Documentof The World Bank FOR OFFICIAL USE ONLY L F -3 43 4 -1 MICROFICHE COPY Report No. 8943-IN Report No. 8943-IN Type: (SAR) MEJIA, ALF/ X81467 / E10009/ AS4TE STAFF APPRAISALREPORT INDIA POWER UTILITIESEFFICIENCY IMPROVEMENT PROJECT JANUARY3, 1992 Energy Operations Division CountryDepartmentII South Asia Region This document has a restricted distribution and may be used by recipients only inthe performance of their official duties. Its contents may not otherwisebe disclosed withoutWorld Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Energy Operations DivisionCountry Department IISouth Asia Region
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
ADB Asian Development BankAEC Ahmedabad Electricity CompanyAIC Average Incremental CostBSES Bombay Suburban Electric Supply Ltd.CEA Central Electricity AuthorityCESC Calcutta Electric Supply CorporationDOP Department of PowerDSCR Debt Service Coverage RatioEAMU Environmental Assessme,.D and Monitoring UnitEHV Extra High VoltageESP Electrostatic PrecipitatorsCo0 Covernment of IndiaHVDC High Voltage Direct CurrentICICI Industrial Credit and Investment Corporation of IndiaIDBI Industrial Development Bank of IndiaLCB Local Competitive BiddingLIB Limited International BiddingLIC Life Insurance Corporation of IndiaLRMC Long Run Marginal CostMIS Management Information SystemNHPC National Hydroelectric Power CorporationNPTC Natlonal Power Transmission CorporationNTPC National Thermal Power CorporationOFAP Operational and Financial Action PlanOPS Operational Policy StatementPFC Power Finance CorporationPLF Plant Load FactorRES Regional Electricity BoardREC Rural Electrification CorporationSEA Socio-Environmental AssessmentsSEB State Electricity BoardSCF Standard Conversion FactorSGC State Generating CorporationSPAR Sub-project Appraisal ReportsTEC Tots Electric CompaniesThe Act Electricity Supply Act of 1948USAID United States Agency for International Development
FISCAL YEAR
April 1 - March 31
FOR OFFICIAL USE ONLY
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
STAFF APPRAISAL REPORT
Table of Contents
Page No.
Loan and Project Summary .................................... iv
I. SECTORAL CONTEXT ........................................... 1
Overview .............................................. 1Electricity Demand and Supply ......................... 2Organization of the Power Sector ...................... 2GOI Strategy in the Power Sector ...................... 3Past Bank Group Strategy in the Power Sector .......... 5Bank Group Support .................................... 7Results of These Efforts ....................... ........ 7Towards a New Approach in the Power Sector ............ 9
II. THE BENEFICIARY ........................................... 10
Formation of PFC ... 10Organization and Staffing of PF .. . . 12Operational Policy Statement . . . 12Pre-allocation of PFC's Funds . . . 13Institutional Strengthening of PFC Borrowers ... 13Lending Criteria ... 14PFC's Loan Processing Procedures . . . 15Collection Procedures . . . 16Accounting and Auditing . . . 16Environment Monitoring Unit . . . 16Monitoring of Projects . . . 17Management Information System ........................ 17Financial Planning, Budgeting and Controls ........... 17
This report was prepared by Messrs. Alfonso Mejis (Principal FinancialAnalyst), Alfonso Sanchez (Principal Engineer), Mark Tomlinson (SeniorEconomist), and Mrs. Magdalena Manzo (Energy Specialist).The report has been reviewed by Messrs. K. Siraj (Operations Advisor);K. Jechoutek (Senior Economist), and J. Hanson (Lead Senior Economist).The report has been endorsed by Mr. Heinz Vergin, Director (IndiaDepartment) and Mr. Jean-Francois Bauer, Division Chief (Energy OperationsDivision, India Department).
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Institutional Strengthening of PFC . .20Pre-investment Fund .............................. 20Financing Through PFC ........................... . 20
Transmission and Distribution Projects .. 20Environmental Upgrading of Power Plants .. 21Engineering Studies for System Renovation ...21Institutional Strengthening of Utilities .... 21Billing and Collections .. 21
1.1 All India: Electricity Supply and Demand1.2 Previous Loans and Credits to Indian Power Sector
(as of November 30, 1991)2.1 PFC Organization Chart2.2 Operational Policy Statement2.3 Guidelines for Preparation of Action Plans2.4 PFC's Lending Operations Up to March 31, 19912.5 Environmental Assessment and Monitoring Unit -
Scope of Work and Procedures3.1 Detailed Project Description3.2 Environmental Review of Power Stations -
Suggested Terms of Reference3.3 A. Tentative Scope of Technical Assistance for
System RenovationB. Suggested Terms of Reference for Thermal
Plant Rehabilitation3.4 Draft Terms of Reference for Preparation of a
Training Program for PFC3.5 PFC Plan for Implementing the Institutional Development Program3.6 PFC Preinvestment Fund Concept and Scope of Operations3.7 Project Cost Summary3.8 Procurement Arrangements3.9 Schedule of Estimated Disbursements4.1 SEB's Financial Peformance 1986-904.2 Historical and Projected Income Statements4.3 Assumptions Followed in Financial Projections4.4 Sensitivity Analysis - Selected Cases5.1 Punjab SEB Transmission and Distribution Project -
Economic Analysis6.1 Documents in Project File
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INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Loan and Project Summary
Borrower: India, acting by its President
Benef4ciary: Power Finance Corporation Ltd. (PFC)
Amount: US$265 million
Terms: Repayment over 20 years, including five years grace,at the Bank's standard variable interest rate.
On-lending Term: From the Government of India (GOI) to PFC, withrepayment over 15 years, including three years grace,at an interest rate at not less than 11.5Z per annumwith GOI assuming the foreign exchange and interestrate risks. PFC will onlend to its clients at aninterest rate which is now set at 12.5Z and which willbe adjusted to reflect variations in its cost offunds, and repayment terms ranging from 3 to 7 years,according to the types of assets financed.
ProjectDescription: The main objectives of the project are to: (a) support
GOI efforts to make PFC a viable and effectiveinstrument for improving th, power sector; (b)strengthen the operations of the beneficiary utilitiesby lending only to those willing to undertakeacceptable reform programs; (c) foster better use ofexisting power facilities by reducing constraints inthe transmission and distribution systems; (d)mitigate the adverse environmental impact of thermalplants in operation by providing adequate anti-pollution and monitoring facilities; and (e) improvethe preparation of power projects and promote thedevelopment of the local consulting industry byfunding preinvestment studies and engineering forpower projects. The proposed project comprises: (a) aprogram to strengthen PFC's capabilities to dischargeits responsibilities; (b) the creation of apreinvestment fund in PFC; and (c) five components tobe financed through PFC: (i) the implementation of apre-identified segment of the lending program of PFC;(ii) environmental upgrading of power plants; (iii)engineering studies for system renovation: (iv)institutional strengthening of power utilities; (v)improvements in SEBs' billing and collection.
v
Benefits: The main benefits of the project are: (a) improvementsin the operational efficiency of the state utilities;(b) improvements in the finances of the stateutilities through reducti n in losses and betterbilling and collections; (c) improvements in theenvironmental operating conditions of participatingutilities; (d) improved quality of service; and (e)better use of existing plant facilities. Projectseligible for PFC funding are required to have aneconomic rate of return of at least 12Z; the economicrates of return of projects already approved, andwhich represent about 50% of all investmentsenvisaged, range from 141 to over lOOZ.
Risks: The proposed project does not pose extraordinarytechnical risks. There are, however, risks related tothe institutional, managerial, and financial aspectsof the project. There is a risk that theparticipating utilities will not meet the expectedimprovements set out in their action plans or that thepace of reform will be slower than planned. This riskwill be minimized by establishing realistic targets inthe plans, and by providing financial and technicalresources to the utilities to facilitate theirimplementation. To minimize the risk of delays causedby siow procurement decisions and administrativeprocessing, at negotiations GOI provided the Bank withthe details of the procedures to be followed toexpedite and simplify clearances of procurementactions and releases of foreign exchange for Bank-financed procurement. There are two risks related toPFC's performance. The first is that PFC could facecollection problems because of the poor financialperformance of its customers. This risk would be keptat an acceptably low level by requiring PFC's clientsto establish a set of suitable guarantees. The secondrisk is that PFC might fail to become an effectivepromoter of institutional improvements at theutilities level. This could occur if PFC does nothave the institutional resolve -- and GOI's support --to attach adequate conditionality to its lendingoperations. This also may occur if politicalpressures prevent PFC from enforcing saidconditionality or its Operational Policy Statement(OPS). To manage this eventuality, agreements werereached to ensure that PFC's policies and proceduresare consistent with its development objectives.
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Estimated Cost: a/
Local Foreign Total b/--------(US$ Million)------
A. Transmission & Distribution Schemes 214 126 340B. Environmental Upgrading of Plants 67 24 91C. Studies for System Renovation 2 4 6D. Institutional Development of SEBs 3 3 6E. Institutional Development of PFC 1 0 1F. Creation of Preinvestment Fund 4 10 14
a/ Including taxes and duties of about US$84 million equivalent.b/ Total may not add up due to rounding.
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
STAFF APPRAISAL REPORT
I. SECTORAL CONTEXT
Overview
1.01 Over the past decade, electricity consumption in India increasedat an average annual -ate of 9.2%. Despite impressive progress in systemsexpansion, power shortages continue and are equivalent to about 9% of totalenergy and 22Z of peak capacity requirement. The supply gap is largelyattributable to the relatively inefficient and wasteful utilization of energyin the country due to technical as well as energy price inefficiencies.Reduction in systems losses (currently estimated at 222), setting of powerrates closer to the economic cost of supply and improved inter-state andregionr.l power trading could significantly reduce the supply shortfall. Theproposed project will address some of these efficiency issues.
1.02 With per capita level of about 270 kWh per annum, electricityconsumption in India is among the lowest in the world, and demand is expectedto continue to expand at an average growth rate of 8X per annum over the nextfive years. Even if GOI were to boldly address the inefficiency problems ofthe sector through adoption of energy conservation measures and correction inprice signals, massive investments in additional capacity will still berequired.
1.03 In the face of the current and medium-term budgetary constraints,central government funding of the sector's investment program is likely to beinsufficient and the state and central government-owned utilities will have toincreasingly rely on their own internal resources to finance power systemsexpansion. However, their ability to contribute internal resources towardcapacity investments is hampered by their poor financial conditions. Thesector's financial distress primarily stems from the operational and financialinefficiencies of the State-owned utilities -- the State Electricity Boards(SEBs) and the State Generation Companies (SGCs). Their poor performance isadversely affecting the finances of the centrally-owned utilities and ishindering efforts at attracting private investors to the sector. A turn-around in the sector's finances and closing of the power gap would requirebold actions on tariff, billing and collection, together with conservationmeasures such as plant efficiency improvements, reductions of transmission anddistribution losses, load management and promotion of greater production andend-use efficiency.
1.04 The Power Finance Corporation (PFC) was established in 1986 byGovernment of India (GOI) to effect some of the needed financial andoperational reforms at the state level. PFC links its financing of the SEBs'priority investments to tangible improvements in their operations. Itsupports efficiency improvements in existing plant operations, expansion andupgrading of transmission and distribution facilities as well as mitigatingmeasures for controlling plant emissions. While helping finance investmentsin power supply, PFC, through its !.an conditionalities, attempts to instillfinancial discipline in the SEBs, thereby strengthening their financial baseand their capacity to contribute to the sector's investment requirements.
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1.05 The following paragraphs describe the salient characteristics ofIndia's power sector, its organizational structure, the Government's strategyfor the sector and the main thrust of the Bank's support in the past, a reviewof the effectiveness of these strategies and the lessons that have been learntfrom the Bank's involvement. They also present the Bank's current assistancestrategy for the sector.
Electricity Supply and Demand
1.06 At present, India's power systems have an installed capacity ofover 62,700 MW (Annex 1.1). This makes their size comparable with that ofFrance, the United Kingdom, and all of sub-Saharan Africa excluding theRepublic of South Africa. In FY90, India generated 245,000 GWh -- about 702from coal stations, 25? from hydro stations, and 5? from gas, oil and nuclearstations. Grid supply has expanded quickly: in FY82 installed capacity wasonly 32,350 MW and generation was 114,000 GWIl. More than half (51Z) ofelectricity demand is attributable to industrial consumption; 22? toagricultural use; 15? residential; 6? commercial; and the balance largely dueto public services. The growth in electricity demand has been accelerated byrelatively low powir tariffs which in turn has fostered wasteful end-use ofenergy. The potentiul impact on demand of adopting economic pricing issignificant; a recent estimata projects a reduction in capacity requirementsby nearly 900 MW a year over the next ten years. Yet even if the sector wereto achieve the full savings potential from a progressive implementation by GOIof pricing reforms and demand management programs, the need for major capacityadditio,ns will remain.
Organization of the Power Sector
1.07 Public Utilities. Responsibility zor electricity supply is sharedconstitutionally between GOI and the States. Through the Department of Power(DOP) of the Ministry of Power and Non-Conventional Energy Sources, GOIcontrols the Central Electricity Authority (CEA), the National Thermal PowerCorporation (NTPC), the National Hydroelectric Power Corporation (NIiPC), theRural Electrification Corporation (REC), and, through CEA, the RegionalElectricity Boards (REBs). DOP also controls the Power Finance Corporation(PFC) and the newly-created National Power Transmission Corporation (NPTC).CEA's tasks are to develop a national power policy and coordinate sectordevelopment. NTPC and NHPC are bulk supply utilities which sell power to theSEBs. REC plans and finances most investments in rural electrification. TheREBs coordinate the dispatch and inter-state power exchanges in each of thecountry's five regional power svstems. Their function is, however, limited bytheir lack of statutory authority and by weaknesses in the structure of bulkpower tariffs. PFC mobilizes resources for the SEBs. NPTC will coordinatethe development and operation of transmission systems. Initially these willbe systems associated with NTPC's and NHPC's power stations; since August1991, NPTC has started to operate and maintain NTPC's transmission facilitiesunder a management contract pending finalization of asset transfer. InNovember 1991, a similar arrangement was entered into with NHPC.
1.08 Under the same Ministry, the Department of Non-Conventional EnergySources administers GOI's renewable energy program, which is one of thelargest among developing countries. The program seeks to supplementconventional power supply with alternative energy systems, e.g., mini-hydro,
biomass, wind and solar energy, as well as meet the decentralized energy needsof the rural sector. The program is implemented through the public utilitiesas well as through energy development boa':ds and the private sector.
1.09 The states con rol the SEBs and the SGCs, which generate about 75Zof electricity supplies and provide most of the distribution to finalconsumers. Although they are supposed to be autonomous, in practice the SELsand SGCs must obtain state approval for decisions on investments, taritfs,borrowings, salary and personnel policies. The SEBs are grouped into fiveregional interconnected systems. The activities coordinated regionallythrough the REBs include generation schedules, overhaul and maintenanceprograms and power transfers,
1.10 Private Utilities. At Independence, private utilities andlicensed local authorities together provided about &0X of public electricitysupply. The Electricity (Supply) Act of 1948 (the Act) creeted the SEBs andentt-usted tlhe' Boards with primary responsibility for public power supply. TheAct also made the SEBs responsible for regulating private utilities. TheIndustrial Policy Resolution of 1956 subsequently defined aspects ofgeneration and distribution which were to be the exclusive responsibility ofthe states. Most licensees were taken over by the SEBs when their licensesexpired, and no new licenses have been granted since 1956. Only five privateutilities remain: Bombay Subuirban Electric Supply Limited, Tata ElectricCompanies, Ahmedabad Electricity Company, Surat Electric Company, and CESCLtd. (formerly Calcutta Electric Supply Corporation). Together they accountfor about 5 of public power supplies in India, and are concentrated in themajor urban centers. In addition, an estimated 6,250 MW of "captive"generating facilities are operated by industries.
GOI Strategy in the Power Sector
1.11 ihe Five-Year Plan eontains the only formal statement of India'senergy and power policies. The Eighth Plan, which is expected to cover theperiod 1993-1997, is still to be finalized. On the basis of preparatorydocuments, the objectives of GOI's energy policy are to: (a) achieve energyself-reliance; (b) reduce oil import dependence; (c) meet rural energy needs;and (d) improve the efficiency of energy production and use. Specificinvestment objectives in the power sector under the Eighth Plan are likely toinclude: (a) accelerating the completion of ongoing projects, particularlyhydroelectric investments; (b) encouraging the corstruction of energyefficient and environmentally benign gas-based combined cycle plants; (c)rehabilitating existing plants; (d) improving the quality of ceal suppliesthrough better coal preparation; (e) increasing investments in transmissionand distribution relative to investments in generation; and (f) continuing themodest development of nuclear power.
1.12 To achieve the Plan objectives, it is essential that GOI and thestate governments tackle the sector's financial and institutional problen-.GOI is constrained in its ability to act unilaterally in the power sector atthe State level. There are two main reasons for this: (a) the SEBs and SGCsare owned by the states and are cften operated as extensions of their ownadministrations; frequently the states use them to pursue socio-political
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objectives; and (b) under India's federal system, allocations of budgetaryresources for investments to the states are made following an automaticmechanism -- the Gadgil Formula -- and so it is politically impossible for GOIto condition budgetary assistance to the states. To promote improvements inthe sector, GOI can only exercise its leverage through those discretionaryfunds not subject to the Gadgil formula. These funds essentially include PFCfinancing and funds from external assistance.
1.13 GOI has recently taken a number of steps to ensure that itsdiscretionary funds are used to effect reforms in the SEBs. The creation ofthe Power Finance Corporation is one step in this direction. PFC is expectedto finance about a quarter of the SEBs' financing requirements for the EighthPlan period. In line with its operational policies, PFC will lend only toutilities who have undertaken to implement Organizational and Financial ActionPlans (OFAPs), endorsed by their respective states, aimed at improving theutilities' resource mobilization and operational efficiency. These OFAPstypically include elements such as: (a) actions, including tariff adjustments,to allow the utilities to reach, in a period of no more than tbree years, theminimum 3% rate of return, after interest, on historically valued assets, asrequired by the Act; (b) commitment from the states to pay cash subsidies tothe utilities whenever tariff revenue is insufficient to meet the minimum 3?rate of return; (c) specific plans to reduce the utilities' receivables; and(d) introduction of clauses in the utilities' tariff to allow them to recoverautomatically, from their consumers, any increase in the cost of both fuel andpurchased power. In addition, GOI has :nformed the Bank that starting inFY92/93 external assistance will be allocated to those projects for whichcounterpart funds needed to complete the project on time are available.
1.14 Faced with a growing "power gap" and diminishing public resourcesavailable for the sector, GO0 has taken bold steps in opening the power sectorto the private sector. In the July 1991 modification to the Industrial PolicyResolution, the power sector was removed from the list of activitiespreviously reserved for tie public sector. In September 1991, the Act wasamended to lift many of the regulatory disincentives to private investment inthe rower sector. In particular, it provides for 100t ownership of powercompanies by the priv-te sector, an extended pericd of license to 30 yearswith 20-year renewals and increased financial returns. Provision is made forprivate generating companies and captive plants to sell power to the SEBs.GOI would also allow foreign companies to have a 100% participation in powerprojects. A High Powered Board chaired by the Cabinet Secretary wasestablished in October 1991 to promote private investment and accelerate theclearance of projects. So far, a total of 21,558 MW of generating plantprojects have been advertised by the various states for private sectorinvestment; of this, private investors have expressed interest in developingschemes involving 5,554 MW. GOI's increased reliance on the private sectorwill also lead in the medium term to improved financial discipline among theSEBs since private investment would only go to states with an attractivepolicy environment and a financially sound SEB.
1.15 Th;se measures are to be complemented by: (a) GOI's increasedreliance on the central generating companies (NTPC, NHPC) for the expansion ofsupply in order to improve cost recovery and ensure that priority projects are
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implemented efficiently; (b) the strengthening of NPTC to rationalize theconstruction and operation of India's bulk transmission system; (c) theestablishment of Regional Tariff Advisory Committees to provide advice tostate governments, SEBs and central generating utilities on the level andstructure of bulk and retail tariffs needed to assure the financial viabiliLyof all agencies in the sector; (d) the adoption of energy conservationmeasures.
Past Bank Group Strategy in the Power Sector
1.16 Over the last decade, IBRD followed a three-pronged strategy inits lending operations in the power sector in India. Firstly, it supportedagencies owned by GOI as a means of effecting sector-wide improvements.Secondly, it financed a selected number of SEBs whose managements and stategovernments appeared to be committed to reforms. Finally, and in closecooperation with IFC, it financed existing private power utiliti-s to improvetheir financial and economic efficiency and to encourage GOI to lower citrybarriers for new investors. The success of this strategy has been uneven.
1.17 Experience with Central Power Agencies. IBRD's support for thecentral agencies has provided many opportunities for institutionalstrengthening. IBRD helped NTPC to become India's model utility and, in theprocess, IBRD also helped to improve operational efficiency nationwide. NTPCprovides about 132 of India's total power supplies and the operationalefficiency of its plants consistently surpass that of the state utilities.Its investment projects were generally completed on schedule and withinbudget, reflecting the strong project management capability it has developed.The procedures introduced by NTPC in quality control helped improve thequality standards of power equipment supplied by IndiRn manufacturers.
1.18 However, GOI's and the Bank's efforts to use NTPC to develop thepower sector into an efficient and commercially viable part of the economyhave fallen considerably short of the objective. This is due to the pervasivenature of the sector's financial problems and the relative autonomy of thestates which limits what can be achieved through involvement exclusively w-'thcentral agencies. The financial health of NTPC has been threatened by thecontinued accumulation of receivables from the SEBs. At the end of May 1990they stood at the equivalent of about six months of sales. At that time, inan effort to eliminate the arrears by October 1993, GOI decided to underwritetheir payment by "attaching" in NTPC's favor, portions of the states'budgetary allocation. While GOI has kept its end of the bargain, SEBscontinue to accumulate arrears. The Bank has informed GOI and NTPC thatsupport for new proiects would no longer be possible unless actions to reduceNTPC's receivables position are taken. The Bank is currently refraining fromfurther commitments to NTPC, including a proposed loan of US$375 million whichhad been negotiated and wab originally scheduled for Board presentation inFY90. GOI has arranged a "debt-equity" swap with the Uttar Pradesh StateElectricity Board (UPSEB) (NTPC's main debtor). It involves NTPC taking overUttar Pradesh's Unchahar Power Plant in exchange for receivables andincreasing the value of UPSEB's letter of credit to the level of expectedsales from NTPC. The negotiations are well advanced and the takeover isexpected to be completed by early 1992. In the long-term, the problem of
NTPC's collections will not be resolved until the financial performance of itsclients is substantially improved through tariff adjustments and collectionimprovements. Since the Center has no direct means to ensure that financialperformance of the state utilities improves, the centrally-owned utilitieshave no option but to enforce financial discipline through meanz such as (a)letters of cre?dit set at the level of its sales to each client, ndlor (b)limiting the supply of power to the level of payments received. GOI issupporting moves in these directions.
2.29 Following the recent approval of Amendments to the ElectricityAct, GOI has now the authority to set the tariffs of the central utilities.To rationalize power systems operations, GOI has decided to implement a two-part bulk tariff for NTPC and NHPC. The proposed tariff revision is expectedto be finalized by March 1992. Its implementation would provide incentivesfcr a more economic dispatching of bulk power supplies within and amongregional grids.
1.20 Experience with SEBs. Beginning in the mid-1980s, IBRD emphasizeddirect involvement with state governments and SEBs, attempting to improveselectively the performances of the Boards. Tariffs and financial performanceare key components of IBRD's strategy towards the SEBs. However, these arealso the areas in which progress is most difficult to achieve since the stategovernments historically would rather promise additional financial support tothe SEBs, through subsidies, than authorize unpopular tariff increases.However as a general rule, those subsidies are not paid, leaving the SEBsinsolvent. IBRD's close lending relationship with the SEBs has beensuccessful in the case of a few of the stronger SEBs, such as the MaharashtraState Electricity Board, which has shown efficiency improvements, relativelybetter financial performance, and willingness to innovate. Projects withinstitutionally and financially weaker SEBs carried a correspondingly higherrisk. Indeed, the performance of several SEBs did not meet expectations. Asa result, the Bank had to apply remedies as follows: (a) in 1989, the loan toDelhi Electric Supply Undertaking (DESU) was canceled; (b) in April 1991,disbursements under the Uttar Pradesh Power Project were suspended; and (c) inJune 1991, the SEBs in the States of Karnataka, Himachal Pradesh and Keralawere advised that disbursements would have to be suspended unless actions tomeet the financial covenants were taken. Th; Bank's stance has yieldedpositive responses as the concerned state governments have come to recognizetheir responsibility for ensuring the financial integrity of their SEBs andthe critical role of proper tariff levels in achieving tl-is objective. DESUhas recently been authorized to substantially increase its tariff even in adifficult political environment and now serves as a model case regardingtariff level and structure. The Karnataka SEB has been able to comply withits financial covenants in September 1991, when the Government of Karnatakapaid the rural electrification subsidy, settled part of its arrears andconverted part of the government loans into equity. Similarly, the State of-imachal Pradesh significantly reduced its payables to the SEB and waivedinterest payments on government loans due from the SEB for FY91. The&overnment of Kerala has exempted the Kerala SEB from paying electricityduties for FY90 and FY91, however, since this is insufficient for the SEB tomeet its financial covenants, the Bank has not extended the closing date ofthe loan (Loan 2582-IN). A 33% tariff increase is to be implemented by Kerala
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as of January 1, 1992. As concerns UPSEB, the state government decided toallow a tariff increase of 281 effective January 1, 1992, which should bringits financial performance for 1992 in line with the Action Plan agreed underthe Uttar Pradesh Power Project. As a result of these actions, the Bank heldin abeyance the cancellation of the outstanding balance of Loan 2957-IN. Adecision to lift the suspension of disbursement will be made upon formalnotification of the implementation of the tariff adjustment. At that time, itwill also be necessary to reassess the scope for loan cancellation based onthe latest cost-estimates which reflect the impact of Rupee devaluation onproject costs.
1.21 Experience with Private Utilities. The Bank and IFC'sexperience with the private utilities has been in general more satisfactory.Unlike the SEBs, the private utilities have beei allowed by their respectivestate governments to operate autonomously and in a technically and financiall,viable manner. They have not suffered from the institutional and financialproblems of the GOI-owned central entities, because the power they generate ilargely fed into their own distribution networks which supply urbanresidential and industrial consumers.
