Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 41627 September 2008

Proposed Multitranche Financing Facility India: Himachal Pradesh Clean Energy Development Investment Program

CURRENCY EQUIVALENTS (as of 22 September 2008)

Currency Unit – Indian rupees/s (Re/Rs)

Re1.00 = $0.0218890236

$1.00 = Rs45.684998

ABBREVIATIONS ADB – Asian Development Bank CDM – clean development mechanism CEA – Central Electricity Authority CERC – Central Electricity Regulatory Commission CO2 – carbon dioxide EA – executing agency EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environmental management plan FFA – framework financing agreement FIRR – financial internal rate of return FYP – five year plan GOHP – government of Himachal Pradesh GRC – grievance redress committee HIMURJA – Himachal Pradesh Energy Development Agency HPERC – Himachal Pradesh Electricity Regulatory Commission HPPCL – Himachal Pradesh Power Corporation Limited HPSEB – Himachal Pradesh State Electricity Board IA – implementing agency ICB – international competitive bidding IEE – initial environmental examination IPDF – indigenous peoples development framework IPDP – indigenous peoples development plan IPP – independent power producer KKPC – Kinner Kailash Power Corporation LIBOR – London interbank offered rate MFF – multitranche financing facility MIS – management information system MOP – Ministry of Power MOU – memorandum of understanding MPP – Multipurpose projects NCB – national competitive bidding NGO – nongovernment organization PFR – periodic financing request PIU – project implementation unit PMU – project management unit PPP – public-private partnership PVPC – Pabber Valley Power Corporation SEIA – summary environmental impact assessment SIEE – summary initial environmental examination

TA – technical assistance WACC – weighted average cost of capital

WEIGHTS AND MEASURES GWh – gigawatt-hour Ha – hectare Km – kilometer kV – Kilovolt kW – kilowatt (1,000 watts) kWh – kilowatt-hour MVA – megavolt-ampere MW – megawatt (1,000 kilowatts)

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 31 March 2008.

(ii) In this report, "$" refers to US dollars.

Vice-President B.N. Lohani, Vice-President-in-Charge, Operations 1 Director General K. Senga, South Asia Department (SARD) Director T. Kandiah, Energy Division, SARD Team leader A. Jeffries, Energy Economist, SARD Team members N. T. Anvaripour, Principal Energy Specialist (Finance), SARD I. Caetani, Social Development Specialist, SARD H. Kobayashi, Energy Specialist, SARD N. Kulichenko, Environmental Specialist, SARD K. Ogino, Energy Specialist, SARD J. Versantvoort, Counsel, Office of the General Counsel

CONTENTS Page

FACILITY INVESTMENT PROGRAM SUMMARY i

MAP

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Background, Performance Indicators, and Analysis 1 B. Analysis of Key Problems and Opportunities 3

III. INVESTMENT PROPOSAL 9 A. Impact and Outcome 9 B. Outputs 10 C. Technical Justification and Eligibility Criteria 10 D. Special Features 12 E. Investment Program and Financing Plan 13 F. Implementation Arrangements 15

IV. PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 19 A. Project Economic and Financial Justification 19 B. Social Aspects 21 C. Environmental Aspects 22 D. Benefits and Beneficiaries 24 E. Potential Risks 25

V. ASSURANCES 26 A. Finance and Implementation 26 B. Safeguards 27

VI. RECOMMENDATION 28

APPENDIXES 1. Design and Monitoring Framework (Investment Program and Sector Road Map) 29 2. Power Sector Assessment 38 3. Organization Structure of the Implementing Agency 46 4. External Assistance to the Power Sector 47 5. Project Readiness 48 6. Capacity Development and Action Plan 49 7. Detailed Cost Estimates for Tranche 1 Subprojects 51 8. Multitranche Financing Facility Implementation Structure 53 9. Subproject Implementation Schedule (Tranches 1 and 2) 54 10. Implementation Schedule of the Multitranche Financing Facility 55 11. Procurement Plan 56 12. Financial Analysis (Tranche 1 subprojects) 58 13. Summary of Economic Analysis 61 14. Summary Poverty Reduction and Social Strategy 65 15. Summary Resettlement Plan 68

SUPPLEMENTARY APPENDIXES (available on request) A. Technical Information on Selected Projects B. Economic Analysis C. Financial Performance and Projections D. Financial Management Assessment E. Procurement Capacity Assessment F. Social Safeguards Documents

(i) Resettlement Framework (ii) Indigenous Peoples Development Framework (iii) Resettlement Plan—Sawra Kuddu Subproject (iv) Resettlement Plan—Kashang Subproject

G. Environmental Safeguards Documents (i) Environmental Assessment and Review Framework (ii) Abstract of the Summary Environmental Impact Assessment for Tranche 1

Subprojects (iii) Summary Environmental Impact Assessment for Tranche 1 Subprojects

(circulated to ADB’s Board of Directors on 28 April 2008). H. Terms of Reference for Internationally Recruited Consultant Positions

FACILITY INVESTMENT PROGRAM SUMMARY Borrower India Classification Targeting classification: General intervention

Sector: Energy Subsector: Hydropower generation Themes: Sustainable economic growth, environmental sustainability, capacity development Subthemes: Fostering physical infrastructure development; cleaner production, control of industrial pollution; institutional development.

Environment Assessment

Tranche 1—category A (the tranche 1 summary environmental impact assessment was disclosed on the website of the Asian Development Bank [ADB] on 28 April 2008).

Background India has enormous economically viable hydropower potential.

However, only about 21% of this potential has been harnessed to date and the percentage share of hydropower in India’s energy mix has steadily declined over the last three decades. Conversely, the share of fossil-fuel burning power generation has increased. India’s economy has grown by 8% per annum in recent years, and the country faces rapidly growing energy needs. Addressing the energy challenge is essential for fostering sustainable economic growth and reducing poverty.

Investment Program Description

The Himachal Pradesh Clean Energy Development Investment Program (the Program) combines physical investments in hydroelectric power generation in Himachal Pradesh with nonphysical interventions in capacity development. All hydropower projects will be run-of-river design. The capacity development component will help the principal Implementing Agency (IA) (i) prepare future projects; (ii) implement and administer approved projects; and (iii) monitor, review, evaluate, and report on program and project implementation, particularly in regard to compliance with ADB policies and procedures. Additional support will focus on financial management and accountability, as well as other aspects of corporate development of the IA and support for other state power sector entities.

Sector Road Map. In its hydropower policy (2006), the government of Himachal Pradesh (GOHP) opted to target its comparative advantage in hydropower as the key focal point of the state power sector, with planned investments in installed capacity backed by institutional reforms and capacity development. GOHP has outlined a policy agenda for hydropower development in the short to medium term and has developed a comprehensive road map to achieve these goals efficiently. A main pillar of the road map is hydropower project implementation by the state, central government, and private sectors, as well as providing enabling infrastructure such as road access and transmission

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interconnections to facilitate hydropower development. The road map also includes institutional changes and stipulates formulating policies and guidelines to assist the sector.

Investment Plan. The state’s overall hydropower development plan aims to achieve 4,021.5 MW of installed hydropower capacity by the end of the 11th Five Year Plan in 2012 as follows.

Sector

Installed Capacity

(MW)

Estimated Cost

($ million) State Sector 290.5 a 493 Central Government and/or Joint Sector b

2,243.0

3,813

Private Sector 1,488.0 2,462 Total 4,021.5 6,768

MW = megawatt. a This figure reflects projects commissioned during the 11th Five Year Plan only. 632 MW of the 808 total MW intended to be funded under the Investment Program are scheduled for commissioning post 2012. b This includes projects developed either by Central Government power sector entities alone or jointly with either state or private sector entities. Source: Government of Himachal Pradesh. Estimated costs are based on general $ per kilowatt cost assumptions. The Program’s selected projects will come from the state’s portion of the overall hydropower development plan, which includes an additional 810 MW to be commissioned post-2012.

Capacity Development. Given the considerable investment plans for additional hydropower additions in Himachal Pradesh, there are capacity development needs within Himachal Pradesh Power Corporation Ltd. (HPPCL), the state’s hydropower generating company established in 2006. GOHP owns 60% of HPPCL and Himachal Pradesh State Electricity Board (HPSEB), the state’s utility, owns 40%. HPPCL has sound engineering and project construction management capabilities, and borrows expertise from its parent (one of the better run state utilities). The main goal is to ensure complete stand-alone capabilities within HPPCL. Identified capacity development objectives of the proposed multitranche financing facility (MFF) include a focus on project preparation, implementation, and management, including (i) helping prepare future projects, (ii) implementing and administering approved projects, and (iii) monitoring, reviewing, evaluating, and reporting on program and project implementation. Particular emphasis will be placed on adherence to ADB policies, procedures, and reporting requirements—including contract management, procurement, disbursements, safeguards compliance and monitoring and reporting systems, as well as support for project planning and construction supervision. It will also emphasize adherence to the national laws, policies and requirements.

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Financial management and accountability will be a second major focus. Capacity currently exists for accounting for construction operations, but when the first subproject begins generating revenue in 2011, the financial management and accounting needs will change. Improved accounting and auditing systems, while incorporating adequate financial management standards to ensure fiduciary oversight of disbursed funds, will commence in 2008.

In addition to project-oriented capacity development, the capacity development component will include corporate development assistance to HPPCL to broaden its functional expertise as the state’s power generating company. Developing HPPCL into a corporatized generation company, separate from HPSEB, the state’s current integrated utility, facilitates the unbundling process. This component will address HPPCL’s training needs in state-of-the-art technologies, and for capacity in clean development mechanism (CDM) procedures.

A separate capacity development subcomponent will support HPSEB. As the state’s transmission utility, HPSEB is responsible for the design and construction of evacuation systems from hydropower projects to the transmission system, as well as ensuring adequate transmission capacity. ADB will assist HPSEB in acquiring an enterprise resource solution to cover all its future computer accounting and management information system (MIS) applications; and in financing the purchase of software, hardware, training, and initial system maintenance to improve management reporting and operating activities. ADB is also considering assisting HPSEB with its transmission system master plan separately from this MFF (with technical assistance preparation in progress).

Himachal Pradesh Power Sector. The power sector of Himachal Pradesh ranked 7th out of 29 in a state power sector performance rating study mandated by the Government. Key aspects evaluated to determine the ratings were state governments’ progress in implementing the key provisions of the Electricity Act, 2003, and in obtaining rural electrification; the quality of the regulatory process; business and financial risk analysis; progress in attaining commercial viability; and the creation of a competitive environment. Noted strengths for Himachal Pradesh include satisfactory progress in the area of distribution reforms, particularly metering and energy accounting, and achievement of 100% rural and consumer electrification. Himachal Pradesh is one of the few states where energy delivered to consumers is 100% metered, and its distribution system has a high 97.4% availability.

Himachal Pradesh has achieved more than 90% metering of its distribution transformers and on feeders up to 33 kilovolts (kV), resulting in transmission and distribution losses of a comparatively low 16.4%, and aggregate technical and commercial losses of about 26%. Also noted were (i) a strong regulatory process,

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including timely issuance of tariff orders and regular monitoring of performance standards and compliance; and (ii) significant steps taken to implement various provisions of the Electricity Act, 2003. The state’s independent regulator, Himachal Pradesh Electricity Regulatory Commission (HPERC), began issuing tariff orders in October 2001. The main features of its tariff orders are the adoption of a cost-to-serve model for tariff determination to rationalize tariffs across various consumer categories, reducing cross subsidies, and introducing tariff-based incentives to reduce transmission and distribution losses further.

Rationale Himachal Pradesh is a small mountainous state with abundant

water resources in the five major rivers flowing through the state from the western Himalayas. The power generation potential of Himachal Pradesh is 20,415 MW—about 25% of India’s total hydropower potential—out of which about 6,150 MW has been developed. Recognizing the state’s comparative advantage in hydropower generation, the main strategy of GOHP is the development of Himachal Pradesh as the “hydropower state” of India. Harnessing this hydropower is vital to meet all in-state demand by providing affordable, reliable power to its residents as the state currently meets only about 50% of its power demand through its own power generating capacity. Harnessing this hydropower will also enable the export of excess power to the rest of the country for the benefit of poorer and power deficient states. Himachal Pradesh’s focus on clean energy development will provide jobs to state residents and will further the country’s goal of meeting its energy needs through clean, indigenous sources. Furthermore, the Program will meet capacity development needs to further improve the state’s power sector.

Impact and Outcome Impact. The impact of the Program will be a sustainable electricity

sector in Himachal Pradesh and improved state finances. Outcome. The outcome of the program will be increased clean energy production through run-of-river hydropower schemes, as well as improved planning, implementation, management and power sector governance.

Program Investment Plan

The Program’s selected projects will come from the state’s portion of the overall hydropower development plan and are expected to total about 808 MW. The estimated cost of these selected projects is about $1.5 billion.

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Financing Plan Financing Plan for the Investment Program

($ million) Source Amount % Asian Development Bank 800.0 53.3Other Financial Institutions 250.0 16.7Government 450.0 30.0

Total 1,500.0 100.0Source: Himachal Pradesh Power Corporation Limited and Asian Development Bank estimates.

