FOR TWO US$300 MILLION BOND ISSUES BY THE FOR AN EGAT - INVESTMENT PROGRAM SUPPORT PROJECT AUGUST 12, 1998

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank PROJECT APPRAISAL DOCUMENT ON PROPOSED PARTIAL CREDIT GUARANTEES FOR TWO US$300 MILLION BOND ISSUES BY THE - ELECTRICITY GENERATING AUTHORITY OF THAILAND (EGAT) FOR AN EGAT - INVESTMENT PROGRAM SUPPORT PROJECT AUGUST 12, 1998 East Asia Energy and Mining Development Sector Uniit Thailand Country Unit East Asia and Pacific Regional Office ReportNo: TH

2 CURRENCY EQUIVALENTS (As of July 1998) Currency Unit = Thai Baht (B) US$1 = B 40.0 B I = US$0.025 WEIGHTS AND MEASURES MW - megawatt (1,000 kilowatts) kwh - kilowatt-hour Gwh - gigawatt-hour (1 million kwh) ABBREVIATIONS AND ACRONYMS BOO - Build Own Operate EGAT - Electricity Generating Authority of Thailand EGCO - Electricity Generating Company EA - Environmental Impact Assessment EIA - Environmental Impact Analysis ERR - Economic Internal Rate of Return FRR - Financial Internal Rate of Return GEF - Global Environmental Facility IPP - Independent Power Producer MEA - Metropolitan Electricity Authority MOF - Ministry of Finance NEB - National Environmental Board NEPO - National Energy Policy Office NESDB - National Economic and Social Development Board OECF - Overseas Economic Cooperation Fund of Japan OEPP - Office of Environmental Policy and Planning p.a. - per annum PDP - Power Development Plan PEA - Provincial Electricity Authority PCG Partial Credit Guarantee PTT - Petroleum Authority of Thailand RAP - Resettlement Action Plan SOE - State Owned Enterprise SPP - Small Power Producer Vice President: Jean Michel Severino Country Director: J Shivakumar Sector Manager: Yoshihiko Sumi Task Team Leader: Darayes Mehta

3 Thailand EGAT - Investment Program Support Project CONTENTS A. Project Development Objective Project dlevelopment objective and key performance indicators... 2 B. Strategic Context Sector-related CAS goal supported by the project Main sector issues and Government strategy Sector issues to be addressed by the project and strategic choices... 5 C. Project Description Summary Project components Key policy and institutional reforms supported by the project Benefits and target population Institutional and implementation arrangements... 9 D. Project Rationale Project alternatives considered and reasons for rejection Major related projects financed by the Bank and/or other development agencies Lessons learned and reflected in proposed project design Indications of borrower commitment and ownership Value added of Bank support in this project E. Summary Project Analysis Economic Financial Technical Institutional Social Environmental assessment Participatory approach F. Sustainability and Risks Sustainability Critical risks Possiblecontroversial aspects... 17

4 G. Main Loan Conditions Effectiveness conditions Other H. Readiness for Implementation I. Compliance with Bank Policies Annexes Annex 1. Project Design Summary Annex 2. Detailed Project Description Attachment A to Annex 2. Term Sheet Attachment B to Annex 2. Environmental Protection Annex 3. Estimated Project Costs Annex 4. Cost-Benefit Analysis Summary Annex 5. Financial Analysis Attachment to Annex 5 Privatization, Restructuring and Regulation of EGAT Annex 6. Procurement and Disbursement Arrangements Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Statement of Loans and Credits Annex 10. Country at a Glance Map: IBRD No

5 INTIERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION East Asia and Pacific Region Country Department EACTH Project Appraisal Document Thailand EGAT - Investment Programn Support Project Date: August 12, 1998 Country Director: J. Shivakumar Project ID: TH-LL Sector: Energy (Power) Lending Instrument: Partial Credit Guarantee Task Team Leader: D. Mehta Sector Manager: Y. Sumi Program Objective Category: Program of Targeted Intervention: [I Yes [XI No Project Financing Data [] Loan [ Credit [X] Guarantee [] Other [Specify) Financing plan (US$m): Source Local Foreign Total Government Commercial Borrowing IBRD Supplier's Credits Borrower's Internal Sources and local borrowing 2,576 2,576 TOTAL 2,576 2,309 4,885 Borrower: Electricity Generating Authority of Thailand (EGAT) Guarantor: Kingdom of Thailand Responsible agency: EGAT Estimated disbursements (Bank FY/US$M): Not applicable For Guarantees: [X] Partial Credit [] Partial risk Proposed coverage: Principal on original scheduled maturity (subject to the outcome of the credit rating exercise and discussions with the lead bank, tlhe Bank's guarantee may alternatively cover payment of principal at maturity, on a non-accelerable basis, and two scheduled semi-armual interest payments). Project sponsor: EGAT (Issuer of the Bonds) Nature of underlying financing: Bond Issue Terms of financing: Principal amount (US$) US$ 600 million - Two bond issues of US$ 300 million each Final maturity 10 years Amortization profile Bullet payment at maturity Financing available without guarantee?: [X] Yes [ No If yes, estimated cost or maturity: About 5 years at about 400 basis points over corresponding US Treasuries but only with a sovereign guarantee (as of July 14, 1998, the date of receipt of proposals for selection of lead managers for the bond issue). Estimated financing cost or maturity with guarantee: 10 years at about 150 basis points over corresponding US Treasuries (as of July 14, 1998) Expected effectiveness date: September 30, 1998 (first bond issue) Closing date: Not applicable

6 2 Note: The Project is being presented for Board approval as a single operation for two bond issues. In the first instance, Board authorization is being sought for a partial credit guarantee foi the first bond issue. Board approval would be sought at the appropriate time for the terms and conditions pertaining to the second bond issue and the provision of a second partial credi guarantee. At that time, the Board would be informed of the progress achieved in respect o financial and institutional aspects, without undertaking a second full Project appraisal. A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The main development objectives of the Project are to: (a) help EGAT meet its essential investment commitments on generation and transmission projects whose implementation has already been under way - at a time when the country faces a severe financial crisis and has difficulties in accessing long-term finance at reasonable maturities; (b) help EGAT not lose ground in: (i) accomplishing its organizational restructuring and corporatization; and (ii) implementing its privatization strategy - both of which are part of the Privatization Master Plan for State-Owned Enterprises (SOEs) which the Government is preparing at the behest of the IMF and with technical assistance financed by the Bank; and (c) help improve the regulatory framework for the energy sector. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annexl): CAS document number: Report No.: TH Date of latest CAS discussion: July 9, The Project is consistent with the Bank's Country Assistance Strategy which recognizes the need to strengthen Thailand's infrastructure base - notably in energy, water and transport - which is vital to regain its international competitiveness. Specifically for the energy sector, the CAS advocates: (a) mobilizing private sector financing for electricity by accessing capital markets through Bank guarantees; (b) catalyzing private sector financing by privatizing and by reducing policy, regulatory and conversion risks; (c) supporting regulatory reform for the energy sector, and (d) bracing EGAT's financial position against the impact of the financial crisis. The Project is also consistent with the conditionality of the IMF standby-arrangement, especially in regard to reforzn and privatization of state-owned enterprises and strengthening of the regulatory framework. Finally, the Project supports power sector reform and restructuring strategies which are consistent with the Bank's power sector policy. It supports the aforementioned objectives by: (a) mobilizing private financing through two US$300 million bond issues (one each in Thai FY98 and FY99) in the international capital markets for vital investments in electricity infrastructure which would: (i) sustain the reliability and efficiency of the power system in the long term; and (ii) facilitate evacuation of power from Independent Power Producer (IPP) plants within Thailand and import from neighboring countries; and

7 3 (b) supporting power sector reform, more specifically through: (i) the restructuring of EGAT into autonomous business units followed by the corporatization of EGAT itself as a whole; (ii) progressive privatization of EGAT's new thermal generation plants; and (iii) establishing and implementing measures to improve the regulatory framework for the energy sector. 2. Main sector issues and Government strategy: The main sector issues and the Government's strategy to respond to these issues are outlined below: 2.1 Large Investment Requirement of the Sector (calling for Restructuring and Privatization): The power sector requires massive investments for which public funds would not be sufficient and private participation would be required. In response, the Government has formulated a comprehensive plan for the restructuring and privatization of the electricity industry (see Attachment to Annex 5). Its immediate thrust is towards: (a) privatization of thermal power generation of EGAT; (b) introduction of Independent Power Producers (IPPs); and (c) introduction of Small (private) Power Producers (SPPs). It is proceeding in parallel with restructuring, corporatizing and commercializing EGAT itself as well as the two distribution entities, the Metropolitan Electricity Authority (MEA) and the Provincial Electricity Authority (PEA). It has envisaged, in the near term, a "single buyer" model for the Thai power system (with EGAT as the buyer), and a long-term model in which a wholesale power market would be established. Reference: Publications of the National Energy Policy Office (NEPO); Bank's Report No TH, Increasing Private Participation and Improving Efficiency in State Enterprises; and Privatization Master Plan for State-Owned Enterprises (under preparation by the Government for the IMF). 2.2 The Financial Crisis and Its Impact on EGAT: The currency crisis in Thailand has had an adverse impact on the financial health of the Thai electricity utilities. Before the crisis, EGAT's financial position was sound and more than satisfied the Bank's financial covenants. Following the crisis (with the exchange rate going from Baht 25/US$ up to more than Baht 50/US$ and thereafter stabilizing at around Baht 40/US$), EGAT suffered heavily from higher operating costs, debt servicing requirements and foreign exchange losses and could no longer meet the self financing ratio covenant of the Bank in FY97 and FY98. Because of the severity of the devaluation, there has been political reluctance to raise tariffs immediately. Although the Government has made adjustments to the tariff from April 1, 1998 to reflect devaluation of the Baht, this has only partially offset the impact of devaluation, and consequently, EGAT has not been able to recover fully. There is need to improve its financial position and remove serious constraints it faces in meeting the financing requirements of its ongoing investment program. The financing gap is further aggravated by EGAT's inability to access long term financing in the international market because of perceived higher country risk and the collapse of the domestic debt market. The Government, in consultation with the Bank, has decided that part of the financial resources required for EGAT should be mobilized from the capital markets. 2.3 Erosion of the Sector's Profitability: Erosion of the sector's profitability has raised concerns about EGAT's ability to meet its obligations towards IPP contracts already finalized and to close IPP deals which have been negotiated and renegotiated following the devaluation of the Baht (see

8 4 Attachment to Annex 5). The adverse financial position of EGAT could also act as a deterrent in pursuing its privatization program at a time that it needs to be kept on track. During the transition period, EGAT would need substantial resources to support its ongoing investments, both in its own generation program (some of which is not planned for privatization in the near future) and in the reinforcement of the transmission network to facilitate purchase of electricity from IPPs. With some stability in the exchange rate, the Government has implemented measures to partly address the adverse impact of the crisis, by providing an automatic adjustment to EGAT's tariff so that the risk of foreign exchange rate variations is passed through to the consumer. 2.4 Non-Independent Regulatory Regime: The power sector requires credible and transparent arrangements for regulation. Although the existing scheme of regulation has been working satisfactorily (as evidenced by operating efficiency and the lack of power shortages), there is a need for orienting the regulatory framework to a more commercial sector structure in view of increased private participation in the sector. In response, the Government has: (a) taken the first step by completing a Bulk Supply Tariff study whose recommendations it is now implementing; and (b) has now completed a comprehensive study to define the structure of the future regulatory system, including functions and procedures. References: (a) Bulk Supply Tariff Study under Bank's Loan No TH, Lam Takhong Pump Storage Project; and (b) Study on Regulatory Framework for The Energy Sector under Bank's Loan No TH, Distribution Automation and Reliability Improvement Project. The Bank will also be financing additional regulatory studies under its technical assistance program. 2.5 Limited Indigenous Energy Resources: Thailand's energy resources for generating electricity are limited and it would need huge energy imports either in the form of fuel (coal and gas) or electricity itself. The Government's strategy calls for: (a) import of power from neighboring countries, especially Lao PDR (this would eventually lead to the establishment of an Indo China Grid) and Malaysia; and (b) importing coal, and other cheap fuels, substantially through private power producers and gas through pipelines from Myanmar. Arrangements for import of power from Lao PDR (the nucleus for the creation of the Indo China (Lower Mekong) Grid, in which the Bank expects to play a significant role, is under active discussion between the countries in the region) and gas from Myanmar are well advanced. Reference: (a) Bank's Report No TH, Thailand - Fuel Options Study; (b) Bank's Report No EAP Greater Mekong Power Trade. 2.6 Deteriorating Supply-Side Efficiency and Reliability: The massive growth in electricity demand in Thailand over the last decade (at an average rate of 10% p. a.) has placed severe strains on the systems that transmit and distribute power and their reliabilities have deteriorated significantly. The Government placed a strong emphasis on reliability in its Eighth 5-year plan ( ) and directed EGAT, MEA and PEA to undertake investments necessary to improve transmission and distribution reliability and efficiency. EGAT is implementing a substantial and long overdue transmission reinforcement program. In regard to PEA and MEA, this aspect is being addressed in the most recent Bank assisted projects (Loans 4067-TH and 3598-TH). 2.7 The Need to Exercise Vigilance on the Investment Program During the Economic Turndown: The recent deteriorating economic situation and consequent reduction in power demand has created a vital need to exercise vigilance on the electricity utilities' expansion and investment programs. Continuous monitoring and tailoring of the system expansion programs is necessary to avoid wasteful investments. The Government is aware of this situation and has directed EGAT to prepare a revised Power Development Plan and MEA and PEA to prune down expansion.

9 5 2.8 The Need to Strengthen the Sector's Environmental Management Capabilities: Rapid development of the power sector has been associated with significant stresses on the environment and has raised serious social concerns. In the last few years the Government has placed a strong emphasis on an environmentally sound and sustainable development. It has strengthened the Environmental Act, revamped the environmental bureaucracy and formalized involvement of NGOs in environmentally sensitive projects and environmental impact assessments. There is now a growing need to strengthen the institutional capabilities of Government agencies in environmental management. While EGAT has accumulated substantial expertise in addressing environmental and social issues project-wise, it does not have a comprehensive corporate policy or documented implementation guidelines for handling the environmental and social issues associated with its development programs. 2.9 The Need to Improve Demand-Side Efficiency: To curb wasteful consumption and to increase the efficiency of electricity use, a strong energy conservation and management program is needed. The Government is fostering this through: (a) economically efficient pricing of resources; and (b) a well-structured demand-side management (DSM) program, which is being very successfully implemented by EGAT. The Bank is intimately associated with this program under the Bank's GlEF funded DSM project (GEF Grant No TH). 3. Sector issues to be addressed by the project and strategic choices: The Project addresses most of the aforementioned sector issues as follows: 3.1 Large Investment Requirements of the Sector (calling for Restructuring and Privatization): The Project provides for agreement on the steps and time frame for the organizational restructuring and corporatization of EGAT and privatization of its thermal power plants. The Project would also support private power development through financing of the critical transmission system for facilitating transport of power from the IPP plants. 3.2 The Financial Crisis and Its Impact on EGAT: The Project provides for the use of the Bank's Partial Credit Guarantee Instrument, to help EGAT float, subject to market conditions, two Bond issues of about US$ 300 million each. The first issue is currently planned for September 1998 and the second issue for June Bank's Partial Credit Guarantee would ensure that the finamcing raised is of adequate maturity and reasonable spread. The present value of Bank exposure for a ten-year issue would be about 56% only (based on the Bank providing a guarantee of the principal for a 10-year bullet bond). This operation would help re-establish EGAT's name as an issuer and would force EGAT to market discipline in terms of transparency of financial accounts and operation. This in turn would complement project objectives of achieving organizational reform and market discipline. 3.3 Erosion of the Sector's Profitability: The Project provides for agreements to redeem and maintain the sector's profitability through implementing measures necessary to restore the self financing, debt service and capital structure requirements of EGAT (similar measures for MEA and PEA are being addressed under Bank's ongoing projects with these utilities). 3.4 Non-Independent Regulatory Regime: The Project provides for agreements with the Government's National Energy Policy Office on defining and implementing measures to improve the regulatory franmework for the energy sector, based on the findings of the study completed under Bank Loan 4067-TH. These measures will be further reviewed under the Privatization Master Plan for State Owned Enterprises, currently under preparation by the Government for the

10 6 IMF. Detailed legislation for an independent regulator would be drafted with technical assistance financed by the Bank. 3.5 Limited Indigenous Energy Resources: The Project would help lay the foundations for interconnection between Thailand and its neighboring countries of Lao PDR and Malaysia (the Indo China (Lower Mekong) Grid) that would meet a substantial portion of Thailand's electricity needs and eventually promote regional power trade. The Project also supports development of power generation using gas from Myanmar. 3.6 Deteriorating Supply-Side Efficiency and Reliability: Through financing vital generation and transmission expansion components which are already under implementation, the Project would help maintain the efficiency and reliability of the entire Thai power supply system in the long run. 3.7 The Need to Exercise Vigilance on the Investment Program During the Economic Turndown: Bank missions have worked closely with EGAT in developing a new expansion program which has resulted in deferring several investments planned in the near term. A revised Power Development Plan prepared during appraisal in July 1998, is being further reviewed in the light of further depression in GDP and demand. Semi-annual review and updating of the power development plan is also called for during Project implementation. 3.8 The Need to Strengthen the Sector's Environmental Management Capabilities: The Project would strengthen EGAT capability and credibility at environmental and resettlement management by laying down the corporate policy for these functions. It also provides for strengthening the environmental management function of EGAT in regard to monitoring and evaluation of environmental impacts of plants constructed by EGAT. C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Through the raising of two bonds of US$300 million each, one by September 30, 1998 and the other by June 1999 (subject to market conditions), the Project would help meet part of the financing gap for EGAT investments during the period FY FY2001, for the following power generation and transmission facilities whose implementation has already commenced 1. Component Category Cost Incl. % of Contingencies Total (US$M) (a) 300 MW, Krabi Thermal Unit 1 Physical (b) 2x700 MW Ratchaburi Thermal Units I & 2 Physical 1, (c) 3x600 MW Ratchaburi CC Blocks 1,2,3 Physical 1, The table lists all Project components that have been appraised. Some of these components may be deferred or curtailed in scope depending on the need to reduce investments commensurate with demand growth.