Bank Group Support
1.22 IBRD has made 32 IBRD loans (US$6.4 billion) and 18 IDA credits(US$2.3 billion) for power projects in India (Annex 1.2). Twenty-sevenprojects have been completed: 20 for generation; four for transmission; andthree for rural electrification. Ongoing projects include ten for generation(three of which are for hydro power plants); three for transmission; and sevewhich include a mix of generation, transmission and distribution. Six of theIBRD loans have been extended to private utilities. The physicalimplementation of most Bank power projects in India has proceeded slowly, buteventually, after significant initial delays, has broadly met expectations.However, loan and credit disbursements continue to show large outstandingbalances (US$3,869 million, as of June 30, 1991). These are due primarily tcthe very long construction periods for generation projects compounded byfrequent delays in procurement and in foreign exchange and import licenseclearances by the various ministries, and the increasing number of projectsunder implementation. Undisbursed balances have been pushed up further byfrequent cost under-runs on major equipment contracts. The latter are due tcthe softening of international markets in the mid-1980s and the rapid realdevaluation of the Rupee. The Bank is reviewing the level of potentialsavings in its power loan portfolio for India with a view towards cancellingthose balances which are no longer required for project implementation.
1.23 IFC has made five investments totalling US$203 million to four olthe five private power utilities in India. These investments were made in Aland TEC in FY89, in TEC and CESC in FY90, and in BSES in FY91. All theprojects are progressing satisfactorily.
Results of these Efforts
1.24 Expansion and Quality of Service. The Bank's support to India'spower sector contributed to the rapid expansion of the country's power suppl
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from 32,350 MW installed capacity in FY82 to over 62.700 MW today. However,the quality of electricity supplies remains unsatisfactory. Interruptions andreductions in supply and voltage are common. The poor quality andunreliability of public supplies cause consumers to purchase costly back-upgenerating capacity which uses scarce liquid fuels. Technical and commerciallosses exceed 20? of net generation.
1.25 Operational Efficiency. In parallel with expanding supply, thesector has made some encouraging ef.iciency gains. For example, the plantload factor has increased from 44Z in FY81 to 55? in FY90. This means thatevery 1 kW of capacity now provides 1,031 kWh (27?) more electricity per yearthan in FY81. Ir, addition, the rate of coal consumption by power stations hasbeen cut by about 10? since FY81. It now requires 720 tons of coal togenerate 1 GWh, compared with 802 tons in FY81. This saves approximately 13million tons of coal annually (about 82 of the sector's total consumption) andis worth about US$300 million/year. These improvements reflect astrengthlening of plant maintenance and operations and are commendable in viewof the deteriorating quality of coal the sector is receiving. A significantinstitutional gain is the one-third reduction in the ratio of employees toconsumers from 29 employees per 1,000 consumers in FY81 to 19 employees atpresent. Many of the efficiency and institutional improvements areattributable to the rapidly expanding shares of NTPC and the private utilitiesin India's power system since FY83.
1.26 Financial Performance. Weighted retail tariffs have increasedslightly since FY82' in constant price terms although they have remained atabout 502 of the long run marginal costs (LRMC). Increases in real costs(particularly for fuel and wages) have largely neutralized the increases inefficiency and real tariffs. In the meantime, tariff differentials amongconsumer groups have widened. Industrial consumers have taken the brunt ofthe increases over the last ten years and their tariffs are in nost states nowclose to, and in some cases even above, LRMC. Agricultural tariffs, on theother hand, actually have fallen in absolute terms and now cover less than 10?of their supply costs. Compounding the problem is the poor collection fromagricultural users, high technical and non-technical system losses, leading toan increasingly large financial burden imposed by the sector on the powersystem. Partly as a result of this subsidization, as shown in Annex 1.1,agriculture's share in total consumption has grown from about 17? in FY82 to22Z in FY90. A similar situation applies to the case of residential uses ofelectricity. Accordingly, GOI has put pressure on the SEBs and the centralutilities to raise tariffs. Since April 1990, 12 SEBs, out of 18, haveincreased their tariffs, and both Kerala and Uttar Pradesh are expected toincrease their's effective January 1, 1992. In September 1991, the StatePower Ministers agreed to have a minimum agricultural tariff, bringing thebeginning of a solution to this problem. In addition, the need for SEBs toestablish automatic cost recovery surcharges for fuel, freight, etc. wasrecognized. The implementation of these initiatives are partly reflected inthe recently announced tariff reforms for Kerala and Uttar Pradesh.
I Using FY82 prices, from 40 Paise/kWh in FY82 to 47 PaiselkWh in FY90.
1.27 The combined financial losses of the SEBs have been steadilyincreasing. When operating losses, non-payment of subsidies and poorcollections are taken into account, the SEBs had a negative internal cashgeneration equivalent to US$4.1 billion from FY86 to FY90. Deficits of thismagnitude materially affect public finances and, because of late payments tosuppliers, create major financial problems for NTPC, NHPC, Indian Railways,Coal India, and Bharat Heavy Electricals Limited (BHEL), the largest localmanufacturer of electrical equipment. As a consequence, GOI was forced inFY91 to earmark central transfer assistance to these entities, funds whichotherwise would have been allocated to the budgets of the delinquent states.
1.28 Conclusion. Notwithstanding tbe efficiency gains secured by thesector in recent years, there is an urgent need for further improvement. Keyconstraints are the lack of financial autonomy and the poor financialdiscipline of the publicly owned utilities, as well as the absence ofcommercial incentives in many markets and subsidized power prices.Physically, these constraints cause India's power systems to provide lesspower and power of a poorer quality, at higher cost, than they otherwise wouldbe able to provide. The economic costs of shortages and poor quality supplyare exacerbated by inefficient end-use of power which is in turn, invited bymispricing and non-collection of dues.
1.29 Performance audits conducted for the Second Power TransmissionProject (Credit 242-IN) and the First and Second Rural Electrificationprojects (Credits 572-IN and 911-IN) highlighted the difficulties of effectinginstitutional improvements in the absence of clear division ofresponsibilities between the central entities and the SEBs. ProjectCompletion reports show that the Third and Fourth Transmission projects(Credits 377-IN and 6C4-IN) experienced similar difficulties; despite someprogress, in general, SEBs did not respond to GOI's initiatives. The lessonslearned from these projects, as well as the experience gained in dealing withthe problems of the sector, had an important bearing in the design of theproposed project.
Towards a New Approach in the Power Sector
1.30 GOI's strategy towards the power sector evolved to a largeextent from the intensive policy dialogue with the Bank over the last year anda half. The Bank supports the major policy reforms recently undertaken,namely the channelling of discretionary funding by the center only to theperforming states and the increased role for the private sector. However,much needs to be done to begin solving the structural problems of the sector.
1.31 The evolving lending strategy would continue to support capacityadditions through the private sector and efficient public utilities while atthe same time giving increased attention to improvements in the utilization ofexisting operating assets. It would seek and support actions by GOI toaddress the longer-term issues in the power sector such as problems in thecurrent allocation process (not only in the power sector but also in coal andnatural gas), the planning process, the operational efficiency of the powersystem, the institutional set up of the state utilities and financing needs ofthe power sector will be explored. In addition, issues affecting energy
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conservation and socio-environmental aspects of power development will betaken up. Bank lending for power would focus on:
(a) promoting domestic and foreign private investments, includingjoint ventures between the private sector and well managed publicutilities;
(b) projects implemented by either center or state utilitiesbenefiting states whose SEBs either perform in a satisfactorymanner or have started implementing credible plans underwritten bytheir states to improve their performance and finances withemphasis on significant up-front tariff adjustments;
(c) investments that promote energy conservation and demand-sidemanagement; and
(d) innovative, small-scale developments such as mini-hydro, co-generation and non-conventional energy schemes which areenvironmentally sound and cost-effective. IBRD will also continueto assist the Indian power sector in addressing the environmentaland sociological aspects of power development.
1.32 The proposed project fits into this strategy because (a) it isdirected to finance investments that will enhance the efficiency of existingassets, such as removing bottlenecks in transmission and distribution systems,engineering studies for systems renovation, environmental upgrading of powerplants, and institutional strengthening of selected SEBs; (b) PFC lends onlyto SEBs/SGCs that either are nerforming or have agreed, with the support fromtheir states, to introduce long lasting improvements in their operations andfinances; and (c) PFC financial support to SEBs/SGCs is conditioned upon theircompliance with conditionality aimed at ensuring that said improvements areactually implemented.
II. THE BENEFICIARY
Formation of PFC
2.01 PFC is a wholly owned entity of the Government of India. It wasincorporated in July 1986, under the Companies Act of 1956, and beganoperations in early 1988. The objectives set in its Memorandum of Associationallow PFC to undertake an ample array of financial activities aimed atsupporting the development of the power sector in India. These activitiesinclude the financing, to both public and private power utilities, of: newcapacity, renovation and modernization of power plants, system improvement,energy conservation, maintenance and repair of fixed assets, pre-investmentactivities, research, and consultancy services.
2.02 GOI, through PFC would allow most of the non-budget funding of theutilities, representing 25Z to 30Z of their total financing requirements, tobe linked to tangible improvements in the utilities' operations. To implementthis objective, PFC would grant loans to SEBs/SGCs conditioned upon the
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implementation of actions which would improve their financial and operationalperformance. This strategy is reflected in an Operational Policy Statement(OPS) (Annex 2.2) prepared by PFC and found satisfactory by the Bank.
2.03 The developmental function assigned to PFC, in the form it is nowconceived, has not been tried before in India. While the role of the typicalsectoral financial institution would be to mobilize resources for a particularsector, PFC's main objective is to promote improvements in the power sectoroperations. The financial function is simply an instrument that provides thenecessary leverage to help ensure PFC's effectiveness. It is envisaged that,in the long term, most power utilities should reach a financial performancethat allows them access to the financial market on the basis of their owncreditworthiness.
2.04 Lending through PFC offers a number of advantages. Firstly, itrepresents an improvement over the umbrella-type operations, attempted in thepast by the Bank using the Rural Electrification Corporation (REC). Theeffectiveness of these operations was limited by the weak institutionalcapability of REC, reflected in poor implementation and supervisionperformance. Secondly, lending through PFC would allow the Bank to expand itsimpact in the sector by having access to most SEBs/SGCs in the country, asopposed to direct lending by the Bank, which has to be restricted to a limitednumber of SEBs/SGCs. Thirdly, because PFC will have frequent operations withmost SEBs/SGCs, probably on an annual basis, it will enjoy the advantage of aclose and regular contact with them, providing a better potential forenforcing lending conditionality.
2.05 However, it is recognized that for PFC to be successful, it has todevelop a strong institutional capability of its own and enjoy considerableautonomy. To ensure that the potential benefits to be derived from lendingthrough PFC actually materialize, the Bank established that any lending to PFCshould be subject to the following parameters:
(a) PFC should have clearly defined, transparent and strict criteriafor its lending decisions (paras, 2.09 and 2.16);
(b) these criteria should apply not only to Bank funds on-lent throughPFC, but to all PFC's resources (para. 2.16);
(c) sub-borrowers that do not meet the agreed criteria should not begranted any loan from PFC (para. 2.16);
(d) PFC should take remedial action against sub-borrowers whichdefault in their undertakings with PFC (para. 2.14); and
(e) the agreements between the Bank and GOI/PFC should provide formonitoring by PFC of compliance with the agreed lending criteriaand undertakings by sub-borrowers to PFC, and for suspension ofBank disbursements if PFC does not fulfill its obligations (paras.4.20 and 4.21).
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Organization and Staffing of PFC
2.06 PFC is run by a Board of Directors which consists of a Chairmanand Managing Director, two full-time directors (for finance and technicalmatters), and four directors representing the Department of Power, the CentralElectricity Authority, the Planning Commission, and the Ministry of Finance.This composition of the Board enhances the coordination between PFC anddifferent decision-making centers in the power sector.
2.07 The Corporation is organized along three divisions, or groups --one for technical matters, one for finance, and one for operations. Eachgroup is headed by a Director. The Technical Group appraises new projects andmonitors the portfolio of loans. The Finance Group is responsible for thefinancial operations of the Corporation and provides support to the TechnicalGroup on the financial aspects of projects. The Operations Group providescritical support to the SEBs in preparing their Operational and FinancialAction Plans (OFAPs) and monitors the implementation of these plans. Asexplained in para. 2.1 , these OFAPs are the framework used by PFC to designthe conditionality for each one of its operations. The Operations Group alsomanages the human resources of the Corporation and provides leadership in theformulation of policies, preparation of procedural guidelines, and study ofissues affecting the power sector. PFC is aware of the need to periodicallyreview the effectiveness of its structure and make adjustments as needed. Thecu-rent organizational structure of PFC is presented in Annex 2.1.
2.08 PFC's top management is experienced and has done an outstandingjob in providing the basis for the future development of the Corporation. PFChas managed to put together a group of about 130 carefully selectedprofessionals. The Corporation is gradually developing a work culturecharacterized by very demanding standards of quality and a high degree ofmotivation among staff. In addition, PFC has retained a small nucleus ofhigh-level consultants experienced in different aspects of power sectoroperations. Although several key positions have been filled with staff ondeputation from other government entities, as a way to facilitate recruitment,PFC is confident it will be able to retain those considered best qualified fortheir respective jobs. PFC is gradually developing a capability forappraising and monitoring the implementationi of projects, and a specialtraining program for its staff will be included in the project (para.3.06).The Technical Assistance component of the project also includes support in thedevelopment of policies and procedures to enhance PFC's capability to prepareand monitor projects and to promote the institutional development of itsborrowers.
Operational Policy Statement
2.09 PFC has prepared an Operational Policy Statement (OPS) whichdescribes the Corporation's rationale, its operating philosophy, objectives,programs, and procedures. A summary is presented in Annex 2.2. The purposeof the OPS is to establish the policies that will guide PFC in its relationswith clients and in its own operational and financial activities. Thefinancial policies embodied in the OPS are summarized in para. 4.16. Changesin the OPS are expected to be called for as a clearer picture of PFC's
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activities emerges. The OPS is the instrument that reflects the majoragreements between PFC and the Bank on how the Corporation will conduct itsoperations, and the implementation of the proposed project will be carried outin accordance with the OPS (para. 4.20).
2.10 The Bank and PFC have reached agreement on the contents of theOPS. Because PFC's clientele is confined to a limited number of borrowers,operating in one economic sector, and are in rather poor financial health,steps have been tEken to mininize the financial risks to PFC. These stepsinclude, inter-alia, the design of a set of repayment guarantees, limits onPFC's exposure, and a provision that PFC will not reschedule its loans (para.4.16).
Pre-allocation of PFC's Funds
2.11 To help preserve PFC's autonomy, GOI and PFC have adopted aprudetc policy of not pre-allocating PFC's funds by states. Pre-allocatingthese funds would undermine PFC's basic developmental objectives and wouldrender totally ineffective the operating policies included in the OPS.2
Given PFC's need for autonomy to promote improvements in the power sector,during negotiations confirmation was obtained that PFC's funds will not bepre-allocated but will be lent following the pre-agreed criteria spelled outin para. 2.16 and included in PFC's OPS (para. 6.03 (b)).
Institutional Strengthening of PFC Borrowers
2.12 The core of PFC's effort to promote better standards ofoperational and financial efficiency in the state power utilities is thepreparation and implementation of action plans tailored to each particularutility. PFC's Operational and Financial Action Plans (OFAPs) consist of aset of actions, to be implemented according to an agreed timetable, aimed atcorrecting the most critical deficiencies of the particular SEB. These OFAPstypically include elements such as: (a) actions, including tariff adjustments,to allow the utilities to reach, in a period of no more than three years, theminimum 3% rate of return, after interest, on historically valued assets, asrequired by the Act; (b) commitment from the states to pay cash subsidies tothe utilities whenever tariff revenue is insufficient t. meet the minimum 32rate of return; (c) specific plans to reduce the utilities' receivables; and(d) introduction of clauses in the utilities' tariff to allow them to recoverautomatically, from their consumers, any increase in the cost of both fuel andpurchased power. Although the SEBs(SGCs are responsible for preparing theOFAPs, PFC's staff provide initial support in diagnosing major problems, andparticipate in a manner that ensures that the views of the utilities'management and, eventually, the states' officials are expressed in theformulation of corrective actions. The utilities also would be responsiblefor retaining consultants to assist in implementing the OFAPs, although PFCcould include the cost of financing this consultancy in its loans to theutilities. The general concept of OFAPs, the elements that enhance their
2 However, the need to avoid pre-allocating PFC's funds does not meanthat GOI and PFC cannot develop indicative targets for planning purposes.
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effectiveness, and the steps followed in their preparation are presented inAnnex 2.3.
2.13 The development of an OFAP for each of the SEBs included in theproposed project was integral to the preparation of the sub-projects presentedby PFC for Bank fin3ncing. The OFAPs for the SEBs of Punjab, Andhra Pradesh,Madhya Pradesh and Gujarat Lave been approved by the concerned stategovernments and accepted by PFC. They contain a comprehensive set of actionsaddressing the most critical issues of each SEB including among others tariffrestructuring, payment by the State of cash subsidy support, billing andcollection, system efficiency, materials management, and financial andaccounting control. The key elements of these OFAPs are summarized in page 5of Annex 2.3. The impact of the OFAPs on the SEBs' financial operations havestarted to be felt. In FY1990 the rates of return of these four SEBs were: -2.5% for Punjab (PSEB), 0.182 for Andhra Pradesh (APSEB), 3.3% for MadhyaPradesh (MPSEB), and -8.0% for Gujarat (GSEB). All four have since adjustedtheir tariffs: PSEB by 14% in FY91, APSEB by 20% in FY91, MPSEB by 10% in FY91and 12Z in FY92, and GSEB by 11% in FY91. MPSEB continues to meet the target3% rate of return. APSEB is estimated to achieve it in FY1992 and PSEB andGSEB in FY1993. Without the tariff and subsidy payment provisions in theOFAPs, the returns in FY1993 are projected to be significantly lowar at: -6.6%for PSEB, -2.42 for APSEB, -7.0% for MPSEB, and -11.2X for GSEB. Likewise, anumber of actions have since been taken by the SEBs with respect to settlingof receivables, payment by the state governments of subsidy, improvinginventory management, and computerization of billings and collections.
2.14 The practice of agreeing on OFAPs as a criterion for lendingshould not be limited to sub-borrowers under the proposed Bank loan. PFCconcurs with this policy dnd as of June 30, 1991, it no longer considers newrequests for loans from SEBs that have not presented a satisfactory OFAP. Theneed for SEBs to achieve the minimum 3% rate of return has been underscored byPFC in its dialogue with the SEBs and in FY92, PFC has started to require SEBsand State Governments to agree on a time-bound program to achieve this minimumreturn. The implementation of the OFAPs will be made part of PFC's legalagreements w'th its borrowers. To give force to the OFAP, it is required thatboth the State government as well as the SEB's management commit themselves,in writing, to implement the OFAP. PFC intends to closely monitor theimplementation of the OFAP as part of its regular supervision activities, andto provide the necessary support to the SEBs to facilitate implementation.Lack of compliance with the OFAPs could trigger the application of remediesestablished by PFC in its guidelines. These guidelines (Annex 2.2) includesuspension of disbursements and cancellation of the loan and denial of accessto future borrowing.
Lending Criteria
2.15 PFC is empowered to lend to anv entity, public or private in thepower sector. However, in its initial years it will concentrate on supportingthe SEBs and the SGCs, where the developmental needs are considered the mostcritical. PFC has established priorities to guide its lending operations,which include the following four activities:
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(a) renovation and modernization of generating plants;
(b) system improvement;
(c) expansion of transmission and distribution systems; and
(d) completion of ongoing generation projects.
2.16 PFC reviews both the eligibility of the borrower as well as thatof any proposed project. To be eligible for PFC financing, a utility shouldundertake to implement an OFAP (para. 2.12) agreeable to PFC to improve itsoperations and finances. In addition, any project proposed must satisfy sixcriteria, as follows:
(a) the project must be economically justified, with an economic rateof return of not less than 12Z;
(b) the project must be technically sound;
(c) the technical solutions proposed in the project must be the leastcost option;
(d) the project must be compatible with existing expansion plans;
(e) the solutions proposed in the project must meet acceptableenvironmental and social impact standards; and
(f) the schemes must have obtained all the clearances required bystate and federal agencies.
Schemes for environmental upgrading of power stations must meet acceptableengineering standards, and should be the most cost-effective means ofmitigating environmental effects.
PFC's Loan Processing Procedures
2.17 Borrowers take the initiative in presenting requests forfinancing. When a request is received, PFC carries out an appraisal of theproject and of the entity. This rnpraisal includes a review of the technicalaspects of the project, its economic justification and environmentalimplications and an assessment of the finances and operations of theimplementing agency. PFC staff are organized regionally to expedite theappraisal process and to allow the Corporation greater familiarity with eachclient's special circumstances. An outcome of this analysis is for thepotential borrower to prepare an OFAP, with PFC support. The OFAP thenprovides the basis for the conditionality in the event PFC decides to financethe project. After the OFAP is approved, it is updated about once a year andthe conditionality is adjusted in subsequent operations. PFC's lending termsare discussed in para. 4.14.
2.18 Disbursements of PFC's funds typically are made directly to thesupplier when the supplier is a government entity, or through commercial banks
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if otherwise. PFC's overall disbursements procedures have been foundacceptable by the Bank. To allow borrowers to make payments in small amounts,a revolving fund of not more than 15Z of the loan amount may be established byPFC. As of March 31, 1991, PFC had gras.ted 352 loans to 21 clients and it hadlent a total of Rs 33.6 billion (about U;$1.3 billion). A summary of PFC'slending operations is presented in Annex 2.4.
Collection Procedures
2.19 PFC has established satisfactory collection procedures. TheCorporation notifies its clients in writing 15 to 20 days before payments aredue, and it has developed a system with its bankers to expedite transfers offunds collected. In the event payment is not made on the due date, one weeklater PFC issues a notice threatening legal action against the borrower andguarantor. If the situation remains unsolved after 60 days, PFC applies theremedies it has established, including suspension of disbursements,cancellation of the undisbursed amounts and making the guarantees effective(Annex 2.2, Attachment). Although these procedures appear sound, PFC'sexperience is still too limited to allow a final assessment of theireffectiveness. PFC's collection performance would be monitored closely duringsupervision.
Accounting and Auditing
2.20 A complete accounting system, in conformity with the Companies Act(1956), was recently installed with the help of consultants and itscomputerization is advancing. PFC conservatively recognizes income only whenactually received and not on an accrual basis. However, an accrual record ismaintained to monitor the maturity of arrears. PFC's statut' y auditor is aprivate firm appointed by GOI on the advice of the Comptroller and AuditorGeneral, who may also elect to carry out his own audit. PFC's audit reportshave been produced on time and they were reviewed by the Bank and foundsatisfactory. During negotiations PFC agreed to submit to the Bank, no laterthan two months after the end of each fiscal year, unaudited financialstatements, and no later than six months after the end of the fiscal year,copies of said financial statements certified by an independent auditoracceptable to the Bank, accompanied by an auditor's report. The financialstatements will include: Income Statement, Statements of Cash Flow, andBalance Sheet (para. 6.04 (a)).
Environment Monitoring Unit
2.21 PFC is creating a specialized unit to assist its borrowers inpreparing the environmental and social dimensions of the projects submitted tothe Corporation. This unit also will be responsible for coordinating thepreparation of Environmental Impact Assessments and monitoring theirimplementation. The Bank has provided some preliminary guidance in the makeup of this unit and PFC is actively recruiting staff. Annex 2.5 presents thescope of the work of this unit.
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Monitoring of Projects
2.22 PFC has developed an efficient system for monitoring the physicalimplementation of the projects it finances. This system includes progressreports and period' visits. In the future, as OFAPs with different borrowersare approved, PFC also will need to strengthen its capability for monitoringtheir implementation. The training and technical assistance programs includedin the proposed operation will support the development of PFC in this respect(para. 3.06). Failure by the borrowor to comply with the conditionalityagreed, incluaing the implementation of the OFAP, will trigger application ofremedies (para. 2.14).
Management Information System
2.23 PFC has been gradually developing a management information system(MIS) which provides control at different levels of the corporate structure.The Corporation is aware that the MIS will need to be enhanced as the volumeof its operations grows. Along these lines, PFC is conceptualizing acomputerized system that will allow different units of the organization toshare common data bases, thereby improving efficiency and consistency acrossthe organization. The technical assistance program under the proposed loanwould provide support to enhance the Corporation's MIS.
Financial Planning, Budgeting and Controls
2.24 PFC has been introducing systems to support its financial management.It has a computerized financial model routinely used in assessing the impactof alternative policies, levels of operations and degrees of performance.Similarly, its budget system and control procedures are adequate for thecurrent level of operation, but will need to be enhanced to handle PFC'sfuture requirements. The institutional development component under theproposed project would support this objective.
III. THE PROJECT
Project Setting
3.01 While India has made commendable progress in expanding itselectricity supply in recent years, shortages still persist which now areequivalent to about 22Z of maximum power demand and 92 of total energy demand.Moreover, the quality of electricity needs improvement, particularly withrespect to the continuity of service and regulation of voltages andfrequencies. Poor quality supply in turn results in frequent industrialequipment burnouts and higher than necessary production costs. In 1989, theBank conducted a study to ascertain the causes of major power systeminefficiencies in India and possible actions to correct them. The project
a India Power Sector Efficiency Review (In two volumes) - November 30,1989 - Report No. 7878-IN.
