Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 3733-MA

STAFF APPRAISAL REPORT Public Disclosure Authorized MALAYSIA

RURAL ELECTRIFICATION PROJECT Public Disclosure Authorized

April 26, 1982

Public Disclosure Authorized Projects Department East Asia and Pacific Regional Office

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

Currency Unit - Ringgit (M$)

US$1.0 = M$2.30 M$1.00 = US$0.435

WEIGHTS AND MEASURES

1 cubic meter (cu m) = 35.31 cubic feet (cu ft) 1 hectare (ha) = 2.47 acres (ac) 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) 1 square kilometer (sq km) = 0.386 square miles (sq mi) 1 kilogram (kg) = 2.205 pounds (lb) 1 metric ton = 1,000 kilograms (kg) 1 cubic meter per second (cms) = 35.31 cubic feet per second (cfs) 1 kilovolt (kV) = 1,000 volts (V) 1 Megavolt-ampere (MVA) = 1,000 kilovolt-amperes (kVA) 1 kilovolt-ampere (kVA) = 1,000 volt-amperes (VA) 1 kilowatt (kW) = 1,000 watts (W) 1 Megawatt (MW) = 1,000 kilowatts (kW) 1 Gigawatt hour (GWh) = 1 million kilowatt hours (kWh) 1 Kilocalorie (kcal) = 3.968 British thermal units (Btu)

ABBREVIATIONS

EPU - Economic Planning Unit, Malaysia KED - Kinta Electric Distribution Co., Ltd. LRMC - Long Run Marginal Cost KM - Merz and McLellan Consulting Engineers, UK NEB - National Electricity Board of the States of Malaya PRHE - Perak River Hydroelectric Power Company, Ltd. SEB - Sabah Electricity Board SESCO - Sarawak Electricity Supply Corporation

FISCAL YEAR

NEB: September 1 - August 31

Government: January 1 - December 31 FOR OFFICIAL USE ONLY

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Table of Contents

Page No.

1. ENERGY AND THE POWER SECTOR

Overview ...... 1 Energy Resources .1...... I Oil ...... 1 Gas ...... I Hydro Power ...... 2 Coal ...... 2 Sector Organization ...... 2 Energy Sector Issues ...... 3 Bank Involvement ...... 3 The Power Sector ...... 4 Role of the Sector in the Economy ...... 4 Power Sector Organization ...... 4 Present State of Power Sector ...... 5 Access to Electricity ...... 7 Rural Electrification ...... 7 Experience with Past Loans ...... 8

2. THE BORROWER

Organizational Structure and Performance ...... 9 Manpower and Training .9...... 9 Management Systems ...... 11 Audit and Internal Control ...... 11 Taxation ...... 12 Billing and Collections ...... 12 Dividends ...... 12 Insurance ...... 12 Industrial Investment ...... 12

3. THE POWER MARKETAND THE DEVELOPMENTPROGRAM

Historical Trend...... 13 Load Forecasts ...... 13

This Report was prepared by Messrs. V.P. Thakor and A. Mejia on the basis of an appraisal conducted in September 1981.

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Page No.

Present Generating Capacity ...... 14 Committed Generation Projects ...... 14 Long-Range Generation Program ...... 15 Transmission ...... 16 Distribution and Rural ...... 17 Rural Electrification ...... 17 Minihydro ...... 18

4. THE PROJECT

Objectives ...... 20 Project Description ...... 20 Transmission Lines and Substations ...... 21 Rural Electrification ...... 22 Social and Economic Profile ...... 25 Minihydro ...... 25 Cost Estimate ...... 27 Engineering and Construction ...... 28 Procurement ...... 29 Implementation Schedule ...... 30 Financing Plan ...... 30 Disbursement ...... 30 Improvement of RE Program ...... 31 Ecology ...... 31

5. FINANCIAL ANALYSIS

Past Performance ...... 31 Present Financial Position ...... 33 Future Profitability ...... 34 Tariffs ...... 34 Financing of Development Program ...... 36 Self-Financing Ratio ...... 37 Liquidity Position ...... 37 Debt Control ...... 37

6. JUSTIFICATION

275 kV Transmission ...... 38 132 kV Lines and Substations ...... 38 Minihydro Schemes ...... 38 Rural Electrification ...... -...... 38 Benefits ...... 39 Domestic Consumers ...... 39 Commercial Consumers ...... 41 Industrial Consumers ...... 42 IERR Calculations ...... 42 Risks ...... 43 Page No.

7. AGREEMENTS REACHED AND RECOMMENDATIONS ...... 43

Recommendations ...... 44

ANNEXES

1. Level of Electrification by State in Peninsular Malaysia 2. Organization Chart 3. Actual and Forecast Sales of Energy, FY69-87 4. Committed Generation Projects 5. Generation Development 1981-86. 6. Energy Capability of NEB System 7. Summary of the Rural Electrification Program in Peninsular Malaysia: 1981-85 8. Summary of RE Program for Kedah, Kelantan, Trengganu and Pahang: 1981-85 9 Summary of RE Program for Kedah, Kelantan, Trengganu and Pahang: Three-Year Period, 1983-85 10. Population, Electrification, Income and Occupation Data of Villages in Trengganu, Pahang, Kedah and Kelantan 11. Minihydro Schemes in Malaysia: Eastern Region 12. Cost Estimate (Tables 1, 2 and 3) 13. Implementation Schedule 14. Disbursement Schedule 15. Financial Statements, FY76-80 16. Financial Forecasts, FY81-88 17. Assumptions in Financial Forecasts 18. Self-Financing Ratios, FY80-88 19. Marginal Cost of Central Diesel Stations 20. Internal Economic Rate of Return Calculations 21. Documents in the Project File

MAP - IBRD 16192

1. ENERGY AND THE POWER SECTOR

Overview

1.01 Malaysia is dependent on oil for almost all of its commercial energy requirements; oil consumption of 150,000 barrels per day (bpd) in 1980 accounted for about 93% of commercial energy used. Fortunately the country is a net exporter of oil. Petroleum exports have risen in value from about US$340 million in 1975 to US$3.1 billion in 1980. Against this the net value of crude imports in 1980 was US$800 million, providing export earnings of US$2.3 billion or roughly 18% of total export earnings on crude account. However, the rapid growth in oil consumption, averaging about 8.5% over the last 10 years, will either reduce exportable surplus or lead to early depletion of reserves. Diversification away from oil is, therefore, a major policy objective. Fortunately the country has discovered substantial gas resources, estimated at nearly three times the level of oil reserves in terms of energy equivalence. Measures to substitute oil by gas in several sectors like power generation, household consumption and transportation are being pursued.

Energy Resources

Oil

1.02 Oil production increased from about 100,000 bpd in 1975 to about 276,000 bpd in 1980. Official estimates of remaining recoverable reserves at January 81 were 1.74 billion barrels, which are considered conservative. Industry sources put ultimate recoverable reserves at about 3-3.6 billion barrels./l Even with higher reserves, with consumption growing at 8-9% p.a., the country could be a net importer of oil by the mid 1990s if no substitution of oil takes place.

Gas

1.03 Total proven gas reserves as of January 1980 were 31.2 trillion standard cubic feet (scf), but expected reserves are 43 trillion scf. About 70% of the reserves are nonassociated gas, produced independently of oil pro- duction. Associated gas is currently p--'uced at the rate of about 260 mil- lion cu ft per day, about 90% of which is flared. There are about 20 fields with nonassociated gas, all offshore with the majority near Trengganu. None of these is producing yet. Two fields offshore Sarawak are under development by Shell in order to supply gas to a Liquified Natural Gas (LNG) plant in

/1 Oil and Gas Sector Memorandum. World Bank, Energy Dept., June 1981. - 2 -

Bintulu coming on stream in 1983, which will yield 6 million tons of LNG per year for export to Japan. Gas will also provide for industrial development in the Bintulu area including an amonia/urea plant. Also a gas gathering system and pipeline are planned from gas fields offshore Trengganu to transport the gas onshore, where a 450 MW combined-cycle power generating plant is planned for startup in 1984. Government is also formulating other plans for gas utilization, including the possibility of a pipeline across Peninsular Malaysia to transport gas to the more populous west coast, for use as fuel for existing or new power plants and in various other industries. A study on gas development and utilization is being undertaken by Petronas (para. 1.09). The Bank has assisted in drafting terms of reference, developing a framework for negotiations and advising on the consultancy contract. Consultants for this study have been selected.

Hydro Power

1.04 Hydroelectric generating capacity in Peninsular Malaysia is 640 MW, with annual production of about 2,000 GWh. An additional 600 MW of capacity (2,300 GWh) is under construction. Further schemes amounting to about 1,000 MW (about 5,000 GWh) have been identified and are in various stages of planning.

1.05 Considerable hydroelectric potential is available in Sarawak and Sabah, where there is little demand for electricity. In Sarawak alone presently known hydropower potential is about 10,000 MW. A feasibility study was conducted for transmitting 1,500 MW of baseload power from Sarawak to the Peninsula by overland transmission lines and submarine cables. The project is reported to be economically attractive, but technically challenging and needing large capital investment. Also its implementation period might be 10-12 years (para. 3.09).

Coal

1.06 Total coal reserves are estimated at 400-500 million tons, mainly in Sarawak. Only 20% of these are considered economically exploitable and the quality is poor. Hence, domestically produced coal can not play any significant role in reducing the country's dependence on oil. The possibility of basing future electricity production on imported coal is under consideration (para. 3.10).

Sector Organization

1.07 A cabinet committee on energy formed in 1980 is responsible for evolving the energy policy. It consists of the Prime Minister, Deputy Prime Minister, and Ministers of Energy, Trade and Industry, and Science and - 3 -

Technology. This committee is supported by a "Committee of Officials" chaired by the Chief Secretary to the Government and having representatives from Petronas, Treasury, the Ministries of Energy, Science and Technology, Trade and Industry, the National Electricity Board and the Economic Planning Unit (EPU).

1.08 The Ministry of Energy, Telecommunications and Posts, created in 1979, has in theory, the responsibility for coordinating the activities of diverse governmental agencies dealing with energy. However, in practice, the Ministry's responsibility for energy policy so far, has been limited and consists primarily of jurisdiction over the National Electricity Board (NEB). In 1980, an Energy Unit was created in the Ministry to act as a secretariat for the cabinet committee on Energy. This unit is expected to have a wider role in the energy sector in future.

1.09 Petronas, established in 1974, as a Government company, has operat- ing responsibilities in the oil and gas sector. Malaysia's Petroleum Development Act gives it exclusive rights over exploration and production of petroleum. It supervises work programs for exploration and production of contracting oil companies and has authority to negotiate future production sharing agreements. Exploration activities are undertaken through a subsidiary company, Petronas Carigali Berhad, formed in 1978.

Energy Sector Issues

1.10 The principal task in the energy sector is to reduce the heavy and increasing dependance of the country on oil and thereby extend the life of its oil reserves and protect foreign exchange earnings. Rapid development of gas resources, with a clear understanding of how best to use the gas, is a major issue.

1.11 Simultaneously, developing an information base on other energy resources like hydropower, coal, renewable resources, etc., and analysis of the demand side, on which the data base is limited, are important to long-term policy decisions.

1.12 Promoting conservation through various efficiency improvement programs and pricing mechanisms is also an important policy objective.

Bank Involvement

1.13 Traditionally the Bank's involvement in the Energy Sector was primarily in the electric power subsector (para. 1.29). However the Bank is currently assisting the Government in two studies, viz. the gas utilization study (para. 1.03) and the National Energy Resources survey. The latter is being financed by the Bank under the Ninth Power Loan (1808-MA) and Bank - 4 -

staff have assisted EPU in drafting terms of reference for the study. Consultants have not yet been selected.

The Power Sector

Role of the Sector in the Economy

1.14 Value added by the electric power sector accounts for only about 2% of GDP. However, electricity provides motive power to the manufacturing and mining industries which amount to about 20% and 5% of GDP respectively.

1.15 The growth of the power sector has kept pace with Malaysia's econo- mic development. Between 1970 and 1980, when GNP grew at an average rate of about 7.5% in real terms, total electricity consumption grew at an average rate of about 12.8%. The elasticity coefficient of 1.7 is comparable to those for countries at similar stages of development.

1.16 Electricity accounts for about 28% of the total consumption of commercial forms of energy. Nearly 86% of electricity production is by use of liquid petroleum fuels; the total petroleum fuel used for power genera- tion in 1980 was about 12.5 million barrels.

Power Sector Organization

1.17 Power in Malaysia is supplied principally by autonomous Government- owned entities. The largest of these is NEB, serving Peninsular Malaysia with the exception of a part of the State of Perak which is supplied by the Perak River Hydroelectric Power Company (PRHE). Also small generating and distri- buting licencees exist in isolated areas where NEB's supply is not yet avail- able. The two states on the island of Borneo are supplied by Government-owned statutory authorities the Sabah Electricity Board (SEB) and the Sarawak Electricity Supply Corporation (SESCO).

1.18 In the state of Perak, PRHE and its distribution subsidiary, Kinta Electric Distribution Co., Ltd. (KED), generate and distribute electricity within their concession area to some 85,700 customers; the bulk of the output is sold to the mining industry. PRHE is a profitable operation. The company is incorporated in the United Kingdom and operates under a concession granted by the State of Perak in 1926 for a term of 80 years with a break clause after 50 years. The Government has acquired all the ordinary shares and is now the sole owner of PRHE. The General Manager of NEB is a director on the board of PRHE. The final integration of PRHE with NEB is scheduled in October 1982. - 5-

Present State of the Power Sector

1.19 The generating capacities installed by various entities as of the end of FY81 and their breakdown by types, are as follows:

Table 1.1: GENERATING CAPACITY IN MALAYSIA (MW)

Entity Total Hydro Steam Gas turbine Diesel

NEB 2,167.6 613.4 1,330.0 100.0 124.2 PRHE 93.1 27.0 64.0 - 2.1 Other Licencees 36.7 2.0 - - 34.7

Total Peninsular Malaysia 2,297.4 642.4 1,394.0 100.0 161.0

SEB 133.0 - - - 133.0 SESCO 148.2 - - 14.6 133.6

Total Malaysia 2,578.6 642.4 1,394.0 114.6 427.6 - 6 -

1.20 The electrical energy generated by the various entities and their sources, in Peninsular Malaysia for FY81 were as follows (in Table 1.2):

Table 1.2: ELECTRICITY GENERATION IN MALAYSIA FOR FY80 (GWh)

Entity Total Hydro Steam Gas turbine Diesel

NEB 8,276.0 1,125.6 6,430.8 303.8 415.8 PRHE 502.5 139.5 363.0 - - Other Licencees 34.1 2.4 - - 31.7 Mining Industry 52.3 - - - 52.3 Other Industries 254.8 - - - 254.8

Total Peninsular Malaysia 9,119.7 1,267.5 6,793.8 303.8 754.6

SEB 413.0 - - - 413.0 SESCO 355.3 - - N.A. N.A.

Total Malaysia 9,888.0 1,267.5 6,793.8 N.A. N.A.

1.21 In FY80, the consumption of electricity in Peninsular Malaysia was 8,025 GWh. The per capita consumption was 720 kWh per annum and per capita production was 810 kWh. 1.22 NEBEs sale of electricity to different categories of consumers in FY80 was as follows:

Sales Category (GWh) %

Residential 1,148 15.8 Commercial 2,216 30.5 Industrial 2,744 37.8 Mining 294 4.0 Supply to PRHE 863 11.9

Total 7,265 100.0

The transmission and distribution losses in NEB system of 10% in 1980 are reasonable (Annex 15, Table 4).

Access to Electricity

1.23 The overall degree of electrification in Peninsular Malaysia at the end of FY80 was 61%; approximately 1.35 million households out of a total of 2.21 million had electricity. However, the intensity among different states varied widely, with 80 to 90% electrification in the states of Selangor, Melaka and Penang and only about 40% in the states of Pahang, Kelantan and Kedah. Annex 1 shows the level of electrification by states in Peninsular Malaysia. The degree of electrification in Sarawak and Sabah is about 25% and 45%, respectively.

Rural Electrification

1.24 Rural electrification in Malaysia began in the 1950s when during the emergency, a large number of villages were electrified from diesel generators to provide perimeter lighting for security reasons. Originally, the installa- tions were operated by NEB-s predecessor organization (the Central Electricity Board) on the basis of cost reimbursement from the Government. After the emergency, the majority of the small systems were sold to private licensees as they were uneconomic on a full NEB service basis; 65 such licensees still exist.

