Document ot

The World Bank

EOR OFFIC I A I. L SE ON LY E

Report No. P-4717-MA

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$56 MILLION

TO

SARAWAK ELECTRICITY SUPPLY CORPORATION

WITH THE GUARANTEE OF MALAYSIA

FOR A

SARAWAK POWER PROJECT

April 28, 1988

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

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CURRENCY EQUIVALENTS

Currency Unit = Rin£git (M$)M$1.0 = US$0.4

US$1.0 = M$2.5(As of December 1987)

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

km = Kilometer (0.62 miles)kg = Kilogram (2.205 pounds)ton = Metric ton (1,000 kilograms)kW Kilowatt (1,000 watts)MW = Megawatt (1,000 kilowatts)kVA = Kilovolt-ampere (1,000 volt-amperes)MVA = Megavolt-ampere (1,000 kilovolt-amperes)kWH = Kilowatt hour (860 kilo calories)GWh = Gigawatt hour (1,000,000 kilowatt hours)kV = Kilovolt (1,000 volts)BTU = British Thermal Unit (0.253 kilo calories)MMBTU = Million BTUb/d = Barrels per day (1 barrel = 159 liters)TOE = Tons of oil equivalentMMTOE = Million TOEMMCFD = Million cubic feet per daytcf = Trillion cubic feet

ABBREVIATIONS

ADB - Asian Development BankEPU - Economic Planning UnitGM - General ManagerGOM - Government of MalaysiaICB - International Competitive BiddingLCB - Local Competitive BiddingLNG - Liquified natural gasLRMC - Long Run Marginal CostMOE - Ministry of Energy, Telecommunications and PostsNEB - National Electricity Board of the States of MalayaOECF - Overseas Eccnomic Cooperation Fund (Japan)Petronas - National Petroleum AgencyPGSB - Petronas Gas Sdn. BerhadSCADA - Supervisory Control and Data Acquisition SystemSEB - Sabah Electricity BoardSESCO - Sarawak Electricity Supply Corporation

FOR OFFICIAI. t SE>. ONl

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MALAYSIA

SARAWAK POWER PROJECT

Loan and Project Summary

Borrower: Sarawak Electricity Supply Corporation (SESCO)

Guarantor: Malaysia

Amount: US$56.0 million equivalent

Terms: 15 years. including three years of grace, at the standardvariable interest rate.

Financing Plan: IBRD US$56.0 millionExport Credit/CormnercialBorrowing US$15.0 million

SESCO US$42.4 million

Total US$113.4 million

Economic Rateof Return: 232

Staff AppraisalReport: Report No. 7082-MA

Map: No. IBRD 20277

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

MEMORAND'JM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCrION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSED %.OANTO SARAWAK ELECTRICITY SUPPLY CORPORAIION FOR A SARAWAK POWER PROJECT

1. The following memorandum and recommendation on a proposed loan toSarawak Electricity Supply Corporation with the guarantee of Malaysia forUS$56 million equivalent is submitted for approval. The proposed loan wouldbe extended on Bank's standard variable interest rate with 15 years maturityincluding 3 years of grace and would help finance a power generation andtransmission project.

2. Background. The Fifth Development Plan prepared by the Government inL984-85 proposed a diversification strategy in the energy sector through a"Four Fuel Policy', basing future development on a mix of oil, gas, hydro andcoal. This strategy translated into plans to: (a) construct the 2,400 MWBakun hydroelectric project costing about US$6 billion; (b) utilize importedcoal to supply part of the energy requirements of the industrial sector and tofuel 1,200 MW of new power plants at Port Klarg; and (c) develop gas resourcesfor power and industrial use by early 19qos. In 1986 the Bank was asked bythe Economic Planning Unit (EPU) to undertake a com)rehensive review of theMalaysian power sector. The Bank's study (Report No 6466-MA) concluded that:(a) the economic cost of gas would be only about US$1.32/MMCF, substantiallylower than earlier assumptions; (b) such low-cost gas would render the Bakunhydro project and power plants burning imported coal economically unviable;and (c) the least-cost power development during the next 15 years wouldprincipally be the addition of gas-based generation. The sector study alsomade recommendations on pricing of gas to the power sector. The Governmentand concerned entities accepted the recommendations of the sector report andtook decisions to postpone the Bakun project and cancel plans for addition ofcoal fired units at Port Klang. SESCO, which would have been the host utilityfor the Bakun project, adopted the Bank's advice to extend its transmissiongrid from Sibu to Bintulu and to base its generation expansion on natural gasat Bintulu. SESCO also agreed to investigate the feasibility of utilizing gasbeing flared at Miri to generate power for Sarawak and possibly also Sabah.