11 (e) 500 kv Transmission System for IPPs and Physical 1, Hong Sa Project in Laos (f) Bulk Power Supply for Greater Bangkok Physical (g) EGAT-TNB Stage II Interconnection Physical (h) Transmission System Expansion Project 9 Physical TOTAL 4, (i) Restructuring and Corporatization of EGAT Institutional 5 Reform (j) Privatization of EGAT Generation Sector Reform 3 (k) Reforming the Sector's Regulatory System Sector Reform 1 (1)(i) Formulation of Corporate Policy for Institutional 0.5 Environmental and Social Management; and (ii) Stemgthening Strengthening EGAT's Environmental Management Function Structure of the Partial Credit Guarantee (see Annex 2 and Attachment A to Annex 2) The proposed bond operations, supported by the World Bank guarantee, would each use a fixed rate bond of a minimum maturity of 10 years repayable with a bullet payment of principal. They would be offered in the Euro/US 144a markets. The partial credit guarantee of the Bank would cover 100 percent of the bullet principal repayment at scheduled maturity, on a non-accelerable basis. Bondholders would assume Thailand risk on the interim interest payments (the Kingdom of Thailand is the owner of EGAT). The use of the Bank's partial credit guarantee for one or two coupon payments on a rolling basis is under consideration, subject to its leading to a rating higher than the sovereign debt. Discussions with the Government (Ministry of Finance (MOF) and EGAT) have been very positive. Based on informal market soundings, indications are that the Bank's guarantee would result in significant additionality both in terms of narrower margins and longer maturities for the issues and in broadening the existing investor base for Thailand debt. With the bullet repayment structure, there is no amortization of principal until maturity. This effectively results in a longer 'grace period' as compared with the grace period of 5 years for a typical Bank loan, and a comparable average life to that of a Bank loan (about 9 years, based on average disbursement profile for Bank loans to the power sector). The Request for Proposals to select the arrangers for the first bond issue was issued in July Key policy and institutional reforms supported by the project: The key policy and institutional reforms supported by the Project are (see Attachment to Annex 5): (a) Internal restructuring of EGAT into autonomous Business Units that would first operate as profit centers, then be converted into EGAT subsidiaries and later privatized. (b) Corporatization of EGAT and its transformation into a limited liability company. (c) Establishment of Ratchaburi Power Co. starting with Combined Cycle Units 1, 2 and 3 as a wholly owned EGAT subsidiary and its subsequent privatization. (d) Divestment of about 14.9% of EGAT's equity in EGCO (already accomplished in July 1998).

12 8 (e) Privatization of any new thermal generating plants constructed by EGAT. (f) Establishment of a wholly-owned transmission subsidiary of EGAT operating as a "single buyer" of power from all duly licensed generators within Thailand (and import from neighboring countries) on an arm's length basis. (g) Improvement of the regulatory framework for the energy sector including: (i) preparation of a draft law for the electricity supply industry and its submission to Parliament; (ii) preparation of secondary regulations and submission to Cabinet (or other appropriate authority) for approval; and (iii) establishment of an independent regulatory office separate from NEPO following approval of secondary regulations. 3. Benefits and target population: Benefits of the Project Components: The Project would help EGAT maintain the reliability and efficiency of its power system (over-stressed by a decade of heavy demand growth) in the long term by keeping on track the implementation of its ongoing generation plants and transmission expansion programs. The development of vital transmission infrastructure would also facilitate: (a) the implementation of the IPP program for which EGAT has recently finalized power purchase agreements; and (b) import of power from the neighboring countries of Lao PDR and Malaysia. The Project would also help sustain elements of the reform program envisioned by the Government for the power sector, including the organizational restructuring of EGAT, its corporatization, privatization of its thermal generation plants and improving the energy sector's regulatory framework. Being a project of national significance, the target population is the population of Thailand. Benefits of the Partial Credit Guarantee (PCG): The benefits of the Partial Credit Guarantee operation would be: (a) Access to capital markets: This operation would enable EGAT to obtain market financing with reasonable spread and maturity with enhanced credit and set a benchmark for its future bond operations. Since the issuer of the paper would be EGAT, the PCG operation would help to establish a track record for the company by exposing EGAT to the rigors of market discipline, thereby facilitating its commercialization and privatization process. (b) Maturitv: After the East Asia crisis, it has become practically impossible for EGAT to go to the capital markets for financing on reasonable terms for any maturity. The operation would enable EGAT to extend its available financing considerably beyond current market tenrs to at least ten years, with an extended grace period through a bullet structure. (c) Competitive Financing Cost: Borrowing with the support of the World Bank Guarantee would be on attractive terms, reflecting not only the Bank's credit enhancement, but also the guarantee on coupons by the Kingdom of Thailand. (d) Leverage: Private lenders would take the interest payment risk on Thai credit for a period of 10 years. The partial credit guarantee for principal only, for a 10 year bond, on a non-accelerable basis, would result in exposure for the Bank of around 56% in present value terms, thereby

13 9 significantly leveraging Bank resources as compared to a Bank loan. In case of a guarantee of the coupon this would increase by 3% for one coupon coverage and 6% for two coupon coverage. The risk taken by the investors will correspondingly reduce. (e) Support for EGAT's Privatization Initiative: The guarantee operation would bring in capital to sustain EGAT's investment program, thereby allowing EGAT to complete its generation facilities that will make EGAT more attractive for subsequent privatization. In addition, the guarantee operation would expose EGAT to financial market discipline and introduce EGAT to international financial markets, which itself could be the source for privatization efforts. These consequences of the bond issues (which are conditional on tangible steps being taken by EGAT and the Government towards restructuring and privatization) are expected to increase market interest in the privatization of EGAT. (f) Reduced Burden on Public Sector Budget: The better financing terms that would be realized due to the Bank's partial credit guarantee would correspondingly reduce the repayment burden on the public sector budg;et. 4. Institutional and imfplementation arrangements: Implementation period: Implementation of the Project components has been ongoing. The earliest Project component started in 1993, while the last Project component would be completed in The Bank financed investments would be substantially completed by Executing agencies: EGAT would be the executing agency for all project components except "Reforming the Regulatory System for the Energy Sector" which would be implemented by the Government's National Energy Policy Office (NEPO) under the guidance of the MOF which is overseeing the privatization and regulatory program for all infrastructure sectors. Project coordination: EGAT would be responsible for overall coordination of the Project. Project oversight (policy guidance, etc.): The Ministry of Finance (MOF) will supervise Project financing and advise EGAT on all financing matters. NEPO and MOF will oversee the implementation of EGAT restructuring and privatization. The Prime Minister's Office will oversee the implementation of regulatory framework reformns by NEPO. Accounting, financial reporting and auditing arrangements: EGAT's accounts are audited annually by the Office of the Auditor General, the government agency responsible for auditing all state enterprises. AII international accounting firm (Price Waterhouse Coopers) also acts as external auditors and has been retained as financial consultant, cooperating with the Auditor General in issuing ECAT's annual accounts. EGAT would submit to the Bank audited financial statements within six months of the close of each fiscal year. Monitoring and evaluation arrangements: Satisfactory procedures for monitoring the progress of the project in terms oif physical execution, environmental and social aspects and financial reports have been agreed with EGAT which would furnish semi-annual progress reports. An Implementation Completion Report (ICR) would be drafted by the Bank with EGAT's assistance not later than six months after completion of the Project. EGAT would also prepare a plan for the operational phase of the Project, and together with the Bank, define the performance indicators to

14 10 be used to monitor operations and development impact. EGAT would also prepare and make available to the Bank its own evaluation report, including a summary report which would be attached unedited to the ICR. Project supervision would focus on monitoring: (a) performance indicators; (b ) compliance with financial covenants; (c) implementation of environmental impact mitigation and resettlement/compensation; (d) physical construction; and (e) institutional restructuring and sector reform. Supervision expertise would comprise: power engineering, economics, financial analysis, environmental and social issues, restructuring and privatization and legal aspects. Two missions annually for a period of four years are foreseen, with total estimated staff-week (sw) inputs (on the basis of sharing with other Thai power projects) of: (a) power engineer, economist and financial analyst sw; (b) enviromnental specialist -- 4 sw; (c) social scientist - 4 sw; and (d) sector reform and restructuring specialist, guarantee specialist and legal expert sw. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Before inclusion in the formal power development plan (PDP), EGAT along with local and international consultants undertakes detailed analysis of -- feasibility; alternatives; fuel availability both locally and in the international markets; flexibility and reliability of fuel supply; transport options; initial environmental impacts (which take into consideration adverse impacts of alternative site locations and supply and disposal facilities for limestone and gypsum, respectively, when a FGD is utilized); land availability and ownership; extent of resettlement; socio-economic impact; political and international treaties; and other relevant issues. EGAT also takes into account the Government's needs related to energy security by diversifying fuel and sites. The projects that satisfy these criteria, are further processed through a program called PRO- SCREEN for project prioritization and inclusion in the PDP. The PDP is scrutinized by the government agencies - National Economic and Social Development Board (NESDB) and NEPO - before being approved by the Cabinet. The Project, thus, is unlikely to have any feasible alternatives that are technically, economically or environmentally superior. If, as an alternative, the Project is not undertaken, or delayed, private power development would be hampered, and the reliability and efficiency of supply would deteriorate and financial and economic losses would ensue to the country in the long term. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector Issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) IP DO* Bank-financed Improving efficiency and Metropolitan Distribution S U reliability of distribution in Reinforcement Project (LN 4199 Bangkok and restructuring of June 24, 1997

15 MEA Improving efficiency and Distribution Automation and S U reliability of distribution Reliability Improvement Project outside Bangkok and (LN 4067 of Sept. 27, 1996) restructuring PEA Meeting system peak Lam Takhong Pump Storage S U demand and addressingl Project ( LN 3884 of Sept. 8, bulk supply tariff issues 1995) Reinforcing distribution and Distribution System S U extending rural Reinforcement Project (LN 3798 electrification of Sept. 27, 1994) Other development agencies OECF of Japan 11 Lam Takhong Pump Storage Project Global Environmental Promotion of Electricity Energy S U facility Efficiency * All power sector projects in Thailand have recently been given unsatisfactory DO rating primarily due to the financial crisis which has resulted in the utilities not being able to meet the Bank's financial covenants. The utilities are expected to meet the financial covenants from FY99 onwards. 3. Lessons learned and reflected in the project design: The following are the main lessons learned and reflected in the Project design: (a) a thorough review of the Power Development Plan and tailoring of investments to the country's economic scenario; (b) a comprehensive review of the environmental impact assessments, the incorporation of strengthening measures and provision for monitoring during implementation; (c) a detailed formulation of the resettlement action plans and provision for monitoring during implementation; and (d) adoption by EGAT of a participatory process in the design, environmental impact assessments and resettlement and compensation programs for the Project. 4. Indications of Borrower commitment and ownership: The Government has made a very specific request to the Bank to prepare this operation on an urgent basis. EGAT's need for the Bond funds is imminent and EGAT has cooperated fully with the Bank missions in all aspects of Project preparation, in an extremely short time frame. Implementation of all Project components has started and some of the components are in an advanced stage. Government and EGAT commitment to the Project is, therefore, assessed to be exceptionally strong.

16 5. Value added of Bank support in this project: Bank association with the Project would add value in the following aspects: 12 (a) The Bank's Partial Credit Guarantee would help catalyze private financing for the power sector through debt financing from the capital markets with reasonable spread and maturity and establish EGAT as an issuer in the capital markets. (b) The Bank's involvement in the review of plans and implementation schedule for restructuring and privatization of EGAT and improving the regulatory framework for the power sector would enhance the credibility of these processes. (c) The Bank's review of EGAT's Power Development Plan and adjustment of its financing plans in tune with the country's economic scenario wo uld help development of an economically viable investment program. (d) The Bank's review and subsequent monitoring of environmental assessments and resettlement plans of major projects in EGAT's investment program would fortify their credibility and set the pace for similar operations for future IPP plants. (e) Finally, Bank presence in the Project would provide a degree of comfort: (i) to the IPPs in the matter of timely and efficient evacuation of power generated by them; and (ii) to the private investors in investing in EGAT's power generation plants. By influencing the creation of a strong 500 kv transmission backbone in Thailand, the Bank would be able to assist in laying the foundation for establishing future interconnections with neighboring countries (the formative Indo China (Lower Mekong) Grid), which would bring benefits to the region as a whole. E: Summary Project Analysis (Detailed assessments are in the project file. See Annex 8): 1. Economic (supported by Annex 4): Following a period of rapid demand growth averaging 10% p. a. during the last decade, the electricity generation requirement of Thailand reached 14,506 MW and 92,725 Gwh during FY 97. This was accompanied with a decline in generation reserve margin to about 12.5% (dependable system installed capacity of 16,300 MW), against a requirement of about 30% for maintaining adequate system reliability and a loss of load probability below 1.0 days p. a. The decline in the efficiency and reliability of the transmission and distribution systems during this period was also significant. The three Thai electricity utilities have been undertaking expansion programs since the mid nineties, which would have enabled the system to reach acceptable levels of reliability, in particular a generation reserve margin exceeding 30% during and varying between 25-30% thereafter. With the decline in demand growth, and curtailment/deferment of projects as feasible, it is expected that the generation reserve margin will increase rapidly in the next few years (varying between 40 to 50% in the years 2000 to 2004) but settling down to about 32% by the year 2005 and varying between 25 to 30% in the long run. (Under the IME'sfifth Letter of Intent under a recently completed fourth review of the reform package, an increased fiscal deficit has been allowed - 3% this fiscal year, 3.55% the next fiscal year - which focuses on employment generating capital investment by state enterprises. It explicitly singles out EGAT's investment program, including Ratchaburi Thermal Units 1-2, Ratchaburi Combined Cycle Blocks 1-3, and Transmission System Expansion Project No. 9 - all of which are components of the Project). The economic justification of the Project is based on a revised demand forecast and a corresponding

17 13 PDP (with several investments deferred), according to which, by the year 2005, the system demand would have grown to about 22,000 MW, the dependable installed capacity to about 29,000 MW and the generation reserve margin to about 32%. [X] Cost-Benefit Ana1lysis: NPV = Baht 31,351 million; ERR = 10.87% []Cost Effectiveness Analysis 2. Financial (see Annex 5): The currency crisis in Thailand has had an adverse impact on EGAT's financial health. Before the crisis, EGAT's financial position was sound, satisfying and even surpassing the Bank's financial covenants. Because the crisis did not emerge until July 1997 (9 months into EGAT's FY) and the existence of an automatic pass through to consumers absorbing increased fuel expenses in the final tariff (Ft), EGAT's revenue-generation was not significantly affected. However, the huge unrealized losses on foreign exchange debt, higher operating expenses, and heavier debt servicing requirements resulting from the crisis which could not be recovered from the Ft, eroded EGAT's profitability and led to its non-compliance with the Bank's financial covenants. The financing gap is further aggravated by EGAT's current inability to access long term financing in the international market because of the country risk and the collapse of the domestic debt market. The Government and EGAT have responded positively to these developments by: (a) permitting foreign exchange fluctuations to be recouped effective April 1, 1998 through its inclusion in the Ft; (b) reviewing EGAT's load growth and reducing its sales forecasts; and (c) revising the power development program. to substantially reduce investments. Notwithstanding these measures, EGAT would need substantial resources to support its ongoing investments, both for its own generation program amd in the reinforcement of transmission network to facilitate electricity transport from IPPs. Fiscal Impact: There would be a positive fiscal impact (equivalent to the discounted future fiscal savings on debt services) due to lower spread resulting from the Bank's partial credit guarantees. The exact amount will depend on the financing terms obtained for the bonds. 3. Technical The physical components of the project are based on detailed feasibility studies undertaken by internationally recognized consultants employed by EGAT. The basic technical parameters of the generating plants and transmission systems have been established by the feasibility studies. Detailed engineering and designs have been and will be done by the concerned Engineering Project Departments of EGAT which have long experience in these disciplines. Consulting assistance has been and will be availed of for the design of generating stations and special designs for the transmission ring around Bangkok. The cost estimates are based on data available in the EGAT Cost Data Bank (which is continuously updated, based on latest contract prices), and are considered to be reasonable. The Project's technical design is, thus, considered to be sound. 4. Institutional a. Executing agencies Although EGAT is wholly-owned by the Govermment and is under the direct supervision of the Prime Minister, it enjoys substantial autonomy. It sets down policies in connection with power

18 14 production and sale of electricity, lignite and other by-products, formulates and approves its own investment plans and budgets, proposes tariffs to the Government, enters into contracts with suppliers of goods and services and borrows from domestic and foreign lenders (subject to Government approval if guarantees are needed). With EGAT achieving "Good State Enterprise Status" in August 1994, it attained even greater day-to-day operating autonomy, i.e. setting financial corporate objectives, decision-making authorities, limits and responsibilities; implementing market-oriented salaries, benefits and bonuses; setting up and managing its own Registered Provident Fund; and recruiting and developing staff. Since 1996, EGAT has been undergoing commercialization and corporatization in parallel with the Government's plan to restructure and privatize the electricity supply industry. Restructuring includes creation of a corporate EGAT (new EGAT), comprising 6 autonomous business units (Transmission, Power Plants, Maintenance, Mining, Engineering and Construction) and 5 operating units (Policy and Planning, Accounting and Finance, Management, Business Development and Hydropower Plants). The approach to privatizing EGAT requires the sale of sufficient assets, on an urgent basis, to finance the expected shortfall resulting from the financial crisis. There is also the need to introduce effective competition to produce efficiency, establish adequate regulatory safeguards to protect consumers, and to consider the welfare of EGAT employees in the restructuring and privatization process. The most recent proposals of EGAT management, which have the Government's approval in principle, and which are in line with IMF's requirements, call for a three-step approach to its privatization and corporate restructuring: Step 1, privatizing the Ratchaburi Combined Cycle 1-3 power plants; Step 2 corporatizing EGAT as a whole and corporatizing and privatizing each subsequent new power plant of EGAT; and Step 3, corporatizing each business unit as a subsidiary of EGAT Company Limited and privatizing each as appropriate. (see Attachmen to Annex 5 for details). b. Project management: Management, implementation and monitoring of project activities would be carried out by EGAT. EGAT has a record of implementing and completing its projects in a timely manner with tight cost control and with substantial achievement of objectives. As a utility, it is endowed with extensive administrative, project management, procurement and technical expertise. With regard to its efficiency, operational, and planning capabilities, recent Bank evaluation reports and other assessments have rated EGAT's performance as outstanding. EGAT has satisfactorily implemented 18 Bank loans (Annex 9) for financing the expansion of electricity generation and transmission facilities, of which 17 have been fully disbursed and one, the Lamn Takhong Pump Storage Project (Loan No TH), is progressing on schedule. EGAT is also satisfactorily implementing a demand-side management project (Trust Fund No TH) for which funding has been provided by the GEF and the Australian Government. Project construction would be under the direct management and supervision of EGAT's Construction Department which is well qualified to handle projects of this magnitude and complexity. A Project Coordination Cell headed by a person at Assistant Governor level, and assisted by staff from the concerned departments of EGAT would be formed to exercise overall coordination of the Project and liaise with the Bank.