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seeks to address several of the inefficiencies detected in the studs in fiveareas, as follows:
(a) Investments in transmission and distribution have not kept pacewith investments to expand generating capacity. This imbalancehas led to system overloading and, as a consequence, highelectricity losses and frequent power interruptions. Moreover,the lack of transmission and distribution capacity prevents fulluse of generating plants. The project seeks to alleviate theseconstraints by providing funding for high-priority transmissionand distribution investments;
(b) SEBs need to address poor maintenance, inadequate controls andoperational supervision, poor communication and monitoringsystems, lack of trained staff, and unsatisfactory billing andcollections. Improvements in these areas, including reductions innon-technical losses, would improve service quality and the cashflow of the SEBs. The project provides funding and technicalsupport for the SEBs to help remedy these deficiencies;
(c) The performance of generating plants in India, particularlythermal plants, is below international standards. For instance,thermal plant availability is 10 to 15 percentage points belowinternational norms. Plant renovation and life extension arecost-effective ways to improve availability and reclaim lostcapacity. GOI and many of the SEBs already are implementing animportant program to partially rehabilitate 164 thermal units.Many thermal units included under the renovation program have beenonly partially rehabilitated and require further work. Inaddition many units have become due for renovation since theprogram was launched in 1984, or were not included in the firstphase of the pro-ram. The project includes a component toidentify further opportunities for plant modernization and lifeextension;
(d) The environmental operating conditions of many thermal plants inIndia are substandard. The project includes a substantialcomponent to provide funding for -w .ding the environmentalconditions of the SEBs' power s4t.,.on; and
(e) The preparation of power projects in India, particularly forhydroelectric plants, is a difficult and slow task whichultimately retards implementation. The quality of projectfeasibility studies, site investigations, and pre-constructionengineering also requires considerable improvement. Inadequatepreparation is caused both by an acute shortage of funds in sectorinstitutioiis and by staff limitations in the technicalorganizations of GOI responsible for this work. Lack of fundsalso prevents studies from being carried out which would improvethe operation and management of the power utilities. Theconsulting industry for power projects in India is still young;strengthening it would help to supplement the technical resources
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provided by government agencies and establish an avenue forintroducing up-to-date engineering practices. The projectincludes a pre-investment fund to stimulate growth in the localconsulting industry. The fund would be used by the power sectoragencies wishing to employ consulting fi ms to carry out studiesand engineering for power projects.
3.02 PFC is becoming an increasingly important institutional vehicle inpromoting efficiency improvements in the SEBs and SGCs. To be effective irth.is endeavor, PFC needs to: (a) lend a large share of the utilities'financial requirements under terms attractive to them to secure the leverageneeded to introduce conditionality; (b) follow financial management practiceswhich ensure its financial viability; (c) have the capability to prepare andsupervise a large volume of projects; and (d) provide support to the utilitiesin designing and implementing their performance improvement plans. Theproject supports GOI's and PFC's actions in these areas.
3.03 With regard to the first point, the project includes the financingof sub-projects for a selected number of SEBs; this financing would representan important addition to the funds currently allocated to the SEBs through theCentral Plan. Regarding the second point, the project provides assistance toPFC for establishing policies and practices which will reduce its financialrisks and ensure its financial viability. With respect to the third andfourth points, the project incorporates a comprehensive institutionaldevelopment program to enhance PFC's capabilities in project appraisal andsupervision.
Project Objectives
3.04 The main objectives of the project are to: (a) support GOI effortsto make PFC a viable and effective instrument for effecting improvements inthe power sector; (b) strengthen the operations of the beneficiary SEBs bylending only to those willing to undertake acceptable reform programs; (c)foster better use of existing power facilities by reducing constraints in thetransmission and distribution systems; (d) mitigate the adverse environmentalimpact of thermal plants in operation by providing adequate anti-pollution andmonitoring facilities; and (e) improve the preparation of power projects andpromote the development of the local consulting industry by funding pre-investment studies and engineering for power projects.
Project Description
3.05 The project comprises: (a) a program to strengthen PFC'scapabilities to discharge its responsibilities; (b) the creation of a pre-investment fund in PFC; and (c) five components to be financed through PFC:(i) the implementation of a pre-identified segment of the lending program ofPFC; (ii) environmental upgrading of power plants; (iii) engineering studiesfor systenm renovation; (iv) institutional strengthening of power utilities;and (v) improvements in SEBs' billing and collection. A detailed descripAionof the project is presented in Annex 3.1.
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3.06 Institutional Strengthening of PFC. This is a program tostrengthen PFC s capabilities to discharge its responsibilities. The programwill provide specialized services, equipment, software, and training. Themajor activities to be covered undcr this program include:
(a) enhancing PFC's management information system;
(b) developing administrative manuals and procedures to guide internaloperations:
(c) developing manuals for project appraisal and monitoring;
(d) training PFC staff in financial, utility, and project management,power economics, upgrading of power plants, transmission anddistribution, and planning and design of distribution systems; and
(e) establishing a unit at PFC for sector studies to support theCorporation's operations.
3.07 Pre-investment Fund. The project includes the establishment of aspecial pre-investment fund at PFC. The fund will be used to finance projectpreparation and other studies aimed at enhancing the performance of powerutilities in the country.
3.08 Financing Through PFC. The project will help PFC finance fivetypes of activities directed to the SEBs/SGCs, as follows:
(a) Transmission and Distribution Projects. Includes the financing ofa pre-identified segment of the loans for this purpose to beapproved by PFC during 1992-94. This segment represents about 8tof PFC's lea.ding program. It includes the financing of theconstruction of specific sub-projects proposed by eligible SEBsand SGCs. These sub-projects are: (i) sub-transmission andassociated distribution works in urban areas; and (ii)transmission lines and substations in the participating SEBs.This being the first Bank operation with PFC, it was consideredprudent to limit Bank financing to a set of identified investmentsin a reduced number of SEBs where the likelihood of a successfulreform program is greater, as opposed to providing financing forthe entire PFC lending program. Along these lines, the projectcomprises investments to be made by the SEBs of the states ofAndhra Pradesh, Gujarat, Madhya Pradesh, and Punjab. PFC hasprepared sub-project appraisal reports (SPARs) for each SEB. EachSPAR includes, among other things, an action plan (OFAP), agreedwith the SEB and the State (see section (d) below), and thedetails of the sub-projects to be financed, their estimated costs,economic and technical justification and an implementationtimetable. These four SEBs have already identified about 70? ofthe transmission and distribution investments under the project.A provision has therefore been made in the project to includeinvestments in one or two additional States where SEBs may becomeeligible for Bank financing, or to include more sub-projects for
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the four SEBs already identified, as the case may be. PFC willprepare SPARs for the remaining investments as other SEBs becomeeligible for Bank financing;
(b) Environmental Upgrading of Power Plants. The project includesstudies, engineering and works to upgrade the environmentaloperating conditions of power plants;
(C) Engineering Studies for System Renovation. This program includesstudies for: (i) further improvement and modernization of thermalstations to supplement the rehabilitation investments sponsored byCEA and PFC during the Seventh five-year plan; and (ii) high-priority upgrading of other system components;
(d) Institutional Strengthening of Utilities. The project includes acomponent for the implementation of the institutional developmentprograms for SEBs and SGCs identified in their OFAPs. Thisassistance will include, among other things, improvements inoperation and management, provision of technical and trainingservices, and acquisition of data processing equipment andsoftware; and
(e) Billing and Collections. The project covers the promotion ofimprovements in the billing and collection systems of the SEBs,including studies, equipment, software, and support forestablishing the necessary systems and procedures.
Status of Project Engineering
3.09 The transmission and distribution sub-projects being proposed forfinancing are standard works routinely carried out by the SEBs and do notinvolve complex engineering. Therefore, the SEBs will be responsible for theengineering of these sub-projects. The participating SEBs have staffqualified to plan and design the sub-projects proposed and would have accessto technical services by employing consultants under the Pre-investment Fund.Sub-projects under this project component are grouped into three categories:
(a) transmission and distribution sub-projects for which engineeringat the bidding level is already complete and all necessaryapprovals by government agencies (CEA, DOP, Planning Commission,etc.) have been granted. This group represents about 60% of theproposed investments in transmission and distribution;
(b) transmission sub-projects for which detailed engineering iscomplete but which are still under review by the concernedgovernment agencies. This group represents 202 of the proposedinvestments; and
(c) transmission and distribution sub-projects for which engineeringis still under preparation and government approvalE are pending.This group comprises 20X of the proposed investments.
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3.10 PFC and SEBs have jointly prepared draft technical specificationsand bidding documents for sub-projects under categories (a) and (b). The samedocuments and specifications will be used, with appropriate changes, for sub-projects under category (). Clearances pending for sub-projects in category(b) are expected to be issued over the first year of project implementation.Final engineering together with the corresponding clearances for sub-projectsunder category (c) are scheduled to be completed before the end of 1992. Atnegotiations PFC agreed that only those transmission and distribution sub-projects in categories (b) and (c) that have completed detailed engineeringand all the clearances required before December 31, 1992, would be eligiblefor Bank financing (para. 6.04 (b)).
3.11 Engineering fo, the installation of electrostatic precipitators(ESPs) under the environmental upgrading of plants is currently at the biddingstage for the stations identified at the time of project appraisal. In mostcases, however, the proposed environmental actions are limited to thecontrolling of particulate emissions through the installation of electrostaticprecipitators. Additional engineering is needed to determine and designactions in other areas of environmental concern such as water treatment, ashhandling, dust control, emissions monitoring equipment, etc. At negotiationsPFC agreed that those SEBs participating in this program will conduct, withthe assistance of consultants if needed, a full review of the environmentalconditions of their stations in order to determine, and subsequentlyimplement, any actions required to meet acceptable environmental standards(para. 6.03 (c)). PFC's environmental unit (para. 2.21) will provide guidanceand assistance to the SEBs in identifying consultants when required, and inpreparing and conducting the environmental reviews, described in Annex 3.2.
3.12 The studies for system renovation will be conducted by the SEBswith assistance of consultants as needed. The studies will focus on improvingefficiency of generating plant, but other system components such asdistribution or transmission systems may be included. SEBs wishing financingfor system renovation studies will conduct them under terms of referenceacceptable to the Bank, prepared for each particular study. Annex 3.3 givesthe suggested scope of the system renovation studies and the terms ofreference for the thermal plant renovation studies.
3.13 The nature and scope of the training program and of theinstitutional strengthening of PFC have been identified but further work isneeded to refine this program and to formulate a detailed implementation plan.The training program should include identification of training agencies,schedules and duration of training, detailed curricula, priorities, targetstaff, etc. PFC has prepared terms of reference for the traix, ng program(Annex 3.4), as well as a detailed plan for the first year of its trainingprogram. The longer term training program will be prepared by consultantsunder the United States Agency for International Development (USAID) componentof the project. An implementation plan for the institutional strengtheningprogram is presented in Annex 3.5.
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Project Implementation Arrangements and Schedule
3.14 PFC will have overall responsibility for project implementationand for supervising and coordinating implementation of the project componentsto be carried out by the SEBs. PFC has appraised or will appraise all sub-projects to ensure that they meet the eligibility criteria for financing byPFC (para. 3.15). PFC has furnished the Bank with satisfactory SPARs for fourSEBs (in Andhra Pradesh, Punjab, Madhya Pradesh and Gujarat). In addition, atnegotiations PFC agreed to submit to the Bank, for prior approval, theremaining items intended to be financed with the proceeds of the Bank loanunder each one of the components of the project (para.6.03(d)). PFC willmonitor implementation through a well established supervision system alreadyin place. PFC also will prepare periodic progress reports on the project forconcerned authorities and the Bank, and will serve as the liaison between theBank and government agencies involved in the project. PFC will provideassistance to the SEBs in matters related to project implementation directlyor through consultants and will help the SEBs identify and select firms toassist them during project execution. PFC will lend funds to the SEBs inaccordance with its operational policies for eligible sub-projects and willobtain reimbursement from the Bank in accordance with the loan disbursementarrangements proposed for this project (para. 3.29).
3.15 In order to be eligible for PFC financing under the project, an SEBor SGC must undertake to implement an OFAP agreeable to PFC and the Bank toimprove its operations and finances (para. 2.14). PFC has established generaleligibility criteria for individual sub-projects (para. 2.16). Bank-financedsub-projects, except for the environmental upgrading of power plants andstudies, must meet these criteria. The criteria are as follows:
(a) transmission sub-projects over 220 kV must be part of the longterm least-cost plan for generation and tran;.mission adopted byCEA;
(b) transmission and distribution sub-projects of 132 kV and Lelowmust be part of the state transmission plan;
(c) the technical solutions proposed must be least cost;
(d) sub-projects must be based on a suitable engineering analysis andbe technically justified in terms of: (i) operational analysis(i.e., load flow, short circuit, stability analysis, etc.); (ii)improving of service standards (i.e., sub-projects must meetunserved demand, contribute to improvements in voltage andfrequency, or increase system reliability); (iii) eliminatingsystem constraints to improved use of existing plant (i.e.,deficiencies in transmission capacity); (iii) remedying theoverloading of system components; or (iv) directly contributing toreducing losses in the system;
(e) the solutions proposed must meet acceptable environmental andsocial impact standards;
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(f) all sub-projects must have an economic rate of return of at least12Z; calculated in accordance with the methodology agreed with theBank (Chapter V); and
(g) sub-projects must have all the clearances required by state andfederal agencies.
3.16 Sub-projects for environmental upgrading of power stations willhave to meet acceptable engineering and environmental standards, and must bethe cost-effective means of mitigating environmental effects. In order toencourage utilities to participate in this program, there will not bepreconditions for eligibility for Bank financing under this project component.Any power utility requesting funding for these sub-projects is eligible forBank financing.
3.17 The project comprises a large number of individual sub-projects,each having its own construction schedule. However, the implementation periodfor the entire project has been estimated at about five and a half years,based on representative transmission and distribution projects financed by theBank. Implementation would take place between January 1992 and June 1997.Procurement of most of the materials and equipment needed for the projectwould be carried out between January 1992 and June 1994. The construction oflines and transmission systems and other civil structures related to theproject would be completed over the remaining three years. To allowsufficient time to complete the sub-projects before the proposed loan isclosed, all contracts financed by the Bank will be awarded before June 30,1994 (para. 6.04 (c)). The participating SEBs and SGCs will be responsiblefor implementing individual transmission and distribution sub-projects and forthe environmental upgrading of their power plants. The SEBs also will beresponsible for implementing their institutional development programs andpreparing system renovation studies, with the assistance of consultants. TheOFAPs will establish in each case the task for which consultants would berequired and the deadline for employing the consultants by the SEBs. The SEBswill prepare the terms of reference for each of the studies required with theassistance of PFC. PFC will implement its own technical assistance andtraining programs in accordance with the detailed plans agreed with the Bank.The program for improving billing and collections will be conducted under thedirection of participating SEBs with the assistance of PFC and consultants.Any SEB is eligible to participate in this program.
3.18 PFC will administer the proposed Pre-investment Fund which willoperate as a line of PFC financing with separate accounts. The Fund willprovide financing for technical services and for studies and training in areassuch as preparation and engineering of power projects, institutionaldevelopment, system improvements, etc. To be eligible for financing from theFund, the studies will have to be contracted with independent consulting firmsor individual consultants. Studies conducted by government departments orgovernment agencies or by individual consultants employed with suchorganizations are not eligible for Bank financing. PFC will give the Bank anopportunity to review the objectives, scope, terms of reference and proposedimplementation approach of any studies financed by the Bank or being part ofthe OFAPs, before approving financing for such studies. PFC will establish a
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roster of consultants and consulting firms in different disciplines related tothe project. Interested SEBs will be able to obtain information from thisroster to prepare short lists for particular assignments. The roster willserve as a data bank and the inclusion of a firm or individual consultant inthe roster should not be construed as PFC approval of its qualifications.Annex 3.6 gives details of the objectives, scope of operations andresponsibilities of the Fund.
Environmental and Resettlement Aspects
3.19 The project does not present any major environmental issues ofsignificance or call for major dislocation of population. It contemplatesenvironmental actions in three aspects: (a) it includes direct investments forabout US$100 million to reduce pollution levels and environmental degradationaround a large number of power plants; (b) it also includes studies for systemrenovation comprising studies for upgrading of power stations which include anassessment of their environmental condition. These assessments would be thebasis for future implementation of mitigatory actions (Annex 3.3); and (c) thetransmission and distribution sub-projects under the project will be subjectto environmental assessments when needed and will include the requiredmitigatory actions to protect the environment. Participating SEBs will beasked, as a condition of obtaining Bank financing for a particular sub-project, to meet acceptable environmental and rehabilitation standards whichas a minimum satisfy Bank requirements for this type of projects. Atnegotiations PFC agreed to include a provision in the on-lending agreementsbetween PFC and its clients that this requirement will be met (para.6.03(e)).
3.20 About 15 to 20 power plants are expected to participate in theprogram for environmental rehabilitation. In order to ensure that theenvironmental assessments of the power plants and that the proposed actionsmeet acceptable standards, at negotiations PFC agreed to give the Bank theopportunity to comment on the first power plant environmental review preparedby each participating SEB prior to PFC funding approval (paras. 3.11 and 6.03(f)). The Bank would comment selectively on other environmental reviews.Goods, works, and technical services required to implement the actionsrecommended by the environmental review will be eligible for Bank financingunder the project.
3.21 Before being eligible for Bank financing, all transmission linesand distribution sub-projects have to be cleared by the Department ofEnvironment, Forests and Wildlife of the GOI. In accordance with GOIregulations, transmission lines will be routed to avoid encroachment onprotected forest and wild life protected zones, or to minimize encroachment onthese areas when no alternative routings are possible. In addition, as acondition of obtaining forest clearances, SEBs are required to propose andimplement compensatory afforestation programs. GOI regulations require theSEBs to plant ten trees for each tree felled for line construction.Government land or degraded forests are to be used in establishing newplantations in order to minimize acquisition of private lands. Constructionspecifications for the project will include provisions for contractors torestore construction areas to environmentally acceptable conditions.Construction access tracks in protected areas will be allowed to revert to
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forest and will be rendered unusable to avoid area encroachment. Inspectionand routine maintenance of lines in protected areas would be completed onfoot. No land will be acquired for the construction of lines because onlyright-of-way is required. The construction of distribution sub-projects willbe confined to urban areas. Most of the proposed sub-projects involveimprovements of existing facilities, so no new land will be required. In someinstances, small urban plots may need to be acquired for expansions ofdistribution substations. Any population that may be dislocated by th-substation will be duly resettled and rehabilitated.
3.22 PFC, through its Environmental Unit (para. 2.21), will assist theSEBs in: (a) determining the sub-projects that require an environmentalassessment; (b) preparing the assessments; and (c) implementing any actionsrecommended in the assessments. PFC also will moritor implementation ofcorrective actions.
Project Costs
3.23 The estimated project cost is about US$640 million, includingphysical and price contirngencies and about US$84 million in taxes and duties.Direct and indirect foreign exchange costs account for US$220 million, or 34Zof the total cost. Interest during construction adds another US$72 million tothe financing required. Project costs are based on December 1989 prices forthe procurement of goods and works similar to the ones contemplated under theproject. The prices have been updated to March 1991. Quantities were derivedfrom detailed designs, where available, and from bidding level or feasibilitylevel designs. The Sub-projects Under Preparation component includes sub-projects for which engineering has been completed but which still requireapprovals by government agencies and sub-projects for which engineering isstill in process (para. 3.09). Consulting and training services for thetechnical assistance programs for PFC and the SEBs have been estimated at 500consultants-month, based on the tentative scope of work agreed with PFC andestimates prepared by USAID consultants. Another 500 consultant-months havebeen estimated for system renovation and environmental upgrading studies. Anallowance of 5% has been made for project engineering and administration.Physical contingencies of 102 have been included. Price contingencies, whichrepresent 31Z of the base cost, are based on inflation rates of 7.8% for 1990,10.1Z for 1991, 11.0% for 1992, 7.0Z for 1993, 6.5 for 1994, 6.0Z for 1995,5.52 for 1996 and thereafter for local costs; and 3.9Z for foreign costs.Interest during construction was calculated assuming interest rates of 7.73%p.a. for the Bank loan and for the loans from cofinanciers and 12.5X p.a. forPFC's loans to the SEBs up to 1991-92 and 15% afterwards. A summary ofproject costs is presented in Table 3.1, and further details are provided inAnnex 3.7.
Interest During Construction:World Bank 546 683 1,128 19 20 40Others 907 62 969 30 2 32
TOTAL FINANCING REQUIRED 9,242 4,696 13,937 470 242 712
Note: Totals may not add up due to rounding.
Project Financing
3.24 The proposed Bank financing for this project is US$265 million,equivalent to about 37Z of the total financing requirements, or about 42Z netof duties and taxes. USAID is prepared to finance about US$14 million for thetechnical assistance program envisaged under the project4. PFC would financeabout US$291 million, equivalent to 41Z of the total financing requirements,and the SEBs and beneficiary states would finance the remaining US$142million, equivalent to 202 of financing requirements. The Bank would notfinance IDC. The project financing plan is presented in Table 3.2.
4 A grant agreement was signed by PFC with USAID in June 1991, theeffectiveness of which is conditional upon the approval by IBRD or the AsianDevelopment Bank (ADB) of a loan to PFC (refer to para. 4.13).
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Table 3.2: Project Financing Plan(US$ Million Equivalent)
3.25 The Bank loan would be made to GOI and GOI has agreed to on-lendthe proceeds to PFC, with a repayment period of 15 years, including threeyears grace and an interest rate of not less than 11.5Z p.a. (para. 6.01).GOI will bear the foreign exchange and interest rate risks. These are thestandard on-lending terms used by GOI to transfer borrowed funds to financialintermediaries. PFC would on-lend the proceeds of the Bank loan, togetherwith its own resources, to selected SEBs, at its standard lending termsreferred to in paragraph 4.14, which include an interest rate which is revisedfrom time to time to ensure that it reflects PFC's cost of borrowing and allowPFC to earn a return on its equity that is positive in real terms. These on-lending terms reflect four important factors. First, neither PFC nor the SEBsare able to bear the foreign exchange risk at this point. Second, PFC'sinterest rates should remain competitive with those of other domesticfinancing sources. Third, the interest rate charged to the SEBs should be inline with the rates agreed under the Bank's direct operations with SEBs.Fourth, it would not be advisable to establish lending terms for the Bank'sfunds different from those PFC applies to its other operations. The generalissue of interest rate structure in India is currently under discussion withGOI. It is expected that any policy changes resulting from these discussionsalso will be reflected in the power sector.
Procurement
3.26 All equipment and materials financed by the Bank costing theequivalent of US$200,000 or more will be procured under ICB procedures. Bank-financed specialized equipment such &s laboratory instruments and equipment,specialized engineering office equipment, computer hardware and software,instruments for monitoring and testing of power system components, up to anaggregate cost of US$5 million, may be procured through international or localshopping procedures acceptable to the Bank. Other materials, equipment,costing US$200,000 or less per contract will be procured under LocalCompetitive Bidding (LCB) procedures acceptable to the Bank. The nature andsize of the civil works, mostly scattered erection of equipment, does notjustify International Competitive Bidding (ICB). Civil works will thereforebe procured under LCB procedures acceptable to the Bank. Foreign suppliersand contractors will not be precluded from participating in LCB.
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3.27 The SEBs have their own crews for installing equipment,particularly equipment for distribution systems. Therefore, the SEBs plan toerect part of the equipment by force account, in cases involving small worksscattered throughout the States for which public bidding is not practical orJustified. The Bank will not finance force account works. Localmanufacturers, competing under ICB, will have a 152 preference margin or theapplicable duty, whichever is lower. Local firms are expected to becompetitive in equipment supply tenders. Consultants financed by the Bankwill be employed in accordance with the Bank's Guidelines for Employment ofConsultants.
3.28 All contracts for the supply of goods financed by the Bank with anestimated cost exceeding US$500,000 equivalent will be subjeLt to prior reviewby the Bank. Other contracts will be subject to ex-post review. About 70contract packages for goods will be subject to prior Bank review, representingabout 802 of total project cost. In order to simplify the Bank's review ofdocuments, the beneficiary SEBs will be requested to agree to use standardbidding documents for all Bank-financed contracts. A summary of procurementarrangements is presented in Table 3.3 and detailed arrangements are presentedin Annex 3.8.
Table 3.3: Summary of Procurement Arrangements a/(T5S$ Million)
ICB LCB Other N.A. Total
L,id 16.2 16.2
Civil Works 72.3 17.4 c/ 89.7(10.0) (10.0)
Materials and Equipment 424.1 47.5 5.6 477.2(233.0) (5.0) (238.0)
Training and Consulting Services 36.2 36.2(17.0) (17.0)
Engineering and Administration 20.7 20.7
Total 424.1 119.8 59.2 36.9 640.0(233.0) (10.0) (22.0) (265.0)
a/ Amounts include taxes and duties (US$84 million), and figures betweenbrackets are the Bank-financed portion.b/ Land acquisition, administration overheads and items not subject tocommercial procurement.c/ Works implemented departmentally.
Disbursements
3.29 Disbursements of Bank funds will be made against: (a) 100? offoreign expenditures, 1002 ex-factory expenditure and 75? of other locally
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procured equipment and materials for eligible sub-projects for transmission,distribution, system renovation, and environmental upgrading of power plants;(b) 1002 of consulting and training services for the SEBs and PFC; (c) 100% offoreign expenditures, 1002 of local ex-factory expenditures and 751 of otherlocally procured hardware, software and equipment for institutionaldevelopment of PFC and the SEBs and pre-investment activities; and (d) 100? ofexpenditures for consulting and training services under the Pre-investmentFund. Disbursements are to be fully documented. To facilitate disbursementsGOI will establish a special account with an authorized allocation of US$14million. GOI agreed to have this Special Account audited by independentauditors, and to furnish to the Bank, not later than six months after the endof each fiscal year, a report of said auditors (para. 6.02 (a)). Annex 3.9shows the schedule of estimated disbursements for Bank funds. The schedulefollows the one used for typical transmission and distribution projectsfinanced by the Bank. The closing date for the loan would be December 31,1997.
Project Monitoring
3.30 PFC is to furnish the Bank with progress reports on the status ofphysical works, consulting services, costs, disbursements, and administrativearrangements for the project within 45 days of the end of each quarter. Thereports should contain special sections reporting on: (a) the compliance withagreements by all PFC borrowers and on the compliance with OFAPs by the SEBsreceiving Bank financing, and (b) on the progress being achieved in theimplementation of the environmental components of the project with particularreference to the activities of the PFC Environmental Unit. PFC also is toreport on the progress made in implementing its own institutional developmentprogram and on any exceptions made to the application of its OperationalPolicy Statement (para. 2.09). The first progress report should be furnishedto the Bank no later than May 15, 1992 and should cover initial projectactivities up to the quarter ending March 31, 1992. In addition, PFC willfurnish the Bank with annual reports on its financial results and on itsadministrative and managerial situation.
