Sri Lanka - Eighth (Diesel) Power Project

Document of The World Bank FOR OFmFCIAL USE ONLY Report No. 7181 PROJECT COMPLETION REPORT SRI LANKA EIGHTH (DIESEL) POWER PROJECT (LOAN 2187-CE) April 4, 1988 Industry and Energy Operations Division Country Department 1 Asia Region T lbi documient bas a westricted distribution and may be used by recipients only In the performance of |their offidal duties. Its contents may not otherwise be disclosed witbout World Bank authorization.  * 101 M OfAL U ONLY TO* WOtLD SANK WasIwlon. D.C. 2133 Gi. ii OtwGUW April 4, 1988 mEORANDUN TO THE EXECUTIVB DIRECTORS AND THi PRESIDENT 3UBJECT: Project Completion Report on Sri Lanka Ziahth (Diesel) Power Project (Loan 2187-CE) Attached, for information, La a copy of a report entitled "Project Completion Report on Sri Lanka Eighth (Diesel) Project (Loan 2187-CE)" prepared by the Asia Regional Office. Purther svaluation of this projeat by the Operations Evaluation Department has not been made. Attachment d p oW d_ it conu o o_ b dbc bo_ W _1 I  eOIVIcAL 0 WINLY SRI EIGHTH (DIESRLT POWER PROJECT CLOMN 2187-cf PROJECT COMPLETION REPORT TABLE Or CONTENTS Preface ........... ..... ................ I Blsic Data Shoet .I...I..* .** Highlights ...........* I. INTRODUCTION . .........e*.. . ..oe.. 1 The Power Subsector .................................... 1 Bank Group Investment ........... 2 TI. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL e..... 3 Project Origin, Preparatong, Appraisal, Negotiation and Approval ................. . .....*.** 3 Project Objectives ....... 4 Project Description . .. ................ .. ...... 4 III. IMPlEMENTION .............*.*....* ....*.*.... 4 Loan Effectiveness .*... ........*.... ...*.............. 4 Project Design and Engineering ......................... 4 Project Executlon ............5 Project Cost ......... ....... ........................... 6 Disbursements ......... .......... ..... ..o.... . 7 rv. OPERATING PERFORMANCE *.........*.....*.* ............. 7 V. FINANCIAL PERFORMANCE a Accountlng Systems, Organization and Audit a......... Tariffs ....e..s.e.s.e.e.ee*eeeeeeeee 8 F4inancal Performance *.....ee.e... ... .............. 9 Present Financial Position .... 11 Accounts Receivable ................................... 12 VI. INSTITUTIONAL DEVELOPMENT 13 VII. ECONOMIC JUSTIFICATION ............... .................. 14 VIII. PERFORMANCE OF THE BORROWER AND THE BANK ...1........... 15 IX. CONCLUSIONS ...................... *.. .. ................16 Thisdocum -ha aresuti distdbutoendmy boe db y gipmsw ns peumaM of their ofcl dutieml t contentsanmy not otmwiM be witb od W Bank latbodwmtl  TAW.L OF CONTENTS (Cont'd) Pe RO LO 1. Outstanding tem to Complete the Turnkey Contract .... 17 2. stimated and Actual Project Cost .................... 18 3. Cumulative forecast and Actual Disbursements ......... 19 4. Forecast & Actual Demand for Electricity - 1981-85 ... 20 S. InCOm Statements - Projcetions and Actual ..........* 21 6. Balance Sheet* - Projections and Actual .............. 22 7. Sources and Applications of Fundsa Statment - Projections and Actual ... ...... ......... 23 8. Es-Post Economic Costs end Benefits ..................24 ATYAC tMENT Comments from the Borrower .........e..... *e......................... 2S I~~~  PROJICT CCMPLETION NIPORT B1I0TB (DIESEL) PORE PROJECT - (LOAN 2187-CE) PREACE j 1. The project Involved the turnkey construcetLn of an 80 MN diesel power station at Sapug k nan near Colombo, the capiutl of S8l Lanka. It covered all civil, mechanical and electrical works and technical services, includiog engineerting, supervision and training of personnel. A project loan of USS42.7 lillion vas approved on June 6, 1982, with full comercial opera- tion of the plant (4 a 20 MN) schaduled for March 1984, and loan closure for March 31, 1985. iowever, slower-than-expected procureent and civil dlitur- bances delayed full comLisioning until September 1, 1984. Since, however, any lt_ms were outstanding, the closing dato wa extended by one year and the loan actually closed on August 8, 1986. 2. The total project cost wa US$51.3 mlllion, 951 of the original estimate of US$54.0 million; hoever, net of port duties and tazes, the project ws completd at 811 of the estimted cost, or US$41.0 million com- pared to US$50.5 million. Local costs, includin Import duties and taxe of US$10.3 million (almost triple the estimted US$3.5 million), were US$15.0 capared wth the SA estimate of US$12 millon, and foreign costs were US$36.3 illion compard with the estimated US$42.0 million. Favorable mrket conditions In 1982 led to bids for below the orignal estimate, causing con- sid*eable savings In the turkey contract. As a reslt, only US$34.2 mllion wa disbursed from the loan US$6 million of the original nunt wa canclled on December 1, 1985, and the remaining US$2.5 amllion was cacelled on Augut o, 1986, following loan closure. 