3. Project Objective and Description. This project aims at utilizingSarawak's natural gas resources to meet its electricity demands, to enhanceoperational efficiency through system integration, and to strengthen theinstitutional capabilities of SESCO in the areas of system planning,engineering design and accounting. The project would consist of: (a) thefirst stage (2 x 30 MW gas turbines) of a 90 MW combined cycle power plant inBintulu; (b) 185 km double circuit, 275 kV transmission line from Bintulu toSibu with the associated substations; (c) a load dispatch center in Bintulu;(d) consulting services for engineering, architectural services andaccounting; and (e) upgrading of SESCO's capabilities in systems planning andengineering design.

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. t.e ;X,ht would be carried out over five years and be executed byset. -i,, t. :( it.y ',upply Co rporation. The total cost of the project is

r :matted at. Uri0Oi (iillion with a foreign exchange component of US$72.0,r.l'ioa ( Z7 .Z A breakdown of :osts and financing plan are given in ScheduleA. Amounti. anid niwthods of procurement and disbursement and the disbursementSL+edoL*L aKrC F,.vett in Schedule B. A time table of key project processinge'er,ts aind the stit.us of Bank operations in Malaysia are given in schedules cand D respectlvely. A map showing project locations is also attached. Thestatf appraisai Report No. 7082 is being distributed separately.

5. 'Rationale for Bank Involvement. Pursuing the recommendations of theBank's bectcr report, Malaysia's power sector will be oriented towards utiliz-ing natural ga; for electricity generation. A major challenge in this transi-tion is the strengthening of the coordination role of the various governmentagenzies and the activation of dialogue between the gas and power sectors toensure efficient allocation of resources. The Bank's input has been and willle essential to: (a) assist the core entities such as the EPU, the Ministry cfEnergy and the Federal Treasury to play the needed coordinating roles; and

assist. the dialogue between the gas and the power entities on majo: issuessaRh as pricing of gas and timing of gas projects. In addition, this projectarising directly from the sector study places the Bank in a unique position tocontribute to the dialogue among the concerned parties and will assist instrengthening the institutional capabilities of SESCO and improving itsoperational efficiency.

tD. Agreed Actions. SESCO and PETRONAS have agreed on a price ofM$ -..//'21BTU of natural gas based on its economic :ost of production andtranbmission. This price would be applicable until the end of 1996. The,.rice escalation factor for the period beyond 1996 is presently beingdiscussed. However, at negotiations assurances were obtained that the basicgas contract will be finalized by October 1988 prior to SESCO's entering intocommitments for purchase of equipment for the power plant and that theG<vernment would ensure that sufficient gas at a reasonable price would beavailable for the proposed plant. Agreements were also obtained from SESCO to(i) implement an action plan to reduce its account receivables from 90 to 75days by 1989 and 60 days by 1991; (ii) implement upon its completion therecommendations of an ongoing study on the sources and magnitude ofdistribution losses and the level of inventories; and (iii) prepare a programto upgrade SESCO's systems planning capabilities and to train SESCO's staff inaccount maintenance. The main financial covenants agreed upon are: (i) a rateof return of not less than 8 p.a. on SESCO's revalued average net fixedassets in operation; (ii) a debt/equity ratio of not greater than 60:40; and(iii) a debt service coverage of not less than 1.3.

Justification and Risks. Economic benefits that would result fromthe project are: (a) energy cost savings through the substitution of low-costgas-based electricity for more costly energy sources; (b) capital cost savingsdue to the integration of the SESCO grid with consequent reduction in reservecapacity; and (c) improved resource allocation through utilization of the gas

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resources of Sarawak. The project faces no substantial risk. The only riskforeseen is that a delay in obtaining right of way for the transmission linecould postpone the full utilization of the power station. However, thelikelihood of this delay is small as there is some slack built into thetransmission line schedule. Further, the p:oject's rate of return issufficiently high to tolerate partial utilization of the power plant for up t,

two years.

