Project Analysis PSDP-II.pdf

7/27/2019 Project Analysis PSDP-II.pdf

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Document of

The World Bank

Report No:ICR000105

IMPLEMENTATION COMPLETION AND RESULTS REPORT(IBRD-46030)

ON A

LOAN

IN THE AMOUNT OF US$ 441.2 MILLION

TO THE

POWER GRID CORPORATION OF INDIA LIMITED

(WITH THE GUARANTEE OF INDIA)

FOR THE

SECOND POWERGRID SYSTEM DEVELOPMENT PROJECT

January 22, 2007

Sustainable Development UnitSouth Asia Region


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CURRENCY EQUIVALENTS

( Exchange Rate Effective 11/01/2006 )

Currency Unit = INR

INR 1.00 = US$ 0.022

US$ 1.00 = INR 45.0

Fiscal Year

April 1 - March 31

ABBREVIATIONS AND ACRONYMS

ABT Availability Based Tariff

CAS Country Assistance Strategy

CDP Community Development Program

CERC Central Electricity Regulatory Commission

EHVAC Extra High Voltage AC

ERLDC Eastern Regional Load Dispatch Center

ERR Economic Rate of Return

ESPP Environmental and Social Policy and Procedures

FIRR Financial Internal Rate of Return

GDP Gross Domestic Product

GSS Grid Sub-Stations

GoI Government of India

HVDC High Voltage Direct CurrentIBRD International Bank for Reconstruction and Development

IDA International Development Agency

IEGC Indian Electricity Grid Code

IPPs Independent Power Producers

JV Joint Venture

L/Cs Letter of Credits

LA Land Acquisition

M&E Monitoring and Evaluation

MoP Ministry of Power

MoU Memorandum of UnderstandingNLD National Long Distance

NPV Net Present Value

OPGW Optical Fibre Ground Wire

PAD Project Appraisal Document

PAP Project Affected People

PDO Project Development Objective


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PMR Project Monitoring Report

PSDP-I Powergrid System Development Project-I

PTC Power Trading Corporation

RA Rehabilitation Assistance

RAP Resettlement Action Plan

TPA Tri-partite Agreement

TTL Task Team leader

UI Unscheduled Interchange

WRLDC Western Regional Load Dispatch Center

Vice President: Praful C. Patel

Country Director: Fayez S. Omar

Sector Manager: Salman Zaheer

Project Team Leader: Sunil Kumar Khosla


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India

Second Powergrid System Development Project

CONTENTS

1. Basic Information

2. Key Dates

3. Ratings Summary

4. Sector and Theme Codes

5. Bank Staff

6. Project Context, Development Objectives and Design7. Key Factors Affecting Implementation and Outcomes

8. Assessment of Outcomes

9. Assessment of Risk to Development Outcome

10. Assessment of Bank and Borrower Performance

11. Lessons Learned

12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

Annex 1. Results Framework Analysis

Annex 2. Restructuring

Annex 3. Project Costs and Financing

Annex 4. Outputs by Component

Annex 5. Economic and Financial AnalysisAnnex 6. Bank Lending and Implementation Support/Supervision Processes

Annex 7. Detailed Ratings of Bank and Borrower Performance

Annex 8. Beneficiary Survey Result

Annex 9. Stakeholder Workshop Report and Results

Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR

Annex 11. Comments of Cofinanciers and Other Partners/Stakeholders

Annex 12. List of Supporting Documents

Annex 13. Additional Annexes


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1. Basic Information

Country: India Project Name:Second PowergridSystem DevelopmentProject

Project ID: P035173 L/C/TF Number(s): IBRD-46030

ICR Date: 01/22/2007 ICR Type: Core ICRLending Instrument: SIL Borrower: POWERGRID

Original TotalCommitment:

USD 450.0M Disbursed Amount: USD 441.2M

Environmental Category:A

Implementing Agencies

Powergrid Corporation of India Limited

Cofinanciers and Other External Partners

2. Key Dates

Process Date Process Original DateRevised / Actual

Date(s)

Concept Review: 09/23/1995 Effectiveness: 11/21/2001 11/21/2001

Appraisal: 01/18/1998 Restructuring(s):

Approval: 05/03/2001 Mid-term Review: 09/01/2003

Closing: 06/30/2006 06/30/2006

3. Ratings Summary

3.1 Performance Rating by ICR

Outcomes: Highly Satisfactory

Risk to Development Outcome: Low or Negligible

Bank Performance: Highly Satisfactory

Borrower Performance: Highly Satisfactory

3.2 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments (if any) Rating:

Potential Problem Project at anytime (Yes/No):

No Quality at Entry (QEA): None

Problem Project at any time(Yes/No):

No Quality of Supervision (QSA): None

DO rating beforeClosing/Inactive status: HighlySatisfactory


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4. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Power 100 100

Original Priority Actual Priority

Theme Code (Primary/Secondary)

Infrastructure services for private sector development Primary Primary

Regulation and competition policy Primary Primary

Other financial and private sector development Primary Primary

Climate change Secondary Secondary

Pollution management and environmental health Secondary Secondary

5. Bank Staff

Positions At ICR At Approval

Vice President: Praful C. Patel Mieko Nishimizu

Country Director: Fayez S. Omar Edwin R. Lim

Sector Manager: Salman ZaheerAlastair J.McKechnie

Project Team Leader:Sunil KumarKhosla

Kari J. Nyman

ICR Team Leader: Mikul Bhatia

ICR Primary Author:Husam MohamedBeides


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6. Project Context, Development Objectives and Design(this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative)

6.1 Context at Appraisal

(brief summary of country macroeconomic and structural/sector background, rationale

or Bank assistance)

Country Background By the second half of the 1990s, reforms in the areas ofinvestment, trade and finance, initiated in response to the 1991 crisis, had stabilized. Higheconomic growth - an average of 7% - was witnessed during 1994-97. However, highconsolidated public sector deficit at about 9% of the country's Gross Domestic Product(GDP) remained a concern. The explicit and implicit subsidy on power itself amounted to1.7% of the GDP during FY97. The 1997 Country Assistance Strategy (CAS) documentproposed Bank group assistance in strengthening private sector participation acrosssectors. In the power sector, the CAS also supported institutional strengthening of centralpower utilities to enable much needed investments.

Sector background In the first half of the 1990s, power system in India grew steadilyand generation capacity reached 86,000 MW. However, demand continued to outstripsupply, with shortages estimated at 10 % of energy and 20 % of peak capacity, andprojected to grow due to lack of sufficient investments. In addition, transmission systeminefficiencies, inadequate coordination between regional power systems, lack ofinvestments in transmission interconnections, an outdated bulk power pricingmechanism, absence of trading and regulatory reforms and the unsatisfactory financialperformance of the sector as a whole were impediments in achieving full potential tomeet growing demand. Therefore, the Government of India (GoI) initiated acomprehensive reform program for power transmission, system operation and bulk power

pricing. The Power Grid Corporation of India (known as POWERGRID) was establishedto "move large blocks of power from central generating stations and surplus from stateelectricity boards, if any, to load centers with reliability, security and economy". GoI hadalso developed legislation for the establishment of regulatory commissions at centre andin states. In addition, GoI also opened the power sector to private investment in 1991,initially focusing on generation, but later expanding to distribution and transmission.

Following the first Bank engagement with POWERGRID - the US$ 350 million PowerSystem Development Project-I (PSDP-I, Ln. 3577-IN), and transfer of transmissioncomponents of earlier IBRD loans and IDA credits from POWERGRID's predecessors,this Second Powergrid System Development Project (PSDP-II, Ln. IBRD 46030) loanbrought the Bank's total funding to POWERGRID to about US$ 1.5 billion. The companyhad also secured funding for its investment program from various domestic andinternational sources during this period. The company's institutional growth since itsinception in 1993 had been remarkable. It had consistently met or exceeded its annualperformance targets set by the Ministry of Power (MOP) and its role in India's powersector was widely appreciated.

Rationale for Bank Involvement Despite the progress made in course of the PSDP-I


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loan, POWERGRID was still facing challenges in critical areas necessary to improve theoverall efficiency of transmission systems and power markets, including (i) massiveinvestments needed to enhance inter-regional transmission capacity and systemcoordination facilities, (ii) implementation of bulk power tariff reforms, and (iii)continuous enhancement of its institutional capacity and operational and financial

performance. Therefore, the Bank's support to POWERGRID under the Loan was timelyand essential for meeting urgent investment needs (including leveraging private sectorinvestments), developing institutional capacity, and supporting sector reforms.

6.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

Project Development

ObjectivesKey Performance Indicators

(as approved)

Objective 1: Toassist India in

restructuring the powertransmission sub-sector,improve coordination inpower systemoperations, and promoteinter-regional and inter-state power tradingthrough regulatory, tariffand institutional reforms

a) Regulatory Reforms: The government has established anenabling legal framework and has also established the

Central Electricity Regulatory Commission (CERC) to takeover tariff functions from the Central Electricity Authorityand Ministry of Power.b) Tariff Reforms: Availability based tariffs have beennotified for central thermal stations and new IndependentPower Plants (IPPs). The new tariffs are fully operational andall transitional issues have been addressed.c) Institutional Reforms: CERC is operational and thegovernment has established an enabling legal framework forprivate investment in transmission.

