Project Number: 39913 Equity Number: EI7227 November 2012 Equity Investment in Central Uttar Pradesh Gas Limited India: Urban Clean Fuels Project Extended Annual Review Report This XARR contains information that is subject to disclosure restrictions agreed between the Asian Development Bank (ADB) and the relevant sponsor or recipient of funds from ADB. Recipients should therefore not disclose its content to third parties, except in connection with the performance of their official duties. ADB shall make publicly available an abbreviated version of this XARR, which will exclude confidential information.
Transcript
Project Number: 39913 Equity Number: EI7227 November 2012
Equity Investment in Central Uttar Pradesh Gas Limited India: Urban Clean Fuels Project
Extended Annual Review Report
This XARR contains information that is subject to disclosure restrictions agreed between the Asian Development Bank (ADB) and the relevant sponsor or recipient of funds from ADB. Recipients should therefore not disclose its content to third parties, except in connection with the performance of their official duties. ADB shall make publicly available an abbreviated version of this XARR, which will exclude confidential information.
CURRENCY EQUIVALENTS
Currency Units – Indian rupee (Re/Rs)
At Appraisal At Project Completion (December 2005) (March 2011)
Re1.00 = $0.022 $0.022 $1.00 = Rs45.95 Rs44.75
ABBREVIATIONS
ADB – Asian Development Bank APM – administered pricing mechanism CGD – city gas distribution CNG – compressed natural gas CUGL – Central Uttar Pradesh Gas Limited HSE – health, safety and environment IEE – initial environmental examination IPO – initial public offering IRR – internal rate of return LNG – liquefied natural gas MDPE – medium-density polyethylene PNG – piped natural gas PNGRB – Petroleum and Natural Gas Regulatory Board RRP – report and recommendation of the President TA – technical assistance WACC – weighted average cost of capital
WEIGHTS AND MEASURES
BCM – billion cubic meters kg (kilogram) – 1,000 grams km (kilometer) m3
MMSCMD MT SCM
– – – – –
1,000 meters cubic meter million metric standard cubic meters per day million tons standard cubic meter million tons standard cubic meter
NOTES
(i) The fiscal year (FY) of the Government ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2012 ends on 31 March 2012.
(ii) In this report, “$” refers to US dollars.
Vice President L. Venkatachalam, Private Sector and Cofinancing Operations Director General P. Erquiaga, Private Sector Operations Department (PSOD) Director M. Barrow, Infrastructure Finance Division 1, PSOD Team leader C. Teo, Principal Investment Specialist, PSOD Team member D. Purka, Principal Investment Specialist, RSDD-CC
L. Afable-Limqueco, Project Analyst, PSOD M. Manabat, Senior Investment Officer, PSOD A. Porras, Safeguards Officer, PSOD
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page
BASIC DATA iEXECUTIVE SUMMARY ii
I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 1 C. Progress Highlights 2
II. EVALUATION 3 A. Project Rationale and Objectives 3 B. Development Impact 3 C. ADB Investment Profitability 5 D. ADB Work Quality 5 E. ADB Additionality 6 F. Overall Evaluation 7
III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 7 A. Issues and Lessons 7 B. Follow-Up Actions (Issues to Monitor) 8 APPENDIXES 1. Private Sector Development Indicators and Ratings: Infrastructure 92. Environmental and Social Impacts 13
BASIC DATA
Central Uttar Pradesh Gas Limited (EI7227 - India)
Key Dates Expected Actual Concept Clearance Approval May 2005 12 May 2005 Board Approval Jan 2006 16 Jan 2006 Shareholders Agreement Nov 2006 30 Nov 2006 Disbursement Dec 2006 20 Dec 2006 Commercial Operations Date Mar 2011 31 Mar 2011 Latest Annual Monitoring Report Feb 2012 29 Feb 2012 Project Administration and Monitoring No. of Missions No. Of Person-Days Due Diligence Investment Negotiations Project Administration XARR Mission
1 1 3 1
8 6 9 6
XARR = extended annual review report Source: Asian Development Bank
EXECUTIVE SUMMARY
On 16 January 2006, the Asian Development Bank (ADB) approved a 20% equity investment of Rs120,000,000 ($2.6 million equivalent) in Central Uttar Pradesh Gas Limited (CUGL) for the Urban Clean Fuels Project. The project’s primary objective was to introduce clean fuel in the form of compressed natural gas (CNG) for vehicles and piped natural gas (PNG) for commercial, industrial, and residential users in Kanpur and Bareilly through development of a city gas distribution network.
Historically, the natural gas industry in India had been highly centralized and government controlled. However, in the years immediately preceding the project, the government initiated a number of reform and policy initiatives to make the industry more competitive and market oriented. A joint venture agreement was signed in July 2004, and CUGL was incorporated in February 2005 as a private sector company. However, at the time of project processing in 2005, private sector participation in the natural gas industry was still very limited.
The overall assessment of the project is considered successful based on the criteria of the Project Administration Instructions 6.07B on Extended Annual Review Reports for Nonsovereign Operations issued on July 2008: (i) development impacts and outcomes, (ii) ADB investment profitability, (iii) ADB work quality, and (iv) ADB additionality.
