Thailand - Fourth Yanhee Power Project

RESTR I CTED FILE C0PY Report No. P-526 L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE YANHEE ELECTRICITY AUTHORITY FOR THE FOURTH POWER PROJECT February 15, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EKECUTIV3 DIRECTORS ON A PRCPOSED LOAN TO THE YANHEE ELECTRICITY AUTHORITY FOR THE FOURTH YANHEE POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Yanhee MEectricity Authority (YEA), to be guaranteed by the Kingdom of Thailand, in an a,nount in various currencies equivalent to US$ 5 million, to assist in financing YEA's construction program for the period 1967-1969. PART I HISTORI CAL 2. YEA was created in 1957 as a condition of the first power loan to Thailand, and became an operating entity in 1961, on completion of its first generating facility. The Bank has riade three loans to YEA. The first, in 1957, contributed US$ 66 million equivalent towards the con- struction of the Yanhee (Bhumibol) Dam and power plant on the Ping River in Northern Thailand; the second, of US$ 6.6 million equivalent in 1963, was for additions to the transmission system, and the third, of US$ 6 million equivalent in 1965, was for additional generating units at the Yanhee (Ehumibol) Dam. These projects have been, or are being, carried out satisfactorily. 3. The proposed loan, which would be the Bank's seventeenth loan to Thailand, was negotiated by a delegation headed by H.E. Sukich Nimmanheminda. the Thai Ambassador in Washington, and Mr. Kasame Chatikavanij, General Manager of YEA. Negotiations were completed on January 2h, 1967. 4. The following is a summary statement of Bank loans to Thailand as at January 31, 1967.  2 . Summary Statement of Bank Loans to Thailand Year Number Principal of of Borrower Purpose Amount UIndisbursed Loan Loan 1950 35-TH Kingdom of Thailand Railway Rehabilitation $ 3.0 - 37-TH Kingdom of Thailand Port Improvement 4.4 - 36-TH Kingdom of Thailand Irrigation 18.0 - 1955 128-TH State Railways Railway Rehabilitation 12.0 - 1956 151-TH Port Authority Port Improvement 3.3 - 1957 175-TH Yanhee Electricity Multi-purpose 65.8 - Authority 1961 280-TH State Railways Railway Rehabilitation 14.6 3.6 1962 327-TH Kingdom of Thailand Petchburi Irrigation 3.4 .7 328-TH Kingdom of Thailand Third Chao Phya 5.6 .9 Irrigation 1963 333-TH Yanhee Electricity Power 6.6 .1 Authority 341-TH Kingdom of Thailand National Highways 25.0 16.2 1964 370-TH Industrial Finance Industry 2.5 1.5 Corporation of Thailand 39h-TH Kingdom of Thailand Meklong Irrigation 22.0 13.9 1965 406-TH Yanhee Electricity Power 6.0 1.4 Authority 1966 455-TH Kingdom of Thailand National Highways 36.o 3L.7 1966 471-TH Kingdom of Thailand Vocational Education 6.0 6.0 Total (less cancellations); $ 23[.2 of which has been repaid: 38.1 Total now outstanding: 196.1 Amount sold: 15.1 of which has been repaid: 9.0 6.1 Total now held by the Bank: 190.0 Total undisbursed: 7. 0 No IDA credits have been made to Thailand.  3. 5. The progress of Bank-financed projects in Thailand generally nas been satisfactory. Complicated procurement procedures caused delay in disbursing Loan No. 280-TH, made in 1961 to the State Railways, and the Closing Date was postponed to September 30, 1967 to meet commitments entered into by June 30, 1966. It is believed that the loan will be fully disbursed by the new Closing Date. Disbursement of the 1963 Highways Loan (341-TH) was slow due to the delay in appointing consultants. Progress now, however, is satisfactory and the project is expected to be completed on schedule towards the end of 1967. The Industrial Finance Corporation of Thailand (Loan 370-TH of 1964) has been slow to submit projects for financing. IFCT has experienced some organizational and management difficulties, and an IFC mission visited the Corporation recently to discuss these difficulties. PART II - DESCRIPTION OF THE PRCPOSED LOAN 6. Borrower! Yanhee Electricity Authority Guarantor: The Kingdom of Thailand Amount: The equivalent in various currencies of $5 million. Purpose: To help finance part of YEA's construction program for the period 1967-1969, including the Third Transmission Line from Yanhee (Blhumibol) Dam to Bangkok, and associated facilities at Bangkok. Interest: 6% per annum. Commitment Charge: 3/8 of 1% per annum. Amortization: Fifteen years including a three-year grace period: then semi-annual installments to retire the loan on February 15, 1982. PART III - THE PROJECT 7. A detailed appraisal of the project, entitled "Thailand - Yanhee Electricity Authority - Appraisal of the Fourth Power Project"'(TO-574a) is attached. 8. YEA is a Government-owned corporate entity with a service area extending from Chiengmai in the north to both sides of the Gulf of Thailand below Bangkok. The Chairman and Board of Directors of YEA are appointed by the Government.  