Objective 2: To support

POWERGRID'sinstitutionaldevelopment andpromote satisfactoryfinancial andcommercialperformance and theimplementation of thePOWERGRIDinvestment and

a) Institutional Growth and Development: Establishment of

environmental and social management department atPOWERGRID corporate level and first independent powertransmission company established and to begin projectimplementation.b) Financial Performance and New Financing Arrangements:Compliance with financial covenants (i.e. 20 % SelfFinancing Ratio and 4:1 debt equity ratio) by mid-term aswell as end of Project.c) Commercial Arrangements: POWERGRID progressivelyreduce and maintain the accounts receivable below 4.0

commercial policy months billing and 100% coverage by letter of credits (LCs).


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Objective 3: To assistPOWERGRID in thedevelopment of modernsystem coordination andcontrol facilities and

reinforcement of itstransmission systemtowards a national grid

Successful completion of investments financed by the Loan.(Expected outcomes from these investments included: Greater availabilityof power through inter-regional transmission; Improved grid parametersincluding frequency and voltage; Higher transmission line availability;

and, Reduction in grid outages)

Objective 4: To supportPOWERGRID in thefacilitation of privateinvestment in the powersector and in its possiblediversification into telecommunications

First independent power transmission company establishedand to begin project implementation by midterm review.More private transmission ventures to be established by endof the Project.

6.3 Revised PDO and Key Indicators (as approved by original approving authority), and

reasons/justification

The project objectives were not revised. The key indicator for Institutional Reformswas revised from "Some private transmission ventures in operation"to "Satisfactoryimplementation of the first joint venture", as POWERGRID no longer has the mandate topromote private participation in transmission. Instead, Government of India (GoI) hasissued guidelines for private participation in transmission and also for tariff basedcompetitive bidding. GoI has also constituted an Empowered Committee to identify andfacilitate private sector participation in transmission.

6.4 Main Beneficiaries, original and revised

(briefly describe the "primary target group" identified in the PAD and as captured in the

PDO, as well as any other individuals and organizations expected to benefit from the

project)

POWERGRID is the borrower and the direct beneficiary of PSDP-II loan in terms ofinvestments funded under the Project and enhancement of institutional capacity.Improvements in transmission systems and system coordination facilities benefitPOWERGRID's clients namely generation, distribution and trading companies, andultimately the end users of electricity. Improved system coordination and transfer ofpower across regions help reduce generation costs, system losses and unserved energy.

Diversification into telecom has enabled telecom service providers to expand access tovoice/data communications and internet services.

6.5 Original Components (as approved)

The loan was designed to support a portion of POWERGRID's investment program forthe 1998-2003 time-slice, estimated at US$ 5.7 billion. In particular the Loan


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supported the implementation of the following project components:Component 1 System Coordination and Control: This component included theestablishment of regional system coordination and control centers at Mumbai (WesternRegion) and Kolkata (Eastern Region). The component was designed to facilitateunified and coordinated operations of the grids in the two regions, and to assist state

utilities in improving their system operations and participate more effectively in powertrade across the regional grids. POWERGRID was already constructing similarcoordination and control centers for Northern and Southern regions under the NRTP andPSDP-I loans respectively, and for North-Eastern region funding from the AsianDevelopment Bank (ADB).Component 2 Transmission System Development: This component covered (a) inter-regional transmission links to enhance the power transfer capacity between the regionaltransmission systems; (b) transmission projects to connect new power stations to the gridand/or to reinforce regional grids; and (c) various power system improvement programs.Component 3 Technical Assistance for Institutional Development: Thiscomponent provided consulting support for POWERGRID's institutional development,

system coordination and control schemes and proposed telecom diversification.Component 4 Completion of on-going Bank-financed Projects: This component wasincluded to support the completion of on-going projects and activities financed by theBank under the previous Loans 3237-IN and 3577-IN.Component 5 Additional Investment Projects: This component provided POWERGRIDthe flexibility to include other investments not covered by the above components, subjectto eligibility criteria agreed between POWERGRID and the Bank.

6.6 Revised Components

The project original components were not revised.

6.7 Other significant changes

(in design, scope and scale, implementation arrangements and schedule, and funding

allocations)

The loan was appraised in January 1998 and negotiations held in April 1998. Boardconsideration was originally scheduled for May 1998 but was indefinitely deferred due tothe international sanctions against India in place at the time. It was finally approved onMay 3, 2001 and became effective on November 21, 2001. Despite the delay, theobjectives and scope of the Project remained unchanged. The Midterm Review andClosing Dates were changed to September 1, 2003 and June 30, 2006, respectively, and

performance indicators updated to reflect the changed project schedule.

7. Key Factors Affecting Implementation and Outcomes7.1 Project Preparation, Design and Quality at Entry

(including whether lessons of earlier operations were taken into account, risks and their

mitigations identified, and adequacy of participatory processes, as applicable)

The project, which was a follow-on to the PSDP-I project (Ln.3577-IN), benefitted from


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7.2 Implementation

(including any project changes/restructuring, mid-term review, Project at Risk status, and

actions taken, as applicable)

Despite the two year delay in the Bank's approval of the Loan due to the international

sanctions against India at that time, and the consequent late start of the Project, theimplementation of the Project components and the utilization of the Loan were highlysatisfactory. The key factor behind successful implementation of policy and structuralreforms in the sector was the follow-up by the Government of India (GoI) on itscommitment to establish the Central Electricity Regulatory Commission(CERC), implement new bulk power tariff regime and introduce the securitizationscheme. Further, GoI enacted the new Electricity Act 2003, introduced NationalElectricity and National Tariff Policies, and provided guidelines for private participationin power sector. Several of these reform initiatives had been implemented even beforethe mid-term review of the project in September 2003. POWERGRID's past experiencein implementing Bank-supported projects, and availability of skilled and motivatedtechnical staff were the ultimate factors behind successful physical implementation ofproject investments. POWERGRID's senior management and technical staff in thecorporate level project monitoring unit constantly monitored implementation progressand promptly addressed any problem that arose. Intensive supervision by the Bank team,facilitated by availability of many task team members at the field office, wasinstrumental in ensuring successful and timely implementation of the project.

7.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

Monitoring and Evaluation (M&E) Design: The M&E plan for the project comprisedof targets that were linked to achievement of different project outputs over giventimeframes. The plan included actual baseline data and focused on monitoring andregular reporting of the progress in achievement of PDOs and project outputs. It includedtargets for completion of investment projects; specific milestones pertaining to sectoralreforms in the Regulatory, Tariff and Institutional areas; milestones for institutionalgrowth and development of POWERGRID; and, indicators pertaining to financial andcommercial performance of the company, inline with the Project covenants. During themid-term review, additional key indicators were agreed, toobjectively measure improvements in power sector performance as well asPOWERGRID's corporate performance.M&E Implementation: POWERGRID met in a timely manner all the reportingrequirements agreed with the bank, including monthly reports on billing and collection,quarterly progress report, financial management report and the annual audited financialstatement of the company. In addition, the Bank team periodically conducted site visits,to examine the facilities created, monitor compliance with environmental and socialsafeguards, and engage in discussions regarding benefits achieved from the investments.The Bank team also interacted regularly with various project stakeholders including theMinistries of Power and Finance, CERC, Power Trading Corporation (PTC) and thePrivate Sector Transmission Companies, in addition to POWERGRID officials, todiscuss progress in sector reforms, sector performance as well as project implementation.


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M&E utilization: M&E information was utilized to provide feedback to POWERGRIDand GoI on issues pertaining to project implementation, sectoral performance,development of institutional capacity in POWERGRID as well as in Power Sector as awhole, and to review outcomes of the project. The information facilitatedPOWERGRID/GoI in maintaining focus on key outstanding issues, timely resolution of

which has enabled successful achievement of project development objectives. Forexample, based on regular monitoring of the level of POWERGRID receivables (currentand long-term), feedback was provided to POWERGRID and GoI on the key stateswhere attention needed to be focused to ensure commercial discipline in the sector.Similarly, a high level of Loan disbursement was achieved through regular evaluation ofimplementation progress and attention to bottlenecks. The systematic monitoring ofsafeguards activities by the Bank team contributed to the development andmainstreaming of the corporate Environmental and Social Policy and Procedures.

7.4 Safeguard and Fiduciary Compliance

(focusing on issues and their resolution, as applicable)

Environmental and Social Safeguards The Project was rated 'Category A' onEnvironmental safeguards management. The environmental and social safeguards issuesassociated with the Project were addressed in accordance with the corporate"Environment and Social Policy and Procedures" (ESPP) developed by POWERGRID,which comply with the Bank's safeguards policies, and are applied to all projectsirrespective of the source of funding. POWERGRID has also appointed a committee ofindependent eminent experts to oversee environmental and social management policiesand their implementation. POWERGRID has reduced the impact on forests by avoidingforest land (including by deploying GIS and satellite imaging for line routing) and designof towers with higher clearance for trees. As a result, involvement of forests in

POWERGRID projects has reduced from 6% before 1998, to about 2% since 1998. Apartfrom paying compensation and rehabilitation assistance to the project affected people,POWERGRID has also undertaken Community Development Programs, which includedevelopment of civic infrastructure (including roads, schools, drinking water facilities,street lights, community halls etc), economic infrastructure (like irrigation scheme inSasaram, milk chilling plant in Kolar), community activities (like health camps) andskills development programs to improve earning potential. Details of the environmentaland social safeguard measures are provided in Annex-13.