The project’s contribution to private sector development is rated satisfactory. The project succeeded in introducing CNG and PNG as clean sources of fuel and this helped improve the air quality in Kanpur and surrounding areas. A reduction in pollution levels in Kanpur was reported by the Uttar Pradesh Pollution Control Board during project implementation. The project succeeded in replacing diesel in vehicles and liquefied petroleum gas cylinders in the domestic sector from 2006 to 2012. The project is rated satisfactory for business success and excellent for economic sustainability. Other development outcomes, such as environmental, social, health, and safety are all rated satisfactory.
ADB’s investment profitability is rated satisfactory. ADB's overall work quality is rated satisfactory based on: (i) a satisfactory rating for
screening, appraisal, and structuring of the project; (ii) a satisfactory rating for monitoring and supervision; and (iii) an excellent rating for role and contribution. ADB took the lead in structuring and negotiating the terms of the legal documentation. The project was robustly designed to accommodate variable size and scope. With these features, the financial viability of the project remained intact. ADB kept itself informed about the project’s implementation through regular site visits, reports from ADB’s nominee director, monthly progress reports, financial statements, and environmental and social monitoring reports. Monitoring reviews have been conducted annually. ADB’s role and contribution were in line with ADB’s country, energy sector, private sector development, and environmental protection strategies, which confirm ADB’s support for private sector participation in clean fuel projects and gas distribution. As a public–private partnership, the project has had a demonstration effect and led to similar public–private joint ventures in secondary cities such as Agra, Ahmedabad, Lucknow, Pune, and Surat.
ADB’s additionality is rated excellent. ADB played the role of “honest broker” in
negotiating the joint venture agreement between the public sector sponsors and private sector funds. The final agreement set a precedent for the structure of several other joint ventures (involving even larger financial investments) in the gas distribution sector. ADB’s participation in the project proved to be catalytic and attracted investors in CUGL and two other city gas distribution (CGD) companies in Pune and Gujarat. The investment helped the sponsors
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determine best business practices for replication in other cities. ADB’s nominee director provided valuable advice to the board and assisted the board in improving corporate governance, adopting best practices in all core business areas, and formulating business plans and strategies. The project’s main issues and lessons learnt are: (i) ADB’s support has had a demonstration effect and has promoted private sector investment in the gas sector. This strategy should continue; and (ii) ADB should ensure the robustness of the project design and carry out close supervision and monitoring in order to ensure project success. ADB is satisfied with the operational performance of CUGL and will continue to monitor them through regular reporting from CUGL.
I. THE PROJECT
A. Project Background
1. On 16 January 2006, the Asian Development Bank (ADB) approved a 20% equity investment of Rs120,000,000 ($2.6 million equivalent) in Central Uttar Pradesh Gas Limited (CUGL) for the Urban Clean Fuels Project.1 2. The project’s primary objective was to introduce clean fuel in the form of compressed natural gas (CNG) and piped natural gas (PNG) to Kanpur and Bareilly. The introduction of natural gas in Kanpur was mandated by the Supreme Court of India. Data from the Central Pollution Control Board collected in 2002 indicated that at least nine cities in India, including Kanpur, had critical air quality problems. As a result, in 2003 the Government of India directed GAIL (India) Limited (GAIL, formerly the Gas Authority of India Limited) to identify the sources of pollution, assess the pollution load, and prepare an action plan. ADB approved a project preparatory technical assistance (TA) grant to the government to assist GAIL with further preparation of the projects identified in its feasibility studies.2 During the project preparatory TA, it was determined that the Urban Clean Fuels Project should be implemented as a private sector initiative.
3. Historically, the natural gas industry in India had been highly centralized and government controlled. However, in the years immediately preceding the project, the government had initiated a number of reform and policy initiatives to make the industry more competitive and market oriented, including both public sector oil and gas companies and private investors. A joint venture agreement was signed in July 2004 and CUGL was incorporated in February 2005 under the Companies Act 1956, and classified as a private sector company. B. Key Project Features
4. CUGL was set up to build, own, operate, and maintain city gas distribution (CGD) networks in Kanpur to deliver CNG to vehicles and PNG to commercial, industrial, and domestic users. The project has two main components: (i) a limited natural gas distribution network within the city and PNG customer connections, and (ii) a CNG mother station and online filling stations to service cars, buses, taxis, and two- and three-wheelers that have been converted to use CNG. 5. Gas is supplied from a tap-off point 18 kilometers away, near Sachendi on the GAIL-operated Hazira-Bajaypur-Jagdishpur pipeline. A feeder line, constructed by GAIL, then connects this pipeline to the city gate station at Fazalganj. 6. The project was based on a phased roll-out of the CNG component, which required completion of one mother station and three online stations in the first year, and 12 additional online stations between the second and sixth years for a total of 16 operational CNG stations. CUGL constructed online stations with gas-driven compressors instead of daughter booster
1 ADB, 2005. Report and Recommendation of the President to the Board of Directors: Proposed Equity Investment in
Central Uttar Pradesh Gas Limited in India. Manila 2 ADB. 2003. Technical Assistance to India for Preparing the Urban Clean Fuel Project. Manila (financed by the
Government of the United Kingdom). The project preparatory TA was implemented by ADB’s South Asia Regional Department.