3. This Project Completion aport wa prepared by the South Asia legion on the basis of the Staff Appraisal Report 3891b-Cl dated May 20, 1982, the Loan and Project Agrements, dated Augut 8, 1982, a completion report sub- mitted by the borrower, docuents In Bank files, and a mission to Srl Lanka in October 1986. 4. In accordance wlth the ?evised procedures for project performance audit reporting, ths Project Completion Report wa read by the Operations Evaluation Departent O(OED), but the project wll not be audited by OlD staff. OD sent copies of the draft report to the Borrwer and Executing Agecy for coute. The comAnts received jve boon taken Into account In preparin the fiml report and tlhy are reproduced as an Attachment to rbe Report.  -'ii- SRI LANKA CEYLON ELw'TRICITY BOAD (CBS) EIGCTH (DIESEL) POWER PROJECT - Loan 2187-CE BASIC DATA SUEET Key Project IDcat (in US$ Millioin) Appraisal Estimate Actual Project Cost 54.0 51.3 Loan Amount 42.7 34.2 /1 Disbursed 42.7 34.2 Cancelled - 8.5 12 Repaid - 2.4 Outstanding - 31.8 Date for Completion of Physical Components 03/84 09/84 Proportion Completed by Target Date (C) 100 90 Economic Rate of Return (Z) 14 18 Institutional Performance Mixed Improving Cumulative Estimated and Actual Disbursements (US$ Kill'ion)- 1983 1984 1985 1986 Appraisal Estimate 13.5 41.6 42.7 Actual 5.2 29.1 34.0 34.2 Actual as Z of Eastimate 39 70 79 80 /1 The interest rate was 11.6Z. /2 Disbursement was extended to May 31, 1986, to enable payment of the money withheld on the main contract under the Performance Guarantee. However, because no final settlement was reached on outstanding contract issu e, the remaining funds in the loan were cancelled after closing. CUM is to meet outstanding payments of about US$3 million from its own funds. -r~..,.rr _R - _r - . W *w--I-I  Other Project Data Appraisal Item Estimate Revision Actual Concept in the Bank - - 10-19-81 Negotiations 05-12 to 14-82 -- Board Approval 06-22-82 06-24-82 06-24-82 Signing - - 08-18-82 Effectiveness 11-16-82 - 11-11-82 Closing Date 03-31-85 03-31-86 08-08-86 Borrower, Executive Agency Ceylon Electricity Board (CEB) Fiscal Year of Borrower January-December Follow-up Project Ninth Power Project (CEB - Distribution Expansion and Rehabilitation) mission Data /1 Month/ No. of No. of man Date of Year Weeks persons Week Report Preparation 11/12/81 /2 Appraisal 01182 1-1/2 3 3 05/20/82 /3 Supervision 1 10/82 1 2 1 01/10/83 Il Supervision 2 03/83 1/2 1 1/2 04/06/83 Supervision 3 06/83 1-1/2 1 1-1/2 08/05/83 Supervision 6 02/84 1 1 1 03/22/84 Supervision 5 09/84 3 4 10 11/12/84 /5 supervision 6 01/85 1 1 1 02/27/85 /6 Supervision 7 06/85 2 3 6 08/12/85 Supervision 8 10/85 1 1 1 11/18/85 /7 t  i, -iv- Country Exchange Rates Name of Currency Rupee (SLRs) Appraisal year average USRI - Rs 20.50 Intervening years average US$1 - Ra 25.04 Completion year average US$1 - Rs 28.36 /1 Al missions were combined covering supervision of all on-going projects, collection of sectoral information for a power subsector report, and preparation of the Ninth Power Project. Of the 25 total manweeks stated, about four can be considered as exclusive for supervising the lighta. Power Project. /2 The project was developed in 1981, in the course of supervising the ongoing Sixth Power Project (1048-CE) and preparation/appraisal of the Seventh Power Project (1210-CE), during which CBS urgently requested an increase in thermal capacity following extensive power shortages in 1979 and 1980. In addition, projected delays in hydro plant commissioning dates were expected to cause further shortages during 1983-1985. A first project brief was issued on November 12, 1981. Shortly thereafter during negotiations for the Seventh Power Project, the main technical elements were discussed. /3 The contents of the appraisal report for the Eighth Power Project, except for the chapters pertaining to project information and justification, were substantially the same as those in the appraisal report for the Seventh Power Project. /4 A full supervision report was not issued; memoranda dated November 11, 1982 and January 10, 1983 covered all three ongoing projects. /S Supervision of the Sixth, Seventh and Eighth Power Projects, and identification of the Ninth Power Project. /6 No full supervision report of this (consultant's) visit was issued. See memorandum of this date. / The three ongoing projects were supervised at the time when the Ninth Power Project was appraised.  SRI LANKA CEYLON ELECTRICITY BOARD EIGHIH (DIESEL) POWER PROJECT s Loan 2187-CE PROJECT COMPLETION REPORT Highlights 1. Delays in several hydro stations under construction by the Mahaweli Authority of Sri Lanka, and the need for the-'al back-up to the hydro system in case of below-average rrinfall, prompted the Bank in 1981 to take 1uick action to assist CEB in financing a diesel power station of up to 120 MW. Subsequently, the station's size was reduced to 80 MW following lower load forecasts which were prepared to take account of a slow-down in economic activity (para. 2.01). 