1.25 Rural electrification with social objectives, however, commenced on a small scale with the first five year Malaya development plan (1956-60), and slightly accelerated during the second five year plan (1961-65). During that decade about 600 villages with about 62,000 consumers were electrified. Thereafter, greater importance to rural electrification has been given in each successive five year development plan as illustrated below. -8-

Number of villages Number of Investment Plan period electrified consumers million M$

1966-70 635 52,418 25 1971-75 1,380 96,727 74 1976-80 3,160 230,000 277

1.26 Under the Seventh Power Project (Loan 1178-MA), financing of a rural electrification study was included in order to formulate a comprehensive rural electrification plan and to review its technical, economic and financial implications. The study was completed in August 1978 by the Middle West Service Company of Chicago in association with the Perunding Bersatu Sdn. Bhd. of Kuala Lumpur.

1.27 The implementation of the growing rural electrification program was constrained by several factors, viz. organization, staff, materials procurement, way leaves, etc. In 1978, NEB set up a Rural Electrification Department, headed by a Chief Engineer, reporting directly to the General Manager, and having implementing units in each state. Special steps were also taken to coordinate materials procurement, way leave and other activities which were causing delays. As a result the implementation performance of the NEB for the rural electrification improved from about 60% to 96% of the planned program each year, towards the end of the Third Malaysian Plan (1976-80).

1.28 The rural electrification program for the Fourth Malaysian Plan (1981-85) has been formulated. Detailed discussion of its contents appear in later sections (paras.3.16-3.20).

Experience with Past Loans

1.29 The Bank has made nine loans to the National Electricity Board of the States of Malaya (NEB), aggregating US$283.2 million (net of cancella- tions). The projects under the first six loans have been completed and are operating satisfactorily. Project performance audit reports (PPARs) were made for the fifth and sixth loans in 1979 and 1981 respectively. The fifth project was completed about 3 months behind schedule with a cost overrun of 15% whereas the sixth project was delayed by eleven months and the cost overrun was 31%. Both these projects were executed as planned and achieved their major objectives. The PPAR for the sixth power project (report - 9 -

no. 3506 of June 22, 1981) notes that NEB is a well managed utility and has some effective staff training programs. It concludes that, apart from the utility's declining financial performance, due to tactors beyond the control ot its management, the project was a success.

1.30 The implementation of the seventh power project is substantially completed, with the third generating unit at Prai in service since October 1980. A cost saving of $3.0 million was achieved in the loan amount. The eighth power project is about six months behind schedule but no cost overrun is expected. The ninth power project which is in the early stage of implementation, is on schedule.

2. THE BORROWER

2.01 The Borrower will be the National Electricity Board of the States of Malaya (NEB), an autonomous Government-owned corporation established in 1949. NEB reports to the Ministry of Energy, Telecommunications and Posts.

Organizational Structure and Performance

2.02 NEB is both a regulatory and an operating agency responsible for the generation, transmission, distribution of electricity in the Peninsular Malaysia. NEB has the legal power to set tariffs and to grant licenses to independent electricity works.

2.03 All members of the Board of Directors are appointed by the Minister of Energy, Telecommunications and Posts who establishes their terms. The Chairman of the Board is the Chief Secretary of the Cabinet and the Deputy Chairman is the General Manager.

2.04 NEB's organization chart is presented in Annex 2. The operation is divided into four departments: Development Planning, Major Projects, Operation and Administration. The Development Planning Department was created recently and is still in the process of consolidating its functions and responsibilities within the organization. It is expected that in the future the Development Planning department will act as a catalyst to improve coordination of operations of the different departments.

Manpower and Training

2.05 A number of senior officials have retired in the last three years. The replacements are experienced professionals who have managed to keep the operation running without disruption.

2.06 At the end of FY81, NEB had 21,144 employees. Table 2.1 shows the evolution of manpower during the past five years by categories and compares it with the growth of sales and number of customers served. - 10 -

Table 2.1: EVOLUTION OF NEB'S MANPOWER FY77-81

Average increase FY77 FY78 FY79 FY80 FY81 p.a. (%)

1. Number of employees (average for each year)

(a) management 494 540 602 654 696 8.9 (b) technical 2,296 2,605 2,969 3,291 3,640 12.2 (c) skilled 3,029 3,664 4,345 4,763 5,242 14.7 (d) semiskilled 4,051 3,956 4,441 4,620 4,462 2.4 (e) unskilled 3,235 3,902 4,276 5,134 6,155 17.4

Total 13,105 14,667 16,633 18,462 20,195 11.4

2. (a) Average number of customers 878,047 964,586 1,070,231 1,193,056 1,311,815 10.5 (b) Number of customers per employee 67 66 64 64 65 -

3. (a) Annual sales (GWh) 5,297 5,934 6,540 7,265 7,800 10.1 (b) Annual sales per employee (MWh) 404 404 393 393 386 - - 11 -

2.07 The growth in number of unskilled employees during the past five years (17.4%) has been substantially larger than the increase in staff at the management and technical levels. This imbalance is partially explained by NEB's growing involvement in rural electrification. It also reflects the perceived shortage of trained staff, mainly in the financial area.

2.08 NEB has been trying to correct this situation through an intense training program. This program includes training in a modern and well equipped training center as well as scholarships for studies in local institutions and abroad. The center initially concentrated its efforts in training technical personnel and now is expanding to management and financial areas.

Management Systems

2.09 NEB prepares annual budgets for capital and operating expenditures. The execution of the budget is monitored every month and revisions are incorporated periodically.

2.10 There is a well-staffed and equipped Data Processing Center. Accounts receivable for three districts, as well as payroll and inventory control are computerized. The computer is also used for engineering applications. NEB is planning to introduce additional computer applications such as financial planning and billing.

2.11 Accounting systems are well designed and provide adequate information, but there have been growing delays in the preparation of financial reports. NEB is presently preparing an action plan to modernize its management information system.

Audit and Internal Control

2.12 NEB accounts are audited by Price Waterhouse and Co. and a local firm, Hanafiah, Raslan, Mohamad and Partners. Both firms have been accepted by the Bank in previous loans to NEB. The Government recently enacted a law requiring the Auditor General to audit the accounts of all government-owned corporations. Due to staff constraints, the Auditor General decided to hire the same two firms to continue as external auditors to NEB, which, according to the new norm, will report directly to the Government. During negotia- tions assurances were obtained that NEB will continue to employ independent auditors acceptable to the Bank to audit NEB's accounts and to send its audited financial statements and auditors' reports to the Bank within six months of the end of each fiscal year.

2.13 Under Loan 1808-MA it was agreed that the Internal Audit Unit now under the Chief Accountant will be reporting to the General Manager by the end of 1981 and that the scope of its work will be expanded to cover other areas of operations. Accordingly, a corporate audit unit has been approved by the NEB Board and its establishment is awaiting the approval of the Public Services Department. - 12 -

Taxation

2.14 NEB has been exempted since January 1980 from payment of corporate taxes, development tax and customs duties.

Billing and Collections

2.15 Bills are prepared monthly by district offices. In all districts the meter readers themselves prepare bills on-the-spot and hand them to customers. This procedure, although placing some burden on the internal control, accounts for the comparatively low level of receivables outstanding (41 days at the end of FY80). Collections are made through district offices, post offices and collection agents. Customers are required to maintain a guarantee deposit equivalent to 60 days of consumption.

Dividends

2.16 NEB pays dividends to the Government on the equity invested. The amount paid is decided every year by the Board of Directors. The Electricity Act sets a limit of 6% on NEB-s equity as the maximum dividend payout.

Insurance

2.17 Since 1964 NEB has retained a firm responsible for providing advice on risk management. As a result NEB has a mixture of self-insurance for minor risks and insurance policies for major ones. Every year a detailed review is undertaken to ensure proper coverage.

Industrial Investment

2.18 NEB has a 60% investment participation in two factories, one produces cables and the other transformers. NEB is now organizing a meter factory in which it would have similar participation. To avoid over- stretching of NEB's cash resources, previous loans to NEB include a covenant that limits investment in industrial activities to a maximum of 1% of its gross fixed assets as revalued each year. This covenant will be repeated in this loan. - 13 -

3. THE POWERMARKET AND THE DEVELOPMENTPROGRAM

Historical Trend

3.01 NEB's sales of electricityhave grown at an annual average rate of 12.8% in the ten year period 1970-80. During the period, the share of industrial consumption,including mining, has been maintained at about 40-42%; and the share of commercial load has remained around 30%. Residential consumptionhas grown steadily from about 12% to 16% of the total sales (Annex 3). The growth trend has been stable and reasonably predictablein the short term.

Load Forecasts

3.02 NEB regularly conducts load forecastingstudies to determine short-term (5 years) as well as long term (20 years) forecasts. Short-term forecastsare based on time series analysis of historical data for the period 1969-80 and also includes provision for extensionof service areas as well as the provision for "step input" loads. It segregatesregional distributionof demand to permit transmissionsystem planning.

3.03 Regression analysis is used to derive long-term forecastsof energy generation,utilizing economic and demographicparameters and historicaldata for the past 15 years to derive the relationships. The forecastsup to the year 2000 on the basis of such an analysis show the growth rate to lie between a low of 8.7% and a high of 10.4% p.a. NEB has accepted a mean of 9.3% growth rate for long-range planning,which is reasonable. NEB proposes to improve its forecastingcapability for which a specialworking group has been set up with representativesfrom EPU and other ministries. The group will endeavor to use supply side forecasts for synthesizingthe power demand and also study the long range effect of Governmentaction on conservationand oil substitutionmeasures on the power demand.

3.04 A combinationof the short-termand the long-term forecasts results in the followingdemand projectionsfor electricitygeneration in the NEB system. - 14 -

Table 3.1: DEMAND FORECASTS

FY Sales (GWh) Generation (GWh) % growth Demand (MW)

1980 7,265/a 8,276/a 9.4/a 1,397 /a 1981 7,800 9,360 7.9 1,550 1982 8,705 10,450 11.6 1,730 1983 9,767 11,720 12.2 1,940 1984 10,978 13,170 12.4 2,180 1985 12,339 14,810 12.4 2,450 1986 13,795 16,550 11.8 2,740 1987 15,312 18,375 11.0 3,040 1988 16,843 20,210 10.0 3,340 1989 18,527 22,230 10.0 3,680 1990 20,380 24,460 10.0 4,050 2000 46,290 55,550 8.5 9,190

/a Actuals.

3.05 These forecasts are at present used for determining the long-range planning of the generation program. However, NEB proposes to review and up- date the forecasts every year.

3.06 Annex 3 shows the sales of NEB by category, since 1969 as well as projections up to 1990.

Present Generating Capacity

3.07 NEB-s present installed capacity is about 2,168 MW consisting of 28% hydro, 61% central steam stations, 6% diesel and 5% gas turbines (para. 1.19, Table 1.1), the latter three categories using liquid petroleum fuels. Hydro stations produced about 14% of the electricity, but a major share of some 86% is produced by petroleum fuels (para. 1.20, Table 1.2).

Committed Generation Projects

3.08 NEB expects to commission about 2,040 MW of additional generating capacity by the end of 1985, through projects under different stages of implementation. These consist of Bersia, Kennering and Kenyir hydro stations (592 MW), Pasir Gudang and Port Klang oil-fired thermal stations (840 MW), Connaught Bridge Gas Turbine Station (160 MW) and Paka combined cycle thermal station (450 MW). Annex 4 shows the sequence of commissioning of these projects. Annex 5 graphically shows the projected growth of the peak demand, and the installed capacity for the period 1981-86, from which it may be observed that the installed capacity and reserve are expected to be critical in the period 1982-85, but will become adequate in 1986, if the new plants are commissioned as scheduled. Annex 6 gives the system energy capability for each year during the period, which shows adequacy of energy capability. - 15 -

Long Range Generation Program

3.09 The Government is anxious to reduce the dependence of electricity generation on fuel oil, which will still be the major fuel for power generation up to 1985. Several options are under consideration. These include expansion of the Paka combined-cycle thermal plant, using offshore gas, to 900 MW or higher; piping of gas from the east coast to the west coast to support gas-fired thermal generation; installing coal-fired thermal units at Port Klang and/or developing other sites for coal-fired stations; accelerating development of hydro schemes on Peninsular Malaysia including Ulu Trengganu (200 MW), Pergau (100 MW), Lebir (50 MW), and Tembeling (110 MW); developing of large hydro capacity in Sarawak and transmission of electricity to Western Malaysia, over 1,400 km away, including about 600 km of submarine transmission. Investigations by a group of German and Swiss consulting engineering companies (SAMA Consortium) under a technical assistance program by the German Agency for Technical Development (GTZ), which were completed in April 1981, have shown that about 1,500 MW of baseload hydro-energy can be economically supplied to Western Malaysia by hydro projects in Sarawak in 10-12 years. Detailed feasibility studies are proposed by the same consortium of consultants.

3.10 Formulation of a long-range power development program is, therefore, a complex exercise dependent on policy decisions about gas utilization (para. 1.03), suitability of local coal for power generation or use of imported coal (para. 1.06) and development of mining and/or other infrastructure for coal handling and transportation as well as investigation of suitable sites for coal-fired thermal stations, feasibility studies for hydro schemes, and consideration of nuclear options as well. During the appraisal of this project, NFB requested Bank assistance to finance a study to prepare the power development strategy for the next 20 years. They also requested assistance for financing another study for coal utilization for power generation which will address various issues, e.g. suitable sites, infrastruc- ture needs, environmental safeguards, coal purchase strategy, etc. The Bank has agreed to finance both these studies using savings from the Ninth Power Loan (1808-MA). The Terms of Reference for the studies were cleared with the Bank and consultants have been appointed for the coal utilization study.

3.11 Pending the formulation of the long-term development strategy, the Government has decided to permit NEB to go ahead with the expansion of the Paka gas-fired combined cycle station to 900 MW. Also a decision to proceed with Ulu Trengganu hydro scheme has been taken. Feasibility studies for the Pergau and Tembeling hydro schemes are in progress.

3.12 NEB has in-house capability for determining the least cost sequence of installation of generating plant, using the WASP program and regularly conducts such studies. The program under implementation up to 1986 is the least cost alternative. The expansion of Paka and the commissioning of - 16 -

Ulu Trengganu hydro plant are justified in 1987 and Commissioning of the Pergau hydro plant in 1988. The Government also decided to accelerate the installation of coal-fired units 3 and 4 (300 MW each) at Port Klang to reduce dependence on oil for electricity generation. NEB has included them in its investment program and appointed consultants for the engineering.

Transmission

3.13 Transmission development studies were carried out by Preece Cardew and Rider, consultants in 1976 and 1977 and these are reviewed and updated by NEB. Major transmission program up to 1985-86 consists of constructing 275 kV transmission backbone system to integrate all generating facilities on Peninsular Malaysia and also to facilitate regional development and accelerate rural electrification program for the east coast, which has not, hitherto, been served by the grid.

3.14 Major 275 kV transmission lines included in the program are as follows (Map IBRD 16192):

(a) Prai-Temangor (117 km);

(b) Temangor-Tanah Merah (115 km);

(c) Kuala Lumpur - Port Klang (32 km);

(d) Kuala Lumpur - Kg. Awah (138 km);

(e) Kg. Awah - Paka (201 km);

(f) Paka - Kenyir (110 km);

(g) Kenyir - Tanah Merah (169 km); and

(h) Rawang - Chendriang (151 km).

All these lines, except the Kenyir-Tanah Merah line, are under different stages of implementation. The proposed project includes Kenyir-Tanah Merah line.

3.15 Major 132 kV lines in the program up to 1985-86 are as follows:

(a) Tanah-Merah - Kota Baharu (in Kelantan);

(b) Tanah-Merah - Kaula Krai (in Kelantan); - 17 -

(c) Tanah-Merah - Gong Kedak (in Kelantan);

(d) Kenyir-Kuala Trengganu - Gong Badak (in Trengganu);

(e) Paka - Kemanan - Tg. Gelang (in Trengganu);

(f) Paka - Dungun (in Trengganu);

(g) Paka - Durian Mas (in Trengganu);

(h) Kamaman - Ayer Puteh (in Trengganu);

(i) Kg. Awah - Bera-Baru - Bandar Muadzam Shah (in Pahang); and

(j) Gurun - Jiniang (in Kedah).

The proposed project includes items (b), (d), (h) and (j). These lines along with the associated substations will provide grid power for supporting the urban and rural electrification programs in these relatively less developed states.

Distribution

3.16 For administrative convenience, NEB has divided Peninsular Malaysia into 25 districts, each headed by a District Manager (DM) with complete responsibility for subtransmission, distribution, sales and consumer liaison. Each district is also responsible for planning and implementing expansion of the distribution network. Since the implementation time for most of the distribution extension schemes is less than one year, normally such planning is formalized only one year ahead, for inclusion in NEB's capital expenditure budget. However, conceptual planning for the next three to four years is carried out at the district level. Recently, NEB has taken two steps to provide a longer timeframe for distribution planning. One, the distribution division at headquarters has been made responsible for coordination of distribution planning. Two, it has appointed a firm of local consulting engineers, Tenaga Ewbank Perunding, to prepare a ten-year perspective development plan for distribution facilities in each state. For example, these consultants have studied the optimum strategy for extending power supply facilities to central Kedah state. The present project includes financing of the 33 kV infrastructure subtransmission in Kedah (para. 4.11), based on these studies.