19 15 5. Social. 5.1 The Project involves: (a) for transmission lines - acquisition of 32,047 acres of land and relocation of 1,174 households; and (b) for generating stations and substations - purchase of 1,006 acres of land from 75 owners through open market transactions. While 14,146 acres, affecting 630 households have already been acquired, 17,901 acres affecting 544 households still need to be acquired. EGAT has confirmed that the compensation and resettlement policies for the land that has been acquired were the same as those agreed with the Bank for future acquisition under the Project. The policies and procedures used for procuring land for different project components have been described in detailed Resettlement Action Plans prepared by EGAT, and are summarized in the following paragraphs. 5.2 The land acquisition impacts for transmission lines are: (a) land acquisition for the tower base; (ii) land acquisition in the right of way (ROW);(b) relocation of houses in the ROW; and (d) impacts on affected houses, trees and other assets. Compensation for the aforementioned impacts is determirned by a Provincial Compensation Committee, headed by a senior provincial official (generally the Vice Governor of the respective province) and includes provincial government officials, EGAT representatives and the representatives of the affected people as members. The committee establishes the replacement cost of affected assets and provides for a system of redress of grievances, if any. The affected persons need to agree on the proposed compensation rate and sign a survey form expressing satisfaction with the compensation rates offered. 5.3 While land for the tower base is compensated at full replacement value, land in the ROW (which can continue to be cultivated) is compensated at 50% - 90% of replacement value. The latter represents compensation at a much higher level than the practice in most Bank's Borrower countries, where compensation is typically equivalent to 5% - 10% of the replacement cost. Those losing more than 25% of their land holdings as a result of acquisition of land for the tower base can opt for allotment of replacement land of equivalent productivity in lieu of cash compensation. Houses and other assets are compensated at their replacement cost along with the affected residential land. Affected trees are compensated at a rate that takes into account the disruption in income stream associated with the trees. 5.4 Land required for generating stations and substations is not acquired using the law of eminent domain. Instead, open market transactions are resorted to and the land is purchased directly from the owners. Prior to land purchase, EGAT confirms that there are no encroachers, tenants or any other secondary claims on the land. Records of land purchase have been provided by EGAT. 5.5 The entire process of resettlement planning and implementation is participatory. District and village leaders are involved at every stage in the resettlement process. The implementation of the resettlement plans is coordinated by the Land Division of EGAT working with the representatives of the provincial, district and village authorities. Detailed cost estimates (including provisions for physical and price contingencies) for the compensation to be paid and other expenses to 'be incurred for conducting various resettlement related activities, have been prepared. Elaborate mechanisms for grievance redress are available to the affected people. 5.6 The resettlement process will be closely monitored during implementation. Monitoring will be both internal, to be conducted by a special monitoring unit to be formed for the Project, and external, to be contracted to an independent agency (registered with the Office of

20 16 Environmental Policy and Planning (OEPP)) to be appointed by EGAT. Periodic monitoring reports will be submitted to the Bank. 6. Environmental Assessment: Environmental Category [X] A []B []C In accordance with Bank's OD 4.01 on Environmental Assessment, the Project has been assigned Category A. The Project comprises four generation and four transmission line components which are in various stages of completion. The environmental assessment (EA) or environmental impact analysis (EIA), as appropriate, of each component has been completed and reviewed individually. EGAT, with the assistance of local and international consultants, prepared the EAs for the four generation components (at three sites) as required by Thai regulations. Focused EIAs for the transmission line components (not required by Thai regulations) were prepared for the Bank. All EAs required by Thai regulations have been approved by the National Environmental Board (NEB). Two of the transmission line EAs were reviewed by the Bank earlier as a part of another project and were found satisfactory. EGAT has provided addenda and executive summaries to the EAs and EIAs for this Project which provide updated information, further clarification and explanation. All eight components of the Project have been designed and will be implemented in accordance with modern concepts of environmental management. A summary of environmental impact, mitigation and monitoring program, and proposals for strengthening the environmental management function of EGAT is presented in the Attachment B to Annex Participatory Approach: [key stakeholders, how involved, and what they have influenced; if participatory approach not used, describe why not applicable] EGAT's corporate plan now explicitly requires public participation and seeks its acceptance of the development project. For the components in this Project, EGAT's objectives in public consultation included their opinion, needs, problems and obstacles from the people and communities living in the operational area, as well as disseminating accurate information about the Project. Local communities, leaders, and government and non-governmental groups were canvassed and requested for recommendations. Several public meetings were held at each of the Project sites to discuss concerns, mitigation measures and seek resolutions. Alternatives to the projects were discussed with the local communities, as appropriate for each site as detailed in the project specific environmental executive summaries. F. Sustainability and Risks 1. Sustainability: The following key factors are critical to Project Sustainability: Institutional: Continued: (a) Government commitment to its power sector reform proposals; (b) EGAT management commitment to implement its restructuring and privatization program. Financial: (a) Periodic review and appropriate adjustments of the Bulk Supply Tariff by the Regulator; and (b) Financial viability of EGAT Company Ltd. and EGAT Transmission operation when it is separated from EGAT parent body in the future. Technical: (a) High standards and quality of power plant, transmission line and substation construction; and (b) Proper maintenance of the facilities constructed under the Project.

21 17 Environmental and Social: (a) Monitoring of the environmental impact mitigation measures; (b) consultation with affected persons - during; and (c) post monitoring and evaluation - after project completion. 2. Critical Risks (reflecting assumptions in the fourth column ofanne.xl): Risk Risk rating Risk Minimization Measure Annex 1. cell "from cutput to objective" Market conditions are favorable to raising Moderate Right market timing, issue bond financing. rating and coupon coverage under the guartantee. Continued commitment of relevant Moderate Continued monitoring by government agencies to power sector reform. IMF and the Bank. Cooperation of EGAT unions in the High Effective communication corporatization and privatization process. between Government, EGAT management and EGAT unions. Annex 1. cell "from components to outputs) Deployment of adequately skilled and Low Appointment of an overall manned project managementeams for each project coordinating cell to project component. ensure smooth operation of the Project. Expeditious management decisions on Low Monitoring by the Bank. procurement related issues. Consultants of high caliber and EGAT Moderate Selective consultant cooperation. appointment process and intensive supervision of consultants' work by EGAT. Consultants of high caliber and NEPO Moderate - Do - by NEPO. cooperation. Overall risk rating Moderate.3. Possible controversial aspects: Nil

22 18 G: Main Loan Conditions 1. Effectiveness Conditions: As this is a guarantee operation supporting a capital markets issue, there are no conditions for effectiveness. The following conditions for Board presentation of the Project and the first bond have been met. (a) The Government has updated the demand growth and investment projections taking into consideration the current and projected economic situation, in a manner satisfactory to the Bank, and has agreed to implement any one or a combination of the following measures: (a) adjustment of EGAT whole-sale tariff; (b) adjustment of EGAT investment program; (c) control of remittances to the RTG; and (d) acceleration of sale of EGAT assets, to ensure that, from FYI 999 and thereafter EGAT will comply with: a self-financing ratio of not less than 25%, a limitation of short and medium term debt to 15% of total debt, a debt equity ratio of not more than 60 to 40, and a debt service cover of not less than 1.3 times. (b) Agreement has been reached between the Government and EGAT on the strategy and schedule for the restructuring, corporatization and privatization of EGAT. EGAT has already appointed Consultants, following terms of reference satisfactory to the Bank, to develop plans for: (a) the internal restructuring of EGAT into autonomous business units, their operation as profit centers and their conversion into wholly-owned subsidiaries of EGAT and subsequent privatization, as appropriate; (b) the corporatization of EGAT as a whole; and (c) the privatization of Ratchaburi Combined Cycle Power Plant Blocks 1, 2 and 3. The Government has confirmed that from FY 1998 and thereafter, EGAT will undertake the development, construction and operation of any new thermal power plants, which are deemed to be unsuitable for development through IPPs, only by means of wholly-owned subsidiaries that it shall establish for such purpose and which shall be subsequently privatized (except in cases where this is not feasible according to the financial adviser). (c) EGAT has accomplished sale of an additional 14.9% of the issued and outstanding shares held by it in EGCO to a foreign strategic investor. This has reduced EGAT share holding in EGCO from 40% to 25.1%. Second EGAT Bond Issue ( by June 1999) After completion of the first bond issue, the Bank will continue its dialogue with EGAT and the Government on institutional, financial, technical, environmental and social issues, and on updating of EGAT's investment program to take account of revised load forecasts. A second bond issue is currently envisioned, subject to market conditions, by June Prior to proceeding with a guarantee for that bond issue, which in any event will be subject to the Bank's normal approval procedures, the Bank will review all relevant developments after the first bond issue including, in particular, the following: (a) The state of compliance with financial covenants of EGAT and the sector as a whole, for FY 1998, and projected compliance for FY This will include a review of measures taken by the Government, as well as by EGAT.

23 (b) Progress satisfactory to the Bank in implementing the Restructuring Action Plan for EGAT's restructuring, corporatization and privatization (covenanted under the Project Agreement for the first bond issue). Review of such progress would focus in particular on: 19 - status of legislation on corporatization of state-owned enterprises - EGAT's establishment as a corporation, and status of progress of the corporatized EGAT's operation with autonomous business units (profit centers) and supporting operating units - process of establishiment of a wholly-owned transmission subsidiary of EGAT to operate as a single buyer of power from all duly licensed generators within Thailand (and import from neighboring countries) on an arm's length basis - status of creation of a Ratchaburi Combined Cycle Company as a wholly-owned subsidiary of EGAT, and of development and execution of a satisfactory power purchase agreement between this company and EGAT - status of Government approval of privatization by EGAT of Ratchaburi Combined Cycle Power Plant, Blocks 1. 2 and Other [classi fy according to covenant types used in Legal Agreements]: Agreements reached with EGAT: Accounts/Audits: EGAT would submit to the Bank audited financial statements within six months of the close of each fiscal year. Financial Performance: (a) EGAT would generate funds from internal sources equivalent to not less than 25% of the annual average of its capital expenditure incurred, or expected to be incurred, for that fiscal year, the previous fiscal year, and the next following fiscal year; (b) EGAT would maintain a debt service coverage ratio of at least 1.3 times; (c) EGAT will maintain a debt:equity ratio of not more than 60:40; and (d) EGAT would limit short and medium-term debt to nio more than 15% of total outstanding debt. Power Development Plan and Investment Program: EGAT would review its Power Development Plan on a semi-annual basis, and discuss with the Bank corrective actions, if any, needed to its investment program in line with the country's evolving economic situation. Management Aspects: (a) EGAT would restructure and corporatize its organization according to agreed action plans; and (b) following restructuring and corporatization, EGAT would maintain its corporate existence and right to carry on its operations, and exercise all rights which are necessary in the conduct of its operations and its carrying out its obligations under the Project. EGAT shall not, without the Bank's prior consent, sell, lease, transfer or otherwise dispose of any of its property or assets which are required for the efficient conduct of its operations in relation to the carrying out of the Project, except with respect to transactions in the ordinary course of its business, which, in the opinion of the Bank, do not materially affect its ability to perform its obligations under the ]?roject or its financial condition or operation.

24 20 Environmental and Resettlement Covenants: EGAT would: (a) construct the generating stations and transmission systems taking into account the environmental impact mitigation measures outlined in its Environmental Impact Assessment and Environmental Impact Analyses reports agreed with the Bank; (b) carry out resettlement and compensation of affected persons according to the Resettlement Action Plans (RAPs) agreed with the Bank; (c) develop and formalize its corporate policy for environmental and social management; and (d) strengthen its environmental management function according to a plan agreed with the Bank. Agreements reached with the Government: Financial Performance: The Government would undertake a review by April 30 of every year the adequacy of power rates to ensure that tariffs are adequate for EGAT to produce the required self-financing ratio, debt service coverage ratio and debt/equity ratio obligations. Management Aspects: Thailand shall, through its National Energy Policy Office (NEPO), adopt, not later than December 31, 1998, a time-bound action plan, in form and substance satisfactory to the Bank, for the strengthening of the regulatory framework for its energy sector. Said action plan shall include, without limitation, the preparation and submission to Parliament of legislation for regulation of the electricity supply industry; such legislation to include provision for the preparation and approval by the competent authorities of implementing regulations for such legislation and for establishment of a regulatory office independent of NEPO. H. Readiness for Implementation [X] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] The following items are lacking and are discussed under loan conditions (Section G). I. Compliance with Bank Policies [ ] This project complies with all applicable Bank policies. [X] The following exception to Bank policies is recommended for approval: Retroactive financing to the extent of 50% (see Annex 6) of the first bond value for eligible expenditures incurred after April 1, 1998, the Project Identification date, and before closing of the bond. The Project complies with all other applicable Bank policies.

25 21 Task Teaun Leader (EASEG): D. Mehta a t 4 Sector Manager (EASEG)kSu if Country Director (EAiCTH): J. Shivakumara- Aa4eAA *o J jxl(a4di'-

26 22 Narrative Sumnmary Sector-related CAS Goal: Annex 1 Thailand EGAT - Investment Program Support Project Project Design Summary Key Performance Indicators Monitoring and Supervision Critical Assumptions and Risks (CAS Objective to Bank Mission) Macroeconomic conditions for raising the necessary financing. Mobilizing private sector Satisfactory closing of bonds Semi-Annual review of financing for electricity by supported by Bank Partial statistics to be maintained by are favorable accessing capital markets Credit Guarantee. Government and EGAT. through Bank guarantees. Catalyzing private sector Timely restructuring and financing by privatizing and corporatization of EGAT. reducing policy risks. Satisfactory privatization of Ratchaburi Combined Cycle Power Plants. Supporting regulatory Establishment of an reform for the energy sector. independent regulatory body for the energy sector. Sustained Government and sector entities' commitment to reforms. Cooperation of EGAT unions in the corporatization and privatization process. Sustained Government and NEPO commitment to reforms. Bracing EGAT's financial Implementation of tariff Sustained Government position againsthe impact reforms. commitment to improving of the financial crisis. EGAT finances. Project Development Maintaining following target Bank supervision missions; (Objective to Goal) Objective: completion dates: EGAT progress reports. Timely closing of the two 1. Help EGAT meet its Krabi Thermal # 1 5/2001 IBRD bond operations. heavy but essential Ratchaburi Therm. investment commitments # 1 1/2000 Adequacy of procurement, during the country's # 2 5/2000 construction management and financial crisis, thus keeping Ratchaburi CC Blocks financing resources. on track the implementation # 1 12/1999 of its generation and # 2 2/2000 Cooperation of EGAT unions transmission construction # 3 4/2000 in the corporatization and programs which it has Wang Noi CC Block privatization process. already commenced. # 3 12/1999 Trans. Exp. No. 9 2/2002 EGAT- TNB 9/1999 Greater Bkk. Trans. 11/ kv Trans. 12/2000

27 23 2. Help EGAT not lose Business Units operating as Financial statements of Continued Government ground in: (i) accomplishing profit centers Business Units. commitment to reform at the its organizational macro and sector levels to restructuring and Parliament approval of EGAT Incorporation provide a stable environment corporatization; and (ii) corporatization law. documents to make private and public implementing its equity offerings of Gen Cos privatization strategy. Transfornation of EGAT to Subsidiaries' Incorporation attractive. a Limited Company. documents. Continued EGAT Business Units converted to Sale of majority shares. management commitment to EGAT subsidiaries. structural reforms and privatization. Business Units privatized. Power Purchase Agreement. Sale of majority shares. Privatization of Ratchaburi Power Purchase Agreement Combined Cycle Plants Sale of majority shares. Privatization of subsequent new Power Gens of EGAT 3. Help improve the regulatory framework for the energy sector Preparation of a draft law Progress reports from NEPO Parliament and Cabinet for the electricity supply and EGAT to be compiled remain committed to industry and its submission by EGAT. regulatory reform and work to Parliament for approval towards timely approval and by March promulgation of the requisite legislation for establishing the Preparation of secondary regulatory agency. regulations and submission to Cabinet for approval by Cooperation from NEPO September Separate regulatory office established within 6 months of approval of secondary regulations. 4. Facilitate the entry of Fresh commercial borrowing EGAT financial statements. Acceptance of EGAT on the EGAT into the commercial by EGAT in international intemational capital markets. debt markets following the capital markets as financial crisis in East Asia. percentage of total new debt incurred To be determined later.

28 24 Outputs Amount of capital raised Underwriter's reports. (Outputs to Objective) 1. Successful placement of through the bond offering. Market conditions are bonds offered by EGAT favorable to raising bond financing. Continued commitment of relevant government agencies to pow er sector reform. 2. EGAT achieves access to Same indicator as for project EGAT financial statements. commercial debt markets on objective. Cooperation of EGAT unions its own account 3. Restructured and Same indicator as for project Infornation provided by corporatized EGAT objective. EGAT and Government. in the corporatization and privatization process. 4. Privatized Generating Same indicator as for project Information provided by Plant objective. EGAT and Government. 5. Implementation of a rules Same indicator as for project Information provided by based system and institutions objective. NEPO. for regulating the power sector Project Components/Sub Inputs: (budget for each (Components to Outputs) components: (see Annex 2 component) for project description) (a) 300 MW Krabi Thermal US$ 283 million Periodic status reports of Deployment of adequately Unit 1. EGAT. skilled and manned project (b) 2x700 MW Ratchaburi US$ 1089 million management teams for each Thermal Units 1 and 2. Bank supervisions. project component. (c) 3x600MW Ratchaburi US$ 1012 million Combined Cycle Blocks 1-3. Expeditious management (d) The 600 MW Wang Noi decisions on procurement Combined Cycle Block 3. US$ 273 million related issues. (e) 500 kv Transmission System for evacuation of US$ 1149 million power from IPP plants in Thailand and the Hong Sa Project in Laos. (f) Strengthening of the Bulk Power Supply System for US$ 360 million greater Bangkok, Stage I. (g) Stage II of the EGAT- TNB (Malaysia) Transm. US$ 161 million Interconnection.