Project Risks
3.31 The project does not pose extraordinary technical risks becausethe type of physical works involved is routinely implemented by utilities inIndia. There are, however, risks related to the institutional, managerial,and financial aspects of the project. On the institutional side, there is arisk that the participating SEBs will not meet the expected improvements setout in the OFAPs or that thp pace of reform will be slower than planned. Thisrisk will be minimized by establishing realistic actions and targets in theOFAPs, and by providing financial and technical resources to the SEBs tofacilitate implementation of the OFAPs. On the managerial side, there is arisk of protracted decision making by the SEBs, particularly in relation toprocurement. This, combined with the extensive, detailed reviews ofprocurement actions typically carried out by GOI agencies for Bank-financedprojects, may slow the pace of implementation. Similarly, project delays mayoccur because of the long time it takes for the implementing agencies toobtain GOI authorizations for payments in foreign currency. To minimize thisrisk GOI recently streamlined the procedures to be followed to expedite and
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simplify clearances of procurement actions and releases of foreign exchangefor Bank-financed procurement. The procedures are expected to ensure thatthese clearances and permits are granted within a reasonable amount of time.Delays also may occur in obtaining administrative clearances for sub-projectsunder processing or preparation (para. 3.09). These delays may result in theSEBs not being able to utilize the entire loan before its closing date. Tokeep this risk at an acceptably low level, the size of the loan has beendetermined after conservatively assuming that only 50% of the sub-projectsunder processing would be cleared in time to become eligible for Bankfinancing.
3.32 There are two risks related to PFC's performance. The first isthat PTC could face collection problems because of the poor financialperformance of its customers. This risk would be kept at an acceptably lowlevel if PFC requires, as a condition of lending to any SEB or SGC, that itestablish a set of suitable guarantees, as described in para. 4.16. Thesecond risk is that PFC might fail to become an effective promoter ofinstitutional improvements at the SEB/SGC level. This could occur if PFC doesnot have the institutional resolve -- and GOI's support -- to attach adequateconditionality to its lending operations. This also may occur if politicalpressures prevent PFC from enforcing said conditionality or its OPS. Tomanage this eventuality, agreements have been reached to ensure that PFC'spolicies and procedures are consistent with its developmental objectives(paras. 4.16, 4.20 and 4.21).
IV. FINANCE
Background
4.01 During the short period it has been in operations, and in thecontext of a strategy to establish its presence in the power sector in India,PFC has managed to implement a relatively large lending program. In thefuture it plans to continue concentrating its efforts in trying to promoteimprovements in the operational efficiency and financial performance of stateowned power utilities. Most of the SEBs are financially weak and,accordingly, constitute a very risky market. Recognizing this situation,PFC's Operational Policy Statement (OPS) was carefully framed to allow PFC todischarge the responsibility assigned to it, while at the same time preservingits financial integrity. In view of the uncertainties about the size of PFC'slending operations, as well as the blend of financial instruments it will beallowed to use and other variables, the assessment of PFC's future financialperformance was made assuming a base case and undertaking a sensitivityanalysis of PFC's performance to changes in those variables. The results showthat PFC's performance under the different scenarios is adequate, provided itcan enforce its collections policy.
PFC's Market
4.02 Although PFC is allowed to lend to any power utility in India,including private utilities, in the medium term it will concentrate most ofits efforts on the SEBs and SGCs, which are recognized as the weakest segmentof the power sector. In the past, despite the fact that investment targets
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are normally set lower than what is required to eliminate the gap betweendemand and supply of electricity, funds made available to state utilities haveconsistently fallen short of the requirements of their expansion programs.This shortfall in funding has resulted in delays in commissioning projectsand, consequently, in cost ovfrruns. The problem of inadequate funding hasseveral causes. First, the methodology followed in preparing the Five-yearPlan underestimates actual funding requirements because Plan estimates: (a) donot take into consideration price escalation during the period ofimplementation; and (b) include optimistic assumptions of SEBs' expectedcontribution to investment from internally generated funds, since no provisionis made for working capital requirements. Second, Plan funds originallyintended for the power sector often are diverted by the states to othersectors.
4.03 As a group, the SEBs have not performed well financially. Duringthe period 1986-90 the SEBs made no contribution to the financing of theirinvestment and had a negative internal cash generation conservativelyestimated at about Rs 61 billion (about US$4.1 billion). The utilities earnedan average rate of return on historically valued net fixed assets, afterinterest, of minus 12X, which allowed them to meet only one-third of theirannual debt service requirements. Annex 4.1 presents a summary of thisperformance for the years 1986-90.
4.04 Since the SEBs have no ability to contribute to the financing oftheir investment programs, following the states' traditional practice offinancing their SEBs solely through debt, state-owned utilities had to borrowheavily to cover the cash deficit -sntioned above, as well as to finance theirif.vestment. About two-thirds of their borrowing come from the states. Theproportionate share of the states in financing the SEBs has been graduallydropping from 70Z in 197'-75 to 65Z at the end of 1986-87. This trend isexpected to continue. The state utilit:es are allowed to issue 20-year, 11.5tbonds which are guaranteed by their respective state governments. These bondsare purchased by the financial institutions for the purposes of theirstatutory reserve requirements, so the market is quite limited.
4.05 In addition to borrowing from the State, SEBs/SGCs obtain loansfrom the Life Insurance Corporation (LIC), the Rural ElectrificationCorporation (REC) and the long-term financial intermediaries like theIndustrial Credit and Investment Corporation of India (ICICI) and theIndustrial Development Bank of India (IDBI). LIC loans carry an interest rateof 13% p.a. and are guaranteed through the mortgage of assets. REC loanscarry an interest rate of 7.52 to 13% p.a. and ICICI and IDBI are lending at14? p.a. All of these loans mature in seven to ten years.
SEBs' Future Funding Requirements
4.06 Power investment estimates for the Eighth Five-Year Plan (now1993-97) are still under discussion. A figure of Rs 500 billion is beingindicated. CEA estimates that 60? of the power sector investment during theEighth Plan could go to the State sector and the rest to the Center. Theestimated amount of Rs 300 billion for the State Sector would represent anincrease of 30? over the Rs 230 billion under the Seventh Plan.
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4.07 It appears that GOI expects PFC funding of the states'srequirements in the power sector to gradually grow to be able to meet about25X to 302 by the end of the Eighth Plan. There is consensus within GOI onthe need for PFC to reach a volume of operations large enough to provide itwith the leverage required to effectively promote improvements in the states'power utilities. On the basis of the figures discussed in para. 4.06, thisvolume of lending operations translates into between Rs 75 billion and Rs 90billion, in addition to the budget funds allocated to the states through theGadgil formula.
PFC's Sources of Financing
4.08 PFC has three major sources of financing available to it: (a)domestic market borrowings; (b) equity contributions; and (c) externalborrowing. Each of them is discussed briefly below.
4.09 Domestic market borrowings. PFC is expected to rely heavily onborrowings from the domestic market. It is important then to have an idea ofthe size of the bond market for Government owned enterprises in India. Table4.1 presents a breakdown of public enterprise borrowings from 1986-87 to 1989-90.
Table 4.1: Market Borrowings by Public Enterprises, 1987-90(Rs billion)
4.10 GOI maintains close control over public enterprise borrowings,establishing the allocation for each specific enterprise, the type ofinstrument to be used, and the timing of the issue. Currently three types ofdomestic bonds are available to the public sector:
4.11 Commercial banks and other financial institutions buy most of theissues of 11.5Z bonds to satisfy statutory requirements, and they tend to holdthem to maturity. They also buy the issues of 95 bonds, which in turn, afterthree months, are offered to the general public over the counter. By the endof 1990-91, PFC had successfully floated four issues of ten-year, 9? bonds,two for Rs 1 billion each and two for Rs 6 billion. It has also floated threeissues of 20-year, 11.5Z bonds for a total of Rs 600 million. Due to theadverse budgetary impact of the tax free bonds, it is expected that in thefuture PFC will mostly rely on taxable bonds for its domestic financing.
4.12 Equity Contributions. PFC has an authorized capital of Rs 10billion, of which Rs 8.5 billion was paid at the end of FY91. Increases inthe authorized capital are normally agreed with GOI for the period of theFive-year Plan and payments are made annually. The current level ofcapitalization is becoming a constraint that may limit PFC's volume ofoperations. Under the Eighth Plan PFC's capital is expected to be increased.
4.13 External Borrowing. PFC is expected to play a key role inchanneling a substantial portion of the loans from multilateral institutionsand bilateral sources to the power sector. In FY90 PFC received a FF 304million (US$60 million) credit from France to finance a Diesel Plant inKarnataka and in FY91 a US$110 million commercial co-financing loan from ADBunder its Complementary Financing Scheme, similar to the Bank's B-Loan scheme,was channeled through PFC. In addition, a grant was received from ODA toassist in the development of appraisal of urban distribution systems. Severalother operations are in different stages of preparation, including: (a) onefrom ADB for US$300 million with a scope similar to the proposed project andscheduled for approval in February, 1992; (b) a DM 66 million assistance fromKFW; (c) a pound 50 million grant from the United Kingdom for an EnergyEfficiency Project; and (d) a grant, NOK 1 million, from Norway forinstitutional development. In order to supplement the foreign exchange fundsmobilised from multilateral and bilateral sources, in a few years, theCorporation may also attempt to access the international capital market. Thetiming and scope of that attempt will depend primarily on the speed with whichIndia will restore its creditworthiness. The Bank may then be able to play acatalytic role with respect to the Corporation's borrowings from the foreignprivate sources.
PFC's Lending Terms
4.14 PFC's current lending terms are shown in Table 4.2. AlthoughPFC's current lending rate is 12.52, the OPS establishes that the lending rateis adjustable to reflect the cost of funds to the Corporation and to ensurethat PFC earns a return on its equity which is positive in real terms (para.4.16 (d)). PFC is currently reviewing its lending rate and it is expectedthat it will be increased to about 162 to 17Z p.a. Loan maturities offered byPFC to its clients are prudently matched with the maturities of PFC's ownborrowings. Although the present repayment terms may be relatively shortgiven the gestation period of some SEB projects, in the long-run, the averagematurity of PFC's liabilities will likely increase as PFC is able to gainaccess to longer-term borrowings.
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Table 4.2: PFC's Lending Terms
Total Grace InterestCategory Maturity Period Rate p.a.
Renovation & Modernization 7 years 1 year 12.5Capacitors 3 years none 12.5Transmission & Distribution 7 years 2 years 12.5Generation 7 years 2 years 12.5
PFC's Historical Performance
4.15 Although PFC's lending operations began in early 1988, in fact,most of 1987-88 operations took place in the last few weeks of the fiscalyear. In order to establish its presence as a source of financing for thepower sector, during its first years of operations PFC made loans primarily tofacilitate the completion of projects underway. In this process, although thedialogue on ways to improve the efficiency of the SEBs was initiated, noconditionality was attached to the loans. As shown in Annex 2.4, up to March31, 1991, PFC had approved loans amounting to Rs 33.6 billion. This rathersubstantial volume of operations for a new organization was financed throughGOI's equity contributions and bond issues, mostly of the 9Z, 10-yearcategory. PFC has made a profit every year since operations started, althoughthe return on its net worth was modest. At the end of 1990-91 PFC had adebt:equity ratio of 1.7:1. The debt service coverage has been adequate.Annex 4.2 presents financial statements for PFC for 1987-88 through 1990-91 aswell as a projection of its operations. Annex 4.3 gives the assumptionsfollowed in the financial projections. Table 4.3 provides some highlightsfrom these statements.
Table 4.3 Highlights of PFC's Historical Performance 1987-88/1990-91(Rs Million)
1987-88 1988-89 1989-90 1990-91
Equity contribution 1,000 2,000 3,000 2,201Bonds issued 1,000 6,200 1,200 6,200Loan disbursement 1,011 4,9;8 6,976 8,968Operating Income 57 601 1,156 2,306Net Income 4 148 304 810Debt service coverage 2.2 .4 1.5 2.3Return on net worth Z 0.3 4.3 4.5 8.3Debt/equity ratio 0.8 2.2 1.4 1.7
PFC's Financial Policies
4.16 PFC has incorporated in its OPS (Annex 2.2) a set of parametersdesigned to ensure a minimum level of financial and operating performance.The following are some of the elements in the OPS which are expected toenhance PFC's financial performance:
(a) General Operational Parameters: PFC will endeavor to: (i) operateas a commercial entity; (ii) maintain a healthy portfolio; and
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(iii) build a strong financial base to enable it to borrow onattractive terms.
(b) Solvency: to preserve its capital structure, PFC has set a maximumdebt:equity ratio of 4sl. As PFC becomes better established, thisratio will be revised.
(c) Liquidity: (i) PFC's operations will be managed so as to maintaina debt service coverage ratio not lower than 1.2; and (ii) PFCwill ensure the availability of liquid assets equal to not lessthan the equivalent of the anticipated disbursements for thefollowing three months.
(d) Profitability: PFC's lending rates will reflect its borrowing andoperational costs, plus a margin to ensure its financialviability, earning an adequate return on its capital (positive inreal terms).
(e) Foreign Exchange Risk: PFC will not bear the interest rate orforeign exchange risks of its operations.
(f) Term Transformation: PFC will determine the average repaymentperiods for its loans so as to ensure that the average maturity ofits assets does not exceed that of its liabilities.
(g) Repayment Guarantees and Exposure Limits: In light of the weakfinancial performance of PFC's clients, as condition ofeffectiveness of each one of PFC's loans, either a State guaranteeor a commercial bank guarantee will be obtained. As indicatedbelow, these guarantees could be enhanced by the SEBs establishingan escrow account in favor of PFC.6 Furthermore, since it is nothealthy for PFC to concentrate an excessive portion of its loansin any single client, PFC will not lend or grant any guarantee toany borrower if as a result of such loan or guarantee the combinedamount of loans and guarantees outstanding with that borrowerexceeds certain limits. Table 4.4 presents a matrix that combinestwo parameters, creditworthiness of the client and the type ofguarantees offered, to determine the credit risk weights to beused in calculating the maximum levels of exposure per client as apercentage of PFC's net worth. These credit risk weights followthe concept of credit conversion factors adopted by the BasleCommittee on Banking Regulations, also known as the "BasleConcordat". Table 4.4 includes a sliding scale that in four yearswould bring PFC's exposure limits tc levels consistent with thestandards normally applied to development finance institutions.This sliding scale has been designed to allow PFC enough time todevelop an adequate equity base. For the purposes of establishingthe credit rating o a client, in the calculation of the debt
The Escrow Account system provides PFC a first claim on the cashcollections of the utilities. In the event the utility fails to service itsdebt, those funds are transferred to PFC.
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service coverage the following parameters will be followed: (i)borrowers would be allowed to exclude the servicing of the loansfrom its State Government, provided the Governmenz commits inwriting not to ask the borrower for payment of any interest andprincipal on its loans while any6 loan or guarantee received fromP'C remains outstanding and due; and (ii) rural electrificationsubsidies not received by the SEBs should be excluded fromrevenues. In analyzing the credit worthiness of its clients, PFCwill give due regard to the client's debt servicing record withother lenders.
Table 4.4: Matrix of Risk Exposure and Guarantees
On-Balance Sheet Assets and Off-Balance Sheet Items
(a) Credit Rating A: Debt Service Coverage in excess of 1.3Credit Rating B: Debt Service Coverage between 1.0 and 1.3Credit Rating C: Debt Service Coverage below 1.0.
(b) STG: State Government GuaranteeBG: Bank GuaranteeEA: Escrow Account
(c) Risk Weight is the factor by which the loans outstandingthat qualify under each level should be multiplied tocalculate the exposure.7
6 To this effect, PFC will request each State to confirm the priorityclaim given by the Electricity Act to PFC's loans over loans granted by theState.
7 For example, a Rs 100 loan ranked as Level 1 will be computed asequivalent to Rs 50 (Rs OO x 0.5) for calculating the risk exposure.
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Maximum Level of Exposure per client, as follows:1991-92: 352 of PFC's Net Worth1992-93: 302 of PFC's Net Worth1993-94: 251 of PFC's Net Worth1994-95 and thereafter: 20% of PFC's Net Worth
(subject to review before the end of 1993-94 todetermine its adequacy).
(h) Non-rescheduling of Loans: Because of the detrimental impact thatre-scheduling could have on the financial discipline that PFC istrying to promote in the sector, PFC has stated that it will notreschedule its loans. It considers that rescheduling couldrender ineffective its loan guarantee system and ultimately leadto serious financial difficulties. However, under specialcircumstances, if the Corporation considers it financiallyprudent, PFC may provide financial restructuring packages to itsborrowers, supported by appropriate conditionality.
(i) Adjustability of PFC's Lending Rate: Under its current policy,when PFC's cost of borrowing increases, only the interest on theundisbursed portion of loans may be adjusted. This policy shouldnot present difficulties as long as PFC borrows only at fixedrates, as is currently the case. However, as PFC beginsborrowing at variable rates, it will include provisions in itslending documents to allow for adjustability of its lending rateon both the disbursed and undisbursed portions of its loans. PFChas retained a consultant to determine the methodology forimplementing this policy. A report is expected by December 31,1991 and a copy of the report will be furnished to the Bank forcomments.
PrC's Future Financial Performance
4.17 PFC's ability to cover a substantial portion of the outstandingrequirements of the state power sector, as discussed in para. 4.07, willdepend on several variables, not all of them under PFC's control. On the onehand, PFC's financing capacity will depend on the volume of funds madeavailable to it by GOI, both in the form of equity contributions and bygranting PFC access to the domestic market and to external lenders. On theother hand, even though the financial needs of the sector are evident, thereis some degree of uncertainty in regard to the attractiveness of PFC'sfinancing package, including the introduction, for the first time in India, ofconditionality attached to loans as well as the capability of SEBs and SGCs tomeet PFC's eligibility criteria (para. 2.16) and PFC's risk exposure limits.
4.18 Under these circumstances, PFC's future financial performance wasevaluated using different assumptions of volume of operations, borrowing andlending maturities, cost of financing, lending terms, and collectionperformance. The results of this analysis confirm PFC's financial viabilityunder the conditions evaluated, and its ability to meet the financial targetsset in the OPS, provided it is able to collect from its borrowers on time.This underscores the need for PFC to adhere to its OPS and particularly to a
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well designed and executed system of guarantees, as discussed above. Asummary of some of the alternatives tested is presented in Annex 4.4.
4.19 The base case, which assumes a level of operations of Rs 75.3billion, was analyzed to determine PFC's performance under existing fiscalconstraints. To meet the financing requirements of the base case, during1991-95 PPC will need to float bonds for Rs 39.6 billion, or 49Z of its totalfunding requirements. It is assumed that from 1991-92 onwards PFC will relymostly on 13Z-7 year bonds and that accordingly, following the provision ofits OPS, it will adjust its lending rate to 15Z. This volume of bonds seemsrealistic as the amounts floated each year are assumed to gradually increasefrom the level attained historically. However, as mentioned above, it is GOTwho decides on the amount, type of bond and the timing of issue on a case-by-case basis. This practice makes it almost impossible for PFC to do properfinancial planning and adds a degree of uncertainty and risk to PFC'soperations. To try to reduce this risk, during negotiations GOI agreed toprovide to PFC, every year before March 31, a firm commitment on the amountPFC will be authorized to raise in the domestic bond market in the followingfinancial year, the type of bonds and approximate dates of these issues(para. 6.02 (b)). Under the conditions assumed in the base case, PFC'sfinances remain satisfactory, as shown in Annex 4.2 and summarized in Table4.5, with a debt service coverage in excess of 2.3 and a return on net worthapproaching 14Z at the end of the five-year period.
Table 4.5 Highlights of PFC's Future Performance, 1991-1995
Debt Service Coverage 2.3 2.6 2.5 2.7 3.0Return on Net Worth 8.3 10.4 9.5 12.7 14.3Debt/Equity Ratio 1.7 1.8 1.9 1.9 1.9
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Conditionality
4.20 To ensure that PFC operates according to the standards agreedunder the OPS, during negotiations PFC agreed to implement the OPS and not tomodify it in a material manner without prior concurrence from the Bank (para.6.03 (a)). In order to reinforce this covenant, at negotiatins PFC wasinformed that failure by PFC to adhere to any of the following key elements ofthe OPS will be construed by the Bank as a serious matter which would affectthe institutional capacity and financial viability of PFC:
(a) the enforcement of suitable repayment guarantees;(b) observance of the risk exposure limits;(c) enforcement of the non-rescheduling clause;(d) observance of the lending criteria; and(e) adjustment of PFC's lending rate to reflect its borrowing cost.
4.21 7o monitor PFC's performance, during negotiations PPC agreed topresent t, the Bank for comments every year, the following reports: (a) byMarch 31 evidence of GOI authorization to PFC to issue bonds in the followingyear; C( by January 31, estimated financial performance for the current andnext y .rs, comparing them to the parameters set in the OPS; and (c) by June30, projected financial statements (income statement, sources and applicationsof funds and balance sheets) for the next following five years, showing howthe OPS parameters will be attained (para. 6.04 (d)).
V. ECONOMIC ANALYSIS AND PROJECT JUSTIFICATION
5.01 The primary justification for the proposed project is theincreased electricity demand to be served by the SEBs through the additionaltransmission and distribution capacities to be installed. Aside fromfacilitating the evacuation of power from existing and expanded generatingplants, the project will result in reduction of line losses, improved systemvoltages, and enhanced reliability of the SEBs' service. To assess theeconomic viability of the various transmission, urban distribution andenvironmental upgrading schemes proposed by the selected SEBs, the schemeswere appraised by PFC as to whether:
a) they are part of the least cost powersystem expansion progrvn at the regionaland state levels; and
b) they can individually yield adequate neteconomic benefits.
5.02 The scope of economic analyses involved in the appraisal of thevarious SEB projects is illustrated in Annex 5.1 in which the economicevaluation of the transmission and distribution projects proposed by thePunjab State Electricity Board is presented in detail.
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Least Cost Analysis
5.03 The SEBs have carried out internal staff studies to arrive atthe least cost options of attaining the operational objectives targeted bytheir proposed projects. These analyses were in terms of detailed load flowstudies which identified the weak segments of the network including existingand potential circuit and transformer overloadings. Alternatives satisfyingsystem reliability and voltage design criteria have been examined at variousstages of planning to arrive at the best option based on technical and costconsiderations.
5.04 PFC has reviewed the alternative options considered by the SEBs.In a number of cases, there were no reasonable alternatives to the proposedschemes, for example, the stringing of a second circuit on transmission towersalready erected and lines traversing the shortest direct route betweendesignated loading points. Moreover, the SEBs have generally standardizedtransmission systems at 220 kV and conductor ratings at 100 MVA per circuit,such that consideration of alternative voltages have largely been limited tocases of upgrading from 132 kV to 220 kV. For sub-transmission systems, thevoltages and type of substations depend on various factors, such as loaddensity and network layout. Transformer size and ratings have also beenstandardized; the most common voltage ratings of the secondary sub-transmission systems are 132/110/66/33 kV, and for primary distributionsystem, 11, 22 or 6.6 kV.
5.05 The 220 kV works itself have been cleared by CEA in accordancewith its transmission planning criteria. These criteria require transmissionsystems to be planned based on regional self-sufficiency, capable oftransmitting the respective state's allocation from the Central sector, andable to withstand specified levels of outages without having to resort to loadshedding or rescheduling of plant generation, i.e. outages of two circuits of220 kV system, or of one circuit of 400 kV or higher voltage system, or of onepole of HVDC bipole, or of an EHV transformer.
5.06 In the case of distribution schemes, whenever possible, low costalternatives have been considered by the SEBs; for example, outdoorsubstations over indoor, overhead lines over underground cables, etc. Sincethe schemes cover mainly critical works for immediate relief to the systemsand are to meet the load growth up to the next five years only, considerationof alternative voltages was limited. The procedure adopted by the SEBs hasbeen to select the reinforcement and renovation works in the distributionsystem which satisfy design criteria mutually agreed with PFC. These criteriacover statutory requirements of supply (e.g., voltage regulation), reliabilitynorms, flexibility for future expansion and other technical considerations.
5.07 With respect to environmental upgrading activities, PFC reviewedand confirmed that the schemes represent the least cost mode of mitigating thepollution effects of power operation.
Program Analysis
5.08 Inasmuch as the proposed 220 kV transmission schemes are plannedin conjunction with the regional power expansion programs, the economic
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viability of these programs have been evaluated for regions where the selectedSEB operations are located. For this purpose, the investments time-slice forthe period 1990-2000 has been analyzed for the Northern Region grid inconnection with the projects proposed by Punjab SEB, for the Western Regionfor projects of Gujarat SEB and Madhya Pradesh SEB, for the Southern Regionfor projects of Andhra Pradesh, and for other regions where proposed SEBprojects may be considered for funding by PFC.
5.09 In addition to reviewing the regional system expansion plans,the selected state's respective power investment program were also evaluatedto ensure that the proposed distribution schemes are integrated into the SEB'sover-all system plan. The economic returns from said plans were calculatedfor the investment time-slice 1990-1995 corresponding to the constructionperiod of the distribution systems.
Project Analysis
5.10 To assess whether each of the many sub-project proposals yieldsufficient economic returns and to determine which ones should receivepriority funding, the proposals were further analyzed as to their project netbenefits and economic returns, and ranked accordingly. For urban distributionimprovement proposals, each scheme was appraised as a discrete and independentproject. On the other hand, in the case of transmission projects, each of theproposed schemes were reviewed as to its operational objectives in the contextof the SEB's grid operations and agreed planning criteria. Schemes affectingthe same sub-systems were analyzed together and the load flows for each sub-system affected under varying supply-demand conditions with and without theproposed facilities were assessed to arrive at the value of benefits. To theextent that lack of detailed load flow calculations from the SEBs preventedsuch sub-system analysis, an approximation of the relative contribution to theover-all grid of specific line components was estimated and an investmentyield corresponding to each line was derived. These estimates were based onthe projected load flow and loss reduction profile of each circuit asindicated by load flow analyses of the grid for the scheduled year of linecommissionings.
Costs
5.11 In evaluating the economic costs of the system expansionprograms for the regions and states, the capital investments for generation,transmission and distribution facilities were estimated for the period 1990-2000 and 1990-1995, respectively. The operating and maintenance expenseprofiles were developed based on the forecast system operation as estimatedunder CEA's or the SEB's generation planning. All financial costs wereconverted to economic costs applying the standard conversion factor (SCF) of0.8 on local costs and by removing effects of taxes, duties and subsidies. Inview of its relatively poor quality and low heating value, local coal supplyis considered non-tradeable and its economic price is estimated based on costat pit-head plus transport expenses to thermal plants involved. The economicprice of fuel oil used by thermal stations for plant firing is based on theborder price plus local handling and delivery costs and is estimated at Rs 2.5to 2.7 per liter.