Rural Electrification

3.17 In Malaysia, an urban area is defined as a gazetted controlled area that has a population of 10,000 or more. Therefore, rural electrification (RE) projects are defined as projects which supply electricity to areas outside the urban areas. In 1980, there were 73 urban areas in Peninsular - 18 -

Malaysia, having about 34% of the total population. Wihile separate statistics of the degree of electrification in urban and rural areas are not available, it is estimated that by the end of 1980 about 85% of the urban households and 55% of the rural households had electricity.

3.18 The degree of electricity in different states varies considerably, the Western states in the Peninsula generally have a much higher degree of electrification than the eastern states (para. 1.23 and Annex 1). Pahang, Kelantan, Kedah, Trengganu and Johor are the least electrified states, with only 40 to 55% of households having electricity. The degree of electrifica- tion in rural areas is considerably lower than above; for example, in Kedah, the coastal area has about 90% electrification but in the noncoastal areas, the electrification is only about 10%. Similar situations exist in other states also.

3.19 The rural electrification activities in Malaysia are carried out through two types of programs. The first is the normal distribution expansion program of NEB which is funded by NEB and includes schemes which are financially viable (RE-l). These are implemented by the Distribution Department through District Managers. The second is the rural electrification program fully or partially funded by the Government which is designed to accelerate rural electrification activities (RE-2). This program includes schemes primarily originating from local and provincial authorities who interact with NEB's District Managers and the rural electrification department. The program is approved by the Government on the basis of NEB's recommendations. The selection criteria for inclusion of projects in this program are social and technical, e.g., (a) equitable distribution of schemes among states so that the less developed states get a higher allocation, (b) proximity of the area to other infrastructure facilities, (c) ease of implementation from the point of view of distance from the grid, and (d) cost per consumer connected. These criteria relate to equity and cost but benefit analysis is not customary. This program is mainly implemented by the Rural Electrification Department of the NEB.

3.20 Annex 7 presents a summary of the rural electrification program expected to be implemented during the Fourth Malaysia Plan (1981-85). The program envisages an investment of M$868 million (US$377 million) and will result in electricity supply to about 400,000 residential consumers. Current projections show that the level of electrification in rural Malaysia will reach 75% by 1990, 85% by 1995 and 95% by the year 2000.

Minihydro

3.21 Its rugged topography and heavy rainfall makes Peninsular Malaysia particularly attractive for the development of minihydro schemes. The definition of minihydro is taken to be those stations which have output between 50 kW and 1,000 kW with heads varying from low (2-15 m), medium (15-70 m) to high (above 70 m). Schemes with lower or higher output are also considered depending on their merits. - 19 -

3.22 The Government has assigned a high priority to the development of the minihydro resources, perceiving them as an economical option for providing electrical energy to rural areas for improving the quality of life and promoting development. The NEB has been made responsible for the minihydro development in Peninsular Malaysia.

3.23 A pilot program to implement six minihydro schemes was formulated to provide NEB with experience to study feasibility of schemes and select appro- priate technology. Equipment for these schemes was purchased by negotiations with suppliers in countries having experience in minihydro development, including China, India, Japan, Germany and Canada. The program was extended to the 22 schemes now in progress. The Intermediate Technology Development Group of the UK provided advice and training of personnel for undertaking this program.

3.24 To accelerate the minihydro program, the Government employed three consulting firms in 1980, to explore minihydro potential in the country and propose about 100 viable schemes. The consultants were assigned responsibi- lity for investigations in different regions as follows:

Shawinigan Engineering, Canada - Western Peninsular Malaysia Stanley Consultants, USA - Eastern Peninsular Malaysia Enex Consultants, New Zealand - Sarawak & Sabah.

The consultancy contracts are with the Economic Planning Unit (EPU) in the Prime Minister's Office, with the NEB having the coordination role for all technical aspects. The financing is from the government funds.

3.25 For financing the implementation of the schemes, the Government has requested ADB and World Bank participation for the Western and Eastern parts of the Peninsula, respectively. Therefore, the proposed project includes minihydro projects in the eastern states of Peninsular Malaysia (para. 4.13).

3.26 In order to implement the minihydro schemes, and continue further investigations for future programs, the NEB has set up a Minihydro Deparment (para. 4.20). - 20 -

4. THE PROJECT

Objectives

4.01 The objective of this operation is to support NEB's efforts to bring the benefits of electrification to those provinces now having a low degree of electrification. By expanding the Peninsular grid transmission to the eastern provinces NEB is establishing the foundation for subsequent electrification which will support the development of local manufacturing and economic activities. The project will assist the Government in providing a distribu- tion network to rural households in villages which have not previously had access to electricity. Also minihydro projects will be constructed in the eastern states of Kelantan, Trengganu, Pahang and Johor to provide electricity in rural areas.

Project Description

4.02 This project will embrace most of the Government-s rural electrifi- cation program in the less developed states of Trengganu, Kelantan, Kedah and Pahang in Peninsular Malaysia during the time period from 1983 to 1985.

4.03 The project will consist of the following elements:

(a) a 275 kV transmission line from Kenyir (Trengganu) to Tanah Merah (Kelantan).

(b) 132 kV transmission lines and stepdown substations as follows:

(i) Tanah Merah-Kuala Krai with substation at Kuala Krai (Kelantan).

(ii) Kenyir-Kuala Trengganu-Gong Badak with substations at Kuala Trengganu and Gong Badak (Trengganu).

(iii) Gurun-Jiniang (Kedah) with substation at Jiniang.

(iv) Kemaman-Ayer Puteh (Pahang).

(c) Rural Electrification schemes in the States of Kedah, Kelantan, Trengganu and Pahang. - 21 -

(d) Minihydro schemes in Trengganu, Kelantan, Pahang and Johore.

(e) Consulting services.

Transmission Lines and Substations

4.04 The 275 kV transmission line from Kenyir to Tanah Merah (169 km) will be a double circuit line with twin ACSR conductors (300 sq mm). It will complete the 275 kV transmission ring in Peninsular Malaysia (see Map IBRD 16192), permitting integrated operation of the proposed generating facilities on the east coast (Paka, Kenyir, Ulu Trengganu) with the major generating facilities in the west. 275 kV substations at Kenyir and Tanah Merah are already under construction. The project provides for additional switching and control equipment and communication facilities.

4.05 All 132 kV lines included in the Project are radial lines, needed to transmit power from the 275 kV grid to establish main grid input points for the subtransmission and distribution network (see Map IBRD 16192). The physical particulars of the 132 kV lines are given in the table below.

Item Length (kn) Particulars

Tanah Merah-Kuala Krai 40 Single circuit, 30 sq mm, ACSR

Kenyir-Kuala Trengganu 32 Double circuit, 300 sq mm, ACSR

Kuala Trengganu-Gong Badak 10 Double circuit, 300 sq mm, ACSR

Gurun-Jiniang 17 Double circuit, 300 sq mm, ACSR

Kemaman-Ayer Puteh 20 Single circuit, 300 sq mm, ACSR to be initially envisaged at 33 kV and upgraded in 1990 Total Route Length 119 - 22 -

4.06 The physical particulars of the proposed 132 kV substations are as follows:

Substation Transformers Switchgear

Kuala-Krai 2 x 15 MVA 3 x 132 kV switching bays, 132 kV/33 kV 33 kV and 11 kV switchgear

Kuala Trengganu 2 x 30 MVA, 7 x 132 kV switching bays 132 kV/11 kV and 11 kV switchgear

Gong-Badak 2 x 15 MVA 5 x 132 kV switching bays 132 x kV/11 kV and 11 kV switchgear

Jiniang 2 x 15 MVA 4 x 132 kV and 5 x 33 kV 132 kV/33 kV switching bays

Tanah-Merah nil 1 x 132 kV switching bay

Gurun nil 2 x 132 kV switching bays

Rural Electrification

4.07 The five year program for the period 1981-85 for rural electrification in Peninsular Malaysia envisages an investment M$868 million (para. 3.20 and Annex 7). The allocation of resources among the states for the Government financed RE-2 Drogram is made on the basis of several criteria (para. 3.19), including the principle of equity which implies that the lesser electrified states get a larger allocation. On the other hand the NEBfinanced projects (RE-1) are judged purely on the basis of financial viability. The allocation in different states in the period 1981-85 is as follows: - 23 -

Allocation (M$ x 106) State RE-2 RE-1

Penang 0 0 Perlis 4.8 0 M4elaka 5.9 15.1 Negri Sembilan 24.7 11.7 Selangor 38.8 12.1 Johore 57.8 100.2 Perak 58.0 0 Trengganu 69.2 95.4 Pahang 71.2 50.8 Kedah 85.9 15.8 Kelantan 107.9 41.6

Total 524.9 342.7

4.08 The five-year program for rural electrification in the states of Kedah, Kelantan, Trengganu and Pahang is summarized in Annex 8. The total investment is estimated to be M$538 million, with RE-1 projects accounting for M$204 million and RE-2 projects M$334 million. About 204,000 new consumers will be connected, including about 188,000 households.

4.09 Annex 9 summarizes the three year time slice (1983-85) of this program which is included in this project. This shows that the project is expected to result in the electrification of rural households in the four states as follows:

Households proposed State to be electrified

Kedah 32,178 Kelantan 40,220 Trengganu 23,685 Pahang 36,789

Total 132,872 - 24 -

4.10 The main components of the rural electrification program included in the project are as follows:

Item Unit Quantity

33 kV OH lines km 478

33 kV cables km 22

11 kV OH lines and UG cables km 1,616

400 V lines km 5,054

11 and 33 kV/400 V substations No 771 transformer capacity MVA 171 11 kV circuit breakers No 797

33/11 kV transformers No 18 MVA 150 33 kV switchgear and panels No 46

11 kV indoor switchgear panels No 156

Meters (single phase) No 140,000 (three phase) No 3,160

LV Distribution Panels No 478 - 25 -

4.11 The total program consists of a large number of subprojects in each state. However, two large subprojects which deserve special mention are:

(a) the central Kedah Valley 33 kV system development project, which consists of construction of about 147 km of 33 kV overhead lines and 33 kV/11 kV substations at five locations, viz. Sg. Tieng, Naka, Kuala Nerang, Sik and Baling to create infrastructure for electrification in Kedah state. This 33 kV backbone transmission network will be fed by the 132 kV extension from Gurun to Jiniang (para. 4.05). Consultants have been appointed for the engineering and construction management of this subproject (M/S Tenaga Ewbank of Malaysia).

(b) the electrification of the Jenka Triangle area in Pahang State, in the districts of Temerloh and Jerantut, covering an area of about 300,000 acres. The area has 29 FELDA (land development) schemes with about 100,000 acres of oil palm land and 60,000 acres of rubber plantations. NEB has recently established 132 kV/11 kV stepdown substations at Bandar Pusat and Kg. Awah from which supply will be extended to about 14,000 households in the area.

Social and Economic Profile

4.12 Annex 10 gives the basic statistical profiles of kampungs (tradi- tional villages) in these four states and also in the whole of peninsular Malaysia. The total population in these states is 3.29 million which is 29.6% of the total in the peninsula. Nearly 65% of the population live in kampungs; the extent of electrification is 44% in Pahang, 41% in Trengganu, 21% in Kelantan and 16.4% in Kedah. Over 60% of the families in kampungs in Trengganu, Kedah and Kelantan have a family income of under M$250 per month. The main activities in kampungs are based on forestry, agriculture (including paddy, rubber, palm oil), fishing and cottage industries. For every 1,000 households there are about 25 commercial establishments (mainly shops) and about 3 to 4 small industrial units.

Minihydro

4.13 Minihydro projects will include those schemes in the eastern states of peninsular Malaysia which are found technically feasible and economically justifiable. During the appraisal and negotiations, selection criteria were agreed for those schemes to be financed by the proposed Bank loan (para 4.14). The consultants will carry out detailed design and benefit/cost analysis of each scheme. - 26 -

4.14 The minihydro schemes will be of three types, viz: (a) those which will be connected to the grid immediately on commissioning; (b) those which are remote from the grid but will replace existing diesel generation; and (c) those which will serve isolated communities not likely to have supply from other sources in the near future. The justification for implementing schemes in the first category will be based on their being able to provide energy at a lower cost than the long-run marginal cost of supply from the grid. The evaluation of benefits from the second category of schemes will be based on cost savings due to the displacement of diesel generation. For the third category of schemes, the justification will be based on the direct and surplus benefits arising out of the use of electricity by the consumers in the areas served by the schemes. They will also have to be proven to be the least cost alternatives for electricity supply. The schemes having an internal economic rate of return (IERR) of at least 10%, will be considered acceptable for Bank financing under this project.

4.15 Investigation so far shows that those schemes in the first category, i.e., those which can be connected to the grid immediately on completion, have comparatively high benefit/cost ratios since the plants can produce and deliver energy to the grid at high load factors of operation, without being constrained by the pattern of demand, which would be the case in the schemes in the second and the third categories. Also, it is found that the grid will extend to most of the remote schemes, by 1990. Therefore, the optimal design of such schemes will take into account the possibility of the grid tie, which will permit the use of otherwise surplus energy.

4.16 The consultants identified 214 potential sites in the states of Kelantan, Trengganu, Pahang and Johor on the basis of a desk study of topo- graphical maps, hydrological data and other available information. Of these 164 sites were considered viable for further study. Reconnaissance visits made to these sites showed that 115 sites were not suitable for development due to various reasons, such as difficulty of access, lack of market in the vicinity, excessive civil works cost, etc. Further detailed investigation resulted in the rejection of four more sites on technical grounds, leaving 45 sites which were evaluated in detail for plant size, layout, market, cost, benefit, etc. resulting in 41 feasible sites distributed as follows: - 27 -

Number of Sites close Other State sites to grid sites

Kelantan 12 1 11

Trengganu 12 10 2

Pahang 14 10 4

Johor 3 3 0

Total 41 24 17

4.17 Annex 11 gives a summary of the capacity, energy capability and preliminary cost estimate for these sites. The interim report from the consultants which will cover details of all investigations and studies, is expected to be available in May 1982. The Government has appointed a techni- cal evaluation committee to scrutinize data submitted by the consultants in the course of their investigation and progressively give clearance to them for further detailed engineering and design for promising sites. The committee has cleared the above schemes for further work. It is proposed that the Bank staff will review a few schemes in detail with NEB and EPU staff and if satisfied, will delegate the selection of other schemes to the committee.

Cost Estimate

4.18 Annex 12, Tables 1, 2 and 3, give the detailed cost estimates for the 275 kV transmission line, 132 kV transmission lines and substations and the rural electrification projects in the states of Kedah, Kelantan, Trengganu and Pahang. The cost estimates for the minihydro schemes are based on the preliminary studies which will be refined at the detailed engineering stage.

4.19 Table 4.1 below gives a summary of the project cost estimate. All costs are based on March 1982 prices. The price contingencies are worked out on the basis of the following inflation factors, for local and foreign costs: 8.5% for 1982, 7.5% for 1983-85, and 6% p.a. thereafter. The costs are net of taxes and duties since the NEB is exempt from them. - 28 -

Table 4.1: COST ESTIMIATESUMMARY

Item Foreign Local Total Foreign Local Total -- (M$ million) ------(US$ million) ---

1. 275 kV Kenyir-Tanah Merah Line 25.20 16.80 42.00 10.96 7.30 18.26

2. 132 kV lines and associated substations 20.55 15.83 36.38 8.93 6.89 15.82

3. Rural electrification projects 177.32 197.20 374.52 77.09 85.74 162.83

4. Mini-hydro projects 47.40 58.40 105.80 20.61 25.39 46.00

5. Consulting services (a) 275 kV line 1.50 0.50 2.00 0.65 0.22 0.87 (b) Kedah Valley Project - 3.22 3.22 - 1.40 1.40 (c) Mini-hydro projects 2.00 - 2.00 0.87 - 0.87

Base Cost 273.97 291.95 565.92 119.11 126.94 246.05

6. Physical contingency /a 10.43 9.84 20.27 4.53 4.28 8.81

7. Price contingency 65.68 70.86 136.54 28.56 30.80 59.36

Total Project Cost 350.08 372.65 722.73 152.20 162.02 314.22

8. Front-end fee on Bank Loan 2.93 - 2.93 1.28 - 1.28

Total Financing Required 353.01 372.65 724.66 153.48 162.02 315.50

/a At about 10% for (1), (2) and (4).

