Document of 6

The World Bank

FOR OFFICIAL USE ONLY

Report No. 2905b-GE

SRI LANKA

SIXTH POWER PROJECT

(CEYLON ELECTRICITY BOARD)

STAFF APPRAISAL REPORT

June 3, 1980

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank autborization.

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SRI LANKA

SIXTH POWER PROJECT

(CEYLON ELECTRICITY BOARD)

CURRENCY EQUIVALENTS

US$1.00 = SL Rs. 15.6SL Rs. 1.00 = US$0.64

MEASURES AND EQUIVALENTS

1 kilometer (km) = 0.6214 mile1 kilovolt (iV) = 1,000 volts1 megavolt ampere (MVA) = 1 million volt amperes

= 1,000 kilovolt amperes1 megawatt (MW) = 1 million watts

1,000 kilowatts1 kilowatt hour (kWh) 1,000 watt hours

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankCEB - Ceylon Electricity BoardCPC - Ceylon Petroleum CorporationGSL - Government of Sri LankaMPE - Ministry of Power and EnergyMDA - Mahaweli Development Authority

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

SRI LANKA

SIXTH POWER PROJECT(CEYLON ELECTRICITY BOARD)

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. THE ENERGY AND POWER SECTOR ........................... 1

A. Energy Resources ................................. 1Hydro Power ....... ..........................1Traditional Fuels ........................... 2Petroleum ................................... 2

B. The Power Subsector .............................. 3Sector Organization ......................... 3External Assistance ......................... 3Existing Facilities ......................... 4Access to Service and Status of Supply ...... 5Rural Electrification ....................... 6System Losses ............................... 6Historical Consumption ...................... 6

Load Forecast ............................... 7

II. THE IMPLEMENTING AGENCY ............................... 8

Lending Arrangements .................................. 8Organization .......................................... 8Management and Staffing ............................... 9Management Systems .................................... 10Accounting and Budgeting .............................. 11Training ...... 11Proposed Transfer of Local Authority Distribution

Systems .......... ................................ 11Audit . ................................................ 12Insurance ........... .................................. 12

This report is based on the findings of an IDA mission comprising B.C. Davisand J.C. Ryan who visited Colombo on two occasions between November 1979 andFebruary 1980 and K.G. Jechoutek who visited Colombo in December 1979.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Table of Contents (Cont'd)

Page No.

III. THE PROJECT ........................................... 12

Objectives .12Description .13Project Cost .14Project Financing Plan .15Engineering and Implementation .15Procurement .17Disbursements .17

Land Acquisition .17Risks .18

IV. FINANCIAL ANALYSIS .18

CEB's Statutory Position ........................ 18

Past Financial Performance .18Present Financial Position .19

Fixed Asset Valuation .20Transfer of Assets from the MahaweliDevelopment Authority .20

Inventories .21Long-term Borrowings .21

Billing and Collection .22Revenues and Tariffs .23

Present Position .23Future Requirements .............................. 23

Financing Plan .24Future Finances .25

V. JUSTIFICATION .26

Approach .26Economic Costs and Benefits .27Results .27

VI. PROPOSED AGREEMENTS .28

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Table of Contents (Cont'd)

ANNEXES Page No.

1. Power and Energy Balances (through 1990) .302. Generating Facilities .313. Existing Transmission and Distribution Systems .324. Load Forecast (through 1990) .345. Organization Chart .356. Reporting Requirements .367. Project Description .378. Project Cost Estimate .459. Construction Schedule .4610. Schedule of Estimated Disbursements .4711. Income Statement (FY1974 through FY1979) .4812. Tariff Structure .4913. Income Statement (FY1978 through FY1987) .5014. Flow of Funds Statement (FY1978 through FY1987) .5115. Balance Sheets (FY1978 through FY1987) ...................... 5216. Assumptions for Financial Projections .5317. Monitoring Indicators .5818. Economic Analysis .5919. Related Documents and Information in the Project File .67

MAP

10199Rl - Sixth Power Project

IA A

SRI LANKA

STAFF APPRAISAL REPORT

SIXTH POWER PROJECT(CEYLON ELECTRICITY BOARD)

I. THE ENERGY AND POWER SECTOR

A. Energy Resources

1.01 Sri Lanka's annual consumption of commercial energy per head is low;in 1976 it was reported as 106 kg standard coal equivalent 1/, compared with2,069 kg per head in the world, 426 in all developing countries, 218 in India,181 in Pakistan, 49 in Burma and 33 in Bangladesh. The range was from 11 inNepal to 25,236 in Qatar. 2/ By 1979 Sri Lanka's consumption had risen toabout 123 kg per head. The people also consume relatively large amounts oftraditional fuel, mainly firewood; estimates of annual consumption vary from180 to 320 kg of fuel wood per head. It has been estimated 3/ that in 1975,62.2% of energy consumed was supplied by firewood, with 26.3% coming from coaland oil, and 11.5% from electricity.

1.02 There are no known reserves of coal, oil or natural gas in thecountry. There is some peat but deposits are said to be small, scattered anddifficult to drain.

Hydro Power

1.03 Sri Lanka has an area of 25,332 square miles. Most of its precip-itation comes from the Southwest monsoon from March to September and from theNortheast monsoon for the rest of the year. Annual average rainfall variesfrom less than 40 inches in some northern parts of the island to more than 200inches in places on the southwest slopes of the hills.

1.04 Sri Lanka's hydropower potential totals about 6,400 GWh per annum,or 1,460 MW at 50% load factor, mainly in three basins centered on the centralhighlands. They are the Mahaweli Basin in central Sri Lanka, the Walawe Basinto the south, and the Kehelgamu-Maskeliya to the southwest. Some hydro powerhas already been developed in each of these basins.

1.05 Present installed hydro generating capacity totals 328 MW out of atotal installed capacity of 398 MW. Seven more stations are planned to bring

1/ 1 kg standard coal equivalent = 7,000 kilocalories.

2/ 'World Energy Supplies 1972-76.' U.N., New York 1978.

3/ 'Towards an Energy Policy in Sri Lanka.' T.L. Sankar, April 1978.

the total installed to about 1,090 MW. The present yield of firm energy isabout 1,500 GWh per year; projected additions will increase this to about 3,740GWh by 1991. GSL's plans envisage that by 1991 all hydro sites with potentialexceeding 15 to 20 MW will have been developed. There may well be smallersites that are economic; further surveys are needed to determine this. 1/Ceylon Electricity Board (CEB) has agreed to update information on potentialhydro sites to enable consultants to be appointed for detailed hydro-feasibilitystudies.

Traditional Fuels

1.06 Wood is the most widely used fuel; statistics on the subject arescarcze but it appears that annual consumption may be between 4 and 5 milliontons. There is concern that the use of wood as fuel at this rate of con-sumption is leading to deforestation. The cutting of trees for use as lumbermay also be contributing significantly to this problem.

Petroleum

1.07 Exploration is taking place and it is expected that drilling bothonshore and offshore will be started in 1980. Sri Lanka was recently classifiedas having favourable geological prospects for potential oil or gas discoverieswhichl gives some cause for hope. 2/

1.08 Ceylon Petroleum Corporation (CPC), a statutory corporation, is thesole importer and refiner; its refinery near Colombo has a capacity of 2.35 Mtonnes per year (40,000 bbls per day). The refinery does not produce enoughkerosene or diesel fuel to satisfy local demand and the deficits are imported.These fuels are sold on the local market at prices lower than either the costof importing them or of producing them locally. Furnace oil, a blend ofresidual and distillate used in CEB's steam power station, is produced by CPCin greater quantity than the local market can absorb; the surplus is exportedat a higher price than local users pay. Gasoline is sold at a high price tooffset the cost of subsidizing kerosene and diesel. 3/

1.09 Data from CPC indicate that refined imports have been rising rapidlyin riecent years to meet increasing demand for kerosene and auto diesel fuel:table 1.1 indicates that whilst net consumption rose by 32% in 6 years, themarket value of that consumption rose by 667%.

1/ The last report on this subject was the updating in 1967/69 by UNDP/FAOof Pfeiffer's 1958 report.

2/ World Bank Staff Working Paper No. 289, April 1978.

3/ Prices in effect on January 27, 1980 were:

Kerosene 13.68 Rs/IGAuto diesel 13.50 Rs/IGFurnace Oil 12.40 Rs/IGGasoline 37.50 Rs/IG

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Table 1.1: CONSUMPTION OF PETROLEUM PRODUCTS

(Tonnes 000's)1973 1974 1975 1976 1977 1978 1979

Crude imported 1,750 1,530 1,465 1,447 1,530 1,444 1,415Refined imports 33 20 6 20 77 167 312Exports 954 556 629 652 682 576 631

Consumption 829 994 842 815 925 1,035 1,096

Value of consumption US$ 21 81 72 75 92 106 161million at current prices

B. The Power Subsector

Sector Organization

1.10 Sri Lanka's first public electricity supply was made available inColombo in 1895 by Messrs. Boustead Bros. The business was soon taken over byUnited Planters Co., who extended it and in 1899 built the Colombo electrictramways. In 1902, the Colombo Electric Tramways and Lighting Co. Ltd. wasformed and provided electricity supply until 1927 when the Department of Gov-ernment Electrical Undertakings (DGEU) was established to control the utilitywhich had by then been purchased by the Government. DGEU was succeeded in1969 when the CEB, a statutory corporation, was established with responsi-bility for the generation, transmission and distribution of electricity inthe country. CEB supplies power direct to consumers and at present also sellsin bulk to 214 local authorities who retail to their own consumers. It isexpected that in 1980 CEB will take over the distribution systems at presentowned by local authorities and sell direct to all consumers. The recentlyformed Ministry of Power and Energy is responsible for supervision of CEB'spolicies.

1.11 CEB has in the past been responsible for the development of generatingcapacity and is presently engaged in building Bowatenne (40 MW) and Canyon (30MW) hydro stations. For the next several years hydro generating capacity willbe developed by the Mahaweli Development Authority (MDA), an agency establishedunder the Ministry of Irrigation and Mahaweli Development having responsibilityfor the implementation of the accelerated Mahaweli multi-purpose developmentprogram. As they are completed, the Mahaweli hydro-generating facilities willbe transferred to CEB for operation. During the next ten years some 540 MW ofadditional hydro capacity will be developed in this way at Victoria, Kotmale,Randenigala and Rantembe (Annex 1).

External Assistance

1.12 Sri Lanka has in the past obtained external financial assistance inthe form of loans or supplier credits towards the foreign exchange costs of its

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power sector development program. The Bank made four loans totalling US$58.4million between 1954 and 1969 for the development of hydro and steam generatingcapacity as follows:

(a) Loan 101-CE (US$15.9 million) to GSL in 1954 to help financethe 25 MW expansion of the Laksapana hydroelectric scheme;

(b) Loan 209-CE (US$7.4 million) to GSL in 1958 to help financeconstruction of a 25 MW thermal plant at Kelanitissa, Colombo;

(c) Loan 283-CE (US$14.1 million) to GSL in 1961 to help finance a25 MW expansion at Kelanitissa; and

(d) Loan 636-CE (US$21.0 million) to CEB 1/ in 1969 to help financethe 90 MW Maskeliya Oya Stage II project, a 25 MW gas turbineand management consultancy and engineering services. US$4.5million of this loan was cancelled when the gas turbine wasnot purchased.

Loan 653-CE/Credit 174-CE (US$29.0 million) to GSL was approved in 1969 forthe multi-purpose Mahaweli Ganga Development project of which the 50 MWUkuwela (Pologolla) power station forms a part and is now operated by CEB.Further, in 1973, a US$6 million IDA credit (372-CE) was approved for thedevelopment of CEB's transmission and distribution systems. All works werecompleted satisfactorily although managerial (paras 2.08 and 2.09) andfinancial (para 4.02) improvements have been less than expected since CEB wasestablished. A further strengthening of CEB is an important feature of theproposed project. Project completion reports in respect of Loan 636-CE andCredit 372-CE to CEB are under preparation.

1.13 More recently, the Asian Development Bank (ADB) has provided financefor construction of the Bowatenne and Canyon hydro stations, for completion in1980 and 1981 respectively, and for rural electrification. The planned con-struction of hydro generating facilities at Samanalawewa with aid from the USSRhas now been postponed until the late 1980's. GSL is arranging bilateralfinancing of the construction of hydro generation components of the Mahaweliprogram as follows: - Sweden (Kotmale), U.K. (Victoria) and West Germany(Randenigala/Rantembe). In addition to the proposed project GSL has requestedIDA assistance in the financing of CEB's further program of thermal generatingcapacity (para 1.16) and transmission works (para 3.07).

Existing Facilities

1.14 CEB's existing generating, transmission and distribution facilitiesare described in Annexes 2 and 3 and illustrated on map 10199Rl. CEB's presentinsitalled capacity is 390 MW, all interconnected on one system. In additionthere are many privately owned generating stations, most of them less than 500kVA but ranging as large as 5.75 MW in CPC's refinery at Sapugaskanda. Thetransmission and distribution system comprises 549 miles of 132 kV line with 17substations, 214 miles of 66 kV lines with 9 substations, about 3,000 miles of

1/ CEB was established in June 1969.

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33 kV, and about 750 miles of 11 kV lines. The system control and load dis-patching centre is at Kolonnawa, and all important plants and switching centerscan communicate by means of power line carrier. Trouble crew vehicles haveradio communication.

Access to Service and Status of Supply

1.15 The total energy generated by CEB's power stations in 1979 was 1,540GWh, about 97% of it by hydro. CEB supplied about 155,000 consumers, including214 local authorities who distributed electricity to another 205,000 consumers,making the total number of consumers about 360,000. Of these, about 263,000were domestic. Allowing an average of 6.5 persons to a family unit, thissuggests that at present only about one household in eight has electricityconnnected. Rural electrification has been extended to about 2,000 of a total25,000 villages (para. 1.19). Electricity consumption per head was less than90 kWh in 1979. The great majority of households use firewood for cooking andkerosene for lighting.

1.16 The Bowatenne station is scheduled to be commissioned by the end of1980, Canyon by the end of 1981, and Victoria and Kotmale in 1984/85. Thesenew hydro stations will not be on line in time to prevent shortages of energyfrom 1980 through 1985. To prevent energy shortages in the years 1980-85 CEBis purchasing three gas turbines of 20 MW each which should be installed in1980. Similarly, the system will not have firm generating capacity to meetpeak power demand from 1980 unless these gas turbines are installed. Fore-casts indicate that another block of thermal generation will be needed afterthese gas turbines and before the next major hydro station; CEB has con-sultants working on a long range study to determine the means of meeting thisdemand at least cost.

1.17 The quality of service to most of CEB's consumers is acceptable;there are exceptions to this but most will be taken care of under the proposedproject. The maintenance of CEB's transmission and distribution system hasbeen adequate although unsystematic. Less satisfactory are the distributionlines of some of the local authorities, where for many years only the barestmaintenance has been done and consumers have been constantly connected toexisting lines so that voltages at peak times are well below acceptable levels.CEB will have to carry out a heavy and costly program of upgrading when ittakes over the local authority systems, for which CEB has requested GSL finan-cial assistance. The largest of the local authority undertakings, Mt. Lavinia,

r with about 14,000 consumers and serving a population of about 250,000 people,was taken over by CEB in 1979. Some of the local authorities serve as few as100 consumers.

1.18 Maintenance of CEB's generating stations has been done reasonablywell in the past but there are signs of recent deterioration. Adequate systemsexist for keeping plant history and maintenance records but in many stationsthese are not being kept up to date. There is no planned maintenance schedulefor each station to permit management to check easily that all items of plantare provided for and have duly been serviced. These deficiencies are par-ticularly evident at the Kelanitissa steam plant.

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Rural Electrification

1.19 The first rural electrification schemes were undertaken in the early1960s. Sri Lanka has about 25,000 villages and CEB had provided service toabout 2,000 by the end of 1979. Some of the local authorities who buy in bulkfrom CEB have extended their lines into nearby villages, adding to the extent

of rural electrification. By 1983, an additional 1,150 villages will be con-nected under the current Rural Electrification project financed by ADB. Simul-taneously, more rural electrification will be done under GSL's decentralizedbudget. Under this scheme an MP may transfer funds out of his constituency'sdevelopment budget to CEB, who will then electrify areas chosen by the MP.About 50 schemes a year, each covering one or two villages, are expected tobe implemented in this way at a cost of about Rs 50 million per year.

1.20 Until now, rural electrification schemes have been selected rather atrandom. The qualifying requirement has been a gross revenue equal to at least12% of the investment. The results so far have been disappointing; forecastsof demand have been over optimistic and actual revenues have averaged only 8%of investment. The response has been to relax the financial criterion; only5% return is now required or, alternatively, 12% on an investment in lowvoltage plant only.

1.21 The ADB project will have significant effects:-

(a) the rural electrification force in CEB is to be expanded andempowered to scrutinize and monitor the formulation andimplementation of new schemes, as well as to implement theADB Project. CEB has agreed to appoint a Project Managerfor rural electrification and a Load Promotion and Monitor-ing Unit;

(b) economic analysis and discounted cash flow calculations areto be introduced into the feasibility analysis of rural schemes;

(c) CEB will arrange installment financing of house wiring and con-nection charges.

