Ceylon - Fourth Power Project

RESTRICTED FILE COPY Report No. P-73Z 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 The report may not be published nor may it be quoted as representing their views.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 CEYLON ELECTRICITY BOARD FOR A FOURTH POWER PROJECT TO BE GUARANTEED BY CEYLON July 10, 1969  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOIMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CEYLON ELECTRICITY BOARD FOR A FOURTH POWER PROJECT TO BE GUARANTEED BY THE GOVERNMENT OF CEYLON 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$21.0 million to the Ceylon Electricity Board (CEB). PART I - HISTORICAL 2. Between 1954 and 1961 the Bank made three loans to Ceylon for power development. These loans totalled US$37.3 million and have helped to construct 125 MW of hydroelectric and thermal power capacity and related transmission facilities. These loans are fully disbursed and the facilities are operating in a satisfactory manner. 3. In 1961 the Government of Ceylon and the Bank agreed that an independent electric power entity was needed to overcome certain serious organizational and operating deficiencies. Efforts to pass the necessary legislation at first ran into difficulty. However, in Miay 1969, Parliament passed the Ceylon Electricity Board Act, which authorizes the Minister of TJand, Irrigation and Power to reconstitute the Department of Government Electrical Undertakings as the Ceylon Electricity Board. The Government has informed the Bank that the Board will be appointed on July 15th, 1969. 4. Negotiations for the Fourth Power Project took place in Washington between June 23 and June 30. The Government of Ceylon iwlas represented by Mr. David Loos, Director of External Resources, Ministry of Planning and Economic Affairs. The Department of Government Electrical Undertakings, Ministry of Land, Irrigation and Power was represented by Mr. M.I. Aziez, General Manager and MIr. V.R. Charavanapavam, Chief Commercial Officer.  - 2 - 5. The following is a summary statement of Bank loans and IDA credits to Ceylon as of June 30, 1969: Amount (US.; million) Year No. Borrower Purnose Bank IDA Undisbursed 1954 101-CE Government of Ceylon Power 15.9 - _ 1958 209-CE Government of Ceylon Power 7.3 - - 1961 283-CE Government of Ceylon Power 14.1 - - 1967 520-CE Development Finance Industrial Corporation of Ceylon Finance 4.o - 3.3 1968 121-CE Government of Ceylon Irrigation 2.0 2.0 1968 569-CE Government of Ceylon Highways 4.9 - 4.9 1968 133-CE Government of Ceylon Highways 4.9 4.9 Total (less cancellations) 46.2 6.9 15.1 Of which has been repaid to Bank and others 11.0 Total now outstanding 35.2 Amount sold 3.3 Of which has been repaid 2.6 0.7 Total now held by Bank and IDA 34.5 Total undLisbursed 8.2 6.9 15.1 6. There have been no disbursements on the irrigation and highway projects to date because tenders could not be issued before the loan and credit documents were negotiated, anc' because of the time required to complete the bidding, evaluation and ordering procedures. 7. Fbrthcoming lencing operations proposed for Ceylon include a second Bank loan of $8 million to the Development Finance Corporation of Ceylon (to be considered by the Executive Directors on July 15, 1969), a land reclamation ancl drainage project and the first stage of the Nahaweli Ganga multi-purpose irrigation and power project. 8. IFC has not invested in Ceylon but is considering both a loan and equity investment in a textile project, which would be financed jointly with the Development Finance Corporation of Ceylon and the Bank of Ceylon.  - 3 - PART II - DESCRIPTION OF THE PROFOSED PROJECT 9. Borrower: Ceylon Electricity Board. Guarantor: 3overnment of Ceylon. Purpose: To cover the foreign exchange costs of the second stage 9OMW hydroelectric development of the Maskeliya Oya and associated transmission facilities, ane of a 25NM gas turbine generating unit at Grandpass, Colombo Amount: Various currencies equivalent to US$21 million. Amortization: In 25 years inclucing a 5-year perioe of grace, in semi-annual installments beginning June 15, 1974 and ending June 15, 1994. Interest Rate: 6% per annum. Commitment Charge: 3/4 of 1% per annum. PART III - THE PROJECT 10. An appraisal report on the proposed project is attached, titled "Appraisal of the Maskeliya Oya Stage II Hydroelectric Project and Other Generating Facilities"1 (PU-17a) dated July 9, 1969. 