Engineering and Construction

4.20 Merz and McLellan Consulting Engineers (MM) of the UK, along with the local consulting firm of Tahir Wong, were appointed consultants by the NEB for the engineering and construction supervision of the 275 kV transmission line, under terms of reference acceptable to the Bank (para 4.21). The engineering and construction of the 132 kV lines and substations will be carried out by NEB's transmission department which has adequate experience in such works. The local consulting firm of Tenaga Ewbank Perunding will be responsible for the engineering and construction supervision of the Central Kedah Valley 33 kV system development projects. Other components of the rural electrification projects will be carried out by the respective departments of NEB, viz. the rural electrification department, the distribution department - 29 -

and the NEB District Manager's organization in the states. Stanley Consul- tants, Inc. of the USA are responsible for the investigation and engineering of minihydro schemes up to the point of the preparation of tender documents. NEB has established a minihydro department for the implementation of the minihydro schemes. The department is placed under the Chief Engineer (Rural Electrification) reporting directly to the General Manager. An adequate organization chart has been approved and recruitment is in progress. Also training of the staff is underway through technology transfer program included in consulting services contracts. It is expected that this department will be able to take over the responsibility for the implementation of the minihydro projects. However, it was agreed that advisory services from consultants will be sought in various areas like vendor selection, construction supervision, etc., according to the terms of reference acceptable to the Bank.

4.21 The consulting services for 275 kV line would amount to about 68 man-months of which 31 man-months will be provided by the local consul- tants. MM's man-month rate for the head office services is about E 3,010 ($6,000). The man-month cost for the local consultant is M$4,900 (US$2,130). The man-month cost including travel, subsistence and other direct reimbursible expenses works out to US$10,000 equivalent. The services of Stanley Consultants, Inc. for minihydro work and Tenaga Ewbank for the Kedah Valley 33 kV system development are not being financed by the Bank. Estimation for further consulting services for the minihydro projects is based on a man-month cost of $10,000.

Procurement

4.22 The Bank loan would be used to finance foreign cost of equipment and services procured by ICB in accordance with the Bank's Procurement Guidelines. The contracts will be packaged as follows: The construction of the 275 kV and 132 kV lines will be executed by contracts covering supply and erection. The following materials for the rural electrification projects will be procured by ICB procedures following Bank guidelines: Aluminum alloy conductors and accessories, steel poles, cross arms and accessories, 11 kV and 33 kV U. G. cables, insulators, 11 kV and 33 kV switchgear, 33/11 kV transformers and energy meters. Procurement of the distribution materials will be carried out in two or three lots.

4.23 For the procurement of equipment for the minihydro plants, the turbine-generator and station equipment will be divided into three categories viz high head, medium head and low head plants. Bidders will be free to bid for any one or all of these. Since the number of high head plants is large, flexibility will be provided in the tenders to divide this into two parts, i.e. a supplier may quote for half the number, at his option. Such a strategy will permit smaller manufacturers to tender without violating the time constraint for delivery. It is proposed to carry out prequalification of suppliers for the electrical and mechanical equipment.

4.24 All bidding packages for goods and services estimated to cost over US$500,000 equivalent would be subject to the Bank's prior review of procure- ment documentation, covering all foreseen contracts. - 30 -

Implementation Schedule

4.25 Annex 13 gives the implementation schedules for the various elements of the project. The construction of the 275 kV line and 132 kV lines and substations is expected to be completed by December 1985, and the minihydro projects by June 1986. The rural electrification program extends up to December 1985.

Financing Plan

4.26 The following financing plan is proposed for the project:

Source Foreign Local Total

IBRD 86.3 - 86.3 Supplier's Credit 15.5 10.0 25.5 Commercial banks 51.7 - 51.7 NEB's resources - 19.7 19.7

Government - 132.3 132.3

Total 153.5 162.0 315.5

NEB will borrow from commercial banks with the guarantee of the Government. Supplier-s credit is proposed for financing the 275 kV transmission line construction. The Bank loan, which will financing about 27% of the project cost, will be used to finance the foreign costs of 132 kV lines and sub- stations, minihydro projects, selected distribution equipment and consulting services.

Disbursement

4.27 The Bank loan would be disbursed against (a) 100% of the foreign expenditures of directly imported equipment and materials, 100% of local expenditures exfactory of locally manufactured items and 70% of the cost of imported items procured locally; and (b) 100% of foreign expenditures for consultants- services. No disbursement will be made for expenditures prior to the loan signing.

4.28 Annex 14 gives the disbursement schedule for the proposed Bank loan based on the implementation schedule. The regional and the IBRD disbursement profiles for loans for transmission and distribution projects are also shown in the annex which show that the disbursement schedule for the project is generally in line with them in the first four years. Disbursements are expected to be completed by December 1986. - 31 -

Improvement of Rural Electrification Program

4.29 It has been agreed that several measures will be introduced to improve the efficiency of the rural electrification program which include: (i) strengthening the planning of the rural electrification program, (ii) designing and implementing an information system which will enable evaluation of the rural electrification program already implemented to provide feedback for improving future planning, (iii) examining the design standards for rural distribution to achieve cost reduction without reducing safety and reliability standards below aceptable limits, and (iv) introducing measures to ensure that productive uses of electricity are encouraged in the Government financed rural electrification schemes. NEB has agreed to prepare detailed proposals and implementation programs for these, acceptable to the Bank by September 1, 1982 and implement them by September 1, 1983.

Ecology

4.30 Transmission and distribution projects will be designed and carried out in accordance with the current technological practices and will cause minimum disturbance to the environment. No safety hazards are foreseen. The minihydro projects will also be engineered and implemented to confine adverse ecological effects to a minimum. Since all minihydro schemes will be of the run-of-the-river type without storage, the environmental problems will be mainly concerned with the forest clearance for access roads and small areas for powerhouse construction. NEB proposes to closely coordinate these activities with the Ministry for Land Development and the state agencies concerned with agriculture and forestry.

5. FINANCIAL ANALYSIS

Past Performance

5.01 Detailed financial statements and performance indicators for fiscal years 1976 through 1980 are presented in Annex 15. During this period, as shown in Table 5.1, the growth rate of operating costs exceeded that of revenues. In spite of this, NEB generated profits every year until 1979 and managed to maintain a rate of return on net revalued assets varying between 5.0% and 7.5%.

5.02 FY80 was the first year in NEB's history in which it incurred an operating loss. During that year NEB had to face steep increases in fuel costs. The Government allowed an increase in tariffs by 13.2% only in October 1979. A further increase of 51.6% in December 1980 was permitted after the close of FY80. As a result, NEB could not comply with the 8% rate of return on revalued fixed assets covenanted for FY80 under Loan 1443-MA. - 32 -

Table 5.1: SUMMARYHISTORICAL INCOME STATEMENTS

Average growth FY76 FY77 FY78 FY79 FY80 (% p.a.)

Energy sales (GWh) 4,543 5,297 5,934 6,540 7,265 12.5 Revenues (M$ million) 493 576 655 833 1,110 22.5 Operating cost (M$ million) 432 530 576 799 1,192 28.2 Net income (M$ million) 61 46 79 34 (82) - Rate of return (M) /a 7.2 5.3 7.5 4.9 (0.2) - Average tariff (M¢/kWh) 10.7 10.7 10.8 12.5 15.0 -

/a On net revalued fixed assets.

5.03 The effect of the increased operating costs mentioned in para. 5.01 is reflected in a decline in the NEB's internal cash generation to finance capital expenditures. This is shown in Table 5.2. From a participation of about 40% in FY76 through FY78, internally generated funds dropped to 20% in FY80. The resulting gap was covered by equity increases.

Table 5.2: PERCENTAGE COMPOSITION OF SOURCES AND APPLICATIONS OF FUNDS - FY76-80

FY76 FY77 FY78 FY79 FY80

Sources Internal sources 41 38 42 32 20 Equity increases 14 25 11 31 42 Borrowings 45 37 47 37 38

Total 100 100 100 100 100

Applications Capital expenditures 90 87 74 81 73 Increase in working capital (6) (4) 9 4 9 Debt service 16 17 17 15 18

Total 100 100 100 100 100

Debt service coverage 2.6 2.2 2.4 2.1 1.1 - 33 -

5.04 As shown in Table 5.3, NEB-s capital structure remains sound. Long-term debt as a percentageof total capitalizationwas 46% at the end of FY80. Similarly,NEB's liquidity position improved substantiallybecause of Government equity contributionsof M$362 million (US$160 million) during FY79 and FY80. Net working capital increased from a negative figure in FY76 and FY77 to a positive M$71 million in FY80.

Table 5.3: SUMMARY HISTORICAL BALANCE SHEETS FY76-80

FY76 FY77 FY78 FY79 FY80

------(M$ Million) ------

Net fixed assets 1,907 2,273 2,572 3,160 3,890 Net working capital (10) (30) 10 22 71

Total 1,897 2,243 2,582 3,182 3,961

Equity 1,188 1,421 1,565 1,969 2,542 Long-term debt 604 716 876 1,071 1,245 Other liabilities 105 106 141 142 174

1,897 2,243 2,582 3,182 3,961

Debt as % of total capitalization/a 46 46 47 46 46

Current ratio 0.9 0.9 1.0 1.1 1.1

/a Excluding surplus from revaluation.

Present Financial Position

5.05 During FY81 NEB experienceda substantialreduction in its sales growth rate./l This was due mainly to delays in the completion of the transmissionline from Prai to the load center of Kuala Lumpur and the need to put Port Dickson Thermal plant out of service for unscheduledmaintenance. Additionally, it appears that the steep tariff increase implementedin December 1980 triggered electricityconservation actions by the consumers. As a consequenceNEB's rate of return on revalued assets was 6.4% in FY81 and the self-financingratio (SFR) was 10.2%, compared to 25% covenanted under

/1 Sales increase in FY81 was 7.4% compared to 11.1% in FY80. - 34 -

Loan 1808-MA for that year. This low SFR is due to reduced sales volume, as explained above, larger capital development expenditure and a substantial increase in working capital. During FY81 NEB's financial position was reinforced with a M$300 million (US$133 million) equity contribution received from the Government to cover revenue foregone in FY80 because of delays in approving NEB's tariff increases. At the end of FY81 NEB's long-term debt as a percentage of total capitalization was 42% and its current ratio was 1.4.

Future Profitability

5.06 Detailed financial projections and monitoring indicators are presented in Annex 16 and the assumptions incorporated in these forecasts are shown in Annex 17. A summary of the projected income statements for FY82-86 is presented in Table 5.4. Under the assumptions followed, NEB-s rate of return on net revalued fixed assets is expected to exceed 7% every year after FY83. This is adequate considering that NEB-s cash requirements are met and that the average rate base is projected to increase more than three-and-a-half times between FY81 and FY86. The operating ratio is also expected to improve slightly during that period.

Table 5.4: SUMMARY PROJECTED INCOME STATEMENTS

FY82 FY83 FY84 FY85 FY86

Income Statement Energy sales (GWh) 8,705 9,767 10,978 12,339 13,795 Revenues (M$ million) 1,954 2,411 3,008 3,613 4,180 Operating cost (M$ million) 1,846 2,201 2,717 3,287 3,755 Net operating income (M$ million) 108 210 291 326 425 Rate of return (%) /a 6.6 7.5 7.8 7.1 7.3 Operating ratio (%) 89 86 86 85 84

Average Tariffs Current (Me/kWh) 21.9 24.2 26.9 28.9 29.9 Constant (Me/kWh) (1982 prices) 21.9 22.5 23.3 23.2 22.5

/a On revalued fixed assets.

Tariffs

5.07 Although NEB has the legal power to adjust its tariffs when required, in practice the Government determines the amount and timing of tariff increases. In 1975 an automatic fuel cost variation charge was - 35 -

introduced but it was abolished at the time of the last tariff increase of about 52% in December 1980 when the Government decided that the electricity tariffs would normally be revised only once a year to avoid cost uncertainties for industrial consumers and to help control inflationary pressures. After that increase, NEB's average tariff of M¢21.9 (US¢9.5) became one of the highest in the region compared to US¢7.9 in Thailand, US06.8 in Indonesia, US¢8.4 in Singapore, and USo7.8 in Philippines. It may be noted that the NEB pays for the fuel oil used for power generation at the international price (M$520 per ton). Also recent calculation (May-81) based on the NEB's investment program for the period 1981-86 for generation, transmission and distribution indicated the average long-run marginal cost of supply to be about M¢l9.0 per kWh, which is lower than the current tariff level.

5.08 Under Loan 1808-MA NEB agreed to (a) exchange views with the Bank on any proposed changes on its tariff structure; and (b) review with the Government at least three months before the end of each year the measures necessary for NEB to comply with the covenanted self-financing ratios. It was agreed to continue this covenant. In addition, during negotiations the following procedure for tariff reviews was agreed with the Government:

(a) NEB's tarriffs will be normally reviewed and revised annually at about the beginning of its fiscal year taking into account (i) the increases in operating costs including increases in fuel prices in the 12 months which are not reflected in its electricity tariffs; (ii) the best estimates of such increases in the following 12 months; and (iii) the need to generate revenues to meet the agreed self-financing percentages.

(b) Should the actual increases in fuel prices during a year be substantially greater than the best estimates assumed in (ii) of (a) above for that year, the Government will take appropriate interim measures as necessary.

(c) If NEB's financial results for a year indicate that it will not achieve the agreed self-financing percentages in that year (Year A), then the tariffs for the immediately succeeding year (Year B) will be set at a level which will permit NEB to recover in Year B the shortfall in the agreed self-financing percentages for Year A.

5.09 Projected tariffs for the period FY82-86 are presented in Table 5.4. It is assumed that during that period tariff increases will be almost entirely limited to adjustments for inflation. - 36 -

Financing of Development Program

5.10 A financing plan for the period FY83 through FY87 is presented in Table 5.5. According to this plan, the NEB will contribute about 25% from internally generated funds to its total financial requirements which is adequate considering NEB's large development Program (para. 5.12). It has been assumed that after FY82 Government equity contributions will be limited to the reimbursement of capital expenditures for rural electrification.

Table 5.5: NEB's FINANCING PLAN FY83-87

M$ US$ (millions) (millions) %

Sources Internal sources 4,408.1 1,916.5 49.4 Less: debt service 2,160.5 939.2 24.2 Net internal generation 2,247.6 977.2 25.2 Customers contributions 237.0 103.0 2.7 Equity 536.0 233.0 6.0 Other 125.0 54.3 1.4 Borrowings 5,771.6 2,509.5 64.7

Total sources of funds 8,917.2 3,877.0 100.0

Financial Requirements Capital expenditures 8,288.3 3,603.6 92.9 Working capital increase 628.9 273.4 7.1

Total requirements 8,917.2 3,877.0 100.0

5.11 NEB has access, through the Malaysian Treasury, to several sources of financing including the Overseas Economic Corporation Fund (Japan), the Commonwealth Development Corporation (UK), the Kuwait Fund for Arab Economic Development, the Asian Development Bank and several international and local commercial banks. It is therefore considered that the NEB will have no difficulty in raising the funds required to finance its development program. In addition, during negotiations assurances were obtained that the Government will provide adequate funds to help finance the NEB's development program if the need arises. - 37 -

Self-Financing Ratio

5.12 NEB recently revised its investment program for FY82 through FY85. The updated program is more than two and a half times the program projected for the same period at the time of appraising the Power IX project in 1978. This increase is largely due to updating of construction cost and more capital intensive coal-fired thermal schemes now proposed. NEB's contribution to construction in each year of the forecast period, using this revised investment program, is analyzed in Annex 18. That analysis shows that, given the tariff level assumed, NEB will attain the self-financing ratios (SFRs) shown in Table 5.6. That table also presents the SFRs previously agreed under Loan 1808-MA and those agreed during negotiations. The new SFRB have been set so that adequate flexibility is preserved. To maintain the previously agreed SFRs, given the substantially higher projected investment, would result in unrealistic tariff increases. Currently NEB's tariffs exceed the long-run marginal cost and are higher than those of neighboring countries (para. 5.07). The projected SFRs are expected to result in rates of return on net revalued fixed assets in excess of 7.0% after FY83 (Table 5.4) which is a satisfactory performance.

Table 5.6: SELF-FINANCING RATIOS (SFR), FY82-88

82 83 84 85 86 87 88 … ______( -)…______

SFRs as projected 17 19 22 26 33 34 33 Agreed minimum SFRs 15 15 20 25 25 30 30 SFRs under Loan 1808-MA 25 25 25 30 30 30 30

Liquidity Position

5.13 NEB's net working capital is expected to increase in the future; the current ratio as projected will remain above 1.3 from FY82 through FY88. Under Loan 1808-MA it was agreed that NEB would limit its current liabilities to one-third of its cash operating expenses. NEB has managed to reduce such ratio from 42% in FY78 to 32% in FY80. It is now considered that at this stage a current ratio covenant is more appropriate to monitor NEB-s liquidity position. Such covenant, agreed during negotiations, requires that NEB's current ratio should be not less than 1.1 at any given time.

