Ceylon - Granpass Thermal Power Project

R E S T R I C T E D Report No. P-165 FILE CP 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 REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the GOVERNMENT OF CEYLON (GRANDPASS THERMAL PROJECT) July 3, 1958  DITERNATIONAL BANK FOR RECONSTRJCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIZCETORS ON A PRTPOSED LOAN TO THE GOVJETNMENT OF CEYLON 1. I submit a report and recommendations on a proposed loan of $7.4 million equivalent to the Government of Ceylon to help finance the Grandpass thermal power project forming part of a further stage (Stage IIB) of the Aberdeen-Laksapana hydroelectric scheme. PARTT I - HISTOMICAL 2. On July 9, 1954 the Bank made a loan, No. 101 CE, of $19.11 million to the Government of Ceylon to finance the foreign exchange cost of Stage IIA of the scheme. This loan had been disbursed to the extent of U1l.5 million on June 30, 1958. As the actual cost of the project was less than estimated an amount of $1.7 million has been cancelled. 3. A Bank Mission was in Ceylon in February and March, 1957 to review the economic and financial sicuation. A technical mission was in Ceylon in March, 1958. 4. Negotiations were begun on June 16 with the representatives of the Government of Ceylon and were concluded on June 25. 5. If the proposed loan were made it would be the Bank's second loan in Ceylon and the total amount lent by the Bank would increase to $24.8 million, net of cancellations. None of the existing loan has been sold to third parties. First repayment is due in January, 1959. PART II - DESC.?IPTION OF THE PROPOSED IOAN 6. The main characteristics of the proposed loan would be as follows: Borrower: The Government of Ceylon Amount: The equivalent in various currencies of 57.4 million. Amortization: In 34 semi-annual installments, commencing on November 1, 1961 and terminating on May 1, 1978. Interest Rate: 5 3/8% Commitment Charge: 3/4 of 1% per annum. Use of Proceeds: For imported equipment and services for a thermal power plant of 25 MW with the necessary transmission and distribution facilities.  - 2 - The proposed loan would cover the entire foreign exchange cost of the project, including interest and other charges on the Bank loan during construction. It would finance about 67% of the total cost of the project which is expected to amount to the equivalent of $11.1 million. PART III - LEGAL INSTRU1JENTS 4ND LEGAL AUTHORITY 7. Attached is a draft Loan Agreement between the Government of Ceylon and the Bank (No. 1). The draft Loan Agreement conforms generally to the normal pattern of the Bank's loan agreements to member governments. 8. Authority for the Government's borrowing from the Bank is contained in existing legislation. 9. Also attached is the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank (No. 2). PART IV - APPRAISAL OF TIG PDPOSED LeAN Description of the Project 10. The Aberdeen-Laksapana hydroelectric scheme, which is part of an elect'rical system operated by the Departm,ent of Government Electrical Unnder- takirngs (DG-7'U), involves the coordinated power deve'lopment of two perallel rivers, the Kehelgamu and the Maskeliya. The scheme is being developed by stages: the first stage (Stage I) was completed in 1951. It consisted of the 25 NW Laksapanaa hydro plant on the Maskeliya river, using water diverted from the Kehelgamu by the Norton dam. 11. The next stage (Stage IIA), largely completed, consists of a dam on the Kehelgamu, the installation of a further 25 NW at the Laksapana power house, and a transmission and distribution system. This stage is the project that has been financed oy the Bankts existing loan. 12. Now the Government is starting Stage IIB of the scheme. A detailed description of the thermal part of it is given in the attached report, "Grandpass Thermal Power Project" No. TO-17h-a (No. 3). This part, which constitutes the project for the proposed loan, involves the building of a 25 MW thermal plant in northern Colombo, and extensions to the transmission and distribution network. The Government has also approached the Bank for a further loan for the hydro part involving the building of a 50 IMr hydro plant on the Kehelgamu with associated transmission facilities. The DGEU 13. The DGEU now operates an integrated power system in S.W. Ceylon with a generating capacity of 77 MW0, of which 50 MhJ is hydro, 12 MT is steam and 15 NW is diesel. The DGEU also distributes power in Colombo, the main centre.  - 3 - 14. The DGEU is a Department of the Ministry of Transport and Works. Not only are its expenditures subject to detailed control by the Ministry of Finance, but its day to day operations are closely supervised by the Minister of Transport and Works. At the time the first Bank loan was made, the Govern- ment and the Bank agreed that there was a need to improve the organization by recruitment and training of engineering staff abroad, and to simplify the procedures which existed between the DGEU and the Ministries. Most of the organizational changes have been effected, but as major expansion plans get under way present procedures are likely to become cumbersome. 15. The Government has recognized that some reforms are necessary. During discussions about the Loan Application for the hydro part of the scheme, the Government informed the Bank that it had decided in principle to establish a statutory authority to replace thQ DGEU. In the circumstances, it was agreed that it would be appropriate to postpone negotiations for a loan for this part of the scheme until the necessary legislative action had been taken. However, this postponement should not delay the execution of the work as it would not be started in any caoe until the first quarter of 1959. Justification of the Project 16. The Project will supply additional power to the S.W. area of Ceylon where half the pc.nulation lives, and where the demand for power has increased very rapidly in recent years. La the past tlo years restrictions have had to be i--posed because of a shortage of gener.ting caoacity, Although the estimated capital cost and cost of operation of the thermal plant is high, it is the only satisfactory solution to the immediate problem of capaci-y shortage in the system. It will also be required after the hydro plant comes into operation becarse the existing reservoirs have insufficient water storage to permit a f'il ut-iization of hy-dro capacity during low water periods. 17. The present per capita consumption of power in Ceylon is about 20 kwh per annum; in the area served by DGEU it is about 36 kwh. Total sales in 1956/57 amounted to 146.7 million kwh, distributed as follows: domestic h2%; commercial 23%; industrial 25%; traction 4%; and street lighting 6%. The industrial load is largely accounted for by tea and rubber factories. In the past six years power sales have been increasing at an average annual rate of 15.5%. Future sales are forecast by the Bank on the basis of an average annual rate of increase of 14%. 18. The tea industry, which provides about 60%o of Ceylon's export earnings, is only to a limited extent supplied with power from the integrated power system. The new generating capacity and transmission lines will make it possible to speed up the substitution of existing diesel unit installations with power delivered from the grid. This change over will result in a 30% reduction in power costs for the tea factories and a reduction in their needs for imported diesel fuel oil. Method of Procurement 19. Purchasing of all major items of imported equipment and materials and the awarding of all major construction contracts will be on the basis of international competitive bidding.  Economic Situation 20. A report "Current Economic Position and Prospects of Ceylon" FE 8a is attached (INJo. k). 21. After making an excellent recovery from the balance of payments crisis of 1953, the Ceylonese economy in 1957 was again faced with adverse balance of payments developments. External assets declined during the year from the equivalent of $248 million to $198 million. The decline was partly caused by a worsening of the terms of trade, but mainly by an increase in import volume, reflecting a rise in import demand. 22. Increased Government expenditures substantially in excess of receipts were partly responsible for the increased demand for imports. In 1956/57 a cash deficit of about Rs. 200 million ($h2 million equivalent), or one-sixth of total revenues, developed largely because of the reintroduct- ion, in 1955, of food subs:.es. Credit creation in the private sector and a poor rice crop also contributed to the increased import demrnnd. 23. The 1957/58 budget envisaged a deficit of Ps. 159 Tnillion. Because certain capital expenditures were not likely to materialize it was expected that the act-al deficit could be kept small and that it could be