- 43 -
5.12 Similarly, in analyzing project costs, the capital and operatingcosts associated with proposed transmission and distribution schemes wereconsidered. In addition, the average incremental cost (AIC) of generation anddistribution were included in the evaluation of transmission schemes, and theAIC of generation and transmission were imputed in the assessment ofdistribution projects, so as to arrive at the full economic cost ofelectricity supply to final end-users.
Benefits
5.13 Given the current situation in India of excess power demand oversupply, it is expected that the economic benefits to be derived frou. thesystem expansion programs at the regional and state levels would consistlargely of increases in electricity consumption. Additional benefitsrepresenting operational cost savings due to displacement of less efficientthermal generation, reduced system losses, reduced frequency and length ofsystem outages are also projected.
5.14 Similarly, benefits from the specific transmission anddistribution improvements proposed by the SEBs are in the form of increasedpower delivery primarily due to additional line and transformer capacity forevacuating power from existing and forthcoming generating stations. Increasedservice availability or operational cost savings due to reduced energy andtransformation losses are also expected. In addition, the projects will leadto enhanced system reliability due to improvements in voltage levels, meteringworks, maintenance and fault attendance systems.
5.15 The additional electricity consumption afforded by the regionaland state power expansion programs and the proposed transmission anddistribution schemes are valued initially at the prevailing tariff 'evels. Ingeneral, the expected financial revenues from the programs and the projectsare expected to be inadequate in view of the current policy of many SEBs ofsetting tariffs below the cost of supply, including granting of explicitsubsidy to specific consumer groups. In this connection, it is envisionedthat with the implementation of the OFAPs which have been mutually agreed tobetween PFC and the SEBs to help mitigate financial shortfalls in the SEBs'operations, the financial returns on the proposed investments wouldcorrespondingly improve.
5.16 Given the scarcity of power supply, however, the value ofelectricity service in India is deemed to be considerably higher than thecurrent rates at which it is sold. Accordingly, the consumers' willingness topay has been estimated based on the cost of electricity from sources otherthan the grid; i.e. from autogeneration from diesel generators for industriesand commercial consumers, and from diesel pumps for irrigation requirements ofagricultural users. The cost of these alternative sources (estimated at Rs2.75 per kWh in the residential/commercial sector, Rs 2.07 per kWh inindustry, and Rs 3.41 per kWh in agriculture) are considered to be the upperlimit of the consumers' willingness to pay for their particular levels ofpower use from the public supply system, while prevailing tariffs serve as thelower limit. The consumer surplus attributable to incremental consumption isestimated to be equivalent to half of the difference between these limits asthe higher cost of autogeneration is seen to reflect the value of energy to
- 44 -
consumers during the peak and intermediate load periods when there is loadshedding, but not necessarily during the rest of the day when energy from thegrid is normally available.
Results of Program and Project Economic Analyses
5.17 Economic evaluations of project proposals forwarded by the SEBsof Punjab, Andhra Pradesh, Madhya Pradesh and Gujarat have been undertaken byPFC. The transmission schemes have been cleared for implementation by CEA andthe distribution schemes have been duly reviewed by PFC as conforming to theagreed technical design criteria. Those that yield sufficient economicreturns of at least 12X would be considered for funding under the proposedproject.
5.18 The economic returns estimated for various projects submitted byPunjab SEB and Andhra Pradesh SEB as well as for some regional and stateprograms are summarized in Table 5.1. Relatively high economic rates ofreturn were derived for the transmission and distribution schemes reflectingthe critical and urgent need for the proposed activities. A number of theproposed transmission expansion will bring immediate and much-needed relief tothe present networks and will result in more efficient dispersal of power fromexisting generating plants as well as from those already nearing completion.On the other hand, the distribution renovation schemes will help meet loadgrowth in the immediate future as well as effect much needed improvement inexisting services. Hence, compared to the relatively low incremental costs ofremoving system bottlenecks through the project facilities, the benefits to bederived from the enhanced service and higher utilization of system supplycapacities are significant.
5.19 Sensitivity analyses based on adverse variations in projectbenefits, costs and implementation schedule indicate that investment returnsremain strong. Moreover, tests using higher AIC values for other investmentcomponents associated with power delivery indicate that project returnscontinue to be well in excess of 122.
Table 5.1: Economic Return of Various SEB Projects
Base Case a/ Using High AIC Values b/NPV 121 EIRR NPV 12% EIRE
pj Based on AIC estimates developed at 123 discount rate. To the extent that the State'sexpansion program yields a return higher than 12X, addittonal return attributable to otherinvestment components Ias partly been credited to the project.
k/ Based on higher AIC estimates derived by applying a discount rate as high as the rate ofreturn of the State expansien program.
VI. AGREEMENTS AND RECOMMENDATION
Agreements Reached
6.01 The conclusion of a Subsidiary Loan Agreement between GOI and PFC,satisfactory to the Bank, will be a condition of effectiveness of the proposedloan (para. 3.25).
6.02 GOI agreed:
(a) to submit to the Bank, not later than six months after the end ofeach fiscal year, an auditor's report on the Special Account(para. 3.29); and
(b) to communicate to the PFC, not later than March 31 each year, afirm commitment on the amount PFC is authorized to raise in thedomestic bond market in the following year, including the type ofbonds 'lo be issued and the estimated dates of such issues (para.4.19).
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6.03 PFC agreed:
(a) to implement the Operational Po'icy Statement (OPS) (Annex 2.2)and consult with the Bank before any material modification isintroduced to it (paras. Z.09 and 4.20);
(b) that PFC's funds will not be pre-allocated but will be lentfollowing a pre-agreed criteria satisfactory to the Bank (para.2.11);
(c) that to be eligible for Bank financing of environmental upgradingof plants, candidate SEBs/SGCs will prepare an environmentalassessment of the stations and agree to implement actions to meetacceptable environmental standards (para. 3.11);
(d) to submit to the Bank for approval the items intended to befinanced with the proceeds of the proposed loan, under eachcomponent of the project (para. 3.14);
(e) to include in its loan agreements a provision to ensure that itsclients meet environmental and rehabilitation standardssatisfactory to the Bank (para. 3.19); and
(f) to give the Bank the opportunity to comment on the first powerplant environmental review of each participating SEB (para. 3.20);
6.04 PFC agreed on the following milestones for implementing theproject:
(a) submit to the Bank, no later than two months after the end of eachfiscal year, unaudited financial statements, and no later than sixmonths after the end of the fiscal year, copies of said financialstatements certified by an independent auditor acceptable to theBank (para. 2.20);
(b) that only sub-projects having complete deL, led engineering andall clearances by December 31, 1992 will be eligible for Bankfinancing (para. 3.10);
(c) to have all contracts financed under the loan awarded by June 30,1994 (para. 3.17); and
(d) submit each year:
(i) before January 31, a report including PFC's currentfinancial performance compared to the parameters setin its OPS;
(ii) before June 30, five-year financial projectionsshowing how the OPS parameters will be attained; and
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(iii) before March 31, evidence of GOI's authorization toPFC to issue domestic bonds during the followingyear, including the amount, the type of bonds andapproximate timing of the issues (para. 4.21).
Recommendation
6.05 On the basis of the above agreements, the proposed projectconstitutes a suitable basis for a Bank loan of US$265 million equivalent toIndia for '0 years, including five years grace, at the Bank's standardvariable interest rate.
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Annex 1.1--. .......
Page 1 of 2
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT..............................................
NOTES:a/ Constrained by suppty capacity. No estimates availabLe on the extent of suppressed demand.b( Power supply position is based on sanctioned schemes assuming additional capacity
during FY 91-95 of only 23307.7 bW.c/ An estimation of demand, based on consumption projections (including consuWtion
to be met by non-utilities) plus transmission and distribution Losses. It is to be noted herethat with the substantial supply constraints it is not possible to accurately estimate fulluvnset demand. This figure merely captures the lowest boundary of demand.
d/ The deficit here is underestimated in light of the inability to accurately estimate unmetdemand.
Source: Fourteenth Electric Power Survey of India, CEA, March 1991
- 49 -
Annex 1.1
Page 2 of 2
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
ELECTRICITY SUPPLY AND DEMAND
ALL INDIA: ENERGY CONSLMPTION BY MAIN CONSUMER CATEGORY
1 India First DVC - Bokaro - Konar 23 4/50 2/56 18.5 16.7 Complete2 India Second DVC tMalthon Panchot 72 1/53 f/58 19.5 10.5 Comptete3 Tata Trombay Power 106 11/54 9/66 16.2 13.9 CompLete4 Tata Second Trombay 164 5/57 9/66 9.8 9.7 Complete5 India Third DVC - Durapur 203 7/58 6/65 25.0 22.0 Complete6 India Kryno Power 223 4/59 4/65 25.0 18.7 Conplete7 India Power Transmission 416 6/65 12/70 73.0 50.0 Comptete8 Tata Second Kothagudem Power 417 6/65 12/70 14.0 13.8 Complete9 Tata Third Tronbay Thermal Power 1549 4/78 12/84 105.0 105.0 Complete10 India Ramagundam Thermal Pover (0) 1648 1/79 6/87 50.0 45.6 Complete11 India Farakka Thermal Power (0) 1887 6/80 6/89 25.0 2.5 Complete12 India Second Ramagundam Thermal Power (M) 2076 12/81 3/92 280.0 /a 270.413 India Third Rural Electrificatfon 2165 6/82 6/88 304.5 295.5 Complete14 India Upper Indravati Hydro 2278 5/83 12/91 156.4 # 0.415 India Central Power Trarsmisslon (0) 2283 5/83 3/92 250.7 J 126.716 India Indira Sarovar 2416 5/84 6/92 17.4 /b 5.317 India Second Farakka Thermal Power (0) 2442 6/84 12/91 300.8 # 184.018 Tata Fourth Trombay Thermal 2452 6/84 6/92 135.4 125.219 India Chandrapur Thermal Power 2544 5/85 12/92 300.0 # 177.420 India Rihand Power Transmission (M 2555 5/85 12/91 250.0 # 191.521 Inr4ia Kerala State Power 2582 6/85 9/91 176.0 38.222 India Combined Cycle (0) 2674 4/86 12/91 485.0 448.423 india Karnataka Power 2827 6/87 12/95 330.0 # 45.524 India National Capital Power Suuply (0) 2844 6/87 6/95 425.0 /c 192.425 India Talcher Thermal Power C*) 2845 6/87 3/96 375.0 53.626 India Second Karnataka Power 2938 5/88 12/96 260.0 # 27.727 Indis Uttar Pradesh Power 2957 6/88 12/96 350.0 47.028 India Nathpa Jhakri Power 3024 3/89 12/97 485.0 36.729 India Maharahstra Power 3096 6/89 12/96 400.0 24.030 India Northern Region Transmission 3237 6/90 9/98 485.0 22.231 Tata Private Power Utilities (TATA) 3239 6/90 6/95 98.0 0.032 SSES Private Power Utilities (ISES) 3344 6/91 12/95 200.0 32.5
Total 6442.2 2653.0(Total Loans for NTPC Projects) ( 2501.3 ). ... ... ..... U
/a Ou of original loan amount of USS300 million, US$20 mitilon were cancelled./b Out of original Loan amount of US$157.4 million, USS140 milLion were cancelled./c Out of original loan amount of US$485 million, USS60 million were cancelled.
IDA Credits.. .......
I India Fourth OVC - Durapur 19 2/62 12/69 21.9 19.9 Complete2 India Second Koyna Power 24 8/62 9/70 21.1 21.1 Corplete3 India Kothagudem Power 3t St63 12/68 24.1 24.1 Comptete4 India Seas Equiprent 89 6/66 6/74 26.6 26.3 CompleteS India Second Power Transmission 242 4/7i 3/77 75.0 72.9 Complete6 India Third Power Transmission 377 3/73 9/78 85.0 85.0 Complete7 Indfa Rural Electrification 572 7/75 12/80 57.0 57.0 Complete8 India Fourth Power Tranrmission 604 1/76 6/83 150.0 149.9 Complate9 India Singraulf Thermal Power (0) 685 3/7 6/84 150.0 150.0 Complete10 India Korba Thermal Power () 793 4/78 3/86 200.0 199.9 CoupLete11 India Rnmagundam Thermal Power (0) 874 1/79 6/87 200.0 200.0 Complete12 India Second Rursl Electrification 911 5/79 3/84 175.0 171.7 Coiplete13 India Second Singrauli Thermal Power (0) 1027 5/80 3/89 300.0 292.8 Complete14 India Farakke Thermal Power (0) 1053 6/80 12/88 225.0 225.0 ComWlete15 India Second Korba Thermal Power (M) 1172 7/81 12/89 400.0 # 370.3 Complete16 India Upper Indrovati Hydro 1356 5/83 12/91 170.0 161.317 India Indira Sarovar SF020 5/84 6/92 13.0 /d 0.618 India Indira Sarover 1613 5/86 6/92 13.2 0.0
Total 2306.9 P227.8(Total Credits for NTPC Projects) ( 1475.0
,.. ....... ..
(0) NTPC Projects/d out of original credit of Us$129.8 equivalent, US$116 equivalent were cancelled.
U 0eaS not yet reflect cancellotions ade on Decomber S. 1991.
INDIA
POWER UTILITIES EFFICIENCY OVEMENT PROJECT
Power Financ Corporatlon Ltd.
Organization Chart
Chairman andManaging Director
Intemal Company SCcrelay Managemnt Coporate Planning, Policy VigilanceAudit and Legal Auidii l Formulation and Co-Ordination _
Diroctor Director Direct(Financiail) (Technical) (Operational)
__ ~~Specialist b n
vLoan ] rResource Financial SPecialist Development Cell forAdministration " | Mobilization | | Advice Suppor Function Power Studies
Accounting, axation, Liquidity Planning Control Fonulation Human Resource Managemnent, PersonnelBudget.[S._and lnvesuwnt Planning and Administraton, Publicity and P.R.
Financial Technology ScanningAppraisal and Co-Ordination
|Co-Ordination||_
l o~~~nvirnmntal | nstitutaonal Devclopmnent
---- Funtional relationship I I4Project Appraisal and Monitoring _ _ _J
Technical, Economicand Financial App=aisal
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Annex 2.2Page 1 of 6
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Operational Policy Statement
(This is a summary of PFC's document entitled "PFC: Operational Policy Statement(OPS): Its Rationale, Operational Philosophy, Objectives, Programs andProcedures", dated November 2, 1990 and approved by PFC's Board on November 12,1990.)
The Rationale
1. PFC has a critical developmental role in the power sector that is pursuedthrough: (a) the promotion of improvements in the operational performance andfinancial managements of the sector's entities; and (b) through the encouragementof a balanced growth of the sector.
Beneficiaries
2. The Memorandum of Association allows PFC to provide assistance to anypower utility in the country. However, in view of the fact that state-ownedutilities comprise the largest segment of the sector and are the utilities wherethe need for improvement in technical efficiency and strengthening of thefinancial management is most acutely felt, PFC will consider this an area ofimmediate priority.
Operations Financed by PFC
3. In its comprehensive role as a development bank, PFC provides financialassistance for power projects, issues guarantees for payment of money, impartstraining and supports the provision of consultancy services.
4. PFC's main objective is to finance:
- power projects, including generation (thermal and hydro),transmission and distribution;
- renovation and modernization of power plants;
- system improvements and energy conservation schemes;
- maintenance and repair of plant and equipment;
- training;
- research and development;
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Annex 2.2
Page 2 of 6
promotion of renewable energy; and
- consultancy.
Linkage with the Five-year Plan
5. Funds provided by PFC to power sector entities constitute an additionalityto the funds assigned to them through the Plan. The borrowers cannot substitutePFC's funds for earmarked allocations by the Planning Commission.
6. PFC funds are not allocated to the states. PFC'c financing decisions arebased solely on the merits of individual projects.
Eligibility Criteria
7. PFC will assist only those SEBs and SGCs who agree to implement Operationaland Financial Action Plans (OFAPs) satisfactory to PFC.
8. PFC will lend only to projects that meet the following criteria:
(a) are economically justified, with a rate of return of not lessthan 12%;
(b) are technically sound;
(c) technical solutions proposed must be least cost;
(d) are compatible with existing expansion plans;
(e) solutions proposed should meet GOI, State environmental andimpact standards; and
(f) schemes should have all clearances required by state andfederal agencies.
9. Schemes for environmental upgrading of power stations have to meetacceptable engineering standards, and should be the most cost-effective means ofmitigating environmental effects.
10. Priority areas for funding are the following:
(a) renovation and modernization of thermal and hydro power plants;
(b) system improvement;
(c) expansion of transmission and distribution systems; and
(d) completion of on-going generation projects.
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Annex 2.2Page 3 of 6
Reoavment Quarantees and ExDosure Limits
11. PFC will extend financial assistance only to those SEBs whose StateGovernments have given confirmation that PFC will have priority on the SEBs'surplus revenue over the loans granted by the State Governments to the SEBs, inaccordance with the Electricity Act.
12. PFC's maximum exposure limits are set according to both its clients'credit worthiness and the guarantees offered by them. The following matrixcombines the credit worthiness of the client and the guarantees offered by theclient, to determine the credit risks weights to be used in calculating themaximum levels of exposure per client as a percentage of PFC's net worth:
Matrix of Risk Exposure and Guarantees
On-Balance Sheet Assets and Off-Balance Sheet Items
7 Backed by GOI 0.0-----------------------------------------------------------
Definitions:
(a) Credit Rating A: Debt Service Coverage in excess of 1.3Credit Rating B: Debt Service Coverage between 1.0 and 1.3Credit Rating C: Debt Service Coverage below 1.0.
(b) STG: State Government GuaranteeSG: Bank GuaranteeEA: Escrow Account.
(C) Risk Weight is the factor by which the loans outstanding that qualifyunder each level should be multiplied to calculate the exposure.
F Por example, a Re 100 loan ranked as Level 1 will be computed asequivalent to Rs 50 (Re 100 X 0.5) for calculating the risk exposure.
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Annex 2.2Page 4 of 6
13. The Maximum Level of Exposure per client is as follows:
1991/92: 35% of PFC's Net Worth1992/93: 30% of PPC's Net Worth1993/94: 25% of PFC's Net Worth1994/95 and thereafter: 20% of PFC's Net Worth (subject to review beforethe end of 1993/94 to determine its adequacy).
14. For the purpose of calculating the credit rating to determine the creditworthiness of a client, a debt service coverage (DSC) is established. Incalculating the DSC: (a) the servicing of the loans from its State can beexcluded, provided the State Goverument commits In writing not to ask the borrowerfor payment of interest and principal on its loans while any loan or guaranteereceived from PFC remains outstanding; and (b) any rural electrification subsidynot received should be excluded from revenues. In establishing the creditworthiness of its clients, PFC gives due regard to the amounts remaining due andunpaid to institutional lenders.
Appraisal Procedures
15. During appraisal PFC will: (a) ensure that the project proposed meetsPFC's selection criteria (para. 8); and (b) ensure that the borrowing entityagrees to implement an OFAP acceptable to PFC.
Terms and Conditions
16. Although PFC mobilizes resources from different sources, its on-lendingterms and conditions will be uniform irrespective of the source of financing.
Non-rescheduling of Loans
17. PFC's loans will not be rescheduled. However, in exceptionalcircumstances, if PFC considers it financially prudent, it may provide a financialrestructuring package supported by appropriate conditionality.
Adiustabilitv of Lendina Rates
18. When PFC begins borrowing at variable interest rates it will includeprovisions in its loan documents to allow its lending rates to be adjusted both onthe disbursed as well as the undisbursed portions of its loans.
Procurement and Disbursement Procedures
19. Funds will be made available to the borrower only when the expendituretakes place. PFC has developed detailed disbursement procedures that apply toevery operation.
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Annex 2.Page 5 of 6
Supervision and Monitoring
20. The borrower shall furnish periodic progress reports, satisfactory toPFC, in respect to implementation oft (a) the project; and (b) the OFAP. Inaddition, PFC's supervision teams will periodically visit the projects to assessprogress and to provide support to the borrower as needed.
Remedies
21. PFC may suspend or cancel any part of a loan if the borrowing entityfails to perform any obligation under the legal agreements. PFC has developed aset of Guidelines for Application of Remedies (See Attachment).
Financial Manaaement of PFC
22. PFC will endeavour to operate as a commercial entity, earning an adequatereturn on its capital (positive in real terms), maintain a healthy portfolio andbuild a strong financial base to enable it to borrow on attractive terms.
Caotal Structure
23. Initially a maximum debt-to equity ratio of 4sl will be maintained. AsPFC becomes better established, this ratio will be periodically revised.
Debt Service Coverage Ratio
24. PFC's operations will be managed so as to maintain a debt service coverageratio not lower than 1.2.
Liauldity
25. PFC will maintain liquid assets equal to not less than the equivalent ofthe anticipated disbursements for the following three months.
Profitabilitv Targetc
26. PFC's lending rates will be positive in real terms and will reflect itsborrowing and operational costs, plus a margin to ensure its financial viability.Lending documents will include a provision to ensure that lending rates areadjusted to reflect this objective.
Foreign Exchanae ard Interest Rate Risks
27. PFC will not bear the interest rate and foreign exchange rLsks in itsoperations.
Guaranteelf
28. PFC will be lending to SEBs and BGCs only with the backing of guaranteesprovided by the State Governments or commercial banks. in addition, PFC may
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Annex 2.2Page 6 of 6
request contingent arrangements, like escrow accounts, to be invoked in certaincases, like when the guarantees have not been honored, or the OFAPs are notimplemented to the satisfaction of PFC, or when SEBs/SGCs want to enhance theirborrowing limits as indicated in para. 12.
Term Transformation
29. PFC will determine the average repayment periods of its loans so as toensure that the average maturity of its assets does not exceed that of itsliabilities.
Guarantees provided by PFC to SEBs/SGCs
30. The provisions in the preceding paragraphs relating to remedies, foreignexchange and interest rate risks, loan guarantees etc. will equally apply toguarantees granted by PFC to SEBs and SGCs for payment of monies by them.
Accounting and Audit Systems
31. PFC will maintain its accounts in conformity with the requirements of theCompanies Act (1956) and directives from the Gol. PFC's statutory Auditor isappointed by the GOI on the advice of the Comptroller and Auditor General, who mayalso carry out his own audit of PFC.
Oroanization and Staffing
32. PFC is aware of the need to develop an efficient organization staffed withcompetent professionals from different disciplines. To support this effort PFCintends to maintain training programs that provide access to the latestdevelopments in the different disciplines.
Review of Policies
33. The above set of policies and procedures will be revised fzom time to timeto reflect the changing needs in the operations of the Corporation.
Note:
PFC's Operational Policy Statement includes four annexes, as follows:Annex 1: Terms and Conditions of PFC's Loans.Annex 2: Disbursement Procedures of PFC's Loans.Annex 3: Guidelines for Application of Remedies in the Event of
Default by its Borrowers.Annex 4: Accounting Policies
The full text of he OPS, together with its annexes is included in theProject Files.
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Annex 2.3Page 1 of 5
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Guidelines for Preparation ofAction Plans
General Approach
1. The effectiveness of action plans as a tool for improving theperformance of power utilities depends largely on the commitment of theutility to its implementation. The best way to ensure said commitment is bygetting the utility involved, from the outser, in the preparation of the Plan.This approach avoids the risk of an adverse reaction to the Plan as theutility may consider that the actions included in it are "imposed" on them andare unrealistic.
First Step: Diagnosis
2. The purpose of this first step is to determine the recent historyand current status of the different aspects of the operations of the utility,including, inter alia, Organizational Structure, Financial Management andControl, Planning, Engineering and Construction, System Operations &Maintenance, Human Resources Administration, Support Services, Billing andCollections, Management Information System, etc. The preparation of thediagnosis requires a group of experienced professionals, with good knowledgeon how each one of the functional areas of the utility should work and of thelevels of performance that should be expected from each area. It is veryimportant that the diagnosis be undertaken with direct participation of thoseto be later involved in the preparation of the Actio:i Plan and in itssubsequent monitoring. Their participation in the diagnosis will give them anirreplaceable insight in the operations of the utility. When due to staffconstraints, or because of the need to have specialized expertise in certainareas, it is necessary to retain consultants, it is highly advisable that thecontrol of the diagnosis remains under the responsibility of the official inPFC in charge of the project.
3. An initial step in the diagnosis is the preparation of a set offinancial statements (income statements, funds flows and balance sheets) forthe 'last three to five years and projections for the next five to ten years,assuming a status quo in the operations, to show what the situation would beif the current level of tariffs and performance are maintained in the future.To provide a more realistic idea of the funds required, the investment programhas to be properly adjusted for price escalation. These proforma statementsare very important because they provide the reference point against which theimpact of the action plan will be measured. They also give an initial view of
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Annexi 2. 3Page 2 of 5
the problems the utility may be facing (for example, liquidity, coststructure, inability to service debt, high level of work in progress).Experience shows that this stage can be productively used to introduce thefinancial staff of the utility in the use of computers for financial analysis.
4. Each one of the functional areas of the utility is reviewed by theexperts in the diagnosis team. For this purpose, the development of a checklist is -iery helpful, although care must be exercised to ensure that its usedoes not result in a mechanical approach. It is important for the team tomaintain at "iI times an investigative attitude, trying to differentiatebetween the symptoms and the causes of the deficiencies detected. In thoprocess of preparing the evaluation, the team interviews the staff responsiblein the utility, reviews documents, prepares flows, visits the relevant officesto see how the work is carried out, and in some cases interviews customers,suppliers, etc. The purpose is to gain a balanced and objective assessment ofthe situation.
5. The outcome of the evaluation is summarized for each functionalarea, ideally in tabular form to facilitate processing of the subsequentsteps. The preparation of a diagnosis normally can be undertaken in no morethan three weeks by a team of two or three expert professionals.
Second Step: Discussion of the Diagnosis
6. It is at this level where the full participation of the utilityshould start. The purpose of this step is to reach agreement with themanagement of the utility on the diagnosis. There are two reasons thatjustify the need for this agreement. The first one, is to ensure that theevaluation team has not made any error of judgement. This is not impossibleto happen, no matter how experienced the team is or how carefully the work hasbeen done, the risk of reaching erroneous conclusions always exists. Thesecond reason is that, unless the utility accepts the existence of theweaknesses detected in the diagnosis, any effort in getting them correctedwould be wasted.