29 25 (h) The Transm. System Expansion Project No 9. US$ 558 million (i) Restructuring and corporatization of EGAT. US$ 5 million EGAT and consultant's Consultants of high caliber () Privatization of EGAT reports. and EGAT cooperation. Generation. US$ 3 million EGAT and consultant's (k) Reforming the reports. Regulating System for the US$ 1 million NEPO and consultant's Consultants of high caliber. Energy Sector. reports. and NEPO cooperation. (I)(i) Corporate policy for Environmental and Social US$0.5 million EGAT Environmental Proper planning and allocation Management; (ii) Division Reports of staff and budgetary Strengthening the resources. environment management function of EGAT.

30 26 Annex 2 Thailand EGAT - Investment Program Support Project Detailed Project Description Project Background 1. Over the last few months, the Government has been sounding out the Bank for assistance in raising bonds for SOEs in the international capital markets. During March 1998, a Bank mission visited Thailand and came to the conclusion that growth of the Thai economy has a direct linkage to the growth of energy supplies and hence continuing the energy investment program, albeit at a lower tempo, would be a precondition for ensuring competitiveness and reviving growth. Bank support to this sector would thus be the most effective way in which the Bank could contribute to the recovery of the Thai economy. The mission also concluded that the most appropriate SOE in the energy sector would be EGAT, based on: (a) Bank's intimate knowledge of the power sector; (b) its continued involvement with EGAT's projects, both, ongoing and under development; (c) EGAT's excellent record in project preparation and implementation; and (d) EGAT's crucial need for financial support during the current financial crisis. Despite the impact of the crisis, EGAT remains a sound and efficient entity and is expected to be back to sound financial status with the steps proposed to be taken by EGAT and the Government. The Government concurred with the mission's view and made a specific request for urgent Bank assistance in helping EGAT meet its heavy borrowing requirements from commercial sources amounting to about US$600 million for FY98 and FY99. Suitable finding sources for these investments couldl not be identified by the Ministry of Finance (MOF) and hence MOF requested an IBRD Partial Credit Guarantee (PCG) to assist EGAT in reestablishing its credit and raising funds on reasonable terms in the international capital markets. Summary of Project Cost and Financing Project Cost (US$ Million) 0;Component; i i ; ;; ; Cost;; 0 i ;; % of Total Generation SFa-cilitiesS 300 MW, Krabi Thermal x700 MW, Ratehaburi Thermal (1 & 2) 1, x600 MW, Ratchaburi Combined Cycle 1, MW, Wagt NboilCombined Cycle Sub TotalE 2,; T:raSnsnilssio:n Fwacilities.. ;; ; i:; X ;S;? f ; 500 kv Tansmission System fbr IPPs and 1,149 i2 1!.6 H0Song Sa Project in Laos0 f tbulk ipower Supplybfor Greater Bangkok EGAT-TMNBStage IItInterconnection Transmission isysemexpansion Project Sub Total 2, Total Cost 4, fi

31 27 Financing Plan (US$ Million) Source of Funds Amount P o- Total (FY 1998 to FY 2000)- ECA's/Suppliers' Credits Other Commercial Financing Long-term Bonds (World Bank Guarantee) Local Borrbwing EGAT Sub Total Drawn before- FY1998 or prospective - (Beyond FY 2000) ECA'stSuppliers' Credits Other Commercial F-inancing Local Borrowing EGAT 1, Sub Total 2, Total ) 4, i - Partial Credit Guarantee 2. It is proposed that two distinct partial credit guarantee operations be undertaken to help mobilize the necessary financing to fund the financing gap of EGAT's investment program. The guarantee will help catalyze private financing for the power sector through debt financing from the capital markets. The East Asia crisis has led to a lowering of EGAT's creditworthiness and its unfavorable financial projections will make it virtually impossible to access the commercial capital markets and achieve long tenor financing at reasonable terms under its own name. Therefore, it is proposed that while EGAT is undergoing restructuring and privatization and the sector reforms are in progress, EGAT would borrow, with the Kingdom of Thailand guarantee backing the coupon payments and Bank guarantee of the principal in order to maximize the terms of the borrowing sought under the partial credit guarantee. Bank guarantee of one or two coupon payments on a rolling basis is also under consideration. 3. Before the East Asia crisis, EGAT had successfully accessed capital markets several times. Details of three such issues, recently in April 1996 and much earlier in March 1985 and August 1983, are set out in the table below. EGAT Market Issues Issuer Date Amount Coupon Isue Price Maturity Market Lead Manager EGAT April 3, 4 Billion 8.84% 100% 5 yrs. Non-US/ Bangkok Bank 1996 Baht International Domestic

32 28 EGAT March 3, 19: % 100% 20 yrs. Domestic/Euro Chase, Lloyds, 1985 million over 6- LTCB Asia, USD month Morgan LIBOR Guaranty EGAT Aug. 10, 60 million % 100% 8 yrs. Domestic/Euro LTCB, 1983 USD over 6- Hanover, Saudi month Intemational LIBOR Structure of the Partial Credit Guarantee (see Attachment A to Annex 2 for Term Sheet) 4. The proposed bond instruments, with the World Bank guarantee, would each be a fixed rate bond issue of a 10 years maturity, repayable with a bullet payment of principal. They would be offered in the Euro/US 144a markets. The partial credit guarantee of the Bank would cover 100 percent of the bullet principal repayment at scheduled maturity, on a non-accelerable basis. Bank guarantee for one or two coupon payments on a rolling basis is also under consideration. Bondholders would assume Thailand risk on the remaining interest payments (The Kingdom of Thailand is the owner of EGAT). Discussions with the Government (MOF and EGAT) have been very positive. Based on informal market soundings, indications are that the Bank's guarantee would result in significant additionality both in terms of narrower margins and longer maturities for the issues and in broadening the existing investor base for Thailand debt. The arrangers for the first bond issue have been appointed in July With the bullet repayment structure, there is no amortization of principal until maturity. This effectively results in a longer 'grace period' as compared with the grace period of 5 years for a typical Bank loan, and a comparable average life to that of a Bank loan (about 9 years, based on average disbursement profile for Bank loans to the power sector). Rationale and Benefits of the Proposed Partial Credit Guarantee 6. In response to the tightening of credit availability following the rapid devaluation of the Baht since July 1997, a number of initiatives have been taken to speed up Thailand's export-led recovery. In this context a facility, partly guaranteed by ADB has been designed to make available US$1 billion to exporters and export oriented businesses for financing short to medium term export related materials. More importantly, the Kingdom of Thailand is proposing to issue a 5 to 7-year global sovereign issue and mobilize between US$ one to two billion from the capital market during the year. The exact timing of the launch of the Government's Global Bond issue would depend upon market conditions. The launch of the proposed bond issue for EGAT would need close coordination with the Government's global bond and other capital market issues proposed by Thailand. Based on the discussions with Fiscal Policy Office and key market players it has been decided that the EGAT issue should proceed independently of the Sovereign Global bond. The partial credit guarantee operation would provide EGAT with long-term funds on reasonable terms. It should be recognized that EGAT has limited other avenues to meet its financing gap, with supplier credits being limited in availability and maturity. The Kingdom of Thailand has expressed its support to enhance EGAT's ability to access the market at reasonable maturities and terms while it is still undergoing restructuring.

33 29 7. In summary, the advantages of the proposed guarantee operation would be: (a) (b) (c) (d) (e) Access to capital markets: This operation would enable EGAT to obtain market financing with reasonable spread and maturity with enhanced credit and set a benchmark for its future bond operations. Since the issuer of the paper would be EGAT, the PCG operation would help to establish a track record for the company by exposing EGAT to the rigors of market discipline, thereby facilitating its commercialization and privatization process. Maturity: After the East Asia crisis, it has become practically impossible for EGAT to go to the capital markets on reasonable terms for any maturity. The operation would enable EGAT to extend its available financing considerably beyond current market terms to ten 10 years, with an extended grace period through a bullet structure. Competitive Financing Cost: Borrowing with the support of the World Bank Guarantee would be on attractive terms, reflecting the Bank's credit enhancement, but also the guarantee on coupons by the Kingdom of Thailand. Leverage: Private lenders would take the interest payment risk on Thai credit for a minimum period of 10 years. The partial credit guarantee for principal only, for a 10 year bond, on a non-accelerable basis, would result in exposure for the Bank of around 56%2 in present value terms, thereby significantly leveraging Bank resources as compared to a Bank loan. In case of a guarantee of the coupon this would increase by 3% for one coupon coverage and 6% for two coupon coverage. The risk taken by the investors will correspondingly reduce. Support for EGAT's Privatization Initiative: The guarantee operation would bring in capital to sustain EGAT's investment program, thereby allowing EGAT to complete its generation facilities that will make EGAT more attractive for subsequent privatization. In addition, the guarantee operation would expose EGAT to market discipline and introduce EGAT to international financial markets, which itself could be the source for privatization efforts. These consequences of the bond issues (which are conditional on tangible steps being taken by EGAT and the Governmentowards restructuring and privatization) are expected to increase market interest in the privatization of EGAT. 2 Based on a Discount rate (for Bank Guaranteed Principal) of 5.9% as of May 18, 1998.

34 30 Project Components 8. The project includes four generation projects, and four transmission systems, as follows: Krabi Thermal Power Plant Unit 1 (Cost US$283 million) (Schedule: March May 2001) 9. The Krabi Thermal Power Plant Units I and 2 will be located at Tambon Khlong Khanan, King Amphoe Nua Khlong, Krabi Province. The plant will use oil (2% sulfur) as main fuel source. The nominal capacity for each unit is 300 MW; the Bank Project would finance Krabi Thermal Unit 1 (300 MW). The proposed power plant would be located within EGAT premises near the old lignite-fired Krabi Power Plant which was decommissioned in September The feasibility study for Krabi was performed by EGAT. Two alternatives for fuel oil versus imported coal were studied. Two alternative gypsum disposal sites were considered, and two alternatives for fuel transport. Dispersion modelling was used to determine the need for FGD, and the response to FGD malfunction. The overall efficiency of the thermal plant is about 35%. Environmental Impact Assessment was performed by TEAM Consulting Engineers Co., Ltd. from December 1995 to August 1996 and the report was approved by NEB on April 24, Procurement was by international competitive bidding. with S. C. Lavalin assisting EGAT as consultant for engineering. Construction is being done by EGAT. The work for site preparation has begun. 10. The Krabi Power Plant will use domestic or imported oil. The blarge transport EIA has been submitted to the Thailand Office of Environmental Policy and Planning (OEPP). Oil would be transferred fromn ships to 1,000 ton barges, through an estuary (24 km) to a dock near the power station, and then via pipeline to the power station. Preliminary analysis indicates an alternative for cost and environmental reasons may be a pipeline from an offshore ship loading facility, to an underground pipeline (16 km) along an existing road right of way to the power station. This alternative was requested through public consultation and is under study; if this alternative is preferred, the Pipeline EIA would be subject to review by the World Bank after approval by OEPP. During operation, water will be used for steam production, SO 2 removal system, and domestic consumption. The main sources of raw water for the above purposes are two existing reservoirs. Raw water would be pre-treated by clarification, filtration, and chlorination. Make up water for the circulating cooling system would be drawn from Khlong Pakasai, and would amount to only 4.5% of the minimum flow rate of Khlong Pakasai. Water quality in Khlong Pakasai has been found to meet standards. Sulphur Dioxide and dust will be controlled by a wet limestone Flue Gas Desulfurization System (FGD) with a minimum of 80% efficiency prior to emission. An emergency plan has been adopted in case of FGD malfunction, since dispersion modelling indicates, unacceptable air quality would result. The operation of the power plant will be stopped within 10 minutes after the signal of FGD break down is shown. 11. The Krabi thermal power plant Units I and 2 will be connected to the grid by new transmission lines from Krabi to Thung-Song substation (the east area) and from Krabi to Phangnga substation (the west area). The scope of transmission system is summarized as follows: * 230 kv Krabi-Phangnga 2 substation, 98.5 km long, including optical fiber with overhead ground wire. * 230 kv Krabi--Thung Song Substation, 97 km long, including optical fiber with overhead ground wire.

35 31 Ratchaburi Power Plant Project 2x700 MW Thermal Units 1 and 2 (Cost US$1,089 million) (Schedule: January May 2001) 3x600MW Combined Cycle Blocks 1, 2 and 3 (Cost US$1,012 million) (Schedule: January March 2001) 12. The Ratchaburi Power Plant Project is located in subdistrict Tambon Ban Rai, approximately 7 km northeast of Ratchaburi Province about 5 km. north of Mae Khlong River. The project will incorporate four 700 MW (nominal) supercritical, conventional heavy oil fired units and three 600 MW (nominal) combined cycle blocks, for a total site development of 4,600 MW. The Bank project includes Ratchaburi Thermal Units 1-2 (2x700 MWI and Combined Cycle Blocks 1-3 (3x600 MW). The overall efficiency of the thermal units is about 38 %, and the combined cycle station efficiency is about 50%. The thermal units will burn residual fuel oil (2% sulfur) and/or natural gas and the combined cycle will burn natural gas as the primary fuel or distillate oil as the back-up fuel. The area of the site is approximately 2,000 rai, and current land use is rice cultivation and fishponds. The feasibility study technical justification and design were performed by Black and Veatch; while EGAT performed the cost estimate, economic analysis, interconnection and upgrade of the transmission system, and integration of the EIA study results. The site selection study was performed by Black and Veatch. Analyses of alternatives included site selection, fuel delivery systems, FGD technology and wastewater discharge point. Environmental Impact Assessment was performed by the Faculty of the Environment and Resource Studies, Mahidol University from December 1993 to November The report was approved by NEB on February 2, Procurement was by international competitive bidding. Procurement for the thermal units was through an engineering, procurement and construction (EPC); the combined cycle procurement was for engineering, while EGAT did the construction and erection. Specifications preparation and engineering consulting for the combined cycle and thermal plants was done by Stone and Webster. Bidding documents for the thermal plant were prepared by Black and Veatch. 13. Sources of natural gas for Ratchaburi Power Plant are developing production regions located in the Gulf of Martaban, Union of Myanmar. Estimates of natural gas reserves and production are 5,700 billion cubic feet and 525 million cubic feet per day respectively. Natural gas pipelines will be extended from production wells across peninsular Myanmar and enter Thailand at the border (Kanchanaburi Province), then continue to the Ratchaburi Power Plant. Delivery of the residual (No. 6) fuel oil will be via a seaberth, fuel oil terminal and a dedicated pipeline. The EIA for this pipeline to the power station has been finished. If alternative fuel delivery schemes are contemplated for the project, an additional EIA would be required, and would have to pass review by OEPP and the World Bank. The raw water supply (75.03 M.m 3 /year) will be provided from Mae Khlong River at Ban Bang Li via pipeline to an onsite raw water reservoir. The water will be pretreated and will serve for all plant needs, including cooling water makeup (69.60 M. m 3 /year), potable water, general service water and demineralized water. The project will not cause any change in the hydrology of the river basin. Wastewater from the closed cycle condenser cooling system at a maximum summer-time temperature of about 36 OC will be discharged into a holding pond before being relayed to a wastewater retention pond. Sulfur dioxide (SO 2 ) emissions from the thermal unit will be controlled by a wet limestone FGD system, of 90% efficiency. To control NOx, low NOx burners would be used. Each stack would be equipped with continuous on-line emissions monitoring systems.