Financial Management Financial Management (FM) arrangements under the PSDP-IIproject were implemented in a satisfactory manner. The Project Monitoring Report(PMR) format designed at the appraisal stage was found to be very bulky and wastherefore simplified during project implementation. The project level audit reports weretimely and did not have any major accountability issues. Many of the old auditobservations appearing in the entity audit report were resolved during the project lifedemonstrating a substantial progress in this area. In 2004-05, at the request ofPOWERGRID, the Bank benchmarked POWERGRID against its peers in the areas ofcorporate governance and financial accountability. The study concluded that whilePOWERGRID's FM arrangements ranked suitably with its Indian peers, with some


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The PDOs on supporting the institutional development, financial performance andinvestment program of POWERGRID (PDO 2, PDO 3) and supporting them infacilitation of private investment in power sector (PDO4) were direct recognition of theleading role POWERGRID assumed in implementing the electricity reform program andwere also in support of its enormous investment needs for expanding the regional

transmission grid and improving its operation and management through modern controlcenters. Therefore all the PDOs were necessary and relevant to the successfulimplementation of the reform process and operation of the regional transmission systems.

8.2 Achievement of Project Development Objectives

(including brief discussion of causal linkages between outputs and outcomes, with details on

outputs in Annex 4)

The achievement of the Project Development Objectives is rated highly satisfactory. Theachievement of individual objectives and their associated outcomes based on theperformance indicators agreed upon at appraisal are outlined below:

PDO-1: To assist India in restructuring the power transmission sub-sector, improvecoordination in power system operations, and promote power trading through regulatory,tariff and institutional reforms.Overall Achievement of this objective is highly satisfactory based on the followingachievements of the objective performance indicators:

Regulatory Reform: Central Electricity Regulatory Commission (CERC)established in 1999 and has since issued several significant orders and developedsecondary regulations. In addition, the Appellate Tribunal for electricity has alsobeen established and is functional. Securitization Scheme implemented andTripartite Agreements (TPA) signed with all states having outstanding dues withPOWERGRID, resulting in significant reduction in POWERGRID's receivables,improved collection efficiency and improvement in overall financialperformance. Energy Electricity Act 2003 enacted, accelerating the pace of thesectoral reforms including separation of trading from transmission andintroduction of open access.

Tariff Reform: New bulk power tariff regime (popularly known as AvailabilityBased Tariffs - ABT in India) has been successfully implemented. Theimplementation of ABT could be considered the most significant development inthe power sector in India in the last decade, which has resulted in significantimprovements in the power system operations, including merit order operation ofplants, more efficient use of generation resources and better demandmanagement, resulting in improved quality of supply.

Institutional Reform: Apart from the establishment of CERC and AppellateTribunal, Institutional reforms have included a legal framework for privateinvestment in transmission. The framework was first established by theElectricity Regulatory Commission Act of 1998, which specified POWERGRIDas the nodal agency to promote private investment in transmission. Accordingly,POWERGRID formed the first public-private Joint Venture project (calledPowerlinks) with Tata Power, which has now been commissioned. However, the


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mandate for promotion of private participation in transmission is no longer withPOWERGRID. Instead, under the new policy and regulatory framework, anEmpowered Commttee would identify and faciliate projects for development bythe private sector based on tariff based competitive bidding.

PDO-2: To support POWERGRID's institutional development and promote satisfactoryfinancial and commercial performance and the implementation of the POWERGRIDinvestment and commercial policy.Overall Achievement of this objective which focuses specifically on POWERGRIDperformance is highly satisfactory based on the following performance indicators:

Institutional Growth and Development: Between 1998 and 2006,POWERGRID's employee productivity improved by more than 65% in terms ofnetwork length to employee ratio. This was achieved through significant ramp-upin procurement and project implementation activities to augment network,without increasing manpower. On corporate governance front, to further enhanceinstitutional capacity and foster greater transparency, POWERGRID has

established several high level committees of independent experts, to advise onmajor functional and operational areas. POWERGRID has developed a CorporateEnvironmental and Social Policy and Procedures (ESSP) to deal with safeguardsissues arising out of projects, irrespective of the source of funding.

Financial Performance: By the end of the Project, POWERGRID met andexceeded all the financial targets and covenants established by the Projectperformance indicators.

Commercial Arrangements: POWERGRID was able to reduce its receivables toless than one month of equivalent billing (compared to target of less than 4months). Also, POWERGRID's LC coverage now stands at about 105% (gross)and 99% (net) of the average billing over the last 12 months.

PDO-3: To assist POWERGRID in the development of modern system coordination andcontrol facilities and reinforcement of its transmission system towards a National Grid.Overall Achievement of this objective is highly satisfactory based on the implementationand completion of the investment projects financed by the Project. The majority of theinvestment projects were implemented on schedule and within budget. The completion ofthe few balance works of the projects financed by PSDP-II loan, will be financed andcompleted under the next Bank project - PSDP-III loan - signed in May, 2006. Detaileddescriptions of investments financed by PSDP-II Loan are provided in Annex-4.

The implementation of the investments financed by PSDP-II Loan has had a significantimpact on the operation of the regional power grids in India. Salient features of theseprojects are the completion of the last two regional dispatch centers (Western RegionLoad Dispatch Center - WRLDC and Eastern Region Load Dispatch Center - ERLDC)and the regional transmission interconnections. The Regional Load Dispatch Centers(RLDCs), which also integrate state transmission networks, have helped in real timemonitoring, control and management of the regional transmission grids.

The completion of the regional transmission interconnections have increased the power


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transfer capacity between the regions (inter-regional capacity increased from 4350 MWin 2001 to 11500 MW in 2006, and power exchange increased from 8492 MU in 2001 to34816 MU in 2006) and enhanced the system reliability (trippings per line per yearreduced from 5.5 in 2001 to 3.5 in 2006, and system availability increased from 98.85%in 2001 to 99.64% in 2006). A major milestone in the grid operation was achieved by

synchronization of the four of the five electrical regions of the country (except southernregion), integrating them into a single grid operating at a common frequency.

PDO-4: To support POWERGRID in the facilitation of private investment in the powersector and in its possible diversification into telecommunications.Overall Achievement of this objective is highly satisfactory based on progress inattracting private investors in power transmission and POWERGRID's success indiversification into telecommunications business. Achievements in these two areas arediscussed below:

Private Sector Participation in Transmission The first ever public-private jointventure (JV) project in transmission in India, the "Powerlinks" Tala-Delhi

transmission line, has been commissioned. Five other joint-venture MoUs havebeen signed. Furthermore, with the change of the regulatory framework allowingdevelopment of new transmission facilities solely by private investors, throughtariff based competitive bidding process, bid process for two segments of WesternRegion Transmission System Strengthening (WRSS-II) project, were identifiedfor implementation by fully independent private power transmission companies.

Diversification into Telecommunications POWERGRID has installed andcommissioned a telecommunications network of about 19500 km covering morethan 61 cities of which a total of 9218 km Optical Fibre Ground Wire (OPGW)was financed by this Loan. In addition to covering major cities, the network hasalso provided coverage to many remote areas of India where private providers are

not willing to invest. The financial performance of the new business has beenlower than originally envisaged, mainly due to delay in GoI investmentapproval for the project, leading to increased competition and reduced revenuerealizations. Nevertheless, POWERGRID is expanding its market share and hasobtained additional licenses for providing national long distance (NLD) services,and is expected to become cash positive in one to two years.

8.3 Efficiency

(Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost,

and comparisons; and Financial Rate of Return)

The economic and financial analysis of the project was carried out at appraisal for theentire time slice of investments, based on revenues from tariffs. The tariff regulationshave since undergone a change, with rate of depreciation reduced from 6% to 3% perannum and rate of return on equity reduced from 16% to 14% per annum. In addition,POWERGRID's average cost of borrowings, which is a pass-through in tariffcalculations, has also reduced from 12.5% to 10%. Further, with a shift in the time-slicefrom 1998-2003 to 2001-06, the underlying investments for the project have alsochanged. The detailed economic and financial analysis at project implementation


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completion is presented in Annex-5.

Economic Rate of Return By using the simple methodology adopted at appraisal, theERR for the time slice of investments from 2001-06 has been calculated as 13.1%(greater than the hurdle rate of 12%), compared to 17.2% for the time slice of

investments from 1998-2003 calculated at the time of appraisal. The NPV for theinvestments at the close of the project is found to be positive at Rs.2808 million.