System Losses

1.22 On an extensive but lightly loaded system such as CEB's a differ-ence of 15% between energy generated and energy sold is reasonable. Up to1976 losses were recorded as less than 12%, but in 1977 they started to in-crease and are now about 16%. Since, in future, sizeable blocks of energywill have to be generated thermally, it is essential to identify the reasonsfor the increase in losses and to curb the trend. As part of the proposals toimprove management (para 2.09), CEB will investigate systems losses and under-take a study of load management and conservation.

Historical Consumption

1.23 Growth in consumption of electrical energy in the long run 1961 to1978 has averaged 9.3% p.a., ranging from 17.8% in 1966 to 3.3% in 1974. From

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1972 to 1977 there was a period of weaker growth, but it appears that a ratehigher than the long term trend is now being established.

1.24 The short and long term annual growth rates for each class of con-sumer are summarized in table 1.2. Energy sales since 1961 are analyzed intable 1.3.

Table 1.2: ANNUAL GROWTH IN ENERGY DEMAND

LocalDomestic Industrial Commercial Authorities Total

1961-65 3.6 14.5 3.8 7.4 8.71965-70 6.3 18.3 6.3 12.0 13.01970-75 6.3 8.8 6.8 5.7 7.81975-78 12.0 4.3 9.1 7.3 6.4

1977-78 11.9 14.0 7.4 9.0 11.61961-78 6.6 12.0 6.3 8.2 9.3

Table 1.3: ENERGY SALES

1961 1966 1971 1976 1978% x% %% g

Domestic 15.5 11.3 8.9 9.5 10.3Industrial 33.3 43.6 51.7 51.4 51.0Commercial 21.7 17.0 12.9 13.9 13.7Local Authorities 29.5 28.1 26.5 25.2 25.0

100.0 100.0 100.0 100.0 100.0

Load Forecast

1.25 CEB prepares an annual short term (5 or 6 years) energy sales forecastfrom forecasts of the consumption of each class of consumer within each ofCEB's geographical Divisions. In so doing, historical trends are consideredfor each of the 23 areas which together make up the Divisions. Due weight isgiven to known prospective loads such as housing schemes, industrial parks,commercial areas, individual industries and commercial properties, and ruralelectrification schems.

1.26 For longer term forecasting, correlation and regression analyses areused. All consumers are divided into three categories, and growth rates arerelated to gross domestic product, to value-added in mining and manufacturingand export processing, and to population. To accommodate deviations from thetrend, upper and lower limit estimates are made.

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1.27 Load forecasts have been prepared recently by various authorities

studying the Mahaweli development program and the energy sector of Sri Lanka,

and these forecasts taken together endorse CEB's own sales forecast. There

does not, however, appear to be justification for CEB's assumption that losses

will rapidly fall back to 12.5% from the recent 16%. In view of the strength

of growth in the economy and in electricity sales since 1977, and the large

number of energy consuming developments projected in the next few years, pre-

dictions of growth rates higher than the long term average in the past seem

plausible although perhaps optimistic. Reports from recent economic studies

predict that the rate of inflation will become excessive unless GSL moderates

the pace of development in the country. Further, the price of electricity is

at present unduly low, on average about US$0.02 per kWh, and a more appropriate

pricing policy, when introduced, may reduce the growth in demand in some extent

(para. 5.03).

1.28 The best central estimate derived from work by CEB, NEDECO and the

appraisal mission is summarised in Table 1.4 and is shown in greater detail in

Annex 4.

Table 1.4: ENERGY SALES FORECAST 1978-87

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Energy Sales GWh 1161 1294 1470 1625 1800 1990 2200 2450 2695 2965

Increase % 11.4 11.5 13.6 11 11 11 11 11 10 10

Losses % 16 16 15 15 14 14 14 13 13 13

Generation GWh 1382 1540 1730 1910 2095 2315 2560 2815 3100 3410

Load Factor % 54 54 54 54 55 55 55 55 55 56

Peak demand MW 291 325 366 404 435 480 531 584 643 695

II. THE IMPLEMENTING AGENCY

Lending Arrangements

2.01 GSL will be the recipient of the proposed credit (US$19.5 million

equivalent) and will onlend the proceeds (paragraph 4.24) to CEB, the imple-

menting agency for the project. A similar arrangement was made under the

earlier transmission annd distribution project (Credit 372-CE).

Organization

2.02 CEB was established by the CEB Act, No. 17 of 1969 (1969 CEB Act)

as the successor to the Department of Government Electrical Undertakings

(DGEU) and is responsible for the development and coordination of the genera-

tion, supply and distribution of electrical energy in Sri Lanka. While CEB is

a public corporation the 1969 CEB Act does not endow it with fully autonomouspowers and the government has reserved to itself a substantial role in impor-

tant policy matters and in particular tariffs, capital investment, borrowing

and the appointment of the Chairman and the General Manager. The conditionsof service of all CEB staff are subject to GSL regulation. CEB is also subjectto the provisions of the Finance Act, No. 38 of 1971 (1971 Finance Act) whichregulates the finances of all public corporations in Sri Lanka.

2.03 CEB is a corporate body governed by a seven-member Board; membersserve a five-year term and may be reappointed. Board members are appointed byGSL - four with experience in either engineering, commerce, administration oraccountancy, and the others representing local authorities, industry and theMinistry of Finance - and may be removed at any time. The Chairman is appointedfrom amongst the Board members; the present Chairman is also the Secretary,Ministry of Power and Energy.

2.04 CEB's organization structure was designed by consultants, UrwickInternational Ltd., in the early 1970s under Loan 636-CE. While some minormodifications have been made in recent years the original pattern is basicallyunchanged and meets CEB's present needs (Annex 5). Changes may be requiredin future as a result of the extension of rural electrification schemes andof the takeover of local authority distribution systems. An assurance hasbeen obtained that CEB will submit to IDA, in advance, any proposal for majorchange to CEB's organizational structure.

Management and Staffing

2.05 While the Chairman is responsible through the Board for policymatters and close liaison with government, the General Manager is CEB's ChiefExecutive Officer. He is responsible for the overall direction and control ofCEB's day-to-day business. The present General Manager is an experienced andlong-serving engineer who is due to retire shortly. He is assisted by twoAdditional General Managers, four Deputy General Managers and a Finance Manager.With the exception of the Finance Manager, who is a qualified accountant, alltop management posts are filled by engineers. The Commercial and PersonnelManagers, Chief Internal Auditor and the Legal Officer all report directly tothe General Manager. CEB's senior management structure is set out in Annex 5.Below this level, CEB operations are decentralized and are controlled at plant(for generation) and divisional level. Each of the seven operating divisionsinto which Sri Lanka is organized is headed by a Divisional Manager, who is aqualified engineer; the divisions are further divided into areas which are theprimary units for systems maintenance, meter reading and consumer services.

2.06 CEB has experienced considerable difficulty in retaining trainedstaff in recent years as many engineers and accountants have left for overseasor private sector posts offering substantially higher monetary rewards. Salarydifferentials for senior CEB staff do not adequately reflect the heavy addi-tional responsibilities of such posts. The lack of experienced engineeringstaff in the 30-45 age range is particularly noticeable at CEB while qualifiedaccountants are now extremely difficult to recruit. These problems appear tobe common to many public sector enterprises in Sri Lanka and, in an effort toimprove the attractiveness of the public sector, GSL recently made such salariestax-exempt.

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2.07 CEB's present manpower is about 10,000, against an authorized totalof 11,098 in 1979. Manpower has increased as follows in recent years:

Table 2.1: CEB MANPOWER

1975 1976 1977 1978 1979-- Actual--------- Authorized Actual

1. Managerial, pro-fessional andadministrative staff 235 244 285 329 357 312

2. Technical, clericaland other supportstaff 1,895 1,934 2,379 2,476 3,412 2,787

3. Labor Grades (skilledsemi-skilled and un-skilled) 6,050 6,308 6,712 6,918 7,329 6,849

8,180 8,486 9,376 9,723 11,098 9,948

Annual percentageincrease - 4% 10% 4% 2%

While CEB's staff numbers are high in relation to the size of its operationsand the number of consumers it serves the increase in recent years has beenreasonable. A major part of the increase in CEB manpower has resulted froman expanding works program, particularly the rural electrification programundertaken by force account. Further manpower increases are expected follow-ing the absorption of the local authority distribution systems and for theoperation and maintenance of planned generation, transmission and distribu-tion facilities.

Management Systems

2.08 Comprehensive management information, accounting and budgetingsystems were introduced by CEB in 1973 following a study by consultants,Urwick International Ltd., financed under Loan 636-CE. While the systems aresatisfactory and are relevant to CEB's operations, senior management is notutilizing the information system, and this has resulted in a lack of controlof CEB's activities. Staffing difficulties in recent years have led toserious delays in the preparation of periodic management reports, particularlyfinancial reports. Internal audit arrangements have never been satisfactorilyestablished in CEB although recently it was agreed with ADB that a ChiefInternal Auditor be appointed. The Chairman has agreed to consider making theperson appointed responsible to the Chairman to ensure greater independence ofaction.

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2.09 While some improvements are expected following the strengtheningof CEB's accounting staff during 1979 CEB's managerial shortcomings requireinvestigation and follow up action. The Chairman has suggested that UrwickInternational Ltd. be retained (a) to review managerial performance and methodsin CEB and in particular reporting and control procedures, including internalaudit arrangements and (b) to recommend improvements and prepare necessarymanagement development and training programs (para 2.11). The cost of thisstudy and the implementation of a program of improvements to be agreed withIDA, including the possible employment of management advisers, will be financedunder the proposed project. The appointment of management consultants is acondition of credit effectiveness. Regular and improved reporting is expectedand details were agreed at negotiations (Annex 6).

Accounting and Budgeting

2.10 CEB's management was unable to offer full explanations for the sub-stantial increases in operating costs in FYs 1979 and 1980 (paragraph 4.04).Financial and associated records are in arrears and financial reporting isinfrequent. GSL agrees that the present lack of budgetary and cost controlsin CEB requires an urgent remedy. CEB has appointed local accountants (a)to assist CEB staff in bringing records up-to-date, preparing timely FY1979accounts for audit and preparing current financial control reports and (b)to analyze and report on the reasons for increases in CEB operating costs inFY1979. The provision of satisfactory accounts for FY1979 is a condition ofcredit effectiveness.

Training

2.11 CEB operates a residential training center at Castlereagh for tech-nicians which offers engineering courses related to CEB's operations. Accom-modation is limited and CEB is planning to develop non-residential technicaltraining facilities in Colombo as a result of a recent investigation by theNational Rural Electric Cooperative Association, Washington, D.C., financedunder the USAID program. Regular training programs are required to fitengineers for managerial positions; at present six-months on-the-job trainingis given to newly qualified engineers prior to assuming responsibility foroperating facilities but there is no program for progressive management dev-elopment. Training programs are also required to familiarize accounting staffwith CEB's financial operations and reporting requirements for financialcontrol. The preparation of such programs has been discussed with CEB andan assurance has been obtained that, following completion of the managementstudy (para 2.09), CEB will submit to IDA a satisfactory training program forall cadres of CEB staff by June 30, 1981 and will thereafter implement theagreed program.

Proposed Transfer of Local Authority Distribution Systems

2.12 While CEB supplies power directly to some 155,000 domestic, com-mercial and industrial consumers throughout Sri Lanka, another 205,000 con-sumers are supplied by local authorities which purchase power in bulk fromCEB. The quality of local authority service to consumers is unsatisfactory

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and GSL has recently determined that CEB should assume responsibility for thedistribution facilities of the local authorities under powers contained in the1969 CEB Act. CEB will take over all staff, assets and liabilities relatingto electricity supply and CEB has requested GSL to make available funds for therehabilitation of the distribution systems.

2.1:3 The transfer of responsibilities to CEB will impose a considerableburden on CEB's present staff and may affect CEB's financial viability; localauthority billing and collection procedures, in particular, will require care-ful review. GSL has been asked to consider a phased takeover consistent withCEB's capabilities. CEB is presently collecting detailed information fromeach local authority and, when the results are known, will be in a positionto consider any necessary changes to its organization and managerial structureand to assess the financial implications. CEB will associate the managementconsultants (para 2.09) with this task and will keep IDA informed of progressand submit, for IDA's agreement prior to the date of transfer, a program forintegrating the local authority systems. An assurance to this effect has beenobtained.

Audit

2.14 In accordance with previous arrangements under Credit 372-CE, CEB'saccounts are audited by the Auditor-General, who has attached a specific teamof officers to CEB. In the past, delays in submitting audited accounts to IDAwithin the required six months of the year-end have occurred repeatedly. CEB'sFY1978 audited accounts were received some eight months late. The problemarises in part from delays by CEB in submitting the accounts for audit and inpart from delays in releasing the Auditor-General's report. CEB is required,under the 1971 Finance Act, to submit its accounts for audit within four monthsof the year-end. The Auditor-General should report to Parliament within tenmonths of the year-end. Following discussions with the Auditor-General,improvements are expected from FY1979 onwards, particularly as greater prior-ity will be given to World Bank audit requirements. However, it seems unlikelythat a target of six months will be achieved in the near future. It is pro-posed, therefore, that CEB should in future submit unaudited accounts to IDAwithin four months of the year-end (at the time of submitting them to theAuditor-General) and the Auditor-General's report within ten months of theyear-end. An assurance to this effect has been obtained.

Insurance

2.15 CEB has for a number of years borne its own insurable risks and hasestablished an Insurance Reserve to which an annual contribution of 1/10% ofgross fixed assets values is transferred from retained earnings. This arrange-ment is satisfactory.

III. THE PROJECT

Objectives

3.01 The project is designed to enable CEB to augment its transmissionand distribution facilities between 1981 and 1984, in order to meet increasing

v il v

demands for electricity from all parts of the country and all sectors of theeconomy and to strengthen CEB's management and commercial performance. Itwill permit power and energy from power stations now under construction toreach the consumers. It is intended to:-

(a) increase the availability of power and reliability of highvoltage grid supplies transmitted to areas where load willsoon exceed present capacity.

(b) transmit high voltage grid supplies to areas where none isavailable at present.

(c) extend and reinforce subtransmission lines so as to improvethe quality of present supplies and to provide electricityin areas as yet unserved.

(d) provide supplies for new housing estates, hotels and commercialbuildings soon to be erected in the course of the redevelopmentof the city of Colombo.

(e) furnish distribution lines and substations necessary to permitconsumers to be connected to the system.

Description

3.02 The proposed project consists of the following components (for moredetail see Annex 7 and Map 10199R1):

(a) 172 miles of 132 kV second circuits to be strung on existingtowers to improve supplies to Ratmalana, Jaffna and Trincomalee.

(b) 50 miles of new single circuit 132 kV line to Valachchenai.

(c) 132 kV grid substation at Valachchenai.

(d) Extensions to existing 132 kV switching stations at Kolonnawa,Ratmalana and Anuradhapura.

(e) 500 miles of 33 kV subtransmission line.

(f) Two new 132 kV primary distribution substations in Colombo withtheir supply cables.

(g) Augmentation of existing primary distribution substations inColombo.

(h) Extensions and alterations to the 11 kV underground cablenetwork in Colombo fed by these substations.

(i) 125 miles of 33 kV overhead distribution line and 250substations.

(j) Construction and service vehicles.

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(k) Operational buildings and staff quarters.

(1) Engineering and management consulting services, technicalassistance and training.

Project Cost

3.03 The estimated cost of the proposed project is Rupees 987.5 million(US$63.3 million) including contingencies and customs duties. The estimatedcosts are summarized in Table 3.1 and shown in greater detail in Annex 8.

Table 3.1: SUMMARY OF ESTIMATED PROJECT COST

Description Foreign Local Total Foreign Local Total------(Rs Million)----- (US$ Million Equivalent)

132 kV Transmission Lines 66.6 10.1 76.7 4.2 0.7 4.9132 kV Sub and SwitchingStations 29.4 2.8 32.2 1.9 0.2 2.1

33 kV Subtransmission Lines 115.0 43.9 158.9 7.4 2.8 10.2Colombo Distribution System 160.8 30.6 191.4 10.3 2.0 12.3Other Distribution Works 43.2 22.5 65.7 2.8 1.4 4.2Vehicles and Tools 8.3 - 8.3 0.5 - 0.5Buildings - 7.0 7.0 - 0.4 0.4Consulting Services/Training 24.6 6.6 31.2 1.6 0.4 2.0CEB's Supervision - 8.1 8.1 - 0.5 0.5

Sub-total 447.9 131.6 579.5 28.7 8.4 37.1

Contingencies:Physical 44.7 13.2 57.9 2.9 0.8 3.7Price 123.0 73.0 196.0 7.9 4.7 12.6

Project Cost before CustomsDuties 615.6 217.8 833.4 39.5 13.9 53.4

Customs Duties - 154.1 154.1 - 9.9 9.9

TOTAL PROJECT COST 615.6 371.9 987.5 39.5 23.8 63.3

3.04 The cost estimates were developed by CEB based on the costs ofrecently undertaken comparable work or recent quotations and updated to end1979 prices. Physical contingencies average 10% and range from 5% for supplyof certain substation equipment to 25% for trenching and cable jointingaccording to the nature of the item. Price contingencies amounting to 19.9%of the project cost were calculated using the following rates of escalation:-

1979 1980 1981 1982 1983 1984

Foreign % 12 10.5 9 8 7 7Local % 18 21 15 12 9 9

Customs duties ranging from 5% to 50% on imported equipment and materials wereallowed as applicable, amounting to 15.6% of the total project cost. The costestimates are adequate.