2. In view of the need for early completion, bid documents were issued in January 1982. Commissioning of the power station was initially targeted by CEB for late 1983, but delays in finalizing financing arrangements and project preparation, including Bank review of bid documents, necessitated a revision of the commissioning date to March 1984 (para. 3.03). Because of this delay, interruptions in power supply, totalling about 37 GWh (1.7X of total sales), occurred from November 1983 through February 1984. 3. The objective of speedy physical completion of the project was sub- stantially met (para. 3.03). The project was appraised in January 1982 and approved by the Board in July 1982. A contract for a 4 x 20 MV plant was awarded on October 12, 1982 with a target completion date of mid-July 1984. In the event the fourth and final unit was coummissioned in September 1984 (para. 3.03). The principal reason for the delay was slower than expected procurement and civil disturbances in mid-1983. Although all the units were commissioned by September 1984, final acceptance was delayed because of numerous outstanding items which the contractor had not completed (para. 3.04). 4. The project achieved its technical objectives, although CBS has had considerably lower requirements for thermal generation than were forecast. This was due to favorable hydrological conditions and to lower demand for electricity because of slower economic growth. Consequently, through end-1986, energy generation by the new plant was minimal. Its main function has been as a back-up plant to meet demand during maintenance and periods of technical supply difficulties. For example, in 1986, the 3 x 67 KW Kotmale hydro statrion developed penstock difficulties and was taken out of service until 1988. Thus, compared to the SAR forecast, the benefit of the Sapugas- kanda power station as a reserve and peaking plant has increased and its energy function has decreased substantially (para. 4.01).  -vi- 5. 1U primary project objective was to provide additional generating capacity to meet forecast demand at least cost. The institutional objectives were generally those agreed under previous lending operations, particularly the Sixth (Cr. 1048-CE) and Seventh (Cr. 1210-CE) Power Projects. Institu- tional objectives and actual performance are not discussed in detail ih the present report, but will be addressed in the forthcoming completion report for the Sixth and Seventh Power Projects. Although CEB's financial perfor- mance was generally satisfactory (paras. 5.03-5.07) during the period when the project was constructed, 1982-85, its wider institutional performance was mixed. The principal issue was inadequate staffing, as a result of low remuneration and the exodus of expert staff to work in tLa Middle East countries (para. 6.01). In early 1985 CEB had only 300 qualified engineers, of whom fewer than 102 had more than five years' experience with CEB. Since job opportunities elsewhere, particularly in the Gulf countries, are now severely restricted the staffing of CEB appears to be improving. An accelerated program for the implementation of institutional changes is under- way, and agreement was reached under the Ninth Power Project (Cr. 1736-CE) that CEB would prepare, and put into effect by December 31, 1987, a scheme of incentives and a promotion policy based on merit to assist it in the reten- tion and recruitment of suitable staff. p~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  SRI LANKA CEYLON ELECTRICITY BOARD (CEB) EIGHTH (DIESEL) POWER PROJECT - Loan 2187-CE PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 Csa's electricity sales increased annually about 9.5Z during 1961-80, includirsg about 11.51 in 1978-80. During the latter years, the Government decided to accelerate the construction of large multipurpose projects, prin- cipally in the Mahaweli basin, including hydro power components for transfer to CEB upon completion. In this context, CUB required the accelerated expan- sion of its transmission system, both at the existing 132-kV level and at a higher voltage level (220-kV), to allow for more extensive transmission of electricity and to connect the new hydro stations to the national grid for supply to the main demand centers. Although CEB was restructured in the early 1970s to cope with this rapid growth, the need for further restructur- ing became apparent at the end of the decade in order to assure its efficient operation in 180s. The Bank Group addressed the technical and institutional problems