variations in the amounts paid during past years is not only due to fluctuations in the net profits, but also to special rebates allowed in years when new plant is put into operation.  :3 17. The net figures arrived at in the way outlined above do not represent the actual net profits realized from operations, because the Departmentls revenue accounts are to a large extent merely cash statements. In order to determine the net profits for the years in question, the Department's figures have been adjusted, as shown in Annex 4. A realistic annual provision for depreciation was assumed instead of the annual amortization components included in total debt service payments. Other adjustments had also to be made in the figures for operating costs. The adjusted income statements show net profits, for the last four years, of about Rs, 6.6 million, before deduction of "pay- ments in lieu of income taxes" and from Rs. 3 million to Rs. 4 million after deduction of these payments. Interest (excluding interest capitalized) was earned about 3.4 times. 18. The revenues of EGEU, not being an autonomous agency, form a part of the general revenues of the Government. All the Department's revenues are paid directly into the Government Treasury and its capital and operating ex- penditures are all voted each year by the legislature. Qgrnsizon and nagemeat 19. LGEU is a part of the Ministry of Transport and Works. As such it is sub4ect to 1rery detailed control and supervision both by this Iiinistry as well as t