8. Recommendation. I am satisfied that the proposed loan would complywith the Articles of Agreement of the Bank and recommend that the ExecutiveDirectors approve the proposed loan.

Barber B. ConablePresident

Attachments

Washington, D.C.April 28, 1988

Schedule A

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MALAYSIA

SARAWAK POWER PROJECT

Estimated Costs:/aLocal Foreign Total------ (US$ million) ----

Power Plant 4.3 23.2 27.5Transmission line 14.7 19.7 34.4Substations 4.0 12.2 16.2Load dispatch center 0.5 2.0 2.5Consultancy services 1.0 3.4 4.4

Total Base Cost 24.5 60.5 85.0

Physical contingencies 2.4 6.1 8 5Price contingencies 2.1 5.4 7.5

Total Project Cost 29.0 72.0 101.0

Interest during construction - 12.4 12.4

Total Financing Required 29.0 84.4 113.4

Financing Plan:

IBRD - 56.0 56.0Export Credit/Commercial rorrowing - 15.0 15.0SESCO 29.0 13.4 42.4

Total 29.0 84.4 113.4

/a SESCO is exempt from payment of duties and taxes on the project.

Schedule B- " - Page 1 of 2

MALAYSIA

SARAWAK POWER PROJECT

Procurement Method(USS million)

Procurement Method TotalProject component ICB LCB Reserve Others /a NA /b cost

2 x 30 MW gasturbine generator 29.3 2.8 - - 0.6 32.7power station (27.5) (0-0) (0.0) (27.5)

275 kV transmissionlineConductors - - 12.0 - - 12.0

(0.0) (0.0)Rest of the line 26.0 - - - 3.0 29.0

(23.0) (0.0) (23.0)

Substations - 1.2 - 15.0 2.9 19.1(0-0) (0.0) (0.0) (0.0)

Load dispatchcenter 2.4 0.5 - - 0.1 3.0

(2.0) (0.0) (0.0) (2.0)

Consulting servicesPower station - - - 2.4 - 2.4

(1.8) (1.8)Transmission system - - - 1.7 - 1.7

(1.2) (1.2)Civil works - - - 0.4 - 0.4

(0.2) (0.2)Gas utilization study - - - 0.3 - 0.3

().1) (0.1)Upgrading planning - - - 0.2 - 0.2capabilities (0.1) (0.1)

Strengtheningaccounting - - - 0.2 - 0.2practices (0.1) (0.1)

Total 57.7 4.5 12.0 20.2 6.6 101.0(52.5) (0-0) (0.0) (3.5) (0.0) (56.0)

la Includes procurement of equipment under export credit/co.mmercialborrowing and consultants' services.

'.¾ Refers to SESCO's expenditures for its own staff, engineering andadministration overheads and way leaves and compensation.

Note: Figures in parentheses indicate financing from TlEc Bank loan.

Schedule BPage 2 of 2

MALAYSIA

.' RA.WAK POWER PROJECT

Disbursements

AmountCategory (US$ million)

(1) Equipment, materials andrelated works 48.0

(a) dire,tly imported IOOZ of foreign expenoditc:es(b) locally manufactured 1002 of ex-factory cost(c) procured locally 702 of local expenditure

(2) Consultant services 3.5 iCc:

(3) Unallucated 4.5

Total 56.0

Estimated IBPD Disbursement,

Eank Fiscal Year A989 1990 1991 1992 1993 1994----------- (US$ million) ------------

Annual 4.5 12.3 13.4 10.7 12.3 2.8Cumulative 4.5 16.8 30.2 40.9 53.2 56.0

St~ hejil Ite (

MALAYSIA

SARAWAK POWER PROJECT

Timetable on Key Project Processing Events

(a) Time taken to prepare: 10 months(b) Prepared by: SESCO with IBRD assistance

(c) First IBRD Mission: February 1987(d) Appraisal Mission Departure: December 1987(e) Negotiations: April 1988(f) Planned date of effectiveness: October 1988(g) List of Relevant PCRs and PPARs: Eighth Power Project