11. IMbst of Ceylon's power generating and distribution facilities are Government-owned and operated and, together with the associated liabilities, will shortly be transferred to the Ceylon Eaectricity Board, a statutory Government Corporation recently established by Act of Parliament. Tle present effective generating capacity of the system is 261MW, of which 191M4W is hydroelectric and 7011W is thermal. The above figures include the recently commissioned Polpitiya hydroelectric station, which is the first stage development of the '4askeliya River. When the assets and liabilities of the Department of Electrical Undertakings have been transferred to the Board, and after the proposed loan has been disbursed,the Eoard's long-term debt would probably only form about one-third of total capitalization. 12. Power consumption has grown at an annual average rate of about 8% since 1961 ancl is likely to continue to increase rapidly over the next few years wLith continued, economic growtth ane. increasing industrial activity.  13. The present generating facilities will meet the exv?ected demand for electricity only until about the end of 1971. The next major step in the power development program, to be included in the present project, is the second stage development of the Ivlaskeliya River which will add 90MW of hydro capacity to the system. It is unlikely that this capacity can be commissioned before late 1972 and to meet the deficit in energy, whiich will arise towards the end of 1971 and persist throughout 1972, the project will also include a 25MW gas turbine generating unit to be installed adjacent to the existing Grandpass steam power station in Colombo. System requirements could then be met until early 1974. Thereafter additional generating requirements are expected to be met by the development of the ITahaweli River. 14. The estimated total cost of the proposed project is US$3165 million equivalent. The proposed $21.0 million Bank loan would cover the foreign exchange cost of major civil works, the cost of electrical and mechanical equipment and the services of engineering, management, and accounting consultants. The contracting of civil works and the procurement of equip-enrt and materials would be subject to international competitive bidding. Cbnstruction is expected to extend over about three years from the date of the main civil works contract, and the new facilities should be in full operation by late 1972. Yanagement of similar projects in the recent past has been reasonably good. 15. The incremental financial rate of return on the proposed invest 4-t in the project would be about 18%, on the basis of new rates which incluc)c. a 17% rate increase recently approved by the Cabinet and made effective from July 1, 1969. The Ceylon Electricity Board, assisted by consultants, wTill take steps to revalue its assets on an appropriate basis, and thereafter will earn a return on its revalued assets of not less than 8%. 1Ihile this stucsy is going on, the Board will meet a reasonable portion of its capital expenditures from internally generated funds. PART IV - LEGAL INSTRUIENTS AND AUTHORITY 16. The Draft Loan Agreement between the Bank and the Ceylon Electricity Board, the Draft Guarantee Agreement between the Government of Ceylon and the Bank, the report of the Committee provided for in Article II, Section 4 (iii) of the Articles of Agreement and the text of a Resolution approving the proposed Loan, are being distributed to the Executive Directo2s separately. The draft agreements follow closely the forms currently in use for electric power development loans. Upon its creation the Ceylon Electricity Ebard will have the necessary power to sign the Loan Agreement. The transfer of the assets and liabilities of the Department of Electrical Undertakings to the Board and the employment of engineering consultants will be conditions of effectiveness (Section 7.01 (a) and (d) of the loan Agreement). In addition, both the level of bills unpaid by local authorities and the time-lag between meter-reading and billing, are to be reduced before the loan is made effective (Section 7.01 (b) and (c) of the Loan Agreement).  - 5 - PART V - TME ECONONY 17. An economic report titled "Current Economic Position and Prospects of Ceylon" (SA-2a) was distributed to the Executive Directors on February 7, 1.969. Paragraphs 18-22 of my report of July 2, 1969, to the Executive Directors on a proposed loan to the Development Finance Corporation of Ceylon contained a summary of recent devalopments. PART VI - CONPLIANCE WITH ARTICLES OF AGREEa1 TN 18. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. P-ART VII - RECOiM1PENDATION 19. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments July 10, 1969