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stations because the electricity supply required to power the latter configuration was unreliable and traffic congestion would have inhibited the safe transportation of the CNG cascades.3 7. The gas pipelines were laid along road shoulders, requiring permission only from the state agencies. The gas distribution connections were incrementally added over a number of years to respond to specific demand. CUGL was responsible for site preparation and construction of the gas stations. CUGL carries out its own operation and maintenance at its CNG stations and on its gas distribution pipelines. C. Progress Highlights
8. CUGL operates and maintains one mother CNG station each in Kanpur and Bareilly, 10 online stations in Kanpur, and its extended CNG and PNG distribution pipelines.4 This progress is below the target of 16 CNG stations in operation by March 2011 that was given in the report and recommendation of the President (RRP). In FY2012, CUGL achieved the highest number of vehicle conversions in a single year since its inception. In Kanpur, all diesel loaders were converted to CNG. In Bareilly, some vehicles were also converted. Thus, for vehicle conversion, an overall achievement rate of around 124% of CUGL’s target was achieved.5 The number of vehicle conversions is above the RRP target of 1% per year. The number of private and public vehicles using CNG in Kanpur and Bareilly has increased by 69% in FY2012 from FY2011. CNG station operations are being monitored through a supervisory control and data acquisition system and central control room. 9. CUGL is currently supplying PNG to (i) industrial customers, including biscuit and chemical industries, printing companies, and a rolling mill; (ii) commercial establishments in Kanpur and Bareilly; and (iii) domestic households in Kanpur and Bareilly.6 PNG connections are below the targeted connection rate as stated in the RRP. This is due to the unexpected and rather persistent nationwide constraints in gas supply,7 the fluctuating and high price of imported regasified LNG, and price caps on domestic PNG8 that have affected the financial viability of the PNG segment of the energy market.9 The target may eventually be met, if a sustained supply of
3 CNG cascades are used for storage, transport, and dispensing of CNG gas to vehicles and form the backbone of
the CNG infrastructure. 4 CUGL has laid down 78.4 kilometers (km) of steel pipelines and 148.3 kilometers of medium-density polyethylene
(MDPE) pipelines in the regions of Kanpur and Bareilly as of 30 September 2012. Out of this, 70.7 km of the steel pipeline network and 129.8 km of the MDPE network have been commissioned.
5 Data sourced from Central Uttar Pradesh Gas Limited. 6 To achieve the bulk domestic connections in Kanpur and Bareilly, CUGL has entered into agreements with builders
in different localities like Azad Nagar, Indira Nagar, and Jaroily in Kanpur and Mahanagar, Green Park, and Sun City in Bareilly. An agreement was signed with the Indian Institute of Technology (IIT) to supply gas to domestic households within the IIT campus.
7 Domestic gas supply exceeds demand; hence, CUGL’s allocation of an administered pricing mechanism (footnote 9) is unlikely to increase.
8 The government’s fuel subsidy is operated under an administered pricing mechanism (APM). This system is based on the retention price concept under which the refineries, oil marketing companies, and pipelines are compensated for operating costs and assured a return of 12% post tax on net worth. Under this concept, a fixed level of profitability for oil companies is ensured subject to their achieving specified capacity utilization. Upstream companies, namely Oil and Natural Gas Corp Ltd (ONGC), Oil India Limited (OIL) and GAIL also operated, until recently, under the Retention Price concept and were assured fixed returns. The administered pricing policy for petroleum products ensured that products like PNG, used by the vulnerable sections of society, or CNG, used by the transport sector, could be sold at prices that are insulated from volatility in the international oil market. APM is applied only on domestic gas production.
9 CUGL is allocated subsidized APM gas which is adjusted annually by the government based on the supply situation. APM gas cannot be used for non-CNG and non-domestic use.
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gas is secured at a price that is lower than alternatives,10 but not in the timeframe that was anticipated during project appraisal. 10. As some pipelines were not laid, the investment in the project was scaled back. The physical completion of the project occurred on 31 March 2011 at a total cost of about 50% below the original estimate stated in the RRP.
II. EVALUATION
A. Project Rationale and Objectives
11. The project’s objectives as set out in the RRP were: (i) to improve ambient air quality by switching vehicles from diesel and gasoline to clean burning CNG and commercial, industrial, and domestic users to PNG in Kanpur and nearby towns; (ii) to establish a public–private joint venture company that could serve as a model for future projects; (iii) to promote private sector participation in infrastructure development in line with ADB’s country strategy and program update for India (2006–2008); (iv) to help India reduce public health costs incurred in treating illnesses caused by air pollution; (v) to improve road safety conditions and help reduce noise pollution by switching vehicles to CNG; and (vi) to help ensure that key environmental and social safeguard requirements are addressed early in the design phase through a project preparatory TA. These objectives were largely met as further discussed in the paragraphs below. B. Development Impact
1. Private Sector Development
12. The project’s main objective was to introduce CNG and PNG as clean fuel in order to improve the air quality of Kanpur and the surrounding areas through a reduction in vehicular and industrial pollution. This proved to be the case, as the Uttar Pradesh Pollution Control Board reported a reduction in pollution levels in Kanpur during implementation of the project.11 The project succeeded in replacing diesel in vehicles and liquefied petroleum gas cylinders in the domestic sector from 2006 to 2012. The RRP contained a conversion rate of 1% per year, but only for private vehicles. However, the RRP does not have any baseline case. The conversion of private vehicles was 59%, 34%, and 450% in 2009, 2010, and 2011 relative to the RRP target. As a result of the reduced pollution, the health of the population will have improved. 13. A significant portion of CNG sales is to large fleets of public vehicles (autorickshaws, tempos, and buses). CNG sales and the CNG network would expand faster if private vehicles were converted from gasoline to CNG more quickly. However, such growth requires vehicle owners to have access to low cost financing to finance the upfront costs of the conversion kits.