that arose as a result of this rapid growtb under the Sixth and Seventh Power Projects. The _ower Subsector 1.02 Electricity supply in Sri Lanka began as a private sector operation in 1905. It ceased as a private business in 1927, when the Covernment bought the utility and created a government department for electricity supply. CEB was created as a statutory corporation in 1969 to take over that department's cesponsibilities for the generation and transmission of electricity throughout the country and distribution in the networks which had been operated by its predecessor. Remaining distribution networks were operated by local authorities, and during the project period, 1982-1985, CEB supplied electricity in bulk to 214 local authorities which accounted for about Ote-fourth of total supply. These local authorities (licensees) were mainly Orgnized on a municipal basis servicing relatively small load centers which "eTe dominated by domestic consumers. Due to their perennial financial PrOblems ant high distribution losses (25-30X being common), the Covernment in 1984 created the Lanka Electric Company (LECO) under the Companies Act to take over licensees gradually. The Asian Development Bank is assisting LECO n thbe organizational aspects of this endeavor and in renovating networks. 1.03 In 1982, CUB's total installed capacity was 55' KW, all intercon- nected in one system. The hydro/thermal capacity mix was 66:34, 369 NW and 190 MI respectivelyt including 120 MW gas turbine capacity. The main trans- QSision voltages were at 132-kV (915 km) and 66-kV (344 km). Distribution was served by a system of 33-kV (5,230 km) and 11-kV (1,205 km) overhead lines- The lengths of the licensees' distribution facilities are not on record.  -2- 1.04 The CEB statutes allow it a reasonable measure of autonomy, which has not been realized, particularly since it was brought under the super- vioory responsibility of the Ministry of Power and Energy that was created in the early 19800 to rationalize the energy sector. For economic and political reasons, the Government has reserved to itself a substantial role in policy mac.ers and appoints both CUB's Chairman, who is also Secretary of State of * the Ministry of Power and Energy, and the Ceneral Manager. The conditions of service for all CUB staff are subject to Covernment regulations which allow midnimal room for incentives. The loss of experienced staff to the private sector and overseas has been exacerbated by a promotion system based on seniority rather than merit. In early 1985, of the 300 engineers in CEB less than 10 has more than five years' experience with CEB. LEC0, by contrast, i is substantially free from Government interference and allowed to set inde- pendent service conditions. However, a agreement with CEB, which is the principal shareholder, prohAibits employment of CEB personnel and, thus, the formation of LECO has not contributed to the exodus of experienced personnel from CUB. 1.05 During project execution, the power subsector encountered many difficulties, reflecting economic and political problems in the country. It is, therefore, satisfactory to note that CEB's financial viability was generally maintained by adequate tariff rate adjustments (para. 5.03). Even so, owing to structural deficiencies, some financial problems were experienced, particularly with regard to accounts receivable (para. 5.09). e This issue was addreased under the Ninth Power Project (Cr...1736-CE). 1.06 Although the execution of works (including Bank Croup financed projects) suffered from many delays, CEB's installed cspacity increased from 559 MW in 1982 to 949 MW in 1985, an increase of 701. In December 1985, the plant mix was 679 MS hydro (increase of 85x) and 270 MW thermal (increase of 42Z). The 220-kV system was substantially completed by mid-1986--about two years late. The delays in most works, including the project, did not cause any difficulties of substance, because growth in demand was slower than originally projected (paras. 4.01 and 5.05). lank Group Involvement 1.07 To date, rhe Bank Group has supported the power subsector through nine projects, excluding the Ukuwela power station (1976, which is a part of a multipurpose Mahaweli Development Project). Up to and including the Seventh Power Project, loans amounted to US$58.4 million equivalent and credits to US$61.5 million equivalent (Fifth, Sixth and Seventh Power projecte), excluding Ukuwela. The loan for the Eighth Power Project was US$42.7 million. Total original commitments (including the recently approved Ninth Power Project) were US$209.9 million equivalent, about 20X of Bank Group lending to Sri Lanka (as of September 30, 1986).  -3- II. PROJECT IDENTIFICATION, PPREPARATION AND APPRAISAL ePrjct Origin, Preparation. Appraisal, Negotiation and Approval 2.01 An electricity demand forecast for 1981-90 was prepared under the Seventh Power project (CL81). The projected growth rate was 24Z for 1981, 9.1Z for 1982, 21.6X for 1983 and 14.9Z for 1985. On this basis, and assum- ing that the 120 KW of existing gas turbine capacity would operate at a 70S plant factor from 1982 onwards, the energy deficit was projected to be about s 200 GWh (71) in 1984 and 100 GWh (31) in 1985 under normal hydro conditions after allowing for the commissioning of the Victoria 3 X 70 MU hydro plant. In 1980 CEB, assisted by consultants, initiated studies for additional ther- mal capacity and in 1981, prepared a long-term least cost generation planning study in cooperation with the Bank Croup, using the Wien Automatic System Planning Package (WASP). As a result of the study, the originally envisaged need for a 120 MW thermal plant was reduced to 80 KW. The project was developed in the course of supervising the Sixth Power Project and develop- ment of the Seventh Power Project. During preparation of the latter project, the Bank Group decided to pursue the Eighth Power Project as soon as possible and agreed in November 1981 to initiate its processing. 2.02 Project appraisal occurred in January 1982, focusing only on techni- cal and economic aspects. Except for the chapters pertaining to the project and justification, the appraisal reports of the Seventh and Eighth Power Projects were almost identical. 2.03 - Partial financing through an IDA credit was considered but the project did not form part of IDA's long-term lending program. Upon request of IDA, the Government investigated the possibilities of other financing. No additional financing could be realized in view of the requirements for the rapid completion requiring a single construction responsibility (turnkey contract), consequently in April 1982 the Bank decided on a loan to cover the full foreign exchange requirements. 2.04 The Loan was neigotiated in May 1982, approved by the Board oan June 24, 1982, and became effective November 11, 1982. Because the project's objectives were primarily technical and economic (para. 2.06), its institu- tional objectives repeated those of the Seventh Power Project. Other objec- tives I/ were defined under the Sixth and Seventh Power Projects, and will be discussed in the forthcoming combined project completion report for those projects; the present report discusses institutional objectives in general terms only (Chapter VI), but provides details on financial performance (Chapter V). J 1/ Rain objectives: improvements in (a) organizational structure, (b) management information, control and performance, (c) planning, including long-term planning and annual updating, (d) budgeting, account- ing procedures, internal and external audits, (e) annual review of tariff structure and rates, (f) lowering of inventory levels, (g) reduction in accounts receivable, (hJ staff training, and Ci) coordination with Government on joint development schemes. _ ~-~,--.- -.-~ -- - - -.  -4- 2.05 Tariff revisions were implemented in accordance with long-run marginal cost (LRNC) principles, based on CEB tariff studies in 1981 and 1984 (para. 5.03). While CEB's tariff rates were unchanged between 1972 and 1977, the average rate, excluding the fuel adjustment charge was increased by about 75Z in 1979, about 232 in 1980, 60X in 1981 and about 32Z in 1982. Based on the 1984 LRMC study, a further rate increase of about 80X was introduced in 1985. Project Objectives 2.06 The major objective of the project was to prevent electricity shortages by providing additional capacity through a type of plant that would remain economically justified throughout its normal life span. It was forecast that without the project, even if all hydra stations under construc- tion were completed on time, Sri Lanka could experience both capacity and energy shortages through 1985, when maximum demand was expected to be 698 MW and firm capacity (after reserves) only 653 MW (giving a shortfall of about 6Z). Energy demand for 1985 was forecast at 3,313 GWh, while total plant generating capability during an average hydrological year would be 3,193 GWh (shortfall of about 41). Although not specifically stated, the project was to continue efforts toward CZB's institutional improvement that were agreed to under the Sixth and Seventh Power Projects. Project Description 2.07 The project comprised the turnkey construction of an 80-MW diesel power station at Sapugaskanda in the northern suburbs of Colombo near the refinery and a new pot&ble water plant' a 132-kV substation, and consulting services for final design preparation of bid documents and supervision of construction. III. IMPLIEMENTATION Loan Effectiveness 3.01 Except for the standard legal provisions, there were no conditions of effectiveness and, following compliance, the loan