Multitranche Financing Facility

The Government has asked ADB to extend financing of $800 million over 8 years through an MFF. The MFF supports a well-defined clean energy investment program underpinned by continued institutional reform and a delineated sector road map. It will allow financing of individual subprojects as projects and conditions warrant, by linking financing to project readiness and capacity.

The MFF is a suitable modality for this Program as it allows ADB to engage with GOHP in a continuous long-term dialogue consistent with the Government’s and ADB’s clean energy policies, and provides up-front support to GOHP for its substantial clean energy development program, but with financial commitments sequenced to match project readiness. As the sequenced investments are all run-of-river hydropower projects, expertise will build over time, allowing future subprojects to benefit directly from implementation experience gained from the initial investments and from the capacity development component.

Specific subprojects have been earmarked for the first and second tranches as well as future tranches, although others from the state’s investment plan may be substituted in future tranches provided they meet the eligibility criteria. The tentative implementation schedule of the MFF envisages five tranches covering physical investments in hydropower generation and nonphysical investments in the form of a capacity development component.

The MFF transaction is accompanied by the tranche 1 periodic financing request (PFR) to finance two subprojects consisting of hydropower generation facilities which are ready for implementation, plus the capacity development component. The total cost of the first tranche subprojects and capacity development amounts to $224.8 million. HPPCL requested ADB to provide $150 million as a first tranche loan. Due diligence in key areas, such as technical, economic, financial, and safeguards, has been completed for tranche 1.

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Framework Financing Agreement

India has entered into a financing framework agreement (FFA) with ADB. Before ADB accepts a PFR under the FFA, the Government, GOHP, and the EA will ensure full compliance with the terms and conditions of the FFA. The capacity development component will provide support if necessary. ADB will evaluate all funding requests, and will ensure that they adhere to representations made and will continue to do so. ADB will provide ongoing guidance to the Indian authorities, and make available additional experts under the capacity development component if needed. ADB staff will report to ADB Management and ADB’s Board of Directors on the status of individual loans, including the performance on representations and warranties. Failure to comply with representations and warranties entitles ADB to hold back additional financing under the MFF.

Periodic Financing Requests

The MFF transaction is accompanied by one PFR as tranche 1. PFR 1: Hydropower Facility Construction and Capacity Development. This tranche includes clean power development via construction of the 111 MW Sawra Kuddu Hydroelectric Project located on the Pabber river in Shimla district of Himachal Pradesh. Construction activities include underground powerhouses, associated civil works, river diversion, electromechanical works, and power evacuation systems. This tranche also includes the civil works for the 65 MW Kashang I Hydroelectric Project, including the common power house for the Kashang I, II and III Projects, located on tributary streams of the Sutlej river in Kinnaur district. (The Kashang I electromechanical works and the Kashang II and III projects are expected to be covered under the second tranche such that the Kashang I, II and III Projects total 195 MW.) These subprojects, as well as all other subprojects earmarked for future tranches, are run-of-river design. The first tranche loan will also include the $12 million capacity development component.

Amount and Terms The MFF will provide up to $800 million from the ordinary capital

resources of ADB, with final terms and conditions to be established under individual loan agreements based on prevailing ADB policies. Pursuant to the FFA, the Government has submitted one PFR to ADB totaling $150 million for tranche 1. This PFR is presented to the Board with the report and recommendation of the President for the MFF and the FFA. The tranche 1 loan will have a principal repayment period of 25 years, which includes a grace period of 5 years. However, each future tranche may be financed under terms different from the financing terms of previous or subsequent tranches. Financing will be made available under ADB’s London interbank offered rate (LIBOR)-based lending facility. The Government can choose from eligible currencies and interest rate regimes, which can change with each loan. Currency and interest

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rate swaps will be made available during the financing period. Repayment schedules can be structured to satisfy the needs of individual loans. Each tranche under the MFF will be at least $40 million.

Allocation and Relending Terms

The Government will provide the proceeds of each tranche to GOHP and will cause the proceeds to be applied to the financing of expenditures on the subprojects and the capacity development component in accordance with the conditions set forth in the FFA and the legal agreements for each tranche. GOHP will onlend funds to HPPCL under arm’s-length terms to ensure commercial discipline.

Advance Procurement and Retroactive Financing

To expedite implementation, the Government and GOHP requested ADB’s approval to carry out advance action for procurement of works and goods, and recruitment of consultants. This advance procurement action is intended to be used in all tranches of the MFF. The Government and GOHP have also requested retroactive financing arrangements to apply to the MFF to cover incurred project expenses in accordance with ADB procedures. ADB granted approval of advance contracting, and approval for retroactive financing on 10 March 2008. The Government, the EA and the implementing agency (IA) have been informed that approval of advance action does not commit ADB to approve any of the individual tranches or to finance the procurement costs. Except as otherwise agreed with ADB, the expenditures incurred for equipment, civil works, and consulting services will be eligible for retroactive financing, provided that these are incurred before the effectiveness of the related loan agreement, but not earlier than 12 months preceding the signing of the related loan agreement, and as long as they do not exceed an amount of 20% of the individual loan. The Government and the EA have been informed that ADB will not finance expenditures incurred prior to effectiveness of individual tranches, even if advance contracting was approved, unless retroactive financing has also been approved.

Period of Utilization The ADB-supported investment program will be implemented over

8 years, including procurement and construction activities. Each specific loan will have its own closing date to match its implementation period. The first PFR was signed on 11 September 2008.

Estimated Program Completion Date

30 September 2016

Executing Agency The Multipurpose Projects (MPP) and Power Department of GOHP

is the EA with overall responsibility for the execution of the Investment Program and subprojects. HPPCL was established by the state government, and it is mandated to develop and operate new hydropower plants in the state. HPPCL will function as the

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principal IA for the proposed MFF, with responsibility for the day-to-day coordination, implementation, and administration of the subprojects. Each of the hydropower projects will have a separate field office to facilitate its smooth functioning. They will function as project management units (PMUs) at the field level and there will be a central PMU within HPPCL’s head office. For the capacity development subcomponent earmarked for HPSEB, HPSEB will be the IA.

Implementation Arrangements

HPPCL will appraise additional subprojects following approval of the MFF. HPPCL will also undertake detailed design, procurement, construction supervision, commissioning, maintenance, and operation of the subprojects. Technical support from consultants and contractors will be employed as necessary with funding from the capacity development component budget. HPPCL will liaise with ADB on a regular basis.

The PMU, through the related IA offices, will be responsible for processing and implementing the subprojects. It will be assisted by technical experts who will evaluate the technical reports, feasibility studies, preliminary design reports, environmental assessment reports, resettlement and indigenous peoples development plans, and detailed design reports to ensure compliance with ADB and government requirements. Summary appraisal reports will be submitted to ADB subsequent to GOHP approval and necessary government clearances.

Procurement Equipment, materials, and civil works to be financed under each

loan of the MFF will be procured in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time), mainly through international and/or national competitive bidding. Advance procurement will be allowed to facilitate timely implementation of the investments.

Consulting Services Consulting services are required to provide support to HPPCL for

project implementation work, including design, supervision of construction, management for the subprojects under the tranche 1 loan, and for feasibility studies of future loans. Consulting services will be provided for evaluation, monitoring, and reporting purposes. In addition, consultants will support the capacity building component under the tranche 1 loan. Consultants will be selected and engaged in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). Consulting firms will be selected using the quality- and cost-based selection method and simplified technical proposal. Individual experts may also be recruited based on biodata submitted in response to specific terms of reference for assignments.

Benefits and Beneficiaries under the MFF

The first group of beneficiaries will be local electricity consumers. Electricity from the proposed hydropower plants under the Investment Program will go directly to the local grid (only the

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surplus will be exported to the national grid), thus helping to fulfill local demand for greater energy resources. Power consumption within the state consists of about 25% domestic users, 7% commercial users, 59% industrial or bulk supply, and 9% irrigation and agricultural use. The MFF is expected to result in more reliable power to consumers, and will lower the cost of supplying power in the state by relying more on in-state power generation. Industry is the largest consumer of electricity in Himachal Pradesh, and the share of industry to state domestic product has increased from 1.1% in FY1951 to 15.9% in FY2004. As the dust-free and cool climate of Himachal Pradesh is suitable for the electronic and precision industries, electronic complexes have been established. These industries are expected to benefit from rationalized power tariffs.

The second group of beneficiaries will be through job creation as a result of the Investment Program. For example, the contractors are expected to hire skilled and unskilled workers for the projects’ civil works. There will also be jobs available beyond the construction phase throughout the projects’ life cycles. GOHP has a policy that 70% of hired labor must be hired from within the state.

Third, local communities in the project areas will benefit from socioeconomic development programs financed through GOHP’s policy of allocating 1.5% of total project costs to the community, with the funds to be administered by local area development committees led by community leaders (these are government funds outside of the MFF). These funds will be earmarked for small-scale projects benefiting the affected communities as decided by the committees.

Clean energy development as promoted by this MFF will contribute to local, regional, and global environmental initiatives. In addition, the Program will benefit all national grid-connected electricity consumers via the export of excess power, and by eliminating or reducing the need for Himachal Pradesh to import power from the national grid, thus enabling the Government to meet its objective of developing the hydropower potential in the country.

Risks and Assumptions The key broad assumptions under the Program are as follows: (i) macroeconomic growth will remain stable; (ii) GOHP remains committed to power sector reforms and institutional improvement; and (iii) GOHP executes its investment plan, successfully combining physical infrastructure investments with nonphysical investments in capacity development to maintain a sustainable power sector. Broad risks to the Investment Program include a slowdown in the depth and pace of policy and sector reforms, including those related to regulation, governance, financial management, institutional change, and tariff regimes.

These risks can be mitigated through political commitment,

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concerted action, and sound supervision. GOHP is fully committed to expand its power supply and continue with sector reforms. The reforms include further tariff reform, improved corporate governance, institutional change, and increased private sector participation. The state is closely following the execution of the long- and medium-term plans for the sector, where hydropower development has a prominent role, and recognizes that capacity development is a major part of the process. GOHP is also committed to the adequate development of the transmission network in the state, for which a separate transmission utility has been envisaged.

More specific, subproject-related assumptions under the Program are: (i) the commitment of HPPCL to construct and operate the hydropower projects in a timely manner and maintain proper implementation supervision, including implementation of safeguard plans; (ii) no material delay in concluding tariffs for the projects and/or on appropriate arrangements for the sale of excess power; (iii) GOHP continues to support capacity development and assumes ownership of the proposed MFF’s capacity development component; and (iv) the subprojects will be eligible for CDM financing (purchase of carbon credits) and the CDM is extended beyond its 2012 end date.

Specific subproject-related risks include delays in recruiting consultants and in the procurement process. Another risk is the lack of, or delay in, counterpart funding including funds to the state transmission utility for construction of the transmission interconnections and required transmission lines. Construction risks include an increase in project costs and the implementation time frame caused by (i) implementation issues (the greatest risk being due to encountering unexpected poor geological conditions); (ii) commodity price increases (such as cement, steel, fuel, and other raw materials) that affect cost estimates; or (iii) poor contractor performance. However, the structures are of conventional design and require special but common construction practices, and the equipment is of conventional design and manufacturing capability. In all, the works require highly qualified civil works contractors and equipment manufactures. This can be achieved through rigid application of ADB’s guidelines for qualification of contractors and consultants and close monitoring of the contracts.

Overall, the integrated benefits and impacts are expected to outweigh the costs, given the likelihood of the risks occurring.

Undertakings Himachal Pradesh has a well-defined power sector road map, a clear investment and capacity development program, and the people and institutions to deliver on the objectives and targets. The provision of ADB finance through an MFF requires an agreement on key undertakings, which are intended to ensure program

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success. The assurances outlined in this document are reflected in legal documentation, covering critical covenants, including (i) proper implementation and evaluation, (ii) providing its share of financing according to the financing plan, (iii) proper fiduciary oversight (including financial as well as business process audits), (iv) proper governance measures, and (v) capacity and institutional development. In addition, the FFA captures provisions for ADB financing, including (i) subproject eligibility criteria; (ii) following safeguards frameworks; (iii) procurement and disbursement procedures; (iv) financial management; and (v) monitoring, administration, and reporting.