14. CUGL provided natural gas to small-scale industries at a lower cost than alternative fuels. This had an immediate impact on job creation by increasing production and attracting
10 PNG competes directly with other forms of fuel, such as electricity, liquefied petroleum gas, and gas cylinders used
for cooking. The latter are subsidized by the government. 11 According to Uttar Pradesh Pollution Control Board, vehicular traffic contributes 80% of the pollution load, while
domestic sources add another 14% and industrial 6%. In 2010, ambient air quality measured by respirable suspended particulate matter improved by 5% to 0.205 mg/m3, and suspended particulate matter improved by 7% to 0.454 mg/m3.
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energy-intensive industries to the area. The project also contributed to human and social development by reducing health risks caused by using inferior fuels (e.g., diesel and kerosene). Lower rates of respiratory disease have improved people’s well-being and brought economic benefits such as reduced healthcare expenditure and higher household productivity, as fewer days are lost to respiratory illnesses. The switch to cleaner PNG fuel has not only helped to reduce pollution, but has also increased the operational efficiency of establishments. 15. CUGL has benefited from the marketing and gas distribution expertise of its promoters. CUGL has also recruited employees with the necessary skills and experience in CGD to strengthen its operations and enable it to execute new projects. As of FY2012, there were 44 direct CUGL staff, double the number in FY2011, and 122 contractual staff deployed at CNG stations, thus demonstrating CUGL’s strong positioning for further expansion. CUGL has a strong focus on developing the competencies of its employees through various initiatives such as coaching, mentoring, and training to develop their knowledge, skills, and attitudes. 16. CUGL is the first private sector CGD company outside of Delhi and Mumbai. Other private sector companies followed the lead of CUGL. By developing the CGD network for clean fuel, CUGL has made a significant contribution to providing the platform for economical and energy efficient fuel in Uttar Pradesh. 17. Given that developing CGD infrastructure is capital intensive, the realization of the project’s objectives was made possible through private sector participation and ownership of the CGD networks in Kanpur. Fulfillment of the project’s objectives has, in turn, contributed to enhancing the city’s economic growth.12 18. The overall rating of the project in terms of contribution to private sector development is satisfactory. The private sector development rating (Appendix 1) would have been higher had CUGL met all the project milestones as stated in the RRP.
2. Business Success
19. The project’s contribution to business success is measured primarily by its real after-tax financial internal rate of return (FIRR) when compared with the real weighted average cost of capital (WACC) for the project entity. In FY2012, the project’s computed real FIRR exceeds the real WACC. Thus, in terms of business success, the project is rated satisfactory.
3. Economic Sustainability
20. The project’s contribution to economic development is measured primarily by the economic internal rate of return (EIRR). The recalculated EIRR is lower than originally computed in the RRP because of the lower than expected operations of the PNG component, but is still above the threshold of 20 percent qualifying the project as excellent for economic sustainability.