9. The present program of expansion has been designed by YEA management to meet the projected system requirements and provide additional capacity by 1969. The program includes: (i) the third steam unit (87.5 O) for the North Banglcok Station; (ii) installation of hydro units 5 and 6 (70 MW each) at the Yanhee Dam; (iii) construction of the third 230 kv. transmission line (450 kilometres) between Yanhee and Bangkok; (iv) installation of a third 60 I4VA synchronous condenser in Bangkok; (v) installation of two 40 MIVA 230/115 kv. transformers in Bangkok, and (vi) construction of a transmission line from the Bangkok Noi substation to a new substation to be constructed about 25 kilometres south of Bangkok. The proposed loan will finance items (iii), (iv) and (v) of the expansion program, and will complete the financing plan for the program. 10. The total cost of the program, including interest during construction, is estimated at about US$ 31.4 million, of which the foreign exchange cost will be equivalent to US$ 20.1 million. YEA has obtained long-term foreign exchange financing of US$ 10 million from the Bank of Thailand, which, together with the proposed Bank loan of US$ 5 million equivalent, would finance abou t8% of the total cost. The balance will be provided from YEA's own resources. 11. The load growth of the YEA system in the past five years has been impressive. The rate of growth was 34% for fiscal year 1965, and 34% for the first nine months of fiscal year 1966. Present estimates indicate that YEA system energy demand will exceed firm energy sources by the end of 1970, and possibly sooner. This shortage will be met by the installation of the third steam unit at North Bangkok, the addition of units 5 and 6 at the Bhumibol Dam - penstocks for which were constructed under the third loan, 406-TH of 1965 - and the third transmission circuit to Bangkok from the Bhurnibol Dam. 12. YEA's present generating capacity is about 2,750 million kwh. annually, in an adverse water year; the forecasts for 1975 indicate gross energy requirements of about 5,120 million kwh. The phenomenal rate of growth of the past five years is expected to taper off by then to an annual rate of about 10%6. About 93% of gross energy generated has been sold in the past, and this ratio is expected to remain constant in the forecast period. For the future, engineering for several projects is going ahead, and two may be started this year. The first is the South Bangkok station designed with an ultimate capacity of 1000 MW but with an initial unit size of 150-200 Mt;. The second is the Phasom Dam, for which a Bank loan has been requested, which may include provision for the installation, by stages,ofcapacity totalling 160 MW. 13. The projectwill be carried out by YEA, whose management and staff have demonstrated ability to carry out similar projects under previous Bank loans. YEA also has smoothly-working arrangements with consulting firms concerning various matters relating to transmission line design, construction design and system planning. While certain parts of the project will be constructed by contract, most of the work will be handled by YEA forces.  5- Howjever, erection of major components, such as the boiler, turbines, generators and heavy switch-gear, will be carried out under the supervision of supplier representatives. 14. Procurement for all equipment and supplies financed under the proposed Bank loan will be on the basis of international competitive bidding in conformity with the "Guidelines relating to Procurement under Bank loans and IDA Credits". Invitations to bid for the supply and erection of the third 230 kv. transmission line were issued in October, 1966, on an international basis after review and approval cf the bidding documents by the Bank. 15. The financial situation of YEA is sound. Equity amounts to 49% of total capitalization and the rate of return on YEA's fixed assets in operation had reached 6.8% at the end of fiscal year 1966. This level of return is acceptable because it is based on the total Yanhee investment without making adjustments for the non-power elements of the whole project. On the basis of existing power rates, the rate of return is expected to be 8.5% in 1967, 11.7% in 1969 and 9.9% in 1970. Debt service will be covered between 1.7 and 2.1 times during this period. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft loan agreement between the Bank and Yanhee Electricity Authority, the draft guarantee agreement between the Kingdom of Thailand and the Bank and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the EXecutive Directors separately. 