Debt Control

5.14 Under the assumptions followed, the debt service coverage ratio is expected to exceed 1.8 each year during the period FY82 through FY88. NEB's capital structure is also expected to remain sound. Its long-term debt will not exceed 60% of the total capital employed. Previous loan agreements require NEB to limit its long-term debt to 60% of the sum of equity and debt. This test will be continued under this loan. - 38 -

6. JUSTIFICATION

275 kV Transmission

6.01 The need for the transmission line between Kenyir and Tanah Merah is justified by technical studies of the system transmission expansion. The construction of the line will permit full utilization of the output from Kenyir Hydroelectric plant and the Paka combined-cycle,gas-fired thermal plant, both scheduled for completion by 1985. Selection of 275 kV as the grid voltage has been justified by long-range studies and a number of 275 kV lines have been constructed or are under construction (para. 3.14). In the case of the Kenyir-Tanah Merah line, it was established that the construction of a 275 kV line would be a lower cost alternative than the construction of 132 kV lines, with the necessary power transfer capacity.

132 kV Lines and Substations

6.02 The 132 kV lines and substations included in the project are necessary for extending the grid supply to areas with existing and potential demand. Each proposal has been studied in comparison with two other alter- natives, viz. (a) establishing or augmenting diesel generating stations to meet the demand and (b) carrying out the extension by 33 kV or 11 kV lines. In all cases the proposed alternative has been demonstrated to be the least cost solution.

Minihydro Schemes

6.03 Each minihydro scheme financed by the Bank Loan will be subjected to selection criteria (para. 4.14) which will ensure that the investment would have an acceptable internal economic rate of return (IERR).

Rural Electrification

6.04 Poverty eradication is a major objective of Malaysia's development effort. The Government has a two-pronged approach to the problem, namely:

(a) job creation, particularly in the modern industrial sector, labor absorption from low productivity occupations in the rural areas; and

(b) productivity improvement, especially of the rural poor.

6.05 The rural electrification program (RE) supports these objectives by facilitating industrial decentralization and industrial expansion outside the 70-75 gazetted towns in Peninsular Malaysia. The development plans greatly emphasize the creation of modern off-farm jobs, accessible to rural - 39 -

centers. Already, some 76 industrial estates have been established and energized.

6.06 The program is expected to contribute to the vitalization of the disadvantaged communities and provide the possibility of using electricity to improve the productivity of the poor.

6.07 The program consists of:

(a) RE 1, financed by the National Electricity Board (NEB); and

(b) RE 2, fully or partially funded by the Government on a grant basis.

The benefits of these schemes are intermixed. Although RE 1 is highly profitable, a part of its income comes from the infrastructure created under RE 2: 33/11 kV lines, distribution transformers, etc. This is because RE 2 focuses mainly on project construction and on a limited group of customers, - those who live in traditional kampungs. Regulations, currently in force, debar RE 2 managers from connecting medium and large commercial and industrial loads. But, after the RE 2 network is completed it is taken over by district managers in charge of RE 1 who then quickly extend their service to industrial and commercial consumers. Thus the RE 2 program understates the benefits of investment and the RE 1 program overstates them. Because of intermixing of benefits separate IERR estimates for each would be misleading. Also adequate data is not available either on the basis of past experience or future projections to carry out suitable modifications to the benefit estimates to attempt realistic segregation. Therefore the IERR has been calculated for the combined program.

Benefits

6.08 The total benefits due to the sale of electricity to consumers consist of (a) direct benefits in terms of revenue collected by the NEB at the prevailing tariffs; and (b) surplus benefits which accrue to the consumers by either substituting electricity for other forms of energy in use or by promoting the use of appliances and tools which could not be used without electricity.

6.09 Identification of consumer surplus is a complex and difficult task. The Rural Electrification Study for Malaysia by the Middle West Service Company of the USA in 1978 (para. 1.26) carried out surveys and conducted interviews to assess these benefits.

Domestic Consumers

6.10 Domestic consumers in Malaysia use electricity for lighting, fans, ironing, rice cookers, water heaters, televisions and refrigerators. Con- sumer surplus is derived due to saving in cost compared to other sources of - 40 -

energy (e.g. kerosene for lighting), greater convenience (e.g. electric iron vs. charcoal iron) and additional consumption of service (e.g. better quality and longer lighting hours). Also the consumers' willingness to pay for appliances like fans, irons, rice cookers and television sets is much greater than the NEB's tariff due to perceived benefits to the household. Household surveys also revealed that consumers feel that electricity brings them benefits in terms of improving their children's education, improving the security of their kampungs (villages), and many also think that it will improve their social and economic life.

6.11 The cost saving is most substantial in the case of lighting since kerosene costs considerably more than electricity. Currently, kerosene costs M¢151.0per liter in Malaysian villages, which in terms of cost per kWh works out to almost M$1.06. (A kerosene lamp giving light equivalent to a 60 W incandescent lamp requires one liter of kerosene for eight hours' service). At offshore prices (Mc70 per liter), the equivalent price would be M$1.45 per kWh. The estimated savings per household per month are shown in the table below:

Savings due to Electricity for Lighting

Monthly Monthly Electricity item cost M$ Kerosene item cost M$

1. Wiring costs @ M$200 1. One Petromax lamps @ annuatized over 10 years 2.71 M$45.0 annuatized over @ 10%. 10 years @ 10%. 0.61

2. At M$1.0 per bulb and a 2. Fuel cost for 8.0 kWh life of 1,000 hours 0.12 equivalent of kerosene @ M$1.45 per kWh 11.60

3. Electricity cost (a) 20 cents per kWh (8 kWh per month) 1.60

Total Cost M$4.43 Total cost = M$12.21

Cost saving = 7.78M$/household/month - 41 -

6.12 Similar cost savings can not be worked out for fans, cookers, irons, refrigerators and television sets. For example, charcoal irons may be less expensive to use but consumers prefer electric irons for their convenience. Similarly, the decision to use electric rice cookers is also mainly based on convenience. Fans, refrigerators and television sets are rarely used when electric supply is not available, but the survey indicated that over 50% of the households would acquire a television set if electricity was available. Thus, for these uses, factors such as convenience, better quality of goods and services, improvement in the quality of life, etc. dictate the choice.

6.13 Additionally, electricity in the household can extend working hours because of better lighting, lighten household chores due to improved availability of water supply and a greater ability and willingness to work in the tropics under electric fans, and increase productivity of the rural work force due to the introduction of electrically-operated tools and equipment. If these changes add one extra working manhour per day per family, the gain would be approximately M$20.0 per month at the current wage rate of M¢0.90 per hour.

6.14 The crucial question therefore is "How much are consumers willing to pay for electricity for the convenience and other advantages?" The answer partly depends on the income level and the preference function. The per capita income in Malaysia in 1980 exceeded US$1,600 and is expected to be US$2,600 a year, in 1980 prices by 1990. Government's development policies are aimed at reducing income disparities between urban and rural population. Even in 1978, nearly one-third of the rural households had an annual income of over M$3,000 per year (Annex 10). Thus rural income levels are substantially higher than other developing countries like India, Thailand or Indonesia. One indication of the higher prices that rural households are prepared to pay can be obtained from the price charged by private licencees, which is M¢40/kWh, in the areas where NEB supply is not available. Another instance is the Jenka Triangle area where a large number of households use small domestic generators (1 kW to 3 kW range) which cost over M$1.0 per kWh.

6.15 In view of the difficulties in establishing precise values for these benefits, for the IERR calculations, the benefits for residential consumers are taken as only (a) revenue to NEB; and (b) kerosene savings.

Commercial Consumers

6.16 A large percentage of commercial consumers in rural areas are shops and restaurants (coffee shops). Shops usually sell a variety of basic necessities. Refrigerators are rarely used by these establishments when electricity is not available. Most of them buy iceblocks from ice factories located in nearby town centers, a block weighing about 65 kg costs over M$5.0. Most shops increase their profits by the use of refrigeration. The Middle West survey showed that the increase in profits range from M$2.0 to M$5.0 per day for the small shops and to M$10 to M$30 per day for coffee shops. - 42 -

It thereforeappears that from refrigerationalone, the surplus is considerable. There are other benefits such as to hairdressers,tailors, local repair shops, etc. Working out the weighted average of the different types of commercial activities,the surplus benefit ranges from 55% to more than 100% of the direct benefits. For the IERR calculations,a conservative average figure of 55% is used for benefit calculation(Total benefit = 1.55 x current tariff = 37.2 Me/kWh).

IndustrialConsumers

6.17 For industrialconsumers, the total benefit is equated to the cost of supply from diesel generators since, if the RE program is held up, the industrywould produce electricityfrom diesel generators. The diesel generated electricty price therefore representsthe wllingness to pay level. To be conservative,the cost of diesel generation from large central diesel stations is used. Annex 19 shows the estimation of diesel generationcost, which works out to M439.89/kWh in 1981 prices. Sensitivityof IERR to change in the estimated benefit is also worked out.

IERR Calculations

6.18 Annex 20 shows the analysis of the costs and benefits of the Rural Electrificationprogram. The IERR for the program works out to be about 26%, with sensitivitiesas follows:

Costs IERR (%)

Capital cost + 10% 23 - 10% 29

(&M cost + 10% 25 - 10% 27

Bulk supply cost + 10% 23 - 10% 28 All costs + 10% 21 - 10% 31

Benefits

Domestic sales + 10% 27 - 10% 25

Commercial sales + 10% 27 - 10% 25

Industrial sales + 10% 29 - 10% 22 - 20% 19 Kerosene saving + 10% 27 - 10% 25 All benefits + 10% 32 - 10% 20 - 43 -

Risks

6.19 There is no unusual risk in a transmission and distribution project of this type. Minihydro schemes are being investigated in sufficient detail to reduce uncertainties.

7. AGREEMENTS REACHED AND RECOMMENDATIONS

7.01 During the negotiations, the following agreements were reached with the NEB and the Government.

(a) With NEB

(i) NEB will employ auditors acceptable to the Bank to audit NEB's accounts and to send audited financial statements and auditor's reports to the Bank within six months of the end of each fiscal year (para. 2.12).

(ii) NEB will limit its industrial investment (para. 2.18).

(iii) NEB will appoint consultants to provide advisory services for the implementation of the minihydro schemes (4.20).

(iv) NEB will strengthen its organization for the planning of the rural electrification program (para. 4.29). -

(v) NEB will implement an information system for the evaluation of rural electrification projects to provide feedback for improving future planning (para. 4.29).

(vi) NEB will review design standards for rural distribution to achieve cost reduction (para. 4.29).

(vii) NEB will introduce measures to promote productive uses of electricity in the Government-financed rural electrification program (para. 4.29).

(viii) NEB will exchange views with the Bank on changes in tariff structure (para. 5.08).

(ix) NEB will review every year, with the Government, the measures necessary to comply with covenanted self-financing ratios (para. 5.08).

(x) NEB will achieve the following minimum self-financing ratios: 15% in FY82 and FY83; 20% in FY84, and 25% in FY85 and FY86, and 30% thereafter (para. 5.12). - 44 -

(xi) NEB will maintain a current ratio of not less than 1.1 (para. 5.13).

(xii) NEB will limit its long-term debt to 60% of the sum of its equity and debt (para. 5.14).

(b) With NEB and Government

(i) NEB/Government will apply criteria for the selection of mini- hydro schemes for implementation, acceptable to the Bank (para. 4.13, 4.14).

(ii) NEB and Government will review the electricity tariff at least once every year and adjust it to enable NEB to achieve self-financing ratios agreed with the Bank (para. 5.08).

(c) With Government

(i) Government will provide or arrange for adequate funds to finance NEB's development program, if necessary (para. 5.11).

Recommendations

7.02 With the above agreements, the Project constitutes a suitable basis for a Bank loan of US$86.3 million to the NEB including a front end fee of about US$1.3 Million, for a period of 15 years including a grace period of three years, with the guarantee of the Government. - 45 - ANNEX 1

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Level of Electrification by State in Peninsular Malaysia

Number of Percentage Number of electricity level of Popul. living qtrs. consumers electrifi- State 1980 1980 8/31/80 cation

Perlis 147,726 33,753 23,245 68.9

Kedah 1,102,200 234,475 103,935 44.3

P. Pinang 911,586 156,808 140,876 89.8

Perak 1,762,288 344,005 217,825 63.3

Selangor 2,405,316 418,042 335,477 80.2 (incl. Federal territory)

N. Sembilan 563,955 123,393 80,844 65.5

Melaka 453,153 87,282 74,028 84.8

Johor 1,601,504 307,478 165,715 53.9

Pahang 770,644 164,224 66,367 40.4

Trengganu 542,280 118,327 64,277 54.3

Kelantan 877,575 187,013 77,293 41.3

Total 11,138,227 2,210,800 1,349,882 61.0 MALAYSIA - NATIONAL ELECTRICITY BOARD ORGANIZATION CHART

EGENERAL MANAGE C

DEPUTYMANAGERGENERALFR DEUYGNRLMANGE FR DEUTAGNEAGDEVELOPMEN FEPTYMANAGER GENERAMAJO OPERAI IONS N PLANNING PROJECTS

I ; I PLANNINGI I INSPECTORI I ACCOUNTANT ||ELECTRNFICATIONIASRV L MATERIALSI L MANAGEMENT I I TRANSMISSION I THERMALIj IDSRA 7 MANAGEMENTI 7 SERVICESI SYSTEM PLANNING| PROJECTS I ACCO JNTSI1 INOVMTI L SYSTEMS* IR I j GENERATIONI j HYORO I DAAI RSRCANI

7 DFVEPOGM X OPERATIONSI I 7 7 PROCESSINCPE SONNEL I )7 PLANNING I 7 PROJECTS DISTRIBUTIONCO#MANAERCIAACIEC | MIYR MANAGESTANNAREI

World E-k 2-33333 MALAYSIA

NATIONAL ELECTRICITY BOARD OF THE STATES OF MALAYA

Actual and Forecast Sales of Energy, FY69-90

Residential Commercial Industrial Mining Bulk supply to PRHE Total

Increase Increase Increase Increase Increase Increase over % of over % of over % of over % of over % of over previous total previous total previous total previous total previous total previous GWh years sales GWh years sales GWh years sales GWh years sales GWh years sales GWh years

Actuial 1969 249 10.7 12.8 577 8.9 29.8 496 14.5 25.6 362 (3,5) 18.7 255 24.4 15.1 1,939 9.7 1970 268 7.6 12.3 629 9.0 28.9 576 16.1 26.4 352 (2,8) 16.2 353 38.4 16.2 2,178 12.3 1971 291 8.6 12.1 688 9.4 28.7 672 16.7 28.0 350 (0.6) 14.6 400 13.3 16.6 2,401 10.2 1972 322 10.7 11.6 775 11.2 28.0 848 26.2 30.7 346 (1.1) 12.5 475 18.8 17.2 2,766 15.2 1973 369 14.6 11.7 899 16.0 28.6 1,079 27.2 34.4 313 (9.5) 10.0 481 1.3 15.3 3,141 13.6 1974 408 10.6 11.7 1,015 12.9 29.0 1,297 20.2 37.0 297 (6.3) 8.5 485 0.8 13.8 3,502 11.5 1975 474 16.2 11.9 1,153 13.6 29.0 1,481 14.2 37.2 303 2.0 7.6 570 17.5 14.3 3,982 13.7 1976 580 22.4 12.8 1,323 14.6 29.1 1,758 18.7 38.7 296 (2.3) 6.5 586 2.8 12.9 4,543 14.1 1977 702 21.0 13.3 1,529 15.6 28.9 1,969 12.0 37.2 320 4.7 5.8 787 34.3 14.8 5,297 16.6 1978 848 20.7 14.3 1,784 16.7 30.1 2,160 9.7 36.4 311 0.2 5.2 831 5.6 14.0 5,934 12.0 1979 987 16.4 15.1 2,038 114.2 31.2 2,448 13.3 37.4 295 (5-1) 4.5 773 (7.0) 11.8 6,541 10.2 1980 1,148 16.3 15.8 2,216 8.7 30.5 2,744 12.1 37.8 294 (0.3) 4.0 863 11.6 11.9 7,265 11.1 Forecast 1981 1,286 12.0 16.5 2,393 8.0 30.6 2,961 7.9 38.0 285 - 3.7 875 1.4 11.2 7,800 7.4 1982 1,492 16.0 17.1 2,632 10.0 30.2 3,381 14.2 38.8 300 (3.4) 3.5 900 2.9 10.4 8,705 11.6 1983 1,731 16.0 17.7 2,895 10.0 29.7 3,891 15.1 39.8 300 5.3 3.1 950 5.6 9.7 9,767 12.2 1984 2,008 16.0 18.3 3,185 10.0 29.0 4,485 15.3 40.9 300 - 2.7 1,000 5.3 9.1 10,978 12.4 1985 2,329 16.0 18.8 3,504 10.0 28.4 5,106 13.8 41.4 300 - 2.5 1,100 10.0 8.9 12,339 12.4 1986 2,678 15.4 19.4 3,837 9.5 27.8 5,780 13.2 41.9 300 - 2.2 1,200 9.1 8.7 13,795 11.8 1987 3,053 14.0 19.9 4,182 9.0 27.3 6,477 12.1 42.3 300 - 2.0 1,300 8.3 8.5 15,312 11.0 1988 3,450 13.0 20.5 4,558 9.0 27.0 7,135 10.2 42.4 300 - 1.8 1,400 7.7 8.3 16,843 10.0 1989 3,864 12.0 20.9 4,968 9.0 26.8 7,895 10.7 42.6 300 - 1.6 1,500 7.1 8.1 18,527 10.0 1990 4,289 11.0 21.0 5,415 9.0 26.6 8,776 11.2 43.1 300 - 1.5 1,600 6.7 7.8 20,380 10.0 Total 81-90 26,180 19.5 37,569 27.9 55,887 41.6 2,985 2.2 11,825 8.8 134,446 - 48 - ANNEX 4