ADB will provide support to the EA and IA responsible for program implementation, from headquarters and potentially through the India Resident Mission. Each new financing request to be converted into a new loan will require an evaluation of the performance of the previous one. ADB will conduct periodic review missions, which will include due diligence on representations and warranties made to ADB. In addition, staff will report on any issues or problems faced by the authorities and the EA, and the remedial actions suggested to overcome them.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed multitranche financing facility (MFF) to India for the Himachal Pradesh Clean Energy Development Investment Program.1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Background, Performance Indicators, and Analysis

2. India’s economy has grown by 8% per annum in recent years, and faces rapidly growing energy needs. Addressing the energy challenge is essential for fostering sustainable economic growth and reducing poverty. Taking into account India’s energy security concerns and the environment, the Government of India (the Government) developed the integrated energy policy2 in 2006. The policy’s goal is to ensure adequate and reliable energy supplies in a technically efficient, economically viable, and environmentally sustainable manner. Specific measures include (i) optimizing the power supply mix, including greater use of indigenous hydropower resources and renewable energy; (ii) pursuing technologies that maximize energy efficiency, demand-side management, and conservation; and (iii) continuing related power sector reforms, including reducing technical and commercial losses of the state transmission and distribution utilities and other restructuring efforts. 3. The Electricity Act, 2003, is the cornerstone legislation for the power sector in India. The act primarily mandates continued restructuring of state electricity boards, full metering for all consumer classes, open access to transmission systems, facilitation of power trading, and tariff rationalization. The Central Electricity Regulatory Commission (CERC) has prescribed detailed rules for cost accounting and allowable tariffs. In addition, India’s 11th Five Year Plan (FYP) aims to ensure electricity connections to all villages and below poverty level households by 2009, and provide round-the-clock power service by the end of 2012 to meet the Government’s “Power For All By 2012” commitment. The 11th FYP also aims to increase generation capacity by 78,500 megawatts (MW), reduce aggregate technical and commercial losses, increase energy efficiency, promote low-carbon energy sources, and increase private sector participation. 4. To ensure energy security for the country, India has decided to fully develop all domestically available energy options. Though India has abundant reserves of coal and coal shall remain an important source for power generation in the medium term, India has also decided to tread a low carbon path for meeting energy needs, including thermal power projects deploying more efficient, super critical technology, gas based power generation (dependent upon the availability and pricing of gas) and nuclear power (dependent upon the access to civilian nuclear technology and availability of fuel. With about 9,000 MW of installed capacity, India is the world’s 4th largest producer of wind power. To address climate change issues, India has drawn up a National Action Plan, which includes solar power promotion. India is also giving emphasis to the conservation of energy. 5. India is also endowed with enormous economically viable hydropower potential. Conventional hydropower capacity is assessed to be about 84,000 MW at 60% load factor (or 140,000 MW installed capacity). Only about 21% of India's hydroelectric potential has been

1 The design and monitoring framework is in Appendix 1. 2 Government of India Planning Commission. 2006. Integrated Energy Policy: Report of the Expert Committee.

New Delhi.

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harnessed to-date and another 10% is under development. The Government recognizes the importance of increasing the share of hydropower generation in the energy mix and introduced the “50,000 MW Hydropower Initiative” in 2003. Under this initiative, the hydro-rich states, including Himachal Pradesh, are given special incentives to promote hydropower development. 6. In order to further address the rehabilitation and resettlement issues linked to the construction of the country’s hydropower resources, the Government of India has announced the New Hydro Policy 2008. This policy provides a level playing field to private developers, and elucidates transparent selection criteria to be used by states for awarding sites to such developers. The policy enables developers to earn revenues through merchant sales up to a maximum of 40% of saleable energy with the balance to be sold under long-term power purchase agreements. The policy seeks to balance incentives for private developers while containing provisions designed to ensure that benefits flow to the project-affected persons. 7. Himachal Pradesh, a small mountainous state with a population of slightly over 6 million, has abundant water resources in the five major rivers flowing through the state from the western Himalayas. The power generation potential of Himachal Pradesh is 20,415 MW, which is about 25% of the total hydropower potential of India, out of which around 6,150 MW has been developed. Recognizing the state’s comparative advantage in hydropower generation, the main strategy of the government of Himachal Pradesh (GOHP), outlined in its state hydropower policy,3 is to become the “hydropower state” of the country, by providing affordable, reliable power to its residents, and selling excess power to the national grid as a major source of revenue for the state. A new corporate entity, Himachal Pradesh Power Corporation Ltd. (HPPCL), has been established by GOHP and it is mandated to develop and operate new hydropower plants in the state. 8. The power sector of Himachal Pradesh ranked seventh out of 29 in a state power sector performance rating study mandated by the Government.4 Key aspects evaluated to determine the ratings were state governments’ progress in implementing the key provisions of the Electricity Act, 2003, and in obtaining rural electrification, the quality of the regulatory process, both business and financial risk analysis, progress in attaining commercial viability, and the creation of a competitive environment. Noted strengths for Himachal Pradesh include satisfactory progress in the area of distribution reforms, particularly metering and energy accounting, and achievement of 100% rural and consumer electrification. Himachal Pradesh is one of the few states where energy delivered to consumers is 100% metered, and its distribution system has a high 97.4% availability. Furthermore, Himachal Pradesh has achieved more than 90% metering of its distribution transformers and on feeders up to 33 kilovolts (kV), resulting in transmission and distribution losses of a comparatively low 16.3%. Also noted were (i) a strong regulatory process, including timely issuance of tariff orders and regular monitoring of performance standards and compliance; and (ii) significant steps taken to implement various provisions of the Electricity Act, 2003. The state’s independent regulator, Himachal Pradesh Electricity Regulatory Commission (HPERC), began issuing tariff orders in October 2001. Salient features of its tariff orders are the adoption of a cost-to-serve model to determine tariffs in order to rationalize tariffs across various consumer categories,5 reducing energy charges of industrial consumers to reduce cross-subsidies, and the introduction of a high-voltage rebate

3 Government of Himachal Pradesh. 2006. Hydro Power Policy 2006. Shimla. 4 CRISIL Ratings and ICRA Limited. June 2006. State Power Sector Performance Ratings - Final Report to the

Ministry of Power, Government of India. New Delhi. 5 FY2005 tariff order.

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and low-voltage surcharge to encourage high-voltage distribution—a step toward reduction of transmission and distribution losses.6 A power sector assessment is in Appendix 2. B. Analysis of Key Problems and Opportunities

1. Physical Constraints

9. Generation. The electricity supply for the people of Himachal Pradesh comes from its own state sector resources and allocated share of central sector-owned generation within the state. The installed capacity of the state sector, which is predominantly hydropower, is 523 MW as of March 2007. Himachal Pradesh experiences energy shortages, especially in the winter months of December to February when river flows are at their lowest, although some peak shortages are experienced throughout the year.7 Currently, it is able to meet about 50% of demand from its own resources. During power shortages, the state must draw power from the national grid, depending on the system conditions. Conversely, the state supplies power to the national grid when generating excess hydropower during peak river flow periods.8 10. According to the 17th Electric Power Survey,9 power demand in Himachal Pradesh is expected to increase from 4,861 gigawatt-hours (GWh) in 2006 (824 MW peak) to 9,504 GWh (1,611 MW peak) by 2012 and to 13,136 GWh (2,194 MW peak) by 2017. This implies compound average growth rates of energy demand of 11.37% from 2006 to 2011 and 6.69% from 2012 to 2017. To meet this growing demand, GOHP’s hydropower development plans must fructify. As both the central sector and private investors are interested in developing hydropower in Himachal Pradesh for export to the national grid, the capacity additions earmarked for the state sector will serve local customers throughout the year, with excesses during peak hydropower periods exported. 11. Transmission. The state’s transmission assets consist of 2,100 kilometers (km) of transmission lines rated 66 kV and above, and about 100 power transformers aggregating to around 2,000 megavolt-amperes (MVA) of capacity. The transmission network in Himachal Pradesh is part of the northern regional grid, which is operating in synchronous mode with the eastern, north eastern, and western regional grids (collectively, the national grid). These physical interconnections enable Himachal Pradesh to exchange power with these regions, depending on the daily power supply balance. With considerable hydropower capacity additions in various stages of planning, development, and construction, additional transmission capacity will be needed to transmit the additional power out of state. 12. Distribution. In 1988, Himachal Pradesh became the first hill state to achieve 100% electrification of all census villages—an impressive accomplishment given the dispersed customer base and mountainous terrain. Presently, Himachal Pradesh has around 19,000 distribution transformers, 28,000 km of high-tension lines, and 50,000 km of low-tension lines. In meeting the Government’s requirements on energy efficiency and reduced system losses, it is essential that every unit generated and delivered is accounted for and audited at different voltage levels. Himachal Pradesh has achieved more than 90% metering on the distribution transformers and on the feeders up to 33 kV, and though its transmission and distribution losses are a comparatively low 16.4%, with aggregate technical and commercial losses of about 26%, 6 FY2007 tariff order. 7 In FY2008, Himachal Pradesh experienced a 1.8% energy shortage, with larger shortages in previous years. 8 Peak hydropower generation occurs from April to October because of strong river flows from the spring snowmelt. 9 The Central Electricity Authority periodically publishes electric power surveys, which include power sector data and

forecasts gathered from all sector agencies to be used for planning purposes.

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the next step is to achieve 100% metering at the distribution transformer and feeder level to assist in further reducing this aggregate technical and commercial loss figure.

2. Capacity Development

13. Given the considerable investment plans for additional hydropower additions in Himachal Pradesh and the central role of HPPCL, capacity development is required. HPPCL was formed in 2006 and its assets are derived from merging two existing state corporations, which were formed to develop and construct two hydropower projects. It is owned 60% by GOHP and 40% by the state’s utility, Himachal Pradesh State Electricity Board (HPSEB). HPPCL has sound engineering and project construction management capabilities, and borrows expertise from its parent (one of the better run state utilities). HPPCL’s organization structure is in Appendix 3. Its capacity development needs include enhanced project planning and management, as well as improved governance and financial management. 14. The state’s independent regulator, HPERC, has been functional since 2001. On 30 October 2007, HPERC sent a separate request to the Asian Development Bank (ADB) for capacity development assistance, which would be carried out as separate technical assistance.10 HPERC’s capacity development objectives are to support enhancing institutional capacity, and to promote and update the regulatory framework to address upcoming sectoral issues effectively, especially implementation of the multiyear tariff regime11 as mandated by the Electricity Act, 2003. 15. As the state’s transmission utility, HPSEB is responsible for the design and construction of the evacuation systems from hydropower projects to the transmission system, as well as for ensuring adequate transmission capacity. Ensuring optimum HPSEB performance is also a capacity development objective, given the considerable hydropower investment plans within the state. 16. Additional capacity development needs in the state include support for carbon market initiatives, particularly given the substantial hydropower capacity additions planned for the state and their ability to offset carbon emissions. Under the project preparatory technical assistance,12 ADB funded a study to develop a carbon market development strategy for Himachal Pradesh, with further assistance to be part of the MFF.

3. Private Sector Participation

17. In Himachal Pradesh, the state’s aggressive hydropower development objectives cannot be reached without further private sector participation to meet the sector’s financing requirements and to enhance operational efficiencies. The Government’s national electricity policy13 and the 11th FYP stress the importance of increased private participation in India’s power sector. In Himachal Pradesh, hydropower development was opened up for private sector participation in 1991, with two projects (totaling 386 MW) already commissioned. For the 11th FYP (2007–2012), 8 hydropower plants with combined capacity of 1,488 MW (37% of

10 ADB. 2007. Country Operations Business Plan 2008–2010: India. Manila. 11 A tariff regime where a utility’s costs in excess of specified levels (which are fixed for a multiyear period) are not

recoverable through the tariff, thus providing an incentive to maintain costs and performance levels. 12 ADB. 2006. Technical Assistance Cluster to India for Project Processing and Capacity Development. Manila (TA

4814-IND). 13 Ministry of Power, Government of India. 2005. National Electricity Policy. New Delhi.

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planned capacity additions excluding mini-hydropower) have been identified for private sector participation, with further additions expected beyond 2012. 18. The primary constraints to private sector participation in the past, in Himachal Pradesh and elsewhere in India, were complex bidding procedures and a cumbersome clearance and approval process. Furthermore, the creditworthiness of state electricity boards was a major concern for independent power producers (IPPs). The state’s hydropower policy addressed many of these concerns, and creates an enabling environment by containing bidding procedures and by outlining incentives to attract private investment. The key policy features for private sector participation are (i) procedures for selection of developers via signing memorandums of understanding for projects up to 100 MW, and based on international competitive bidding for projects above 100 MW; (ii) no clearances required from the Central Electricity Authority for projects selected by a competitive bidding process costing up to $600 million; (iii) premium sales prices for peak power; and (iv) 100% foreign equity permitted with automatic approval. Furthermore, the introduction of open access and power trading enables IPPs to export their power to the national grid, allowing for more flexible and favorable power sales arrangements through the open access mechanism. 19. Another constraint to private sector participation is the very long gestation period when developing a hydropower project. The need for detailed hydrology studies, the difficult mountain terrain, often remote locations requiring construction of access roads, and the numerous government clearances required considerably increase the risk profile of investing private capital into early stage project development. Thus, it can be more practical for an entity such as HPPCL to commence the planning process; identify viable sites; conduct the relevant studies; and obtain the various engineering, social, and environmental clearances—and, at this later stage, leverage private capital and expertise through joint ventures or other public–private partnership (PPP) arrangements.

