Thailand - Second Yanhee Project

RESTRICTED Report No. P-310 FIL COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE YANHEE ELECTRICITY AUTHORITY FOR THE SECOND YANHEE PROJECT February 19, 1963  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOM1ENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE YANHEE ELECTRICITY AUTHORITY FOR THE SECOND YANHEE PROJECT 1.- I submit the following report and recommendations on a proposed loan to the Yanhee Electricity Authority (YEA), to be guaranteed by the Kingdom of Thailand, in an amount in various currencies equivalent to $6.6 million, to assist in financing the construction of transmission lines and sub-stations. PART I - HISTORICAL 20 In 1957, the Bank made a loan of $66 million to the YEA for the first. stage of a multi-purpose project, which included provision for the generation, transmission and distribution of power in the central part of Thailand. That stage consisted of the construction of a dam on the Ping river, the installation of the first two units, of 70 MW each, in a hydro-electric power plant and the erection of a high voltage transmission system to serve Bangkok and provinces in the central part of Thailand. 3. The construction of the dam (now known as the Bhumiphol Dam) is proceeding according to schedule and is expected to be completed by the end of this year. If the rainfall is sufficient later this year, power from the initial two generating units will be available to the Yanhee system early in 1964. 4. The Bankts appraisal of the project has been based on infor- mation acquired in the course of a series of missions to investigate the progress of the first project. The last such mission was in Thailand early in 1962. 5. The proposed loan was negotiated by a delegation headed by H.E. Visutr Arthayukti, the Thai Ambassador in Washington, and Mr. Kasame Chatikavanij, General Manager of the YEA. Negotiations were completed on February 12, 1963. 6. If the proposed loan is made, it will be the tenth loan to Thailand, and will increase the total amount lent by the Bank to $137 million, net of cancellations. The status on January 31 of loans previously made was as follows:  -2- Amount of Loan Year Borrower Purpose Net of Cancellations 1950 Thailand Railways Rehabilitation $ 3,000,000 1950 Thailand Port Improvement 4.,40, 000 1950 Thailand Irrigation 18,000,000 1955 State Railways Railways Rehabilitation 12,000,000 1956 Port Authority Port Improvement 3,259,078 1957 YEA Multi-purpose 66,000,000 1961 State Railways Railways Rehabilitation 14,600,000 1962 Thailand Petchburi Irrigation 3,400,000 1962 Thailand Third Chao Phya Irrigation 5,600,000 Total net of cancellations $130,259,078 of which has been repaid 16,184,078 Total now outstanding $114,075,000 Amount sold $s,503,480 of which has been repaid 2,549,000 1,954,480 Net amount held by Bank $112,120,520 ?' 7. No IDA credits have been made to Thailand. PART II - DESCRIPTION OF PROPOSED LOAN 8. The main characteristics of the proposed loan are as follows: Purpose: To assist in financing a seeond high voltage (230 KV) transmission line bet.wpin YenhAKc _a4ngkok, sub-stations and sub-transmission lines (115 Kv and 69 Kv) to serve 12 communities in the central provinces of Thailand. Borrower: Yanhee Electricity Authority. Guarantor: Kingdom of Thailand. Amount: The equivalent in various currencies of $6.6 million. Interest: 5 1/2% per annum, including 1% commission. Commitment Charges: 3/4 of 1% per annum. Payment Dates: April 15 and October 15. Amortization: Semi-annual instalments from April 15* 1966 to April 15, 1983. 1/ Includes $35,022,192 not yet disbursed as of January 31, 1963.  - 3 - PART III - APPRAISAL OF THE PROPOSED LOAN 9. A detailed appraisal of the project (TO-349a) is attached (No. 1). Justification of the Project 10. In the First Yanhee Project it was originally enavisaged that two 138 Kv lines would be constructed on wooden poles to Bangkok, the intention being that as additional generating units were inetalled at the dam in subsequent stages, a third line of 230 Kv capacity would be con- structed. The installation of a 75 MW steam unit in Bangkok, which became necessary as part of the measures required to cope with the load while the first project was under construction, made it possible to adopt technically superior transmission arrangements by building, initially, one 230 Kv line strung on steel towers designed to carry, eventually, two such lines. The second line, which is the principal part of this proposed project, will provide additional capacity and improve system operation. Appreciable technical and financial advantages will also be gained by installing the second line on the steel towers before the first line becomes live. The load is expected to increase beyond the capacity of the first 230 Kv line by 1966, and the additional line will provide sufficient capacity to meet transmission requirements until about 1973 when the demand is expected to reach 350 MW. 11. The YEA was created as a wholly government-owned agency by a special act in 1957 but did not become an operational entity until Miarch 1961. It now supplies bulk power in the Bangkok area to the Metropolitan Electricity Authority by using existing diesel and steam capacity. Early in 1964 when power from the Yanhee project is expected to become available, the YEA will have responsibility for operating a system with a generating capacity of 320 MW (140 MW hydro, 150 MW steam and 30 MW diesel) with total sales of about 600 million Kwh. Low voltage distribution in Bangkok is the responsibility of the Metropolitan Electricity Authority. The Bank is satisfied that adequate arrangements are being made by the 14EA in the Bangkok area to take and distribute power from the YEA system. 