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Committed Generation Projects Peninsular Malaysia

Unit Capacity Commissioning Station no. Type MW date Remark

Pasir Grudang 1 Thermal (oil) 120 Mar 82 2 " 120 Sep 82 Connaught Bridge 1 Gas turbine 80 Mar 83 2 " 80 Aug 83 Bersia 1 Hydro 24 May 83 240 GWh/year 2 24 Jul 83 3 24 Sep 83 Kennering 1 Hydro 40 Nov 83 460 GWh/year 2 40 Jan 84 3 40 Mar 84 Paka 1 Gas turbine 75 Aug 84 2 75 Oct 84 3 75 Dec 84 4 75 Feb 85 5 Topping turbine 75 Aug 85 6 " 75 Nov 85 Port Klang 1 Thermal (oil/gas) 300 Feb 85 2 300 Jul 85 Kenyir 1 Hydro 100 Feb 85 1600 GWh/year 2 100 May 85 3 100 Aug 85 4 100 Nov 85

Total 2,042 MW - - - - - N N) N) Np N £ t£3 ) S O 4N 8 8 8 8N O 8 ° 8 8 8 8 o.

I I I I I I I I I I I I I

3D

0,

\\ ------PASIR GUDANG 1 m m z m

\ ------P PASIR GUDANG 2 - z z mr-- - - CONNAUGHT BRIDGE 1 2 Z\\ Ls------BERSIA 1 rn

>\\ %----CONNAUGIIT BRIDGE 2, BERSIA 2 0 r- m< -- -BERSIA 3

- KENERING1 m1 -- KENERING 2 - 3 -KENERING co

z \ \ s-~~~~~~~----PAKA 1 (0 -- - - PAKA- 2 0F \\ Y--PAKA 3 -- PAKA 4, PORT KLANG 1, KENYIR 1

…\ \ --- KENVIR 2 … - - PORT KLANG 2 -- KENYIR 3, PAKA 5

-- KENYIR 4, PAKA 6

0~ .II ~~~~~~~~~~~~~~3- I I I0 I I I I I °eI - 50 - ANNEX 6

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Energy Capability of NEB System

Energy (GWh) FY Additions Oil Gas Hydro Total

81 Base 10,300 - 1,980 12,280

82 Pasir Gudang-1 10,720 - 1,980 12,700

83 Pasir Gudang-2 } Connaught Bridge-1&2 } Bersia-1&2 } 12,330 - 2,020 14,350

84 Bersia-3 } Kenering-1, 2,3 } Paka-1 } 13,035 45 2,540 15,620

85 Paka-2, 3, 4, 5 } Port Klang-1, 2 } Kenyir-1, 2, 3 } 15,140 1,225 3,080 19,445

86 Paka-6 } Kenyir-4 } 17,420 2,890 4,210 24,520

Note: In 1986, the oil-fired generating capacity will reduce to 71% of the total. - 51 - ANNEX 7

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Summary of the Rural Electrification Program

in Peninsular Malaysia: 1981-85

1981 1982 1983 1984 1985 Total

Investment (M$ million) RE-1 /a 33.2 64.5 78.4 79.6 87.0 342.7 RE-2 /a 95.1 125.1 140.1 97.0 67.6 524.9 Total 128.3 190.5 218.5 176.6 154.6 867.8 Number of New Customers RE-1 Residential 16,214 29,542 41,630 40,904 35,609 163,899 Commercial 1,617 3,552 3,951 5,039 4,371 18,530 Industrial 101 303 193 170 205 972 RE-2 Residential 36,147 53,298 56,823 52,348 37,751 235,467 Commercial 1,516 2,091 2,140 2,760 1,438 9,945 Industrial 155 148 197 209 158 867 Total Residential 52,361 82,840 98,453 93,252 73,360 399,366 Commercial 3,133 5,643 6,091 7,799 5,809 28,475 Industrial 256 451 390 379 363 1,839 Electricity Sales (GWh) (Noncumulative) /b RE-1 Residential 16.4 31.5 38.3 34.7 31.3 152.2 Commercial 24.5 44.2 38.4 47.3 38.9 119.3 Industrial 161.5 88.2 156.9 134.7 133.6 674.8 RE-2 Residential 17.1 27.0 71.1 23.4 16.5 155.1 Commercial 3.9 6.7 11.1 9.9 5.1 36.7 Industrial 2.8 3.7 8.9 14.6 5.0 35.0 Total Sales Residential 33.5 58.5 109.4 58.1 47.8 307.3 Commercial 28.4 50.9 49.5 57.2 44.0 156.0 Industrial 164.3 91.9 165.8 149.3 138.6 709.8

/a RE-1 includes rural electrification projects financed by NEB whereas RE-2 includes government-financed rural electrification projects. /b The figures indicate estimated sales to the new customers added during the year. MALAYSIA

RURAL ELECTRIFICATION PROJECT

Summary of RE Program for Kedah, Kelantan, Trengganu and Pahang Five Year Period 1981-85

RE-1 RE-2 Total Item Kedah Kelantan Trengganu Pahang Total Kedah Kelantan Trengganu Pahang Total RE-1 + RE-2

Investment M$ x 106 (1981 prices) 15.8 41.6 95.4 50.8 203.6 85.9 107.9 69.2 71.2 334.2 537.8 Physical Content 33 kV lines (km) 5.0 41.0 70.0 65.0 181.0 175.0 161.0 173.0 148.0 657.0 838.0 11 kV lines (km) 135.0 79.0 521.0 372.0 1,107.0 604.0 393.0 295.0 380.0 1,672 2,779 M Substations (No) 77.0 85.0 228.0 151.0 541.0 251.0 270.0 162.0 120.0 803.0 1,344 L.V. lines (km) 106.0 16.0 912.0 713.0 1,747.0 1,455 2,377 992.0 1,390 6,214 7,961 New Customers Residential 5,001 6,524 8,216 26,048 45,789 38,895 51,887 29,918 20,665 142,365 188,154 Commercial 295 1,377 3,652 2,745 8,069 759 1,158 2,191 2,449 6,557 14,626 Industrial 3 89 190 229 511 52 453 151 47 703 1,214 Total 5,299 7,990 12,058 29,022 54,369 39,706 53,498 32,260 23,161 149,625 203,994 MALAYSIA

RURAL ELECTRIFICATION PROJECT

Summary of RE Program for Kedah, Kelantan, Trengganu and Pahang

Three Year Period 1983-85

RE-1 RE-2 Total Item Kedah Kelantan Trengganu Pahang Total Kedah Kelantan Trengganu Pahang Total RE-1 + RE-2

Investment M$ x 106 8.6 26.5 54.5 62.6 152.2 59.8 60.8 32.0 49.1 201.7 353.9 1

Physical Content 33 kV lines (km) - 21.5 70.0 65.2 156.7 98.5 68.0 102.0 74.0 342.5 477.7 11 kV lines (km) 97.0 42.6 313.0 296.8 749.4 373.1 246.0 109.0 139.0 867.1 1,616.5 Substations (No) 51.0 56.0 153.0 102.0 362.0 165.0 163.0 83.0 49.0 460.0 822.0 L.V. lines (km) 64.0 13.0 572.0 669.0 1,318.0 995.0 1,645 483.0 613.0 3,736 5,054

New Customers Residential 4,166 5,063 4,920 24,092 38,241 28,012 35,157 18,765 12,697 94,631 132,872 Commercial 260 1,154 2,187 2,523 6,124 569 822 1,274 1,455 4,120 10,244 Industrial 2 66 133 148 349 40 294 90 39 463 812

V~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~> - 54 - ANNEX 10

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Population, Electrification, Income and Occupation Data of

Villages in Trengganu, Pahang, Kedah and Kelantan

Peninsular Trengganu Pahang Kedah Kelantan Malaysia

Population, Kampungs, Households & Electrification Total population x 1,000 542.3 770.6 1,102.2 877.6 11,138.2 Number of living quarters x 1,000 118.3 164.2 103.9 187.0 2,210.8 Number of Kampungs (tradional villages) 1,973 538.0 794.0 386.0 6,171.0 Population x 1,000 313.2 492.3 780.3 545.0 6,051.6 Families 64,128 100,855 260,679 128,836 1,350,107 Households 58,578 88,559 235,978 109,561 1,196,851 Households with electricity 23,963 39,042 38,733 22,648 491,555 (%) (40.9) (44.1) (16.4) (20.7) (41.1)

Income Distribution in Kampungs Less than $250 49,489 59,787 126,339 104,110 762,696 (%) (82.4) (58.8) (82.5) (84.9) (66.5) $250-$400 8,154 27,106 19,495 13,503 252,463 (%) (13.6) (26.7) (12.7) (11.0) (22.0) Above $400 2,396 14,815 7,253 4,990 132,446 (%) (4.0) (14.5) (4.8) (4.1) (11.5)

Occupational Profile in Kampungs Shops 1,512 2,433 4,607 3,054 26,947 Rice mills 124 83 487 489 1,741 Oil mills 6 1 2 2 79 Fish, ice and coffee processing 102 17 17 123 818 Saw mills 43 101 63 50 729 Iron works 12 40 41 34 519 Dressmaking, weaving, batik, handicrafts 649 116 121 399 2,559

Sources: Population of states from 1980 census. Other data from implementation and coordination unit, Prime Minister-s Department (1978 Data). - 55 - ANNEX 11 Page 1 of 2

M4ALAYSIA

RURAL ELECTRIFICATION PROJECT

Mini-hydro Schemes in Malaysia: Eastern Region

Annual Scheme Capacity energy Cost State reference kU GWh M$ x 103

Johor J-12 190 1.26 2,214 J-14 75 0.55 1,453 J-29 115 0.91 857

Total 380 2.72 4,524

Kelantan K-2 340 2.42 3,330 K-4 740 5.42 3,044 K-7 380 2.75 1,805 K-10 500 3.71 2,956 K-13 285 1.54 2,951 K-18 590 4.06 2,585 K-21 500 3.28 3,344 K-42 1,050 7.27 2,656 K-44 540 3.90 2,587 K-51 360 2.60 1,806 K-53 165 1.14 1,871 K-64 285 1.92 2,186

Total 5,735 40.01 31,121

Pahang P-1 210 1.48 2,571 P-21 510 3.98 2,910 P-22 50 0.28 1,061 P-36 315 2.23 2,134 P-51 1,070 7.97 7,754 P-52 315 2.24 2,679 P-54 260 1.78 3,009 P-55 375 2.73 2,641 P-57 510 3.73 4,679 P-68 360 2.58 2,844 P-69 335 2.35 2,649 P-72 385 2.80 2,881 P-76 350 2.45 2,602 P-81 245 1.59 2,239

Total 5,290 38.19 42,653 - 56 - ANNEX 11 Page 2 of 2

Annual Scheme Capacity energy Cost 3 State reference kW GWh M$ x 10

Trengganu T-1 235 1.74 2,909 T-5 275 1.66 1,976 T-7 415 2.95 2,271 T-13 225 1.58 1,845 T-15 380 2.58 2,562 T-20 200 1.43 2,243 T-24 275 1.94 2,619 T-26 230 1.62 2,665 T-30 560 3.95 3,632 T-35 1,010 7.18 2,727 T-36 430 3.20 2,611 T-37 290 2.05 2,325

Total 4,525 31.88 30,383 - 57 - ANNEX 12 Table 1

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Cost Estimate - 275 kV Kenyir - Tanah Merah

Transmission Line (169 km)

Cost (M$ x 106) Item Foreign Local Total

Towers 8.50 0.25 8.75 Conductors 16.00 0.25 16.25 Survey and compensation - 2.37 2.37 Clearance of right of way and roads - 3.06 3.06 Foundations and tower erection 0.18 4.32 4.50 Stringing and commissioning 0.52 2.73 3.25 Overheads and administration - 3.82 3.82 Consulting services 1.50 0.50 2.00

Total Base Cost /a 26.70 17.30 44.00

Physical contingency (10%) 2.67 1.73 4.40

Price contingency /b 6.21 4.14 10.35

Total Cost 35.58 23.17 58.75

Equivalent US$ Millions 15.47 10.07 25.54

/a March 1982 prices.

/b Inflation rates for foreign and local costs assumed as 1982 - 8.5%, 1983-85 - 7.5%, 1986 and beyond - 6.0%. - 58 - ANNEX 12 Table 2

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Cost Estimate - 132 kV Lines (119 km) and 132/33/11 kV Substation

Cost (M$ x 106) Item Foreign Local Total

Towers 4.01 0.06 4.07 Conductors and accessories 5.35 0.07 5.42 132 kV switchgear 5.34 0.61 5.95 33 kV switchgear 1.35 0.19 1.54 11 kV switchgear 0.94 0.12 1.06 Transformers (a) 132/33 kV 1.20 0.13 1.33 (b) 132/11 kV 1.00 0.12 1.12 (c) 33/11 kV 0.52 0.07 0.59 Cables, control panels and accessories 0.64 0.66 1.30 Survey and compensation - 2.08 2.08 Route clearance and roads - 1.68 1.68 Stringing of lines and commissioning - 1.38 1.38 Foundation and erection of towers 0.20 3.76 3.96 Civil works and buildings - 1.85 1.85 O.H. and administration - 3.05 3.05

Base Cost /a 20.55 15.83 36.28

Physical contingency (10%) 2.05 1.58 3.63 Price contingency /b 6.36 4.91 11.27

Total Cost 28.96 22.32 51.18

Equivalent in US$ Millions 12.60 9.70 22.30

/a March 1982 prices.

/b Inflation: 1982 - 8.5%, 1983-85 - 7.5%, 1986 & beyond - 6%. - 59 - ANNEX 12 Table 3

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Kedah, Kelantan, Trengganu and Pahang

Cost (M$ x 106) Item Foreign Local Total

33 kV 0.TH. lines 27.17 3.35 30.52 33 kV U.G. cables 4.15 2.36 6.51 33/11 kV substation 11.13 7.00 18.13 11 kV lines 57.58 31.51 89.09 33 & 11 kV/400 V substations 25.66 18.08 43.74 L.V. lines 29 02 77.60 106.62 Service connections and meters 22.61 43.83 66.43 Land and way leave - 13.47 13.47 Consulting services - 3.22 3.22

Total Base Cost /a 177.32 200.42 377.74

Physical contingency /b - - - Price contingency /c 41.60 49.36 90.96

Total Project Cost 218.92 249.78 468.70

Equivalent US$ millions 95.2 108.6 203.8

Ia March 1982 prices.

/b Physical contingencie are included in the base costs.

/c Price contingencies for local and foreign costs worked out with inflation as follows: 1982 - 8.5%, 1983-85 - 7.5%, 1986 and after - 6.0%. - 6o - ANNEX13

MALAYSIA RURAL ELECTRIFICATION PROJECT Implementation Schedule

ITEM 1982 1983 1984 1985 1986

A. 275 KV and 132 KV Transmisstion Lines i) Tenders Preparation

Float

Adj. and Award (ii) Survey Tower Spotting Right of Way- (iii) Manufacture _ _ -_ Delivery (iv) Access, Foundations Erection m-m (v) Commissioning B. Substations i) Tenders Preparation Float Adj. and Award Hi) Manufacture- - Delivery (iii) Civil Works _ _ _ _ (iv) Erection and Commissioning C. Rural Electrification i) Tenders Preparationt Fioat Adj. and Award (ii) Construction ______D. Minihydro i)Designs (ii) Tenders Preparation Float Adj. and Award (iii) Manufacture - - - Delivery - - - t - (iv) Civil Works _ i _ _ _ (v) Commissioning

World Bank-23495 - 61 - ANNEX 14

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Disbursement Schedule

Percent Disbursement Bank Disbursement (US$ x 106) Pro- IBRD Regional FY Semester Semester Cumulative ject profile /a profile /b

1983 I 1.3 II 2.0 3.3 3.8 14.0 3.0

1984 I 10.0 13.3 II 10.0 23.3 27.0 37.0 23.0

1985 I 15.0 38.3 II 15.0 53.3 61.8 61.0 44.0

1986 I 15.0 68.3 II 12.0 80.3 93.0 81.0 71.0

1987 I 6.0 86.3 100.0 95.0 92.0 II - /c

/a IBRD profile for nine transmission and distribution projects.