36 The Ratchaburi Power Plant Project will be connected to EGAT's transmission system through the 500 kv and 230 kv substations at the plant site. The transmission systems for the project include the following: * 230 kv, double circuit transmission lines connect the plant's substation to Ratchaburi 2 substation. * 500 kv, doulble circuit transmission lines connect the plant's substation to Chom Bung substation. * 500 kv, double circuit transmission lines connect Chom Bung substation to Sai Noi substation. Wang Noi Combined Cycle Power Station, Stage II, 600MW (Cost US$273 million) (Schedule: June October 1998) 15. The Wang Noi combined cycle base load power station has been constructed on an area of 718 rai in Tambon Khao Ngam and Wang Chula, Amphoe Wang Noi, Ayudhaya Province. Stage I, comprising the first two 600MW units, is in operation. The Bank Project comprisesstage 2 (600 MW) of the ultimate capacity of 1,800 MW. Each block of 600MW is composed of 2 sets of MW gas turbines and a 200MW steam turbine. The overall efficiency of the combined cycle station is about 50%. The feasibility study, design and construction management were performed by Black and Veatch; while EGAT performed the cost estimate, economic analysis, interconnection and upgrade of the transmission system, and integration of the EIA study results. Alternatives analyzed for the project included choice of technology, site selection, water sources, wastewater treatment schemes and choice of receiving waters. The Environmental Impact Assessment was performed by the Southeast Asia Technology Co., Ltd. from November 1993 to April The ireport was approved by the National Environment Board (NEB) on August 15, Procurement of the plant has been done by intemational competitive bidding, through an engineering, procurement and construction (EPC) contract. 16. Natural gas will be supplied from the Gulf of Thailand and inland sources through a petroleum Authority of Thailand (PTT) pipeline; there will be no storage facilities on the plant site for natural gas. Distillate No. 2 oil ( % S, average 0.53% S) will be used only as backup. The oil is delivered to the site by tank truck. Makeup water for the power station is drawn from Khlong Raphiphat and a well. The power station demand would be only 6 % of the minimum (July 1992) recorded monthly flow of Khlong Raphiphat. A closed cycle condenser cooling water system is used. Oxides of nitrogen are controlled in the first two blocks of combustion turbines by water injection; the third block uses low NOx burners. The stacks are equipped with on-line NOx monitors. 500 KV Transmission System for Independent Power Producers and (Schedule: Septeirber February 2002) Hong Sa Project in Laos: (Cost US$1,149 million) (Schedule: December May 2002) 17. International consultants engaged by EGAT in 1993 selected a 500kV transmission system as a least-cost option to transmit 10,000 MW of power from IPP plants to the Greater Bangkok area (in each of the western and eastern corridors around the Gulf of Thailand) from the following options: 500kV HVAC, 765kV HVAC, and +/-500kV HVDC. EGAT will construct two 500 KV transmission lines along the Gulf of Thailand from Bang Saphan (Prachuap Khiri Khan Province) to Chom Bung on the western coast and from Rayong to Nong Chok and Wang Noi on the eastern coast. These 500 KV lines will receive the power from IPP power plants and

37 33 transmit most of the generated power to the load centers in Greater Bangkok and the surrounding area. In addition, a 500 KV transmission system for the Greater Bangkok Area will be developed, replacing the existing 230 KV system. Western Area, 500 KV Transmission Lines: The transmission system for the disbursement of power from IPPs in the Western Area includes construction of two transmission lines: (i) 275 km long Ist route of 500 KV double circuit line from Bang Saphan to Chom Bung; (ii) 280 km long 2 nd route of 500 KV double circuit line from Bang Saphan substation to Chom Bung. Western Area, Substations: The substation projects for the Western Area include expansion of the following 3 existing substations: (i) Expansion of Bang Saphan 500 KV substation with installation of 500/230 KV of 1000 MVA transformer, line shunt reactors and addition of a communication system; (ii) Expansion of Chom Bung 500 KV substation with installation of line shunt reactors and addition of a communication system; and (iii) expansion of Sai Noi 500 KV substation and addition of a communication system. Eastern Area, 500 KV Transmission Lines: The transmission lines for the Eastern Area include two transmission lines: (i) 155 km long Ist route of 500 KV double circuit line from Rayong 4 to T Junction; and, (ii) 170 km long 2 nd route of 500 KV double circuit line from Rayong 4 substation to T Junction. Eastern Area, Substations: The substations for the Eastern Area include the construction of one new and expansion of one existing substation: (i) new 500/230 KV Rayong 4 substation with installation of line shunt reactors at 500 KV Rayong 4-Nong Chok and Rayong 4-Wong Noi lines, and addition of a communication system; and, (ii) expansion of the 230 KV Rayong 2 substation with addition of a communication system. 18. The Hong Sa lignite fired thermal project in Lao PDR is covered under the MOU signed between the governments of Lao PDR and Thailand for exporting up to 3,000 MW of power from Laos. The Project's first stage would comprise 2 units of 372 MW constructed by Thai Lao Power Company Ltd. on a BOT basis for the Lao Government. The transmission system covered by the project will be a 500 kv double circuit line constructed by EGAT from its Mae Moh substation to the Lao PDR border. Bulk Power Supply for Greater Bangkok (Cost US$360 million) (Schedule: October March 2002) 19. The design of the bulk power supply system project is based on studies completed by consultants in 1992 and later modified by EGAT in the light of higher power demand projections made in the To avoid problems of land and right-of-way acquisition, the design is based on the use of existing substations and transmission line routes. To supply significantly more power through lines in existing right-of-ways, 500kV transmission will be introduced into the urban area of Bangkok in To accommodate space related constraints for transmission lines, the following measures are adopted: (a) 500 and 230 kv lines would use multi-conductors (2 or 4 bundled per phase) to replace the 230 kv lines in existing right-of-ways; (b) compact multi-circuited and multi-bundled lines would be installed in narrow right-of-ways; (c) GIS systems would be installed in substations to conserve space; and (d) underground transmission facilities would be considered, when severe space-related constraints exist. The system is designed to limit excessive fault currents to minimize damage due to short-circuits, loss of interconnection between stations, and disruptions of the supply system. Circuit breakers with interruption capacity, up to 50 ka, would replace existing low interruption capacity breakers and the system would be divided into three load areas bounded by switch-breakers, with each area having sufficient capability to supply its own demand. The project component involves the reinforcement of transmission lines, expansion and renovation of five substations, and construction of a new substation in the Greater Bangkok area to meet the projected power demand of 8,290 MW in 2001 from a level of 5,722MW in The bulk supply system being reinforced will introduce a voltage level of 500kV into the area after 2001, even though the

38 34 system will initially be energized at 230kV. Ten transmission line segments, totaling 113 km or 245 cct. km of lines, will be constructed, out of which 81 km would consist of 500kV lines and the rest 230kV lines. The 500 and 230kV lines would be constructed using 4x1272 MCM ACSR and 2 x 1272 conductors per phase, respectively. The new substation, with 2, 300 MVA, 230/115kV transformers would be constructed at Thepharak and expansion and renovation would be undertaken at the five substations at Bang Phli, Bangkok Noi, North Bangkok, Chaeng Watthana and Lat Phrao, comprising 16 transformers with a total capacity of 5,050 MVA. The project also includes installation of 20 shunt capacitor banks with a total capacity of 1,518 MVAR for reactive power control. EGAT-TNB Stage II Interconnection (Cost US$161 million) (Schedule: July October 1999) 20. The power systems of Thailand and Malaysia are currently interconnected through a weak AC link with a transfer capacity of only 80 MW which does not facilitate synchronous operation of the two systems. Realizing the benefits of system interconnection in terms of improving system efficiency and reducing reserves, SwedPower, a Swedish consulting company, was appointed to improve the performance of the existing interconnection and to recommend the additional EGAT-TNB Stage II interconnection that would be robust and highly reliable for a fully synchronized operation. The study was commenced in May 1989 and was completed in September For the Stage II Interconnection, SwedPower recommended installation of 300 MW, upgradable to 600 MW, HVDC interconnection between the power systems of Thailand and Malaysia. The proposed EGAT-TNB Stage II Interconnection project is a 300 MW, ±300 kv, bi-directional HVDC point-to-pointransmission, upgradable to a capacity of 600 MW inthe future. Associated with the DC link, the project also covers strengthening of the 230 kv system in the south of Thailand. Transmission System Expansion Project No. 9 (Cost US$558 million) (Schedule: June March 2001) 21. The main objective of this project is to strengthen the transmission network of EGAT in the provincial areas served by PEA.The project is a package of 26 subprojects of transmission lines and substations expansion and reinforcement. The project involves the construction and reinforcement of transmission lines totaling 1,890 circuit-kilometers, and 10 substations. The total amount of 5,900 MVA transformer capacity and 1,202 MVA reactive power compensation equipment installed at the existing substations are also included. The Transmission System Expansion Project No. 9 (TS.9) is presently under different stages of implementation. Restructuring and Corporatization of EGAT (Estimated Cost - US$5 million) Privatization of EGAT(Estimated Cost - US$3 million) 22. In March 1998, EGAT management decided, with the Government's approval in principle, on a three-step approach to its privatization and corporate restructuring calling for: (a) Step 1, corporatizing EGAT as a whole and privatizing the Ratchaburi Combined Cycle 1-3 power plants which was originally intended for Step 2, but in view of the expected cash flow shortfall over the next 2 years, is being advanced to Step I in the privatization process; (b) Step 2, corporatizing and privatizing each subsequent new power plant of EGAT; and (c) Step 3, corporatizing each business unit as a subsidiary of EGAT Company Limited and privatizing each as appropriate. A change in approach was required due to EGAT's cash flow problems, the delay in the approval of the Corporatization Law, and the obligations required from the Government by the International Monetary Fund's standby arrangement to initiate sales of EGAT stakes in

39 35 EGCO and Ratchaburi Combined Cycle Power Co. The revised privatization approach is as follows: 23. In Step 1, EGAT would transfer the Ratchaburi Combined Cycle Power Plant Blocks 1-3 to a wholly-owned subsidiary which would subsequently seek private sector participation of at least 51%. In parallel, the original plan to organize EGAT into autonomous business units and to transform EGAT into a limited company (100% owned by the Ministry of Finance) when the Corporatization Law is ready will be carried out. Presently, each business unit as envisaged in the organizational restructuring plan is beginning to operate as a more self-sufficient entity. Although previous expectations that each Business Unit would become a separate statutory company have been shelved for the time being, it is expected that by October 1998, each unit will be a self-accounting division with its own financial statements. This will involve a system through which all business and operating units would fully recover the costs of their services to other units of the company or to external users. 24. In Step 2, corporatization of EGAT as a whole is expected to be completed within one year from the approval of the Corporatization Law - in the latter part of Further, it is envisioned that all new power plant projects after Ratchaburi Combined Cycle would be corporatized and privatized. EGAT would evaluate whether some or all new power plants would be combined with the EGAT powergens or be privatized separately with EGAT Company Ltd. holding no more than 49% of shares in each new power plant company. 25. In Step 3, each business unit would be formed into a 100% - owned subsidiary of EGAT Company Limited with the individual units corporatized and privatized when ready according to the plan adopted in The individual business units are to be corporatized at different times, depending on their readiness, however, it is anticipated that all units would have been corporatized by the end of the third year after the approval of the Corporatization Law. Reforming the Regulatory System for the Energy Sector (Estimated Cost - US$1 million) 26. Privatization of the energy sector has created the need for a comprehensive legal and regulatory framework to protect the interests of consumers, investors and the Government. NEPO engaged consultants (under the Distribution Automation and Reliability Improvement Project (Loan No TH) with PEA, to help design and establish an independent regulatory office for the energy sector. This would eventually assume NEPO's current regulatory powers. The consultants have framed proposals for future regulation of the electricity sector based on EGAT, initially, being the single buyer from generators but moving to a competitive power pool in the medium-term. For the gas industry, it has taken account of the need to introduce more competition at all levels, for transmission and distribution through bidding concessions. The final form of regulation will depend on the shape of the electricity and gas industries and the extent to which competition and privatization is adopted. Its proposals include the following principles: (a) a regulator responsible for regulation of the electricity and gas industries, independent from NEPO, accountable to the Prime Minister or another Minister; (b) regulation would be undertaken by a commission with five members with technical competence appointed for terms of 3-5 years; (c) the commission's functions would include pricing, investment and competition policy and quality of service. It would also issue licenses as an instrument for regulation;

40 36 (d) establishing the regulator through primary legislation and secondary legislation setting out related administrative procedures; (e) price cap regulation is being proposed with regular review periods; (f) NEPO would be initially responsible to establish key regulatory functions during the transitory phase prior to the regulator becoming independent. 27. The next step is to draft the enabling legislation. The consultants have commenced this work. The Project covers: (a) Preparation of a draft law for the electricity supply industry and its submission to Parliament for approval by March 1999; (b) Preparation of secondary regulations and submission to Cabinet for approval by September 1999; and (c) Establishment of a separate regulatory office within 6 months of approval of secondary regulations. (a) Formulation of Corporate Policy for Environmental and Social Management (b) Strengthening EGAT's Environmental Management Function (Estimated Cost - US$0.5 million) 28. EGAT, with the assistance of the Bank, will develop a framework for a Corporate Environmental and Social Policy (CESP). The CESP, which sets out the guidelines for EGAT's policy with regards to environmental and resettlement management, would incorporate a broad range of social issues including resettlement of project affected persons, land acquisition and resettlement related issues, participatory project design, issues related to impacts on ethnic minorities, and community development initiatives (not necessarily in adversely affected areas) of EGAT. The CESP, which would be applicable to all projects implemented by EGAT or where EGAT has a financial stake (IPPs would also be encouraged to follow the Policy as recommended guidelines to deal with environmental and social issues), would integrate the process of addressing environmental and social issues into EGAT's existing project preparation cycle. 29. All eight components of the project have been designed and will be implemented in accordance with the modem concept of environmental management. EGAT currently has an environmental department that includes 90 qualified professionals. The focus of the group is mainly environmental impact assessment for project development. Under the project the focus would be expanded to include more environmental management functions. EGAT will develop a plan to modernize the Environmental Management Group with the following objectives: (a) standardize effluent and emissions disposal and treatment technologies; (b) establish company training programs, to keep pace with changing environmental regulations, for workers at various management and operations levels, for environment and safety; and (c) central followup and control cn environmental compliance and safety performance of plants. EGAT would carry out trend analysis of pollution monitoring data and prepare exception reports; enhance monitoring data collection and analysis capability; provide operational feedback to Corporate Engineering for carrying out necessary modifications in existing/future systems; and provide corporate support to stations. 30. Environrmental management units would be established at the power stations. The environmental management units at the power stations will include the following activities when fully developed: (a) implementation of environmental health and safety policies; (b) monitoring for compliance wiith regulatory and corporate standards,

41 Attachment A to Annex 2 Kingdom of Thailand EGAT - Investment Program Support Project US$300 million Bond Issue Sumnmary of Terms of the Bank's Partial Credit Guarantee Issuer: Guarantors: Electricity Generating Authority of Thailand (EGAT). World Bank as to payment of principal only at stated maturity, on a non-accelerable basis. Coupon payments are guaranteed by Government of Thailand (GOT). Subject to the outcome of the credit rating exercise and discussions with the lead manager, the Bank's guarantee may additionally cover up to two scheduled semni-annual interest payments on a rolling basis. Issue Format: Eurobond and US 144A. Lead Manager: Amount & Currency: Use of Proceeds: Maturity & Amortization: Indicative Coupon: Issue Price: ABN AMRO Bank N.V. US$300 million. The net proceeds of the Bonds will be used for partial funding of EGAT's investment program for FY , in accordance with the terms of the Project Agreement between EGAT and the Bank. 10 years - Bullet, at scheduled maturity. Fixed rate at bp per annum over 10-year US Treasury yield'; payable semi-annually in arrears. This pricing spread is based on Bank guarantee of principal at maturity only, and is subject to capital market conditions on the date of launch. 100% (indicative). World Bank Guarantee Principal: The guarantee will cover payment of principal only at maturity in year 2008 Provisions: and is not accelerable in the event of any payment default by EGAT prior to stated maturity. The Bank will be obliged to pay only to the extent that EGAT has failed to pay the principal amount of the bonds, and only following confmation of such default by the Fiscal Agent. The World Bank would be entitled to reimbursement from GOT on demand, or as the Bank may otherwise direct, any amount paid under the guarantee. Coupon: Should the Bank also guarantee coupon payments (up to two), the Sovereign would be the primary guarantor for the payment of scheduled coupons 2. In the case of a default by EGAT and the Sovereign in the payment of the coupon, the Bank would make the payment to the bondholders within a stipulated period. The Sovereign will within 60 days following the Bank's payment reimburse the Bank for the coupon paid. As long as this reimbursement is made within 60 days, the Bank's guarantee coverage of two coupon payments would continue. Otherwise, coverage of only one additional coupon payment would roll over. Once the Bank makes the second coupon payment under its guarantee, EGAT/GOT must reimburse the Bank and clear all outstanding arrears with the Bank related to this bond issue, within 60 days, before the second coupon coverage can roll over again 3. Failure to do so would tenninate the Bank's rolling interest cover. Final pricing will only be dmetmined on the launch date. 2 While it may be possible that coverage of a single rolling coupon payment could suffice, it would be prudent in light of current market conditions to retain the flexibility to cover up to two semi-annual coupon payments. Based on the additional feedback from the rating agencies, the exact interest coverage will be furiher refined and its terms and conditions communicated to the Board. Although the investors would be taking the sovereign/issuer risk for the coupon this structur entails that as long as the sovereign reimburses the Bank in time, the Bank could conceivably pay against all scheduled coupons. However, the Bank exposure at any given time would not exceed one or two interest payments, as the case may be.

42 38 Attachment A to Annex 2 Guarantee Related Fees: Principal: The fee represents 0.25% per annum, charged on the guaranteed principal exposure on a present value basis, discounted at the Bank's cost of funds as of the date of launch (currently estimated to be US$3.85 million). The entire fee is payable in advance at the closing date, out of the gross proceeds of the Bonds. In the event of early redemption of the Bonds (or part thereof), a pre-calculated refund of a prorated part of the guarantee fee will be made by the Bank, provided that GOTIEGAT are not in default to the Bank with respect to other guarantee fee obligations or with respect to amounts previously paid by the Bank under the guarantee. Coupon: Should the Bank also cover one or two interest payments, the Bank would charge an additional fee of 0.25% per annum on the guaranteed coupon exposure, payable semiannually, in advance of each period. The first installment would be due at the closing date, also out of the gross proceeds of the Bonds. Failure by EGAT/GOT to make timely payments of such fee installments would be treated by the Bank as a breach by EGAT/GOT of their payment obligations to the Bank, and would cause the Bank to suspend its guarantee coverage of coupon payments. Commission (re-offerfee): 55bp; payable from bond proceeds. Expenses to EGAT. Capped at US$60,000 - listing fees, paying agency fees, printing costs, trustee fees, closing costs. OtherEGATExpenses: * Road show costs: capped at US$13,000 per person. * Rating agency fees: about US$100,000 (for Moody's). Lead manager absorbs S&P rating. * Annual rating maintenance fees: estimated at US$20,000-25,000 per agency. * EGAT's legal counsel: estimated at US$200,000. Syndication (tentative): Roadshow: Issue Rating: FiscalAgent. Lead Manager/Bookruiner (80%): ABN AMRO Bank N.V. Co-lead managers (15%): 3 European & US investment banks; nominated by GOT/EGAT and satisfactory to the Bank. Co-managers (5%): 5 investment banks with 1% each. London-Frankfurt-Milan-New York-Chicago. Other cities via conference calls. S&P and Moody's. TBD Distrbution: US 50% Italy 15% UK 15% Other Europe 10% Asia 10% Investor Placement: Investment Advisors 50% Hedge Funds 5% Banks 5% Insurance companies 25% Pension Funds 10% Retail 5% Buy-out Option: Drawdown: If interest/coupon payments are covered under the Guarantee, then following a default by EGAT and GOT, a demand by the Fiscal Agent, payment by the Bank under the guarantee, and failure by GOT and EGAT to indemnify the Bank in respect of such payment, the Bank shall have the right, within a stipulated number of days (TBD) of such failure, to offer to purchase the bonds for an amount equal to the outstanding principal and accrued but unpaid interest on the bonds. On the closing date of the issue, EGAT will receive the full amount of the proceeds less the guarantee fee payable to the Bank and all other fees, commissions and expenses payable to the Managers, Fiscal Agent, Paying Agents, and advisors. The entire net proceeds of the issue will be credited to a special account maintained by a fmancial institution acceptable to the Bank. Subsequent drawdowns from the special account will be made exclusively for the purposes described above under "Use of Proceeds". The special account will be audited by independent auditors acceptable to the Bank and the audit reports will be submitted to the Bank. If the Bank determines that funds have been used for ineligible expenditures, GOT and EGAT must replenish the special account.

