Sri Lanka - Proposed Power Sector Restructuring Project

Report No. PIC4062 Project Name Sri Lanka-Proposed Power Sector Restructuring Project (@+) Region South Asia Sector Other Power & Energy Project ID LKPE44795 Borrower Government of Sri Lanka (GOSL) Implementing Agency Ministry of Irrigation, Power and Energy 500, T.B. Jayah Mawatha Colombo 10, SRI LANKA Tel: 687370 Fax: 694968 Ceylon Electricity Board 50, Sir Chittampalam A. Gardiner Mawatha P. 0. Box 540 Colombo 2, SRI LANKA Tel: 329108 Fax: 449572 Date PID Updated May 7, 1997 Projected Appraisal February 2000 Projected Board Date July 2000 1. Country and Sector Background. Sri Lanka's power sub-sector is dominated by the Ceylon Electricity Board (CEB), a statutory entity established in 1969, that is responsible for electricity generation and transmission throughout the country and for distribution except in areas served by the Lanka Electric Company (Pvt.) Limited (LECO) and local authorities (licensees). Prior to 1983, while CEB served about 300,000 consumers island-wide, there were more than 200 licensees (government-owned local authorities) operating mostly small distribution systems to supply power to municipal and urban areas with a total of about 400,000 consumers. Due to shortages of technical, financial and managerial resources, many licensees' systems faced serious problems, including high system losses (estimated to average about 259 of incoming supply), poor quality of supply, low revenue collection, high level of arrears owed to CEB, and long delays in connecting new consumers. The fragmentation of responsibility for electricity distribution impeded the subsector's efficient development and operation. 2. To remedy this situation, LECO was set up in 1983 under the Companies Act with a mandate to gradually take over the distribution systems of local authorities. It was soon realized that LECO would need a number of years to build up its own institutional capacity and achieve necessary financial viability. Further, as most of the remaining licensees' systems were spread over the island, it appeared more rational, in view of economies of scale, for them to be taken over by CEB, which operates island-wide distribution systems. Through financing provided by ADB and IDA, LECO has taken over about 30 and CEB about 150 licensees' systems.  The remaining 34 licensees are located in the Northern Province and cannot be taken over in the immediate future due to the continuing security situation. Although this process has rationalized the distribution function, the inherent inefficiencies still persist. For example, the distribution losses are high and were above 18t during FY94, retail tariffs are ill-structured, and decision making is centralized and time-consuming. In addition, CEB does not have the necessary autonomy (as was envisaged during its formation) required to operate as an efficient power utility. Wide spread government interference in its day-to-day activities has resulted in CEB's total dependence on government procedures and practices and as a result, decision making at every stage is delayed. 3. Given exclusive public ownership of power entities in the past, GOSL is finding it difficult to attract private investors for the power generation. For some time now, international donor agencies have been insisting that instead of continuing the past practice of advancing loans and grants in the public sector, GOSL should explore the potential of private investment. This has resulted in stagnation in the generating capacity, and, as a result, the country has been deprived of any generating unit of significance in the last four years. 4. GOSL/CEB, therefore, realizes that there is an urgent need to review, analyze and reform the entire power sector. To assist the GOSL in its reform efforts, the Bank has initiated a power sector restructuring study (LK-SR-41383) that will identify a pragmatic and viable reform path, and will review three aspects of the sector, i.e., sector structure, sector ownership, and sector regulation. Once the study's recommendations are finalized and accepted by the GOSL, the proposed Project will assist GOSL/CEB in implementing the structural reform (vertical and/or horizontal separation of CEB's facilities), ownership reform (inducement of the private sector, presently private ownership is virtually non- existent), and establish a transparent regulatory framework. 5. Objectives. The objectives of the proposed project are: (a) assist in developing and implementing the Government of Sri Lanka's (GOSL) power sector restructuring strategy including the establishment of a transparent and credible sector regulatory framework; (b) provide technical assistance for efficiency improvement in distribution operations through adoption of appropriate sectoral reforms and implementation of a state-of-the- art SCADA and Management Information Systems. (c) assist in creating an enabling environment for private sector participation in the power sector; and (d) provide technical assistance for capacity and institutional building consistent with the regulatory arrangement. 6. Proposed Description. Likely components of the proposed project include: -2-  (a) Policy Component would assist GOSL to: restructure and reform the power sector, including privatization options, specifically, its distribution operations including labor reorganization and retrenchment programs; create an enabling environment for private sector participation; and implement a transparent and credible power sector regulatory framework. (b) Investment Component would consist of: construction of a new 220-kV and 132-kV transmission works needed to reinforce the system; and construction and augmentation of the distribution system including the procurement of metering, communication and SCADA. (c) Technical Assistance Component would consist of: studies needed to support the technical and financial separation of distribution entities; design, development and installation of an appropriate MIS system; project consultancy required for preparation of bidding documents, bid evaluation, supervision; and other institutional capacity building measures including training of CEB staff to enable them to gain necessary experience in implementing and sustaining reforms. 7. Tentative Financing (US$ million) Local Foreign Total Government 17 7 24 Cofinanciers-(including OECF) 0 41 41 IDA 1 29 30 Total 18 77 95 8. Implementation. To be determined. 9. Sustainability. The reform would be initiated and implemented by the Government with active support from IDA and other donors. The options for reform will be discussed at a Power Sector Restructuring Workshop (to be scheduled) where high-level decision- makers and stakeholders will attend. The discussions are expected to result in an agreed course of action for the reform process; this would ensure that the reform process is transparent and participatory in nature. The Workshop is being planned, financed and carried out by the Government; this would ensure necessary ownership of the reform actions agreed. For these reasons, the project is expected to be sustainable. 10. Lessons learned from past operations in the country/sector. To date, the Bank has financed eleven power projects totaling about US$290 million. Through these operations, the Bank provided assistance to augment the hydro and thermal generation facilities as well as to reinforce/rehabilitate transmission and distribution systems. The projects included sectoral issues and strategies to address them. The lessons learned from the previous operations are: (a) there should be more effective coordination between other principal development agencies (OECF, ADB, etc.) so that there is consistency in the lending/technical assistance strategies; (b) the - 3 -  institutional changes cannot be a addressed on a priority basis unless they are supported by defined action plans; and (c) GOSL/CEB should streamline its protracted procurement procedures. These lessons will be reflected in the design of this project. 11. Poverty Category. Not applicable. 12. Environmental Aspects. No adverse impact to the environment is anticipated and thus, the project is expected to be rated "B." Environmental Impact Assessments would be needed for the transmission lines. A survey for the transmission lines will be undertaken after they have been identified in the JICA-financed power system plan (completion was scheduled in December 1996). 13. Program Objective Categories. The project will contribute to the program objective categories for Environmental Sustainable Development and Private Sector Development. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending May, 9 1997. - 4 -  Annex Environmental Aspects The project has been given a "B" rating, meaning no adverse impact to the environment is anticipated. Environmental Impact Assessments will be needed for the transmission lines. Transmission lines would be surveyed after they have been identified in the JICA-financed power system plan (expected completion of report - December 1996). Based on this survey, the magnitude of resettlement, if any, will be identified. In case any resettlement issues are identified, an Action Plan will be prepared in accordance with GOSL and IDA policies. A survey may also be undertaken for the environmental and health/safety conditions to assure compliance with GOSL environmental standards in line with Bank requirements for which necessary TORs would be provided. Required rehabilitation, if any, would be considered for inclusion in the project. GOSL design and construction standards will be compared and adjusted to internationally accepted standards -5-