7. The best approach to discuss the diagnosis is to have meetingswith the staff responsible for each particular activity. The objectives ofthese meetings are to: (a) establish whether they agree with the diagnosis oftheir respective areas; (b) get a better understanding of the causes of theproblem; (c) confirm that no major issues remain unidentified; and (d)determine whether any corrective action is already being implemented. Thisstep normally takes no more than three days. At the end of the discussions arevised diagnosis would be produced.
Third Step: Preparation of the Action Plan
8. It is critical to stay away from the traditional approach ofpretending to solve problems by simply stating that certain improvements in
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Annex 2.3Page 3 of 5
the performance targets should be reached by a future date. What is needed isto agree on the actions required to correct the weaknesses detected. Forexample, it is not of much use to say that Transmission and Distributionlosses should be reduced to 18Z by December 1990, without indicating thespecific actions to be taken in order to reach that performance. Here iswhere the participation of the SEBISGC staff becomes critical. With theactive participation of each one of those in the utility responsible for theactivity where a weakness is detected, ideas on how to deal with the problemswill be explored. It is advisable to begin by asking those responsible forthe activity about potential solutions. This tends to generate interestingproposals and gets them involved. They tend to know better than anyone whatwould work and what will not. Often it is better to adopt solutions that,although not optimal, are realistic. However, sometimes one encounters toonegative or pessimistic positions that need to be changed through dialogue.In addition, PFC staff and the consultants can bring fresh ideas andexperiences tried successfully in other utilities to broaden the scope ofoptions.
9. After pondering the different options open in each case, onesolution is selected. These options fall into two categories of actions:those under the control of the SEB/SGC and those outside their control(normally under the control of the State). The solutions may either includecorrective actions to be iundertaken by the management of the SEBISGC, orrequire the assistance of specialized experts, in which case each one of thesteps required to retain said experts should be included in the action plan(terms of reference, short list, selection, contract etc.).
10. Once the actions to deal with each problem have been agreed upon,the next step is L- establish:
(a) when each action should be implemented;
(b) who is responsible for implementing it;
(c) what results are expected from its implementation, trying toquantify the outcome or present it in terms of changes inperformance indicators (plant availability, PLF, rate ofreturn, collection performance, etc);
(d) resources required to implement the action; and
(e) how and how frequently the implementation is going to bemonitored.
Fourth Step: Ranking of Issues and Phasing
11. It is not realistic to expect to solve every problem in one shot.Accordingly, the weaknesses detected should be ranked, giving priority to
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those that, if corrected, would have the greatest impact in terms of cash flowgeneration capability of the utility. This ranking should be done jointlywith the management of the utility. Once the ranking is completed, the issuesto be tackled in a First Phase should be selected. The duration of this FirstPhase has to be determinad in each case. In the case of PFC, since theobjective is to have frequent operations with each SEB/SGC, each phase shouldprobably include only the actions that could be completed in, say, 12 to 18months, given: (a) the time required to undertake them, and (b) theimplementation capability of the utility. The funds required to implement theaction plan should be quantified and a financing plan to ensure its timelycompletion should be agreed upon.
12. Since institutional improvements should be a continuous operation,the action plan should include a trigger point, be it a date or the completionof a critical activity, indicating when the following phase should beinitiated.
Fifth Step: Financial Impact of the Action Plan
13. Most improvements in the performance of a utility have an impacton rhe utility's finances. For this reason, it is important to prepare asecond set of financial projections reflecting the expected financial impactof the improvements intended to be accomplished through the Action Plan.These projections should be comppred with those prepared as part of thediagnosis, where a status quo was assumed. This comparison would clearly showhow meaningful the proposed Action Plan is. If the Action Plan is notmeaningful enough, it would need to be revised as needed until satisfactoryresults are obtained.
14. The financial projections showing the impact of the Action Planalso serve the purpose of providing a reference point for future monitoring.The pru!jaration of the Action Plan, its phases and the revised projectedfinancil statement3 normally require about four weeks of two professionals,with ample experienct in power utilities management (one engineer and onefinancial analyst) wo,-king closely with the staff of the utility.
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Summary of Key Elements of OFAPs Approved for the SEBs ofPuniab, Andhra Pradesh, Madhva Pradesh and Guiarat
Functional Area Actions
Tariff Restructuring Incorporation of automatic fuel surc.hargeAnnual tariff review and revision processAppointment of Committee to review tariff structure
Payment of Subsidy Agreement by state governments to pay subsidy (inadvance or monthly and on a cash basis) to allow the SEBto meet the 3% rate of return
Capital Restructuring Conversion of part of State Government loan into equityto achieve debt equity ratio of 1:1.
Billing and Collection Settling of inter-state and government outstandingaccounts receivablesComputerize billing and collection accountsConduct meter testingIntroduce age analysis of accounts
Materials Management Review and develop inventory control systems for thermalpower stationsReview T&D stores management system and issue timelystores control reports
Internal Audit Undertake technical audit (cost and quality)
Accounting Systems Staff training on commercial accountingAppoint consultants to develop and implement costingsystem for thermal plants
Planning & Budgeting Develop project evaluation and prioritization criteriaInvolve financial department in planningLink budgeting process with accounting systemIntroduce manpower planning
Systems EfficiencyGeneration Conduct of full plant inspections
Preparation of plant upgrading plansPreparation of detailed station maintenance manuals
Transmission Conduct transmission network system analysis and prepareand implement least cost corrective actions.
Distribution Prepare 10-year sub-transmission and distribution masterplans for selected urban centersPrepare 3-year plans for addressing deficiency of lowtension service for selected centers.
Environmental Assessment and Monitoring UnitScope of Work and Procedures
1. Introduction
1.0 GOI and a number of States require that environmental assessmentof power projects be submitted to the concerned authorities as a condition toobtain environmental and forest clearances for project implementation. Inaddition, there are Central and State norms for compensation andrehabilitation of population affected by Public Projects that power utilitiesmust observe. GOI and the States issue environmental and forest clearancesprovided the concerned utilities undertake actions indicated in the letter ofclearance to minimize adverse effects of proposed projects. Only projectswhich have been cleared in this respect by all concerned agencies would beeligible for Bank financing.
2.0 The World Bank requires, for all projects it finances, that theenvironmental and social implications of the same be appraised and dealt within accordance with Bank policies in this regard. If Central and Stateregulations exist, the Bank requires that the project ronforms to the moststringent of all of them, including the Bank's.
3.0 Because of the public interest in environmental matters and theneed that PFC financed projects meet the necessary environmental and socialstandards, the Corporation created an Environmental Assessment and MonitoringUnit (EAMU) under the Technical Director.
2. Respogsibilities
The EAMU would:
'a) ensure that environmental assessment "nd social impact assessmentof the project are incorporated in early stages of formulation asa factor in the analysis of alternatives and design of theproject;
(b) assist the borrowers as necessary in identifying majorenvironmental and social issues associated to the project;
(c) assist in the preparation of terms of reference for socio-environmental assessments (SEAs) of different kinds of projectsand keep a roster of Consultants who can help in preparingassessments and impact mitigation plans;
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Annex 2.5Page 2 of 2
td) monitor execution of SEAs to ensure that they meet acceptablequality standards;
(e) ensure that costs of mitigatory actions are properly considered inselecting and costing projects;
(f) ensure that SEAs are conducted in accordance with the applicablestandards;
(g) monitor implementation of mitigatory plans and ensure that actionsindicated by the concerned agencies for environmental clearanceare carried out;
(h) assist borrowers in assessing and proposing solutions for thecorrection of environmental deficiencies of power plants alreadyin operation; and
(i) promote and assist utilities in the creation of units specializedin environmental aspects of power utilities (i.e. design,monitoring etc.)
The EAMU would not carry out itself SEAs but would provide assistance, reviewand monitoring of any work undertaken by the SEBs or their consultants inregards to PFC financed projects.
3. Staffing
The EAMU would be staffed initially with one environmentalengineer (emission, effluents, etc) one part time environmental scientistCforest, wildlife, fisheries, etc.) and one part time sociologist/anthropologist with experience in rehabilitation of displaced persons.
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Annex 3.1Page 1 of 8
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Detailed Project DescriRtion
I. TRANSMISSION AND DISTRIBUTION
1. The project includes a number of transmission and distributionschemes which have been selected to alleviate most urgent deficiencies in thesystem. Typically schemes include: (i) removal of transmission constraintsfor power evacuation from power plants; (ii) reinforcement of overloadedtransmission lines; (iii) increase of capacity of associated substations; (iv)expansion of overloaded distribution substations; (v) reinforcement of 66, 33,and kV distribution grid; (vi) installation of capacitors and distributiontransformers to improve service and reduce losses; and (vii) purchase andinstallation of single-phase and three-phase consumption meters for newconnections or to replace defective ones. The following are the schemesidentified thus far:
A. Punjab
Transmission Lines - Phase I
Ropar - Rajpura, 220 kV, 76 ckt-km
Installation of second circuit for evacuation of power from Roparthermal plant.
Rajpura - Patiala, 220 kV, 26 ckt-km
Extension of single-circuit line to evacuate power from Ropar stationvia Rajpura.
Bhakra - Mahlipur - Jalandhar II, 220 kV, 94 ckt-km.
Installation of double-circuit towers and first circuit of line toevacuate Punjab's share of Bhakra power plant. Includes setting up of a220/66-kV substation at Mahlipur with 1 x 100 MVA module.
Mukastar - Jallalabad, 220 kV, 35 ckt-km
Installation of double-circuit towers and first circuit of line toincrease supply to Jallalabad. Includes setting up of a 220/66-kVsubstation at Jallalabad with 1 x 100 MVA module.
Double circuit line for evacuation of power from Ropar thermal plant.Includes expansion of Jalandhar II 220/66-kV substation by 1 x 100 MVA.
- Ropar - Govindgarh, 220 kV, 120 ckt-km
Double circuit line for evacuation of power from Ropar thermal plant.Includes expansion of Govindgarh 220/66-kV substation by 1 x 100 MVA,and setting up of Govindgarh II, 220/66 kV substation with lxlO0 MVA.
- Guru Nanak Dev (GND) (stage III) - Mukatsar, 220 kV, 65 ckt-km
Single circuit line from Guru Nanak Dev for power evacuation. Includesconnection of stages II and III of GND.
- GND (stage III) - Sunam, 220 kV, 170 ckt-km.
Double circuit line via Mansa for power evacuation and expansion ofsubstation at Sunam by 1 x 100 MVA (220/66 kV).
- xMoga - Mukatsar 220 kV 35 ckt-kin
Installation of double circuit towers and first circuit of line to tapPunjab's share of NHPC plants.
Distribution Schemes
Distribution improvements in seven urban center as presented in Table 1.
Closing of southern 220-kV ring in the state. Installation of doublecircuit towers and first circuit to improve reliability of supply tothis area. Includes bay extensions at Chitoor, Renigunta and Sullurpet.
Transmission Lines - Phase II
- Cuddapah - Renigunta, 220 kV, 132 ckt-km
Construction of double circuit line to. feed power from Ramagundamthermal plant into Southern Andra Pradesh. Includes extension of onebay at Cuddapah and Renigunta substations and increase of transformationcapacity at Renigunta by I x 100 MVA.
- Ramagundam - Nizamabad, 220 kV, 147 ckt-km
Installation of second circuit of this line to evacuate power fromRamagundam thermal plant. Includes extension of line bays at Ramagundamand Nizamabad substations, and addition of 1 x 100 MVA transformer atNizamabad.
- Ramagundam - Warangal, 220 kV, 90 ckt-km
Installation of second circuit of this line to evacuate power fromRamagundam thermal plant. Includes bay extensions at Ramagundam andWarangal substations and addition of 1 x 100 MVA transformer atNizamabad.
Distribution Schemes
Distribution improvements in seven urban centers are presented in Table 2.
Construction of double circuit line to utilize MP share of power from Korba &Vidhyachal power plants. Includes the following associated works:
- Construction of 400/220 kV, 315 MVA substation at Malanpur.
- Addition of two 400 kV bays at Bina.
- Double circuit interconnection between 220 kV and 400 kV substations atMalanpur (20 ckt-km).
- Addition of four 220-kV bays at Malanpur.
- Birsinghpur - Damo - Katni, 400 kV, 432 ckt-km.
Construction of double circuit line to utilize MP share from Amarkantak andBirsinghpur thermal plants and from Tons hydro plant. Includes construction of220/132-kV substation at Katni with 160 MVA capacity and extension of two 220-kVbays each at Birsinghpur and Damoh.
Satna - Katni, 220 kV, 200 ckt-km
Construction of double circuit line to increase supply to Katni & Damoh area.Includes extension of four 220-kV bays at Katni and four 220-kV bays at Satna, 20ckt-km interconnection (_32 kV) between 220-kV and 132-kV sections at Katni, andaddition of 132 kV bays at Katni.
Distribution Schemes
Distribution improvements in seven urban centers are presented in Table 3.
2. PFC has received financing applications for installation ofelectrostatic precipitators (ESPs) or expansion and renovation of existingones in a number of power plants. These are expected to be financed by theBank as follows:
State Power Station
Gujarat Ukai
Uttar Pradesh HarduagangObraPanki
West Bengal Durgapur
The estimated investment in these plants is about US$100milionu. In addition,PFC expects to receive requests for the following schemes during 1990/91-1992/93 which could be financed by the Bank or other cofinanciers on a first-come-first served basis depending upon the availability of funds:
S.tate Powr Station
Gujarat Wanakbori
Uttar Pradesh Obra (Phase II)
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Anneg 3. 1Page 7 of 8
Madhya Pradesh Satpura
West Bengal Kolas '.
Bihar Patr. ctUBaraun.
Orissa Talcher
Assam Bongaigaon
Andhra Pradesh Kothagudem
Estimated investment on these stations is about US$ 60 million. It has beenassumed that 60% of the plants identified would be eligible for Bank financingunder this component. Participating SEBs would also conduct .-I parallel anenvironmental audit of each plant included in the program to determine, andimplement, any actions necessary to correct environmental deficiencies of thestation (Annex 3.2) . The objective is for the station to meet theenvironmental standards established by GOI, the State or the Bank, whicheveris more stringent. It has been estimated that about 100 consultant-monthswould be required to conduct the environmental audits, prepare the upgradingprograms, and assist the SEBs in their implementation.
III. INSTITUTIONAL DEVELOPMENT FOR SEBs
3. PFC and the participating SEBs have identified areas in which SEBsneed immediate assistance for improvement. Actions to obtain and implementsuch assistance and associated timetables have been included as part of theOFAPs agreed between PFC and the SEBs. Many of these actions requireparticipation of consultants and training of staff. There is also a need forthe SEBs to acquire data processing systems, including computer equipment andsoftware. Major areas in which assistance is required are: accounting,management information systems, organization and msthods, inventorymanagement, operation and maintenance of plant, system modernization, advanceddistribution planning, and billing and collections. The latter subject isdiscussed in further detail below. It has been estimated that about 400consultant-months (average of 65 staff-months per participating SEB) would berequired of which about 300 would be local and about 100 foreign. Letters ofinvitation for proposals including terms of reference for specific assignmentsare under preparation and would be issued by individual SEBs in accordancewith the timetables agreed in the OFAPs.
IV. SYSTEM RENOVATION STUDIES
4. This component is aimed at identifying high-priority investmentsin the areas of upgrading of generating plant as well as in transmission anddistribution. The main objectives of the program are: (i) determine the causesof inefficient use of installations; (ii) propose ways to attack such causesor modification of existing designs or operating practices to avoid causes theelimination of which is uneconomical; and (iii) prepare the necessary
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Annex 3.1Page 8 of 8
engineering and implementation plan to carry out the recommendations. All SEBsand SGCs are eligible to participate in this program. It is expected thatabout 25 power stations, one or two major transmission systems, and about sixurban distribution centers would be included in the program. It has beenestimated that about 400 consultant-months would be required for the studiesof which some 300 would be local. Annex 3.3 gives the suggested terms ofreference for renovation of thermal stations.
V. INSTITUTIONAL DEVELOPMENT OF PFC
5. This a program to strengthen PFC's capabilities to discharge itsresponsibilities. The program will provide specialized services, equipment,software, and training. An Implementation Plan is presented in Annex 3.5. Themajor activities to be covered under this program include:
(a) enhancing PFC's management information system;
(b) developing administrative manuals and procedures to guide internaloperations:
(c) developing manuals for project appraisal and monitoring;
(d) training PFC staff in financial management, utility management,project management, power economics, upgrading of power plants,transmission and distribution, and planning and design ofdistribution systems; and
(e) establishing a unit at PFC for sector studies to support theCorporation's operations.
VI. PREINVESTMENT FUND
6. Annex 3.6 gives the details of functions and operation of thePreinvestment Fund.
VII. IMPROVEMENTS OF BILLING AND COLLECTIONS
7. This component is geared to support efforts being made by variousSEBs to improve their billing and collection systems. Some participant SEBsnave agreed, as part of the OFAPs, to revamp and modernize their billing andcollections. The objectives are, inter alia, to reduce cycle times, simplifyprocedures, set proper customer accounts, improve controls, and facilitatecustomer access to collection points. SEBs are in the process of preparingterms of reference and letters of invitation for consulting services inaccordance with the timetables agreed in the OFAPs. A second set of operationsunder this component comprises support to pilot billing and collection schemesof an innovative nature. Two of such schemes have already been identified: oneis related to possible implementation of prepaid supply by use of magneticcards and the other is a customer self-reading of meter being already testedsuccessfully by Uttar Pradesh SEB. The details of how to support these pilottrials will be developed jointly by PFC, the SEBs and the Bank.
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INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Environmental Review of Power Stations
Suggested Terms of Reference
OWl ectives
1. The objectives of the environmental review are to: (i) determinethe degree to which participating power stations are meeting environmentalstandards set by GOI, the States and the Bank; (ii) identify the correctiveactions needed to meet such standards in sustainable way; (iii) recommendother actions to restore plant environs to acceptable environmental conditionand maintain such condition thereafter; (i , recommend an environmentalmonitoring system for the plant; and, (v) prepare a detailed program forimplementation of the recommendations. The review should comprise handling ofinputs (coal, oil, etc.), emissions and effluents from the plant (stackemissions, water discharges, ash, dust control, etc), sanitary conditions inand around the station, including colonies and camps, foci of deteriorationaround the station stemming from plant operations, irregular settlementsassociated to the plant, and any other environmental impacts the need to bemitigated or corrected. The recommendations of the review should be actionoriented. In some cases the initial review may recommend more detailed studiesof certain aspects to establish proper solutions to particular problems. Thesestudies should not slow down other actions to arrest or mitigate environmentaldeterioration that can be implemented in parallel with the studies.
Scone of the Review
2. The review would comprise the following main activities:
(a) determination of environmental compliance requirements (review ofapplicable regulations and policies);
(b) review of any existing past records on environmental monitoring ofthe station and assess quality and relevance of record keeping;
(c) establish deficiencies in monitoring and formulate temporaryprogram for sampling and collecting missing information forpurposes of this review;
(d) assess quality of reporting and procedures for notification ofenvironmental conditions of the plant (for the utility and forother external authorities);
(e) assess adequacy of administrative arrangements to handleenvironmental aspects of the station (authority andresponsibility) and skills improvement needs;
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(f) assess employees and staff awareness of environmental aspects ofthe operation and need for educational programs;
(g) determine adverse environmental effects, potential risks anddeviation from norms being caused by handling of plant inputsincluding fuels, chemicals, water,and materials (dust, noise,spills potential, working conditions of operators, etc.);
(h) determine adverse environmental affects, potential risks anddeviation from norms being caused by handling of plant outputs(gas and particulate emissions, liquid effluents, ash, dust,refuse, etc);
(i) assess the adequacy of on-site/off-site facilities to handlestation inputs and outputs;
(j) assess the adequacy of pollution control equipment installed atthe plant, including gas emissions, particulate retention andremoval, water and sewage treatment, noise abatement devices, dustcontrol, etc;
(1) review adequacy of procedures and frequency of maintenance ofantipollution equipment including inspection and calibration ofmonitoring equipment;
(m) assessment of the overall sanitary conditions throughout thestation (water supply, sewage disposal, garbage disposal, rodentscontrol, sanitary facilities for staff,etc.) including coloniesand camps; and
(n) identification of other adverse effects on environment around theplant, caused by its operat'on, which should be addressed ormitigated.
ReDort and Recommendations
3. The results and recommendations of the review should be presentedin a report which should include a timetable for implementation of eachrecommendation, proposed approach and administrative arrangements, costestimates, and additional studies required if any, etc.
'.mnlementation
4. PFC would, as a condition of financing the installation ofelectrostatic precipitators, agree with the concerned SEB that it wouldconduct the environmental review and implement the recommendations as per theagreed timetable.
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Annex 3.3Page 1 of 9
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
'.. Tentative Scope of Technical Assistance for System Renovation
Background
1. Facing severe power shortages, India has decided, as part of itspower sector development strategy, to identify and implement actions formodernizing and upgrading existing facilities as a cost effective way toimprove supply. PFC is expected to play a significant role in this taskthrough providing financing for renovation and modernization schemes and byassisting SEBs and SGCs in the identification and formulation of such schemes.With these objectives in mind, PFC is interested in obtaining technicalassistance to enhance its knowledge of system rehabilitation andmodernization. The assistance would cover renovation of thermal andhydropower plants, transmission systems and substations and urban distributiongrids.
Scope
2. PFC is particularly interested in the following topics:
- system constraints analysis to identify elements suitable forupgrading;
- detailed methodology for inspection and diagnosis of systemelements (thermal and hydro plants, transmission lines,subctations' distribution systems);
- determination of cost effectiveness of rehabilitation schemes;
- approach to preparation and planning of rehabilitation projects;
- availability and suitability of state of the art equipment andmaterials for modernization projects, and planning of retrofittingschemes;
- organizational set-up for implementation and monitoring ofrehabilitation and modernization projects; and
- ex-post evaluation of renovation or modernization projects.
Methodology
3. PFC considers that the most effective way to induct andfamiliarize its staff with current practice is to expose its personnel toactual practice in utilities successfully implementing renovation and
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Annex 3.3Page 2 of 9
modernization programs. Under this approach, PFC staff would be invited byparticipating utilities to work in different phases of project formulation andimplementation.
4. In addition, staff from participating utilities would visit Indiato make classroom presentations, and organize workshops on specific aspects ofrehabilitation and modernization. This activity should be heavily oriented tothe practical aspects of planning and implementation as opposed to theoreticalanalysis of projects.
5. Participating utilities would subsequently provi_. support andadvice through PFC to predetermined SEBs in identification and preparation ofpilot schemes for modernization and rehabilitation.
6. The program is expected to last from three to four years. Adetailed program would be prepareJ when participating utilities areidentified.
Financing
7. PFC is interested in obtaining grant finance from the homecountries of participating utilities, Any expenses not covered by donorcountries would be financpd by the Bank.
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Annex 3.3Page 3 of 9
B. Suggested Terms of Reference for
Thermal Plant Rehabilitation
Objective
1. The objective of the work is to formulate and execute a program toupgrade the performance of the existing thermal plant in the most costeffective manner. The program will include a review and improvement ofequipment and installations, operational procedures, environmental operatingconditions of the plant, plant management and support services, andidentification of training needs of the staff. The main objectives of theprogram would be to: i) identify the causes of malfunctioning or poorperformance of units; ii) identify ways of economically eliminating ormitigating these causes of the problems; and, iii) implementing remedialactions as needed to restore plant to acceptable performance levels.
Phases
2. The proposed program is to be developed in three phases whoseprecise scope will depend upon the results of the preceding phase. GOI andthe SEBs have carried out diagnostics of the physical conditions of the units.Many SEBs have also partially upgraded a number of stations. These diagnosticsand actions should be taken as a basis, to be verified and modified asappropriate. The following paragraphs describe the general scope of eachphase.
Phase I
3. During Phase I, a work team (WT) including SEBs' staff andconsultants as needed would identify and select the corrective actions to beproposed in the program, including their economic justification and priority.In this phase the WT should:
(a) review the already existing reports or studies on the unitsprepared by GOI and the SEBs;
(b) confirm, modify or expand the proposals contained in the abovedocuments through visits and inspections to the units, discussionswith operations staff of the concerned plants, and review of theexisting information about the units' performance and operation;
(c) review and analyze the operation practices, the reliability,accuracy and relevance of the data being collected by the SEB, thequality of their analysis and the use being made of theinformation;
(d) review the practices for maintenance planning and scheduling;
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(e) assess the need for staff training and for administrative changesin the operation and maintenance, if needed;
(f) reviaw the support systems, like management of spares, fuel, etc.;
(g) assess the quality of the monitoring system, and appropriatenessof the instrumentation being used; and,
(h) develop cost estimates for the different corrective actions andprepare a cost-benefit analysis to rank them in merit order;
4. At the end of Phase I, the WT will prepare a report with theirfindings and recommendations, the cost estimates, and a tentativeimplementation plan for approval by SEB senior management.
Phase II
5. During this phase the WT will 6-velop a detailed implementationand monitoring plan to carry-out the meast selected under Phase I. Inaddition, the WT will develop the engineer .tg, technical specifications,drawings, and packaging for procurement of the necessary parts and equipment.Among other aspects, the following should be considered:
(a) organizational set-up for implementation;
(b) procurement schedule including recommended packaging andprocurement procedure to be followed (ICB, LCB, etc.) for eachpackage;
(c) repair schedule for each unit considering its operationalcommitments, delivery time for parts and equipment to be procuredand the options for power substitution;
(d) staff needed to carry-out the program by specialty and timing;
(e) training program of the staff;
(f) program for changes in procedures and practices for operation andmaintenance; and,
(g) monitoring for physical progress, cost control and results of theprogram, including the preparation of a model for progressreports;
Phase III
6. The SEB, with the assistance of the WT, would implement theprogram and evaluate the results.
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Annex 3.3Page 5 of 9
Sco0e of Work
7. The following is the list of plants and units andplant services systems to be renovated:
SEB Plant Name Unit Nos. KW Size Plant Systems
8. The WT will, for each unit and plant included in this program,carry out the following tasks:
(a) review the records and reports on the history of each of the unitsand plant systems under evaluation. This shall include the O&Mmaterial procurement and spares status, records and any otherpertinent files which may reveal data for evaluation. Theinformation revealed by these reviews shall be used in definingthe tasks to be included in the renovation of the units. Thisshall include the reasons for forced outages and unscheduled loadreductions. The tabulation of the tasks to be performed on eachunit/system under evaluation, shall be comprised of two lists; onewill include the tasks common to most of the units of this sizeand manufacture and the other list will relate only to conditionsprevailing in the individual plant or unit(s). If there is a needfor the redesign of a piece of equipment or a system, the WT willdraw up the terms of the redesign work and recommend who would dothe redesign. The plant engineering personnel shall beincorporated into the WT research, testing and inspection teams;
(b) discuss with the plant engineers any and all problems known tothem that either impact on the performance and availability of theunit or where designs have been furnished which are not compatiblewith the current fuels and/or operating regimen;
(c) inspect the entire unit and plant services during a scheduledoutage. The WT will pre-test equipment and related systems forperformance and/or integrity prior to the outage and analyze thedata to establish the areas which require detailed inspection andevaluation during the outage;
(d) review with plant managers and engineers the records, types andformat of the reports issued by each group, the oral and writ-tenoperating methods and procedures employed by the Operation andMaintenance departments, the performance of engineering andlaboratory test groups and any documents which will establish theways and means of managing the functioning of the plant.Maintenance planning procedures shall be given specialconsideration;
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Annex 3.3Page 6 of 9
(e) review the spare parts procurement and material conitrolprocedures. The fact that many of the plants are remote from anyother industrial facilities shall be weighed in the WT review ofthe personnel qualifications, spare parts and machine shopfacilities on hand;
(f) assess the adequacy of the administrative organization of theplant.