(PCR No. 6241)

Schedule n- 8 - Page 1 of 2

Tit: SrArl.S JF BANK GROUP OPERATIONS IN MALAYSA

A. SrAI'EMENT OF BANK LOANS /aAs of March 31, 1988

Amount in US$ r:-illtlon(less cancellations)

Borrower Purpose Bank Undisbursed

v-,-;rt loans fulLy disbursed 1,064.83[ L79 Malavsia MUDA II Irrigation 29.60 ).4'- 9'8H1 Malaysia Trans-Perak Area Dev. 30.65 8.20

. ' 9 i9)i Malaysia FELCRA I 37.0 fl_j;98. Malavsia Industrial Training (Educ. VI) 2,(.I1 21.6h

'_ L9i2 Nat'l Elec. Board Rural Electrification (Power X) Th.30 4.1h* +32 .9 Malaysia 'alacca Agri. Development 1i.7., >.no19A3 Malaysla Kedah Valleys Agri. Development 34.5[' 9,38

* , 1i9^3 .Yalavsia Sabah-Sarawak Road 71.'25.1'n; Nat'l Elec. Board Power (XI) 70). T 2189Lri85 1Malavsia Small Scale Enterprises S1.96

- ~185 F'ELDA FELDA Palm Oil Mill ProJect 26.12!3 Malaysia Sabah Forestry Tech. Assistance (.5' .'1- 13l Malaysia Second Industrial Training .'3.

-'j n Malaysia Land Settlement Infrastructure 3.i-J 86 lMalaysia lohore Water Supply Project t' 0' 53.'3

* l'J'4;1 Malaysia Primary and Secondary Education 12.t23n Malaysia Port 'Kelang 2.1' 2.7' r Lt Mala;sia Port Kelang 1I'< 15.59'9Y7 Malaysia Second Western Johore Agr. Dev. 55.''K 533.0'1987 bank Kemajuan Development Finance Project 2 .'1,.b87 Sabah Dev. Bank Development Finance Project 45.(i987 Nat'i Elec. Board Energy Efficiency & Plant Rehab. b9.Y' 1987 Malaysia National Forestry Research & Dev. 9.00 9.00-1937 Malaysia University Development 48.2') 8.20988 Malaysia Second FELCRA Land Development 66.0' 66.00')

Tt.'al Loans (less cancellation) 2,155.51of which has been repaid 540.24

'otal now outstanding 1,615.27

Am,ount sold 132.85ot which has been repaid 67.28

>.tal loans now held bv Bank 1,482.4,-- t-idl undisbursed 783.,9

st.-tus of tne projects listed in Part A is described in a separate report on all-:2'Ziu-\ financed projects in execution, which is updated twice yearly and circulatedt ::. Executive Directors on April 30 and October 31.

Schedule DPage 2 of 2

B. STATEMFNT OF IFC INVESTMENTAs of March 31, 1988

Amount inType of US$ million

Year Obligor business Loan Equity Total

1964-74 Malaysian Industrial Devel- Financing - 1.94 1.94opment Finance Ltd. (MIDF)

1987 Malaysia Fund, Inc. Money and - 25.46 25.46Capital Mkt.

1989 SFAVI-MA Money and - 1.00 1.00Capital Mkt.

1966 Tasek Cement Ltd. Cement 1.28 0.28 i.56

1968-69 Malayawata Steel Ltd. Steel 2.45 1.24 3.69

1970 India-Malaysia Textiles, Ltd. Textiles 1.25 0.25 1.50

1985 Pacific Hardwoods Pulp and 9.97 1.53 11.50Paper Prod.

Total Gross Commitment 14.95 31.70 46.65

Less: repayments, sales, cancellations,terminations and write-off 7.12 29.17 36.29

Total Commitments Now Held bv IFC 7.83 2.53 10.36

Total Undisbursed - 0.41 0.41

170 111 17? 113 114

MALAYSIA t x

SARAWAK AND SABAH

SARAWAK FIRST POWER PROJECT ILGRID PLAN OF SARAWAK ELECTRIC CORPORATION .

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