12 Kanpur’s GDP has increased from $17 billion in March 2010 to $18 billion in March 2011 and to $22 billion in
March 2012. Source: http://en.wikipedia.org/wiki/Economy_of_Uttar_Pradesh,
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4. Environment, Social, Health, and Safety Performance
21. The project was classified as environment category B and preparation of an initial environmental examination (IEE) report was required. The IEE was undertaken as part of the project preparatory TA in 2003. Further reviews and additional site visits were conducted in 2004 and 2005 to update the IEE report. No significant adverse environmental aspects were anticipated owing to the project size, location, short construction period, and method of operation. The development of the PNG distribution system and the construction of CNG stations, which were rolled out in stages, had some environmental impacts. However, the environmental impacts were only temporary, including dust generation and traffic disturbance experienced by local residents and motorists in some parts of the project area. 22. In terms of social safeguards, the project was classified as category B for involuntary resettlement and category C for indigenous peoples. No significant land use changes or land or right-of-way acquisitions were required because the PNG pipelines were laid under the shoulder of the existing city roads. CUGL optimized the design of the CNG facilities by avoiding resettlement, compensation, and acquisition of private land. Since the gas distribution pipelines, CNG mother stations,13 and online filling stations were located on unoccupied government land, the project did not give rise to any land acquisition, right of way or involuntary resettlement issues during construction. The project also had no adverse impacts on indigenous peoples. CUGL has complied with the relevant national labor policies and regulations. ADB also noted that CUGL has strictly complied with the requirement to submit annual monitoring reports to ADB for review and evaluation. The project is rated satisfactory for environmental, health, and safety performance. Assessment of environmental and social impacts is in Appendix 2. C. ADB Investment Profitability
23. ADB’s investment profitability is rated satisfactory. [Confidential information is deleted] D. ADB Work Quality
24. ADB's work quality is rated satisfactory based on its (i) screening, appraisal, and structuring of the project; (ii) monitoring and supervision; and (iii) role and contribution. 25. Screening, appraisal, and structuring of the project. After concept clearance in May 2005, ADB conducted due diligence, examining technical, legal, environmental, social, and financial aspects. ADB received the Board’s approval in January 2006 and signed the shareholders agreement in November 2006. ADB took the lead in structuring and negotiating the terms of the legal documentation. The project was structured such that the infrastructure would be rolled out based on demand and the availability of gas supply. The project was robustly designed to accommodate variable size and scope. With these features, the financial
13 For the CUGL-owned mother/online stations, land was acquired through a request to the district authorities of
Kanpur or Bareilly, as appropriate. Six CNG operations were installed at existing gas stations owned by BPCL and Hindustan Petroleum Corporation Ltd., and sales supply agreements were signed with these owners. Currently, the transfer of the registration of land deeds for CNG stations at Fazalganj and Bareilly from GAIL (the original owner) to CUGL is being processed with the Kanpur District Authority.
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viability of the project remained intact.14 ADB’s performance in relation to screening, appraisal, and structuring is rated satisfactory. 26. Monitoring and supervision. Because of the relatively small amounts involved, there was a single subscription for all shares in December 2006. ADB kept itself promptly and fully informed regarding project implementation through site visits, progress reports from ADB’s nominee director, monthly operational and financial progress reports, audited financial statements, and environmental and social monitoring reports. Monitoring reports are prepared on an annual basis, involving both field and desk reviews. Both CUGL and the project sponsors have complied with all reporting requirements in a timely manner. ADB has kept itself up to date and fully informed regarding the project and CUGL’s performance. ADB’s performance in relation to monitoring and supervision is rated satisfactory.
27. Role and contribution. ADB’s role and contribution were in line with ADB’s country, energy sector, private sector development, and environmental protection strategies, which confirm ADB’s support for private sector participation in clean fuel projects and gas distribution. The project supports several key priorities of ADB’s energy sector strategy, which are: (i) expanding, de-constricting, and optimizing transmission and distribution systems; (ii) promoting private sector participation; and (iii) ensuring environmental and social sustainability in the sector. As a public–private partnership, the project was the first step in introducing clean fuels in major cities other than Delhi and Mumbai, and has led to similar public–private joint ventures with the private sector in secondary cities such as Agra, Ahmedabad, Lucknow, Pune, and Surat. ADB’s role and contribution is rated excellent. E. ADB Additionality
28. Without ADB’s financial assistance, the rollout of the initial CNG stations and network infrastructure in Kanpur would not have been implemented in a timely manner. ADB played the role of “honest broker” in negotiating the joint venture agreement between the public sector sponsors and private sector funds. The final agreement set the precedent for the structure of several other joint ventures (involving even larger financial investments) in the gas distribution sector. Key features of these agreements included representation on the board, tag-along and exit rights for minority shareholders, trigger events for default, and other protections to balance the risk/reward relationship amongst the shareholders. ADB’s participation in the project proved to be demonstrational and catalytic, and attracted investors in CUGL and in two other CGD companies in Pune and Gujarat. 29. ADB maintained a good working relationship with the sponsors. Any significant issues were handled promptly through consultations, and high standards for management, governance, anticorruption, and equality in hiring practices were consistently enforced. The investment also helped the sponsors determine best business practices for replication in other cities. 30. ADB nominated an experienced person to represent it on CUGL’s board. ADB’s nominee director provided valuable guidance and advice to the board and assisted the board in
14 The project’s capital expenditure was about 50% below original estimates, commencement of CNG and PNG
connections were delayed, and operations were lower than originally estimated. However, these issues did not impact on the financial viability of the project or trigger any defaults.
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improving corporate governance, adopting best practices in all core business areas, and formulating business plans and strategies. 31. ADB’s additionality is therefore rated excellent. F. Overall Evaluation
32. Overall, the project is considered successful. The ratings are summarized in Table 1. A key conclusion derived from the extended review of project implementation and operation is that ADB supported a technically sound project. The project, which is being implemented with satisfactory-to-excellent quality, addresses the government’s immediate need to control the rise of pollution in cities, like Kanpur, which do not meet national ambient air quality standards. CUGL has mostly met the physical objectives under the CNG component identified at appraisal, but fell short of the PNG component as explained above, and is 50% below the capital expenditure budget given in the RRP. The operation and maintenance of the project is considered exemplary. Overall, the project has contributed to a marked improvement in air quality in Kanpur and nearby towns.