17. The draft agreements conform to the form of agreements for the previous loans to YEA (Loan 175-TH of 1957, 333-TH of 1963 and 406-TH of 1965). The covenant on prices for the sale of electricity (Section 5.09 of the Loan Agreement), however, has been modified to reflect more accurately the actual practice followed by YEA. As a consequence, correspomding amendments of the loan agreements for the previous loans to YEA are also included. (Section 5.10 of the Loan Agreement). PART V - THE ECONOMY 18. An economic report on the situation of Thailand (FE 53b) was distributed to Executive Directors on May 24, 1966. A brief resume of the economic situation and outleok is given in the following paragraphs. 19. The Thai economy has established an impressive record of economic growth. During the years 1961-1966 growth of real output exceeded 7% a year. Rapidly rising exports and domestic savings enabled the economy  6. to support a steep increase in investment, from under 16% of gross domestic product in 1957 to 23% in 1966, while the resource gap went up only marginally. This is a remarkable achievement for a country which, despite fast growth, is still poor, with an average per capita income of $120. In general, the policies of the Thai Government have been well suited to the needs of the economy and have been directed towards encouraging private activity. The management of fiscal affairs and monetary policy has been such as to maintain overall financial stability, encourage growth of exports and attract an increasing flow of foreign private capital. Public outlays were raised substantially in recent years and on the whole were directed towards meeting urgent economic and social needs. 20. The five years 1967-1971 covered by Thailand's Second Plan are expected to be a period of continuing economic growth. Real income is likely to increase by about 7% a year, which would permit further substantial increases in income per head. As in the past, investment will probably increase more rapidly than gross domestic product. However, the basic trend is for exports and domestic savings to grow more slowly than investment and associated imports, so that there is likely to be a somewhat larger need than in the past for reserves and foreign resources to fill the investment gap. 21. Thailand's performance and the prospect of increasing investment along satisfactory lines would justify an increase of borrowing abroad from official sources. This would raiseno questicn of creditworthiness. However, Thailand is now receiving a large inflow of exchange from the United States, associated with U.S. military activities in South Vietnam. Its effect on the Thai balance of payments in 1966 was such that, despite a current account deficit more than twice as large as the average of the preceding four years, exchange reserves went up by nearly $200 million. Reserves are now above $900 million and are continuing to rise. The deficit on the current account balance of payments reflects, in part, expenditures which are offset by transfer payments and capital inflows from the United States. The alternative to borrowing is to use a part of these reserves for capital investment, and the Thai authorities have decided to do so; but they nevertheless wish to continue borrowing modest amounts from the Bank, as they obtain many benefits from Bank lending in addition to financing. 22. An economic mission is now in Thailand. Among other things, it will analyse Thailand's prospective exchange position and consider what would be a proper policy for Thailand to adopt with respect to its reserves and external borrowing, including borrowing from the Bank. Pending this examination, I consider that the Bank should lend only modest amounts on the projects to be financed and let Thailand cover the bulk of the foreign exchange as well as the local currency requirements from its own resources. This policy is reflected in the Loan proposed in this Report. PART VI - CONPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank.  7. PART VII - RECOMENDATION 24. I recommend that the Executive Directors adopt the following Resolution: RESOLUTION NO. Approval of Loan to Yanhee Electricity Authority, to be guaranteed by the Kingdom of Thailand, in an amount in various currencies equivalent to US$ 5 Million. RESOLVED: THAT the Bank shall grant a loan to Yanhee Electricity Authority, to be guaranteed by the Kingdom of Thailand, in an amount in various currencies equivalent to five million United States dollars (US$ 5,000,000) to mature on and prior to February 15, 1982, to bear interest at the rate of six per cent (6%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Fourth Yanhee Project) between the Bank and Yanhee Electricity Authority and the form of Guarantee Agreement (Fourth Yanhee Project) between Kingdom of Thailand and the Bank, which, have been presented to this meeting. Washington, D.C. George D. Woods February 15., 1967 President