Project Financing Plan

3.05 It is proposed that parallel financing of the project be arrangedbetween IDA (US$19.5 million) and the Saudi Fund (US$20 million). The combinedamount (US$39.5 million) would cover 100% of the foreign costs of the proposedproject and represents 62% of the total project cost (or 74% excluding customsduties). CEB will be expected to meet all local costs from internal cash gene-ration. The components to be financed by IDA, the Saudi Fund and CEB are iden-tified in Table 3.2. 1/ A firm commitment for Saudi funding for the projectis a condition of credit effectiveness.

Table 3.2: PROJECT FINANCING PLAN /a

US$ Million Percentage (X)Equivalent

IDA132 kV lines 6.0132 kV Substations andSwitching Stations /b 3.0

33 kV Subtransmission 8.0Vehicles and tools 0.5Consultancies/Training 2.0

19.5 30.8

Saudi FundColombo Distribution 14.0Other Distribution 4.033 kV Subtransmission 2.0

20.0 31.6

CEBLocal costs 23.8 37.6

63.3 100

/a Excluding interest during construction and working capitalrequire ments.

/b Includes the cost of the 132 kV switchyard extensions forColombo distribution.

Engineering and Implementation

3.06 Most of the works in the proposed project are of kinds which alreadyexist on CEB's system and with which CEB's engineers have substantial previousexperience; they are thus able to produce their own designs, specificationsand tender documents, and to supervise the construction. The one area in which

1/ An alternative, which the Saudi Fund has suggested, provides for IDA tofinance all 33 kV subtransmission works and the Saudi Fund to financeconsultancies.

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CEB does not have previous experience is the proposed indoor primary substa-tions in Colombo. Foreign engineering consultants will be retained for thedesign and supervision of that part of the project and their appointment isa condition of credit effectiveness. Engineering costs are estimated atUS$0.4 million. The contract will provide for about 36 man months of for-eign engineers' services at an estimated man month cost of US4'8,500 includingsalaries, costs, fees, international travel and subsistence.

3.07 A future project, for which IDA assistance has been requested,comprises the 220 kV and 132 kV lines, substations and switching stations re-quired to transmit the output from the planned generating stations at Victoria,Kotmale and Randenigala - Rantembe into the Colombo area. CEB's engineersin 1979 performed studies which indicated that a voltage higher than 132 kVwould be economic for this phase of expansion, and their findings were con-firmed by consultants, who recommended 220 kV for certain of the new lines.Detailed engineering design for this work will be needed shortly and provisionhas been made under this project for the appointment of foreign consultantsfor design work and preparation of tender documents. Engineering costs areestimated at US$1 million. The contract will provide for about 90 man monthsof foreign engineers' services at an estimated man month cost of $8,500 inc-luding salaries, costs, fees, international travel and subsistence.

3.08 The project will be completed in stages between late 1981 and March1984 (Annex 9).

3.09 During the period of the project, CEB's construction forces will beperforming the following line work which will limit their availability forthe proposed project:

Ukuwela - Bowatenne line; 32 km of 132 kV single circuit tobe built in 1981.

Pannipitiya - Neboda line; 38 km of 132 kV double circuit,to be built in 1982/83.

Canyon - Laxapana line; 10 km of 132 kV single circuit, tobe built in 1980/81.

Relocation of 5 km of 132 kV line for the Kotte Parliamentarycomplex in 1980/81.

ADB Rural Electrification Project covering 1150 villages in1981/83. Special Projects rural electrification - 300 kmper year.

Routine system augmentation - 400 km of line and 150 sub-stations per year.

3.10 The 132 kV components of the project will be constructed under foursingle responsibility contracts. These will cover the 132 kV transmissionlines, the grid substation and switching stations, the 132 kV primary distri-bution substations, and the 132 kV underground cables. Single responsiblitycontracts are preferred because they place undivided responsibility for all the

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work upon one contractor, thus avoiding disputes which otherwise arise betweenthe construction contractor and the owner or the suppliers of materials oversuch difficulties as late deliveries and the repair or replacement of materialsfound defective. The remaining construction work in the project will beperformed by CEB's own work force.

Procurement

3.11 International competitive bidding in accordance with IDA's guide-lines will be employed in the award of all major components to be financed byIDA, including both the contracts for the high voltage lines and substationsand the supply of foreign equipment and materials to be employed or erected byCEB. Vehicles, equipment and materials not exceeding US$10,000 an item andUS$100,000 in aggregate may be procured in accordance with local procedures,which are satisfactory. The foreign components to be financed by the SaudiFund will be procured and disbursed in accordance with Saudi Fund's require-

ments.

Disbursements

3.12 The credit will be disbursed against the following items:-

(a) 100% of the foreign expenditures of contracts for:

(i) 132 kV transmission lines

(ii) 132 kV substations and switching stations, includingthe changes to the 132 kV switchgear at Kolonnawaand Kelanitissa required for Colombo distribution.

(b) Equipment and materials for the 33 kV subtransmission linesand vehicles and tools: 100% of the foreign expendituresfor directly imported items, or 100% of the local expendi-tures (ex factory) for locally manufactured items or 65%for locally procured items.

(c) 100% of the foreign expenditures of consultancies, techni-cal assistance and training. 1/

A schedule of estimated disbursements is given in Annex 10. To cover paymentsto engineering and management consultants it is recommended that retroactivefinancing not exceeding US$350,000 be authorized for expenditures incurredafter May 1, 1980. 1/

Land Acquisition

3.13 Land is required for the grid substation at Valachchenai and the twonew primary distribution substations in Colombo. The land is owned by govern-ment agencies and will be transferred to CEB when required.

1/ This item may be financed by the Saudi Fund in which case retroactivefinancing would not be required.

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Risks

3.14 The project consists of normal electric utility work entailing nounusual risks and no particular difficulty is foreseen in its execution.Price contingencies in the cost estimates have been allocated so as to mini-mize the risk of cost overruns due to delays.

IV. FINANCIAL ANALYSIS

CEB's Statutory Position

4.01 CEB's finances are regulated by the provisions of the 1969 CEB Actand the 1971 Finance Act, which affects all public corporations in Sri Lanka.CEB is required, by Section 38 of the 1969 CEB Act, to operate in a commer-cial manner so as to ensure that revenues are sufficient to meet all outgoings,including depreciation and interest, and a reasonable proportion of developmentcosts. CEB's statutory obligations were amended in two important respectsfollowing IDA approval of Credit 372-CE 1/ in 1973:

(a) CEB is permitted to charge depreciation in its accounts basedon a current valuation of fixed assets rather than the historiccost of such assets.

(b) CEB's obligation to pay an 8% annual dividend on GSL's equitycapital is waived each year until CEB has generated a 30%contribution to the combined annual capital expenditure onelectricity supply, including interest during construction,of CEB and any other body responsible for undertaking a jointscheme with CEB.

Past Financial Performance

4.02 CEB was required, under IDA Credit 372-CE, (Project Agreement Section4.04(a)(ii)) to maintain tariffs at levels sufficient to produce, from FY1974,at least an 8% annual rate of return on currently valued net fixed assets. Inthis respect CEB's financial performance has been unsatisfactory mainly as aresult of unchanged tariff levels between April 1, 1972 and December 1, 1978.The failure to increase tariffs reduced CEB's capacity to contribute to itsinvestment program in recent years, although the overall contribution fromFY1974 through 1978 was 33%. 2/ In the seven years FY's 1972 through 1978whereas the average cost of energy (including depreciation) per kWh rose by58% from Rs 0.11 to 0.17 CEB's average sales revenue per kWh rose by only 6%,from Rs 0.15 to 0.16.

1/ These conditions have been repeated under the proposed Credit.

2/ After allowing for increased working capital requirements the amountavailable was equivalent to 10% of capital investment between FY1974-78.

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4.03 CEB's actual financial operations for the five years to FY1978 andthe estimated position in FY1979 are summarized in Table 4.1 below and areshown in greater detail in Annex 11.

Table 4.1: CEB INCOME STATEMENT(FY1974 through FY1979)

(Rupees Million)

-------------Actual--------------- Estimated1974 1975 1976 1977 1978 1979

Energy Sales (GWh) 892 965 996 1,042 1,161 1,294Sales Revenue (Rs/kWh) 0.16 0.16 0.16 0.16 0.18 /a 0.30Operating Revenues 158 169 178 197 242 406

Less

Operating Costs includingDepreciation 91 103 121 151 196 309

Operating Surplus 67 66 57 46 46 97Interest 79) (15) (16) T2) (28) E2)

Operating Ratio /b 42% 44% 53% 48% 47% 50%Average Currently Valued /cNet Fixed Assets (ANFA) 972 1,034 1,104 1,921 2,148 2,686

Rate of Return on ANFA 6.9% 6.4% 5.2% 2.4% 2.1% 3.6%Contribution to CEB'sInvestment Program 63% 51% 37% 43% 16% 30%

/a Sales revenue/kWh increased from Rs 0.16 to 0.18 in FY1978 as a resultof a tariff increase on December 1, 1978.

/b Operating costs before depreciation divided by operating revenues./c Following an initial valuation of CEB's fixed assets at January 1, 1972

subsequent revaluations of fixed assets, using local indices agreed withIDA, were incorporated in CEB's accounts on January 1, 1977 and 1978.A further revaluation to January 1, 1979 will be made in CEB's FY1979accounts: it is estimated that this will increase the value of CEB'sfixed assets by 37-1/2%.

Present Financial Position

4.04 CEB's tariff increase from December 1, 1978 averaged about 80% andincreased sales revenue/kWh from Rs 0.16 in FY1978 to Rs 0.30 in FY1979. CEB'stariff structure was also modified substantially and a fuel adjustment clausewas authorized. To date, however GSL has not permitted the full fuel adjust-ment (paragraph 4.17). CEB confidently expected, in late 1978, to make atleast an 8% rate of return on net fixed assets in FY-1979 but operating costincreases of about 80% in FY1979 and the higher than expected revaluation ofassets reduced the rate of return to about 4%. Cost increases resulted inpart from increased thermal generation, cyclone damage and pay and priceescalation but so far CEB has been unable to offer full explanations for allthe increases (paragraph 2.10).

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4.05 CEB's financial position as at December 31, 1978, based on auditedaccounts for FY1978, was as follows:

Table 4.2: CEB AUDITED BALANCE SHEET(at December 31, 1978)

(Rupees Million)

ASSETS:Net Fixed Assets 2,221Work in Progress 446

2,667Current Assets 525Less: Current Liabilities 259 266

Total 2,933

LIABILITIESEquity: GSL/Consumer Contributions 527

Revaluation Reserve 1,147Retained Earnings 619 2,293Loans 525Other /a 115

2,933

/a "Other" represents the transfer to CEB of the Ukuwela hydro-station from the Mahaweli Development Board on terms yet tobe finalized.

While CEB's balance sheet appears satisfactory, with a current ratio 2.0and a debt/equity ratio 19:81, several matters need to be resolved and appro-priate adjustments made in CEB's future accounts (paragraphs 4.06 to 4.11):

(a) Fixed Asset Valuation

4.06 CEB's unaudited accounts for FY1979 will not be available beforemid-1980, but should incorporate a further revaluation of fixed assets asat January 1, 1979 in accordance with the movement of certain GSL publishedindices during 1978. This method of valuation was previously agreed with IDAand will form the basis of future annual reviews of CEB's fixed asset values.

(b) Transfer of Assets from the Mahaweli Development Authority (MDA) 1/

4.07 The 1969 CEB Act authorized CEB to enter into "joint schemes" withgovernment bodies for the generation of electricity although the legislationmakes no mention of the operational and financial aspects of such arrangements.Previously, the Mahaweli Development Board (MDB) constructed the Ukuwela(earlier known as "Polgolla") 40MW hydro-plant as part of a multi-purpose

1/ MDA has succeeded MDB as the agency responsible for the acceleratedMahaweli program.

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project (with assistance from IDA Under Credit 174-CE) and it was agreed thatthe power assets should be transferred to CEB on terms to be agreed with IDA.Subsequently, under Credit 372-CE, GSL agreed to certain conditions 1/ toensure that CEB is sufficiently involved in the formulation of future jointschemes, several of which are now planned under the accelerated Mahaweliprogram, and, further, that the power assets are transferred to CEB on com-pletion of the schemes on terms agreed with IDA. These requirements werefurther discussed during negotiations and the earlier conditions are repeatedunder the proposed credit.

4.08 The Ukuwela hydro-plant was commissioned in July 1976 and is oper-ated by CEB but a satisfactory transfer of the assets has yet to be reflectedin CEB's accounts. An amount of Rs 115 million is included, provisionally,under fixed assets in CEB's balance sheet at December 31, 1978 together withan equivalent liability. The nature of this liability is uncertain as GSL hasnot advised CEB of the terms under which such assets are to be transferred.At negotiations, GSL's proposals were received and are being reviewed. It hasbeen agreed that this will be completed before December 31, 1980.

(c) Inventories

4.09 The estimated value of CEB's inventories at December 31, 1979 isabout Rs 200 million, which represents about 18 months supply of materialsand spare parts. This is due, in part, to stockbuilding because of the diffi-culties in obtaining foreign exchange in earlier years. This level appearsexcessive and inventory controls will be reviewed by the management consul-tants (paragraph 2.09). Assurances have been obtained that CEB will reduceinventories to a satisfactory level by end FY1982 and that GSL will ensurethe timely availability of foreign exchange for the future purchase of CEB'sinventory requirements. 2/

(d) Long-term Borrowings

4.10 Most of CEB's long-term loans are received from GSL under onlendingarrangements. GSL bears any foreign exchange risk on such loans which CEBservices in local currency. CEB is also responsible for servicing certain for-eign loans, which were transferred from DGEU when CEB was established in 1969,and on which CEB has so far borne the foreign exchange risk. CEB's long-termborrowings do not reflect the latter liability in that the amounts outstandingare based on the historic figures at the time of transfer to CEB, as reducedby subsequent repayments. CEB has unsuccessfully attempted to recover fromGSL the debt service on such loans in excess of their historic value. 3/ GSL

1/ Development Credit Agreement 372-CE, S3.02.

2/ Under Development Credit Agreement 372-CE (Section 3.03) GSL agreed tomake available to CEB the foreign exchange needed to repair or replaceassets.

3/ CEB maintains a separate account, known as the 'Deputy Secretary,Treasury - Parity Variance Account' for this purpose which, atDecember 31, 1978, stood at about Rs 122 million.

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has never acknowledged this liability and CEB may have to write-off thisamount against 'retained earnings' in future years. Nevertheless, GSL hasbeen asked to further review this matter urgently. An assurance has beenobtained that this matter will be resolved before December 31, 1980.

4.11 Tbh terms for GSL funding to CEB in FYs 1978 and 1979 have yet tobe determined. This is unsatisfactory and again GSL has been asked to resolvethis matter before December 31, 1980. Further, GSL has been asked to adviseCEB, in advance, of the terms of any future loans not covered by an onlendingagreement. (Such loans are made generally towards financing the local costsof CEB projects).

Billing and Collection

4.12 CEB's billing and collection performance has been reasonably satis-factory in recent years. Under Credit 372-CE, CEB's customer receivables onthe last day of each month should not exceed the aggregate billings for thethree months' ending on the same day. CEB has made considerable efforts tomeet this target and while the precise position at December 31, 1979 is notyet known the August 31, 1979 figures indicated receivables equivalent to 3.6month's billings. Some deterioration has occurred during 1979 in the positionof the local authorities (receivables at August 31, 1979 equal 5.7 monthsbillings) arising from:

(a) the large tariff increase in December 1978 following which GSLagreed that the local authorities should continue to pay atthe old rates and GSL would pay the balance to CEB on theirbehalf;

(b) the decision that CEB should take over the local authoritydistribution systems (paragraph 2.12) which has led to anincrease in local authority arrears.

4.13 CEB's present billing and collection arrangements are centralizedat the head office in Colombo and most customer accounting is processed bycomputer. CEB has considerable difficulty in recruiting satisfactory meterreading staff and errors on meter readings are estimated in excess of 10%.CEB is conscious of this problem and is constantly striving to secure improve-ments. CEB estimates that over 50% of monthly bills are for less than Rs 15(US$1) but is reluctant to introduce a fixed charge in view of potentialabuses. Accounting for large consumers, who comprise about 3,000 of CEB's155,000 consumers but account for about 80% of CEB's sales revenues, ishandled by a separate section to facilitate prompt recovery proceedings.