Table 1: Evaluation of the Central Uttar Pradesh Gas Limited Project
Indicator/Rating Excellent Satisfactory Partly
Satisfactory Unsatisfactory Development Impact
Private sector development √ Business success √ Economic sustainability √ Environmental, social, health and safety performance
III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS
A. Issues and Lessons
33. The project’s risks were identified and properly addressed during due diligence, and were considered low to moderate, taking into consideration the strong financial position of the two promoters and the ‘first mover’ advantage of this project. However, the following issues and lessons were noted:
(i) Stimulating private sector development. ADB’s intervention was timely, coming shortly after the government had opened the municipal natural gas sector to private investment and enterprise. ADB’s leadership and role as an honest broker in introducing a legal framework for public–private partnerships in an important part of the country’s economy was a catalyst for other private sector investments, such as those made by Mahanagar Natural Gas Limited in Pune, Adani Gas in Lucknow and Agra, and Gujarat
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Gas in Surat and Ahmedabad. ADB’s support has had a demonstration effect and promoted private sector investment in the gas sector. This strategy should continue.
(ii) Ensuring a robust project design and close supervision and monitoring. In this project, very close and continued supervision and monitoring were implemented. Since design plays an important part in the overall success of a project, it must be tailored accordingly. Supervision during project implementation and after project completion is also a critical success factor. ADB’s project team and nominated director provided guidance to CUGL and the board that helped to make the project successful.
B. Follow-Up Action 34. ADB is satisfied with the operational performance of CUGL and will continue to monitor them through regular reporting from CUGL.
Appendix 1
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PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS: INFRASTRUCTURE Indicators Ratings Justification/Annotations
Impact to Date
Potential Future Impact (sustainability) and Risk
to Its Realization
Combined Ratea
1. Beyond Company Impact
Impactb Impact Riskc Rating
1.1 Private sector expansion. Contributes as a pioneering or high-profile project to facilitating or preparing for more private participation in the sector and economy at large.
Satisfactory Excellent Low Satisfactory CUGL is the first private sector city gas distributor outside of Delhi and Mumbai. ADB’s support of CUGL has had a demonstration effect. Other private sector companies followed the lead of CUGL.
1.2. Competition. Contributes new competition pressure on public and/or other sector players to increase efficiency and improve access and service in the industry.
Excellent Satisfactory Low Satisfactory Following the success of CGD companies in the country, including that of CUGL, PNGRB, the gas regulatory board, proceeded to set up a competitive regulatory environment for the CGD sector in India. When bids are called for by PNGRB for the development of a CGD network, interested entities may submit bids and the successful bidder will be awarded the right to develop the CGD network, consisting of CNG & PNG infrastructure in that particular city. This has induced other entities to be involved in CGD projects, and thus competition in this field has been initiated. PNGRB plans to roll out new CGD networks in over 200 cities by 2015.
1.3. Innovation. Demonstrates efficient new products and services, including areas such as marketing, distribution, tariffs, production, and technology; and ways to cover or contain cost, manage demand,
Excellent Excellent Low Excellent CUGL is the first company in Kanpur to operate a CGD network, and its operating practices as well as health and safety procedures have set the industry standards and are being replicated by other CGD companies.
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ppendix 1
Indicators Ratings Justification/Annotations Impact to
Date Potential Future Impact (sustainability) and Risk
to Its Realization
Combined Ratea
etc. 1.4. Linkages. Relative to investments, contributes notable upstream or downstream linkage effects to business clients, consumers, suppliers, key industries, etc., in support of growth.
Satisfactory Excellent Low Satisfactory The CGD network now operating in Kanpur has facilitated the growth of businesses by providing industries with cleaner and lower cost fuel and reducing pollution, thus enabling and supporting growth.
1.5. Catalytic element. Contributes by including pioneering and/or catalytic finance, mobilizing or inducing more local or foreign market financing and/or foreign direct investment in the sector
Satisfactory Excellent Low Satisfactory ADB was catalytic in attracting the participation of the other two private investors in CUGL
1.6. Affected laws, frameworks, regulation. Contributes to improved laws and sector regulation for PPP, concessions, joint ventures, and BOT projects; and to liberalizing markets as applicable for improved sector
Satisfactory Excellent Low Excellent The recommendations in the project preparatory technical assistance led the government to change the laws, rules, and policies to facilitate project development. This change took place when PNGRB launched the Petroleum & Natural Gas Regulatory Board Act, 2006, which provides the legal framework for the development of the natural gas pipelines and city or local gas distribution networks. With the arrival of the PNGRB, the implementation of CNG and PNG in various cities is being taken up in a phased manner as and when the bids are called for by the regulator. Several bids have been finalized and authorizations issued. Currently, there are some ongoing bids, as shown on the PNGRB website.
Appendix 1
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Indicators Ratings Justification/Annotations Impact to
Date Potential Future Impact (sustainability) and Risk
to Its Realization
Combined Ratea
efficiency 2. Direct Company Impact With Wider Potential
2.1. Skills contribution. Contributes to new strategic, managerial, and operating skills with actual or potential wider replication in the sector and industry
Excellent Excellent Low Excellent ADB’s nominee director, who has been on the board since CUGL’s inception, has wide experience in the oil and gas industry in India. He provides valuable guidance to the CUGL board. CUGL has a strong focus on developing the competencies of its employees through various initiatives such as coaching, mentoring, and training to develop their knowledge, skills, and attitudes. CUGL therefore runs a series of technical and staff development programs such as customer relationship management, effective purchasing, operation and maintenance, negotiation skills, stress management and work–life balance, effective communication, logistics, and English language. CUGL is also conducting mandatory training on fire and safety and first aid to all employees, including those working in the corporate office, mother station, and online filling stations.