became effective, within the 90-day provision after signing on govember 11, 1982. Project Design and Enginecering 3.02 The power station was originally designed to be executed with radiator cooling. In the bidding documents, however, CEB sought bids for alternative cooling towers which would use water from a new treatment plant under construction by the Potable Water Authority, which welSomed the prospect of CEB as a consumer with a demand of about 1,800 m per day, or about 15X of the treatment plant's capacity. CEB selected the cooling tower system, due to its lower capital (about one-fourth) and operational costs, compared to a radiator cooling system. In hindsight, this choice is ques- tionable, since the use of potable water for power station cooling would not have high priority in times of technical problems or severe drought. Some  technical problems at the gotable water plant have caused rationing to CEB. A storage tank for 3,000 m (less than two days of full power plant opera- tion) is expected to be contracted soon to cover some fluctuation in supply. Therefore, CEB should initiate a study to ascertain if and when a partial or complete replacement of the potable water supply, using a closed system cooling, would be required. However, reverting to river water would not be an acceptable solution, since the heavy pollution would adversely affect the thermal system and the engines would have to be derated. Project Execution 3.03 The project was executed reasonably satisfactorily. Bid documents were opened in April 1982, and CEB planned to award the contract immediately after loan signing. Bid evaluation, however, was extremely difficult 1/, causing a four-month delay. The award was made in October, and the contract signed on November 12, 1982. Initially agreed dates for completion were April through June 1984. Under a bonus provision, the first two (20 NW each) units were to be completed in February 1984 and the two remaining units (20 MW each) in July 1984. However, in July 1983, civil disturbances interrupted work and personnel subsequently returned to the site more slowly than expected. The revised target date for the first two units, late April 1984, was met, as was August 15, for the third unit; however, the fourth unit started operations two weeks late on September 1, 1984. 3.04 Although the units were ready for commercial operation, work not directly connected to the running of the machines. remain to be completed. Numerous important items were missing e.g., most tools and spares had not arrived and much outstanding work was pending, such as fire pcotection facilities, repair of unreliable control circuitry, and installation of workshop facilities. Some teething problems were experienced, such as gas leakages in the cylinder heads of one engine and turbo-blower problems for all engines. The manufacturer was investigating the causes in late 1986 and had returned one blower to the factory for tests in order to remedy the defects. CE8's main difficulties with the contractor, however, are not qualitative, but quantitative, with respect to contract completion. "As built" drawings are still to be completed, and spares used by the contractor prior to preliminary takeover have not been replaced (see Annex 1). As a result, final acceptance certificates have not been issued. The contractor disputed a penalty applied to the late completion of the fourth unit and final payment of retention monies had not been made in October 1986. 1/ The question arose whether the lowest evaluated bidder was to be considered "responsive" in the light of the requirement of proven opera- tional experience with the machine offered. Three different committees in Sri Lanka had different opinions and opinions in IDA were similarly divided. Representations by the various manufacturers further aggravated the situation until consensus was reached on non-acceptability of the diesels because, although based on a well known design, they had never operated commercially at the required speed, capacity and number of cylinders, while diesels offered by competitors had proven operational experience, despite a slightly older design (diesel manufacturers upgrade designs and performance almost continuously).  -6- 3.05 In view of the outstanding issues between CEB and the contractor, the Bank extended the original closing date of March 31, 1985 by one year. During supervision, CEB was repeatedly requested to take measures to solve the outstanding problems and disburse the required funds. CEB was not in a position to issue the Taking Over Certificate although the plant was commis- sioned, due to the Contractor not meeting the contractual requirements in regard to supply of spares to issue the certificate for payment by July 1986 and the Bank finally informed CEB that it would only disburse against requests reiching the Bank before August 1, 1986. The Bank informed CEB, on March 10, 1986, of the closing procedure. The remaining funds were cancelled from the loan account on August 9, 1986. Amounts due to the contractor (excluding disputed amounts) at the end of August 1986 amounted to about US$3 million equivalent. 