4.14 CEB's existing obligation, under Credit 372-CE, to ensure thatcustomer receivables do not exceed three months' billings is repeated underthe proposed credit. Further, at negotiations, an assurance has been obtainedthat (a) GSL will ensure the payment by the local authorities to CEB of allcurrent bills and (b) a program will be agreed to clear local authorityarrears. 1/

1/ Arrears will be settled as part of the transfer arrangements, but shouldthe transfer be delayed beyond September 1980, GSL will agree with IDAa program by October 31, 1980.

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Revenues and Tariffs

Present Position

4.15 The details of CEB's recent tariff structure are set out in Annex12. CEB's tariffs were unchanged between April 1972 and December 1978 whenthe present tariffs were introduced. CEB's average tariff increased by about80% from Rs 0.16 to 0.30/kWh (about USU2). The tariff level is still low byinternational standards, reflecting the hitherto almost exclusive consumptionof hydro-generated energy. CEB's average cost, including depreciation, wasabout Rs 0.25/kWh in FY1979. This situation will change significantly in theearly 1980's, a period during which CEB will need to generate considerablethermal energy to meet demand pending the commissioning of the Victoria andKotmale hydro-stations in 1984/85. Most local authority retail tariffs arebelow the level of CEB's and, following CEB takeover of the systems, retailtariffs will be fixed by law at then current CEB levels.

4.16 CEB's present tariffs are insufficient in relation to both financialrate of return and economic long-run marginal cost criteria. Present averagetariffs range from Rs 0.25/kWh for domestic consumers to between Rs 0.29-0.38/kWh for non-domestic consumers. Domestic consumers pay a declining blocktariff - Rs 0.31/kWh for the first 50 units per month and Rs 0.21/kWh forunits in excess of 50: there is little incentive to conservation.

4.17 GSL approved the inclusion of a fuel adjustment clause in CEB'stariff schedule in December 1978 to be used during periods of thermal generationin the early 1980's. This was intended to reflect the increasing cost ofthermal generation based upon the price of fuel as against the price prevailingon July 31, 1978. The higher rate will be charged to domestic consumers onconsumption in excess of 50 units per month and to non-domestic consumers onunits in excess of 75% of recent minimum monthly consumption. Over 60% ofdomestic consumers use less than 50 units per month and so will be unaffected.However, in FY79 CEB was not permitted to use the fuel adjustment clause andin FY80 the higher rate for domestic consumption has been limited to Rs 0.50/kWh. Although no accurate prediction can be made of the financial or con-servation consequences of such an arbitrarily constructed clause CEB hopes torecover fuel costs in full and to obtain some reduction in energy demand. 1/

Future Requirements

4.18 CEB is presently engaged on a study of long run marginal cost (LRMC)pricing with technical assistance from the Bank: LRMC based - tariffs wouldbe of the order of Rs 1.80/kWh for low voltage consumers and R 0.80/kWh forhigh voltage consumers. Presently, however, there is cross-subsidization ofdomestic consumers for socio-political reasons. While it would be unreason-able to expect the immediate adoption of LRMC pricing, some improvement inthe tariff structure is expected on completion of the present study. CEB has

1/ CEB intends to revise the fuel adjustment clause as part of the presenttariff review (para 4.19).

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agreed to complete the present study and review the tariff structure beforeDecember 31, 1980 in consultation with GSL and IDA, and will thereafter imple-ment any agreed recommendations in accordance with a satisfactory timetable.

4.19 In order to improve CEB's financial performance and achieve an 8%rate of return on average currently valued net fixed assets, a tariff increaseof about 65% is required prior to credit effectiveness: it is estimated thatan increase in the average tariff from Rs 0.30 to 0.50/kWh is needed to achievethis target (in FY80 such an increase, from July 1, would produce about a 7%rate of return). CEB will also ensure that the cost of fuel is recovered infull through the operation of the fuel adjustment clause.

4.20 A further assurance has been obtained that, thereafter, CEB willreview tariffs annually, before the start of CEB's financial year, to ensurethat revenues are sufficient to meet operating costs (including fuel costs)and depreciation and to produce a rate of return on currently valued net fixedassets of at least 8% annually.

4.21 From FY1982 tariffs will increase further from the present levels tomeet increases in operating costs, price escalation and CEB's contribution toinvestment. In FY's 1982/83 CEB may have to increase tariffs to the equivalentof a 10% rate of return in order to generate sufficient internal resources tomeet the local costs of its investment program. 1/ In FY1984, the averagetariff 2/ is estimated at Rs 0.76/kWh (USc/5/kWhT and, thereafter, followingthe commissioning of the Mahaweli hydro-stations, it is estimated to increaseto Rs 1.17/kWh (USe 7-1/2 kWh) by FY1987. In real terms this represents adoubling of tariffs from the present level.

Financing Plan

4.22 CEB's investment program through FY1984 is presently under reviewfollowing GSL's recent exercise to limit public expenditure. Most of thehydro-power investment in the 1980's in Sri Lanka will be carried out underthe accelerated Mahaweli program with the power assets being transferred toCEB on completion of each scheme (para 4.07). CEB is not expected to con-tribute to these schemes which will be financed under bilateral arrangements.However, CEB will have to provide transmission links to the proposed hydro-stations and meet short-term power needs through 1985 by further thermalinvestments. Following completion of present studies, CEB will prepare aninvestment program through FY1984 and will submit this to IDA by October/November 1980.

4.23 CEB's estimated financial requirements for the period FY1981 throughFY1984 and the sources of funds are summarized in Table 4.3.

1/ CEB officials indicated, at negotiations, that as an alternative CEBmay borrow from local banks.

2/ Excluding the fuel adjustment surcharge which is estimated at Rs 0.36/kwhin FY1984 and Rs 0.14/kWh in FY1987.

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Table 4.3: CEB FINANCING PLAN FY81 THROUGH FY84

Rupees US$ Million PercentageMillion (equivalent) %

Requirements

Capital Expenditure:Sixth Power Project /a 1,080 69.2 17Other Projects 4,541 291.1 73

Working Capital 592 38.0 106,213 398.3 100

Sources of Funds

CEB Internal Cash Generation 3,470 222.4 56Less: Debt Service 1,211 77.6 20Contribution to Investment 2,259 144.8 36

IDA Credit 304 19.5 5Saudi Fund 312 20.0 5Other Loans /b 2,140 137.2 34Consumer Contributions 468 30.0 8GSL Grants 730 46.8 12

6,213 398.3 100

/a Including interest during construction (Rs 92.5 million).lb Onlending by GSL to fund existing commitments (US$17.1 million) and

the foreign costs (US$120.1 million) of future projects.

4.24 The proceeds of the IDA credit of US$19.5 million will be madeavailable to CEB by GSL at 10% interest for a 20 year period with 3 yearsgrace. 1/ GSL will bear any foreign exchange risk in accordance with the1969 CEB Act. The execution of an onlending agreement satisfactory to IDAis a condition of credit effectiveness.

4.25 To protect its future financial viability, CEB has agreed not toincur any long-term debt without IDA's prior agreement unless its maximumfuture debt service is covered at least 1.25 times by its most recent 12months' operating surplus before depreciation.

Future Finances

4.26 Financial projections for the period FY78 through FY87 are set outin Annexes 13-15. Assumptions used to prepare the projections are set out in

1/ CEB's commercial borrowing is negligible and loans are obtained towardsforeign and local expenditures from GSL whose present lending rate isbelow 10%. Inflation in Sri Lanka was 1977 15%, 1978 9%, 1979 18% andis forecast at 1980 21%, 1981 15% and 1982 12%.

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Annex 16. Salient features of CEB's future finances, which are satisfactory, 1/are summarized in Table 4.4.

Table 4.4: SUMMARY OF CEB'S FUTURE FINANCES

1980 1981 1982 1983 1984 1985 1986 1987

1. Average Revenue /a /b(Rs/KWh) 0.56 0.74 0.86 1.08 1.12 1.09 1.22 1.31(USJ/kWh) 4 5 6 7 7 7 8 8

2. Average Tariff /b(Rs/kWh) 0.40 0.50 0.62 0.73 0.76 0.88 1.05 1.17(at FY80 prices) (0.40) (0.43) (0.47) (0.49) (0.47) (0.51) (0.57) (0.60)

3. Average Cost ofEnergy Sold /c

(Rs/kWh) 0.30 0.40 0.43 0.57 0.61 0.48 0.49 0.49(US4/kWh) 2 2 3 3 4 3 3 3

4. Operating Ratio /c 53% 54% 49% 53% 55% 44% 40% 37%5. Rate of return

on Net FixedAssets (%) -annually revalued 6.6 8 10 10 8 8 8 8

6. Debt servicecoverage 3.1 3.3 3.2 3.0 2.4 2.0 1.6 1.5

7. Contribution toInvestment (%) /d 32 29 33 45 31 25 19 22

8. Current Ratio 1.8 1.8 1.7 1.8 2.0 2.1 2.2 2.49. Debt/Equity Ratio 25:75 25:75 31:69 32.68 29:71 40:60 46:54 48:52

/a Including fuel adjustment surcharge.7W To satisfy minimum financial requirements./ c Before depreciation.7-7 Based on a three year average; in FYs 1985-1987 the percentage declines,

reflecting the transfer to CEB of assets from the Mahaweli DevelopmentAuthority - Victoria (1985), Kotmale (1986) and Randenigala (1987) asindicated in Annex 14.

4.27 Key indicators which will be used in monitoring CEB's performance areset out in Annex 17.

V. JUSTIFICATION

Approach

5.01 The proposed project is an integral part of the total power sectorinvestment program in Sri Lanka, incorporating CEB's expenditure on generation,

1/ It is unlikely, based on the assumptions in Annex 16, that CEB will beliable to pay either income tax or dividends on GSL equity (para 4.01(b))in the period FY1980 through 1987.

- 27 -

transmission and distribution, the Mahaweli program of hydroelectric stations,and the Samanalawewa hydro station. It includes transmission of the addi-tional power generated to satisfy incremental demand at the load centers. Itsnature as a selected aggregate of individual lines and substations does notlend itself to isolated justification although each component of the projectis justified as the solution to its own problem. The method employed in thisreport is one of justifying the entire investment program, covering theproposed project implicitly.

5.02 As several agencies are involved in the planning of parts of the in-vestment program, conscious efforts to identify an overall least-cost solutionare only beginning. The only presently available aggregate investment programtherefore, is analyzed with respect to its feasibility in economic terms,rather than compared to other potential programs.

Economic Costs and Benefits

5.03 The investment program in its present form is presented in Annex 18Table 1. It represents all known planned expenditure relevant to the powersector for the period 1980-1989, and is based on CEB demand forecasts. Theprogram implies a high marginal cost per incremental unit, a fact that islikely to lead to significant tariff increases in the near future (para 4.21).

5.04 Where available, costs are expressed in CIF or equivalent borderterms. Local costs are converted to border prices using a shadow/market wageratio and a standard conversion factor (Annex 18, paras. 3 to 5). Economicbenefits arising from incremental supply to electricity consumers are calcu-lated as the total willingness to pay including the consumers' surplus, assumedto be approximated by the cost and extent of using alternative energy sourcesfor economic activities and lighting (Annex 18, paras 6 to 12).

Results

5.05 The use of expected 1980 tariff revenues (including fuel surcharge)as a proxy for benefits leads to a minimum rate of return of 3%, indicatingthat tariffs are well below marginal cost. An attempt was made to quantifyadditional benefits in the form of user surplus (paragraph 5.04), assumingvarious possible shapes of the demand curve for power. In economic terms,the rate of return is likely to be between 8% and 16%, the best estimate beingabout 12%. A 10% increase in costs would reduce the rate of return to about10%, while a 10% decrease in costs would boost it to over 13% (Annex 18,Table 3). Hence, the investment program in its aggregate form is justifiedin economic terms.

- 28 -

VI. PROPOSED AGREEMENTS

6.01 During negotiations the following agreements were reached with CEB:

(a) CEB will submit to IDA, in advance, any proposal for majorchange to CEB's organizational structure (paragraph 2.04).

(b) CEB will appoint management consultants 1/ to review presentmanagement problems and will thereafter implement an agreedprogram of improvements (paragraph 2.09).

(c) CEB will submit to IDA satisfactory accounts for FY1979 1/.(paragraph 2.10).

(d) CEB will submit to IDA a satisfactory training program beforeJune 30, 1981 and will thereafter implement the agreed program(paragraph 2.11).

(e) CEB will agree with IDA a satisfactory program for the transferof the local authority distribution systems (paragraph 2.13).

(f) CEB will submit to IDA its unaudited accounts within four monthsand the auditor's report within ten months of the fiscal year-end (paragraph 2.14).

(g) CEB will appoint engineering consultants in connection withthe design and supervision of certain works forming part ofthe Colombo distribution system 1/ (paragraph 3.06);

(h) No dividend will be paid on CEB's equity capital until earningsexceed 30% of capital expenditure (paragraph 4.01).

(i) CEB will reduce Inventories to a satisfactory level byDecember 31, 1982 (paragraph 4.09).

(j) CEB's Consumer accounts receivables will not exceed the equiv-alent of three months' billings (paragraph 4.14).

(k) CEB will review its tariff structure before December 31, 1980in consultation with GSL and IDA and will thereafter implementany agreed recommendations (paragraph 4.18).

(1) CEB will revise tariff levels in order to produce an annualrate of return on currently valued net fixed assets of atleast 8%; an immediate increase of about 65% is a conditionof credit effectiveness (paragraphs 4.19-4.20)); and

(m) CEB will ensure debt service coverage of at least 1.25 times(paragraph 4.25).

1/ Special condition of credit effectiveness.

- 29 -

6.02 Further, at negotiations, the following agreements were reachedwith GSL:

(a) GSL will ensure (i) adequate participation by CEB in theplanning of the Mahaweli program and in other joint schemesand, (ii) the prompt transfer of assets to CEB from MDA onterms satisfactory to IDA (paragraph 4.07);

(b) GSL will ensure agreement before December 31, 1980 in respect ofthe following matters:

(i) the terms of the transfer to CEB of the Ukuwela hydro-station (paragraph 4.08);

(ii) the settlement of the amount shown outstanding in CEB'saccounts in respect of the parity variance on foreignloans (paragraph 4.10); and

(iii) the terms of funding to CEB in FYs 1978 and 1979 (para-graph 4.11).

(c) GSL will ensure the timely availability to CEB of sufficientforeign exchange for the purchase of inventories and spareparts (paragraph 4.09); and

(d) GSL will ensure the timely payment of all amounts owed to CEB byits local authorities (paragraph 4.14).

6.03 With a firm commitment for Saudi funding 1/ (para 3.05) the proposedproject is suitable for an IDA Credit of US$19.5 million.

1/ Special condition of credit effectiveness.

- 30 -ANNEX 1

SRI LANKA

Sixth Power Project

(Ceylon Electricity Board)

Power anid Eaergy Balances

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Laksapana 3x8.33 + 2 x 12.5 MW 50Inginiyagala 2x2 + 2x3 NW 0Udawalawe 3x2 mw 2Wimalasurendra 2x25 Nw 50Polpitiya 2037.5 w 75New Laksapana 2x50 MW 100Ukuwela 2x1 8

.5 MW 363131/ 313 313 313 313 313 313 313 313 313 313

Bowatenne lx40 MW 40 40 40 40 40 40 40 40 40 40 40Canyon 1x30 MW 30 30 30 30 30 30 30 30 30 30Victoria 3x72 MW 216 216 216 216 216 216 216Kotmale

3x700 NW 210 210 210 210 210 210

Randenigala 2x34 MSw 68 68 58 68 68Rantembe 2x23 NW 46 46 46 46Samanalawewa 3x51 NW 153Kelanitissa Steam 2x25 NW 40 40 40 40 40 40 40 40 40 40 40Pettah diesels 6 Ng 2 2 2 2 0 0 0 0 0 0 0Chunnakam diesels 14 MW 8 8 8 8 0 0 0 0 0 0 0Thermal I 3x2O MW 60 60 60 60 60 60 60 60 60 60 60Thermal II 100 NW - - 60 100 100 100 100 100 100 100 100

Capacity start year NW 363 463 493 553 593 799 1,009 1,077 1,123 1,123 1,123Capacity added in year MW 100 30 60 40 206 210 68 46 - - 153Capacity end year MW 463 493 553 593 799 1,009 1,077 1,123 1,123 1,123 1,276Installed for peak MW 423 463 553 593 727 939 1,009 1,077 1,123 1,123 1,225Firm capacity (25% Standby) NW 338 370 442 474 582 751 807 862 898 898 980

Maximum demand NW 366 404 435 480 531 584 643 695 763 833 908

Energy demand GWh 1,730 1,910 2,095 2,315 2,560 2,815 3,100 3,410 3,745 4,085 4,455

Hydro existing 1980 GWh 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500Bowatenne 108 GWh 80 108 108 108 108 108 108 108 108 108Canyon 144 GWh 110 144 144 144 144 144 144 144 144Victoria 686 GWh 200 686 686 686 686 686 686Kotmale 376 GWh 50 376 376 376 376 376Randenigala 366 GWh 366 366 366 366Rantembe 158 GWh 158 158 158Samanalawewa 400 GWh _ 200

Total hydro energy GWh 1,500 1,580 1,718 1,752 1.952 2,48 3,80 3,338 3,338 3,538Kelanitissa Steam GWh 210 260 260 260 260 260 260 260 260 260 260Diesels GWh 10 10 10 10 - - - - - - -Thermal I GWh 50 260 260 260 260 260 260 260 260 260 260Thermal II GWb - - 100 420 700 700 700 700 700 790 700Available thermal energy GWh 270 530 630 1,040 1,220 1,220 1,220 1,220 1,220 1,220 1,220

Thermal energy required GWh 230 330 377 563 608 327 286 230 407 747 917

1/ 313 MW is effective capacity; installed capacity is 328 Ml

ANNEX 2

- 31 -

SRI LANKA

Sixth Power Project

(Ceylon Electricity Board)

Generating Facilities

Existing Date of Installed Effective

Type Commisiioning Capacity MW Capacity MW

Old Laksapana hydro 1950/58 50 50

Inginiyagala " 1950 10 0

Uda Walawe if 1968 6 2

Wimalasurendra (Norton Bridge) " 1965 50 50

Polpitiya (Maskeliya Oya Stage 1) " 1969 75 75

New Laksapana (Maskeliya OyaStage 2) " 1974 100 100

Ukuwela (Polgolla) it 1976 37 37

Sub Total 328 314

Kelanitissa (Grand Pass) steam 1962 50 40

1/Pettah- diesel 1954 6 2

1/~~~~~~~~~~~~~~~~~iChunnakam- 1954 14 8

Sub Total 70 50

Total 398 364

Under Construction

Kelanitissa gas 1980 60turbines

Bowatenne hydro 1980 40

Canyon " 1981 30

Victoria 1984 216

Kotmale 1985 210

1/ It is intended that these stations will be retired in 1982.