43 3 9 Attachment A to Annex 2 Taxes and Other Deductions: Documentation: Bonds: All payments to be made under or in connection with the Bonds to be free and clear of any taxes, withholdings or other deductions. Standard documentation including: Offering Circular, Terms and Conditions of Bonds, Warranty Agreement, Fiscal Agency Agreement, Paying Agency Agreement and Subscription Agreement. Special provisions will be included to reflect the World Bank's participation, to provide disclosure of material information on the Bank and terms of the partial credit guarantee provided by the Bank. The Bonds are unconditional and unsubordinated obligations of EGAT. No modification to the terms of the Bonds can be made without the Bank's approval. In the event that the Bonds are redeemed or canceled, the Banks guarantee will be discharged. Indemnity by GOT/EGATT: GOT will enter into an Indemnity Agreement and EGAT will enter into a Project Agreement with the Bank in respect of the guarantee. Under these agreements, GOT and EGAT will each agree to reimburse and indemnify the Bank in respect of any amount paid out (including other costs and expenses incurred) under the provisions of the guarantee, on demand or as the Bank may otherwise direct. Governing Law & Jurisdiction: The terms and conditions of the Bonds, the Partial Credit Guarantee and all agreements are subject to the laws of the State of New York. The Indemnity Agreement with GOT and the Project Agreement with EGAT contain the dispute resolution provision common to all Bank agreements with member countries and follow the usual legal regilne.

44 40 Environmental Protection Attachment B to Annex 2 1. Power plants and transmission lines are subject to stringent standards in Thailand (more stringent than the Bank guidelines in general). The proposed generation facilities will utilize cleaner fuels like natural gas. Flue Gas Desulfurization (FGD) will be installed for power plants at Ratchaburi and Krabi (fuel oil with 2% sulfur) to remove 70,000 tons of sulfur dioxide per year. The selected FGD systems represent commercially proven technology and will be designed to remove at least 80% of sulfur at Krabi and 90% at Ratchaburi. An environmental monitoring and management system would be instituted at each facility in order to meet regulations along with EGAT's corporate policy goals and responsibility. Environmental Cornsiderations 2. In accordance with OD 4.01 on Environmental Assessment, the overall project has been assigned Category A. The project comprises four generation and four transmission line components which are in various stages of completion. The environmental assessment (EA) or environmental impact analysis (EIA) of each component has been completed and reviewed individually. EGAT, with assistance of local and international consultants, prepared the EAs for the four generation components (at three sites) as required by Thailand regulations. Focused EIAs for the transmission lines components (not required by Thailand regulations) were prepared for the Bank project. All EAs required by the Thailand regulation have been approved by the National Environmental Board (NEB). Two of the transmission line EAs were reviewed by the Bank earlier as a part of another project and were found satisfactory. EGAT has provided addenda and executive summaries to the EAs and EIAs for this project which provide updated information, further clarification and explanation. All eight components of the project have been designed and will be implemented in accordance with the modem concept of environmental management. Generation Compsnents 3. For the four generation facilities at three sites, EGAT has proposed to use environmentally friendly and clean natural gas at Wang Noi and Ratchaburi Combined cycle and 2% sulfur fuel oil for Rachaburi thermal and Krabi. FGD systems with at least 90% efficiency at Rachaburi and 80% at Krabi will be utilized to remove about 70,000 tons of sulfur dioxide per year to meet stringent sulfur dioxide emissions standards in Thailand. Particulates emissions will also be partially controlled by the FGD. The calculated amount of particulate emissions at Ratchaburi thermal and Krabi are expected to be around 70 mg/nm3 which is less than the Bank guideline dated 1983 (applicable when these power plants were designed but are higher than the 1997 guidelines of :30 mg/nm3). Dispersion modeling for the sites predicted maximum ground level concentration of the power plant to be less than 5 um/m3 (which is minimal). Considering the location of these facilities, further particulate control is not needed. However, ambient monitoring for particulate matter will be conducted and if the power plant is shown to be a major contributor to the exceedance of particulate standards, further controls may be considered. 4. When possible, gypsum which is a by product of FGD will be utilized for the construction industry. Nitrogen oxides will be controlled at each facility, as required to meet emissions standards. Continuous monitoring for sulfur and nitrogen oxides for air pollution will be instituted at each facility.

45 41 5. Water usage will be minimized by employing closed loop (or recirculating cycle) cooling systems. Water intakes will be pretreated and discharges will be controlled to meet Thai standards and the Bank guidelines. A holding pond, water reservoir and a waste water treatment system will be constructed to reduce discharge water temperature. When required, water will be neutralized before being discharged. Oil/water separators are provided at oil storage and handling areas and domestic sewage would be treated. Screens and other methods to prevent fish entering the inlet water pipes will be employed. 6. EGAT facilities will be surrounded with visual screens like greenbelt and other barriers to reduce noise and intrusion. Noisy activities (e.g. limestone blasting) will be conducted only during the day time and in coordination with the local authority. Transmission Components 7. In the selection of routes for transmission lines and substation sites, EGAT uses design criteria to minimize environmental impacts on forest, wildlife, watershed areas, populations, archeological sites and scenery. Transmission line right of ways are not to be located through: (a) restricted Class IA watershed area, according to laws and regulations; and (b) holy places, archeological sites and government sites. Transmission line right of ways should also avoid: (a) watershed area class 1B, Class C forest conservation areas, mangrove forest, national parks and other conservation areas; (b) community and developed areas; (c) parallel with, or close to telephone and telegraph cables for a long distance to avoid interference; and, (d) airports. 8. Detailed Route Surveys. Before construction of the transmission system, detailed route surveys will be perforned by EGAT staff together with the Royal Forestry Department (RFD). The number of forest trees to be cut will be documented. In addition, final route selection adjustments to avoid dwellings and circumvent other areas of potential negative impact will be made, according to EGAT's environmental design criteria. 9. Construction. EGAT's guidelines for construction activities are: (a) avoid installation of new access roads for construction purposes; try to utilize existing trails; (b) no cutting of trees over the limitations set by RFD; and (c) clean up construction sites upon completion of construction work. 10. Maintenance of the Right of Way. Along the valleys, only trees considered to be hazardous to the stability of the transmission system would be cut down. Landowners are permitted to cultivate economic crops at EGAT's option along the right of way corridors. Upon completion of transmission line construction work, ground cover around the towers will be planted and land contouring will be done as required to provide a protective covering for the earth and to prevent soil erosion. No herbicides are used in right of way maintenance. 11. For all components in this project, environmental aspects have been taken into consideration and should cause minimal disturbance to the human and natural environment. An environmental management program consisting of both mitigation and monitoring action plans at the plant level have been incorporated into the each of the project components to confirmn environmental performance on a sustainable basis. Monitoring will be conducted at each facilities for air and water effluent quality, noise, ground water hydrology and quality, aquatic ecology, solid waste management, socio-economic indicators, public health and safety.

46 42 Fuel Transport 12. All fuel transport routes are selected with the least impact on people, forest, and wildlife. Fuel transport EAs for each generation facility (not financed under this project) have been prepared by fuel suppliers (e.g. Petroleum Authority of Thailand - PTT) and reviewed and approved by the NEB. These EAs have also been sent to the Bank public information center for this project. 13. The Yadana gas pipeline for Ratchaburi plant is buried in a 3 meter deep ditch. This gas pipeline does pass through a 26 km of conserved forest which has provoked opposition. The social impact of this pipeline has been estimated to be low. About 26 households have to move their house a few meters. No new access roads are needed. Royal Forest Department will reforest 852 rais to compensate for the passing through the protected areas. Analysis of Alternatives 14. In their planning and development analysis, EGAT takes into account the alternatives for: site locations, fuel type and transport, limestone supply and gypsum disposal when FGD is utilized. Before the projects are included in the formal power sector development (PDP) analysis of: feasibility; alternatives; fuel availability both locally and in the international markets; flexibility and reliability of fuel supply; transport options; initial environmental impacts; land availability and ownership; extent of resettlement; socio-economic impact; political and international treaties; and others are performed by EGAT along with local and international consultants. EGAT also takes into account the Government of Thailand's needs related to energy security by diversifying fuel and sites. The projects that satisfy these criteria, are further processed through a program called PRO-SCREEN for project prioritization and inclusion in PDP. 15. The components under considerations were based on extensive analysis as described above. Constraints on expansion of lignite and hydro, and to meet exponentially growing demand, EGAT to choose the fastest generation method, namely gas turbines and combined cycle. The fastest site capable of immediate development was Wang Noi as this site had already been acquired by EGAT previously for possible use, when needed, as a major substation. 16. While Wang Noi was being accelerated, the Cabinet contracted with Myanmar to purchase Yadana natural gas for 30 years starting in PTT completed detailed pipeline routing studies and a major EA (April 1997). Ratchaburi was selected as the main site for the generation facility because it balanced the cost of transmission lines with the cost of gas pipelines. The Yadana gas pipeline had to be connected to the existing Gulf of Thailand gas pipeline network. Although pipelines are somewhat more expensive than transmission lines, the need to connect to the, gulf gas lines was the main factor in selecting the Ratchaburi site between Myanmar and the main load center of Bangkok. The Ratchaburi site had been previously acquired by EGAT as there would be no involuntary resettlement. The other attraction of this site was that there was no biodiversity, forest or other habitat. The Yadana pipeline was completed in June The Ratchaburi site is expected to be developed to 1800 MW with generation starting in September In order to spread economic risks, the site is planned to be half gas and half oil. 17. Power demand in the Southern region of Thailand will exceed the demand soon. Krabi site was selected for expansion as it was an existing site of an old lignite plant which had been decommissioned. Complying with the Cabinet's fuel diversification policy and in view of the

47 43 low and falling prices of international fuel oil, Krabi is to be developed into a 600 MW imported oil power plant. 18. Least-cost planning showed that upgrading of the current 80 MW interconnection of Thailand and Malaysia power grids to 300 MW is now the priority, hence is included in this project, for commissioning in This HVDC line can be upgraded to 600 MW in the future. Public Consultation 19. EGAT's corporate policy now explicitly requires public participation and seeks their acceptance of the development project. For the components in this project, EGAT's objectives in public consultation included their opinion, needs, problems and obstacles from the people and communities living in the operational area, as well as disseminating accurate information about the project. Local communities, leaders, and government and non-governmental groups were canvassed and requested recommendations. Several public meetings were held at each of the project site to discuss concerns, mitigation measures and seek resolutions. Alternatives to the projects were discussed with the local communities, as appropriate for each site as detailed in the project specific environmental executive summaries. Even though public participation is included in EGAT policy, the timing, transparency and public awareness of planning considerations in project selection will be improved.

48 44 Environmental Considerations During Bank Supervision. 20. The following items would form part of the supervision of the Bank. Component Issue Supervision Activities EGAT environmental emissions and effluent site visits and inspection of monitoring monitoring as per EIA's environmental controls and mitigation measures, review environmental monitoring data, exception reports, and follow up with management. Yadana gas pipeline for traverses 26 km of conserved site inspection, review Ratchaburi plant forest mitigation measures, follow up on implementation Ratchaburi and Krabi fuel 1) barge transport, Spill 1) review implementation delivery systems Prevention Control and measures, loading operations Countermeasures Plans; and safety; and capacity and 2) pipelines; needs for spill response; 3) alternatives 2) inspection of sensitive segments of pipeline right of ways, further definition and implementation of mitigation measures; 3) review EIAs for any changes in plans for fuel delivery systems, and site inspections Transmission lines: right of ways that traverse inspection of traverses 500 kv for IPPs; reserved forest or other through protected areas, Transmission System No. 9 protected areas further definition and implementation of mitigation measures

49 45 Annex 3 Thailand EGAT - Investment Program Support Project Cost Estimates: Summary The cost estijmates given in this Annex are based on EGAT's cost estimates for the various Project components which are in different stages of implementation. These estimates have been prepared in different years and have been updated at appraisal. The estimates are not necessarily in the Bank's normal format. Further, some of the Project components may be deleted or deferred following cuts in investments that may be dictated by depression in demand.

50 46 Annex 3 Thailand EGAT - Investment Program Support Project Cost Estimates: Summary r ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ EERi ilieese- Ei isieedescription MIIcoS Tota,, IHo lil - ''.EESSSE....!. i... pse E. EL.,,,....w.u--u... is S.iE.EEEEEEEEEEEE i.e ~~~~~~~~~~~~~~~~~~~... fi;.es EEEE.;. l ieei.ile errr-.... E irierrereereer irere i.e. ireeee EEE.ER E.EER-, l t ;t g;..,...., g l.-... I Krabi Thermal Unit 1 (300 MW) ,50 4,805 11,308 Krabi Thermal Unit 1 (300 MW) ,783 3,645 9,42 Transmission System ,160 1,88 2 Ratchaburi Thermal Units 1-2 (2x700 MW) ,08 25,582 '17,98C 43,56 Ratchaburi Thermal Plant Unit ,150 10,84E 28,99 Transmission System ,43 7,132 14,56 3 Ratchaburi Combined Cycle Blocks ,012 25,04C 15,440 40,48 (3x600 MW) Ractchaburi Combined Cycle Block ,70 9,860 29,56 Transmission System ,340 5,580 10,92 4 Wang Noi Combined Cycle Stage 2 ( ,02 2,913 10,93 MW) 6 Transmission System for Evacuation of ,31 13,095 21,40 Power from IPPs /I Western Area ,69 8,185 13,88 Eastem Area ,61 4,910 7,52 6 Transmission System to Receive Power ,90 4,640 6,54 from Hong Sa (Laos) 7 Bulk Power Supply System for Greater ,32 5,080 14,40 Bangkok 8 EGAT-TNB (Malaysia)- Stage II ,41 3,024 6,440 Interconnection 9 Transmission System Expansion Project ,56 10,752 22,32 No.9 (TS.9) -Totl. 2. L 7 177,39 I USD = 40 THB Estimates prepared and updated by EGAT /1 Part Cost Estimate reflecting deferment of some components

51 47 Annex 3 Krabi Oil Fired Thermal Plant Unit MW Sr. jdeecr,pti'on,,.'ll USO,, Millio : TBD:: ,,, C Equipment , , Spare Parts Local Transport Site Services Design Engineering Training Program Erection Civil Works Land&LandRight Port Facility&Pipe Line Sub - Total , , , Engineering Services Contingencies Sub - Total , , , Import Duty & Taxes Escalation Sub - Total , , , Interest During Construction :: ' i P.ice J ] 1:' '' ''li[' '':::1 14. :3. ': ' ' ',4, '1 : ' ii : Level o. Price Level I I

52 48 Annex 3 Transmission System for Krabi Oil Fired Thermal Power plant Unit I - 300MW Nos II : I :; il. D. Mi., ~~~~~~~~~~......S Transmission Lines kv Krabi - Thung Song Sub-Total Transm Lines Substations kv Krabi Substation kv Thung Song Substation Expansion i kv Nakhon Si Thammarat Substation Expansion cio Communication System Addition Sub-Total Substations Sub-Total 11' , Engineering & Supervision Physical Contingencies Sub - Total 2 16, , Escalation Import Duties Sub - Total , Interest During Construction Sub - Total , , Value Added Tax ThtaI[,,,1-7: ''''''''''''''''''''''i I ''' 18.o I2.. ''' Price level

53 49 Annex 3 Ratchaburi Thermal Powewr Plant Units 1 and 2-2x700 MW Sr. Description Million USD F Million THB No. FC LC ToTotal FC LC Total 1 Steam Gen. & Aux , , Required Spare Parts Turbine Gen. And Aux , , FGD , , Power House Electrical & Control Eqp , , Water Treatment , Cooling Water System Port Facility , , Land and Land Rights Erection , , , Civil Works , ,229.5 Sub-Total , , , Engineering Services Contingencies ,174.2 Sub-Total , , , Escalation , , Import Duties and Taxes Sub-Total , , , jinterest During Const , ,... 4,3, : [I T,a Price Level -1995

54 50 Annex 3 Transmission System for Ratchaburi Thermal Power Plants Units 1 and 2-2x700MW 1S, r.,,,,~~~~~~~~~. :...ie. i... EEEEEEEE. ECecipit :: Millio USD lt MWlo ThB : 1 I No -- -I EEE 1C -:E LC -i:g -oa - -:-FC LC Total -C Transmission Lines kv Chom Bung -Wang Noi , , , Reconstruction of 230 kvi Ratchaburi 2 -Ban Pong Reconstruction of 230 kv Ban Pong 2 -.Sai.Noi Sub-Total TIL , , ,311.1 Substations kv Ratchaburi Power Plant Switchyard Expansion kv Chom Bung Substation Expansion /230 kv Wang Noi Substation , , kv Ban Pong 2 Substation Expansion kv Sai Noi Substations Expansion Comm. System Add Sub-Total Subs , ,953.4 Sub - Total , , , Engineering & Supervision Physical Contingencies ,065.5 Sub-Total , , , Escalation , , Import Duties u Sub-Total , , , Interest During Construction Sub-Total , , , Value Added Tax Price level

55 51 Annex 3 Ratchaburi Combined Cycle Power Plant Blocks 1,2,3-3x600 MW [ Sr. Description Million USD Million THB _ No. FC [ LC [ Total FC _C L I Total 1 Gas Turbine , , Steam Turbine , , HRSG , , Circulating Water System Power House , , Electrical and Control , , Fuel Oil Handling Gas Pipeline 0, Land and Land Rights Erection , , , Civil Works , ,590.0 Sub-Total , , , Engineering Services Contingencies ,199.3 Sub-Total , , , Import Duties and Taxes Escalation , ,984.2 Sub-Total , , , Interest During Construction , Price Level '''' ' ::: ::'' ,, : I. j. I.. I ,... I ::-. ::.. 11.:..1. :: :: I Total11. IF :,.. :.:.:.: ''.,1 96j6:'1:.9 j