3.06 CEB reporting to the Bank during project execution did not civer all aspects of the project. Although the consultants reported monthly to CEB, the condensed information sent to the Bank as quarterly reports (also prepared by the consultants) was inadequate since they only contained infor- mation on the "contract" work. Only seven quarterly reports were received by the Bank, the first dated June 30, 1983 and the seventh, June 1986. No reports were submitted between September 1984 and June 1985. The reports were not supplemented by a separate CEB report giving its views on project execution and supervision, progress on project work e-ecated by CEB, and providing full project accounting information. The same problems were apparent for the Sixth and Seventh Power Projects. This issue was addressed by a supervision mission in 1985. CEB now submits comprehensive quarterly reports to the Bank, including project accounts which have been computerized. CEB's unsatisfactory reporting performance was apparently due to lack of experienced staff, who were already overburdened with day-to-day work. Project Cost 3.07 The project was completed at a cost of about US$51.3 million, includ- ing a front-end fee of about US$0.6 million, compared with an original estimate of US$54 million. The estimate was prepared on the basis of actual bids for the diesel engines which had been opened prior to preparation of the final SAR. As the bids were invited on firm price basis, no provision was included for price contingencies. Although the overall cost was 95% of the estimate, the actual foreign cost (US$36.3 million) was only 862 of the estimate (US$42 million). However, the actual local cost (at US$15 million equivalent) was 125% of the original estimate (US$i2 million), largely because import duties, estimated at US$3.5 million, were US$10.3 million. The contractors' actual local costs were only about half the estimate, US$3.9 million versus US$7.4 million. CEB did not keep detailed records of its own costs, particularly supervision and overhead costs. Consequently CEB's own costs have been estimated in this report. This defect has been rectified under the new system of accounts and improved project accounting system (para. 3.06). 3.08 As is usual, variation orders were issued. They amounted to about 5.6% of the original foreign portion of the contract price and 11.0% of the local portion, and were thus roughly in line with the estimated physical contingencies of 5% and 10% respectively. However, in 1985 it was apparent  that considerable sums would remain undisbursed and US$6 million was can- celled on December 1, 1985. At the closing date, only US$34.2 million (801) of the original loan amount of US$42.7 million had been disbursed; thus, a further US$2.5 million was cancelled on August 9, 1986, following the closing of the loan. 3.09 Before the first cancellation, CEB had sought Bank agreement to use the savings to purchase equipment for a new training school. This request was outside the description and scope of the project; subsequently IDA agreed to consider financing the equipment under the Sixth and Seventh Power projects, which included specific training provisions. Disbursements 3.10 The estimated and actual disbursements are shown in Annex 3. The actual disbursements were both lower than had been estimated and occurred at a slower rate because: (i) the contract was signed later than expected; (ii) the foreign cost was below the estimate; (iii) civil disturbances delayed completion; and (iv) outstanding technical problems were not resolved expeditiously by the contractor, and retention monies could not be released because the final completion certificate had not been issued. IV. OPERATING PERFORMANCE 4.01 - When the project became operational in 1984 the demand conditions were very different to those projected in the SAR, The growth rates of peak demand and energy consumption in the period 1981-1984 were much lower than had been projected. The comparison of forecast and actual demand for elec- tricity is shown in Annex 4. Except in 1983, just prior to the Project's completion in 1984, hydro conditions were good. In 1984 peak demand, at 487 MW, was 201 (123 MW) below the SAR estimate. Similarly, energy demand, at 2,261 GWh, was 22X lower than the projected level. This trend and favorable hydro conditions continued in 1985 and 1986 and, as a consequence, in the period 1984-86, the new plant's role, as a prospective provider of energy and capacity, was changed