- 32 -ANNEX 3Page 1

SRI LANKA

Sixth Power Project(Ceylon Electricity Board)

Existing Transmission and Distribution Systems

The CEB system operates at 132 kV, 66 kV, 33 kV and 11 kV.

132 kV System

1. The 132 kV system comprises 549 miles of line, of which 361 milesare double circuit and 188 miles single circuit.

2. At the heart of the system are the two largest hydro generatingstations, Polpitiya and Laksapana, connected together by four 132 kV circuits.Wimalasurendra hydro station, at Norton Bridge, is also connected to Laksapanaby a short double circuit line.

3. The largest load centre is at Kolonnawa near Colombo; it is fed byfour circuits from Polpitiya. There are tees off these lines to substationsat Thulhiriya and Oruwala. Also feeding into Kolonnawa are two circuits fromthe steam power station at Kelanitissa.

4. From the bars at Kolonnawa a single circuit runs south to substationsat Pannipitiya and Ratmalana, whilst another double circuit runs north up thecoast to substations at Sapugaskanda, Katunayaka, Bolowatta and Puttalam. FromPolpitiya a double circuit runs north up the middle of the island as far asAnuradhapura, from where it continues as a single circuit by way of Kilinochchisubstation to Chunnakam in the northernmost part of the country. BetweenPolpitiya and Anuradhapura there is a substation at Habarana, as well as anincoming tee from the hydro station at Ukuwela. From Anuradhapura a singlecircuit tap takes off to Trincomalee on the east coast. Starting from thebusbars at Laksapana, a double circuit line runs down as far as Galle onthe south coast, with substations along the way at Balangoda and Deniyaya.

66 kV Network

5. The system consists of about 214 miles of double circuit lineassociated with the earliest power developments. In the old part of theLaksapana station there are 66 kV busbars connected to Kolonnawa receivingstation by a double circuit line which also feeds substations at Padukka andAvissawela. Another double circuit from Laksapana runs east, to substationsat Norton Bridge, Nuwara Eliya and Badulla. From Badulla a single circuitcontinues east as far as the hydro station at Inginiyagala; this section wasconstructed for 132 kV but is at present operated at 66 kV. A third lineoriginating at Laksapana carries two circuits north as far as Kandy. Fromthere to Kurunegala there is a single circuit built for 132 kV but operatedat 66 kV.

ANNEX 3- 33 Page 2

6. The 66 kV system is interconnected with the 132 kV system by interbustransformers at Kolonnawa and Laksapana.

Subtransmission and Distribution

7. The major load centres of Colombo are served by an 11 kV undergroundsystem, but the remainder of the country is served by more than 3,000 routemiles of overhead lines at 33 kV, and 750 miles at 11 kV. Important pointshave alternative supply routes. Most of the 132 kV substations are inter-linked by 33 kV subtransmission lines to facilitate maintenance.

8. The city of Colombo draws its power 'at 33 kV from Kolonnawa, wherethere are four 30 MVA transformers. Four 33/11 kV substations designated A,B, C and D are connected to Kolonnawa and to each other by about 28 miles ofunderground cable. Each of these substations serves its own 11 kV ring. Therings are normally open so that each is effectively two radial feeders, soas to simplify protection. Most of the 11 kV/400 V substations on these ringscontain two 500 MVA transformers. Ring A serves a predominantly domestic market,while the central ring B serves the main commercial and port areas. Ring Ccovers the mainly industrial part of Colombo to the north, whilst D servesother areas of domestic and commercial consumers.

9. There is some overhead LT distribution in Colombo, but most is doneby underground cables. Radial feeders from the substations supply feederpillars, from where distribution cables run out and are tapped for consumerservice connections.

SRI LANKA

Sixth Power Project

(Ceylon Electricity Board)

Load Forecast

~~Actual Average Annual .-- Estimated -Average AnnualIncrease % Increase %

1975 1976 1977 1978 1979 1975 79 1980 1981 1982 1983 1984 1995 1986 1987 1988 1989 1990 1979-90

Sale,: GWhDo-estic 91 95 107 119 134 10.2 147 161 175 193 219

Small Industry 252 252 254 289 315 5.7 336 354 378 403 443Large Industry 268 261 263 300 365 8.0 467 559 663 770 865Comercial 130 137 151 163 169 6.8 184 196 209 225 245Local authorities 224 251 267 290 311 8.5 336 355 375 399 428

Total Sales GWh 965 996 1,042 1.181

Total Sales (Sest Central Estimete) 1,294 7.6 1,470 1,625 1,800 1,990 2,200 2,450 2,695 2,965 3,260 3,555 3,875 10.5

Losses % 10.6 12.1 14.4 16.0 16 15 15 14 14 14 13 13 13 13 13 13 V

Total Generation GWh 1,079 1,133 1,217 1,382 1,540 1,730 1,910 2,095 2,315 2,560 2,915 3,100 3,410 3,745 4,085 4,455 10.1

Load Factor % 56 54 53 54 54 54 54 55 55 55 55 55 56 56 56 56

Maximum Demand MW 219 240 261 291 325 366 404 435 480 531 584 643 695 763 833 908, 9.8

Nos. of Consumers . 19791/Domestic 79,799 86,604 97,998 113,950 122,670 263,815 287,500 312,900 340,500 370,400 420,900 438,000 476,000 519,000 566,000 617,000 673,000 8.9Smll Indostry 2,909 3.064 3,246 3.480 3,753 8,711 9,150 9,600 10,100 10,600 11,100 11,700 12,300 13.000 13.700 14.400 15.000 5.1

Large Industry 54 56 56 62 63 63 63 63 63 64 64 65 66 67 68 69 70

Comercial 22,834 24,200 24,311 26,509 28,402 86,812 92,900 99,400 106.100 113,100 121,000 129,000 137,000 147,000 157,000 168,000 180,000 6.9

Local Authorities 537 548 556 568 591 - - - - - - - -Total 106,133 114,472 126,167 144.569 155.479 359,401 389.613 421.963 456,763 494,164 535,064 578,765 625,366 679,067 736,768 799,469 868,070 8.4

1/ Figures for 1979 and after reflect the overall totals including consumers at present supplied by local

authorities.

SRI LANKASIXTH POWER PROJECT

(CEYLON ELECTRICITY BOARD)Organization Chart

CHAIRMAN

_ VICE CHAIRMAN

________________________ g SECRETARYTO THE BOARD

GENERAL MANAGER

|ADDITIONALGENERAL ADDITIONAL GENERALMANAGER MANAGER

OPERATION & MAINTENANCE DEVELOPMENT&CONSTRUCTION

I.I DEPUTY GENERAL DEPUTY GENERAL DEPUTY GENERAL DEPUTY GENERAL FINANCE

MANAGER MANAGER MANAGER MANAGER | PROJECT MANAGER MANAGERGENERATION OPERATING DIVISIONS SYSTEM PLANNING CONSTRUCTION M

AWORNAGER RESEARCH& HYDRO DEV.& CENTRAL GARAGE DEV. UNIT UNIT

PERSONNEL LEGAL OFFICER INTERNAL AUDIT COMMERCIALMANAGER j OFFICER MANAGER

World Bank - 21440

- 36 -

ANNEX 6

SRI LANKA

Sixth Power Project(Ceylon Electricity Board)

Reporting Requirement

The following reports will be provided to IDA. Similar comprehensivereporting was agreed under Credit 372-CE.

QUARTERLY (Within 30 days of the quarter-end)

(a) PROJECT REPORT

A summary of progress under the project with annexes for the following:

(i) Project Cost Estimate.

(ii) Schedule of Orders and Deliveries of Equipment.

(iii) Expenditure and Commitments Statement.

(iv) Actual and Forecast Disbursements of the IDA Credit.

(b) FINANCIAL REPORT

(i) Income, Flow of Funds and Balance Sheet (for the current fiscalyear).

(ii) Accounts Receivable))

(iii) Inventories ) (Analysis at end of quarter)

(iv) Sales )

ANNUALLY

(a) Unaudited accounts and supporting statements (within 4 months of year-end).

(b) Audit report (within 9 months of year-end).

(c) Financial plan - three year capital and revenue forecast (within 90 daysof the start of the fiscal year).

(d) CEB's Annual Report (within 6 months of year-end).

- 37 -ANNEX 7Page 1

SRI LANKA

Sixth Power Project(Ceylon Electricity Board)

Project Description

1. 132 kV Lines

1.1 Kolannawa to Ratmalana 132 kV transmission line.

The work comprises the provision of a second circuit on existingtowers over a distance of 12 miles.

Ratmalana grid substation is at present fed by a single 132 kVcircuit from Kolonnawa. This substation serves the largest industrialcentre in Colombo, and the load on it has been growing rapidly. The sub-station was originally equipped with two 15 MVA transformers, and these werelater uprated to 18 MVA each by the addition of forced air cooling. InSeptember 1979 the night peak was 34 MW, sustained from 6.30 to 9.30 pm; theday load was 23 MW. New 30 MVA transformers had already been purchased andwere ready for despatch from the manufacturer's works by the end of 1979.The Ratmalana substation load can at present be supported on a Sunday bymeans of the 33 kV subtransmission, which will permit the first 132 kV circuitto be de energized whilst work is in progress on the second.

This double circuit line will be tapped near Pannipitiya to feeda new grid substation for the Parliamentary Complex at Kotte and industrialloads in that vicinity.

1.2 There is at present a single circuit 132 kV line from Anuradhapurato Trincomalee via Kantalai. A second circuit will be strung on the existingtowers from Anuradhapura as far as Kantalai, from where a new single circuitwill depart to Valachchenai. This piece of work is therefore subdivided intotwo parts: -

1.2.1 Anuradhapura to Kantalai 132 kV transmission line

The work consists of stringing a second circuit on existing towersover a distance of 40 miles.

1.2.2 Kantalai to Valachchenai 132 kV transmission line

The work is to build approximately 50 miles of single circuit line.

Trincomalee is at present served by one 10 MVA transformer andanother similar transformer has already been ordered to meet the increasingload. A large flour mill in Trincomalee is expected to be completed in 1980;owned by Prima, of Singapore, it is expected to cost Rs 350 M and will require

ANNEX 7- 38 - Page 2

9 NW. The coast near Trincomalee is expected to be the scene of the develop-ment of a number of large new tourist hotels in the coming decade; such hotelsmay be expected to demand up to .5 MW each. At Valachchenai there is a stateowned complex of paper mills, which draws 6 MW and is fed only by a 33 kV linefrom Habarana, 50 miles away. Twenty miles of this line runs through jungle,and poles are frequently damaged by elephants. Losses on the line are highand the reliability of supply at the paper mills is unacceptable.

Construction of this 132 kV link will release the existing 33 kVline to serve the territory between Kantalai and Valachchenai, where newsettlements will be arising out of the Mahaweli developments. This is goodcountry for growing rice, and the coastal area has potential for touristhotels.

1.3 Anuradhapura to Chunnakam 132 kV transmission line.

The work is to provide a second ciruit on the existing line overa distance of 120 miles.

Chunnakam grid substation feeds the largest load centre in thenorth of the country and is at present equipped with three 10 MVA transformers;the load in September 1979 was 17.5 MW. Tenders have been called for two 30MVA transformers to replace the present three, thus doubling the capacity.Load flow studies indicate that voltage drop on the line will be unacceptableby the end of 1980, and also that losses will have risen to about 5 MW at peak.The second circuit will cure these problems. The northern part of the countryhas only one circuit feeding it. There is an 8 MW diesel plant at Jaffna,but this is costly to operate and is not large enough to support the loadby itself. The second circuit is needed to give security of supply; withoutit, the diesel station will have to be run in order to maintain voltage.

Chunnakam is the site of a large cement factory taking about 10 MW;because of the shortage of cement manufacturing capacity in the country thereare plans to expand this plant. Any outage on the existing line causes lossof production of cement which is both scarce and valuable. This second circuitwill also improve security of supply to the Kilinochchi substation, which feedsthe Paranthan Chemicals Corporation, an important industrial consumer.

The second circuit will have to be installed with the first circuitenergised, as there is no 33 kV subtransmission link to this area.

2. 132 kV Substations and Switching Stations

2.1 Valachchenai 132/33 kV Substation.

The work will provide 2 bays of 132 kV and 6 bays of 33 kV switch-gear and all associated equipment. The two 10 MVA transformers needed arealready on hand.

- 39 - ANNEX 7Page 3

2.2 Ratmalana 132 kV switching station.

The work will add one bay of 132 kV switchgear and accessories.

2.3 Kolonnawa 132 kV switching station.

The work will add one bay of 132 kV switchgear and associated equip-ment.

2.4 Anuradhapura.

The work will add three bays of 132 kV switchgear and associatedequipment.

3. 33 kV Subtransmission Lines

The project includes about 500 miles of 33 kV lines, consisting of40 separate extensions varying in length from 4 miles to 24 miles. Four ofthese extensions are needed for operational needs such as closing loops. Theremainder will serve new loads large enough to provide revenues sufficient tojustify the capital cost of the extensions. 33 kV extensions such as thesebut less than 5 miles in length are normally covered by routine system augmenta-tion provisions in CEB's annual budgets.

Attachment 1 to this Annex lists the estimated loads and consumersor other justification for these extensions.

4. Colombo Distribution System

The city of Colombo is at present fed from Kolonnawa near the northeast boundary of the city. A network of 33 kV cables from Kolonnawa feedsfour primary substations, which in turn feed consumer substations by an under-ground network of 11 kV cables. The four primary substations will soon reachthe limit of their firm capacity and in order to meet load growth it is plannedto increase the capacity of two of the substations (where there is space to doso), and to add two new substations.

CEB's engineering studies indicate that the most economical schemeis to install 132/11 kV transformers in the new substations, fed by 132 kVcables from Kolonnawa and Kelanitissa. Because of space restriction and inorder to avoid salt pollution from the nearby ocean these substations may beindoors.

The work in this section of the project thus consists of: -

4.1 Extension to the 132 kV switchgear at Kolonnawa and Kelanitissa.

4.2 Supply and installation of 13 route kilometers of 132 kV cable toform a single loop connecting the two supply points and the two substations.A tentative route for the cable has been chosen and will be fixed afterdetailed surveys.

- 40 -ANNEX 7Page 4

4.3 Supply and erection of two 132/11 kV primary substations, locatedat Fort and Union Place. Each substation will be equipped initially withtwo 30 MVA, ONAF transformers, with provision for a third.

4.4 Modifications and additions to the 11 kV underground cable systemas necessary to share the load between the proposed new arrangement of sixsubstations.

4.5 The augmentation of existing substations C and D by the additionof a third 33/11 kV, 12.5 MVA, ONAF transformer and accessories at each ofthem.

4.6 The supply of transformers, switchgear and equipment for 40 consumersubstations, 11 kV/400 V, rated 500 to 750 kVA each. (Connection charges tocover the cost of these substations will be levied on the consumers for whomthey are constructed).

5. General Distribution

This part of the project provides for 250 consumer substations,33 kV/400 V, of capacities varying from 50 to 500 kVA, and an average of 1/2mile of 33 kV line with each substation.