4. Sector Road Map

20. GOHP has outlined a policy agenda for hydropower development in the short to medium term, backed by continued reforms and capacity development, and has developed a comprehensive road map to achieve these goals efficiently. A main pillar of the road map is hydropower project implementation by the state, central government, and private sectors. The state sector has a goal of adding over 1,100 MW of additional capacity, with 290.5 MW commissioned by the end of the 11th FYP, and will allocate funds from the state budget to accomplish this. As part of the hydropower policy, promoting additional private sector investment in the sector is a key priority, with clear goals for competitive tendering of IPP hydropower projects by 2010, with ensuing privately owned capacity additions to follow, as well as a planned implementation of pilot PPP arrangements between the state and private sectors. An additional state goal is providing enabling infrastructure, such as road access and interconnection points, to facilitate hydropower development. 21. The road map also includes institutional changes and stipulates formulating policies and guidelines to assist the sector. The key policy is the state’s hydropower policy. In another example, the state recognizes the need for a formal state environmental policy to ensure that the state’s investment program follow a path of sustainable development with built-in environmental conservation and enhancement measures. 22. Identified capacity development objectives include enhancing planning and financial management capabilities, particularly at HPPCL as the state’s hydropower generation company.

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GOHP identified capacity development needs in implementing ADB-funded investments, such as support for design, procurement, contract management, and subproject management, as well as developing expertise in environmental and social safeguards implementation. This proposed MFF’s capacity development component will support these efforts to commercialize HPPCL. A matrix that summarizes the sector road map is in Appendix 1.

5. Asian Development Bank’s Strategy in the Power Sector

23. ADB’s assistance for the energy sector as outlined in the 2008 country partnership strategy14 has six main priorities: (i) promotion of higher efficiency, low-carbon energy sources, e.g., run-of-river type hydropower projects,15 cleaner fuel, and renewable energy; (ii) expansion and optimization of transmission and distribution systems; (iii) sector reforms; (iv) institutional strengthening to implement reforms required by the Electricity Act, 2003, including development of more flexible power delivery and trading systems; (v) promotion of private sector participation; and (vi) encouraging energy efficiency, energy conservation, rural electrification, and ensuring environmental and social sustainability. These priorities are generally consistent with those in the previous country strategy and program updates.16 To support the Government’s goals, ADB’s future strategy for the power sector will be in synergy with India’s 11th FYP. ADB will continue to expand its promotion of state-level reforms by including other states, and by deepening its efforts in states where it is already active, such as Assam, Gujarat, Madhya Pradesh, and Uttarakhand. The proposed intervention in Himachal Pradesh is consistent with ADB’s strategy of promoting higher efficiency, low-carbon energy sources through run-of-river hydropower investments, as well as institutional strengthening to implement reforms as required by the Electricity Act, 2003. 24. Energy–Environment Nexus. A major strategic challenge in the Asia and Pacific region is meeting the rapidly growing demand for electricity in the most cost-effective and environmentally sustainable way. This is particularly important in India. By its sheer size and increasing weight in the global economy and energy markets, India has a key role to play in addressing the global challenge of climate change. It is thus vital to address environmental issues in energy sector interventions, and to mitigate environmental impacts through promoting cleaner technologies. 25. The Government recognizes the importance of energy and related environmental issues. Climate change is an important consideration in India’s national plan and Millennium Development Goals. The Ministry of Environment and Forests is the nodal ministry for climate change and the Clean Development Mechanism (CDM). 17 Other relevant agencies and 14 ADB. Forthcoming. Country Partnership Strategy (2008–2010): India. Manila. 15 Run-of-river hydropower projects utilize the flow of water within the natural range of the river, requiring limited or no

pondage (water storage) versus storage hydropower facilities using dams. Storage facilities use a dam to store the water, which may be released either to meet changing electricity needs or to maintain a constant water level. In contrast, run-of-river plants divert a portion of a river’s current into a diversion channel, pipe and/or tunnel, which is then released through a turbine, and delivered back into the same river downstream. Run-of-river designs can include weirs or barrages to ensure adequate flow into the pipe or tunnel, particularly at peak periods. However, run-of-river hydropower projects may involve the construction of barrages to ensure adequate flow into the penstock or tunnel, particularly at peak periods, and thus may contain pondage predominantly within the existing riverbanks. Such barrages allow water and fish passage through the river at all times (unlike storage dams).

16 ADB. 2004. Country Strategy and Program Update (2005–2007): India. Manila; ADB. 2005. Country Strategy and Program Update (2006–2008): India. Manila.

17 The CDM is a mechanism established by the Kyoto Protocol aimed at reducing global emissions of greenhouse gases in a cost-effective manner. The CDM is a market-based financial instrument with the dual purpose of assisting developing nations to achieve sustainable development and industrial countries to meet their emission reduction targets. The CDM allows industrial countries to invest in “clean” projects in developing countries,

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institutions include the Ministry of New and Renewable Energy, Bureau of Energy Efficiency and the Technology Information, Forecasting and Assessment Council, with specific mandates to promote climate-friendly technologies. The national environment policy 18 is the framework document that specifically governs climate change interventions. It provides the basis for the integration of environmental considerations in the policies of various sectors. For the energy sector, the Government included measures for increased use of hydropower resources and renewable energy in the power supply mix in its integrated energy policy (footnote 2). Specifically related to hydropower, the Government’s “50,000 MW Hydropower Initiative” promotes capacity additions in the mountainous states with abundant hydropower resource potential to implement physical investments that address the power supply mix. 26. At the state level, GOHP’s hydropower policy puts the state at the forefront of India's hydropower development efforts. Himachal Pradesh’s investment program, complemented by the proposed MFF, is consistent with government initiatives, as well as a number of ADB recommendations on addressing the energy–environment nexus,19 such as (i) promoting clean, renewable hydropower; (ii) including a strong role for private sector participation; and (iii) promoting unbundling and restructuring. 20 The carbon footprint of the energy sector in Himachal Pradesh is quite small, as nearly all its power generation is produced by emissions-free hydropower and the state has comparatively low aggregate technical and commercial losses, ensuring that power is used efficiently. Given Himachal Pradesh’s sparsely populated, mountainous terrain, there is little heavy industry, though there are small but growing electronics manufacturing operations. Himachal Pradesh’s connectivity with the national grid ensures that its aggressive hydropower investment program is important in addressing India’s overall energy and environmental concerns. 27. The sustained dialogue with GOHP enabled by this proposed MFF, as well as ADB interventions in other states, ensure ADB support in helping India meet its considerable challenge. ADB assistance to India encompasses both demand- and supply-related programs to enhance the impact of the Government’s initiatives. This will be effectively achieved through a combination of lending and technical assistance instruments. The interventions will include (i) renovation and modernization of the existing hydro- and thermal power plants, (ii) upgrading of inefficient thermal power plants to enhance their performance, (iii) developing renewable and alternative energy sources, (iv) reducing technical and commercial losses in transmission and distribution networks and facilities, and (v) mainstreaming demand-side management and energy conservation while ensuring environmental and social sustainability. ADB’s energy efficiency initiative and carbon market initiative will be employed to leverage resources for such interventions and to allow promotion of energy efficiency, renewable energy, and other forms of clean energy. For example, ADB has provided base financing for CDM projects across the region with pending carbon credit transactions; and ADB’s CDM facility provides parallel assistance to projects that can qualify for CDM and to facilitate agreements between sellers or project owners, and buyers of carbon credits.21

e.g., renewable energy such as hydropower, and to acquire certified emission reductions—generically referred to as “carbon credits”—that can be used to comply with the Kyoto Protocol. Certified emission reductions are the official commodity generated by CDM projects. One certified emission reduction equals 1 ton of carbon dioxide equivalent.

18 Government of India, Ministry of Environment and Forests. 2006. National Environment Policy 2006. New Delhi. 19 ADB. 2007. Energy Policy 2000 Review: Energy Efficiency for a Better Future. Manila. 20 Unbundling is facilitated by this proposed MFF via the capacity development of HPPCL into a corporatized

hydropower generation company for the state, separate from the state’s current integrated utility, HPSEB. 21 ADB. Clean Development Mechanism Facility. http://www.adb.org/CDMF/

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6. Lessons

28. In the past, ADB extended assistance to distinct power projects in various states, as well as to the central power sector agencies. Since 1986, ADB has provided 33 loans totaling over $6.2 billion to the overall energy sector, with 19 loans totaling over $4.2 billion specifically to the power sector. A detailed list of ADB assistance to the sector, including individual and total loan amounts, is in Appendix 4. Although this policy enabled ADB to support many projects, ADB’s resources were spread too thin. As a result, ADB could not fully achieve its desired goal of policy reforms with its power sector borrowers. Since 2000, ADB has focused its lending on states committed to reforming and restructuring their power sectors on the premise that moving the power sector toward financial sustainability will increase the ability of state governments to allocate resources for poverty reduction. 29. In 2002–2003, ADB conducted project performance audits of energy projects in India,22 which identified the following lessons: (i) land acquisition should be carried out expeditiously to minimize implementation delays; (ii) construction contracts should be properly packaged (including fewer and larger contracts) to simplify procurement and facilitate project implementation; and (iii) loan covenants should be appropriate, as loan covenants in a particular investment project lack the impact to change overall government policies. Furthermore, an earlier performance audit of a thermal power project in India23 contained key findings including (i) ADB’s energy policy to promote cleaner energy sources and reduce reliance on coal-fired generating capacity is reconfirmed, given overall environmental and cost implications; and (ii) sector restructuring should be implemented gradually rather than attempting quick reform through project covenants. 30. A sector assistance program evaluation24 was conducted in 2007 on the energy sector in India, which identifies lessons and areas where the Government, ADB, the private sector, and other stakeholders can work together in achieving sector development goals more effectively. The main lessons identified are: (i) ADB’s approach to lending at the state level has worked well and should be used as a model for future assistance; (ii) sustained technical assistance is needed to support state level reform programs; and (iii) corporatization is providing benefits similar to those normally attributed to privatization, as the introduction of commercially and financially sustainable principles into state entities can considerably improve efficiency and deliver better services to customers. 31. These experiences are reflected in the design and preparation of the proposed MFF, including corporatizing the state hydropower generating company, HPPCL, and providing support at the state level for reforms and capacity development. Lessons have also been incorporated into subproject selection and preparing procurement packages, which are consistent with the project readiness criteria agreed between India and ADB.25 Details on the project readiness for the first tranche of the proposed MFF are in Appendix 5.

22 ADB. 2002. Project Performance Audit Report on the North Madras Thermal Power Project in India. Manila (Loan

798-IND); and ADB. 2003. Project Performance Audit Report on the Gas Rehabilitation and Expansion Project in India. Manila (Loan 1285-IND).

23 ADB. 1999. Project Performance Audit Report on the Rayalaseema Power Project in India. Manila (Loan 988-IND). 24 ADB. 2007. Sector Assistance Program Evaluation on Energy Sector in India – Building on Success for More

Results. Manila. 25 The Government and ADB jointly agree to follow a set of prerequisites to assure smooth implementation of

projects. Under these project readiness criteria, the Executing Agency must be ready to award at least 30% of contracts immediately after loan effectiveness.

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7. External Assistance

32. The power sector in India has received assistance from various international development partners (Appendix 4). Japan Bank for International Cooperation and the World Bank have been the major source of external funding to the sector, focusing on reforms in generation, facility rehabilitation and improvement, and development of renewable energy resources. 26 Further, German development cooperation through KfW is also assisting the sector. The United States Agency for International Development and the Department for International Development of the United Kingdom are also present in the sector through technical assistance support.

8. Policy Dialogue

33. Regulatory System. The Electricity Act came into force on 9 June 2003. Himachal Pradesh already had an established, functioning regulatory commission as of 2001, and has been issuing tariff orders since then. Annually, HPSEB and other licensees (e.g., certain IPPs) are required to petition HPERC for tariffs, and after consideration of stakeholders’ inputs, HPERC rules on tariff applications. The resulting tariff orders are the key instrument of regulation and sector governance. Licensees are allowed to appeal the tariff orders, which may eventually be resolved by court rulings. 34. HPERC holds regular review meetings to monitor compliance with the various directives, and in its tariff order for FY2006, it made efforts to reduce cross-subsidies and to optimize power purchase costs by mandating the procurement of power on a merit order dispatch basis. HPERC has also taken steps toward complying with the provisions of the Electricity Act, 2003, from a regulatory perspective, including issuing and monitoring performance standards for HPSEB, constituting a forum for addressing consumer grievances, and appointing an ombudsman. In June 2005, HPERC issued open access regulations. 35. Sector Restructuring. HPSEB currently owns very little generation (476 MW total). As HPPCL is to own and operate all planned state sector hydropower development, it will become the state’s generating company. The corporatization of HPPCL effectively unbundles generation from HPSEB’s predominantly transmission and distribution operations, and an eventual transfer of HPSEB’s few generating assets to HPPCL is envisioned. Further to the process of HPSEB’s restructuring, HPSEB has drawn up a proposal for its unbundling. The first step is to unbundle the distinct operations internally and account for them separately. In its FY2007 and FY2008 tariff filings, HPSEB unbundled its costs into generation, transmission, and distribution elements; and adopted an approach toward unbundling, identifying, and isolating its assets, costs, and revenues.