2.2 Demonstration of new standards. Demonstrates new ways to operate the business and compete, and investee performance against relevant best industry benchmarks and standards
Excellent Excellent Low Excellent CUGL ensures that it adopts international standards in the operation, maintenance, marketing, construction, and human resources of the project sponsors. By setting high standards based on these technical and management advantages, CUGL is helping raise efficiency in the overall industry through competition and example. To fully mainstream and integrate all HSE aspects in all its business processes, an HSE manual is being prepared by CUGL. The HSE policy has been approved by CUGL management and an application for ISO accreditation is under process and is expected to be completed in 2012 or 2013. The legal documentation and agreements for this project set the precedent for the structure of several other joint ventures (involving even larger financial investments) in the CGD sector. These included representation on the board, tag-along and exit rights for minority shareholders, trigger events for default, and other protection to balance the risk/reward relationship amongst the shareholders.
2.3. Improved governance. As
Satisfactory Excellent Low Satisfactory CUGL’s corporate governance and its ESHS management guidelines are now emulated by other companies in the industry.
12 A
ppendix 1
Indicators Ratings Justification/Annotations Impact to
Date Potential Future Impact (sustainability) and Risk
to Its Realization
Combined Ratea
evident in set standards in corporate governance; stakeholder relations, ESHS fields, and/or in good energy conservation standards 3. Overall PSD Rating. Unsatisfactory, partly satisfactory, satisfactory, and excellent. The rating is not an arithmetic mean of the individual indicator ratings and does not have fixed weights. Actual positive or negative impacts, future impacts, and risks to its realization need to be considered.
Satisfactory Excellent Low Satisfactory
ADB = Asian Development Bank; BPCL = Bharat Petroleum Corporation Limited; CGD = city gas distribution; CNG = compressed natural gas; CUGL = Central UP Gas Limited; ESHS = Environmental, Social, Health and Safety; GAIL = Gail (India) Limited; HSE = health, safety, and environment; ISO = International Organization for Standardization; PNG = piped natural gas a The combined rating should weigh future impact and risk to its sustainable realization. b Excellent, satisfactory, partly satisfactory, and unsatisfactory. The rating is not an arithmetic mean of the individual indicator ratings, and these have no
fixed weights. Consider already manifest actual impact (positive or negative) and the potential for impact as well as risk to its realization. c Risk rating scale: Risk: high, medium, modest, and low. Source: Asian Development Bank and CUGL estimates.
13 Appendix 2
ENVIRONMENTAL AND SOCIAL IMPACTS
I. Introduction 1. On 16 January 2006, the Asian Development Bank (ADB) approved a 20% equity investment of Rs120,000,000 ($2.6 million equivalent) in Central Uttar Pradesh Gas Limited (CUGL) for the Urban Clean Fuels Project.1 The investment’s primary objective was to introduce clean fuel in the form of compressed natural gas (CNG) and piped natural gas (PNG) to Kanpur and Bareilly. Gas is supplied from a tap-off point 18 km away, near Sachendi on the Hazira-Bajaypur-Jagdishpur pipeline, which is operated by GAIL (India) Limited (GAIL, formerly the Gas Authority of India Limited). A feeder line, constructed by GAIL, then connects this pipeline to the city gate station at Fazalganj. An evaluation of the implementation of the city gas distribution network and of the project’s compliance with the environmental and social safeguards requirements was conducted. II. Review Findings 2. Environmental Impacts. The project was classified as environment category B and preparation of an initial environmental examination (IEE) report was required. The IEE was undertaken as part of the ADB’s project preparatory technical assistance2 project in 2003. Further reviews and additional site visits were conducted in 2004 and 2005 to update the IEE report. No significant adverse environmental aspects were anticipated owing to the project size, location, short construction period, and method of operation. The development of the PNG distribution system and the construction of CNG stations, which were rolled out in stages, had some environmental impacts. However, the environmental impacts were temporary, including dust generation and traffic disturbance experienced by local residents and motorists in some parts of the project area. 3. Occupational Health and Safety. In the absence of a health, safety, and environment (HSE) department, CUGL has officially designated a senior HSE officer responsible for implementation of the environmental management plan, including occupational and community health and safety issues during construction and operation. Major environmental, health, and safety issues being monitored during project operations are: (i) reduction of natural gas leakage at the flange joints of pipes, fittings, compressor packing rings, and sealing rings, (ii) prevention/reduction of odor (i.e. ethyl mercaptan emission) during odorant transfer from barrel to storage tank,3 and (iii) proper storage and final disposal of non-hazardous and hazardous waste by licensed haulers and transporters to designated disposal areas.4 CUGL also conducts mandatory training on fire, safety, and first aid to all employees (including contractors) working in the corporate office, mother station, and online filling stations. To fully mainstream and integrate all HSE aspects in all its business processes, an HSE manual is being prepared by
1 ADB, 2005. Report and Recommendation of the President to the Board of Directors: Proposed Equity Investment in
Central Uttar Pradesh Gas Limited in India. Manila 2 ADB, 2003. Technical Assistance to India for The Urban Clean Fuels Project. Manila (TA 4182-IND). 3 Natural gas is an odorless and colorless flammable gas. Natural gas odorization refers to the operations involving
the addition of an odorant to gas to ensure characteristic odor of natural gas. This process is carried out so that the indistinctive and unpleasant presence of gas in air in concentration below the lower explosive limit (LEL) is readily detectable. Ethyl mercaptan is an odorant added during gas manufacturing/refining process so as to be able to detect the smell.