6. Vehicles and Tools

The project provides for the supply of 25 vehicles outside Colomboand 6 for Colombo. Provision is also made for tools for CEB's forces whowill build 33 kV distribution lines.

7. Buildings

The project includes various buildings associated with the transmis-sion and distribution system: - an area office, stores and quarters atValachchenai; depots and quarters at Kilinochchi and Mannar; and quarters atAnuradhapura and Ratmalana.

8. Consultancies, Technical Assistance and Training

8.1 Engineering of 132 kV primary substations and cables. The workrequired is to review the conclusions of CEB's preliminary studies as tocapacity, layout, voltage, etc; to prepare detailed designs, drawings,specifications and tender documents; to assist in the evaluation of tendersand preparation of contracts; to inspect materials and equipment at thefactories and during installation on site; to assist with commissioning.The work will be performed in collaboration with CEB's engineers. Theestimate provides for about 36 man months of engineering.

8.2 Engineering of 220 kV transmission lines, substations and switchingstations required to deliver power from Victoria and Kotmale into the Colomboarea. The estimate provides about 3% of a preliminary estimate of the capitalcost of these transmission facilities, equivalent to about 90 man months ofengineering.

- 41 - ANNEX 7

Page 5

8.3 Management Consultancy. The estimate provides for about 50 manmonths of consulting services. This is to cover reviewing the operation ofthe systems installed by consultants in 1973 to ascertain why managementinformation is no longer being produced, and to rectify this deficiency; andto provide for advisers to management while experience is gained.

8.4 Some foreign exchange costs may be incurred for training CEB staffoverseas in order to accomplish training objectives which are to be agreedwith IDA.

ANNEX 7ATTACHMENT 1

- 42 - Page 1

List of 33 kV Subtransmission Lines

Legend:

T - town

I - industry

B - bulk supply

RE - rural electrification scheme

WESTERN DIVISION Miles KVA Remarks

W 1. Udugampola - Minuwangoda 4.5 150 Interconnection. 3RE

W 2. Willattawa Junction-Chilaw 8 750 llB, 10I, 5RE

W 3. Divulapitiya-Minuwamgoda-Kotugoda 11.5 2,000 7B, 4T, 4RE

W 4. Agalawatto-Kalawana 14 850 41, 71, 4RE

W 5. Hattipola Bowatte (Kurukandiya) 10 2,500 6I, 2T, 4RE

W 6. Mawaramandiya-Yakkala 12.75 3,000 101, 5T, 5RE

W 7. Ingiriya-Ratnapura 23 3,000 12I, 5T, 8RE, Interconnection

W 8. Baduwatta (Colombo/Ratnapura Rd.)Kurugammodara (Panadura/RatnapuraRd.) 10 1,500 6I, 4T, 4RE

W 9. Radawana-Miriswatte 8 750 5I, 4T, 2RE

W10. Radawana-Dompe 10 1,200 4I, 5T, 3RE

Wll. Palavi-Rajakdaluwa 20 - 6RE, InterconnectionBolawatta/Puttalam GridSubstation

ANNEX 7ATTACHMENT1Page 2

SOUTHERN DIVISION Miles KVA Remarks

S 1. Keembiya to Baddegama 6.5 800 4B, 4RE, InterconnectionGalle-Deniyava Subs.

S 2. Nagoda to Talgaswela 4 550 6B

S 3. Makumbura-Batemulla 8 100 2RE

S 4. Talgaswela-Pitigala 8 100 2RE

S 5. Malpudanella-Udugama 20 1,380 9B, 5RE

CENTRAL DIVISION

C 1. Ambepussa-Edurapotha 9.7 500 2B, 4RE

C 2. Kawatayamuna-Matale to Naula 14 600 3B, 4RE

C 3. Yatigaloluwa-Polgahawela toNarammala 7 250 5RE

C 4. Ragala-Haraspedda and Watumulla 6.5 250 5RE

NORTHERN DIVISION

N 1. Talawa-Tambuttegama-Ranjangana 6.5 150 3RE, Irrigation scheme

N 2. Valekadai junction off Valachchenai 4 300 4I, 2RE

N 3. Kankesanturai-Kondavil 10 2,200 Replacing old line

N 4. Kilinochchi-Paranthan & Mankulam-Mulathivu 50 2,000 12RE, Paranthan Chemicals,

tourist hotelsN 5. Anuradhapura-Talawa-Eppawela 16 150 4RE, Interconnection A'pura and

Habarana Grid SubstationsN 6. Punkudutivu/Nainativu (Ext.) 6 300 3RE. Now using diesels.

N 7. Muthur-Alloi 8 400 2I, 4B, Irrigation

N 8. Lovelane-Chinabay 6 1,000 25RE. Replacing old line.

N 9. Mampuri-Kalpitiya 20 175 5RE. Fisheries-diesels.

N10. Galkulama-Nikawaratiya 20 300 5RE. InterconnectionPuttalam/Kurunagala Grid Subs

Nll. Puttalama-Mulankandaweli 22 400 Fisheries Corporation Program

ANNEX 7ATTACHMENT 1

44 Page 3

EASTERN DIVISION Miles KVA Remarks

E 1. Karametiya-Mahiyangana 15 450 3B, IT, 4RE

E 2. Meephakula-Taldena 4 140 3RE

E 3. Koslanda-Wellawaya 9 2,000 4B, 1RE

E 4. Kakachchachawatte-Piyangala 5 150 3T

E 5. Piyangala-Mahaoya 24 150 1B, 3RE

E 6. Mahaoya-Padiyatalawa 12 100 3T, 3RE

E 7. Balangoda-Kaltota (Tapped offWikiliya 33 kV line) 10.5 260 4RE

E 8. Obegoda-Siyambalanduwa 16 500 6B, BRE

E 9. Thirukkoondaiadimadu-Vakarai 16 600 6RE, 3I, 2 Tourist Hotels

-45 - ANNEX 8

SRI LANKA

Sixth Power Project

(Ceylon Electricity Board)

Project Cost Estimate

Foreign Local Total Foreip Local Total(Rs Thousand) (US$ Thousand)

132 kV Transmission Line.s equivalentKolonnawa to Ratmalana 2,556 180 2,736 164 12 176Anuradhapura to Valachchenai 38,520 8,100 46,620 2,469 519 2,988Anuradhapura to Chunnakam 25,560 1,800 27,360 1,638 115 1,753

66,636 10,080 76,716 4,271 646 4,917132 kV Sub and Switching StationsValachchenai 15,300 1,925 17,225 981 123 1,104Kolonnawa and Ratmalana 5,660 370 6,030 363 23 386Anuradhapura 8,475 475 8,950 543 35 578

29,435 2,770 32,205 1,887 181 2,06833 kV Subtransmission Lines500 miles 115,000 43,900 158,900 7,372 2,814 10,186

Colombo Distribution System132 kV Switching 3,875 400 4,275 248 26 274132 kV Cables 57,142 6,756 63,898 3,663 433 4,096132 kV Substations 60,518 20,600 81,118 3,879 1,321 5,20011 kV Network modification 12,165 800 12,965 780 51 831Primary Substations augmentation 14,105 2,000 16,105 904 128 1,032Consumer Substations 13,000 13,000 833 833

160,805 30,556 191,361 10,307 1,959 12,266Other Distribution125 miles 33 kV line 12,500 15,000 27,500 801 961 1,762250 substations 30,750 7,500 38,250 1,971 481 2,452

43,250 22,500 65,750 2,772 1,442 4,214Vehicles and Tools 8,250 8,250 529 529

Buildings 7,000 7,000 449 449

Consulting Services 24,550 6,650 31,200 1,574 426 2,000

CEB's Supervision 8,143 8,143 522 522447,926 131,599 579,525 28,712 8,439 37,151

Contingencies -

Physical 44,682 13,159 57,841 2,864 844 3,708Price 123,041 73,014 196,055 7,887 4,680 12,567

615,649 217,772 833,421 39,463 13,963 53,426

Customs Duty 154,059 154,059 9,876 9,876

TOTAL PROJECT COST 615,649 371,831 987,480 39,463 23,839 63,302

SRI LANKASIXTH POWER PROJECT

(CEYLON ELECTRICITY BOARD)Construction Schedule

1980 1981 1982 1983 1984

_ I 1 2 | 3 4 1 2 3 4 1 2 3 4 1 2 3 4

132 kV line Kolonnawa to Ratmalana _ , .

132 kV line Anuradhapura to Valachchenai ,J .. t _ _132 kV line Anuradhapura to Chunnakam _ ...

Grid Substation Valachchenai _

Switching stations Kolonnawa and Ratmalna C leee _

Switching station Anuradhapura ........ ** ...

33 kV Subtransmission Lines iii ee .* -.-. ..- .

33 kV Distribution lines and substations - iii .. .. … … … … … … … …_

Col ombo

1 32 kV Switching Kolonnawa and Kelanitissa N" ... _

132 kV Cables _ . l . -

132 kV Primary Substations E & F . .. ... _..

Augmentation of Primary Substations C & D ' i_ _-.. -in.. ._ _

Modifications to 11 kV network _ .

Consumer Substations h....... .._ -

LEGEND

WA _ Produce Documents

eumeuuee Tender Period

IlImmIIIIII= Evaluation & Order

......... ...Delivery of Foreign Materials

Construction World Bank - 21441

ANNEX 10- 47 -

SRI LANKA

Sixth Power ProJect

(Ceylon Electricity Board)

Schedule of Estimated Disbursements

IDA Fiscal Disbursements (US$ million) CumulativeYear Quarter Quarterly Cumulative Percentage

19812 0.5 0.5 33 0.5 1.0 54 1.4 2.4 12

1982 1 2.1 4.5 232 2.5 7.0 363 2.5 9.5 494 2.5 12.0 62

1983 1 1.7 13.7 702 1.3 15.0 773 1.2 16.2 834 0.9 17.1 88

1984 1 0.8 17.9 922 0.7 18.6 953 0.7 19.3 994 0.2 19.5 100

- 48 - ANNEX 11

SRI LANKA

Sixth Power Project

(Ceylon Electricity Board)

Income Statement, FY1974 Through FY1979

(Rupees Million)

Year Ending Actual_ EstimatedDecember 31 t974 1975 1976 1977 1978 1979

Energy Generation (GWh) 1,011 1,079 1,133 1,217 1,382 1,540

Energy Sales (GWh) 892 965 996 1,042 1,161 1,294

Energy Losses (%) 11.8 10.6 12.1 14.4 16.0 16.0

Sales Revenue (Rs/kWh) 0.16 0.16 0.16 0.16 0.18 0.30

Revenues:

Sales 142.4 155.3 161.3 170.8 205.3 388.5

Other 15.9 13.4 16.9 25.9 36.5 18.0

158.3 168.7 178.2 196.7 241.8 406.5

Expenses:

Generation 8.8 8.0 9.1 9.8 13.3 29.0

Fuel - 3.1 0.3 4.6 1.1 7.4 27.9

Transmission 5.4 6.6 6.8 5.5 7.6 16.7

Distribution 14.3 20.6 26.0 24.8 35.2 59.1

Administration 26.1 31.2 37.1 38.5 46.0 66.4

Insurance 1.4 1.4 1.5 2.6 3.1 4.5

Depreciation 32.2 34.8 36.1 68.4 83.3 105.8

91.3 102.9 121.2 150.7 195.9 309.4

Operating Income 67.0 65.8 57.0 46.0 45.9 97.1

Less: Interest (8.7) (15.2) (15.9) (24.7) (27.8) (24.1)

Net Income 58.3 50.6 41.1 21.3 18.1 73.0

Operating Ratio 42% 44% 53% 48% 47% 50%

Average Net Fixed Assets 972 1,034 1,104 1,921 2,148 2,686

Rate of Return on ANFA 6.9% 6.4% 5.2% 2.4% 2.1% 3.6%

ANNEX 12

SRI LANKA

Sixth Power Project

(Ceylon Electricity Board)

Tariff Structure (Effective December 1, 1978)

Unit Charge Maximum Demand Minimum MonthlyCategory (Rs/KWh) Charge (Rs/KVA) Charge (Rupees)

1. Domestic/Charitable:

First 50 units 0.31 - ) 5)

Over 50 units 0.21 -)

2. Domestic up to 400 sq. ft.with professional use:

First 100 units 0.31 - ) 7.50)

Over 100 units 0.21 -)

3. Bulk Supply (to LocalAuthority Licensees)

(a) Up to 400 V 0.20 17 5/KVA

(b) Over 400 V 0.19 15 5/KVA

4. General Purposes:

(a) Up to 400 V/50 KVA 0.36 - 10 or 5/KVA in

excess of 10 KVA(b) Up to 400 V/

over 50 KVA 0.25 19 5/KVA

(c) Over 400 V 0.24 17 5/KVA

5. Street Lighting 0.25 - -

6. Religious Premises 0.18 5

SRI LANKA

Sixth Power Project

CEYLON ELECTRICITY Income Statemeat RUPEES MILLION 03/25/80

1978 1979 1980 1981 1982 1983 1984 1985 196 1987

POPULATION.THOUSAND 14215.00 14499.30 14789.29 15085.07 15386,77 15694,5l1 ibooa.oo l1328.57 16655.14 16968,24POPULATION SERVED.ENERGY 1708,03 1848.04 2016,04 2191,04 2387,05 2590,05 2858,05 306,06 3332,0b 3833,07X POPULATION SERVED*ENERGY 12.02 12,75 13.o3 14,52 15.51 16,50 17,84 18,78 20,01 21,39CONNECTIONSeENERGY 336.00 359,00 390,0Q 422,00 457,00 494,00 540.00 579,00 825,00 879,00

VOLUME SOLD"MILLION kWh 1161,00 1294,00 1470,00 1825,00 1800,00 1990,00 2200,00 2450.00 2695,00 295,o00CONSUMPTION/CONNEC/MONTH 28f.95 300,37 314,1U 320,89 328,23 335,70 339,51 352.02 359,33 363.89

UNACCOUNTED FOR ENERGY 18.00 16,00 15.00 15,0D 14,00 14,00 14.00 13,00 13.00 13.00PRODUCTIONwMILL.kwh 1382,14 1540,48 1729.41 1911,76 2093,02 2313,95 2558,14 2816,09 3097,70 3408,05AVERAGE ENERGY TARIFF /kwh 0.18 0.30 0,40 0,50 0,62 0,73 0,76 0,88 1.05 1.17

ENERGY REVENUES 3 205.2O 388,46 588,00 816.26 1122.61 1447,39 1661,08 2160,28 2020,21 3459,69OTHER OPERATIONAL REVENUES- 36.50 18,00 236,40 380,80 431,60 700,00 812.90 501,40 475,80 423,50

TOTAL REVENUtS 241.7b 406,46 824,40 1197,0o 1554.21 2147,39 2473,98 2661,68 396,01 3883,19

GENERATION/OPERATION 13,30 29,00 41,30 66,S0 83.20 112,20 137,30 229,10 338,20 426,00GENERATION/FUEL 7.40 27,90 216,40 358,80 407,60 674,00 784,90 471.40 443.80 389,50TQANSMISSION 7,60 16,70 20,10 24,70 30,30 38,80 S0,00 56,20 83,60 71,70DISTRIBUTION 35,20 59,10 75,80 93,60 115,60 149.30 193,50 217,90 247,20 278,60

DIRECT COSTS 63,50 132,70 3S3,40 543,60 636,70 974,30 1165,70 974,b0 1092.80 1165,60ADMINISTRATIUNM 46,00 68,40 58,70 70,90 83,40 95,40 109,20 121,60 135,30 150,60OTHER INOIRECTCOSTS 2/ 3,06 4,46 25,90 36,50 47,00 64,20 75,40 84.20 105,60 126s,50

TQTAL COSTS 112,5b 203,50 438,00 651,00 767,10 1133,90 13So,30 1180,40 1333,70 1442,90

INCOME BEFORE DEPRECIATION 129,20 202,90 386,40 548,06 787,11 l013,49 1123,68 1481,28 1982,31 2440,29DEPRECIATION 83,28 105,75 143,75 180,73 224,98 286,98 365,87 472,12 612,09 754,64

INCOME BEFORE INTERE5T 45,92 97,15 242,6S 365,33 562,13 726,S1 7S7,81 1009,16 135S0,22 168S,65INTEREIT CHARGED OPER, 2a,80 24,10 98,20 135,10 193,50 273.80 374,20 546,88 89S,01 1191,87

sssssxs tass.gas *|2 assun *gwlsxsS *gg"gtas so-xuag Bgaslsoos wasaxag. gaso-gllg atass-X u

NET SUtPLUS (4) 18.12 73.05 144,45 230,23 368,63 452,71 383,61 462.28 455,21 493,98

AVERAGE RATE BASE 2147,59 2686,46 3662,01 4588,63 S621,32 72bS,11 9472,59 12614,45 16877,73 21070,66 L

*OPERATING RATIO X 46,58 50,08 53,13 54,38 49,36 52,80 54,58 44,35 40,46 37,16*RATE OF RETURN X 2.14 3,62 6,63 8,00 10,00 10,00 8,00 8,00 8,00 8,00

1/ Includes Business Turnover Tax at 1% Sales Revenues.

