Sri Lanka - Power Distribution and Transmission Project

Document of The World Bank FOR OFFICIAL U-E ONLY Report No. P-4786-CE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CRSDIT OF SDR 29.2 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A POWER DISTRIBUTION AND TRANSMISSION PROJECT LI June 2, 1988 This document has a restricted distrbution 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.  CURRENCY EQUIVALENTS US$1.0 = SL Rs 32.0 SL Rs 1.0 = US$0*031 MEASURES AND EQUIVALENT 1 kilovolt (kV) 2 1,000 volts 1 megavolt ampere (MVA) 1 million volt amperes = 1,000 kilovolt amperes I kilowatt (kV) 2 1,000 watts 1 megawatt (MV) 1 million watts = 1,000 kilowatts 1 kilowatt hour (kWh) l 1,000 watt hours 1 gigawatt hour (GWh) = 1 million kilowatt hours PRINCIPAL ABBREVIATIONS AND ACRONYMS CEB = Ceylon Electricity Board 3OSL - GoCernment of Sri Lanka LECO W Lanka Electricity Company (Private) Limited CEB FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY SRI LANKA POWER DISLRIBUTION AND TRANSMISSION PROJECT CREDIT AND PROJECT SUMMARY * Borrower: Democratic Socialist Republic of Sri Lanka. * Beneficiary: Ceylon Electricity Board (CEB) Amount: SDR 29.2 million (US$40.5 million) Terms: Standard, with 40 years maturity Onlending Terms: The Government of Sri Lanka (GOSL) would relend SDR 15.1 million (US$20.9 million) out of the proceeds of the credit to CEB at an interest rate of ten per cent per annum, repayable over 20 years, including a five year grace period; the remaining SDR 14.1 million (US$19.6 million) would be relent to CEB for financing the dis- tribution component of the proposed project at an interest rate of ten per cent per annum, repayable over 25 years, including seven years of grace. MOSL would bear the foreign exchange risk. Financing Plan: IDA US$ 40.5 million Cofinancing US$ 31.0 million CEB US$ 41.5 million Total US$113.0 million Economic Rate of Return: 11.7Z Staff Appraisal Report: Report No. 7192-CE Mbpss IBRD 20551 and 20860 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO SRI LANKA FOR A POWER DISTRIBUTION AND TRANSMISSION PROJECT 1. The following report on a proposed development credit to Sri Lanka for SDR 29.2 million (US$40.5 million equivalent) on standard IDA terms with 40 years maturity is submitted for approval. The proposed credit would help to finance a power distribution and transmission project. The Government of Sri Lanka is seeking cofinancing for SDR 22.3 million (US$31.0 million equiv- alent) for the transmission component of the proposed project. 2. Background. The efficient operation and development of Sri Lanka's power subsector has been impeded by the fragmentation of responsibility for electricity supply among CEB, Lanka Electricity Company (Private) Ltd. (LECO) and about 210 licensees (local authorities). Many licensees' distribution systems face serious problems, including high system losses, unreliable and poor quality of supply, high accounts payable to CEB (averaging 5.5 months' billing in 1987), and shortages of competent staff. In 1980 GOSL deferred a proposal for CEB to take over all licensees' systems because of CEB's own institutional weaknesses. In 1983, as an interim measure, LECO was estab- lished to take over some licensees. GOSL now plans to address the poor performance of licensees by transferring about one-third of their consumers to CEB (which is now institutionally stronger) and one-third to LECO, leaving one-third with the more efficient licensees. The project's distribution component would support CEB's adoption of about 180,000 consumers currently served by about 130 licensees. The transmission component is part of CEB's least-cost expansion plan, while the feasibility study for the Kalu Ganga Multipurpose Project would plan the optimal mix of hydropower generation and other developments in Sri Lanka's only major river basin for which a com- prehensive development plan has not yet been prepared. 3. Rationale for IDA Involvement. IDA has supported nine power projects to help Sri Lanka develop an efficient power subsec._or. The project would complement Power IX (Credit 1736-CE), which addresses energy conservation and resource use efficiency issues through the reduction of system losses in CEB's distribution system and is assisting in the institutional strengthening of CEB. The priority now is to address those issues in licensees' distribu- tion systems and to reform the institutional arrangements for power distribu- tion. IDA's involvement in the project would support speedy, effective implementation of COSL's reform program, which is justified to reduce the waste of resources associated with high system losses--often exceeding 20%--and to address the endemic problem of high accounts payable by licensees to CEB. It would also facilitate CEB's further institutional strengthening and ensure that the Kalu Ganga Multipurpose Project feasibility study appropriately addresses environmental and resettlement issues.  -2- 4. Project Objectives. The project would support measures aimed at: rationalizing the organization of power distribution; rehabilitating and enpanding distribution systems presently managed by licensees to reduce system losses and improve the quality of electricity supply; implementing CEB's least-cost transmission expansion program; strengthening CEB institu- tionally through the decentralized computerization of its billing system and training staff in computerized billing and engineering; and improving CEB's revenue collection by reducing accounts receivable from licensees. The project would also assist in the optimal development of the land and water resources of the Kalu Ganga basin. 