Additionally, detailed economic analysis has been undertaken for each component of thebank-funded project, and despite the highly conservative assumptions, the ERR in eachcase is found to be higher than the hurdle rate of 12%, ranging between 13.6% for thetelecom investment to 49.6% for the East-North-I interconnector. It is important to notethat the economic multiplier of a healthy power sector is very high, especially in view ofthe impetus it can provide to economic growth. However, given the difficulties inquantifying such economic multipliers, the same have been excluded from this analysisand the ERR analysis is highly conservative.

Financial Rate of ReturnThe FIRR of the investment program which was calculated as 18.4% at the time ofproject appraisal, when the cost of capital for POWERGRID was 13.5%, is now found tobe 14.9% against a cost of capital of 11.2%. At project completion, the investmentscontinue to be financially sound, with financial rate of return comfortably higher than thecost of capital for the company. The reduction in transmission tariff has ultimatelybenefited retail electricity consumers, who now enjoy a lower cost of delivered power.Also, the reduction in regulated tariff has not affected POWERGRID's financialperformance, which continues to be healthy.

8.4 Justification of Overall Outcome Rating(combining relevance, achievement of PDOs, and efficiency)

Rating: Highly Satisfactory

The overall rating of the Project is rated highly satisfactory on the basis of its highrelevance (as discussed in section 8.1), highly satisfactory achievement of all the PDOs(as discussed in section 8.2), and efficiency in implementation (as discussed in section8.3). In addition, the Project's sectoral achievements and improvements inPOWERGRID performance have contributed to further liberalization and developmentof the electricity trading markets in India. The highly satisfactory rating is also justifiedby the sustainability of the project components. Going forward, the role of the regional

load dispatch centers will become more important with the development of electricitytrading market envisaged by the Electricity Act of 2003 and the transmission facilitiesfinanced by the Loan will enable transfer of large quanta of power across and betweenthe regions.

8.5 Overarching Themes, Other Outcomes and Impacts

(if any, where not previously covered or to amplify discussion above)

(a) Poverty Impacts, Gender Aspects, and Social Development


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several employees responsible for procurement and financial management of on-goingWorld Bank projects, who were experienced with the Bank's procurement and financialmanagement guidelines. Quality at entry is therefore rated highly satisfactory.

(b) Quality of Supervision

(including of fiduciary and safeguards policies)Rating: Highly Satisfactory

The Bank supervision team carried 13 supervision missions, including the projectcompletion mission, over the five year implementation period. Intensive supervision andcontinuous involvement by the Bank's team were instrumental in ensuring that the projectcomponents were successfully implemented and the Project was closed as scheduled andwith very high disbursement of the Loan. Effective supervision of projectimplementation was helped by the fact that the supervision team remained largelyunchanged particularly since the mid-term review. Also, as noted above, most membersof the supervision team (including the TTL) were stationed in the Bank's office in India

for most part of the project, enabling prompt handling of critical issues, and closeworking relationships with GoI officials and POWERGRID staff. The team conductedregular site-visits to all the facilities financed under the loan both duringimplementation and after commissioning to assess implementation progress, quality ofexecution, and benefits from the project. Furthermore, over the course of the Projectimplementation, the Bank team continued to be actively involved in the reform process ofthe energy sector and one of its key engagements, for example, was supporting theenactment of the Electricity Act of 2003. Based on the above supervision activities, thequality of supervision, therefore, is rated highly satisfactory.

(c) Justification of Rating for Overall Bank Performance


The rating for overall Bank performance is based on the highly satisfactory quality atentry and high quality supervision carried out by the Bank team.

10.2 Borrower

(a) Government Performance

Rating: Satisfactory

Support from the government has been critical to the successful implementation of theproject and achievement of project objectives - particularly on the policy and regulatory

front. The government followed up on its reform commitment by establishing a fullyfunctional Central Electricity Regulatory Commission (CERC), introducing theSecuritization Scheme (including signing of Tripartite Agreement (TPA)) and enactingthe new Electricity Act 2003 which has accelerated the pace of the sectoral reforms. Thenew Act provided the framework for several reform initiatives such as introduction ofOpen Access in transmission and private participation in transmission projects. However,considering the government's inability to nominate one third non-government members toPOWERGRID board (this being the only unmet covenant under the Guarantees


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Agreement), and the delay in GoI approval for POWERGRID's telecommunicationsinvestment (this has contributed to reduced financial returns from these investments dueto increased competition and lower prices), the team feels that Government Performancecan only be rated Satisfactory.

(b) Implementing Agency or Agencies PerformanceRating: Highly Satisfactory

ImplementingAgency

Performance

PowergridCorporation ofIndia Limited

POWERGRID was the borrower and the implementing agency and itsperformance is rated highly satisfactory. This rating is based onPOWERGRID commitment to the Project during all of its stages fromidentification to preparation to implementation, which was one of themain key factors for the successful implementation of the Project.POWERGRID was able to carry out and complete all the projectsfinanced by the Loan on schedule and some projects were completed atcosts below the allocated budget. In addition, POWERGRID's highlysatisfactory achievements in meeting all the development outcomesrelated to its institutional, financial and performance targets also justifythe high satisfactory rating. The Bank supervision team has rated theProject implementation as satisfactory in its final status report, mainlydue to the delay in the implementation of the telecommunicationsnetwork - which however was largely due to the time taken by thegovernment in approving the investments. Therefore, this ICR haschosen a highly satisfactory rating for POWERGRID for theachievement of the project development objectives, successfulimplementation of all the projects financed by the Loan with highdisbursement level at about 98% of the US$ 450 million and without theneed for any extension.

(c) Justification of Rating for Overall Borrower Performance


Overall borrower performance is rated highly satisfactory based on POWERGRID andGovernment performance.

11. Lessons Learned

(both project-specific and of wide general application)

The main lessons learned from the design and implementation of the Project as well as itsachievements are the following:

The project exhibited good rehabilitation and resettlement practices (R&R) andcommunity development programs. Several good environmental practices havebeen institutionalized including technical innovations to minimize environmental


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impact. Also, the Environmental and Social Safeguard systems weremainstreamed at the corporate level under this project. The safeguard practicesfollwed during the project and the development of corporate level ESPPoffer models for replication in other sectors and entities. Details of Environmentand Social safeguard practices followed during the project are provided in Annex-

13. The development of a close working relationship between the Bank team and

POWERGRID and other power sector stakeholders was critical for achieving theproject development objectives. That the team was largely country office basedhelped in faster resolution of critical issues and closer working relationship withclient counterparts.

The time-slice lending approach is an appropriate mechanism for lending to largepower utilities, such as POWERGRID, with large investment needs to provide theutility with the flexibility of financing priority investment projects and to respondto changes in its investment program as the newly electricity markets evolve.

12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies

Evaluation of the project by POWERGRID (as reflected in the completion reportprepared by them) is consistent with that of the Bank, and assesses the project as HighlySatisfactory. POWERGRID and GoI have provided comments on the draft ICR whichare included in Annex-10 of this ICR. The comments pertain mainly to minor errors inthe draft ICR and an update on developments / further progress since the ICR mission.The comments have been appropriately incorporated in the final ICR. The Bank team'sresponse to each comment is indicated in Annex-10.

(b) Cofinanciers

(c) Other partners and stakeholders

(e.g. NGOs/private sector/civil society)


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Annex 1. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document)

Project Development

Objectives

Key Performance Indicators

(as approved)

Objective 1: Toassist India inrestructuring the powertransmission sub-sector,improve coordination inpower systemoperations, and promoteinter-regional and inter-state power trading

through regulatory, tariffand institutional reforms

a) Regulatory Reforms: The government has established anenabling legal framework and has also established the CentralElectricity Regulatory Commission (CERC) to take overtariff functions from the Central Electricity Authority andMinistry of Power.b) Tariff Reforms: Availability based tariffs have beennotified for central thermal stations and new IndependentPower Plants (IPPs). The new tariffs are fully operational andall transitional issues have been addressed.c) Institutional Reforms: CERC is operational and the

government has established an enabling legal framework forprivate investment in transmission.

Objective 2: To supportPOWERGRID'sinstitutionaldevelopment andpromote satisfactoryfinancial andcommercial performanceand the implementation

of the POWERGRIDinvestment andcommercial policy

a) Institutional Growth and Development: Establishment ofenvironmental and social management department atPOWERGRID corporate level and first independent powertransmission company established and to begin projectimplementation.b) Financial Performance and New Financing Arrangements:Compliance with financial covenants (i.e. 20 % SelfFinancing Ratio and 4:1 debt equity ratio) by mid-term aswell as end of Project.c) Commercial Arrangements: POWERGRID progressivelyreduce and maintain the accounts receivable below 4.0months billing and 100% coverage by letter of credits (LCs).

Objective 3: To assistPOWERGRID in thedevelopment of modernsystem coordination andcontrol facilities andreinforcement of itstransmission system

towards a national grid

Successful completion of investments financed by the Loan.(Expected outcomes from these investments included: Greater availabilityof power through inter-regional transmission; Improved grid parametersincluding frequency and voltage; Higher transmission line availability;and, Reduction in grid outages)

Objective 4: To supportPOWERGRID in thefacilitation of privateinvestment in the powersector and in its possiblediversification intotelecommunications

First independent power transmission company establishedand to begin project implementation by midterm review.More private transmission ventures to be established by endof the Project.