56 52 Annex 3 Transmission System for Ratchaburi Combined Cycle Power Plant Blocks 1,2,3-3x6OOMW Sr. f S... FlonTh~ ''''''1 Descrlptlr. ~~~~~~~~~~~~ Transmission Lines kv Ratchaburi Power Plant - Ratchaburi kv Ratchaburi Power Plant - Chom Bung kv Chom Bung - Sai Noi , , kv Ratchaburi Power Plant - Samut Sakhon Reconstruction of the 115 kv Samut Sakhon Sub-Total TIL , , ,381.8 Substations 6 500/230 kv Ratchaburi Power Plant Switchyard , , kv Ratchaburi 2 Substation Expansion kv Chom Bung Substation kv Sai Noi Substation Expansion /115 kv Samut Sakhon 4 Substation kv Samut Sakhon 2 Substation Expansion Communication System Addition Sub-Total Substations , ,254.8 Sub-Total , , , Engineering & Supervision Physical Contingencies Sub-Total , , , Escalation Import Duties Sub-Total , , , Interest During Construction Sub-Total , , , Value AddedTax _ Pric g e.'; Level....: Price Level

57 53 Annex 3 Wang Noi Combined Cycle Power Plant Stage MW Sr. --- : EDescription: - Milio T..S...Millin No LC--ot- FC : LC Totalt: F.::: I Gas Turbine , , HRSG Boiler Steam Turbine Generator Eqp Power House Control and Access. Elect. Eq , , Wtare Treatment Plant Cooling Water System Civil Works Local Transport Sub-Total , , Engineering Services Contingencies Sub-Total , , , Import Duties and Taxes Escalation Sub-Total , , , jinterest During Construction , , I 11:... - :. -- i : : i :-:~~~ :.Il { Irc lt eval Price Level , :.111.1:... {1.:.: {.:.:1 :: I~~~~~~~~~~~~~~~~~~~ I 2, i

58 54 Annex 3 Transmission System for IPPs (West) Description MIIIIos~~~~~ IJSD IIMillwkn THB... ~~~~~~~~~~~~~~~~~~~~~~~ i; iee. L,,E '1.' N TRANSMISSION LINES kv Bang Saphan-Chom Bung 1st Line , , ,166.0 Sub-Total -Transmission Lines , , ,166.0 SUBSTATIONS 2 500/230 kv Bang Saphan Substation Expan kv Chom Bung Substation Expansion kv Sai Noi Substation Expansion , , Installation of Reactor at 500 kv Lines Communication System Addition Sub-Total Substations , ,413.0 Sub-Total , , , Engineering & Supervision Physical Contingencies Sub-Total , , , Escalation , , Import Duties Sub-Total , , , Interest During Construction Sub-Total , , , Value Added Tax Note: Part Cost estimate reflecting deferment of some components

59 55 Annex 3 Transmission System for IPPs (East) St -1- Description Million USA - Milion IB-l No.... F.C. L T - L.C x Total -j-- TRANSMISSION LINE kv Rayong 4 - T Junction lst Line Route , , kv Rayong 4 - Rayong Sub-Total Transmission Lines , ,376.0 SUBSTATION kv Rayong 4 Substation , , kv Rayong 2 Substation Expansion Installation of Shunt Reactor at 500 kv Line Communication System Addition Sub-Total Substations , ,691.5 Sub-Total , , , Engineering & Supervision Physical Contingencies Sub-Total , , , Escalation Import Duties Sub-Total , , , Interest During Construction Sub-Total , , , ValueAddedTax L_...i - I2~II 65*4 ~ 122.8J , ,810. 7,5--:: Note: Part Cost Estimate reflecting deferment of some components

60 56 Annex 3 Transmission System for Hong Sa Sr Description _ Millon USD F Million THB No. r FC LC Total FC _ LC Total I 500 kv Laos/Thai Border- Mae Moh 3 T/L , , , kvmae Moh 3 Switchyard Expansion Communication System Addition Sub-Total , , , Engineering Services Contingencies Sub-Total , , , Import Duties and Taxes Sub-Total , , , Escalation , ,251.0 Sub-Total , , , Interest During Construction Value Added Tax Price level ~~~~~~~.. i ierere.,#.,.e i,:e..., E I : 16.0

61 57 Annex 3 Bulk Power Supply System for Greater Bangkok Description.:Hv USD IopH --s.r. l--- ' DescH tior'' '~~~~~~~~....,-... ~~~~~~~:. 1 - L:......,':'Mli-.US:,---' :." ":Mi l ' -B: :1:Total'- I' '' :L - ['.:ttotal TRANSMISSION LINE kv Detour Line Sai Noi-Bangkok Noi Reconstruction of 500 kv Sai Noi-Bkk Noi Reconstruction of 500 kv Nong Chok-OnNuch kv Detour Line Rangsit-Chaeng Wathana Reconstruction of 500 kv Sai Noi - Rangsit 7.1 & Recons. of 500 kv Rangsit - Chaeng Watthana kv Detour Line Chaeng Watthana-Lat Phrao Reconst. of 230 kv Bangkok Noi - North Bangkok Reconst. of 230 kv Chaeng Watthana - North Bangkok Junction Reconst. of 230 kv North Bangkok - North Bangkok Junction- Lat Phrao Sub-Total Transmission Lines , , ,370.6 SUBSTATION 11 Replacement of circuit breaker at Bang Phi Thepharak Bangkok Noi Expansion North Bangkok Renovation and Expansion Chaeng Watthana Expansion Lat Phrao Renovation and Expansion , , Addition of Transformers at Existing Substations , Reactive Power Cornpensation Equipment Sub-Total Transmission Lines , , Communication System Addition Sub-Total , , , Engineering & Supervision Physical Contingencies ,069.1 Sub-Total , , , Escalation , Import Duties Sub-Total , ,020A 13, Interest During Construction Sub-Total , , , Value Added Tax Pr.. Level :: -::-..,, -,. -:, '';:" -. ::Tice ', '7. '....,..'... Price Level

62 58 Annex 3 EGAT-TNB Stage 11 Interconnection Sr. Description Million USD Million THB [No. FC LC Total FC LC Total TRANSMISSION LINES kv Hat Yai 2 - Khlong Ngae HVDC Khlong Ngae - Thai/Malaysia Border kv Khlong Ngae - Thung Song ,437.3 ission Lines , ,807.0 SUBSTATIONS kv Hat Yai 2 Substation Expansion Khlong Ngae HVDC Converter Station , , kv Thung Song Substation Expansion Communication System Addition Substations , ,243.7 Sub-Total , , , Engineering Services Contingencies Sub-Total , , , Import Duties and Taxes Escalation ~~~~~~~~~~~~~~~~~~~~~~~~~~ Sub-Total , , , Interest During Construction Value Added Tax _ I I l...~~~ ~~~~~~~~~~~~~~~~~~~~~~~ 'I'M':R.. E.'... H'''''... '...' H'..':. ''''''3E::' H:''4' 'K '3i. Price Level i E I ~~~~~~~~~~~ E

63 59 Annex 3 Transmission System Expansion Project No 9 r......, I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~... o, ~..-- _---''''''''i :Ttt L1LC Toa ] TRANSMISSION LINES 1230kV BanPong2-BanF'ong1-NakhonChaisi-SamPh kv Bo Win - Ban Bung kv Tha Wung Line Termination kVThalan3-Saraburi kv Ratchaburi 2- Ftatchaburi kv Prachan Buri 2.- Watthana Nakhon kv Mukdahan 2 Line Termination and 115 kv Mukdahan 2 That Phanom - Nakhon Phanom kv Udon Thani 2 - Nong Bua Lam Phu kv Roi Et - Phayaklaphum Phisai - Surin kv Chaiyaphum - Bamnet Narong kv Ubon Ratchathani 2 - Kantharalak kvsurin-sangkha kv Surat Thani - Thung Song and 230 kv Thung Song - Nakhon Si Thammarat , kVKhlongNgae-Yala kv Phangnga - Phuket Junction and 115 kv Phuket 2 - Phuket Junction & kvyala - Narathiwat & kv Surat Thani - Ban Don kV Lan Krabu - Kamphaengphet kv Mae Moh 3 - Lampang kv Chiang Mai 2 - MIae Taen Sub-Total Transmission Line A ,758A 3, ,935.0 SUBSTATIONS 21 Ban Pong 2 Expansion, Nakhon Chaisi Expansion and Sam Phran 2 Expansion Bo Wing Expansion and Ban Bung Expansion Tha Wung Thalan 3 Expansion and Saraburi I Expansion Ratchaburi 2 Expansion and Ratchaburi Expansion Prachin Buri 2 Expansion and Watthana Nakhon Expansion Mukdahan 2, Mukdahan I Expansion, That Phanom Expansion and Nakhon Phanom Expansion Udon Thani 2 Expansion and Nong Bua Lam Phu Expansion Roi Et Expansion, Phayalkhaphum Phisai Expansion and Surin Expansion Chaiyaphum Expansion and Bamnet Narong Udon Ratchaburi 2 Expansion and Kantharalak Surin Expansion and Sangkha Surat Thani Expansion, Thung Song Expansion and Nakhon Si Thammarat Expansion Khlong Ngae Expansion and Yala Expansion Phangnga Expansion PhLiket 2 Expansion Yala Expansion and Naral:hiwat Expansion Surat Thani Expansion and Ban Don Expansion Mae Moh 3 Expansion and Chiang Rai Expansion Lan krabu Expansion and Kamphaengphet Expansion Mae Moh 3 Expansion and Lampang 2 Expansion &9

64 . 60 Annex 3 Transmission System Expansion Project No 9 ESr.- E Eii -P-iEE- - * n:... E LXe n-... i..... Won:... T a Chiang Mai 2 Expansion and Mae Taeng Addition of Transformers at Existing Substations , , Reactive Power Compensation Equipment Installation Miscellaneous System Expansion , ,212.8 Sub-Total Substation , , , Communication System Expansion Sub-Total , , , Engineering Services Contingencies , ,627.4 Sub-Total , , , Import Duties and Taxes Escalation , ,613.0 Sub-Total , , , Interest During Construction - 2& , , Value Added Tax I... I. =... Price Level TQt4II#11lI~.9 I SILO 10,

65 61 Annex 4 Thailand EGAT - Investment Program Support Project Cost Benefit Analysis Summary (Monetary Values are in Thai Baht) (Base Year ) Present Value of Flows Fiscal Impact Economic Financial Analysis Analysis Taxes Subsidies Benefits 852,627 mln. 852,627 Costs 821,276 mln. 884,873 63,597 Net Benefits: 31,351 mln. -32,246 IRR: % 9.13 % Sensitivity analysis/switching Values of Critical Items to drop ERR to 10%: Variable Energy Sales or -4.0% Average Selling Price Investment Costs +11.5% Power Purchase Cost +5.0%

66 62 Economic Justification Electricity Supply Situation 1. Following a period of rapid demand growth averaging 10% p. a. during the last decade, the electricity generation requirement of Thailand reached 14,506 MW and 92,725 Gwh during FY 97. This was accompanied with a decline in generation reserve margin to about 12.5% (dependable system installed capacity of 16,300 MW), against a requirement of about 30% for maintaining adequate system reliability and a loss of load probability below 1.0 days p. a. The decline in the efficiency and reliability of the transmission and distribution systems during this period was also significant. The three Thai electricity utilities have been undertaking expansion programs since the mid nineties, which would have enabled the system to reach acceptable levels of reliability, in particular a generation reserve margin exceeding 30% during and varying between 25-30% thereafter. With the decline in demand growth, and curtailment/deferment of projects as feasible, it is expected that the generation reserve margin will increase rapidly in the next few years (varying between 40 to 50% in the years 2000 to 2004) but settling down to about 32% by the year 2005 and varying between 25 to 30% in the long run. 2. The growth of the electricity market will depend heavily on the recovery of the Thai economy. The pace of this process remains uncertain and depends on progress in domestic reforms and the external economic enviromnent. The following assumptions were made at appraisal in projecting a lower electricity demand growth scenario: (a) an energy growth of 0.65% for FY98, based on actual figures till May 1998 and a negative -1% growth for each of the next four months of FY98; (b) a negative demand growth of -2.25% for FY98; (c) a zero GDP growth and a very modest demand growth of 0.5% for FY99; (d) the Thai economy will start to recover from the year 2000; (e) an average demand growth of 7.7% from 1999 to 2005 based on the latest forecast of Thailand's Load Forecast Sub-Committee (Sep. 1997), (a GDP elasticity of electricity demand of about 1.35). Least Cost Expansion Plan 3. In order to assess the Project, an adjusted Power Development Plan (PDP) was prepared at appraisal consistent with the load forecast mentioned above. Compared to EGAT's latest PDP (Dec. 1997) the proposed investment program includes the following main adjustments: (a) postponement of five IPPs (for 4,435 MW) by about two years; (b) postponement of power imports by about three years; (c) deferment of corresponding transmission investments accordingly. According to the revised PDP, by the year 2005, the system demand would have grown to about 22,000 MW, the dependable installed capacity to about 29,000 MW and the generation reserve margin to about 32%. Analysis of Economic and Financial Rates of Return and Project Risk 4. The economic viability of the adjusted PDP is used as a proxy to assess the proposed EGAT - Investment Program Support Project. This assumption is supported by the following: (a) the investments to be supported by the Project account for about 72% of the adjusted PDP during the period ; and (b) the transmission components of the PDP are an integral part of the expansion plan and, as such, their benefits cannot be separated from the generation components. Transmission investments are essential to transport incremental energy and provide

67 63 a more efficient and reliable operation of the system, both factors directly linked to the expansion of generation. 5. The analysis is done in constant 1997 prices, no allowance is made for the shadow exchange rate or for labor costs, as actual values reflect opportunity costs. The economic costs include: (a) capital investment for transmission and generation projects planned to be complete during the period , excluding duties and taxes and interest during construction; (b) corresponding operation and maintenance costs 4 ; (c) economic fuel costs based on information supplied by NEPO; and (d) cost of purchased power from IPPs and Small Power producers (SPPs). The economic benefits are based on the incremental sales -- after transmission losses -- that would be made possible by the new generation and transmission facilities, valued at EGAT's average selling price of B /kWh for 1998 (which results in the same tariff in 1997 terms after allowing 10% for deflation and adding a VAT of 10%), derived from EGAT's financial projections. This is a conservative estimate for the economic benefits associated to electricity consumption since it does not take into account the benefits of increased system reliability and consumers' willingness to pay which is above tariff levels among important sections of residential, commercial and industrial consumers. The cost and benefit streams are presented in the attached tables. 6. The ERR is estimated at 10.87% and the NPV at 10% discount rate at 31,351 million Baht. A financial analysis using the same methodology, but leaving out taxes and duties yields a financial rate of return of 9.13 % and a NPV of - 32,246 million Baht at 10% discount rate. 7. The project's economic viability was tested for the following variables to achieve the benchmark return of 10% for economic viability of the project: (a) (b) (c) Energy Sales or Average Selling Price: The ERR is sensitive to variations in these variables, dropping to 10% for a decrease of 4% in either variable. As sales price would be adjusted to achieve a self-financing ratio of 25%, the risk of the Project becoming economically unviable due to variations in the aforementioned variables is small. Cost Overrun: A cost overrun of 11.5 % in EGAT's transmission and generation investments drops the ERR to 10%. As a substantial portion of the equipments have already beebn ordered, the likelihood of overall cost increase of this magnitude is small. Escalation in Energy Purchase Price: A 5.0 % increase in the contracted IPP price results in an ERR of 10% However, power from the IPPs is contracted on a long term basis and price escalations of this magnitude are unlikely. Economic Viability of Individual Project Components 8. The economic viability of the individual Project components had been assessed in the feasibility studies of each sub-project. The economic costs, benefits and ERR -- or benefit/cost ratio -- estimated in these studies are presented below. As these components are at an advanced stage of implementation -- with the exception of Krabi Thermal Unit I and the 500kV 4 O&M costs as % of capital costs: Thermal plants - 2.5%; Combined cycle plants - 2.8%; Gas turbine plants - 3%; Hydro plants - 1%; Transmission system - 1.5%.

68 64 Southern Region, which is less affected by the current crisis. Accordingly, the commissioning of Unit 1 is required for late The 500kV transmission system is an integral part of the IPP program, being necessary to transport the power of five IPPs. Therefore, its implementation schedule is a function of the IPPs commissioning plan. Project Component Costs (US$ million) Benefits ERR Total Sunk (Feasibility Invest. Costs 5 Study) Krabi Thermal Unit 1 ( Incremental sales of 1, % MW) Gwh per year. Ratchaburi Thermal Incremental sales of 22, % 6 (2x700 MW) Gwh per year made Ratchaburi Combined Cycle available by the thermal and combined cycle plants. (3x600 MW) Wang Noi Combined Cycle Incremental sales of 4, % (600 MW) Gwh per year. Transmission System for Incremental sales to MEA 22.6 % IPPs. and PEA resulting from this project plus related IPPs energy. Bulk Power for Greater Incremental sales to MEA 13.4 % Bangkok Area resulting from this project plus related generation investment. EGAT-TNB Stage II Economic power exchange B/C ratio: Interconnection (due to non-coincident peaks), investment savings 1.59 ' due to reduced reserve capacity requirements, and reduced operating costs (spinning reserve sharing). Transmission System least cost subprojects 11.8 % Expansion Proj. No. 9 5 Assuming 50% of 1998 disbursements. 6 ERR for both Ratchaburi plants, thermal and combined cycle. 7 Economic justification based on avoided cost approach.