5. Project Description. The proposed project would consist of the following components: (a) a five-year time-slice of CEB's expenditures to rehabilitate, develop and expand distribution systems to be taken over from selected licensees; (b) the construction of about 230 km of 132-kV transmis- sion lines, the reconductoring of about 150 km of 132-kV transmission lines and the construction and augmentation of related substations; (c) consulting services to: (i) develop a decentralized computerized billing system and a management information system; (ii) assist CEB in the preparation of the detailed specifications and design of the 132-kV transmission system in (b) and preparation of bidding documents for major transmission contracts; (iii) assist CES in carrying out a tariff study; (iv) assist in the development of a training program for middle-level technical officers; (v) assist in the establishment of a consumer relations unit; and (vi) assist in monitoring the implementation of systems initiated when CEB was reorganized in 1984; and (d) undertake a feasibility study for the Kalu Ganga Multipurpose Project. The project would be implemented over six years. The total cost of the project is estimated at US$113.0 million equivalent, with a foreign exchange com- ponent of US$61.0 million (54%). A breakdown of costs aad the financing plan are shown in Schedule A. The transmission component of the proposed project, excluding the Anuradhapura-Mannar 132-kV line and the new Mannar grid substa- tion to be financed by IDA, would be financed by the cofinancier. The timely implementation of the project components to be financed by IDA is not contin- gent on satisfactory conclusion of cofinancing arrangements. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. Retroactive financing of up to US$1.0 million for expenditures incurred after January 1, 1988 is included. A timetable of key project processing events and the status of Bank Group operations in Sri Lanka are given in Schedules C and D, respectively. Two maps highlight- ing the project area, IBRD Nos. 20551 and 20860, are attached. The Staff Appraisal Report, No. 7192-CE dated June 2, 1988 is being distributed separately. 6. Agreed Actions. Agreement has been reached with GOSL that it will: (a) review with IDA the results of the tariff and load management study upon its completion by October 31, 1989 and thereafter implement the agreed recom- mendations; (b) carry out a program satisfactory to IDA to redeploy or retire ex-staff of local authority distribution systems taken over by CEB; (c) take all necessary actions, including tariff increases, to enable CEB to continue to earn a minimum rate of return of 8% on the current value of its average  -3- net fixed assets employed; and (d) pass legislation enabling CEB to take over licensees' electricity distribution systems, to meet the condition of credit effectiveness. Further, CEB has agreed to: (a) complete by October 31, 1989 a tariff and load management study under terms of reference as agreed with IDA during negotiations; (b) initiate by December 31, 1988 the implementation of a program for the computerization of its billing system at the divisional level and upgrading of its management information system; (c) implement a dated program to retrain licensees' staff transferred to CEB; (d) continue the action program to reduce overall accounts receivable for electricity supplied to a level not exceeding three months' billings by December 31, 1988; (e) subm-t to IDA its unaudited accounts within four months from the end of the fiscal year and audited accounts within ten months; (f) deposit its annual insurance provision into the escrow account within eleven months of the end of the fiscal year; and (g) consult with the Association before incurring new debt which would cause its long term debt service coverage to fall below 1.5 times. 7. Benefits. Benefits would include the more efficient operation and development of the power subsector through its restructuring; resource savings by reducing power system losses; improved reliability of electricity supply; and increased subsector revenues and lower operating costs. Other benefits would include institutional strengthening of CEB through the com- puterization of its billing system at the divisional level and staff train- ing. Furthermore, the proposed feasibility study for the Kalu Ganga Multi- purpose Project would assist in the optimal development of the land and water resources in the Kalu Ganga basin. The least cost power development program of CEB, which includes the proposed project, is expected to have a minimum quantifiable economic rate of return of 11.7%. 8. Risks. Although the proposed project involves a major institutional reorganization, no unusual risks are foreseen. The major risk concerns possible delays in the passage of the legislation enabling CEB to take over licensees' distribution systems. This risk would be minimized by the passage of the required legislation before credit effectiveness. 9. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. Date: June 2, 1988.  -4- SCHEDULE A SRI LANKA POWER DISTRIBUTION AND TRANSMISSION PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs: a/ Local Foreign Total