2/ Comprises bad debts and Insurance Fund Contributions,

3/ Includes fuel adjustment surcharge.

SRI LANKA

CEYLON ELECTRICITY Sixth Power Project RUPEES MILLION 03/25/80

...... .... , ,, , ,,,,_,,,,,_,,,,Fow of Funds ,,

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

SOURCES OF FUNDS3333333333333333

INCOME BEFORE DEPRECIATION 129.20 202.90 386,40 546,0x 707,11 1013.49 1123,68 1481,28 1962.31 2440.29*wow.-.*Oa *l.e. nfll .a e.nf .lf.n

GROSS INTERNAL GENERATION 129,20 202,90 386.40 546,06 787,11 1013.49 11236,8 1481,28 1962.31 2440.29GOVERMENT GRANTS 16.00 69,00 114,00 265,00 175.00 140,00 1S50.0 SO,O0 1SO,00 150,00

OTHER CONTRIBUTIONS Z.20 4,00 4.0u 139,00 139.00 135,00 55,00 55.00 5.00 5,00EQUITY INCREASE 17,80 40,00 0,00 0,00 0,00 0,00 0,00 0.00 0,O0 0,00

IDA CREDIT 0,00 0,00 0,00 85,38 136,03 70,51 12,20 0,00 0,00 O0OO

SAUDI LOAN 0.00 0.00 0.00 87,56 139.50 72,31 12,52 0,00 0.00 0,00

OTHER LOANS SS39.0 Z03,b0 587.0U 253,DO 899.00 795.00 193,00 3411,00 3878,00 2695,00

TOTAL LOANS 33 ,0 203,50 587,00 425,93 1174,53 937.82 217,72 3411.00 3878,00 2695,00

TOTAL SOURCES 504.20 519,40 1091.40 1,376.00 2275.84 2226.31 1546,40 5097.28 5995.31 5290.29

APPLICATIONS OF FUNDS

INVESTMENT IN PRUJECT 0.00 0,00 0,00 263.27 417,04 247.55 60.12 0.00 0. 00 000CAPITALIZED INTEREST 0.00 0,00 o,o0 8,65 31.07 51,99 0,00 0,00 0.00 0.00OtHER CEB SCHEMES 354,40 437,60 869.00 851,00 - S76,00 144S,00 669,00 769.00 786,oo 610,00

MAHAYELI SCHEMES 0,00 0,00 0.00 0,00 0.00 0.00 0,00 3150,00 3600,00 2550.00

TOTAL INVESTMENT 354,40 437,60 669,00 1122,92 2024,11 1744,54 729,12 3919,00 430,00 3160,00FOREIGN LOAN AMORTIZATION o.00 0.00 0.00 0.00 0O00 0.00 15.20 16.71 18,30 20,22

OTHER LOANS AMORTIZATION 46*20 48,10 28.20 28,20 52,40 65,40 73.50 162,70 313,10 44540

,_,fl __fl.. fl.e.O WO-l flm. *ew .u - --- _ .-. ...-

TOTAL AMORTIZATION 46.20 48,10 28,20 28,20 52,40 65.40 88.70 179,41 331,48 465.62OPER,INTEREST LONG T,DEBT 27.80 24,10 98,2Q 135,10 193.50 273.80 374,20 546,88 895,01 1191,67

TOTAL OPERATIONAL INTEREST 27W80 24,10 98.20 135.10 193.50 273,80 374,20 546,88 895,01 1191.67sssazx sstw *anxxx-s *astaxss *gll"ssg zxvgzuxs *ggsuxa ssssaas- ss-slw-s an- saw-

TOTAL DEBT SERVICE 74.00 72,20 126.40 163.30 245,90 339.20 462,90 726,29 1226,49 1,657.29 3INCREASE IN iORK,CAPITAL 75,80 9,60 96.00 89,78 5.63 142,57 354,38 451,99 382,81 473.00

TOTAL APPLICATIUNS 504.20 5l0.4O 1091,40 1.376.00 2275.64 2226.31 1546,40 5.097,28 5995,31 5290,29

DEBT SERVICE RATIO 1/ i,75 2.81 3,06 3,34 3,20 2.99 2,43 2,04 1,60 1,47X CONTRIBUTION TO INVESTMENT- 15.59 29.87 32,10 28,59 33,19 44,97 31,01 25.07 19,25 21,94I INTERNAL CASH RATIO 2.07 3,41 S,16 5,90 6,15 6,25 5e58 4.73 3,56 3.23

1/ From EY1980 this is based on a three-year (past, present and future) average investment;from FY1985 through 1987 investment includes the transfer of assets to CEB from MDA.

SRI LANKA

Sixth Power Project

CEYLON ELECTRICITY Balance Sheet RUPEES MILLION 03/25/80- - - a. .aaaaa..a..a .. a .. .. -- . , .. , ,, , , ,- …....... -.- a.a. ---.- i

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

ta 3S E t 8w..........

FIXED ASSLTS IN UPER, 3126,50 4564,3'4 5690,00 72538a0 9108,18 11762,83 14845,86 19490,61 25025,05 29857,55

MINUS ACCUM,ODEPRECIATION 905,59 1350,93 1697.32 2081,73 2s14s88 3003,04 3609,16 4297,83 5107,79 6232,50

NET FIXED ASSETS 2220,92 3273,47 4192,0b 5172,07 oss3,30 8759,79 11230,70 15192.78 79857,26 23625,06wORK IN PROGRESS 446,10 618,30 846,30 1312,22 2207,33 2025.87 612,98 777,98 790,98 627,98

CASH AND BANKS 56.90 60.20 147.69 192.09 207,59 193,59 476,59 930,90 1146,14 1515,21

ACCOUNTS RECEIVABLE 56.SO 116,50 206.10 299,26 388,SS 536,6s 618,49 665,42 894,00 970,80

SUNDRY RECEIVABLES 97.20 b1,bO 74,S4 8s.72 96,00 104.64 114,06 120,90 108,16 1ss,85

INVENTORIES 159,50 200,00 200,0 200.00 145,00 190.00 220,00 200,00 240,00 230,00

SUNDRY WORKS 19,00 2S,80 0,00 0,00 0,00 0,00 0,00 0,00 0.00 0.00

6ST PARITY VARIANCI 12l,60 121,80 l1,80 121,60 121,80 12l.80 t21,80 121.80 121,80 121,80

TOTAL CURRENT ASSETS 510,90 585,90 750,11 696,87 058,74 1146,88 1550,94 2039,02 2460,10 2973,65

3wUU333U tsaz.guu UBUUUUU *xaausua *-3u333u auuasuxa Bonanzas uagmuuua *samssaa UsauxulU

TOTAL ASsETs 317T,92 4417,61 5769,10 7383,16 9759,37 1l932,54 13400,63 1009, 79 231i6,34 27226,70

EQUITY AND LIABILITIESa... atM...... -tt -- a. t-ta-

ESUITY S01.70 541.70 541,70 541,70 s41,70 541,70 S41,70 S41,70 541,70 541,70

CONTRISUTIONS 41.20 114,20 232,20 636,20 950,20 1225,20 1430.20 1635,20 1790,20 1945,20

R&VALUATION SURPLUS 1146.60 1979.64 2461,66 2964,78 34el,98 4009,45 4710,23 5384,43 6296,00 7487,44

OPERATIONAL SURPLUS s88.72 661,77 806,22 1036,45 1405.08 1857,79 2241,40 2703,68 3158,88 3652,87

,,attata aaaaa...a7 taaa7aa tt7a*t. fl .. ...... ......... ..... a.. ........ .....

TOTAL EQUITY 227e.42 3297,31 4041,77 5179,13 6378,96 7634.14 8923,S3 10265,01 11786,78 13627.20

LONG TERM DEBT(NET) ssi.io io7,20 112;,00 1699,53 2;08,o; 3657,79 3;;6,09 6775,61 ioi8i,99 12347,74

ACCOUNT PAYABLES 196.70 232,10 2BO684 322,97 361,72 394.28 429,76 45SS55 402,86 511,86

DEPOSITS/SUNDRIES 62.80 92,80 112.29 129,13 144,63 157,64 t7l.83 182,14 193007 204,65

CURRENT MATURITIES 48.10 28,20 28,20 52,40 65.40 88,69 179.41 331,48 465i62 535.24

TOTAL CURRENT LIABILITIES 301.60 353,10 421,33 504,50 571,75 640.61 781,01 909.17 1141,57 1251,75

TOTAL LIABILITIES e99,s0 1120,30 1747,33 2204,03 3360,41 4298,40 4477,10 7744.78 11329,56 13599,50asgauzEm ZZU.,UZU U U ,.SUI uau a , S. . ,..... ,.U BU, .. is U*SSU X

TOTAL EQUITYaLIABILITIES 3177692 4417,01 5789,10 7363,16 9759,37 11932.54 13400,63 18009,79 23116,34 2?226,7

*WORKING CAPITALamILLION 251.40 261,00 357,0( 446,77 452,39 594,97 949.35 1401,34 1704,16 2257,15

*CURRENT RATIO 1,66 l,6b 1,7w 1,78 1,68 1,79 1,99 2.10 2,16 2,3h

X DEST/(DEBT*EGUITY) 20.62 18,88 24.70 24,71 30,S7 32,39 29,29 39,76 46,36 47,54

ANNEX 16

SRI LANKA

Sixth Power Project(Ceylon Electricity Board)

Assumptions for Financial Projections

1. Financial projections for CEB have been prepared for the periodthrough FY1987 using, as a base, CEB's audited accounts for FY1978, their"best" estimates for FY1979 and budgetted figures for FY1980. It is not yetpossible to assess the impact of the takeover of the local authority distribu-tion systems on CEB's revenues or operational costs.

IMCOME STATEMENT (ANNEX 13)

Revenues

2. Energy sales figures are taken from the "Load Forecast through 1990"(Annex 3). CEB's present average tariff is Rs 0.30/kWh and this has beenadjusted annually from FY1981 in order to produce at least CEB's covenanted8% rate of return (ROR) on currently valued net fixed assets. In FYs 1982and 1983 a 10% ROR is needed to fund CEB's contribution to the investmentprogram.

3. A tariff increase to Rs. 0.50/kWh in FY1980, which is required as acondition of credit effectiveness, would provide an 8% ROR in a full fiscalyear but it is unlikely to take effect before July 1, 1980. On this assump-tion the ROR would be 6.6% in FY1980.

4. It is assumed that fuel costs are fully recovered each year throughthe operation of CEB's fuel adjustment surcharge.

5. An annual allowance of about 2-1/2% has been made for bad debts.

OPERATING COSTS

6. Operating costs have been projected from the FY1980 budget base.Increases have been allowed for the commissioning of new plant, transmissionand distribution systems, for the increasing use of fuel oil and for inflationbased on present guidelines.

7. Fuel costs are based on the projected thermal energy requirementsindicated in Annex 4 and using local rates of price escalation.

8. Generation, transmission and distribution operating and maintenanceexpenses in FY1980 represent about 2-1/2% of CEB's gross fixed assets. Thesecosts have been projected assuming an annual incremental 0 and M cost of 2-1/2%of newly commissioned assets and weighted rates of price escalation to reflect

- 54 -ANNEX 16Page 2

the estimated imported and local components of such costs.

9. Depreciation is calculated at 2 3/4% of gross fixed assets, revaluedannually ur aig weighted rates of price escalation.

10. Administrative costs are based on a 5% annual rate of growth combinedwith local rates of price escalation and include Business Turnover Tax at 1% ofCEB's sales revenues.

11. Annual contributions to CEB's Insurance Fund are at the rate of 1/10%of CEB gross fixed assets.

FLOW OF FUND STATEMENT (ANNEX 14)

CEB Investment program and Financing Plan

12. CEB was in the process of reviewing its investment program at the timeof appraisal following a request from GSL to reduce investment in the periodthrough 1983. CEB's submission comprises the following schemes the costs ofwhich have been increased for price escalation in order to assess CEB's financialrequirements through 1987. Funding assumptions are set out below. The programbeyond 1983 is very tentative.

ANNEX 1655 Pa~~~~Fge 3

Construction Source of fundingProject Period (Foreign Costs) (Local Costs)

Under Construction

Bowatenne (hydro) Through 1980 ADB/OPEC loans GSL loansCanyon (hydro) Through 1981

Planned

Gas Turbines (60 MW) 1980 GSL loans GSL loans

Diesels (100 MW) 1982-83 Foreign loan CEB(ICG)

Transmission/distribution works:

CEB IV 1/ 1981-83 IDA , Saudi CEB(ICG)Fund loans 1/

CEB V 1985-87 Foreign loan CEB(ICG)

CEB VI 1982-87 Foreign loan CEB(ICG)

Rural Electrification:

(ADB assisted) 1980-83 ADB/OPEC 2/ GSL grant

(Other) 1984-87 GSL grant GSL grant

Improvements to localauthority systems 1982-87 GSL grant GSL grant

Other works (annual program) Through 1987 CEB(ICG) CEB(ICG)

1/ The proposed Sixth Power Project.2/ Agreement with ADB requires onlending to CEB as grants.

- 56 - ANNEX 16Page 4

13. All new foreign loans are assumed to be onlent to CEB for 20 years,with 3 years grace, at a 10% rate of interest.

Mahaweli Hydro Developments

14. This program is supervised by MDA and is financed through bilateralarrangements with donor countries. On completion of the works the hydro-electric components will be transferred to CEB for subsequent operation. Thetotal costs of each scheme will be apportioned between CEB and MDA on anagreed basis. In order to determine the amount to be transferred to CEB MDA'slatest estimated costs for the Victoria, Kotmale and Randenigala projects wereadjusted for price escalation, the cost of the hydro-electrical componentswere identified and the residual costs were assumed to be apportioned on a50:50 basis.

15. GSL has agreed with the U.K. to transfer the Victoria hydro-stationto CEB with a corresponding amount of loan with interest at 10% to be repaidto GSL over 25 years in equal annual installments. These terms are reasonable.No agreement has been reached in respect of the other Mahaweli projects; transferarrangements similar to those for Victoria have been assumed.

BALANCE SHEET (Annex 15)

Fixed Assets

16. CEB's fixed assets have been revalued to FY1978 in accordance withthe movement of indices previously agreed with IDA. A further revaluation of37-1/2% will be required in CEB's FY1979 accounts. Thereafter, annual re-valuations have been projected based upon current guidelines of price escala-tion for foreign and local goods. Accumulated depreciation has been similarlyrevalued each year and the balance credited to CEB's Revaluation Reserve.

17. Work-in-progress represents capital expenditures under the proposedproject and other CEB projects indicated at paragraph 12 above; transfershave been made to the fixed asset account on commissioning of new facilities.

Current Assets

18. The following assumptions have been made:

(a) Accounts receivable: equivalent to 3 months billings.

(b) Inventories are to be reduced to the equivalent of 4 monthsoperational materials requirements and six weeks fuel requirementsby December 31, 1982 and thereafter maintained at these levels;a stock of construction materials (Rs 50 million) has also beenassumed.

(c) Sundry Receivables have been adjusted annually for local priceescalation.

_ 57 _ ANNEX 16Page 5

(d) DST Parity Variance represents the amount shown owing by theTreasury in CEB's FY1978 accounts (Rs 121.8 million)in respect of the additional foreign exchange cost of certainforeign loans transferred to CEB in 1969 (SAR paragraph 4.10).

Equity

19. Equity comprises CEB's initial capital, as increased from time totime by GSL grants towards construction costs (mainly rural electrification),consumer contributions, revaluation surplus and retained earnings (operationalsurplus).

Long-term Debt

20. Long-term debt comprises (a) existing GSL loans to CEB includingthose made under onlending arrangements with IBRD, IDA, ADB, OPEC etc. (tocover foreign costs of previous and ongoing projects), and (b) loans requiredin accordance with paragraphs 12-15 above to fund CEB investment programthrough 1987.

Current Liabilities

21. These comprise accounts payable, deposits and sundry items whichhave been adjusted annually for local price escalation and current maturitiesof long-term loans (representing amortization due in the following fiscal year).