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Revised Project Development Objectives (as approved by original approving authority)

The project objectives were not revised. The key indicator for Institutional Reformswas revised from "Some private transmission ventures in operation"to "Satisfactory

implementation of the first joint venture", as POWERGRID no longer has the mandate topromote private participation in transmission. Instead, Government of India (GoI) hasissued guidelines for private participation in transmission and also for tariff basedcompetitive bidding. GoI has also constituted an Empowered Committee to identify andfacilitate private sector participation in transmission.

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target

Values (from

approval documents)

Formally

Revised

Target

Values

Actual Value Achieved

at Completion or

Target Years

Indicator 1 : Regulatory, Tariff and Institutional Reforms

Value(quantitativeorQualitative)

Enabling legalframework to beestablished; Bulkpower tariffs studydone by the Consultant(ECC).Implementationawaited.

Establishment of fullyfunctional CentralElectricity Regulatoryauthority; SatisfactoryImplementation of thenew tariff regime.

Comprehensive NewElectricity Actpromulgated; Regulator& Appellate Tribunalfully functional; Tariffpolicy notified; Countrywide successfulimplementation of BulkPower Tariffs.

Date

achieved03/31/1998 06/30/2006 07/21/2005

Comments(incl. %achievement)

All targets have been achieved (100% achievement)

Indicator 2 :Institutional development and satisfactory commercial performance ofPOWERGRID


Environment & Socialpractices to beassimilated in thecorporate functioningFinancial performancefragile with highaccounts receivable(6.5 Months),Low(60%) L/C coveragefor sales.

POWERGRID to useEnvironment & Socialpolicy for all projectsirrespective of fundingsource. Maintainaccounts receivablesbelow 4.0 monthsbilling and 100 % L/Ccoverage for currentbillings

Env. & Socialmanagement dept.established at corporateand regional levels.A/cs receivables 0.4month as of June 2006;current collections at100%; Net L/Ccoverage at 99%(though total L/Ccoverage exceeds100%)

Dateachieved

03/31/1998 06/30/2006 06/30/2006


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(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target

Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Regulatory Reforms


No independentregulatory agencyin place.

Establishment offully functionalCentral ElectricityRegulatoryCommission.

Fully functional CentralElectricity RegulatoryCommission and AppellateTribunal in place regulating thecentral transmission andgeneration sectors.

Dateachieved

03/31/1998 06/30/2006 07/21/2005



Indicator 2 : Tariff Reforms

Value(quantitativeor

Qualitative)

Bulk power tariffreforms studycompleted,proposing majorchanges in the bulk

power tariffdesigns. ErraticGrid performance

Issuance of bulkpower tariffnotifications forinter-regional

power exchangesfrom central pool

Successful implementation ofbulk power tariffs (ABT). GridAvailability=99.6% duringFY05-06; Frequency>95% ofthe time within Grid code

range (Except NR due to acuteshortages) UI nonpayment


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Annex 2. Restructuring (if any)

Not Applicable


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Annex 3. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components

Appraisal

Estimate (USDM)

Actual/Latest

Estimate (USD M)

Percentage of

Appraisal

SYSTEM COORDINATION ANDCONTROL : Eastern Region

73.46 80.22 109.20

SYSTEM COORDINATION ANDCONTROL : Western Region

73.17 40.24 55.00

SYSTEM COORDINATION ANDCONTROL : NLDC

17.34 9.99 57.61

TRANSMISSION : East NorthInterconnector-I (Sasaram)

160.74 119.10 74.09

TRANSMISSION : East North

Interconnector-II (Tala)

194.40 193.80 99.69

TRANSMISSION : East SouthInterconnector-II (Talcher)

956.00 688.22 71.99

TRANSMISSION : Southern RegionSystem Strengthening - III

61.92 63.29 102.21

TECHNICAL ASSISTANCE 5.00 2.50 50.00

Completion of Projects under NRTP andPSDP-I

63.07 59.97 95.08

TELECOMMUNICATIONS 220.19 207.60 94.28

Total Baseline Cost 1,825.29 1,464.93

Physical Contingencies 133.79

Price Contingencies 159.26Total Project Costs 2,118.34

Front-end fee PPF 0.00 0.00 0.00

Front-end fee IBRD 0.00 0.00 0.00

Total Financing Required 2,118.34 1,464.93

(b) Financing

Source of Funds

Type of

Cofinancing

Appraisal

Estimate (USDM)

Actual/Latest

Estimate (USD M)

Percentage of

Appraisal

Borrower 1172.74 765.50 65.27

International Bank forReconstruction and Development

450.00 506.62 112.58

GERMANY:KREDITANSTALT FURWIEDERAUFBAU (KFW)

Supplier'sCredit

495.60 192.81 38.90


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Borrowing Country's Fin.Intermediary/ies

0.00 0.00

(c) Disbursement Profile


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Annex 4. Outputs by Component

The majority of the investment components under the PSDP-II Project were implementedon schedule and within budget. A summary of the component-wise loan utilization isprovided in table below. The few balance works will be financed and completed under the

next Bank project, the PSDP-III loan signed in May, 2006.Table: Component-wise Loan Utilization

Project EstimatedUtilization(US$ m)

ActualUtilization(US$ m)

Remarks

Component 1- System Coordination and ControlEastern Region System Coordination &Control Project

61.63 56.29 Under Commercial Operationsince Sept'05

Western Region System Coordination& Control Project

23.58 21.96 Under Commercial Operationsince Feb'06

Component 2 - Transmission System DevelopmentEast-North Interconnector I 67.43 67.43 Under Commercial Operation

since Dec'02

East-South Interconnector II 53.20 53.20 Pole-I Under CommercialOperation since Dec'02

and Pole-II since Mar'03High Capacity East-NorthInterconnector II

98.30 77.97 Commissioned in Aug'06, exceptone substation (expected byMar'07).

Component 3 - Technical Assistance for Institutional DevelopmentConsultancy Services 2.50 1.52 Completed.

(Left over man-days underULDC-WR contract shall beutilised for NLDC work.)

Component 4 - Completion of on-going Bank-financed ProjectsTransmission projects from previousloans

59.97 59.97 Completed and commissioned

Component 5 Additional Investment ProjectsTelecom Project 88.19 78.89 Total of 9218 km OPGW and

OFC financed by this Loan isinstalled expanding the size ofoperational telecom network to19538 km. Installation of theremaining 435 km of OPGWexpected to be completed byNov 06.

Transmission System Strengthening III

in Southern Region

48.48 23.92 Completion expected by Apr'07.

90% supplies completed anderection works are in progress.Spill over to PSDP-III loan.

National Load Despatch Center 4.24 0 Contract awarded in J une 2006.Expected to be completed byMay 2008. The project wouldspill over to PSDP-III loan.

Total 507.52 441.15


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POWERGRID established ULDC scheme in Western Region at an approved costof US$ 52 million with a commissioning schedule of March 2006 and wascompleted seven months ahead of schedule and at US$ 12 million lesser cost. Thescope of the project included (a) establishment of the regional load dispatch center(RLDC) at Mumbai, central power coordination center (CPCC) at Jabalpur and

state/sub-load load dispatch centers (SLDC) at Bhilai, Gotri, Jambuva, Jetpur,Gandhinagar, Jabalpur, Indore, Bhopal and Panaji, (b) installation of 167 RTUsand (c) installation of a dedicated telecom network of 1489 km of fibre optic cable,46 power line carrier communication terminals.

Component 2: Transmission System DevelopmentThis component involved financing of inter-regional transmission links to enhance transferof power across regions necessitated by large dispersion of generation resources and loadcenters. Inter-regional links financed under this component included:

1. East North Interconnector-I (Sasaram Back-to-back HVDC) Project: Dueto inadequate growth in demand in Eastern region, the power generated fromexisting power stations in the region was not being fully utilized, thus forcing thegenerating stations to back down their production. Therefore, the East-NorthInterconnector-I project was implemented for optimal utilization of existing powergeneration capacity and as an important inter-regional link in the formation of theNational Grid. The project, commissioned in November, 2002, has power transfercapacity of 500 MW from Eastern Region (ER) to Northern Region (NR). Thecompleted cost of the project was US$ 119 million which was about 20% lowerthan the approved estimate.

The scope of the project included:(a) 400 kV double circuit line from Biharshariff to Sasaram (ER) - 194 km;

(b) 400 kV double circuit line from Sasaram (ER) to Allahabad (NR) (includingLILO at Sarnath) - 218 km;(c) 500 MW HVDC back-to-back station at Sasaram;(d) New 400 kV sub-station at Sasaram;(e) Extension of Biharshariff substation - Addition of two new bays of 400 kV; and(f) Extension of Allahabad substation - Addition of two new bays of 400 kV.(g) LILO of 132 kV single circuit Dehri-Karamnasa at Sasaram

- 132/33 kV bays alongwith transformer at Sasaram- Additional works for utilization of Biharshariff-Sasaram-Allahabad 400 kV

double circuit line for transfer of surplus power from Eastern Region.

