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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.