SRI LANKA

Sixth Power ProjectMonitoring IndLicators

CEYLON ELECTRICITY 05/25/80_- ..................... _..... ....... a ---- _-.- .......... ......... _._ ............... _

1978 1979 198U 1981 1982 1983 1984 1985 1986 1987

-.................... ....... a ...... ....... 0.-

DEMAND

CONNECTIONSwENERGY 336,00 359,00 390,0v 422,00 457,00 494,00 540,00 579,00 625,00 b79,00

CONSUMPTION-MILLION KWH 11e 00 1294,00 1470,00 1625,00 1800,00 1990.00 0 20 0,00 450,0 0 26 ~ t00 2965,00

X UNACCOUNTED FOR ENERGY 16,00 1600 15.00 15.00 14,00 14,00 14.00 13.00 13,00 13.00

PROOUCTIONMILLION KWH 1382.14 1540.48 1729,4i 1911.76 2093.02 2313.95 2S58,14 2816.09 3097.70 3408,05

P6R CAPITA PRODUCTION-KWH 2217.01 2283,79 2350,23 2390,53 2402.28 2447,70 2453,97 2516.39 2547,05 2570,06

PRODUCTION CAPACITY 1720,00 1720.00 1770,00 2130,00 2350,00 2790,00 3170,00 3710,00 4030,00 4 O0,00

X USED OF CAPACITY 80.36 89.56 97.7i 89.75 89,06 B2,94 80,70 75*91 76i87 77,4b

s INCREASE IN CONSUMPTION 11a46 13,Q 10,54 .10,77 10.56 10.55 11.36 10,00 10o02

X INCREASE IN PRODUCTION 11.46 l2.2b 10.54 9,48 loSb 10.55 10,08 10,00 10.02

COSTS

EXCHANGE RATE 1USS I 1S.60 IS,o0 15,60 15,60 15.60 15.60 15,80 15.60 15,60 15.60

OPERATING CUSTS.MILLION (Rs) 112.56 203,56 438,00 651.00 767.10 1133,90 13S0,30 1180,40 1333,70 1442,90

COST USs/KWH S0LD 0.01 0,01 o,o2 0,03 0,03 0.04 0,04 0.03 0.03 0.03

X INCREASE UPERATING COSTS 80.85 115,17 48.63 17.83 47,82 19,08 .12.58 12,99 8.19

ACCUM,PROJECT INVEST,LOCAL 000 0. a00 0,00 20327 680,31 927.86 987,50 987.98 987,98 987,98

ACCUM,PROJECT INVEST.USS 0.00 000 0. 00 16.88 43.61 59.48 63.30 0.00 0a00 0,00

ACCUM, % PROJECT INVEST, 0.00 0,00 o,o0 26.6S b6,88 93,92 10 0.00 0,00 0.0 0 0.0 0 0

ACCUM.BANK LOAN US 0. 00 0 00 0,00 5 47 14.19 18,71 19,5O 0,00 00o0 0,0o0

ACCUMULATIVE X 8ANK LOAN 0.00 0,00 0.0U 28.07 72,80 95,99 100.00 000 0.00 0.00

REVENUES

OPERATING REVENUESoMILLION(Rs)241.76 406o48 824.40 1197.06 1554.21 2147.39 2473,98 2661.68 3296,01 3683,19

ALERAGE TARIFF Rs/KWH SOLD o.18 0,30 0,40 0,50 0,62 0,73 0,76 0,88 1,05 1t17

AVERAGE TARIFF US I/KWH SOLD 0.01 0.02 0.03 0,03 0,04 0,05 005 0.06 0,07 0.07

AVERAGE REVENUES USS/KWH 0.01 0.02 0,04 0,05 0,06 0,07 0,07 0,07 0.06 0.08

S INCREASE IN TARIFFS 69.80 33,24 25,se 24,16 16,62 3,81 16,78 18.68 11.50

ANALYSIS IN CONSTANT (1980) PRICES

CONSTANT PRICE INDLX 76,69 83,b0 l1o,o0 117,71 133.48 147,39 160,65 172,60 182,95 193,93

AVERAGE TARIFF/VOLUME SOLD (Rs) 0.23 0.36 0.40 0,43 0,47 0,49 0.47 0,51 0,57 0,60

% INORNSE IN TARIFF 55.78 11,3i 6,68 9,49 5.62 w4.76 8.70 11,96 5,19

OPERATING CUSTS9MILLION (Rs) 146,77 243,51 438,00 553,03 574,68 769,34 840,52 683,91 728,99 744,04

% INCRASE OPDUTING COSTS _ oS91 79,8 26,26 3,91 33,87 9,25 .18,63 6,59 2,06

FINANCIAL RATIOS

RATE Of RETORN 2,14 3,62 6,63 8.00 100,0 o.oo 8,00 8,00 b,00 8,00

X OPERATING RATIO 46.Sb 50,08 53,13 54,38 49,36 52,80 54,58 44,35 40,46 37,16

DEBT SERVICE RATIO 1 75 2,81 3,6O 3,34 3,20 2,99 2,43 2.04 1.60 1.47

X RECEIVA8LES IN BILLING 23,37 28,66 25,00 25,00 25,00 25.00 2S 00 25.00 25.00 25.00

2 CONTRI8UT.T O INVESTMENT 14.45 23,61 32,10 28,S9 33,19 44,97 31,01 25,07 19,25 21,94

x DEST/(DEBT+EoUITY) 20.62 18,88 24,70 24,71 30,57 32,39 29,29 39,76 46,36 47,54

CURRENT RATIO 1.66 1.66 1.78 1.78 1 .68 1.79 1.99 2 .10 2 16 2 . 38

ANNEX 18

- 59 -

SRI LANKA

Sixth Power Project(Ceylon Electricity Board)

Economic Analysis

Method

1. The proposed project constitutes a part of the transmission expend-iture necessary to transmit additional power from existing and future generatingstations to the load centers. It is an integral part of the total power sectorinvestment program and can be justified only as part of the latter rather thanas an independent, self-contained project. The approach adopted in this report,therefore, is one of justification of the entire power sector investment programin its present state, allowing the conclusion that the part covered by the proposedproject is implicitly justified.

2. The analysis is complicated by the fact that CEB, the authorityultimately responsible for supplying power at the retail level, controls onlythe smaller part of total sector investment. While account is taken of powerdemand forecasts to a certain extent, the input of CEB into the planning of theimplementation of the Mahaweli Program is limited. There is, therefore, noclear-cut sector-wide effort to formulate a least-cost investment program tosatisfy forecast demand. This situation requires an analysis of the overalleconomic feasibility of the only existing investment program by comparing itscapital and current costs with the implicit benefits derived from the availabilityof additional power supply.

Economic Costs

3. Cost items are valued at CIF or equivalent border prices, whereavailable. The remaining local costs are split into labor and other local costcomponents, and adjusted by a shadow/market wage ratio of 0.67, and by a standardconversion factor of 0.91.

4. The foreign (CIF) and local (domestic price) components of new capacityare estimated to be as follows:

Foreign (%) Local (%) of which Labor (%)

Gas turbines 95 5 2.5Diesel thermal 80 20 10Hydro 75 25 12.5Transmission & Distribution 68 32 25.5

- 60 -ANNEX 18Page 2

5. Operating and maintenance expenditure is assumed to amount to 3% ofcumulative investment, with equal shares of labor and other local cost. Fuelcost is based on the actual production cost of light diesel and furnace oil inthe Colombo refinery: the bulk of the domestic consumption of `lese productsis supplied from domestic production rather than from imports of the refinedfuel. The fuel cost amounts to Rs 0.44/kWh for diesel thermal plant, andRs. 1.03/kWh for gas turbines.

Economic Benefits

6. Benefits of electricity supply, accruing to final consumers, areassessed as the willingness to pay for a given quantity of energy for specificpurposes. Analysis of this willingness to pay is based on (i) tariff revenue,(ii) observed expenditure on alternative energy sources in the absence ofelectricity supply, and (iii) on sample interviews. The sum of revenue andconsumer surplus is estimated as the area under the derived demand curve forenergy required for output production or lighting. Low, medium and highestimates for user surplus are examined.

7. Domestic electricity consumption. Almost 90% of Sri Lanka householdsare using kerosene lamps for lighting; in rural areas, this percentage risesto 97%. Domestic uses of electricity other than lighting are limited (withthe exception of the Colombo metropolitan area): about 85% of total domesticelectricity consumption is estimated to be used for lighting purposes. Inthe absence of electricity supply, households would use kerosene: the totalamount of lighting, however, would be significantly lower due to the high costof the kerosene alternative. About 15% of present total domestic electricityuse can be considered minimum lighting requirements. This portion is valuedat the economic cost of Rs 6.30 per kWh equivalent. The remainder of consump-tion is assumed to be valued at a price declining to Rs 0.59/kWh (the average1980 domestic tariff revenue) at the margin: the average value of this portionis Rs 3.45 per kWh equivalent. These values are applied to CEB-supplieddomestic consumption as well as to that part of the "bulk supply" to municipal-ities, that is estimated to be domestic use.

8. The cost of kerosene lighting is arrived at as follows, assuming alamp with a light output of 60 W equivalent, used for 1,100 hours per year for5 years:

Capital cost : Rs 325.00

Annuitized charge : Rs 1.40/kWh(13% opportunity cost of capital)

Fuel cost:0.08 1/hour at Rs 5.46/1 : Rs 4.90/kWh

Total Cost : Rs 6.30/kWh

ANNEX 18Page 3

9. Commercial consumption. As with domestic consumption, it is assumedthat 15% of electricity consumption would be replaced by kerosene lighting,the remainder declining in value to the consumer up to the margin of aboutRs 1.10/kWh, the average commercial tariff revenue including fuel surcharge.The average economic value of Rs 3.70 is applied to commercial consumption.Domestic and commercial consumption together (including their shares of CEB"bulk supply") account for about 44% of total electricity consumption.

10. Industrial consumption. For most of industry, the alternative topower supply is own diesel generation. This can be in the form of maintaininga standby diesel generating set for protection against power outages, or ofsupplying the complete energy requirement of the production process. Bothoptions are used by industrial organizations in Sri Lanka. In 1979 about 25%of industrial energy in the country was supplied by isolated diesel generationoutside the power grid. It is this share of incremental industrial electricitydemand that is assumed to replace diesel generation, and is valued at Rs 1.00/kWh,the average economic cost of operating a diesel set full time. The remaining75% of industrial demand are assumed to be valued at a price declining to themargin of Rs 0.95/kWh (the average industrial tariff revenue), resulting in anaverage value of Rs 0.98/kWh. Industry at present accounts for about 55% ofincremental electricity demand.

11. The average economic cost of operating a diesel generating set ofabout 100 KVA capacity at a rate of 4,400 annual hours for 20 years is arrivedat as follows:

Capital cost/KW Rs 3,000

Capital cost/KW/year Rs 427

Spares/KW/year Rs 50

Labor/KW/year Rs 100

Total/KW/year Rs 577 = Rs 0.13/kWh

Fuel Cost:

0.06 gals/KVA/hour at Rs 15/gal = Rs 0.90/kWh

Total Cost/kWh : Rs 1.03/kWhsay, Rs 1.00/kWh

- 62 -

ANNEX 18Page 4

12. The total economic weighted value of a kWh of incremental electricitydemand is summarized as follows:

Consumer Category % of consumption Value (Rs/kWh)Full Potential Conservative

Surplus Surplus

Domestic/Commercial 7 6.30 6.30Domestic 18 3.45 0.59Commercial 19 3.70 1.10Industrial 14 1.00 1.00Industrial 41 0.98 0.95Street Light 1 0.75 0.75

Total weighted 100 2.31 1.29

13. If tariff revenues are taken to be a proxy of the minimum benefit,the basic tariff as proposed for 1980 by CEB plus the average expected fuelsurcharge to be billed to the consumer is an appropriate measure for the years1980-84. The average surcharge will be on the order of 50% of basic tariff.The weighted tariff value is summarized as follows:

Consumer Category % of consumption Value (Rs/kWh)With Surcharge

Domestic 21 0.59Commercial 23 1.10Industrial 55 0.95Street Light 1 0.75Weighted 0.91

Cost/Benefit Analysis

14. The entire power sector investment program as known at the time ofappraisal is presented in Table 1. The Mahaweli (non-CEB) hydro projectsof Kotmale, Victoria, Randenigala, and Rantembe are assumed to be guided bypower sector needs rather than irrigation requirements in their implementation,and the total cost of the dams is included.

15. The economic costs of this investment program are compared to thebenefits arising from incremental sales 1/ made possible by this investment,using tariff as well as economic valuation of electricity supply and CEBestimates of demand. As a sensitivity analysis, the cost of the entire pro-gram is varied by 10% up and down. All cost and benefit streams for the basecase and the delayed case are shown in Table 2. Local costs are presentedafter adjustment to border prices. The exercise is conducted in terms of con-stant 1980 prices. For purposes of comparison, benefits are also expressed

1/ Estimated at the time of formulation of the investment program.

ANNEX 18Page 5

in terms of tariff revenue rather than in economic terms, implying a substan-tial underestimate of benefits. Results are presented in Table 3.

16. Benefits and costs are underestimated, if the irrigation componentof the Mahaweli program is taken into account. Additional costs would bethe downstream irrigation investment expenditures, additional benefits theincreased net agricultural output resulting from irrigation. Table 3indicates that the power sector investment program including the completeMahaweli headworks is likely to be economically justified, using electricitybenefits alone. The total power-cum-irrigation investment package is there-fore likely to be justified.

SRI LANKA

SIXTH POWER PROJECT

Power Sector Investment Program 1980-89 (April 1980)(Rs million in 1980 prices)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Generation

CEB: Bowatenne/Canyon 238 221 25 - - - - - - -

Thermal phase 1 1/ 245 30 - - - - _ _ _ _

Thermal phase 2 - - - 594 462 44 - - - - -

2/Non-CEB:- Kotmale 500 1,110 1,127 1,210 1,100 - - - - -

Victoria 800 727 826 826 1,366 - - - - -

Rladenigala/ - - 83 346 512 940 940 940 - -

RantembeSamanalawewa - - - 68 341 678 696 968 386 160 1

Transmission

Project 4 - 205 320 190 46 - - -

Project 5 - - - - - 83 268 111 20

Project 6 - - 250 250 100 - - -

Distribution

RE: ADB project 3/ 100 120 130 150 - - - - - -

Other programs- 15 15 15 15 15 15 15 15 15 15Other works 335 335 330 250 200 200 200 200 200 200

Total Power Sector 2,233 2,763 3,700 3,767 3,724 1,916 2,119 2,234 .621 375

1/ Assuming diesel plant (100 MW)2/ Includes complete headworks.3/ Decentralized budget.Note: Planning after 1985 is incomplete.Source: CEB, GSL

May 1980

ANNEX 18

- 65- P*g 7

SRI LANKA

SIXTH POWER PROJECT

Economic Costs and Benefits of the Power Sector Investment Program(Re million, 1980 prices)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 90-20015

- Costs

Thermal generation

CIF 233 29 475 370 35 - - - - - _

Local 14 1 94 73 7 - - - - - -

Hydro generation

CIF 1,154 1,544 1,546 1,838 2,490 1,214 1,227 1,431 290 120 -

Local 304 406 407 483 655 320 323 377 76 32 -

Transmission and Distribution

CIF 306 459 711 581 245 203 328 222 160 146 -

Local 106 155 240 197 83 69 111 75 54 49 -

Operation and Maintenance-/ 64 140 246 352 457 661 571 634 651 662 662

Fuel cost (CIF/FOB) - 39 121 202 116 400 116 116 291 170 170

Total Cost 2,181 2,776 3,840 4,096 4,088 2,867 2,676 2,855 1,523 1,179 832

Benefits

Incremental GWh sales (GWh) - 158 330 523 735 971 1,236 1,529 1,855 2,220 2,478

Tariff value of sale,2/ - 144 300 476 669 884 1,125 1,391 1,688 2,020 2,255

Full potential economic valueof sales 3/ - 365 762 1,208 1,698 2,243 2,855 3,532 4,285 5,128 5,724

Combined tariff/econ.omic valueof sales 4/ - 204 426 675 948 1,253 1,594 1,972 2,393 2,864. 3,197

Combined tariff/economic plus 50%of difference to full potentialeconomic / - 285 594 942 1,323 1,748 2,225 2,752 3,339 3,996 4,236

1/ Including boiler replacement in steam plant in 1985.2/ Average revenue RsO.91/kWh, including fuel surcharge.3/ Average value Rs2.31/kWh (assuming demand curve with constant slope).4/ Average value Rsl.29/kWh (assuming stepped demand curve).5/ Assuming concave demand curve.

May 1980

ANNEX 18- 66 - Page 8

SRI LANKA

SIXTH POWER PROJECT

Results of Cost-Benefit Analysis

Net Present Value InternalCost Benefit (Rs mn.) at discount rate of Rate of Return

10% 13% 15% (M)

Economic Tariff -9,501 -10,518 -10,781 3.31/

Economic Economic I 11,137 4,133 1,166 16.02/

Economic Economic II -3,897 -6,540 -7,537 7.63/

Economic Economic III 2,766 -1,741 -3,588 11.6

Sensitivity to Cost Change

Economic Economic III-/ 465 -3,755 -5,452 10.3plus 10%

3/Economic Economic III-/ 5,049 254 -1,742 13.2minus 10%

1/ High: straight-line demand curve.2/ Low: stepped demand curve.3/ Medium: concave demand curve.

May 1980

- 67 w ANNEX 19

SRI LANKA

Ceylon Electricity Board

Sixth Power Project

Related Documents and Information in the Project File

1. Feasibility Study for Thermal Generating Plant. Preece Cardew & Rider.September 1979.

2. Study of Primary Transmission Voltage. Preece Cardew & Rider.September 1979.

3. Towards an Energy Policy in Sri Lanka T.L. Sankar and GBA Fernando.October 1977.

I

SRI -LANKAAPi

~~~~~0o ~~~~~~~~~~~~SIXTH POWER PROJECT(CEYLON ELECTRICITY' BOARD)

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