III. INVESTMENT PROPOSAL

A. Impact and Outcome

36. The impact of the ADB-supported subset of the state’s investment plan, the Himachal Pradesh Clean Energy Development Investment Program (the Program), will be a sustainable electricity sector in Himachal Pradesh and improved state finances.

26 There is a World Bank-funded project (412 MW Rampur Hydropower Project) located within Himachal Pradesh. It

is a central government sector project with GOHP as a 30% minority shareholder.

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37. The outcome of the Program will be increased clean energy production through run-of-river hydropower schemes, as well as improved planning, implementation, management and power sector governance. B. Outputs

38. The Program will provide financing for two major areas of investment:

(i) Hydropower capacity additions. Construction of physical infrastructure built for hydropower generation, including underground powerhouses, associated civil works, tunnels, river diversion, and power evacuation systems. Specific subprojects have been earmarked for the first and second tranches and include the Sawra Kuddu Hydroelectric Project (111 MW) and the Kashang I, II and III Hydroelectric Projects (195 MW). Subprojects identified for future projects include the Sainj (100 MW) and Shongtong-Karcham (402 MW) hydroelectric projects, although others from the state’s investment plan may be substituted in future tranches provided they meet the eligibility criteria. All hydropower projects proposed for the Program will be run-of-river design.

(ii) Capacity development. This activity will focus on addressing constraints at the

Implementing Agency (IA) levels, wherein $12 million has been earmarked for capacity development components. For the principal IA (HPPCL), the capacity development is designed to address weaknesses identified by the procurement capacity and the financial management assessment as well as the training of HPPCL staff to be able to manage its growing asset size. The main focus of the project preparation, implementation, and management subcomponent will help the IA (a) prepare future projects; (b) implement and administer approved projects; and (c) monitor, review, evaluate, and report on program and project implementation. This subcomponent will also include project planning, construction supervision, contract management, procurement, disbursements, safeguards compliance, and monitoring and reporting systems. Financial management and accountability is a second major subcomponent designed to improve accounting and auditing systems, while incorporating adequate financial management standards to ensure fiduciary oversight of disbursed funds. A third subcomponent will address HPPCL’s training needs in state-of-the-art technologies, management, and development of in-house capacity in CDM procedures. The total capacity building subcomponents under tranche 1 benefiting HPPCL will be $9 million. The remaining $3 million will be used under tranche 1 for the benefit of the state’s transmission utility, HPSEB. The new generation capacity to be added in the state will increase responsibilities in the areas of transmission and distribution for HPSEB. It was agreed to assist HPSEB in acquiring an enterprise resource planning solution to cover all its future computer accounting and management information system (MIS) applications and to finance the purchase of software, hardware, training, and initial system maintenance. The capacity development and action plan is in Appendix 6.

C. Technical Justification and Eligibility Criteria

39. The long-term generation expansion program for Himachal Pradesh has been designed based on national, regional, and state-level least-cost expansion planning led by the Ministry of Power, Central Electricity Authority, and GOHP. The expansion program is technically,

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financially, and economically viable; and can be implemented with minimal environmental and social impact. Best practice design standards and construction techniques will be applied to all investments. Technical details on the hydropower projects of the proposed Program are available in Supplementary Appendix A. 40. The following criteria will apply for selecting and approving subprojects intended for financing under the MFF:

(i) the subproject will be consistent with the state’s hydropower policy and forms part of the state’s investment program;

(ii) the subproject was designed on a least-cost basis; and reflects “best practice” design, construction, and operations and maintenance features;

(iii) the subproject displays performance-based design consistent with international benchmarks for system efficiency and operational risks;

(iv) the subproject will be economically viable and financially sustainable; (v) the subproject was prepared and designed in compliance with the FFA (including

ADB’s Social Dimensions and Safeguard Requirements set forth in the FFA); (vi) the subproject is ready to absorb the requested financing; (vii) a land acquisition and resettlement plan that meets the requirements of ADB’s

Involuntary Resettlement Policy (2005) and the resettlement framework referred to in the FFA, as amended or updated from time to time, has been prepared for the subproject and submitted to ADB for review, as necessary;

(viii) an indigenous peoples development plan (IPDP) that meets the requirements of ADB’s Policy on Indigenous Peoples (1998) and the indigenous peoples development framework (IPDF) referred to in the FFA has been prepared for the subproject and submitted to ADB for review;

(ix) an environmental impact assessment (EIA) or an initial environmental examination (IEE) (as the case may be) and an environmental management and monitoring plan that meets the requirements of ADB’s Environment Policy (2002) and the Environmental Assessment and Review Framework (EARF) referred to in the FFA, as amended or updated from time to time, have been prepared for the subproject and submitted to ADB for review;

(x) summary environmental impact assessment (SEIA) and summary initial environmental examinations (SIEE) for environment category A and B-sensitive subprojects, respectively, have been prepared and reviewed by ADB as required and made available to the public 120 days before a periodic financing request (PFR) is submitted to ADB;

(xi) a poverty and social assessment will be conducted for the subproject and results have been presented in ADB’s summary poverty reduction and social strategy format;

(xii) sufficient counterpart funding has been allocated by India and/or GOHP as required to implement the subproject as scheduled and maintain the subproject in accordance with the requirements of the FFA; and

(xiii) all necessary national and state government approvals have been obtained for the subproject.

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D. Special Features 41. Climate Change Mitigation and Carbon Emissions Trading. The hydropower investments are candidates for earning revenue from selling emissions reductions under the CDM.27 Based on power generation potential of about 3,102 GWh per year, and as these projects are located in the northern regional grid considering an emission factor of 750 tons per GWh,28 these projects collectively have the potential to generate up to 2.3 million emission reductions per year, or 2.3 million tons of carbon dioxide (CO2) equivalent. However, a detailed assessment is required with respect to additionality issues and other requirements of the Kyoto Protocol before these projects are taken up for CDM development. In addition, most of these projects are likely to be commissioned in 2012 or beyond, so non-CDM markets that could offer carbon credit revenue opportunities should also be investigated. When taking into account all projects within the state in various stages of planning, there is a potential to avoid up to 21.8 million tons of CO2 equivalent per annum (footnote 28). ADB provided a CDM specialist during project preparation to assess carbon market potential for the proposed projects as well as the state as a whole, which resulted in a detailed presentation attended by state government officials representing many sectors. At HPPCL’s request, ADB has also provided terms for CDM financing through ADB’s Asia Pacific Carbon Fund and Future Carbon Fund. HPPCL is exploring various options including evaluating the fund’s products. Follow-up missions will include a presentation on the Future Carbon Fund and its services and benefits. 42. Private Sector Participation. The state’s hydropower policy recognizes the importance of private investment in fully harnessing the state’s hydropower resources. There are currently about 386 MW of privately-owned hydropower projects operating in Himachal Pradesh, with additional 2,238 MW (including 750 MW of mini-hydropower) earmarked for private sector development during the 11th FYP. Given the huge capital needs of the state’s overall investment program, HPPCL is exploring various types of PPP. In April 2008, HPPCL’s board approved a plan to develop a 500 MW hydropower facility jointly with the private sector, as well as 10 MW of solar projects within the state. In addition, another standby project29 in the state’s investment plan may be considered for adopting a PPP arrangement. ADB has discussed PPP with HPPCL, HPERC, Infrastructure Development Board, and various other state government representatives. At the request of GOHP, the capacity development component of the proposed MFF will include knowledge transfer of the applicable structures and modalities, mechanics, and documentation requirements for HPPCL to enter into PPPs in hydropower projects. In addition, HPPCL is a candidate for assistance through a proposed ADB technical assistance designed to prepare and market actual PPP projects throughout India.30 43. Capacity Development. Other than supporting HPPCL’s capacity development needs in project management, construction supervision, and ongoing project management, additional assistance will include improved governance and financial management to support its corporatization as the state’s stand-alone power generating company. As HPPCL intends to enter into joint ventures with the private sector to develop and construct 10 MW of solar power projects and a 500 MW hydropower project in the state by forming a PPP, HPPCL has requested assistance on knowledge transfer of various aspects of PPP. The MFF will also 27 A criteria for CDM eligibility is “additionality”, and refers to whether a project is “additional” and is not the business-

as-usual scenario (e.g., if the project is less profitable than either a benchmark or nonrenewable alternatives, or otherwise faces other barriers).

28 ADB estimate. 29 Chirgaon Majhgaon Hydroelectric Project (46 MW). 30 ADB. Forthcoming. Technical Assistance to India for Preparing the Public–Private Partnerships Pilot Projects

Initiative (Mainstreaming PPPs). Manila.

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support capacity development for the application process, documentation, and ongoing management of carbon credits within HPPCL. In addition to assisting HPPCL, the capacity development component will include assistance to the state’s transmission utility, HPSEB. The capacity development subcomponent within the Program totaling $3 million will assist HPSEB in acquiring an enterprise resource planning solution to cover all its future computer accounting and management information systems applications to ensure HPSEB is able to properly manage and report on its operational activities. Also, as upgrading transmission capacity will be required as hydropower generating capacity is added in the state, ADB is considering assisting HPSEB with its transmission system master plan separately from this MFF (with technical assistance preparation in progress). E. Investment Program and Financing Plan

44. The state’s overall hydropower development plan aims to achieve 4,021.5 MW of installed hydropower capacity31 by the end of the 11th Five Year Plan in 2012 (Table 1).

Table 1: Hydropower Development for the 11th Five Year Plan

Sector Installed

Capacity (MW) Estimated Cost

($ million) State Sector 290.5 a 493 Central Government and/or Joint Sector b

2,243.0

3,813

Private Sector 1,488.0 2,462 Total 4,021.5 6,768 MW = megawatt. a This figure reflects projects commissioned during the 11th Five Year Plan only. 632 MW of the 808 total MW intended to be funded under the Investment Program are scheduled for commissioning post 2012. b This includes projects developed either by Central Government power sector entities alone or jointly with either state or private sector entities. Source: Government of Himachal Pradesh. Estimated costs are based on general $ per kilowatt cost assumptions.

Other than the selected projects to be financed by ADB, financing for the state sector’s portion of this generation plan is intended to come from other financial institutions in the form of loans. The private sector project financing will be privately arranged. 45. The Program’s selected projects will come from the state’s portion of the overall hydropower development plan and are expected to total about 808 MW. The estimated cost of these selected projects is about $1.5 billion. The Government has requested financing up to the equivalent of $800 million from ADB’s ordinary capital resources, and both the Government and GOHP have asked ADB to extend this financing in the form of an MFF. GOHP will finance $450 million (30%) and the remaining $250 million (16.7%) will be financed from other Indian financial institutions, with potential lenders being Power Finance Corporation 32 and Rural Electrification Corporation, or through other cofinancing efforts. Funding for tranche 1 will come from ADB, and cofinancing is being sought for future tranches. GOHP has already released sufficient equity funds to HPPCL for 2008 and has provisioned for required funds for the following year. Power Finance Corporation, Rural Electrification Corporation and/or Indian

31 Excluding mini-hydropower additions. 32 Power Finance Corporation is an Indian public financial institution dedicated to power sector financing and

committed to the integrated development of the power and associated sectors.

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financial institution financing will be contemplated for later tranches. The total proposed amounts are shown in Table 2.

Table 2: Financing Plan for the Multitranche Financing Facility ($ million)

Source Total % Asian Development Bank 800.0 53.3Other Financial Institutions 250.0 16.7Government 450.0 30.0

Total 1,500.0 100.0Source: Himachal Pradesh Power Corporation Limited and Asian Development Bank estimates.

46. The financing will be provided under an MFF in accordance with ADB policy.33 The MFF supports a well-defined clean energy investment program underpinned by continued institutional reform and a credible sector road map. The MFF is a suitable modality for this Program as it allows ADB to engage with GOHP in a continuous, long-term dialogue consistent with the Government’s and ADB’s clean energy policies. As hydropower is vital to India, and Himachal Pradesh has the hydro resources to become the country’s hydropower state, continuous ADB engagement over multiple subprojects, including nonphysical investments in capacity building, will maximize the financial as well as knowledge-based resources that ADB can offer GOHP as a client. An MFF provides up-front support to GOHP for its substantial clean energy development program, but with financial commitments sequenced to match project readiness. As the sequenced investments are all run-of-river hydropower projects, expertise will build over time, allowing future subprojects to benefit directly from the implementation experience gained from the initial investments and from the capacity development component, which is expected to carry on for a significant portion of the Program. 47. The MFF will extend multiple loans to finance a range of projects under the Investment Program, subject to the submission of a related PFR by the Government and execution of the related loan and project agreements. Each PFR will be accompanied by a detailed cost estimate, as well as an implementation schedule. The Government is required to comply with the FFA requirements. The loans under the MFF will finance civil works, equipment, construction, consulting services, and capacity building activities. The minimum amount of a PFR will be $40 million. 48. All provisions of the ordinary operations loan regulations applicable to London interbank offered rate (LIBOR)-based loans34 will apply to each loan, subject to any modifications that might be included under any loan agreement. The Government can choose from eligible currencies and interest rate regimes for each loan. The specific terms of each loan will be based on the related PFR, with interest to be determined in accordance with ADB’s LIBOR-based lending facility. The Government has provided ADB with (i) the reasons for its decisions to borrow under ADB’s LIBOR-based lending facility, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. 49. If the Government requests any cofinancing arrangements or related assistance for projects under the MFF, ADB may assist with these, subject to related ADB policy and 33 ADB. 2008. Mainstreaming the Multitranche Financing Facility. Manila. 34 ADB. 2001. Ordinary Operations Loan Regulations Applicable to LIBOR-Based Loans Made from ADB’s Ordinary

Capital Resources. Manila.