The commissioning of the interconnector has enabled transfer of power fromEastern region to Northern region and has also facilitated transfer of higher level ofpower to Western and Southern regions, which are connected to the NorthernRegion through Vindhyachal and Gazuwaka back to back HVDC stations.

2. East-South Interconnector-II (Talcher-II) Under this project, an

asynchronous 2000 MW HVDC bi-pole 500 kV link line was constructed forbulk transfer of power mainly from Talcher- II generating station in Eastern


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Region to the deficit Southern region. The HVDC sub-stations at Talcher andKolar for the Talcher-Kolar HVDC bi-pole transmission line were commissionedin November, 2002 and February, 2003 respectively. The cost of the project wasUS$ 688 million and the project was completed nine months ahead of schedule,with a cost saving of US$ 17 million. For the terminal packages, supplier's credit

was provided by KfW, Germany.

The scope of the project included:

(a) Talcher-Kolar 500 kV 2000 MW HVDC bi-pole line - 1376 km;(b) Kolar-Hoody 400 kV double circuit - 51 km(c) Kolar-Madras 400 kV single circuit - 211 km(d) Kolar-Hosur 400 kV double circuit - 69 km(e) Hosur-Palakodu-Salem-Udumalpet 400 kV single circuit - 265 km(f) LILO of Cuddapah-Somanhalli 400 kV single circuit at Kolar - 15 km(g) Talcher HVDC converter station - 2x1000 MW, with 22 new 400 kV bays,and 5 new 500 kV DC bays;

(h) Kolar HVDC converter station - 2x1000 MW, with 24 new 400 kV bays and 4new 500kV DC bays;(i) Repeater Station;(j) Electrode stations at Talcher & Kolar end along with electrode line;(k) New 400/220 kV substations at Hosur and Kolar; and,(l) Extension of 400/220 kV substations at Hoody, Salem and Udamaplet, Madras400kV substation.

The commissioning of this interconnector has not only provided additional powerto the Southern Region, but also improved the performance of the regional grid interms of improved voltage profile, improved frequency and reduced transmission

losses.

Figure-2:Valve Hall at Talcher HVDC Substation Figure-3:DC Filters at Talcher HVDCSubstation

3. High Capacity East-North Interconnector-II This scheme was envisaged tostrengthen the inter-connection between Eastern and Northern regions through asecond link and to enable synchronous operation of the grids of the Northern,Eastern, Western and North-Eastern regions. The scheme, which was substantially


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completed in August, 2006, would also facilitate transfer of surplus renewablepower from Tala hydropower project in Bhutan and other hydro projects in theNorth-Eastern Region to the power deficit Northern Region. The project wasdivided into two parts, the sub-stations were financed and executed byPOWERGRID, while the transmission lines were financed and executed by

Powerlinks - POWERGRID's Joint Venture (JV) with Tata Power. The total costof the project (including JV portion) was estimated at US$ 552 million of whichthe POWERGRID portion was US$ 194 million.

The scope of the project under POWERGRID's funding included:(a) Gorakhpur (POWERGRID) - Gorakhpur (UPPCL) 400 kV D/C - 92 Ckt. Kms.(b) Lucknow (New) - Unnao 400 kV D/C -152 Ckt. Kms.(c) LILO of Dadri-Ballabhgarh 400 kV D/C line at new S/S in Delhi - 60 Ckt.Kms.(d) 40% Fixed Series Compensation (FSC) and 5% to 15% Thyristor ControlledSeries Compensation (TCSC) on each Ckt. of Purnea-Muzaffarpur 400 kV D/C

line(e) 40% Fixed Series Compensation (FSC) & 5% to 15% ThyristorControlled Series Compensation (TCSC) on each Ckt. of Muzaffarpur-Gorakhpur400 kV D/C line(f) New 400kV substations at Muzaffarpur, Gorakhpur, Lucknow and New Delhi(Gas insulated substation) with the required 400 kV bay extensions;(g) Substation extension at Gorakhpur, Unnao, Bareilly (all UPPCL), Madola,Siliguri, Purnea (all POWERGRID) and Muzaffarpur (BSEB).

The transmission link between Tala and Mandola is already completed and theproject is operational. The only remaining portion of the project - the new sub-

station at Maharanibagh (New Delhi) - is expected to be completed by end March,2007. With the commissioning of the transmission link from Tala to Mandola,the synchronization of the Northern Grid with Eastern, Western and North-EasternGrids (already synchronized and together called as Central Grid) was achieved onAugust 26, 2006. With this, the whole country except the Southern Region is nowoperating at a common frequency.

Figure-4 : Control Room at Lucknow Substation


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Component 3: Technical Assistance for Institutional Development

This component included financing the following two consulting services of a total cost ofUS$ 2.5 million:

1. Technical Assistance for Telecom Project: POWERGRID's plan for

diversification into telecommunications was technically and economically assessedand recommended by a consultant study. The study envisaged the development ofa broadband optic fiber backbone telecommunications networks to cover about 56major metros and cities in India using the company transmission right-of-ways ofthe company's transmission lines. The consultants (IVO of Finland) for the studywere appointed in July 1999. The consultants assessed various policy guidelinesannounced by GoI, reviewed regulatory framework in telecommunications andelectricity sectors and conducted an overall market and SWOT analysis in order toarrive at an appropriate business plan for POWERGRID. Based on therecommendations of the consultants, POWERGRID decided to enter telecombusiness initially by leasing capacity on its fibre optic network, with a plan to add

advanced/ higher value services at the appropriate time.

2. Technical Assistance for ULDC schemes in Eastern & Westernregions: Leading international consultants KEMA -ECC provided support toPOWERGRID for the design and implementation of the regional dispatch centersfor the Eastern and Western regions financed under PSDP-II loan.

The major activities undertaken by KEMA included,(a) Evaluation of existing facilities;(b) Development of specifications for EMS/SCADA, communication system,PLCC/PABX and auxiliary power supply packages;

(c) Bid evaluation and recommendation for contract award(d) Review of vendor design, acceptance testing procedures and training plansunder various packages;(e) Assisting POWERGRID in Factory Acceptance Testing (FAT) of variousequipment/systems; and(f) Assistance during project implementation.

Component 4: Completion of on-going Bank-financed ProjectsPOWERGRID II loan also provided funding for completion of the balance activities ofprojects financed by earlier World Bank loans to POWERGRID (namely NRTP (loan no.3237-IN) and PSDP-I (loan no. 3577-IN)). An amount of US$ 43.08 million and US$

16.89 million have been utilized under PSDP-II loan for completion of the followingprojects financed by these two loans:

1. NRTP loan spill-over projects: Kishenpur-Moga transmission link, Nathpa-Jhakri transmission link and the regional load dispatch center project in Northernregion2. PSDP-I loan spill-over projects: The regional load dispatch center project inSouthern region and the consultancy services for the regional load dispatch center


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project in Eastern and Southern regions.

Component 5: Additional Investment ProjectsThis component included financing the following additional investment projects includedin POWERGRID investment programs:

1. POWERGRID's Diversification into Telecom Business: Under thiscomponent, POWERGRID has developed a state-of-the-art commercial telecomnetwork using advanced fibre optic technology connecting major cities in India toprovide highly reliable, high-speed connectivity between important Long DistanceCharging Areas (LDCAs). This includes links with high volume of TelecomTraffic and also some links in non-remunerative areas. The planned cost of theproject was estimated at Rs 9342 million and is expected to be completed byJanuary'07. POWERGRID has completed about 19,500 kilometers of the plannedtelecommunications network, of which a total of 9218 km was financed by PSDP-II Loan.

The scope of work for the project included design, survey, supply and installation,testing and commissioning of:(a) overhead fibre optic cables and accessories;(b) underground fibre optic cables and accessories;(c) Optical transmission system (DWDM and SDH) including opticalamplifiers/repeaters;(d) Underground and overhead Fibre Optic access links;(e) Integrated network management system;(f) Auxiliaries equipments; and(g) Test equipment.

Figure-5 : National Telecom Control Center at Delhi

2. System Strengthening in Southern Region-III: The PSDP-II loan alsofinanced POWERGRID's investment plan for strengthening the transmissionsystem in Southern region to meet the anticipated peak demand projections of35,000 MW. The plan is being executed and is expected to be completed within theplanned cost of US$ 63 million.


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The scope of the investment for strengthening the transmission system in theSouthern region includes:(a) Gooty-Raichur 400 kV double-circuit transmission line - 160 km;(b) Neelamangala-Somanahally 400 kV double-circuit transmisson line - 50 km;(c) 400/ 220 kV Somanhally Substation expansion- 2 new 400 kV bays;

(d) 400/ 220 kV Gooty Substation expansion - 2 new 400 kV bays;(e) 400/ 220 kV Neelamangla Substation expansion - 2 new 400 kV bays; and(f) 400/ 220 kV Raichur Substation expansion - 2 new 400 kV bays;

3. National load Dispatch Centre (NLDC) : To facilitate synchronous operation ofthe National Grid and uninhibited bulk exchange of power across the regionsthrough proper coordination and control, a National Load Despatch Center is beingestablished at New Delhi with a back up at ERLDC, Kolkata. The scheme is underimplementation and is expected to be completed by May, 2008. The balanceexpenditure under the project would be funded under PSDP-III loan (Loan no.4813-IN) as spillover expenditure.