/b Regional profile based on transmission and distribution projects in the AEP region; sample includes seven projects under implementation for 5 years and nine projects under implementation for 3 years.

/c The disbursement schedule for the project is based on the implementation plan according to which disbursements should be completed by December 31, 1986. - 62 - ANNEX 15 Table 1

MALAYSIA

NATIONAL ELECTRICITY BOARD OF THE STATES OF MALAYA

Income Statements FY75/76 - FY79/80 (M$ million)

FY75/76 FY76/77 FY77/78 FY78/79 FY79/80

Sales (GWh) 4,543 5,297 5,934 6,540 7,265 Sales increase (%) 14.1 16.6 12.0 10.2 11.1 Average price per kWh (Mc) 10.7 10.7 10.8 12.6 15.0

Revenue from sale of electricity 487.9 566.1 643.4 821.6 1,091.4 Other operating revenue 5.3 10.4 11.9 11.8 5.4 Government subsidy for R.E./a 13.6

Total Revenues 493.2 576.5 655.3 833.4 1,110.4

Operating Expenses Purchased power 12.8 14.3 14.3 27.8 34.8 Fuel 210.4 241.3 280.8 412.6 744.6 Administrative, operations and maintenance 100.2 139.7 129.2 166.8 183.4 Taxes 11.0 25.0 15.0 - -

Total Costs 334.4 420.3 439.3 607.2 962.8

Income before depreciation 158.8 156.2 216.0 226.2 147.6 Depreciation lb 67.3 78.2 88.3 131.3 153.3

Income Before Interest 91.5 78.0 127.7 94.9 (5.7)

Nonoperating income - - - 0.6 0.6 Interest charged to operations 29.9 31.9 48.5 60.9 77.0

Net Income 61.6 46.1 79.2 34.6 (82.1)

Appropriations of Net Income Dividends 5.0 6.4 7.1 8.7 Retained earnings 56.6 39.7 72.1 25.9 (82.1)

/a Introduced in FY80 to cover operating losses in rural electrification.

/b On revalued fixed assets. - 63 - ANNEX 15 Table 2

MALAYSIA

NATIONAL ELECTRICITY BOARD OF THE STATES OF MALAYA

Sources and Application of Funds FY75/76 - FY79/80 (M$ million)

FY75/76 FY76/77 FY77/78 FY78/79 FY79/80

Sources of Funds Income before depreciation 158.8 156.2 216.0 226.2 147.6 Less dividends 5.0 6.4 7.1 8.7 - Gross internal generation 153.8 149.8 208.9 217.5 147.6 Nonoperating income - - - 0.6 0.6 Consumers- contributions 12.9 24.6 58.2 74.5 96.8 Other liabilities 33.5 (1.4) (8.3) (4.0) (22.9) Consumers' deposits 7.2 5.7 6.8 10.9 12.6 Equity increase 69.0 - 130.7 231.0 Long-term borrowing 148.9 149.1 201.5 253.8 248.8 Short-term loans 23.9 (3.7) 36.2 (5.5) 42.3

Total Borrowings 172.8 145.4 237.7 248.3 291.1

Total Sources 380.2 393.1 503.3 678.5 756.8

Application of Funds Investment 341.1 343.6 372.4 546.2 555.2 Debt service: amortization 29.3 35.0 37.1 41.5 58.5 interest 29.9 31.9 48.5 60.9 77.0

Total Debt Service 59.2 66.9 85.6 102.4 135.5

Increase (decrease) in working capital (21.5) (17.4) 44.1 28.7 66.1 Industrial investment 1.4 1.2 1.2 -

Total 380.2 393.1 503.3 678.5 756.8 - 64 - ANNEX 15 Table 3 MALAYSIA

NATIONAL ELECTRICITY BOARD OF THE STATES OF MALAYA

Balance Sheets - FY75/76 - FY79/80 (M$ million)

FY75/76 FY76/77 FY77/78 FY78/79 FY79/80

Assets

Gross fixed assets in operation 2,223.3 2,516.2 2,997.2 3,473.0 4,049.9 Less: accumulated depreciation 700.8 823.2 911.5 1,078.8 1,338.0 Net fixed assets in operation 1,522.5 1,693.0 2,085.7 2,394.2 2,711.9 Work in progress 381.0 576.6 480.9 760.0 1,172.4

Cash and banks 3.4 2.2 2.5 1.8 3.7 Accounts receivable 50.0 59.3 66.2 84.4 122.6 Other receivables 50.1 54.8 92.6 78.4 135.5 Inventories 104.0 115.7 172.6 231.9 279.2

Total Current Assets 207.5 232.0 333.9 396.5 541.0

Industrial investment 3.9 3.9 5.1 6.3 6.3

Total Assets 2,114.9 2,505.5 2,905.6 3,557.0 4,431.6

Equity and Liabilities

Equity 167.7 236.7 236.7 367.4 598.4 Contributions 121.4 146. 204.2 278.7 375.5 Revaluation surplus 486.0 586.7 599.6 772.5 1,100.6 Operational surplus 412.5 452.2 524.3 550.2 468.1

Total Equity 1,187.6 1,421.6 1,564.8 1,968.8 2,542.6

Long-term debt (net) 604.4 716.2 876.4 1,071.5 1,245.5 Current maturities 35.0 37.3 41.5 58.5 74.9 Accounts payable 91.3 127.4 177.1 217.8 309.5 Payable to construction contractors 30.8 36.1 27.6 28.1 39.9 Taxes and dividends payable 60.7 61.2 77.8 70.5 45.4

Total Current Liabilities 217.8 262.0 324.0 374.9 469.7

Revolving loans 30.7 27.0 63.2 57.7 100.0 Provision for pensions 13.0 12.5 5.4 1.4 - Payables from Penang takeover 23.6 22.7 21.5 21.5 - Consumers' deposits 37.8 43.5 50.3 61.2 73.8

Total Liabilities 927.3 1,083.9 1,340.8 1,588.2 1,889.0

Total Equity and Liabilities 2,114.9 2,505.5 2,905.6 3,557.0 4,431.6 - 65 - ANNEX 15 Table 4

IMALAYSIA

NATIONAL ELECTRICITY BOARD OF THE STATES OF MALAYA

Performance Indicators

(percentage change in relation to the previous year is presented in brackets)

FY76 FY77 FY78 FY79 FY80

Technical

Installed capacity (MW) 1,187.8 (3.8) 1,316.4 (10.8) 1,439.8 (9.4) 1,795.7 (24.7) 2,167.6 (20.7) Maximum demand (MW) 843.8 (22.9) 975.1 (15.6) 1,162.0 (11.0) 1,297.5 (11.7) 1,457.0 (12.3) Energy generated and purchased (GWh) 5,356.9 (15.1) 6,257.8 (16.8) 6,991.5 (11.7) 7,651.0 (9.4) 8,466.0 (10.6) Energy sent out (GWh) 5,143.2 (14.9) 5,953.6 (16.7) 6,651.4 (11.7) 7,302.4 (9.8) 8,071.3 (10.5)

Market

Energy sales (GWh) 4,543 (14.1) 5,297 (16.6) 5,934.2 (12.0) 6,540.6 (10.2) 7,265 (11.1) System losses (%) 11.0 11.0 10.8 10.4 10.0 Annual load factor (%) 72.8 68.9 69.5 71.5 67.6 No. of consumers ('000) 838.9 916.3 (9.2) 1,012.8 (10.5) 1,127.7 (11.3) 1,258.5 (11.6) No. of employees (end of year) 12,463 13,746 (7.6) 15,590 (13.3) 17,679 (13.4) 19,248 (8.8) kWh sold per employee ('000) (averages) 355 404 404 393 386

Profitability

Average rate of return (%)/a 7.2 5.3 7.5 4.9 (0.2) Average tariff - total (M¢/kWh) 10.7 10.7 10.8 12.5 15.0 Average operating cost /b 8.8 9.4 8.9 10.9 14.9 Average fuel cost (M¢/kWh) 4.6 4.5 4.7 6.3 10.2 Contribution to construction (%)/c 46.0 38.0 35.0 36.5 7.9 Operating ratio (%) 81.0 86.0 80.0 85.0 100.5 Number of days bills outstanding 37 39 38 37 41

Debt

Debt/equity ratio (excluding reval. surplus) 46/54 46/54 47/53 46/54 46/54 Current liabilities as % of cash operating expenses /d 28 32 42 36 32 Debt services coverage 2.6 2.2 2.4 2.1 1.1

Liquidity

Net working capital (M$ million) /e -10.3 -30.0 9.9 21.6 71.3 Current ratio (times) /e 0.95 0.88 1.03 1.06 1.15

/a After taxes; on revalued assets.

/b Per unit sold. Taxes and depreciation are included in operating costs.

/c Internally generated funds including consumer contributions, other operating income and subsidy for R.E., less debt service and working capital increases as a percentage of the average capital investment for three years (past, pre- sent and next).

/d Current liabilities includes trade creditors, other payable, interest payable, taxes and dividends payable; it does not include: payable to construction contractors and revolving loans. Operating expenses include taxes and interest.

/e Includes current maturities. NEB INCOME STATEMENT MILL.MS

1981 1982 1983 1984 t985 1986 1987 1988 u ...... sm S...... ws ss..s...a...... s.s......

VOLUME SOLD-MILLION GWH 7800.00 8705.00 9767.00 10978.00 12339.00 137P5 00 15312.00 16843 e0

AVERAGE ENERGY TARIFF /UWH 0.20 0.22 0.24 0.27 0.29 0.30 0.32 0.35

ENERGY REVENUES 1578.00 1906.00 2361.00 2958.00 3563.00 4135.00 4935.00 5893.00 OTHER OPERATIONAL REVENUE 37.00 48.00 50.00 50.00 50.00 45.00 45.00 45.00

TOTAL REVENUES 1615.00 1954.00 2411.00 3008.00 3613.00 4180.00 4980.00 5938.00

FUEL AND POWER 1054.80 1288.30 1533.40 1910.10 2258.00 2496.90 2909.20 3520.10 OTHER OPERATING EXPE 240.20 252.40 302.80 373.20 444.20 524.20 627.80 724.20 DRTCT19. ------36.20 2283.30 2702.20 302--.10 3537.00 4244.30- DIRECT COSTS 1295.00 1540.70 1836.20 2283.30 2702.20 3021.10 3537.00 4244.30 TOTAL.cosTs 19.0 540.7 136.20 2283.30 2702.20 3021.10 337.0 444.SO0o

INCOME BEFORE DEPRECIATION 320.00 413.30 574.80 724.70 910.80 1158.90 1443.00 1693.70 DEPRECIATION 161.63 200.65 249.26 300.12 387.84 478.17 555.86 631.28

INCOME BfFORE INTEREST 158,37 212.65 325.54 424.58 522.96 680.73 887.14 1062.42 INTEREST CHARGED OPER. 94.00 104.80 116.00 133.90 196.96 255.96 300.91 395.49 NON OPER.REVENUES 0.00 -49.00 -58.60 -72.00 -72.00 -97.90 -103.60 -t12.10

NET SURPLUS 64.37 58.85 150.94 218.68 254.00 326.87 482.63 554.83

AVERAGE RATE BASE 2456.62 3235.36 4307.34 5463.47 7397 80 9301.99 10717.73 11934.10

RATE OF RETURN % 6.45 6.57 7.56 7.77 7.07 7.32 8.28 8.90

~dU (D

oO Hz a-. -NEB FLOW OF FUNDS MILL.M$

1981 1982 1983 1984 1985 1986 1987 1988 .. st-s. .UU....SUU..tMUS3WUS U..*WS"SW=SUU S..S...... S t5a...... v.....SS...S=t USS...USSS...... s..SS SOURCES OF FUNDS

INCOME BEFORE DEPRECIATION 320.00 413.30 574.80 724.70 910.80 1158.90 1443.00 1693.70 NON-OPER.REVENUES (NET) 0.00 -49.00 -58.60 -72.00 -72.00 -97.90 -103.60 -1l2.10

GROSS INTERNAL GENERATION 320.00 364.30 516.20 652.70 838.80 1061.00 1339.40 1581.60 GOVERMENT GRANTS 75.00 102.00 93.00 100.00 .108.00 114.00 121.00 128.00 OTHER CONTRIBUTIONS 62.00 40.00 42.00 45.00 50.00 50.00 50.00 50.00 CONSUMERS DEPOSITS 21.20 18.42 51.85 41.79 42.35 40.04 56.00 67.06 INCREASE OTHER LIABILITIES -0.20 7.20 -42.00 0.00 0.00 -65.00 0.00 0.00 EQUITY INCREASE 300.00 74.10 0.00 0.00 0.00 0.00 0.00 0.00 16RD LOAN 0.00 0.00 7.59 46.00 69.00 62.10 13.80 0.00

OTHER LOANS 224.59 849.97 1143.16 1336.37 1085.14 845.56 1162.95 1198.01

TOTAL LOANS 224.59 849.97 1150.75 1382.37 1154.14 907.66 1176.75 1198.0t SS=S===== SS===ta wSS==~=f afl=n==== se======S====t== Pa=-sS=== TOTAL SOURCES 1002.59 1455.99 1811.80 2221.86 2193.29 2107.70 2743.15 3024.67

APPLICATIONS OF FUNDS

INVESTMENT IN PROdECT 0.00 0.00 96.80 206.00 216.80 157.50 45.63 0.00 CAPITALIZED INTEREST 10.68 48.75 113.08 195.66 237.31 255.34 273.09 230.56 OTHER INVESTMENT 664.32 1161.25 1268.12 1421.34 1218.89 1054.16 1528.64 1670.37

TOTAL INVESTMENT 675.00 1210.00 1478.00 1823.00 1673.00 1467.00 1847.36 1900.93 FOREIGN LOAN AMORTIZATION 0.00 0.00 0.00 0.00 0.00 12.41 16.54 16.54

OTHER LOANS AMORTIZATION 73.00 101.20 129.80 149.50 222.40 269.39 356.79 478.02

TOTAL AMORTIZATION 73.00 101.20 129.80 149.50 222.40 281.80 373.33 494.56 OPER.INTEREST LONG T.DEBT 94.00 104.80 116.00 133.90 196.96 255.96 300.91 395.49

TOTAL DEBT SERVICE 167.00 206.00 245.80 283.40 419.36 537.76 674.24 890.05 INCREASE IN WORK.CAPITAL 159.99 35.99 88.00 115.46 100.93 102.94 221.55 233.69 INVESTMENT IN INDUST 0.60 4.00 0.00 0.00 0.00 0.00 0.00 0.00 ,s,=====t=,===_ S=a======~ t,======,=====-==5=-======TOTAL APPLICATIONS 1002.59 1455.99 1811.80 2221.86 2193.29 2107.70 2743.15 3024.67

O) o ON -NEB BALANCE SHFFT MILL.MS

1981 1982 1983 1984 1985 1986 1987 1988

A S S E r S

FIXED ASSETS IN OPER. 4929.52 6536.13 8125.93 10063.08 13442.31 15537.65 18150.66 20108.83 MINUS ACCUM.DEPRECIATION 1651.62 1992.66 2391.36 2870.83 3473.98 4160.59 4966.08 5895.33

NET FIXED ASSETS 3277.90 4543.47 5734.57 7192.25 9968.32 11377.05 13184.58 14213.50 WORK IN PROGRESS 1332.30 1354.70 1733.10 2228.40 1276.90 1455.10 1621.70 2653.50 CASH AND BANKS 20.90 25.30 60.11 78.05 106.75 156.74 166.17 192.40 ACCOUNTS RECEIVABLE 192.99 212.99 262.80 327.87 393.82 455.62 542.82 647.24 OTHER RECEIVABLES 188.00 233.87 222.91 231.91 242.91 248.91 291.91 385.91 INVENT4RIES 250.00 306.00 371.00 412.00 513.00 555.00 686.00 718.00 FUEL INVENTORIES 63.00 64.42 76.67 95.51 112.90 124.85 145.46 176.01