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procedures. Furthermore, it is possible that ADB will seek a component of grant funding from the Clean Energy Financing Partnership Facility35 for a portion of one of the loans. 50. The Government will provide the proceeds of each tranche to GOHP and will cause the proceeds to be applied to the financing of expenditures on the subprojects and the capacity development component in accordance with the conditions set forth in the FFA and the legal agreements for each tranche. GOHP will onlend funds to HPPCL under arm’s-length terms to ensure commercial discipline. 51. The MFF transaction is accompanied by the tranche 1 PFR to finance two subprojects consisting of hydropower generation facilities, which are ready for implementation, plus a capacity development component.36 The total cost of the first tranche subprojects and capacity development amounts to $224.8 million. HPPCL requested ADB to provide $150 million as a first tranche loan. The amount of $150 million is a firm loan amount in ADB’s 2008 assistance pipeline for India. The detailed cost estimates of the first tranche loan are given in Appendix 7. F. Implementation Arrangements

1. Executing and Implementing Agency

52. The Multipurpose Projects (MPP) and Power Department of GOHP is the EA with overall responsibility for execution of the Investment Program and subprojects. HPPCL was established by the state government, and it is mandated to develop and operate new hydropower plants in the state. HPPCL will function as the IA for the proposed MFF with responsibility for the day-to-day coordination, implementation, and administration of the investment subprojects and capacity development components for which HPPCL is the recipient. Each of the hydropower projects will have a separate field office to facilitate its smooth functioning. They will function as PMUs at the field level, performing project site-specific monitoring, construction supervision, and reporting. There will be a central PMU within HPPCL’s head office covering the overall MFF and performing centralized financial reporting management functions. As a $3 million capacity development subcomponent is earmarked for HPSEB, it will be the IA for that particular subcomponent. The MFF implementation structure chart is in Appendix 8.

2. Implementation Period

53. The Program will be implemented over 8 years, including procurement and construction activities. Each specific loan will have its own closing date to match the implementation period of the subproject(s) funded under that loan. The first PFR for an amount of $150 million was signed on 11 September 2008. The indicative implementation schedule for the appraised subprojects is in Appendix 9 and an indicative schedule for the overall MFF is in Appendix 10.

3. Program Management

54. HPPCL will appraise additional subprojects following approval of the MFF. HPPCL will also undertake detailed design, procurement, construction supervision, commissioning,

35 The Clean Energy Financing Partnership Facility was launched in April 2007 as an innovative mechanism to pool

various forms of additional development assistance funds for clean energy under one roof. It is a multidonor fund which supports grant components of investment projects and technical assistance.

36 This consists of the 111 MW Sawra Kuddu Hydroelectric Project, the civil works for the 65 MW Kashang I Hydroelectric Project (including the common power house for the Kashang I, II and III Projects totaling 195 MW), and a $12 million capacity development component.

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maintenance, and operation of the subprojects. Technical support from consultants and contractors will be employed as necessary with funding from the capacity development component budget. HPPCL will liaise with ADB on a regular basis. 55. The PMU will be responsible for processing and implementing the subprojects. It will be assisted by technical experts who will evaluate the technical reports, feasibility studies, preliminary design reports, environmental assessment reports, resettlement and indigenous peoples development plans, and detailed design reports to ensure compliance with ADB and government requirements. Summary appraisal reports will be submitted to ADB subsequent to GOHP approval and required government clearances.

4. Performance Monitoring, Evaluation and Progress Reporting

56. The PMU will prepare quarterly progress reports and submit these to ADB within 30 days of the end of each quarter. These reports will provide (i) a narrative description of progress made during the period; (ii) changes in the implementation schedule; (iii) problems or difficulties encountered; (iv) work to be carried out in the next period; (v) progress on environmental and social compliance; (vi) for all environment category A projects and all environmentally sensitive category B projects, a report on implementation of EMPs; and (vi) compliance with conditions of the individual loan and project agreements. The progress reports will also include a summary financial account for the project components, including subprojects, consisting of project expenditures during the period, total expenditures to date, and benefit monitoring in accordance with procedures and details acceptable to ADB. Performance will be evaluated on the basis of indicators and targets stipulated in the design and monitoring framework. The ADB project team will prepare periodic reports to inform ADB’s Board of Directors of overall progress. A Board information report will be submitted annually, and supplemental progress reports will be submitted prior to management approval of individual loan agreements.

5. Review

57. ADB will field an inception mission within 3 months of the first loan approval. ADB will review the implementation and operations based on the quarterly progress reports and meet with HPPCL and GOHP semiannually to discuss implementation progress. A midterm review to be carried out 2 years after loan effectiveness will focus on engineering, resettlement, and environmental aspects of the ADB-supported investments and review the financial status of HPPCL. Representatives of ADB, GOHP, and HPPCL will take part in the review. The review will allow for any necessary midcourse corrections to ensure successful implementation and achievement of objectives. For all environment category A subprojects and all environmentally sensitive category B projects, review missions from ADB regional departments will conduct an annual review of environmental aspects of the subproject. A project completion report will be submitted within 3 months following completion of the individual loans. A facility completion report will be prepared after the completion of all ADB-supported activities and subprojects.

6. Stakeholder Participation and Consultation

58. The project development agencies, in particular HPPCL, have been consulting with stakeholders including affected communities during the design stage. During the preparatory stages of the first tranche projects, consultations have been carried out with various government officials concerned. Local communities were consulted as part of the social and resettlement study to gather their views on the proposed Program. All the affected persons are also being

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consulted on a one-to-one basis through questionnaire surveys. Additionally, focus group discussions are in progress within the project influence areas. Consultations will continue during the entire project cycle according to a stakeholder participation plan. As there will be preparatory work for second and/or third tranche projects during first tranche implementation, stakeholder participation and public consultation will continue as initiated in the first tranche processing.

7. Procurement

59. Goods, equipment, and civil works to be financed under the MFF will be procured in accordance with ADB Procurement Guidelines (2007, as amended from time to time). International competitive bidding (ICB) will be used for civil works and turnkey contracts targeting the construction of hydropower plants. National competitive bidding (NCB) will be used for contracts for goods and equipment estimated to cost less than $1.0 million. Goods and works less than $100,000 will be procured following shopping procedures. Before commencement of NCB procurement, ADB and the Government will review the procurement procedures related to the project component to be funded by ADB to ensure consistency with ADB requirements. Any necessary modifications or clarifications will be documented in the procurement plan. Contract packages will be prepared and structured to ensure maximum competition. Similar contractual arrangements and specifications will be applied to other subprojects. In accordance with these arrangements, a procurement plan for the subprojects under the tranche 1 loan is in Appendix 11.

8. Consulting Services

60. Consulting services are required to provide support to HPPCL for project implementation work, including design, supervision of construction, management for the subprojects under the approved MFF loans, and for processing work and PFR preparation for future loans. Consulting services will also be provided for evaluation, monitoring, and reporting purposes. In addition, consultants will support the capacity building component under the MFF. Consultants will be selected and engaged in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). Consulting firms will be selected using the quality- and cost-based selection method and full technical proposal. Individual experts may also be recruited based on biodata submitted in response to specific terms of reference for assignments.

9. Disbursement Arrangements

61. The proceeds of individual loans under the MFF will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). Subject to ADB controller’s concurrence, ADB’s statement of expenditures will be used to reimburse eligible expenditures, which will be applicable to individual payments of $100,000 or less.

10. Advance Contracting and Retroactive Financing

62. To expedite implementation, the Government and GOHP has requested ADB’s approval to carry out advance actions for procurement of works and goods, and recruitment of consultants. This advance procurement action is intended to be used in all tranches of the MFF. The Government and GOHP have also requested retroactive financing arrangements to apply to the MFF to cover incurred project expenses in accordance with ADB’s procedures. ADB granted approval of advance contracting, and approval for retroactive financing on 10 March 2008. The Government, the EA and the IA have been informed that approval of advance actions does not

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commit ADB to approve any of the individual tranches or to finance the procurement costs. Except as otherwise agreed with ADB, the expenditures incurred for equipment, civil works, and consulting services will be eligible for retroactive financing, provided that these are incurred before the effectiveness of the related loan agreement, but not earlier than 12 months preceding the signing of the related loan agreement, and as long as they do not exceed an amount of 20% of the individual loan. Each PFR will specify the nature of expenditure if retroactive financing is required. The Government and the EA have been informed that ADB will not finance expenditures incurred prior to effectiveness of individual tranches, even if advance contracting was approved, unless retroactive financing has also been approved.

11. Accounting, Auditing, and Financial Reporting

63. HPPCL shall maintain separate accounts for each subproject and for its overall operations. HPPCL shall have such accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB. HPPCL shall furnish to ADB certified copies of such audited accounts and financial statements and the relating report of the auditors no later than 9 months after the close of the fiscal year. This shall include the auditors' opinion on the use of loan proceeds and compliance with the covenants of the legal agreement(s) as well as on the use of the procedures for statement of expenditures. HPPCL shall furnish to ADB such further information concerning such accounts, financial statements and the audit as ADB shall from time to time reasonably request.

12. Anticorruption Policy

64. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to review and examine, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to subprojects and components under the Investment Program. In this regard, investigation of government officials, if any, would be requested by ADB to be undertaken by the Government. To support these efforts, relevant provisions of ADB’s Anticorruption Policy (1998, as amended to date) are included in the loan regulations (footnote 34) and the bidding documents for the MFF. In particular, all contracts financed by ADB in connection with the MFF shall include provisions specifying the right of ADB to audit and examine the records and accounts of HPPCL and all contractors, suppliers, consultants, and other service providers as they relate to the subprojects and components under the Investment Program.

13. Governance Measures

65. ADB’s intervention will support the corporatization of HPPCL into an efficient, commercially oriented generation company. ADB’s capacity development component will support organizational and governance efforts; and will enhance HPPCL’s capacity to manage both the physical and financial construction activities, and provide management and financial reporting to meet both GOHP and ADB accounting, asset management, and reporting requirements. On managing physical construction activities, use of ADB guidelines on procurement and consulting services and standard bidding documents will provide an opportunity for better monitoring. Bid specifications and packaging will ensure maximum competition. On managing financial activities, recruitment of additional financial management experts and the enhancement of internal control systems, supported with advanced information and communication technology-based financial management systems, will ensure efficiency and

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accountability. External auditors will audit the financial statements. Measurable financial performance indicators are being set and will be evaluated by HPERC. ADB review missions will review HPPCL’s accounting and control systems to monitor expenditures and other financial transactions, and ensure safe custody of project-financed assets. A summary of governance measures is in Table 3.

Table 3: Governance Measures Area Measure Procurement • Use of ADB guidelines on procurement and consulting services for all

tranches of the proposed MFF in Himachal Pradesh • Use of ADB’s standard bidding documents and standard request for proposal

documents for procurement and recruitment of consultants • Bid specifications and packaging to be prepared to ensure maximum

competition. • Capacity development of the IA via this MFF to increase transparency,

accountability, and efficiency in procurement Financial Management and Audit

• Capacity development of HPPCL in enhanced accounting and internal control systems, financial management, and internal audit capabilities, including expanded use of computerized financial management systems, to ensure efficiency and accountability (details in Appendix 6)

• HPPCL’s internal audit scope to cover revenue audit; and internal audit reports to the audit committee of their board of directors.

• Internal controllers are appointed and report to the managing director of the IA • External auditors acceptable to ADB to audit financial statements regularly

Institutional and/or Corporate Governance

• Continued introduction of a corporate culture within HPPCL through further commercialization (part of capacity development program)

• Public disclosure of HPPCL's operational and financial performance to improve transparency

• Fully functional sector regulator to improve sector governance and ensure level playing field among sector entities

• Promotion of private sector participation and public–private partnerships through knowledge transfer to HPPCL to promote joint ventures with the private sector in hydropower development

ADB = Asian Development Bank, EA = executing agency, HPPCL = Himachal Pradesh Power Corporation Limited, IA = implementing agency, MFF = multitranche financing facility. Source: Asian Development Bank assessment.

IV. PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Project Economic and Financial Justification

1. Financial Management 66. A financial management assessment of the IA (HPPCL) was undertaken to assess its ability to undertake and fulfill ADB’s fiduciary requirements for the project components. The assessment was in accordance with ADB’s Financial Management and Analysis of Projects 37 using the financial management assessment questionnaire and field interviews. HPPCL includes the merged operations of Pabber Valley Power Corporation (PVPC) and Kinner Kailash Power Corporation (KKPC), two companies established as special purpose vehicles to construct the Sawra Kuddu and Kashang projects. HPPCL’s first financial statements were prepared for the financial year ending 31 March 2007, and following the merger of the three companies as of 37 ADB. 2005. Financial Management and Analysis of Projects. Manila.