9. The WT shall review the plant organizations as they are now withthe purpose of making suggestions and/or observations where improvements inthe plant organization and skills can be enhanced through the proposedprogram.
10. Two major areas of improvement in unit efficiency and performancelie in: (a) the renovation and modernization of the instrument and controls;and, (b) the degree of upgraded or modern equipment, system and materials tobe installed on the unit. The WT shall determine and evaluate the conditionand suitability of the instruments and controls and the capability of theexisting equipment to efficiently process the fuels and ash materials and theair, gas, water, steam and power flows being transmitted through the units.The ability of the existing design equipment to function under actualconditions shall be evaluated against the installation of modern designequipment which would further enhance the performance and reliability of theunits. The evaluation shall include the life extension benefits by therenovation of the systems.
11. The following unit systems and equipment shall be included in theWT scope of review and evaluation:
(a) mill system from the feeder to the burners, including the coalpipes and the hot air ducting from the primary air fans to themill. The upgrading of the mills with new, modern design parts isalso to be investigated and evaluated;
(b) fans, including the forced and induced draft fans, primary airfans and if applicable, recirculating gas fans;
(c) coal and fuel oil burners including turn down ratios, flamestability, flame monitoring and control, wear rates, efficiency ofcombustion, etc;
(d) furnace and convection pass tubes, supports, hangers and headers.Include the effect on life span due to high temperature excursionsand due to high ash erosion and excess air operation;
(e) boiler casing/setting air tightness;
(f) air preheater operation, maintenance and thermal performance;
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(g) general condition and upkeep of insulation and lagging;
(h) high pressure and temperature piping and valve systems includinghangers, snubbers and weld integrity, creep and stress cracks,etc.;
(i) ash handling and storage facilities, capacity and wear rates;
(j) feedwater heaters and piping, valves, and support system;
(k) pump and motor drive units performance, control and reliability;
(1) turbine-generator functioning, equipment integrity and performancefrom front standard to the exciter. This includes bearings,governor, rotor and stator integrity (turbine and generator),seals, blading, electrical windings, etc.;
(m) condensing, cooling water and auxiliary equipment systems,instruments and controls including vacuum and seal systems,cathodic protection, level control and tube erosion/corrosionrates and pluggage and wear rates. The cooling towers andcondensate, hotwell and circulating water pumps' condition andperformance are also to be established;
(n) make-up water rates shall be assessed. Target consumption is tobe less than one percent;
(o) control and instrumentation functioning, control accuracy, partsavailability, capacity to control to within required set points,flame stability and monitoring and control systems, etc.; and
(p) the electrical system equipment and materials conditions are to beexamined, including the history of reliability of service on suchitems as the motors, switchgear and motor control centers,transformers, the relays and electrical controls and auxiliarypower consumption. The CEA statistical report on equipmentfailures indicates an unusually high incidence of electricalequipment failures. This should be studied and a program draftedfor the improvement in the reliability of this equipment.
12. In addition to the units to be evaluated and renovated, there arespecific plant systems which also require inspection by the WT. The plantsystems to be evaluated are listed below:
(a) the coal handling system shall be inspected and evaluated as tothe adequacy and suitability of service as it pertains to thepresent quality, quantity and physical size and extraneousmaterial content of the coal being delivered. The inspectionshall cover from coal delivery wagons to its discharge into themills. The coal sampling system(s) and the magnetic separator(s)
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Annex 3.3Page 8 of 9
and the size, number and capacity of the plant coal crushers areto be considered in this analysis;
(b) the stacking procedures used for storing the coal at the site asit pertains to rain drainage and the size of the storage pile(plant equivalent operating time), shall be included in theassessment of the coal handling system;
(c) the ash handling system shall include the ash pipe conveyingsystems from the unit hopper to the storage pond. The integrityof the ash pond volume is also to be evaluated including theadequacy of the size of the pond based on load forecasts, the ashcontent in the coal and the ash collected with the installation ofthe new high efficiency ESP's. The planting of trees andvegetation on the filled pond surfaces also shall be evaluated;
(d) the plant water treating and coal analysis test laboratories andinstrument test and repair shop facilities shall also be assessedfor suitability based on the size and complexity of the station;
(e) the cooling and makeup water systems may be installed as a commonplant system and as such should be included in the inspection andrenovation program. This includes the water storage tanks and thecooling towers and circulating water pumps and motors;
(f) the chimney may be installed as a common system and should also beappraised. This would include the flues and ducts as well as theinsulation and lagging and stack liner(s) integrity; and
(g) the plant control and instrument systems which are not included inthe units package.
13. It is recognized that the renovation and modernization of theunits may restore them to full rating. However, it is also apparent thatunless the original causes of the deterioration are also corrected, the unitswill return to the same poor condition again in 5 to 6 years time. This isespecially the case if the boiler furnace and convection pass sectionscontinue to experience the present day coal and ash flow rates. The WT shallalso include in the scope of services a realistic boiler rating which willpermit the unit to operate at acceptable availability rates (902) andmaintenance costs. It is assumed that the balance of the cycle will becapable of operating at full rating after the modernization of the unit. TheWT shall verify this point. In order to achieve full unit nameplate ratingsand still maintain acceptable performance on the boiler, the VT shall alsoinvestigate and establish the technical and economic feasibility of installingan additional boiler unit to supplement the lost steam flow from the deratedboilers. This cost shall be evaluated against the addition of new thermalcapacity.
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Annex 3.3Page 9 of 9
Environmental Upgrading
14. The WT will conduct a thorough inspection of the environmentalaspects of the stations to determine whether they meet established pollutionstandards and whether they are generally operated in a way that minimizesadverse environmental impact. The WT will also review the station'smonitoring arrangements and systems to ascertain their adequacy in light ofexisting regulations and current practice. The work of the WT will includeair pollution, coal handling and stacking practices, ash disposal system andreclamation of ash ponds, water discharges and thermal pollution. Theplanting of trees and vegetation on the filled pond surfaces also shall beevaluated.
15. The WT will pay particular attention to safety and industrialsecurity practices being enforced by the stations management on SEBs' staffand workers and those employed by sabs~ontractors working for the SEB.
Monitoring and Reporting
16. The WT will submit monthly project progress reports on the statusof the project in each plant, including cost expenditures, cash flow,schedule, construction progress with pictures, and any and all other mattersof interest pertaining to the overall status of the project and also thestatus of the work at each plant site.
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INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Draft Terms of Reference for Preparation of a TrainingProgram for PFC
1. Study the various functions to be performed at different levelswithin each department of the Power Finance Corporation. Growth Plans of PFCshould be considered to find out functions needed/likely to be performed innext 5 years.
2. Determine the expertise required at various levels to efficientlycarry out tasks. This would take into consideration work methods currentlyused the likely impact of any computerization/automation. As far aspracticable the dynamics of environment changes and technological innovationswould be kept in mind.
3. Identify existing skills available within PFC depending upon thequalifications, experience and training of different personnel.
4. Evaluate gaps between the skills required to carry out tasks andskills available within PFC.
5. Define the type of skills required into technical, inter-disciplinary and behavioral areas. Special emphasis would be laid on types ofinduction level training, refresher training and on the job training, andretraining of individuals as they move from one level to another.
6. Evaluate training needs at various levels based on the above, andclassify the as short term (to carry out specific tasks) and long term (toupgrade inzer-disciplinary skills and behavioral skills).
7. Study and recommend a corporate training plan for next 3-5 years.
8. Analyze and recommend an organization set up to look aftertraining functions in PFC. This includes defining roles and responsibilitiesfor training officers and mechanisms for their implementation. -Indicatetraining resources required and budgetary estimates.
9. List the institutions within and outside the country that canprovide training to PFC personnel in various functions. List the institutionsfor different functional areas of training vis-a-vis their specialization.
10. Prepare course outlines for various training programs to beorganized on regular basis.
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Annex 3.4Page 2 of 2
11. Develop a feedback mechanism to evaluate the impact of trainingbased on participants' feedback, instructors' appraisal and occasionalindependent review.
12. Develop linkage of training to performance evaluation, CadreDevelo-naent, job enrichment and institutional strengthening of PFC.
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Annex 3.5
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
POWER FINANCE CORPORATIONPLAN FOR IMPLEMENTING THE INSTITUTIONAL DEVELOPMENT PRoGRAM
1. Strengthening of PFC:(a) Structure 1(b) Managerial FunctAons I
(incLuding manuals Iand procedures) I USAID Prepare 1 month Hire 3 months Interim 3 months Final 6 months
(c) Human Resource Mgmt. I T.O.R. after loan consul- after Action after Action after(d) SEBa' Support Functions I is made tants loan is Plan start of Plan start of(e) M.I.S. 1 effective effective study study(f) Office Technology l
2. Establish Sector Studies IBRO Define 3 month ApprovaL 4 months Staffing 6 months Work 8 monthsUnit in PFC Scope of after loan by PFC6s after after Program after
Unit is made Board loan is loan is for the loan iseffective effective effective First Year effective
3. Establishment ofPre-investment Fund in PFC
(a) Set-up of Separate Fund I Prepare 6 months Retain 12 months(b) Define Policies & I T.O.R. after loan Consul- after
Procedures 1 IBRD is tents. loan is(c) Prepare ManuaLs I effective effective(d) Organize Consultants J
Rtoster 1(e) Appoint Staff
4. Enhancement of SESs' Prepare 5 months Retain 12 monthsBilling and Collections USAID/ T.O.R. after Loan Consul- after
(a) Preparation of OFAPs I(b) Consultancy to I USAID/ lAs needed according to each individual OFAPI
Implement OFAPs I IiRD(c) Training of SEBs Staff I
6. Engineering Studies forSystem Renovation
(a) Further Improvement to I Identify 4 months Prepare 6 months Retain 12 monthsplants renovated during 7thl IBRO Require- after loan T.O.R. after Consul- afterPlan 1 ments is made Loan is tants. loan is
effective effective effective
(b) High Priority I tBRD Identify 6 months Prepare 8 months Retain 14 monthsUpgrading of Other PLants 3 Candidate after T.O.R. after Consul- after
plants loan Is ioan is tents. loan iseffective effective effective
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Annex 3.6Page 1 of 3
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT "ROJECT
Power Finance Corporation Preinvestment FundConceRt and Scope of Operations
Background
1. Power sector operations and expansion have been hindered in India,inter alia, by a shortage of adequately prepared schemes to improve efficiencyand to expand system's capacity. The problem is particularly severe inhydropower projects and distribution schemes but it extends also to renovationof thermal stations and in some cases to transmission projects. The situationis the result of inadequate availability of funds to prepare projects andinadequate staffing of the SEBs or both. Moreover the level of preparation ofmany, projects are frequently below that required for financing decisions.This results in delays in obtaining funding and, more seriously, in unexpectedtechnical difficulties and cost over-runs duritrg construction.
Objectives
2. To alleviate the shortage of well prepared projects PFC hasdecided to create a Preinvestment Fund (PFCPF) which, would provide financingfor project preparation and design. The proposed PFCPF would f4nance thefollowing activities according to terms to be established by Pil:
(a) Preparation of prefeasibility or identification of power expansionor improvement schemes;
(b) preparation of feasibility studies for power schemes;
(c) preparation of detailed engineering for power schemes;
(d) preparation of studies of institutional nature and those necessaryto improve the managerial, financial or operational efficiency ofpower sector or power utilities;
(e) technical assistance and training necessary to implement actionsrecommended in the studies mentioned in (d);
(f) studies necessary for system integration at regional or nationallevel and for improved and efficient integrated operation;
(g) studies of a sectoral nature leading to improve sector-widepolicies and efficiency.
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Annex 3.6Page 2 of 3
Eligible ExRenses for Financing
3. PFC would finance the following items:
(a) Salaries (including social benefits), overheads, fees andreimbursable expenses of consulting firms or individualconsultants retained by the utilities (salaries, social benefitsand overheads of Government ownedO Consultant Organizattons,Government consultants or utility s staff are not eligible forBank financing but reimbursable expenses are);
(b) purchase of specialized equipment such as surveying andlaboratory equipment, specialized office equipment, computerhardware and software, equipment required for fieldinvestigation of projects, environmental monitoring equipment,etc;
(c) field exploration for projects contracted out includinggeological investigations, exploratory, audits, laboratory,modelling costs, specialized material testing. establishment ofinstrumentation systems (hydrological, seismologicalenvironmental, etc.) and any other activities necessary tosupport sound technical project design and preparation;
AnDroval of Loans
4. PFCPF financing would consider upon submission of properlysupported requests submitted by the concerned utilities. The proposal shouldinclude a justification of the proposed study, the scope and terms ofreference, cost estimate and basis for it, schelule of main activities anddetailed arrangements for implementation (i.e. employment of consulting firms,individual consultants, counter part staff and facilities. etc.) and detailedprocedures to be followed for procurement of goods, works and services.
Amount of Financing
5. PFC could finance up to 100% of eligible study costs on tents bedetermined from time to time by PFC Board.
Source of Funds
6. PFC would finance the activities of PFCPF through equitycontribution from GOI, grants and loans from various donors and multilateralfinancial institutions and reinvestment of profits that may be generatedthrough its own operations.
Accounts and Audit
7. Accounts of PFC would be kept in such a way that all PFCPFoperations can be clearly identified and audited by independent auditors.
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Annex 3.6Page 3 of 3
Prganization and Responsibilities
8. The PFCPF would operate as a specialized unit within PFC and not asa separate entity. This unit would be staffed as needed to discharge thefollowing responsibilities:
(a) Review and recommend to the Board of PFC requests for financingstudies;
(b) assist potential borrower in the identification and preparation offinancing applications;
(c) keep a roster of firms and individuals qualified ftc consultancyassignment for use by users of the PFCPF;
(d) establish guidelines for selection and use of consultants;
(e) assist borrowers in the selection of consultants;
(f) assist borrowers in the preparation of terms of reference andtypical contracts for consultancy services;
(g) assist borrowers In administration of consultancy contracts; and
TOTAL PROJECT COST 749 367 1,116 26 13 39Interest During Construction:
World Bank 20 33 54 1 1 2Other 83 0 83 3 0 3
..... ...... T ...... 1,2-3-30 ...... .....14 ..
TOTAL FINANCING REQUIRED 852 401 1,2F3 30 14 4
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Annex 3.8Page 1 of 2
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Procurement Arrangements
1. Procurement of materials and equipment for the project would becarried out by individual beneficiary SEBs under the coordination of PFC.Model bidding documents, approved by the Bank, would be used to ensureconsistency of procedures. PFC plans to hold two main international biddingrounds as follows:
Activity Date Date(Phase I) (Phase II)
Finalization of bid documents 10/91Invitation of bids 12/91-2/92 4/92-6/92Bid opening 3192-5192 7/92-9/92Bid evaluation and review by Bank 5/92-7/92 9/92-11/92Award of Contracts 6/92-8/92 10/92-6/94
The main packages to be procured comprise the follo-tng materials, equipmentand works:
Meters ConductorPower Transformers CapacitorsRail Poles Concrete PolesSteel Structures Batteries and ChargersInsulators and Fittings EarthwireLow-tension Circuit Lightning ArrestorsCommunications Equipment Miscellaneous EquipmentErection of Equipment Miscellaneous CivilLand Antipollution EquipmentEngineering and Administration Studies for SystemStudies for SEBs Development Studies for PFC DevelopmentPreinvestment Studies
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Annex 3.8Page 2 of 2
2. Invitation of proposals for consuLing services for Training andInstitutional Development of PFC would be procured starting in January 1992.Consultancs are expected to mobilize by July 1992. Consultants for the SEBswould be retained in accordance with the timetable agreed in the OFAPs foreach SEB.
Repayment of Loans 5,251 6,470 8,018 9,342 9,289 38,370
Net Ir.ternal Cash Generation (8,003) (6,593) (11,837) (19,274) (15,863) (61,569)
Net Int. Cash Generation US$ million (635) (509) (850) (1,188) (910) (4,091)
C. Financial Ratios
--------------- Average
Net Fixed assets, beg. of year 136,870 166,060 180,850 204,570 244,220 191,545
Average Rate of Return (d) -5.0 -3.8 -4.6 -7.5 -9.3 -6.2
Adjusted Av. Rate of Return(e) -11.3 -9.4 -12.8 -13.3 -13.2 -11.9
Debt Service Coverage (f) 0.65 0.83 0.53 0.52 0.54 0.60
Debt Service Coverage (g) 0.36 0.46 0.30 0.30 0.30 0.33
Source: Planning Comission, Annual Reports on the Uorkings of the SE0s,
New Delhi, 1989, 1990; PFC data.
(a) Subsidies are seldom paid. In some cases they are upset against interest.
(b) Assuming that receivables are equivalent to about 90 days of sales .
tc) Assumes that interests on Goverrnment Loans are not paid.(d) On net historical fixed assets, after interest.
(e) Adjusted for subsidies not received.
(f) Adjusted for subsidies not received. Excludes interest on Goverrumnt loans(g) Adjusted for subsidies not received. Includes interest on Government loans
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Annex 4.2
INDIA Page 1 of 4
POWER UTILITIES EFFICIENCY 1MPROVEMENT PROJECT
POWER FINANCE CORPORATIONHistorical and Projected Income Statemnts
Assumptions Followed In Financial ProjectionsBase Case
Income Statement
1. Interest on Loans: 12.5Z p.a. up to 1991/92; 15?afterwards.
2. Income from Investments: 10? p.a. on cash reserves invested.
3. Administration: one half of one percent of loans disbursedduring the year.
4. Bond Issue Expense: 1? of the bonds floated during the year.
5. Tax Provision: 212 of income before taxes.
Sources and Applications of Funds1. Equity Contribution: it was assumed that GOI would continue
making its contributions towards PFC'scapital at the same pace of preriousyears.
2. Borrowings: although it is recognized that, to helpdevelop PFC into a major player in thepower sector, GOI intends to allow it totap the domestic market in amounts muchlarger than those of the initial years,for the base case it was decided to take amore pessimistic approach. Accordingly,the level of borrowing grows gradually.On the other hand, the limitations in theavailability of 10 year, 92 and 20-year,11.5? bonds, were taken intoconsideration. Most of the borrowing isassumed to be through 7 years, 13t bonds.On-lending from GOI to PFi of the proceedsof foreign loans is assumed at 11.5Z p.a.,with a total maturity of 15 yearsincluding 3 years grace period. GOIassumes the foreign exchange risk.
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3. Repayment Received: In the spite of the securities designed into PFCoperations, to maintain a conservative margin itwas assumed that only 80? of the payments duewere collected.
4. Loans Granted: Several factors affect the future level of PFC'slending. These include: (a) receptivity toPFC's conditionality; (b) ability of clients tocomply with PFC's eligibility criteria; (c)availability to SEBs/SGCs of alternative sourcesof funds; and (d) PFC's own access to sources offinancing. For thebe reasons, a ratherconservative posture was assumed. However, itis recognized that the level of lending assumedin the base case may not be compatible with theshare of the sector funding GOI expects to takein the Eighth Plan.
Balance Sheet
Investments: The cash reserve was assumed equivalent toabout six months of disbursements. It wasassumed that it would be invested inassets readily convertible into cash.
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Annex 4.4Page 1 of 2
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Sensitivity Analysis - Selected Cases
Case "A"
Parameters (1990191-1994/95):
(a) Lending Volume: Rs 125,000 million, at 12.5Z p.a.
(b) Foreign Borrowing: Rs 10,000 million (112 of borrowings), at 82 p.a. plus 62foreign exchange risk.
(c) 10-year, 9% Bonds: Rs 46,800 million (532 of borrowing).
*d) 20-year, 11.52 Bonds: Rs 31,200 million (35Z of borrowing).
IRG as Z of Loans Granted-Rs. Million 11 14 20 27 34Debt Service Coverage Ratio (DSCR) 2.2 2.1 2.2 2.4 2.5DSCR Excluding Collections 1.9 1.8 1.7 1.6 1.6Interest as Z of Operating Expenses 80 83 85 86 87Net Return on Portfolio Z 3.9 3.4 3.2 3.1 3.1Administration as Z of Portfolio 0.1 0.1 0.1 0.1 0.1Return on Net Worth 2 13.1 13.2 13.5 13.7 13.6Debt Equity Ratio 2.6 3.1 3.4 3.6 3.6
Case "BO
Parameters (1990/91-1994/95)
(a) Lending Volume: Rs 44,650 million, at 152 p.a.
(b) Foreign Borrowing: Rs 6,400 million (26Z of borrowings), at 142 p.a.
(c) 10-year, 9% Bonds: nil.
(d) 20-year, 11.5Z Bonds: Rs 16,750 million (67X of borrowing).
IRG As X of Loans Disbursed 15.74 26.60 35.78 33.98 33.92Debt Service Coverage Ratio 2.15 2.60 2.86 2.65 2.50Interest as Z of Optg Cost 98.20 97.82 97.51 97.43 97.38Return on Loan Portfolio 4.73 5.61 5.26 4.90 4.66Admn Expl Portfolio 0.06 0.06 0.06 0.05 0.05Return on Net Worth 2 12.61 14.24 13.40 12.88 12.85Interest Paid As 2 Of Total 47.53 43.43 45.65 48.46 50.91
Case "C"
Parameters (1990191-1994195)
Substantially the same as the Base Case, but assuming PFC's lending rate remains at12.5?
(a) Lending Volume: Rs 73,338 million, at 12.5% p.a.
IRG as X of Loans Disbursed 21 24 27 31 33Debt Service Coverage Ratio (DSCR) 2.3 2.4 2.3 2.5 2.5DSCR Excluding Collections 1.4 1.7 1.6 1.6 1.6Interest as Z of Ope. Expenses 77 82 86 86 87Net Return on Portfolio X 3.2 2.8 2.9 3.0 3.1Administration as Z of Portfolio 0.2 0.2 0.2 0.2 0.2Return on Net Worth 2 8.5 9.0 9.3 9.5 9.8Debt Equity Ratio 1.7 2.2 2.2 2.2 2.2
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Annex 5.1Page 1 of 19
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
PUNJAB SEB TRANSMISSION AND DISTRIBUTION PROJECT
Economic Analysis
1. Punjab State Electricity Board is seeking PFC financing under theproposed Bank loan for its proposed set of transmission and distributionexpansion schemes. This section illustrates the methodology applied by PFC inevaluating the economic viability of the T&D schemes based on the approachrecommended by the Bank. Similar analyses were undertaken in the economicappraisal of project proposals from other SEBs.
2. To assess the economic viability of PSEB's proposed transmission anddistribution schemes, the sub-projects were reviewed as to whether:
(a) they are part of t.ie least cost power system expansion program forthe State as well as for the Northern Region p..wer grid; and
(b) the investments will yield adequate economic benefits to the country.
Pro.ect Scope and Objectives
3. Punjab SEB's proposed project for PFC financing from the World Bankloan consists of:
(a) construction of about 331 km of single circuit and 250 km of doublecircuit 220 kV lines, and associated substation with aggregatetransformer capacity of 600 MVA; and
(b) reinforcement of distribution system in seven (7) major towns byproviding additional sub-transmission lines, associated sub-stationand distribution transformers as well as capacitor banks and meters.
4. The transmission system improvements will help meet the growingelectricity demand in Punjab State by facilitating the evacuation of powerfrom the 2x210 MW capacity additions to PSEB's Ropar Thermal Plant and GuruNanak Development Thermal Plant (GNDTP), respectively. In addition, theproject will improve the dispersal of the allocated share of power from thenodal point of the central sector (NTPC and NHPC). Other components of thetransmission project involving network revamping will result in the upgradingof delivery voltages, increased service reliability and reduced system losses.
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5. The parallel expansion and reinforcement of the discribution systembeing proposed is expected to result in delivery of electricity to more users,increased reliability of existing services and lower distribution losses.
Market Profile.
6. Over the past 5 years, peak demand for power served by the Punjabgrid, increased at an average annual rate of 12.7% reaching 2,771 MW in1989/90. Actual peak demand is however estimated to be even higher in view ofthe load curtailments that have been experienced due to the shortage of demandcapacity at periods of system peak. In the coming 5 years, peak demand isexpected to grow at an average of 7.3% per annum or to just below 4000 MW by1994/95. Energy sales have increased since 1985 at a corresponding rate of12.3%, and is estimated to have reached 12,037 GWh in 1989/90. Sales isprojected to rise at a yearly average of 7.1% growing to nearly 17,000 GWh by1994/95.
7. The present structure of electricity demand in Punjab comprise of39.7% agricultural, 34.6% industrial, 11.0% domestic, 7.8% fertilizerproduction served through common hydro pool, 2.6% commercial, and the balanceof 4.3% for streetlighting and bulk supply. The high share of agriculturaldemand is expected to be sustained over the coming years since Punjab is alead agriculture center of India accounting for about 60% of the country'scereal production.
Svstem SUDPly
8. PSEB's current installed capacity is 3,050 MW consisting of 1280 MWcoal-fired plants, 515 MW of hydro and 1254 MW share of common poolhydroplant. In addition, PSEB has an allocation of 575 MW from the centralsector power projects operated by NHPC and NTPC.