to that of standby plant.. Without the project, the capacity deficit would f-ave been about 20 MW in 1984 and 1986, and the 1985 surplus would have been 50 KW. In practice, the plant was only required for energy purposes during March through May 1985, when production was only about 47 CWh. 4.02 These events and changes in demand do not constitute an argument that the plant should have been postponed. CE8's management acted expeditiously when the worsening capacity and energy capabilities showed the possibility of large power shortages which had persisted from 1979 through 1983. Sub- sequently, the physical condition of the Kelanitissa steam plant steadily worsened and it was taken out of service in 1985 for rehabilitation and hydro plapt construction delays have occurred due to penstock problems at Kotmale. The present benefit of the plant, as standby capacity, is only temporary; it is expected to generate significant quantities of energy in the period 1989-1996. An additional benefit of the plant is that of cost savings resulting from the postponement of new thermal plant by at least a year (the aunual growth of peak demand is in the order of the plant's capacity).  -8- V. FINANCIAL PERFORMANCE Accounting Systems, Organization and Audit 5.01 CEB made substantial progress in improving its financial management practices during project implementation. Modern accounting systems and procedures for better financial reporting and control were implemented, based on the recommendations of the consultants recruited under the Sixth Power Project (Cr. 1048-CE). Accounting activities, with the exception of revenue accounting, were decentralized, billing was automated and steps taken to automate other areas of accounting and financial reporting, and an internal audit unit was established. These changes have resulted in streamlined financial reporting procedures and have improved CEB's control over its finances by providing management with detailed and timely information. Furthermore, in order to rationalize the values of assets and to establish proper depreciation schedules the Board engaged consultants under the Sixth Power Project (Cr. 1048-CE) to carry out a Fixed Asset Accounting Study. The final report was issued in February 1987. 5.02 As with other public corporations, the external audit of CEB's accounts is carried out by the Auditor General of Sri Lanka, which is accept- able to the Bank Group. Although the quality of audits has been satisfac- tory, until FY85 .they were often submitted late to the Bank. This was a result of the lengthy tima required for CEB to finalize the accounts because of its complex internal reporting procedures. However, following CEB's reorganization and improvements in reporting procedures (para. 5.01) in 1984, the 1985 audited accounts were submitted within the covenanted period. Tariffs 5.03 CEB's tariffs have been increased regularly to ensure compliance with the financial performance covenant agreed with the Bank Croup (para. 5.06). As agreed under the Sixth Power Project (Cr. 1048-CE), tariff studies based on long-run marginal cost were undertaken in 1981 and 1984 and formed the basis for significant changes in CEB's tariff structures. The tariff revi- sion in March 1985 changed the tariff structure to allow for separate energy and demand charges for hotel, industrial and general purpose consumers with contract demands exceeding 40 kVA, and optional time of day energy rates for industrial and hotel consumers. As shown in Table 1, the average revenue per kWh (excluding fuel surcharge) increased from Rs 0.78 in 1982 to Rs 1.36 in 1985, i.e., at an average annual rate of about 26%. In contrast, the SAR ,forecast increases in average revenue from Rs 0.71/kWh to Rs 0.98/kWh, or about 12.5% a year.  -9- Table 1 Average Tariff Revenue per kWh Sold, 1982-1985 (Excluding Fuel Surcharge) - - SAR Estimate- --- -------Actual--- 2 z Rs/kWh Increase Rs/kWh rncrease 1982 0.710 22.4 0.776 32.4 1983 0.790 11.3 0.845 8.9 1984 0.790 - 0.780 (7.7) 1985 0.976 23.5 1.362 74.6 Financial Performaiee 5.04 CEB's income statements, balance sheets and sources and applications of funds statements, comparing the SAR forecasts with actual results for the period 1982-85 (and current estimates for 1986), are presented in Annexes 5, 6 and 7 and summarized in Table 2.  - -S- -.- -~ - '1 ~~~~~~~~~~~-10- Table 2 CEB's Operating Results 1982-85 Comparison of SAR Estimates with Actual Results ----1982 -- -----1983-- --- 1984---- SAR SAR SAR SAR Esti- Esti- Esti- Esti- mates Actual mates Actual mates Actual mates Actua Electricity Generation 2,354 2,066 2,585 2,114 2,884 2,261 3,313 2,46. (CWh) Electricity Sales (CWh) 2,001 1,679 2,196 1,792 2,451 1,876 2,816 2,06.0 Electricity Losses (X) 1S 19 LS 15 15 17 15 lr Average Rate (RsWkWh) 0.71 0.78 0.19 0.84 0.79 0.78 0.98 1.3f