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1 August 2007, the accounts as of 31 March 2008 will incorporate the assets of PVPC and KKPC. At present, PVPC and KKPC are construction companies, with annual accounts recording works in progress and financing sources, with all staff costs and other operating costs capitalized. Revenues will not be generated from hydropower projects until the beginning of FY2013. The existing accounting systems of PVPC and KKPC are manual accrual systems, based on HPSEB ledger and accounting codes. Accounting staff employed by these special purpose vehicles at both the project site offices and head office will transfer to HPPCL. 67. The capacity development component of the proposed MFF (part of tranche 1) is designed to address weaknesses identified by the financial management assessment, and will develop a computerized accounting system and MIS that will meet HPPCL’s accounting and financial reporting requirements as well as the project level accounting and reporting requirements under the MFF. Staff will be trained in the new computerized accounting systems; corporate accounting procedures; and in all appropriate accounting, reporting, and audit functions. HPPCL may also obtain support from chartered accounting firms for internal audit function until staff has been properly trained. As a consequence of existing support from HPPCL’s parent, HPSEB, and the proposed upgrading and computerisation of accounting and MIS systems and recommended training, the proposed project financial management arrangements are considered satisfactory.

2. Financial Sustainability—Past Performance and Future Projections 68. To assess the sector’s past financial sustainability, the financial performance of HPSEB was examined. While HPSEB generated losses over FY2003–FY2005, it achieved net profits in FY2006 and FY2007. HPSEB’s increased revenues and improved profit performance have resulted from an increase in electricity sales to consumers as well as an increase in power sales outside the state. Another factor was an increase in tariffs, though revenue increases from higher tariffs were partially offset by a sharp increase in power purchase costs. HPSEB has also improved operationally by reducing its system losses from 24.8% in FY2003 to 16.3% in FY2007. However, HPSEB’s net profit and internally generated cash has not been sufficient to meet its debt service. It has nevertheless met its debt obligations by utilizing long-term borrowings (timing difference between drawdowns and capital expenditures), increasing short-term borrowings, and by extending payment periods to its creditors. HPSEB’s balance sheet is relatively strong, with a favorable debt–equity ratio. Accounts receivable are creditable at 1.4 months of electricity sales revenue in FY2007, indicating that most customers pay within 15 days of receiving their bill. This is a considerable improvement, compared with 4.1 months of receivables in FY2003. The details are in Supplementary Appendixes C and D. 69. Going forward, to ensure sound financial performance, HPPCL should maintain a debt service coverage ratio of 1.2. GOHP and HPPCL will ensure this sustainable target is maintained, even in the event of transfer of HPSEB’s generation functions. Financial projections prepared for HPPCL demonstrate that a debt service coverage ratio of 1.4 in FY2013 and 1.3 or greater is maintained through FY2020. The impact of the transfer of HPSEB’s hydro assets and liabilities to HPPCL was also examined. The transfer would result in a positive contribution to HPPCL’s financial performance. HPPCL’s projected cash on hand in FY2020 is Rs7.1 billion ($178 million) when including HPSEB hydropower generation operations, compared with Rs2.1 billion ($53 million) without HPSEB’s operations.

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3. Financial Analysis 70. Separate financial analysis for each subproject and tranche of the proposed MFF will be carried out. A financial evaluation of the tranche 1 projects, Sawra Kuddu and Kashang I (including Kashang II and III to be financed in tranche 2 as they are an integrated project), was carried out in 2008 prices. The project cost estimates and financial projections were converted into real terms by adjusting for the projected effects of domestic inflation. Project revenues are based on the methodology applied by the regulator (HPERC) based on the 2004 CERC tariff regulations. The base case financial internal rates of return (FIRRs) for each project are 7.0% for Sawra Kuddu and 6.7% for Kashang I, II and III, compared with the average weighted average cost of capital (WACC) of 3.6%, thus indicating financial viability. Sensitivity analyses showed that the results were robust to a range of project-related sensitivities. The value of carbon credits was not included, as there is uncertainty surrounding the value of such credits beyond the current 2012 expiration of the Kyoto Protocol. It is expected, however, that such credits will further enhance the Program’s viability, and the availability of credits has been taken into account by HPPCL in its investment analysis. A summary of the financial analysis is in Appendix 12.

4. Economic Analysis 71. Economic analysis was undertaken for the subprojects to be financed under the first tranche of the MFF. The economic internal rates of return (EIRRs) were calculated by comparing with- and without-project scenarios. Economic benefits accrue to consumers in Himachal Pradesh, the national grid, and the overall economy. Incremental consumption occurs because of the extended availability of electricity during peak demand periods. This was valued using consumers’ willingness to pay for this incremental consumption. Non-incremental consumption occurs as other forms of energy are displaced by electricity from the project (the resource cost saving). This was valued on the basis of the estimated marginal cost of generation from the grid. Although only the civil works of the Kashang I project, including the common power hours for the Kashang I, II and III projects, is included in tranche 1, certain costs for the Kashang II and III projects (tranche 2) are incurred during the construction of the first stage. For this reason, economic analysis for the integrated Kashang I, II and III projects were undertaken rather than just for the first stage as a stand-alone project. Sensitivity to the effects of deferral and cancellation of the subsequent stages of the Kashang project was tested. 72. Initial estimates indicate that Sawra Kuddu has an EIRR of 20.7% and Kashang I, II and III has an EIRR of 17.8%. This shows the economic viability of both subprojects. Both subprojects demonstrate robust economic performance under a range of downside sensitivity tests. A summary of the economic analysis is in Appendix 13, with further detail available in Supplementary Appendix B. B. Social Aspects 73. Land acquisition will be significant for the Sawra Kuddu subproject but it will not be significant for Kashang I, II and III. In both cases, the design is based on run-of-river schemes in remote and scarcely populated areas. Impacts will therefore be limited. Extensive discussions with HPPCL officials have occurred on involuntary resettlement and indigenous peoples. HPPCL has been made aware of the documentation that addresses social and resettlement issues and indigenous peoples that will be required for each tranche. The importance of proper implementation of safeguards mitigation measures during the project construction and operation stages was also emphasized.

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74. Land for the Sawra Kuddu and Kashang I, II and III subprojects38 has been identified; and acquisition procedures have been initiated following the Land Acquisition Act, and the national policy on resettlement and rehabilitation.39 Additional land will be required for widening the access roads for Kashang I, II and III. A resettlement and rehabilitation plan was prepared in accordance with ADB’s Involuntary Resettlement Policy (1995), Operations Manual section on involuntary resettlement,40 and government policies to meet ADB standards and requirements. HPPCL assured that it will comply with all domestic laws and ADB policies, and has prepared requisite plans where applicable, including the resettlement framework, which was completed in January 2008 for the overall Program and keeps in view the relevant policies endorsed by GOHP.41 Social screening has been done for the tranche 1 subprojects. It is observed that involuntary resettlement will be minimized. A census survey of all affected persons was carried out along with their socioeconomic details. Based on the assessment, two resettlement plans, one for each project, were prepared and submitted to ADB. A total of 195 households will be affected, of which 193 on a permanent basis. A total of 49.42 hectares of land will also be affected. 75. As Himachal Pradesh contains tribal areas and therefore benefits as a special status state, HPPCL will ensure that issues related to tribal, indigenous or ethnic minority people, as well as other vulnerable groups,42 will be addressed and taken into consideration during the project preparation stage, whenever there might be a risk of marginalization or discrimination. If impacts on indigenous peoples are identified, mitigation will be undertaken commensurate with the magnitude of project impacts and sensitivity levels. This will be done through preparation of an IPDP (if required), or integration of specific sections in favor of the indigenous people in the resettlement plan, based on ADB’s Policy on Indigenous Peoples (1998). Keeping in view the MFF modalities, HPPCL has prepared a draft IPDF for the overall Investment Program. Based on the initial social assessment of the tranche 1 subprojects, it is noted that tribal people living in the vicinity of the subproject areas are mostly mainstream population. Therefore, no specific plan is required. However, special provisions will be made in the entitlement matrix of the resettlement plan. The summary poverty reduction and social strategy is in Appendix 14 and the summary resettlement plan is in Appendix 15. 76. The resettlement plans, resettlement framework, and IPDF have been disclosed to the affected persons and were posted on ADB’s website prior to ADB’s Management review meeting. They are also available as Supplementary Appendix F. C. Environmental Aspects 77. The proposed tranche 1 hydropower projects are classified ADB environmental category A. Although the Kashang I, II and III projects can be classified category B, the Sawra Kuddu project (funded in tranche 1), falls in category A because of (i) the construction of a 3-hour peaking run-of-river barrage; (ii) the resulting effect on the aqua fauna and flora; and (iii) the submergence of 50.3 hectares (0.50 km2) of land, resulting in substantially reduced water flows and degradation of riverbanks between the barrage and

38 Land for the intake site, powerhouse site, staff colony, and the approach road. 39 Government of India. 2007. The National Rehabilitation and Resettlement Policy of 2007. New Delhi. 40 ADB. 2006. Operations Manual. Section F2: Involuntary Resettlement. Manila (25 September). 41 HPPCL. 2008. Resettlement Planning Document for the Himachal Pradesh Clean Energy Development

Investment Program in India. http://www.adb.org/Documents/Resettlement_Plans/IND/41627/41627-IND-RF.pdf 42 In Himachal Pradesh, tenancy was banned by law about 5 years ago. Tenants and landless farmers were given free land by the Government to reduce poverty rates in the state.

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tailrace outlet. Environmental impacts have been identified for both the Sawra Kuddu and Kashang I, II and III projects. HPPCL prepared the subproject-specific EMPs. The hydropower policy requires the maintenance of a minimum ecological flow43 in areas below the head race tunnel, so both projects are designed to comply with this requirement. Cumulative impacts, including downstream effects, have been determined and are being revised. Environmental safeguard documentation is available in Supplementary Appendix G. 78. For future tranches, HPPCL will ensure that all necessary environmental clearances are obtained from the relevant statutory authorities of the Government, and all environmental mitigation measures set forth in the site-specific EMPs for each project are incorporated in detailed designs (including any amendments to detailed designs) and followed during construction and operation of the subprojects. HPPCL will monitor, audit, and report twice annually to ADB the implementation of tranche-specific EMPs. A full EIA is required, and for any environment category A or B sensitive subprojects, an SEIA or SIEE will be prepared and made available to the public 120 days before a PFR is submitted to ADB for approval. The SEIA will be translated and made available to affected persons in the project area. EIA reports for the two tranche 1 subprojects (Sawra Kuddu and the civil works of Kashang I) have been made available to ADB. The SEIA (Supplementary Appendix G) was completed and disclosed on ADB’s website on 28 April 2008.44 It is expected that draft EIA reports for future tranche subprojects will be available on the following schedule: (i) Sainj—September 2008, (ii) integrated Kashang—November 2008, and (iii) Shongtong Karcham—February 2009. 79. Adequate provisions will be made in the Program to cover the environmental mitigation and monitoring requirements, and their associated costs. The project sites are located mostly on state-owned land and, to a smaller extent, on privately owned land. The government-owned land and land acquired for the subprojects from private owners is mostly uninhabited and idle, and located outside of towns and villages. The subprojects are not located in or close to protected areas. The civil works contracts will incorporate mitigation measures related to construction as specified in the EMPs. Implementation of construction mitigation measures will be the contractor’s primary responsibility, and the IA will be responsible for implementing tranche-specific EMPs. The principal impacts are soil erosion at construction sites and catchment reservoirs, impacts on potable water resources, disruption to aquatic life including fisheries, loss of vegetation caused by potential forest and sub-forest clearing, management of construction waste, and excavated soil and rock disposal. These impacts will be mitigated by erosion control measures, provision of camp toilets, septic tanks, and soak pits, treatment in settling tanks, reuse of excavation wastes wherever possible, controlled disposal of residual and excavation wastes, and further by providing compensation for reforestation. HPPCL confirmed that no endangered, rare, or threatened species of flora or fauna have been reported at any subproject sites. 80. HPPCL will make tranche-specific subproject EIA studies available to ADB. In addition to project-specific investigations and feasibility studies, sector development plans prepared by the Central Water Commission, Central Electricity Authority, HPSEB, HPPCL, and other agencies will also be provided. ADB consultants will review the documents to confirm that the proposed Investment Program is consistent with ADB’s energy, environmental, and social safeguards policies.