Scope of the Project includes:(a) Control Centre to be located at New Delhi and Back up at ERLDC Kolkata.(b) Interface equipments like routers & hub for data acquisition from RLDCs atRLDC and NLDC/ back up NLDC.(c) Communication systems for data, voice and fax between regional tie linestations, RLDCs & NLDC through dedicated wide band networks (FO) withVSAT as back up communication.(d) Auxiliary Power Supply Systems, as required.


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Annex 5. Economic and Financial Analysis (including assumptions in the analysis)

ECONOMIC ANALYSIS

The investments funded by the Bank under the Project form a part of a time slice of

POWERGRID's overall investment program originally envisaged for 1998-2003, butactually implemented for the 2001-06 time slice. At appraisal, the Economic Rate of Returnof the entire investment program of POWERGRID was estimated at 17.2% for the 1998-2003 time slice, with an NPV of Rs.20,972 million. Using the same methodology usedduring project appraisal, the revised ERR for the program has been estimated, as shown inTable 1 below, at 13.1%, for the 2001-06 time slice (higher than the 12% hurdle rate), with apositive NPV of Rs. 2,808 million (using 12% discount rate, 2001 prices).

Table-1: Economic Analysis of POWERGRID's Investment Program during 2001-06using revenues from tariff as minimum valuation of benefits (All figures in INR million)

Year Investment O&M RevenueNet

Benefit

1992 -1993 124 (124)1994 335 (335)1995 990 (990)1996 2197 (2,197)1997 3296 (3,296)1998 4308 (4,308)1999 4153 (4,153)2000 8391 (8,391)2001 11607 211 3034 (8,785)2002 18928 264 3791 (15,401)2003 20115 951 13668 (7,397)2004 12861 995 14305 449

2005 10352 803 12529 1,3742006 6062 939 15668 8,6672007 1806 937 15631 12,8882008 937 15631 14,6952028 937 15631 14,695

NPV at a discount rate of 12% 2,808IRR 13.1%

NPV 11,323Assuming Depreciation of 6%, RoEof 16% and Cost of Borrowing of12.5% IRR 15.9%

The difference between the ERR calculated at appraisal and the once calculated in the abovetable is largely due to the methodology adopted, which uses financial revenues fromregulated tariff as a minimum valuation of the benefits of the project. The revenues fromtariff have reduced since appraisal due to changes in tariff regulations, including (a)


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reduction in rate of return on equity from 16% to 14% per annum, (b) reduction in applicabledepreciation rate from 6% to 3% per annum. Further, POWERGRID's average cost ofborrowing - a pass-through element in tariff determination - reduced from about 12.5%estimated at the time of appraisal, to about 10% during implementation. Also, due to the shiftin investment time slice from 1998-2003 to 2001-2006, the underlying investments in the

two analyses are also different.

Using the earlier tariff regulations (16% return on equity and 6% depreciation), and cost ofborrowing (12.5%), the ERR is estimated at 15.9% and the NPV of economic benefits iscalculated as Rs.11,323 million. Despite the shortcomings of the above approach, it is seenthat the conservative estimate of ERR obtained, is higher than the economic hurdle rate of12%, and the NPV is positive.

To further assess the economic benefits of each component of financed by PSDP-II loan amore detailed approach has been taken in this ICR. The results of such analysis - which usedconservative assumptions - found that the ERRs for the Project's components are in the range

of 13.6% (for telecom investments) to 49.6% (for East-North-I Interconnector) - well abovethe hurdle rate of 12% as shown in Table-2 below. In addition, the NPV of each of thesecomponents is found to be positive.

Table-2: Component-wise ERR based on detailed analysis

Component Name ERR

A System Coordination and Control for Westernand Eastern Regions

13.6%

B Inter-regional Transmission Linesi. East-North Interconnector-Iii. East-South Interconnector-II

iii. East-North Interconnector-II

49.6%35.8%

35.8%C Transmission System Strengthening (SR-III) 19.1%

D Telecom Investments 13.6%

The economic evaluation for each component is summarized in the following subsections:

A. System Coordination and Control for Western and Eastern Regions

The value of System Coordination and Control component was US$ 78.25 million, or about17.7% of the Bank funding. Investments in system coordination and control have resulted inreduction in grid disturbances, improved grid parameters such as frequency and voltage, and

improved demand-supply coordination leading to better utilization of existing generationfacilities. The investments have also facilitated short-term trading through Open Access totransmission. Since the valuation of other benefits is difficult, only the benefit fromreduction in grid disturbances has been used for ICR economic analysis. In the absence ofextensive research on economic loss due to grid disturbances in the Indian context (thoughthere are several such studies for developed countries), a conservative estimation of Rs.5.32per kWh for the cost of unserved energy has been used as a minimum bound for benefits ofreduction in outages.


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Key Assumptions

Reduction in Grid Disturbances The reliability of grid network in Western and Easternregions improved significantly between 2001 and 2006, with no major or minor grid outages

in 2006 in either of the two regions. The reduction in grid disturbances has been achievedthrough investments in control and coordination systems. The improvement has also beenhelped in part by strengthening of transmission systems and the introduction of AvailabilityBased Tariffs (ABT), which encourages grid discipline.

Unserved Energy in Event of Grid Failures The estimation of unserved energy in event ofgrid failures, based on typical load loss information provided by the load dispatch centers, isprovided in table-3. The average annual reduction in unserved energy is found to be 165 MUfor the two regions taken together. Eastern and Western regions were synchronized in April2003, and therefore system stability for the two regions should be examined together.

Table-3: Estimation of Reduction in Unserved EnergyEastern Region Western Region

MinorDisturbance

MajorDisturbance

MinorDisturbance

MajorDisturbance

Units

Area Affected A state or apart thereof

An entireregion

A state or apart thereof

An entireregion

Typical Load Loss 2,000 10,000 4,800 24,000 MWTypical Load Restoration Time 9 24 9 24 HrsAverage Loss of Energy Supply 7 92 19 253 MUAverage Outages per year beforeRLDC Investments

1.67 0.33 2.00 0.33 Nos

Average Outages per year after

RLDC Investments0 0 0 0 Nos

Reduction in Outages 1.67 0.33 2 0.33 NosReduction in Unserved Energy 12 31 38 84 MU

Cost of Unserved Energy For industrial and agricultural consumers, estimates of Cost ofUnserved Energy used in the ICR analysis are based on TERI study "Cost of UnservedEnergy" (Project Report No.98PG42), 2001 prepared for the World Bank and DfID. Theseestimates are based on 'Willingness to Pay' survey conducted in 1999, which has beenadjusted to 2006 prices. For Domestic and Commercial consumers, the prevailing averagetariffs have been taken as a minimum economic benefit derived by consumers from supplyof power. The weighted average across these major consumer categories that is Rs.5.32 per

kWh is used here. For simplicity, other consumer categories such as Public Lighting,Public Water Works, Railway Traction etc together constituting about 12% of theconsumption have been excluded from the calculation of the economic benefits of thiscomponent. Another indication of the cost of unserved energy is obtained from theprevailing Unscheduled Interchange (UI) rate, which is Rs.5.70 per kWh.

Average Cost of Generation The average variable cost of generation has been taken asRs.0.80 per kWh, which is in line with the variable cost for most thermal power plants in


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India.

Results

Table-4 provides the ERR calculations for the investments in coordination and control

systems in Western and eastern regions. Based solely on a highly conservative estimate ofbenefits related to reduction in grid disturbances, the ERR is found to be 13.6% higher thanthe benchmark 12%.

Table-4: Calculation of ERR for System Coordination and Control InvestmentsYear Capex

(million Rs)Benefit fromreduction in

outages(million Rs)

Net Benefit(million Rs)

2000 85 -662001 249 -2042002

484 -407

2003 962 -8512004 1277 -11732005 1348 733 -5572006 745 733 -122007 249 733 4712008 83 733 6422009 733 7332010 733 7332025 733 733NPV 2,125ERR 13.6%

B. Inter-regional Transmission Lines

The value of this component was US$ 198.6 million, or about 45% of the Bank funding. Theinter-regional transmission lines funded by the Bank under the PSDP-II loan were (i) East-North Interconnector-I, (ii) East-South Interconnector-II, and (iii) High Capacity East-NorthInterconnector-II. The principal economic benefit from each of these is the availability ofadditional power in a deficit region (Northern or Southern) from the power surplus Easternregion. Due to the prevailing power shortages in the country (energy shortage of 8.3% andpeak shortage of 12.3% in 2006 even under restricted demand), which are likely tocontinue at least in the medium term, any incremental power made available is either

additional or replaces costly gas/liquid-fuel based generation. The economic benefit of theinterregional transmission links is therefore calculated as the difference between marginalcosts of generation across the two concerned regions.