12. The proposed project includes provision for sub-stations and sub-transmission lines to serve 12 communities in Thailand and to supply a proposed zinc mine and smelter near the Burma border. Present market forecasts indicate a satisfactory rate of load growth can be expected in the areas served by most of these lines. Load growth in some of the areas served by the sub-transmission lines in the north and southeast is expected to be slow in reaching a satisfactory level, but the invest- ment in these lines will amount to only a small proportion - about 1J% - of fixed assets in 1965. Load growth will be dependent upon effective action being taken to improve the provincial distribution system. In the provinces the Provincial Electricity Authority has responsibility for low voltage distribution and has undertaken, with German technical assistance. the preparation of plans for the extension and improvement of the distri- bution system.  -'4- Project Execution 130 The second 230 Kv line would be strung on the existing towers by the Italian contractor now installing the first 230 Kv line. Most of the design work for the 115 Kv and 69 Kv lines and sub-stations has been done by consultants, Engineering and construction would be by YEA forces assisted by consultants. Cost of the Project 14. The total cost of the project, including interest during con- struction, would be about $11 million equivalent, of which $6.6 million, the amount of the proposed loan, would be in foreign exchange.. Procurement 150 In order to secure the savings which would be achieved in this way, the contract for the second 230 Kv line would be given to the con- tractor now supplying and constructing the first 230 Kv line. Equipment to be imoorted for the remaining parts of the project would be procured on the basis of international bidding. Economic Situation 16. A report "Current Economic Position and Prospects of Thailand" (No. FE-25a) was circulated to the Board on July 19, 1962 (Sec?162-130). P:esident's Report No. P-305 issued on December 12, 1962, paragraphs 23-26, reported recent economic trends in Thailand, and indicated that Thailand is maintaining a rate of growth of the economy greater than the rate of increase in the population, and has exchange reserves equivalent to about one year's imports. There have been no significant developments since that date. As further loan operations are in prospect, an economic mission is at present in Thailand with a view to producing an up-to-date report on the economic position and prospects of Thailand for circulation in the near future. 17. The official external debt of Thailand including the proposed loan, would amount to $258 million, the service burden on which amounts approximately to 3% of current foreign exchange earnings, The debt service burden is expected to rise to 5% of projected earnings in 1966. Prospects of Fulfillment of Obligations 18. The YEA has the power to fix its rates. Provisions in the YEA Act, the First Project Loan Agreement and in the draft Loan Agreement between the Bank and YEA require that rates should cover all operating expenses and debt service, and should leave a surplus sufficient to finance a substantial proportion of future ex-oansion. Under the First Project Guarantee Agreement and the draft Guarantee Agreement, if the funds avail- able to the Borrower to carry out the project are inadequate, the Kingdom of Thailand will make additional funds availabe.  190 In 1962, the first year of operations, YEA's net income was 45 million; it is expected to increase to /256 million by 1970. The YEA is following a very conservative depreciation policy and the total cost of the First Yanhee Project, which will have multi-purpose benefits, is being amortized entirely by power revenues. The rate of return from power revenues on the total investment is expected to reach 9% by 1970. 20. By 1967, when assets begin to be fully utilized, the cash flow is expected to be such that the YEA will be able to finance further develop- ment from its own resources. Debt service coverage should increase from 1.1:1 in 1965 to the comfortable level of 2:1 in 1970. With present selling rates, YEA should have no difficulty in meeting its present and proposed obligations to the Bank. 21. The Kingdom of Thailand, as Guarantor, should be able to provide foreign exchange to enable YEA to service its debt to the Bank, as well as to meet Thailand's other international obligations. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 22. Attached are drafts of the following documents: (a) Loan Agreement between the Yanhee Electricity Authority and the Bank (Second Yanhee Project) (No. 2); (b) Guarantee Agreement between the Kingdom of Thailand and the Bank (No. 3), 23. The Loan Agreement conforms to the customary pattern, but provides in addition to the usual provisions, that withdrawals from the Loan Account will not be made with respect to certain of the transmission lines included in the Project until arrangements satisfactory to the Bank have been made for construction of distribution facilities in the areas to be served by such works or for the sale of power (Section 2.02), that the Borrower shall appoint independent auditors satisfactory to the Bank (Section 5.08), that the Borrower shall establish and maintain sound rate levels (Section 5.09) and that the Borrower shall not incur any debt in respect of projects other than the present project and the earlier Bank financed project without the prior agreement of the Bank (Section 5.10). 24. The Guarantee Agreement conforms substantially to the customary pattern. 25. Also attached is the Report of the Committee provided for in Article III$ Section 4 (iii) of the Articles of Agreement of the Bank relating to the project (No. 4).  - 6 - PART V - COMPLIANTCE WITH ARTICLES OF AGREEMENT 26. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMiENDATIONS 27. I recommend that the Bank make a loan to the Yanhee Electricity Authority, with the guarantee of the Kingdom of Thailand, for the Second Yanhee Project in an amount in various currencies equivalent to $6.6 million, for a term of 20 years; that the loan bear interest (including commission) at 5B% per annum and be subject to such other terms as are specified in the draft Loan Agreement and Guarantee Agreement attached; and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). George D. Woods President Washington, D.C. February 29, 1963