4 Non-hazardous waste includes food, paper, and metal, while hazardous waste includes polyethylene pipes, empty drums containing ethyl mercaptan, paints, grease, used filters and oil, fluorescent tubes and lamps, and used batteries.
CUGL. The HSE policy has been approved by CUGL management. The application for ISO accreditation is underway and is expected to be completed in 2012 or 2013. The joint sponsor, GAIL, is an ISO 9002 and ISO 14001 certified company. 4. Environmental Management and Monitoring. The Uttar Pradesh Pollution Control Board is responsible for regular monitoring of air quality within Kanpur City. It administers 16 air quality monitoring stations, and the air quality parameters being monitored and tested are sulphur dioxide, nitrogen dioxide, suspended particulate matter, and respirable suspended particulate matter, covering both residential and industrial areas. According to the Uttar Pradesh Pollution Control Board, vehicular traffic contributes 80% of the pollution load, while domestic sources add another 14%, and industrial 6%. As CUGL widens its network coverage and accessibility in line with customer demand, and as more public vehicles switch from gasoline and diesel to CNG, it is expected that indirect and non-quantifiable project benefits can be achieved. These benefits include (i) reductions in pollution and acid damage to buildings and heritage sites; (ii) potential increases in amenity values to land and property; and (iii) more tourism resulting from reduced pollution. CUGL will closely coordinate with and support the Pollution Control Board in its efforts to establish an air quality database within Kanpur City to determine and validate the positive and beneficial impacts of CNG to human health and the environment. 5. Social Impacts. In terms of social safeguards, the project was classified as category B for involuntary resettlement and category C for indigenous peoples. No significant land use changes or land or right-of-way acquisitions were required because the PNG pipelines were laid under the shoulder of the existing city roads. CUGL optimized the design of the CNG facilities by avoiding resettlement, compensation, and acquisition of private land. Since the gas distribution pipelines, CNG mother stations, 5 and online filling stations were located on unoccupied government land, the project did not give rise to any land acquisition, right of way or involuntary resettlement issues during construction. The project also had no adverse impacts on indigenous peoples. 6. All the relevant national labor policies and regulations have been complied with and there is no record of noncompliance with any labor regulations. CUGL outsources much of its support work at the CNG stations, with an agency providing supervisors, plumbers, security personnel, and helpers.6 No women or children are hired within the CNG stations. Women employees are hired at the corporate office and maternity leave is granted in accordance with local labor laws. An annual incident report has indicated no injuries or accidents during operation. 7. CUGL’s customer relationship management has appointed customer care executives to handle all issues, queries, and complaints from customers received by telephone, email or in person. During the site inspection at the Fazalganj mother station and the nearby online filling
5 For the CUGL-owned mother and online stations, land was acquired through a request to the district authorities of
Kanpur or Bareilly, as appropriate. Six CNG operations were installed at existing gas stations and sales supply agreements were signed with these owners. Currently, the transfer of the registration of land deeds for CNG stations at Fazalganj and Bareilly from the original owner to CUGL is being processed with the Kanpur District Authority.
6 The outsourcing agency conducts regular skills training programs related to operation of the CNG station, such as gas pump operation, accounting, and sales, before field deployment. The required service is on an 8 hour working shift for 7 days a week with three shifts per day: (i) 6am to 2pm, (ii) 2pm to 10pm, and (iii) 10pm to 6am.
Appendix 2 14
15 Appendix 8
stations, the employee assigned to receive calls was interviewed. Most of the calls or reports received concerned possible gas leakages in the PNG connections in some residential areas, and these were immediately addressed by CUGL personnel (plumber and helper). CUGL also has a safety response vehicle complete with tools and equipment to undertake repair and maintenance of PNG connections. Customer representatives from the residential area at Model Town (subdivision) and industrial (biscuit factory) owners have been interviewed and have expressed their satisfaction with the PNG service provided by CUGL. III. Conclusion and Recommendation 8. Based on a review and evaluation of the safeguards documents, ADB’s inspection of the project facilities, such as the mother station at Fazalganj and the nearby online filling stations, and interviews with staff at the corporate office, stations and with CUGL customers, it is concluded that CUGL has complied with ADB’s environmental, health, and safety requirements and Indian regulations. ADB also noted that CUGL has strictly complied with the requirement to submit annual monitoring reports to ADB for review and evaluation.