9. The Board operates an extensive high voltage transmission grid atvoltages of 220 kV, 132 kV, 66 kV and 33 kV. Major expansion has occurred inthe 220 kV and 66 kV network, including upgrading of 132 kV supply to 220 kV,and of 33 kV supply to 66 kV, At the same time, the 33 kV network isprogressively being phased out. PSEB's substation capacity has expanded at anaverage annual rate of 7.6% since 1984. As of March 31, 1989, PSEB'stransmission and distribution facilities are as follows:
Table 1: PSEB's T&D Network
Voltage TED Lines Substation(in ckt.km.) No. Capacity (MVA)
10. System peak normally occurs in late summer and fall (September toNovember) under high temperature conditions. The rise in demand is primarilydue to irrigation pumping requirements for agricultural purposes. In 1989/90,the peak demand of 2771 MW was registered in September and the system's loadfactor was about 65%. Transmission and distribution losses were 17%.
11. Generation dispatch in the grid is based on the seasonal pattern ofhydro production which accounts for about 60% of the system's energyrequirements. Major pondage inflows occur in summer, during the monsoonseason, and after winter when snow melt from the mountains. Overhaulmaintenance of theri,ial stations is pursued at time of maximum hydroproduction; conversely, hydroplant maintenance is carried out when irrigationreleases are low, at which time, thermal production is maximized.
12. This seasonal interplay of thermal and hydro production is a criticalfactor in the design of PSEB's transmission network. A salient feature of theproposed project is the strengthening of the transmission linkage between thethermal and hydro stations so as to permit optimum and flexible operation ofthe grid under varying conditions of hydro and thermal mix.
Least Cost Analysis
13. The PSEB has carried out internal staff studies to arrive at theleast cost options of attaining the operational objectives targetted by theirproposed projects. These analyses were in terms of detailed load flow studiesto identify the weak points of the network and possible circuit andtransformer overloadings. Alternatives satisfying system reliability andvoltage design criteria have been examined at various stages of planning toarrive at the best option based on technical and cost considerations.
14. PFC has reviewed the alternative options considered by the PSEB. Ina number of cases, there were no reasonable alternatives to the proposedschemes, e.g. the stringing of a second circuit on transmission towersalready erected and lines traversing the shortest direct route betweendesignated loading points. Moreover, as in other systems, PSEB has generallystandardized transmission system voltages at 220 kV and conductor ratings at100 MVA per circuit, such that consideration of alternative voltages havelargely been limited to cases of upgrading from 132 kV to 220 kV. For sub-transmission systems, the voltages and type of substations depend on variousfactors, such as load density and network layout. Transformer size andratings have also been standardized; the most common voltage ratings of thesecondary sub-transmission systems are 132/110/66/33 kv, and for primarydistribution system, 11, 22 or 6.6 kV.
15. The 220 kV works itself have been cleared by CEA following itstransmission planning criteria. These criteria require transmission systemsto be planned based on regional self-sufficiency, capable of transmitting the
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respective state's allocation from the Central Sector, and able co withstandspecified levels of outages I/ without having to resort to load shedding orrescheduling of plant generation.
16. In the case of distribution schemes, whenever possible, low costalternatives have been considered by PSEB, e.g., outdoor substations overindoor, overhead lines following shortest direct routes over undergroundcables, etc. Since the schemes cover mainly critical works for immediaterelief to the systems and are to meet the load growth up to the next fiveyears only, consideration of alternative voltages was limited. The procedureadopted by PSEB has been to select the reinforcement and renovationrequirement in the distribution system to satisfy design criteria mutuallyagreed with PFC. These criteria cover statutory requirements of supply (e.g.,voltage regulation), reliability norms, flexibility for future expansion andother technical considerations.
State oer Investment grogram Analysis
17. The State Power Investment Plan for Punjab calls for the installationby PSEB of 930 MW of generating plant addition between 1990 and 1995, of whi.hover 90% is in terms of additional coal thermal capacity. Together with theplanned transmission and distribution improvements, the program will involvecapital outlays of about Rs 21 billion (excluding IDC and contingency) overthe five-year period ending 1995. Of this aggregate investment, 60%represents the cost of generation plant expansion, 26% for transmissiondevelopment, and the balance of 14% for distribution improvement. PSEB'ssystem expansion under the program will be further supplemented by additionalpower allocation from the Central Sector resulting from NTPC's and NHPC'srespective investment expansion activities. Energy transfers from the CentralSector is projected to increase from 2144 Gwh in 1988/89 to 3438 GWh in1991/92 and stabilizing thereafter.
18. Under the Program, reserve capacity margin is expected to declinefrom 29% to 15% suggesting that peak capacity shortfall will continue to be aproblem despite the planned plant additions.
State Proaram Costs
19. In addition to the capital costs of the program, the operating andmaintenance (O&M) expenses associated with ,he grid operation including thecost of energy purchases from the Central Sector were considered. The costand technical operating parameters assumed are:
(a) Fuel costs are based on the purchase price of Rs 642 per ton of coaland Rs 3.33 per liter of fuel oil; and fuel consumption rates of 0.66kg per kWh generated for coal, and 0.0132 kg per kWh for oil as perexisting plant operation;
11 These are outages of (a) two circuit of 220 kV system, or (b) of onecircuit of 400 kV or higher voltage system, or (c) of one pole of HVDCbipole, or (d) of an EHV transformer.
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Annex 5.1Page 5 of 19
(b) Annual capacity factor of thermal units is taken at 60%; auxiliaryconsumption at 8%;
(c) Other O&M expenses are estimated at 2.0% of capacity cost forgeneration, 2.5% for transmission, and 3% for distribution. Theseestimates are consistent with historical levels of O&M costs of PSEBwith due allowance for incremental effects of plant improvements; and
(d) Purchases from Central Sector projects was priced at Rs 0.44 per kWhbased on anticipated price levels to be set by NHPC and NTPC.
20. In calculating the economic costs, taxeE and duties are excluded fromthe above financial estimates, and local currency costs subject to a standardconversion factor (SCF) of 0.8. Coal used at PSEB's thermal plants arerailed from mines situated near the border of Bihar and West Ber.gal and isclassified as low grade CIL class E steaming coal with specific heating valueof 16.0 GJ/Tonne (or 3800 to 3900 kcal/kg). In view of its relatively poorquality and low heating value, the coal is considered non-tradeable and itseconomic cost is estimated at Rs 429 per ton. The economic price of fuel oilis based on the border price plus local handling and delivery costs and isestimated at Rs 2.5 per liter.
State Program Benefits
21. The benefits of the State Power Investment Program consist of theadditional power supply arising from capacity expansion in power plants(930 MW) as well as in the transmission and distribution network.Commissioning of new generation facilities is expected to meet increases insystem demand as well as displace less efficient thermal generation during theplants' initial years of operation.
Table 2: Projected Energy Dispatch from New PSEB Capacity(in GWh)
Additional GWh GWh Displacement Total GWhFiscal Year Input to System of Less Efficient Units Generation
22. The benefit due to incremental power supply (including thoseresulting from power purchases) is assessed in terms of the revenues derivedfrom the equivalent electricity sales (assuming 17% T&D lo3ses). The patternof end-user consumption is assumed to remain stable at 40% agriculture, 40%industries, and 20% residential/commercial. Average sales revenue is assumedto remain constant at Rs 0.70 per kWh based on prevailing tariffs and State
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Annex 5.1Page 6 of 19
subsidy. PSEB's average tariff increased by less than 5% a year since 1984/85and has thus not kept abreast with inflation. Domestic and industrialcustomers have shouldered most of the increase, while agricultural usersenjoyed even larger tariff subsidy resulting in reduced agricultural rates ofRs 0.08 per kWh in 1988/89 compared to Rs 0.19 per kWh in 1985.
23. For the purpose of determining the economic value of electricityconsumption, the prevailing tariff adjusted by SCF of 0.8 is taken as thelower limit of the consumers' willingness to pay, i.e. Rs 0.56 per kWh. Theupper limit is established based on the consumers' cost of electricity fromalternative power sources. For residential and commercial consumption, thealternative is taken to be the cost of autogeneration from small dieselsestimated at Rs 2.75 per kWh. For industrial users, the relevant cost is thatof autogeneration from larger diesel units (250-400 kW) estimated at Rs 2.07per kWh. For agricultural consumers, the upper limit was taken to be theequivalent energy cost of providing irrigation pumping from diesel pumps inlieu of electric pumps, estimated at Rs 3.41 per kWh. Applying these costs tothe sectoral pattern of electricity consumption in Punjab yields an averageupper limit of Rs 2.74 per kwh. To estimate the consumer surplus, it isassumed that to avail of additional power, consumers will be willing to pay apremium equivalent to about 50% of the difference between the cost ofsubstitutes and existing tariffs; i.e., an average consumer surplus of Rs 1.09per kWh.
24. The value of energy displacement of generation from less efficientthermal generation is expressed in terms of cost savings arising from thehigher thermal efficiency derived from the operation of the new units comparedto the existing units at GNDTP at Bhatinda.
Investment Returns on State Program
25. Financial evaluation of the 5-year State Power Investment Programindicates that for as long as the ex.sting average tariff of Rs 0.70 per kWhprevails, the program will yield a negative financial return. The cost ofincremental supply attributable to the program is Rs 0.92 per kWh sold,assuming zero interest rate of financing. Of this, Rs 0.785 per kWh is due tothe generation component; Rs 0.087 per kWh is due to transmission, and Rs0.05 per kWh due to distribution. If the program were to yield sufficientfinancial margins to service funds at say, 12% interest, the tariff would haveto be set to at least Rs 1.41 per kWh. The OFAP mutually agreed to betweenPSEB and PFC will address deficiencies in PSEB's financial operations, and ifsuccessfully implemented will improve the financial returns to PSEB'sinvestment program.
26. In contrast, the economic internal rate of return (EIRR) of the StatePower Expansion Program is 2i6, yielding a net present value (NPV) at 12% ofRs 12,634 million. Benefits considered include the consumer surplusassociated with incremental electricity sales. If consumer surplus wereexcluded, the EIRR would be negative given that tariffs continue to be setbelow the marginal cost of supply.
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Annex 5.1Page -' of 19
27. Sensitivity analyses under conditions of reduced electricity sales,project cost overruns and delayed commissioning result in the followingindicators of economic returns:
Table 3: Results of Sensitivity Analyses of the State Prozram
EIRR NPV at 12%(V) (Rs million)
Base case 26 12,634Benefits less 20% 18 5,772Costs over 20% 20 8,468Benefits less 20% and costs over 20% 13 1,438One year delay in commissioning 20 8,903
28. Even under adverse variations in benefit and cost levels, the Stateinvestment program is expected to yield more than the target minimum economicrate of return of 12%. Nevertheless, prudent control of program expenditureswill have to be exercised together with efficient operation of proposed systemfacilities to ensure that the program's service targets are fully met andbenefits maximized.
Average Incremental Cost (AIC) of Power SuDPlY
29. As a measure of the long run marginal cost (LRMC) of el :tricity inthe State of Punjab, the average incremental cost (AIC) of supply at thelevels of generation, transmission and distribution were derived based on thecosts associated with the State's Power Investment Program. The resulting AICestimates per kWh sold, at the discount rate of 12%, are: Rs 0.81 per kWh atthe generation level, Rs 0.162 per kWh at transmission, and Rs 0.09 per kWh atdistribution. The total AIC per kWh sold comes to Rs 1.062 per kWh comparedto the value of electricity based on an estimate of consumers' "willingness topay" of Rs 1.65 per kWh.
Northern Region ExRansion Program Analysis 2/
30. PSEB's proposed transmission projects have been sanctioned by CEA asconsistent with the overall power development plan for the Northern RlegionPower Grid. In addition to Punjab, the regional plan is based on the powerrequirements of the States of Himachal Pradesh, Jammu and Kashmir, Rajasthan,Uttar Pradesh, and the union territories of Chandigarh and Delhi.
/ This discussion is based on the regional program analysis undertaken inconnection with the Northern Region Transmission Project. Thecalculations were adjusted with respect to: (a) consideration of 0 andM expenses starting only in 1996/97; and (b) exclusion of projectedincreases in tariff level to match the constant tariff assumption usedin the evaluation of the State program and of the individual sub-projects.
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31. Peak load served by the grid has expanded at an annual average rateof 13.2% from 5,694 MW in 1981/82 to 11,991 MW in 1987/88. Energy deliveriesgrew at an average of 10.1% per annum, 'rom 30,035 GWh to 53,566 GWh over thesame period. However, regional grid supply has been unable to keep pace withthe growth in demand. It is estimated that in 1987/88, the peaking capacitydeficit was 3,276 MW or 27% of peak demand, and the energy supply shortfallwas 6,155 GWh equivalent to 10% of total requirement. Over the coming years,CEA projects that system peak load and energy demand in the region wouid growat about 9.8% a year to reach 36,646 MW and 182,239 GWh by year 2000.Capacity and energy supply deficits (in the order of 6000 MW and 13,600 GWh,respectively) will continue to be a problem despite the programmed expansionin powez infrastructure.
32. The current (1989/90) pattern of electricity consumption in theNorthern Region is characterized by 42% industrial use, 28% agricultural, 16%domestic, 9.6% commercial, and the balance due to public utilities. By year2000, it is projected that industry and agriculture will retain their relativeranks, with modest gains in the share of domestic and commercial sectorsexpected.
Regional Program Costs
33. Among the expenses and operating parameters considered in theestimation of the costs associated with the Northern Region power program forthe time-slice 1989/90 to 1999/2000 are the following:
(a) Economic value of investments in generation plants are projected toinvolve over Rs 200 billion. Capital costs of transmission anddistribution facilities are estimated to be in the range of 60% ofgeneration investments;
(b) Incremental operating and maintenance costs are assumed proportionalto the capacity costs of the respective facilities; i.e., at 2.5% forthermal plants, 1.1% for hydroplants, 1.0% for transmission anddistribution;
(c) System losses are projected to decline from the current 22% to 15% by1996/97. Plant station use is assumed at 10% for thermal stationsand 1% for hydroplants; and
(d) Fuel costs are based on fuel consumption rates of 0.61 kg. of coalper kWh and 10 ml of oil per kWh. Average cost of coal supply isRs 237 per tonne, assuming 50% of thermal stations are located at thepithead, and 50% near load centers. Economic price of fuel oil isassumed at Rs 2.7 per liter.
34. The economic costs applied excludes all forms of taxes and duties,and includes adjustment of local costs by the 0.8 standard conversion factor.
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Annex 5.1Page 9 of 19
Program Benefits
35. Benefits derived from the regional expansion program and theirvaluation are similar to those resulting from the State program. Existingaverage tariff in the region is Rs 0.67 per kWh, or after applying the 0.8SCP, it is equivalent to the lower limit of consumers' willingness to pay ofRs 0.53 per kWh. The consumer surplus is estimated at Rs 1.10 per kWh,yielding an average value of electricity service of Rs 1.63 per kWh.
Program Returns
36. Assuming benefits reflect consumer surplus, the derived economic rateof return for the program is 15%, or yielding a net present value of Rs 51.400million at the 12% hurdle rate. If consumer surplus were excluded, the EIRRwould be 0.6%.
Transmission Project Analysis
37. PSEB's proposed 220 kV transmission project involves two majorcategories of works under which CEA clearances have been obtained, namely:
(a) evacuation and dispersal of power from generation stations, and
(b) system revamp and upgrading.
38. Specifically, the project calls for the completion of transmissionlines associated with the Ropar Thermal Plant (RTP) Stage II, installation ofnew 220 kV routes in conjunction with the commissioning of RTP Stage III,establishment of a tie-line between the existing (Stage II) and forthcoming(Stage III) at GNDTP, and 220kV access to the south-eastern region of Punjabby connecting GNDTP Stage III to Sunam via Mansa. The system revamp componentwill involve voltage upgradin-, relieve ove-..;.. 4ng of existing circuits,provide 220 kV service to the Jallalabad loa, cer:er, as well as facilitateefficient dispersal of power from the Bhakra r,_-o complex.
39. The transmission activities will involve eight line segments of whichthree are associated with RTP power evacuationi, two with GNDTP and the restinvolving general system improvement. Proposed substation expansion calls foradditional transformer capacity totalling 600 MVA compo3ed of the following:
40. The transmission project will involve Rs 970 million capital outlayover the period 1992 and 1994, representing 18% of PSEB's aggregatetransmission expansion program for the coming 5 years. In addition toensuring that the proposed set of transmission schemes is consistent with thesystem expansion plan for the Northern Region and for the State, thetransmission project was analyzed an to its net benefit and investment return.
41. The initial approach was to view the project from its operationalobjectives and to gauge the deleterious effects on PSEB's system operation ifthe proposed schemes were not pursued. Load flow studies at system peakdemand were provided by PSEB both with and without the new lines for selectedyears. An analysis of these load fliws indicate that as early as 1992/93, theabsence of the proposed lines for evacuating power from the Ropar ThermalStation (RTP) will cause an overloading in the existing circuits, namely, RTP-Lalton Kalan (LTKL) and RTP-Gobindgarh, during maximum thermal conditionswhich would result in load curtailment of at least 150 WW during peak hours.Moreover, even with the shedding of the 150 MW load, the probability ofoutage incidence under both maximum thermal and maximum hydro conditions isincreased due to heavier circuit loading. Transmission expansion in RTP'sservice area represent at least 50% of the incremental sales served by theproject.
42. A second set of benefits is derived from the operation of the linesassociated with the commissioning of the GNDTP III at Bhatinda and erection ofthe Mukatsar-Jallalabad line. Based on the load flow configuration of1994/95, the proposed circuits in the Bhatinda service area are expected tocarry a combined peak load of about 190 MW from the GNDTP station duringmaximum thermal production of which at least 60% represents incremental load.Part of this incremental demand is attributable to the load growth in Sunamand Jallalabad estimated to reach 87 MW and 105 MW by 1994/95.
43. A third set of benefits is the reduction in overall system lossestimated at 37 MW resulting from the implementation of the proposed systemrevamp.
44. In addition to the capital and associated operating and maintenancecosts of the project, the incremental capacity and operating costs ofgeneration and distribution based on the AIC estimates derived from the Stateprogram are considered. Incremental sales from the increased plant generationpermitted by the project are valued in terms of consumers' willingness to pay.Savings due to prevented load curtailment, reduced outage risks, and reducedsystem losses are likewise expressed in terms of improved levels of energydelivery.
45. The resulting economic rate of return (EIRR) is 87% for thetransmission package and its net present value (NPV) at the discount rate of12% is Rs 5.568 million. The high economic return reflects the criticalnature and urgent need for the lines, as their absence would create a systembottleneck in the delivery of additional power available from the thermalplants and will hinder improvement of existing electricity service in theState. On the other hand, the financial rate of return is negative sincetariff is set below financial cost of supply.
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Annex 5.1Page 11 of 19
Alternative ARproach
46. In order to assess the relative contribution of each of the eightline segments comprising the proposed transmission package, and thusfacilitate investment decision in case funding limitation requires PFC to rankand prioritize sub-projects, an alternative estimation approach was pursued.It was assumed that since the package accounts for 20% of the transmissioninvestme.nts in the State over the next 5 years, additional PSEB transmissioncapacity equivalent to a year's expansion is attributable to the package.Accordingly, it is assumed that the eight lines will service a one-yearincrement in system sales and this service level is taken to remain constantover the operating life of the lines. The proportion of incremental salesattributable to each line is assigned based on the relative magnitude of theload that is expected to flow through the line; i.e., proportional to theratio of peak load flowing on the individual circuit to the sum of peak loadserviced by all the project lines. In addition, the reduction in transmissionlosses resulting from installation of each circuit were also identified.
47. The estimated average peak loading and loss reduction for eachcomponent are given in Table 5.
Table 5: Avgraee Peak Load Flow and Loss Reduction(in MW)
48. Expectedly, the resulting financiel returns for all the transmissioncomponents are negative reflecting the low level of tariff relative to thecost of production. However, the economic rate of return (inclusive ofbenefits due to consumer surplus) consistently exceed the hurdle rate of 12%.
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Annex 5.1Page 12 of 19
Table 6: Net Present Values and Economic Rates of Returnof Pronosed Transmission Lines
49. If the cost and benefit flows derived for each of the project lineswere consolidated, the resulting EIRR for the transmission package is 90j.The return is slightly higher than the j1 return obtained under the firstapproach due to the deferred timing of circuit loadings in the Bhatinda areaassumed under the first approach as well as the lower level of system lossreduction considered. I/ Both approaches reflect similar findings on therelative economic contribution of each of the transmission components.
50. Since detailed load flow simulations (under different generation mixconditions and for several operating years) necessary for analysis under thefirst approach are not readily available as it requires detailed computersimulations, it has been agreed that in the interim, the second method will beused by PFC in evaluating all the other transmission proposals submitted bythe various SEBs. In addition to facilitating the evaluation of multiple-line proposals, the approach is able to reflect the salient operationalcharacteristics of each scheme and provides an adequate estimation of theeconomics of the transmission projecc. Further, since the power sector inIndia is experiencing major capacity shortfalls, it can be assumed that thenew transmission lines will fully absorb incremental demand upon linecommissioning. _/
1/ From an overall system perspective, the effective reduction in lossesderived from the package is 38 MW, while linear addition of lossreduction per transmission segment yields an overestimated system lossreduction of 50 MW.
I/ In practice, the proposed lines will likely service part of existingloads during initial years of operation, but will eventually carryhigher loads as it absorbs more '.ncremental demand over the years. Thepotential overestimation of benefits in initial years is offset by theconservative assumption of constant line loading through the projectlife.
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Distribution Project Analysis
51. The proposed urban distribution projects in seven towns in Punjabinvolve a total investment outlay of about Rs 276 million over a four-yearperiod from 1990/91 to 1993/94. Each distribution project is treated as adiscrete project and is individually appraised as to its economic viability.
52. In addition to the iirect capital costs and operating and maintenanceexpenses associated with each distribution scheme, the AIC of generation andtransmission are applied on the incremental supply assumed to flow through theproposed distribution facilities so as to arrive at the full cost of powerdelivery.
53. Two set; of benefits were identified namely, (a) incremental sales inthe urban area served by the network expansion, and (b) reduction indistribution losses. To arrive at the estimated level of incremental sales,the annual load connections and load flows per major feeder and transformer"with and without" the proposed improvements for the forecast period 1989/90to 1994/95 were analyzed. In calculating the loss reduction attributable tothe projects, three sets of losses were considered; i.e., energy losses perfeeder line losses, distribution transformer losses and power transformerlosses. A summary of the resulting benefits expressed in equivalentincremental energy sales is given in Table 7.
Table 7: Benefits from PSEB's Proposed Urban Distribution Projects
54. Except for the investments in Faridkot City, the financial rates ofreturn derived for the distribution projects are negative due to low tarifflevels. In contrast, their economic rates of return exceed the 12% hurdlerate confirming the projects' economic viability. The estimated net presentvalues (NPVs) and EIRRs of the distribution schemes are summarized in Table 8.
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Annex 5.1Page 14 of 19
Table 8: Net Present Values and Economic Returns ofPSEB's Urban Distribution Projects
55. Sensitivity analyses carried out under conditions of adversevariations in cost and benefits indicate that satisfactory economic returnsfor both the transmission and distribution sets of sub-projects aremaintained. Sensitivity tests using higher AIC values were also performedinasmuch as project returns were based on average incremental cost (AIC)estimates developed under the discount rate of 12% and to the extent that theState's Power Expansion Program yields a return higher than 12%, additionalreturn attributable to other program components have pai:tly been credited tothe project. Accordingly, AIC estimates based on a 26% roturn for otherinvestment components were used and the results show that all project schemesare still able to generate at least 12% rates of return as follows:
Table 9. Sensitivity Tests Using Higher AIC Values
a/ AJ suses 302 hyAroplant nitilizatioa nd progressive reduction of TAD losses fron the 222 in 1989/90 to 15 in 1999/2000.hi Eaud ao prevailing economic tariff level of is 0.53 per k hc/ Consumer rplus estimated at is 1.10 per kiI.
Source: laek and CIA estimates o
INDIA
PONIR OTILIItS IFFICIKICY rRPBOv?IIil PROJECt
Punjab SIR Transaission Projecteconomic Analysis as a Single Project NP! at 12% Re 5568 million
21PB: 812t o is BBillions I
fiscal TBlaSlISSiO3 COSTS TOTIL IDCORIINTAL NiTTear --------------------------- GEIRR&TIO DISTIBIUTION DILIVRY SALIS TARIFF CONSOMER COST TOTAL ECOlOMICEnding Capital OAl Sub-Total COSTS al COSTS b/ COStS cob BRI2U0 c SORPLOSd/ SAVINGS BUNlFITS 0EIIFITS
a/ The average lncrenental cost of (AIC) of generation is estiaated at BI 0.81 per Whl based on Punjab SIBOs poser expansion program. g X Ixbl The AIC of distributioo is eutinated at go 0.09 per ilk. 4c/ The econoate value of the tariff is astumed at the prevailing rate of Be 0.56 per lhU. < LJud/ The consuaer surplus is estimated at Be 1.09 per kUh.
al Thb aen ge iocreneutal cost (AIC) of eneratiom Is estioated at Is 0.81 per kgb based on Punjab SIB's pover expansion program. |bI The UIC of distribution is estimated at Ba 0.09 per k0h. - Xc/ The economic value of prevailing tariff i6 asmuned at is 0.56 per NbI. Go 4 LO
dJ The cosu er surplus is estimated at 3m 1.09 per hUh. 0
al Average incremental cost (AICI of generation is estimated at Ra 0.81 per kNh sold based on Punjab SIR's power ezpansion program.b/ lIC of transeission is estimated at Rs 0.16 per kib sold.c/ ecomomic value of prevailiag tariff ts assnued at Is 0.62 per klh sold. - t xd/ Conssuer surplus is estimated at Bs 1.01 per kth sold.
Source PIC nd Bank estimatee
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Annex 6.1
INDIA
POWER UTILITIES EFFICIENCY IMPROVEMENT PROJECT
Documents in Project File
1. Punjab State Electricity Board, Sub-project Appraisal Report; PFC:June 1991.
2. Andhra Pradesh State Electricity Board, Sub-project AppraisalReport; PFC: June 1991.
3. Madhya Pradesh State Electricity Board, Sub-project AppraisalReport; PFC: June 1991.
4. Gujarat State Electricity Board, Sub-project Appraisal Report; PFC:June 1991.
5. PFC's Operational Policy Statement; PFC: November 1990.