Key Assumptions

Marginal Cost of Generation in various regions The marginal cost of generation in thepower deficit Northern and Southern regions, where gas and liquid based generation is


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frequently pressed into service is assumed to be Rs.3.62 / kWh, based on the cost ofgeneration of recently commissioned Kawas-I (Rs.3.4036 / kWh) and Gandhar (Rs.3.8484 /kWh) plants. While liquid fuel based generation (costing about Rs.6-8 per kWh) is beingpressed into service at present, a conservative gas based generation cost has been consideredhere. The marginal cost of generation in the Eastern region is assumed to be Rs. 2.0/kWh,

based on the cost of power from new coal based generation plants.

The annual exchange of power across these links, and the calculation of annual economicbenefits from it are provided in Table-5. The exchange for EN-I and ES-II links is based ondata for 2005-06, whereas for EN-II which was commissioned in August 2006, data forSeptember 2006 has been extrapolated. This is a conservative assumption since utilization ofEN-II link would increase over the next one year with increase in generation from TalaHydropower plant.

Table-5: Calculation of Annual Economic Benefit from Exchange of Power

East

North-I

East

South-II

East

North-II UnitsAnnual Net Power Exchange * 2926 11150 5844 MU

Marginal Cost of Power in Receiving Region 3.62 3.62 3.62 Rs./kWh

Marginal Cost of Power in Source Region 2.00 2.00 2.00 Rs./kWh

Difference in Marginal Cost of Power 1.62 1.62 1.62 Rs./kWh

Annual Economic Benefit 474 1806 947 Rs. crores

*Based on present exchanges, likely to increase further in future

Results

The ERR for the three inter-regional links is found to be much higher than the hurdle rate of

12% in all cases as calculated in Table-6.

Table-6: Calculation of ERR for Inter-regional Transmission LinksEast North Interconnector-I East South Interconnector-II East North Interconnector-IIYear

Capex O&M Benefit NetBenefit



2000 114 -114 209 -209 02001 208 -208 603 -603 02002 130 -130 1405 -1405 02003 159 4 268 104 1126 -1126 1 -1

2004 9 8 516 499 117 60 1967 1790 111 -1112005 2 8 495 485 30 58 1888 1800 722 -7222006 0 8 474 466 0 55 1806 1751 1130 34 473 -6902007 0 7 451 443 0 52 1717 1665 245 65 900 5902008 0 7 432 425 0 50 1645 1594 78 62 862 7222009 0 7 415 409 0 48 1583 1535 0 60 830 7702010 0 7 400 393 0 46 1524 1477 0 57 799 7412011 0 6 385 378 0 45 1466 1422 0 55 769 713


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2012 0 6 370 364 0 43 1411 1368 0 53 740 6872013 0 6 356 351 0 41 1358 1317 0 51 712 6612014 0 6 343 337 0 40 1307 1267 0 49 685 6362015 0 5 330 325 0 38 1258 1220 0 47 659 6122020 0 4 273 268 0 32 1039 1007 0 39 545 5062025 0 4 225 222 0 26 858 832 0 32 450 418

49.6% 35.8% 35.8%

C. Transmission System Strengthening

The project funded investments for the Southern Region Transmission SystemStrengthening-III scheme. System simulations by POWERGRID revealed that with theexpansion of generation load supported by the transmission system, tripping of a certain line(Nagarjunsagar-Raichur) posed a very high risk of collapse of transmission grid in Karnatakadue to cascading failures. The risk has been addressed through the Southern region systemstrengthening scheme-III. The principal economic benefit of the scheme is therefore

reduction in chances of grid disturbances due to tripping of the said line. The economicbenefit of the investments has been valued in the ICR economic analysis based on theprobability of such a failure occurring, and the consequential loss of power supply valuedat the cost of unserved energy. The value of this component was US$ 23.92 million, or about5.4% of the Bank funding.

Key Assumptions

Loss of Energy Supply due to Disturbance in SR Grid from Tripping of Nagarjunsagar-

Raichur (NSR) Line The probability of tripping of the NSR line has been assumed to bethe same as that for an average line in POWERGRID's transmission network, which stood at

3.52 trippings per line during the year 2005-06. Assuming a restoration time of 12 hours ineach case, the expected outage time of this line during the year is 28 hours. Consequent tothe tripping of this line, the entire electrical system (parameters such as frequency, voltage,phase etc) in the Karnataka state would start to oscillate, eventually leading to collapse of thestate grid. Prompt action by the load dispatch center may arrest the spread of grid failure tothe entire region through load shedding. Therefore, the analysis conservatively assumesshedding of 50% of the state load thus preventing collapse of the entire state grid. Timetaken for recovery is assumed to be 12 hours. The load shed during this period can only bereconnected once the NSR link is restored. Based on the above, the loss of energy isestimated at 89.4 MU per annum. The valuation of energy loss due to load shedding has beencalculated using the Cost of Unserved Energy and Variable Cost of Generation, as estimated

in 'Section-A' of this analysis.

Results

The ERR of the SR-III investments due to the reduction of the chances of line trip and thusload shedding is found to be 19.1%, with an NPV of Rs.595 million As shown in Table 7below.


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Table-7: Calculation of ERR for Southern Region-III InvestmentsYear Capex

(million Rs)Economic

Benefit(million Rs)

Net Benefit(million Rs)

2004 5 -4.22005 8 -7.22006 593 -592.62007 1464 404 -1135.92008 182 404 204.12009 404 404.12010 404 404.12011 404 404.12012 404 404.12013 404 404.12014 404 404.12015 404 404.12025 404 404.1

NPV 595ERR 19.1%

D. Telecom Investments

The value of this component was US$79 million i.e. about 18% of the Bank funding. Totalinvestments under this sub-project (including funding from other sources) stood at US$211million. POWERGRID's diversification into telecom was intended to exploit the synergiesbetween transmission and telecom businesses, and the strategic advantages of supporting thetelecom network on the existing transmission towers. These synergies/advantages included(i) existing transmission network on which telecom network could be easily superimposed,

(ii) process of obtaining right of way for telecom network is eliminated, (iii) fasterimplementation of overhead network compared to underground cabling, (iv) lower annualrecurring costs of overhead network, and (v) communication network requirement related tothe Unified Load Dispatch & Communication (ULDC) Schemes.

Under the prevailing competition in the telecom markets in India, POWERGRID's telecomservices can be replaced by similar services from other players, without any significant pricedifference. Therefore the economic benefit from these investments is estimated using themarket prices for the telecom services provided. The market prices and capacity utilizationby POWERGRID have been projected in the future. To evaluate the impact of theseassumptions, scenario analysis has been undertaken by varying these assumptions.

Key Assumptions

Revenue Growth and Additional Capital Expenditure Despite stiff competition andfalling prices, POWERGRID has been able to increase its telecom revenues at more than50% per annum for the last two years. The company expects to maintain this growth trendover the next four years, leveraging the newly acquired National Long Distance (NLD)license and surge in demand for broadband services. After this, the revenue growth is


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assumed to stabilize at 10% from 2012. POWERGRID already has a strong optical fibernetwork in place. Going forward, it would need to augment capacity through addition ofterminal equipment, while using the existing optical fiber network which has a useful lifeof more than 25 years. The additional capital expenditure on terminal equipment is projectedat about Rs.200 million each year, increasing to about Rs.400 million per year after 2012

when terminal equipment would have to be replaced each year in phases.

Results

Despite the reduction in the economic benefits from POWERGRID's telecom investmentsdue to delay in implementation, based on the market valuation of telecom services, theeconomic rate of return is found to be 13.6% (see table-8). This estimate assumes sustainedrevenue growth rate of 45% between FY2009 and FY2011, compared to more than 50% overthe last two years and also expected in the current year. The estimate does not includeadditional economic benefits such as network access to remote (and politically sensitive)areas in North-East and Jammu & Kashmir, and high network reliability even in face of

natural calamities and digging.

To analyze the impact of growth assumptions on the project ERR, a sensitivity analysis hasbeen carried out, as shown in Table-9. It is seen that the ERR is higher than the hurdle rate of12% in all cases, except when the growth rate between FY2009 and FY2011 is only 35%.POWERGRID finds this scenario unlikely, in view of the current high rate of growth; rapidincrease in demand for broadband, NLD telephony services and shift from voice to data;acquisition of NLD license by POWERGRID; strategic tie-ups with internet and telecomservice providers; and, an enhanced focus on marketing.

Table-8: Calculation of ERR for Telecom Investments (Base Case)Year Capex

(millionRs)

O&M

(million Rs)

RevenueGrowth

Rate(Nominal)

RealRevenue

(million Rs)

NetBenefit(million

Rs)

FY 2001 985 0 0 -985FY 2002 2035 18 30 -2023FY 2003 923 34 95 -862FY 2004 1717 54 82 -1690FY 2005 2809 155 275 -2690FY 2006 760 190 46% 385 -565FY 2007 642 276 56% 570 -347FY 2008 182 346 50% 819 291

FY 2009 175 350 45% 1144 619FY 2010 169 353 45% 1596 1074FY 2011 325 357 45% 2227 1546FY 2012 313 361 28% 2733 206

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