TOTAL CURRENT ASSETS 714.89 842.58 993.48 1145.34 1369.38 1541.12 1832.36 2119.56 INVESTMENT IN INDUST 6.90 10.90 1o.90 10.90 10.90 10.90 10.90 10.90

TOTAL ASSETS 5331.99 6751.65 8472.06 10576.89 12625.50 14384.17 16649.54 18997.46

EQUITY AND LIABILITIES

EOUITY 898.40 972.50 972.50 972.50 972.50 972.50 972.50 972.50 CONTRIBUTIONS 512.50 654.50 789.50 934.50 1092.50 1256.50 1427.50 1605.50 a REVALUATION SURPLUS 1313.24 1591.86 1932.62 2362.72 2902.13 3500.23 4182.86 4973.93 OPERATIONAL SURPLUS 532.46 591.31 742.25 960.93 1214.94 1541.80 2024.43 2579.27 1

TOTAL EQUITY 3256.60 3810.17 4436.88 5230.65 6182.07 7271.04 8607.29 10131.20

LONG TERM OEBT(NET) 1370.79 2090.96 3092.21 4252.18 5124.52 5658.85 6341.04 6942.99

ACCOUNT PAYABLES 379.10 451.00 504.00 527.00 635.00 693.00 757.00 802.00 DIVIDENDS PAYABLE 29.50 49.30 59.20 72.60 87.70 98.50 104.20 112.70 CURRENT MATURITIES 101.20 129.80 149.50 222.40 281.80 373.33 494.56 596.06

TOTAL CURRENT LIABILITIES 509.80 630.10 712.70 822.00 1004.50 1164.83 1355.76 1510.76 CONSUMERS DEPOSITS 95.00 113.42 165.27 207.06 249.41 289.45 345.45 412.51 OTHER LIABILITIES 99.80 107.00 65.00 65.00 65.00 0.00 0.00 0.00

TOTAL LIABILITIES 2075.39 2941.48 4035.18 5346.24 6443.43 7113.13 8042.25 8866.26

TOTAL EOUITY-LIABILITIES . 5331.99 6751.65 8472.06 10576-89 12625.50 14384.17 16649.54 18997.46

0 O

~4: oFt - 69 - ANNEX 16 Page 4 of 4

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Financial Monitoring Indicators

FY: 81 82 83 84 85 86 8/ 88 (estimated)

Profitability Average rate of return (%)/a 6.4 6.6 7.5 7.8 7.1 7.3 8.3 8.9 Contribution to construction (%) /b 10 17 19 22 26 33 34 33 Operating ratio (%) /c 90 89 86 86 85 84 82 82 Average rate base (M$ million)/d 2,456 3,235 4,307 5,463 7,398 9,302 10,717 11,934

Debt Debt as % of equity & debt /e 42 49 55 58 59 60 59 58 Debt service coverage 1.9 1.8 2.1 2.3 2.0 2.0 2.0 1.8

Liquidity Net working capital (M$ million)/f 205 212.5 281 323 365 3/6 4/6 609 Current ratio (times)/f 1.40 1.34 1.39 1.39 1.36 1.32 1.35 1.40

/a On average net revalued assets in operation. Revaluation factor assumed equal to forecast inflation rates. Current covenant requires the use of the capital formation deflator as published by Bank Negara. /b Self-financing ratio is presented in Annex 18. /c Operating cost, including depreciation, as a percentage of operational revenue. /d Consumer contributions revalued as indicated in /a are deducted to compute the rate base. /e According to current covenant surpluses from revaluations are excluded from equity. /f Current liabilities includes current maturities of long-term debt; revolving loans from commercial banks are excluded (see Annex 17). - 70 - ANNEX 17 Page 1

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Assumptions in Financial Forecasts

Price Contingencies

1. The following escalation rates were used both for foreign and local costs: FY82: 8.5%; FY83 through FY85: 7.5% and FY86 and thereafter 6.0%.

Revenues

2. Early years load forecast was adjusted downwards to allow for recovery of the growth slowdown experienced in FY81. As the transmission line to bring electricity from Prai Thermal Plant to the Kuala Lumpur area is completed, the currently suppressed demand is expected to be satisfied. The supply will further improve as several projects are commissioned.

3. The last tariff increase in December 1980 set the average rate at MP21.9/Kwh (USc/9.52), higher than the long-run marginal cost of supply estimated at about Mq19.0 for 1981. Since this tariff level is adequate, it was considered that additional adjustments were not realistic except in cases of drastic increases in fuel cost. Accordingly it was assumed that during the forecast period (FY82-88) NEB's tariff would be adjusted almost exclusively for inflation.

Fuel Cost

4. It was assumed that oil prices are going to remain stable through FY82 and that they will increase 2% in real terms in FY83 and 3% thereafter. Additionally changes in fuel mix were assumed as Bersia, Kenering and Kenyir hydroelectric projects are commissioned. Due to the present uncertainties about pricing of gas and coal, it was assumed conservatively that they would be priced equivalent to oil.

Capital Expenditure

5. Investment reflects the latest development program prepared by NEB, escalated as indicated in para. 1. NEB's development program is discussed in Chapter III.

Equity

6. It was assumed that after FY83 the Government will not make any equity contribution in excess of the reimbursement of capital expenditure for rural electrification projects. - 71 - ANNEX 17 Page 2

Borrowings

7. Given NEB's previous experience and current opportunities, the relative participation of different sources in future borrowing was assumed to be distributed as follows: bilateral and export credits 45%; multilateral 20%; commercial banks (foreign and domestic) 30% and suppliers credit 5%. In the past NEB has received bilateral and export credits on very soft terms (3-1/2 to 4-1/2% p.a.). It was assumed that these loans will be contracted at 5% p.a. in the future. On the basis that both international and domestic inflation rates will be about 6% p.a. it was assumed that annual interest rates would be 10% for multinational loans, 12% commercial bank loans and 9% suppliers credit. This results in a weighted average of 8.3% p.a. To be on the conservative side 10% p.a. was used in the projections.

Notes on Financial Ratios

8. Self-financing ratio, which measures NEB's contribution from internally generated funds to its capital investment, is calculated on a 3-year average investment which includes the previous year, the test and the next following year (see Annex 18).

9. For the computation of the rate of return on net average fixed assets, fixed assets, accumulated depreciation and consumers contribution are revalued using the fixed capital formation deflator published by the central Bank of Malaysia. For the forecast period the escalation rates presented in para. 1 were used.

10. Current Bank overdrafts in the case of NEB are actually revolving loans contracted at very favorable interest rates (8-1/2-9% p.a.). The customary yearly repayment is not required in the case of NEB and commercial banks advise NEB well in advance whenever they are considering that the loan or part of it should be repaid. Because of these special characteristics these loans were not included in the computation of net working capital and current ratio. Nevertheless, if in the future they become repayable within the following 12 months, these loans, or part of them, should be treated as current liabilities. MALAYSIA

RURAL ELECTRIFICATION PROJECT

Self-financing Ratios, FY80-88

FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY79 (hist.) (est.) ------(projected) ------

Funds from Internal Sources Electricity revenues - 1,091 1,578 1,906 2,361 2,958 3,563 4,135 4,935 5,893 Consumer contributions - 38 62 40 42 45 50 50 50 50 Consumer deposits - 12 21 18 52 42 42 40 56 67 Other income - 5 11 18 20 20 20 20 20 20 Subsidy for losses in R.E. - 14 26 30 30 30 30 25 25 25 Subtotal - 1,160 1,698 2,012 2,505 3,095 3,705 4,270 5,086 6,055 Less Operating cost (excl. depreciation) - 963 1,295 1,540 1,836 2,283 2,702 3,021 3,537 4,244 Interest charged to operations - 77 94 105 116 134 197 256 301 395 Loan repayments - 58 73 101 130 149 222 282 373 494 Cash dividends - - - 49 59 72 72 98 103 112 Investment in industries - - 1 4 ------Increases in working capital - 66 160 36 88 115 101 103 221 234 Subtotal - 1,164 1,623 1,835 2,229 2,753 3,297 3,760 4,535 5,479 Net funds from internal sources - (4) 75 177 276 342 408 510 551 576 Capital Expenditures Total (incl. interest during construction) 548 555 675 1,210 1,478 1,823 1,673 1,467 1,847 1,901 Less: investment in R.E. -64 -58 -75 -102 -93 -100 -108 -114 -121 -128 Net 484 497 600 1,108 1,385 1,723 1,565 1,353 1,726 1,773 Three year average - 538 735 1,031 1,405 1,557 1,547 1,548 1,617 1,757 Self-financing ratio - (0.7) 10.2 17.2 19.6 21.9 26.5 32.9 34.1 32.8

Proposed self-financing ratio - - - 15.0 15.0 20.0 25.0 25.0 30.0 30.0 - 73 - ANNEX 19

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Peninsular Malaysia

Marginal Cost of Central Diesel Stations (Costs in M$ million, energy in MWh)

Other Energy Present value /c Capital Fuel generation Total genera- Energy Total Fuel Energy Years cost /a cost /b cost /a cost tion /a sales /a cost cost sales

1 8,230 - - 8,230 - - 7,348 - - 2 16,460 89,197 6,803 112,460 339,800 280,500 89,652 71,107 250,446 3 16,460 89,197 6,803 112,460 339,800 280,500 80,047 63,489 199,654 4 16,460 89,197 6,803 112,460 339,800 280,500 71,470 56,686 178,263 5 16,460 89,197 6,803 112,460 339,800 280,500 63,813 50,613 159,163 6 16,460 89,197 6,803 112,460 339,800 280,500 56,976 45,190 142,110 7 16,460 89,197 6,803 112,460 339,800 280,500 50,871 40,348 126,884 8 16,460 89,197 6,803 112,460 339,800 280,500 45,421 36,025 113,289 9 16,460 89,197 6,803 112,460 339,800 280,500 40,554 32,165 101,151 10 16,460 89,197 6,803 112,460 339,800 280,500 36,209 28,719 90,313 11 16,460 89,197 6,803 112,460 339,800 280,500 32,330 25,642 80,637 12 16,460 89,197 6,803 112,460 339,800 280,500 28,866 22,895 71,997 13 16,460 89,197 6,803 112,460 339,800 280,500 25,773 20,442 64,283 14 16,460 89,1q7 6,803 112,460 339,800 280,500 23,012 18,251 57,396 15 16,460 89,197 6,803 112,460 339,800 280,500 20,546 16,296 51,246 Total 672,887 527,868 1,686,835

/a Currently Malaysia operates several diesel stations with 64.7 MW capacity as follows: Generation Estimated Generation Losses & cost, Generating investment, at 60! own con- other than capacity 1980 prices load factor sumption Sales fuel cost (kW) (M$°000) (MWh) (MWh) (Mih) (in M$) Kota Bharu 38,350 64,700 201,600 37,000 164,600 4,209 Lewal/Lundung PS & Besut 5,200 8,700 27,300 5,000 22,300 1,773 Kuala Trengganu & KTR power station 15,400 26,000 80,900 12,700 68,200 239 Kuala Lipis 3,000 5,100 15,800 2,200 13,600 324 Mersing 2,702 4,600 14,200 2,400 11,800 258 Total 64,652 109,100 339,800 59,300 280,500 6,803 Since the diesel stations are currently operated at over 60% load factor (l.f.), which is inappropriate, the above figures are adjusted to correspond to a 60% l.f. operation. Investment is based on US$750/kW, and the capital cost on 12% OCC and a 14-year life span for diesel sets. Based on the annuity formula, the capital charge would be 15.09% a year. /b The retail fuel cost at international prices is about M¢71/liter, or US$50/bbl (diesel) for a heat value of 6 million BTU. A 14,000 BTU/kWh heat rate for diesel sets would yield a fuel cost of M¢26.25/kWh (generation) at 1980 prices. /c Present value (p.v.) is derived by using a 12% annual discount rate. Based on the estimates the marginal cost of power supply from central diesel stations is M¢39.89 per kWh including a fuel cost of 31.29¢/kWh, in 1981 price. - 74 - ANNEX 20

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Internal Economic Rate of Return (IERR) Calculations

Costs (M$106 ) Sales (GWh)/d Households Benefit M$ x 106 Invest- O&M Bulk Dome- Corn- Indus- connected Dome- Commer- Indus- Kerosene Years ment /a /b supply /c Total stic mercial trial Total (no.)/e stic/f cial/g trial/h saving/i Total

1983 136.22 2.72 17.40 156.34 18.0 22.4 62.1 102.5 31,195 3.60 8.33 24.78 2.91 39.62 1984 115.91 5.04 38.46 159.41 43.0 55.5 128.0 226.5 75,946 8.60 20.65 51.07 7.09 87.41 1985 87.47 6.79 56.64 150.90 65.6 75.1 192.9 333.6 114,537 13.12 27.94 76.97 10.69 128.72 1986 6.80 6.93 60.45 74.18 74.7 78.8 202.5 356.0 128,674 14.94 29.31 80.80 12.01 137.06 1987 64.07 77.93 81.1 82.8 212.7 377.3 135,761 16.22 30.77 84.84 12.67 144.50 1988 67.26 81.26 85.9 86.9 223.3 396.1 138,476 17.18 32.31 89.08 12.93 151.50 1989 70.90 84.92 91.1 91.3 234.5 416.9 141,245 18.22 33.93 93.54 13.19 158.88 1990 74.47 88.74 96.6 95.8 246.2 438.6 144,070 19.32 35.63 98.21 13.45 166.61 1991 48.36 92.77 102.4 100.6 258.5 461.5 146,951 20.48 37.41 103.12 13.72 174.73 1992 82.45 96.99 108.5 105.7 271.4 485.6 149,890 21.70 39.28 108.28 13.99 183.25 1993 86.75 101.43 115.0 110.9 285.0 510.9 152,888 23.00 41.42 113.69 14.27 192.38 1994 91.28 106.09 121.9 116.5 299.2 537.6 155,946 24.38 43.30 119.38 14.56 201.59 1995 96.06 111.01 129.2 122.3 314.2 565.7 159,065 25.84 45.47 125.35 14.85 211.51 1996 0 104.21 122.3 314.2 45.47 125.35 1997 0 122.3 314.2 45.47 125.35 1998 0 122.3 314.2 45.47 125.35 1999 0 122.3 314.2 45.47 125.35 2000 0 122.3 314.2 45.47 125.35 2001 0 122.3 314.2 45.47 125.35 2002 0 122.3 314.2 45.47 125.35 2003 0 122.3 314.2 45.47 125.35 2004 0 122.3 314.2 45.47 125.35 2005 0 '122.3 314.2 45.47 125.35 2006 0 122.3 314.2 45.47 125.35 2007 0 122.3 314.2 45.47 125.35 2008 0 122.3 314.2 45.47 125.35 2009 0 122.3 314.2 45.47 125.35 2010 0 '22.3 314.2 45.47 125.35

IERR 25.7%

/a Investment between 1986 and 1995 at 2% of earlier investment each year, to sustain growth.

/b O&M Cost = 2% of investment.

/c Bulk Sapply Cost = Mc16.98 per kWh at the point of sale, based on LRMC calculations by the Bank Mission in May 1981.

/d Growth in Sales: Domestic = 4% p.a.; Commercial & Industrial = 5% p.a.

/e Growth in Housholds = 2% p.a., after 1987.

/f Domestic Revenue @ Mc20 per kWh (prevailing tariff).

/g Commercial Benefit @ M¢37.2 per kWh (para. 6.16).

/h Industrial Benefit @ Mc39.9 per kWh (para. 6.17).

/i Rerosene Saving $7.78 per household per month (see para. 6.11).

/j Industrial and commercial sales have been reduced to 80% of the forecast to account for the price elasticity of demand, which implies elasticity for commercials sales = -0.35 and that for industrial sales = -0.20. (Elasticity of -0.1 means 1% reduction in sales for 10% increase in price). - 75 - ANNEX 21

MALAYSIA

RURAL ELECTRIFICATION PROJECT

Documents in Project File

1. Rural Electrification Study: Peninsular Malaysia, Middle West Service Co. Report, August 1978

2. Central Kedah Valley 33 kV System Development Design Concept Report, October 1980, Tenaga Ewbanks Perunding Consulting Engineers

3. Transmission Project Reports Nos. PPP(T) 1981/2-3-4-5-6 of July 1981, National Electricity Board of Malaysia

4. System Development 1981-2000, Part I, Load Forecasts, No. PP 1981/1, April 1981, National Electricity Board

5. Report on Generation Development Studies, FY86-90, No. PP(a), 1981/5 of August 1981, National Electricity Board

6. Master Plan for Power System Development Summary, April 1981, German Agency for Technical Coperation Ltd., SAMA Consortium

7. Statistical Bulletin (Year Ending August 31, 1979), National Electricity Board

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