69 CALCULATION OF ERR OF EGAT'S PDP ( ) Cost Stream (MTHB) Benefit Stream Fiscal Year incremental. Cost of Incremental Selling Price Incremental Purchased Total Energy Energy Sale (THBlkWh) Sale Revenue Net Benefit Capital Cost O&M Cost Fuel Cost Energy Total Cost Sale (GWh) (GWh) Constant Price (MTHB) (MTHB) z o Total ERR= 10.87% NPV: Cost (10% DCR) $821,276 NPV: Benefit (10% DCR) = $852,627 Net Benefit (10% DCR) = $31,351

70 CALCULATION OF FRR OF EGAT'S PDP ( ) Cost Stream (MTHB) Benefit Stream Fiscal Year incremental Cost of Incremental Selling Price Incremental Purchased Total Energy Energy Sale (THB/kWh) Sale Revenue Net Benefit Capital Cost O&M Cost Fuel Cost Energy Total Cost Sale (GWh) (GWh) Constant Price (MTHB) (MTHB) o Total FRR= 9.140% NPV: Cost (10% DCR) = $884,872 NPV: Benefit (10% DCR) = $852,627 Net Benefit (10% DCR) = ($32,245)

71 67 Annex 5 Thailand EGAT - Investment Program Support Project Financial Analysis The Currency Crisis and its Impact on Foreign Exchange Losses 1. The currency crisis in Thailand has had an adverse impact on the financial health of the Thai electricity utilities. Before the crisis, EGAT's financial position was sound and more than satisfied the Bank's main financial covenant which seeks a minimum self financing ratio (SFR) of 25%. In fact, EGAT has been able to achieve SFRs of over 30% in the last few years. The crisis emerged in July 1997 following the Government's decision to float the currency and adopt a managed floatin,g exchange rate system. As a result, the Baht/US$ exchange rate fell dramatically going to more than Baht 50/US$. It had stabilized at around Baht 40/US$ at the time of Project appraisal in June The crisis has led to substantial unrealized losses on foreign debt and to higher operating expenses. For the year ended September 30, 1997, EGAT deferred a loss of Baht 21.4 billion because the MOF did not allow it to write-off the entire loss on its foreign debt in 1997, which it would have done had it followed the international accounting standard covering the treatment of foreign currency transactions. The unrealized loss of Baht 21.4 billion appears as a deferred item in EGAT's balance sheet, to be recouped over the remaining terms of the loans. By following the aforementioned accounting procedure, EGAT was able to record a net profit of Baht 12.8 billion, making it liable for remittance to the Government. The adoption of this accounting treatment led to a qualification of its financial statements by EGAT's auditors. At appraisal, EGAT provided restated accounts based on compliance with the international standard and it has been assumed for the purposes of the Projecthat EGAT's finances and financial projections will be based on the international accounting standard. 3. With the entire foreign exchange loss taken into account in FY97, EGAT incurred a net loss of Baht 8.6 billion and its self-financing ratio was negative (-11.7%). This performance was far below the 25% level agreed with the Bank. Over the next few years, annual allocation of the unrealized loss based on the remaining life of the loans will cost EGAT's consumers about US $65 million per annum at April 1998 exchange rates - about 30 stang/kwh or US 0.7 cents/kwh. 4. In accordance with regulations applicable to state enterprises, EGAT is liable to remit to MOF a proportion of its net income. Despite the adverse effects of the devaluation on EGAT's profits, it was required to remit Baht 8.4 billion from its FY97 revenues to the Government. The level of Government remittance is significant as this amount reduces EGAT's level of internal cash to self-finance its investments. 5. EGAT financial results were based on an increase in electricity sales of 8% in FY97 (compared with 9% the previous year) and operating revenues for the period of Baht 125 billion, 15% over FY96. This shows that EGAT's revenues were not significantly affected by the financial crisis up to September 30, EGAT's bulk supply tariff rose 6.6% in FY97 to Baht 1.46/kWh due mainly to the application of the automatic adjustment factor (Ft). While the average prices of oil, gas and lignite rose in FY97 by about 12%, the impact on EGAT's

72 68 operating income was marginal, because these costs were recouped through the Ft. However, there were substantial increases in other operating expenses in FY97: (a) (b) purchased power of Baht 21.3 billion increased by 63% (volume increased by 43% and the overall average price of purchased power rose from Baht 1. 14/kWh to Baht 1.29/kWh); and administrative expenses increased by 32% to Baht 3.5 billion; largely payroll expenses and consultancy costs on financial, legal and management expenditures relating to EGAT's privatization. 6. The Government and EGAT have responded positively to these adverse developments by: * permitting foreign exchange fluctuations to be recouped effective April 1998 through inclusion in the Ft. (this raised EGAT's tariff in 1998 by 10 stang/kwh - about 8%). * reviewing EGAT's load growth and reducing its sales forecasts. - revising the power development program to reduce investments by about Baht 95 billion. 7. Erosion of the sector's profitability, nonetheless, has raised concerns about EGAT's ability to meet its obligations towards the IPP contracts already finalized and to close IPP deals currently under negotiation. The adverse financial position of EGAT could also act as a deterrent on its privatization program at a time that it needs to be kept on track. During the transition period, EGAT would need substantial resources to support its large ongoing investments, both for its own generation program and in the reinforcement of the transmission network to facilitate purchase of electricity from IPPs. The financing gap is further aggravated by EGAT's current inability to access long term financing in the international market because of the country risk and the collapse of the domestic debt market. EGAT Long-Term Debt and Debt Service Cover 8. Total outstanding loans rose in FY97 from Baht 146 billion to Baht 173 billion. Loan repayments in FY97 rose from Baht 12.8 billion to Baht 21.4 billion, an increase of 67%. EGAT has no minimum debt service cover undertaking with the Bank. Following the crisis, EGAT's debt service cover has fallen from about 1.6 times in FY96 to 1.05 times in FY97. This is well below the level normally sought by the Bank of 1.3 to 1.5 times. Instead of a debt service covenant, previous Bank loans require EGAT to maintain a minimum debt/equity ratio of 60/40. In FY96, EGAT's debt/equity ratio was very sound at 55/45 but at the end of FY97, its debt/equity ratio had risen to 63/37. Fixed Assets Valuation 9. Fixed assets have normally been valued in EGAT's audited financial accounts at historical cost. For the purposes of the Bank, EGAT prepares separate statements which revalue the fixed assets and depreciation using the Capital Formation Deflation Index provided by the National Economic and Social Development Board. The deflator for FY97 was 5 %. The revalued net fixed assets derived were used for calculating EGAT's financial ratios for the Bank. This revaluation has served little purpose since it is not needed for determining EGAT's

73 69 performance under the self financing ratio. The revaluation does not in any case produce an adequate revalued assets base for measuring EGAT's financial return. This is because recent exchange rate movements have greatly exceeded the local deflator. For privatization purposes, EGAT's fixed assets will need to be properly revalued to reflect their worth to a strategic investor or for use in any prospectus that might accompany a public listing of part or all of its fixed assets. Such a valuation would reflect the potential earnings that could be derived from their efficient operation over their estimated remaining lives. This value is likely to be higher than historical values given in EGAT's audited accounts. EGAT's Financial Projections 10. For the purposes of the proposed Project and the prospectus for the bond issues, EGAT's financial projections were restated to provide potential bondholders with financial accounts which show its financial results after international accounting standards are followed. This will give bondholders a more meaningful financial picture (which would not be subjected to qualification by EGAT's auditors) and would provide a sound basis for seeking improvement in its finances. 11. Further deterioration in EGAT's finances has occurred since the end of FY97 due to continuing decline in the Baht/US$ exchange rate. This has fallen from Baht 36/US$1 to about Baht 55/US $1 and is currently about Baht 40/US$1, as of end June In FY98, the tariff is forecast to rise to Baht 1.784/ kwh. This increase includes only the automatic adjustment for fuel prices and foreign exchange (the base tariff has not been increased as there has been political reluctance to raise talriffsufficiently to comply with the SFR covenant). 12. EGAT's financial projections, summarized in the table below, show that before restructuring and privatization, it would be able to achieve satisfactory financial performance and meet its debt service by reducing its investment expenditure based on the expected lower growth in demand and providing it can suitably defer some purchases of power from IPPs. It will also depend on success in obtaining access to funds from the proposed two bond issues, and from sales of shares in EGCO. Proceeds of privatization of Ratchaburi and other subsidiaries have not been taken into account but these would serve to help finance new investments after 2000 and reduce new borrowings. 13. EGAT's projected financial performance for the next five years ( ), are based on its most recent revised forecast as of June 1998 and assume a very low case demand scenario of 4.6% growth on average from The projections show that EGAT's self-financing ratio will recover to 0.6% in FY98 and EGAT will achieve satisfactory financial performance and compliance with the Bank's covenants from FY99 onwards provided: (a) the investment program is tailored down commensurate with the low demand growth projections; (b) the remittance to Government does not exceed 35% of net income; and (c) tariff adjustments are made in sufficient amounts beginning FY00.

74 70 EGAT Financial Projections * Years Ending September: 1996 through 2002 (In Billions of Baht) Avg. p.a. Growth Actual Forecast Income Statement Items Energy Sales (GWh) 85,897 86,462 87,781 93, , , Average Revenues (B/kWh) Revenues 125, , , , , , Operating Income 22,646 28,486 30,172 40,676 48,610 52, Net Income -8,607 14,809 20,689 28,189 30,182 32, Funds Statement Items Internal Sources 42,361 47,642 49,556 61,338 71,844 76, Borrowings 18,536 53,616 34,504 66,494 40,617 52, Other Sources of Funds 907 5, ,742 2, Total Sources 61, ,193 84, , , , Capital Expenditures 34,083 45,510 45,713 61,075 30,801 49, Working Capital Increase -17,019 22,680-1,899 17,464 6,775 3, (Decrease) Debt Service 30,313 32,826 28,952 37,235 57,647 61, Other Applications 14,427 6,177 11,793 12,565 18,981 17, Total Applications 61, ,193 84, , , , Balance Sheet Items Current Assets 38,407 59,782 60,946 75,940 85,665 91, Less Current Liabilities -43,834-45,189-55,403-69,760-76,124-84, Other Assets 27,955 28,744 30,735 32,420 37,262 38, Net Fixed Assets 249, , , , , , Total Assets 272, , , , , , Debt and Other Liabilities 162, , , , , , Equity 110, , , , , , Total Liabilities & Equity 272, , , , , , Financial Ratios Oper. Income as % of Revenue Net Income as%ofrevenue Rate of Return on Revalued Net Fixed Assets ( /) Debt Service Coverage % Total Capital Expenditures financed by Internal Sources (Self Financing Ratio) Current Ratio Debt Equity Ratio 58:42 63:37 62:38 62:38 60:40 60:40 61:39 * Sales projections are based on indications the time of appraisal in July Most recent data show a further decline in GDP and demand and would need appropriate measures to achieve the financial ratios.

75 The timing of EGAT's capital expenditures is vital to EGAT's financial rehabilitation. Since the crisis, EGAT has reviewed its investment program under the very low case scenario and delayed investments in the earlier approved power development plan. About Baht 95 billion in capital investments from FY99-02 would have to be deferred to reflect the downward trend of forecast demand. T]his downsized investment program would give EGAT some breathing room until the next round of annual tariff increases of 8%, 6% and 3% is required in FYOO-02 respectively. The reduced investment program can be more appropriately financed by EGAT's weakened cash flow', and still enable it to meet debt obligations from lenders and bondholders. With sufficient internal funds to service interest and principal repayments, a debt service coverage ratio of 1 3x would be achievable. EGAT's debt equity ratio would be marginally above the Bank's requirement of 60:40 in FY In the past, the Bank has derived EGAT's debt equity ratio following annual revaluation of its net fixed assets. For reasons explained above (see "Fixed Assets Valuation"), no revaluation of fixed assets has been done for the financial projections. If assets were revalued, the resulting increase in EGAT's equity would ensure that it meets the Bank's covenant relatively easily. 15. EGAT is expected by Government to continue to remit at least 35% of its net income to MOF to maintain its "Good State Enterprise" status. In FY98, EGAT is expected to remit Baht 9.1 billion based on its FY97 net income. The financial projections assume that no remittance would be made in respect of FY98 because EGAT incurred a net loss in FY97. Should the SFR or the debt service coverage ratio fall in future years below the agreed limits, the Government should not require any remittance from EGAT.

76 72 Privatization, Restructuring and Regulation of EGAT Attachment to Annex 5 Background to Restructuring and Privatization of EGAT 1. There are currently three Government-owned electricity enterprises in Thailand: the Electricity Generating Authority of Thailand (EGAT) responsible for generation and transmission, the Metropolitan Electricity Authority (MEA) distributing power in Bangkok and adjoining provinces and the Provincial Electricity Authority (PEA) supplying the rest of the country. In addition, EGAT owns about 25.1% of the shares in the Electricity Generating Public Co. Ltd. (EGCO). EGCO was formed in May 1992 when it purchased the 1,200 MW Rayong power plant from EGAT. It subsequently also purchased EGAT's 800 MW Khanom power plant. In January 1995, EGCO was listed on the Thai Stock exchange. 2. Until 1992, EGAT was the sole commercial producer of electricity in the country. Private companies could produce electricity for self-consumption, but were not allowed to sell it. According to the EC;AT Act of 1968 and subsequent amendments, EGAT has the responsibility to provide electric energy for the whole country by generating, transmitting and selling the bulk energy to MEA and PEA, other direct energy customers, and neighboring countries. EGAT could also undertake energy related activities such as the development of alternative energy sources from natural resources and lignite production. 3. A 1992 Amendment of the EGAT Act had two major impacts on the electricity supply industry in Thailand. First, it ended EGAT's monopoly over electricity generation paving the way for new legislation allowing private producers, and second, it permitted EGAT to begin restructuring its organization in line with the Government's objectives of corporatization and privatization. 4. In September 1992, the Government approved a four-phase Plan for the commercialization and privatization of the electricity supply industry in Thailand in accordance with guidelines proposed by the National Energy Policy Office (NEPO). The plan provided for: (a) the transformation of EGAT into a Good State Enterprise in 1994; (b) (c) (d) the corporatization and privatization of EGCO and the transfer of substantial thermal generation units to EGCO during ; the introduction of substantial small power producer and independent power producer programs during ; and the transformation of EGAT to a corporation and its internal restructuring into business units, which would be operated, initially, as profit centers and operating units which would be operated as cost centers. 5. Although wholly-owned by the Government and under the direct supervision of the Prime Minister, EGAT has enjoyed substantial autonomy. With EGAT achieving "Good State Enterprise Status" in August 1994, it attained even greater day-to-day operating autonomy, i.e.

77 73 setting its own corporate objectives, implementing market-oriented salaries, benefits and bonuses; and setting up and managing its own Registered Provident Fund. 6. Plans for privatization of the electricity industry were first approved by the Government in They involved the separation of EGAT's thermal plants and their establishment as limited liability companies, which would sell shares through an initial public offering (IPO). The transmission and hydro facilities were to remain as part of EGAT. EGAT was to be the purchaser of power from the thermal plants, the Independent Power Producers (IPPs) and the Small Power Producers (SPPs) and Lao PDR but would gradually allow power suppliers to sell directly to users. The longer-term plan was to form a power pool and develop wholesale trading and some retail competition. 7. In June 1996, the Cabinet and EGAT's Board approved EGAT restructuring into a number of companies including three power generating companies (Powergens), a maintenance company, an engineering and construction company and a lignite mining company. Its other functions were to be reformatted as a holding company; the EGAT Company Limited, which would be unbundled and organized around its redefined core roles of power planning, power trading, transmission and hydro, and transition management, forming new business ventures from support services, and demand side management. 8. There would also be six business units (transmission, generation, maintenance, mining, engineering and construction) and five operating units (policy and planning, accounting and finance, business development, hydropower plants and administration). The transmission business unit would be established as a semi-autonomous business unit within the corporate EGAT and be the transmission network operator, responsible for developing and operating a reliable and cost-effective transmission network service for Thailand's electricity supply industry. The hydro power plant business unit would remain with the corporate EGAT while continuing to meet the national power objectives of providing emergency power and peaking duties, and the social obligations of flood control and irrigation. Current Status of EGAT's Privatization 9. EGAT and the Government remain committed to privatizing Thailand's electricity generating capacity and related infrastructure, where practicable. However, two matters are presently causing delay to the process: (a) the reduced level of demand growth from a moribund economy slowing down the need for renewal and expansion of capacity; and (b) objections from EGAT's employees' trade union to the extent and mode of privatization originally envisaged. 10. Privatization is in its early stages, but the process is well under way. Despite the delays, the Government is committed to three principal privatization objectives: (a) (b) (c) the restructuring and corporatization of EGAT's existing operations; the sale of significant interests in existing EGAT's thermal power plants and, possibly, certain other operations to the private sector; and encouragement of private sector interests to build new generating capacity. 11. Under the third letter of intent made with the IMF, the Government has agreed that EGAT will initiate further sales of its stake in EGCO and the Ratchaburi power plant (Power Gen

78 74 2) in Under the conditionality of the Bank's Economic and Financial Adjustment Loan (Report No TH), and the IMF's fourth letter of intent, the Government has committed itself to spell out details of a comprehensive strategy for privatization in a Master Plan for State Enterprise Reform to be approved by the Cabinet by August 31, Private sector participation in the energy sector would form a major part of the master plan which is expected to spell out with clear deadlines, the objectives and organizational arrangements of the privatization strategy, sequence alnd timetables for corporatization of EGAT and other state enterprises, choices of the appropriate divestiture strategy, guidelines for improved monitoring of EGAT and other state enterprises and the establishment of an effective regulatory framework. Technical assistance for the Miinistry of Finance, which is coordinating these efforts, is being provided by the Bank's Economic Management Assistance Project (Report No TH). The Project is designed to complement the Government's overall efforts at privatization. 12. In March 1998, EGAT's management decided, with the Government's approval in principle, on a three-step approach to its privatization and corporate restructuring calling for: (a) (b) (c) SteFp 1, corporatizing EGAT as a whole and privatizing the Ratchaburi Combined Cycle 1-3 power plants (latter was originally intended to be part of Step 2, but in view of the expected cash flow shortfall over the next 2 years, , is being advanced to Step I in the privatization process); Step 2, corporatizing and privatizing each subsequent new power plant of EGAT; and Step 3, corporatizing each business unit as a subsidiary of EGAT Company Limited and privatizing each as appropriate. 13. A change in approach was required due to EGAT's cash flow problems, the delay in the approval of the Corporatization Law, and the obligations required from the Government by the International Monetary Fund's standby arrangement package to initiate sales of EGAT stakes in EGCO and Ratchaburi. The revised privatization approach is as follows: (a) (b) In Step 1, EGAT would transfer the Ratchaburi Combined Cycle Power Plant Blocks 1-3 to a wholly-owned subsidiary which would subsequently seek private sector participation of at least 51%. In parallel, the original plan to organize EGAT into autonomous business units and to transform EGAT into a limited company (100% owned by the Ministry of Finance) when the Corporatization Law is ready will be carried out. Presently, each business unit as envisaged in the organizational restructuring plan is beginning to operate as a more self-sufficient entity. Although previous expectations that each Business Unit would become a separate statutory company have been shelved for the time being, it is expected that by October 1998, each unit will be a self-accounting division with its own financial statements. This will involve a system through which all business and operating units would fully recover the costs of their services to other units of the company or to external users. In Step 2, corporatization of EGAT as a whole is expected to be completed within one year from the approval of the Corporatization Law - in the latter part of Further, it is envisioned that all new power plant projects after Ratchaburi Combined Cycle would be corporatized and privatized. EGAT