43 Minimum ecological flow is 15% of 10-day threshold flow in a 90% dependable year. 44 ADB. 2008. Environmental Assessment Reports for the Himachal Pradesh Clean Energy Development Investment

Program in India. http://www.adb.org/Documents/Environment/IND/41627/default.asp

24

D. Benefits and Beneficiaries 81. The overall objective of expanding clean energy generation in Himachal Pradesh will contribute to state level economic development on several fronts. The first group of beneficiaries will be local electricity consumers. Electricity from the proposed hydropower plants under the Investment Program will go directly to the local grid, helping to fulfill growing local demand for greater energy resources. Power consumption within the state consists of about 25% domestic users, 7% commercial users, 59% industrial or bulk supply, and 9% irrigation and agricultural use.45 The MFF is expected to result in more reliable power to consumers, and will rationalize the cost of supplying power in the state by relying more on in-state power generation and thus reducing imports from the national grid. This will rationalize tariffs as well as improve the state power sector’s financial viability. 82. Industry is the largest consumer of electricity in Himachal Pradesh. Industry’s share of state domestic product increased from 1.1% in FY1950 to 15.9% in FY2004 while services accounted for 17.3% in FY2004, up from 5.9% in FY1950. As the dust-free and cool climate of Himachal Pradesh is suitable for the electronic and precision industries, electronic complexes have been established, including the manufacturing of watches, thermometers, microscopes, hospital and laboratory equipment, televisions, and computer parts. Furniture making, rope making, bamboo products, and manufacturing and specialized wood-based industrial units have also been established within the state. These industries are expected to benefit from low power costs. Social services in Himachal Pradesh will also improve as poor and vulnerable consumers (including hospitals, schools, and other social utilities) that are often hardest hit by inadequate power supply, load shedding, and poor power quality, will benefit from the Investment Program. 83. The second group of beneficiaries will be through job creation as a result of the Investment Program. For example, the contractors are expected to hire skilled and unskilled workers for the projects’ civil works. Jobs will also be available beyond the construction phase throughout the projects’ life cycles. GOHP has a policy that 70% of labor must be hired from within the state. 84. Third, local communities in the project areas will benefit from socioeconomic development programs financed through GOHP’s policy of allocating 1.5% of total project costs to the community, with the funds to be administered by local area development committees led by community leaders. These funds will be earmarked for small-scale projects benefiting the affected communities as decided by the committees. As the total project costs for the proposed investment projects approaches $1.5 billion, funds approximating $22 million will be spent in the communities affected by the projects.46 85. Clean energy development as promoted by this MFF will contribute to local, regional, and global environmental initiatives. In addition, the Program will benefit all national grid-connected electricity consumers via the export of excess power for the benefit of poorer and power deficient states, and by eliminating the need to import power from the national grid, thus enabling the Government to meet its objective of developing the hydropower potential in the country.

45 Averages of FY2007 actual figures and 2008 projections. HPERC. 2007. Tariff Order for Himachal Pradesh State

Electricity Board (FY2007–2008). Shimla: Government of Himachal Pradesh (16 April). 46 This is a GOHP policy and will be administered by GOHP and the local area development committees. Such funds

are not part of ADB’s funding packages and are thus outside of the scope of the projects.

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E. Potential Risks 86. The key broad assumptions under the Program are: (i) macroeconomic growth will remain stable; (ii) GOHP remains committed to power sector reforms and institutional improvement; and (iii) GOHP executes its investment plan, successfully combining physical infrastructure investments with nonphysical investments in capacity development to maintain a sustainable power sector. Broad risks to the Investment Program include a slowdown in the depth and pace of policy and sector reforms, including those related to regulation, governance, financial management, institutional change, and tariff regimes. 87. These risks can be mitigated political commitment, concerted action, and sound supervision. GOHP is fully committed to expand its power supply and continue with sector reforms, including further tariff reform, improved corporate governance, institutional change, and increased private sector participation. The state is closely following the execution of the long- and medium-term plans for the sector, where hydropower development has a prominent role, and recognizes that capacity development is a major part of the process. GOHP is also committed to the adequate development of the transmission network in the state, for which a separate transmission utility has been envisaged. The proposed interventions will help address these issues at two separate levels—state and project. The themes covered are broad (planning and policy formulation) and specific (due diligence, project preparation, implementation, evaluation, monitoring, and reporting for results). Good governance and fiduciary controls are recognized as important, along with measures to ensure transparency and efficiency. 88. Specific subproject-related assumptions under the Program are: (i) the commitment of HPPCL to construct and operate the hydropower projects in a timely manner and maintain proper implementation supervision, including implementation of safeguard plans; (ii) there is no material delay in concluding tariffs for the projects and/or on arrangements for the sale of excess power;47 (iii) GOHP continues to support capacity development and assumes ownership of the capacity development components; and (iv) the subprojects will be eligible for CDM financing (purchase of carbon credits) and the CDM is extended beyond its 2012 end date. 89. Specific subproject-related risks include delays in recruiting consultants, in the bidding process, and in procurement process. Another risk is the lack of, or delay in, counterpart funding, including funds to HPSEB for construction of the transmission interconnections and required transmission lines. Construction risks include an increase in project costs and the implementation time frame caused by (i) implementation issues (the greatest risk being due to encountering unexpected poor geological conditions); (ii) commodity price increases (such as cement, steel, fuel, and other raw materials) that effect cost estimates; or (iii) poor contractor performance. Many of the structures are large, bear heavy loads and stresses, and/or deal with tenuous foundation conditions. However, the structures are of conventional design and require special but common construction practices, and the equipment is of conventional design and manufacturing capability. There are also risks in quality of work and delays in construction. In all, the works require highly qualified civil works contractors and equipment manufactures. This can be achieved through rigid application of ADB’s guidelines for qualification of contractors and consultants and close monitoring of the contracts. In addition, HPPCL has assigned skilled engineering staff resources to mitigate these inherent hydropower sector risks. To mitigate

47 Currently, GOHP utilizes assigned, licensed power traders from PTC India (formerly Power Trading Corporation of

India) to arrange for the sale of excess hydropower out of state during the peak summer period. GOHP intends to seek further opportunities in a transparent manner as power trading in India develops.

26

commodity price risk, contingency funds have been allocated to accommodate unforeseen price changes. 90. Overall, the integrated benefits and impacts are expected to outweigh the costs, given the likelihood of the risks occurring.

V. ASSURANCES

91. In addition to the standard assurances, the Government and GOHP have given the following assurances, which have been incorporated into the FFA or will be incorporated into the individual loan agreement and project agreements, as appropriate. A. Finance and Implementation

92. Counterpart Funding. The Government shall cause GOHP and/or HPPCL to make available all counterpart funds required for timely and effective implementation of the subprojects, including funds required to meet additional costs arising from design changes, price escalation in construction costs and/or unforeseen circumstances, and shall cause GOHP and/or HPPCL to make the resources thus required available on an annual basis. 93. Merger. GOHP shall ensure that no later than 31 December 2009, the legal merger of HPPCL, KKPC and PVPC has been completed. Unless ADB agrees otherwise, the merger must be completed in such manner (i) that the operations of KKPC and PVPC have been for the risk and account of HPPCL as per 31 July 2007, (ii) that the assets and liabilities of KKPC and PVPC have been transferred to HPPCL at historical cost, and (iii) that these assets and liabilities comprise all KKPC’s and PVPC’s assets, contracts, approvals, instruments and other arrangements pertaining to the project facilities. GOHP shall ensure that the actual and contingent liabilities acquired by HPPCL under the merger comprise solely arm’s-length obligations incurred by KKPC and PVPC in the normal course of business. Until such time that the merger has been completed in accordance with the foregoing, HPPCL, KKPC and PVPC shall continue to operate as if the merger was completed already. 94. Financial Accountability and Transparency. By 31 March 2010, HPPCL shall have taken the following measures to strengthen its internal audit functions: (i) adoption of internal audit guidelines in line with best practices; and (ii) appointment of internal controllers that report to the chairman and managing director of HPPCL on a regular basis. 95. The Government and GOHP shall allow and assist ADB's representatives to carry out random spot checks on the work in progress and utilization of funds for the subprojects. HPPCL shall announce the project and business opportunities associated with the subprojects on its corporate website. 96. Debt Service Coverage Ratio. HPPCL will maintain a debt service coverage ratio48 of 1.2 following the commencement of commercial operations of the first subproject. 97. Financial Management and other Recruitment. No later than 31 December 2008, HPPCL shall have recruited key finance staff, including an assistant general manager, a senior

48 The standard formula comprises all free cash flows, expressed as the sum of revenues, less the sum of expenses

(excluding depreciation and other non-cash operating charges, movements in working capital, and interest and other charges on debt), divided by the estimated debt service requirements in such year of the forecast.

27

manager, and such other managers as required by the positions sanctioned in its organization structure and manpower plan dated 12 June 2008. GOHP will recruit a finance director for HPPCL as soon as possible, and no later than 30 September 2009. No later than 31 December 2010, HPPCL will have recruited staff to meet all its other manpower requirements as laid down in the organization structure and manpower plan. 98. Tariff Filing. HPPCL shall submit to HPERC tariff applications for the subprojects in a timely manner prior to commercial operations of each facility. GOHP shall ensure that the rate at which HPPCL sells the electricity it generates is established in accordance with, and meets the requirements of, the relevant provisions of the Electricity Act, 2003. HPPCL will promptly submit all documentation reasonably requested by HPERC, including transmission service agreements or power purchase agreements as applicable. 99. Associated Facilities. The EA and HPSEB shall ensure that all additional transmission facilities (including substations and power transmission lines) required to evacuate power from the subprojects, are completed in a timely manner. 100. Capacity Development. HPPCL shall analyze the recommendations made by consultants under its capacity development component for adoption of suitable MIS, and agree with ADB on the extent and manner of implementation. HPSEB shall analyze the recommendations made by consultants under its capacity development component, and agree with ADB on the extent and manner of implementation. B. Safeguards

101. Land Availability and Resettlement. HPPCL shall, subject to compliance with the relevant provision of the resettlement framework and resettlement plans and environmental assessment and review framework and EMP and in accordance with all applicable laws and regulations of India and Himachal Pradesh, acquire or make available the land and rights to land required for commencement of construction activities in accordance with the schedule agreed under the related civil works contracts, and will have cleared the utilities, trees, and any other obstruction from such land. 102. HPPCL shall ensure that the resettlement plans, including compensation and entitlements for affected households and persons, are implemented in conformity with all applicable laws and regulations of the Government, including as amended from time to time, and the entitlement benefits as listed in the Government’s applicable laws, ADB’s Involuntary Resettlement Policy, and the resettlement framework. 103. HPPCL shall ensure that people affected by the project are fairly compensated in a timely manner based on replacement values in accordance with the related resettlement plans and resettlement framework, such that their living standards are not adversely affected, and that the payments will be made in a timely manner, prior to dispossession from land and other assets. HPPCL shall submit progress and completion reports on land acquisition and resettlement under the quarterly progress reports for each subproject. 104. HPPCL shall ensure that prior to land acquisition and any resettlement for the project, the relevant resettlement plan, including its update based on consensus of the affected persons, is disclosed with all necessary information made available to person affected by the project and confirm that it be uploaded on the ADB website.

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105. The EA shall ensure that essential public infrastructure that may be affected by land acquisition and resettlement is replaced, as appropriate, in an expeditious manner in accordance with the resettlement plans. 106. HPPCL shall ensure that construction contracts contain binding requirements for construction contractors to fully reinstate pathways, other local infrastructure, and agricultural land to at least their pre-project condition upon construction completion. HPPCL shall adequately record the condition of roads, agricultural land and other infrastructure prior to transport of material and construction commencement. 107. To the extent required under the resettlement framework and to the extent reasonably possible HPPCL shall engage an independent external expert or agency acceptable to ADB to assist with implementation of the resettlement plans. 108. The Government will cause GOHP to ensure that within three months of the loan effective date, the EA will establish a grievance redress committee or committees with representation from all stakeholders in the subprojects for addressing any grievances from affected peoples concerning resettlement, environment and any other social issues in a timely manner. 109. Environment. HPPCL shall implement the projects and operate and maintain all project facilities in accordance with the EARF, EIA, ADB’s Environment Policy and the Government’s and GOHP’s applicable laws, rules, and regulations. HPPCL shall ensure that the provisions of the EIA, SEIA are adhered to during the design, construction and operation of the project facilities. Any changes to the location, land alignment, or environmental impacts on account of detailed designs of the subprojects shall be mutually agreed between the Government and ADB, and must be consistent with the eligibility criteria set forth in the FFA. 110. SEIA and SIEE for environment category A and B-sensitive subprojects, respectively, will be prepared and reviewed by ADB as required and made available to the public 120 days before a PFR is submitted to ADB. HPPCL will prepare quarterly progress reports and submit these to ADB within 30 days of the end of each quarter. These reports will include compliance with environmental and social safeguards requirements, including, for all environment category A projects and all environmentally sensitive category B projects, a progress report on implementation of the relevant EMPs.

VI. RECOMMENDATION

111. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $800 million equivalent to India for the Himachal Pradesh Clean Energy Development Investment Program from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; and such other terms and conditions as are substantially in accordance with those set forth in the Framework Financing Agreement presented to the Board.

Haruhiko Kuroda President

24 September 2008

Appendix 1 29

DESIGN AND MONITORING FRAMEWORK (Investment Program and Sector Road Map)

A. Investment Program

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Impact A sustainable state electricity sector and improved state finances

Relative to FY2007 baseline of 4,160 GWh, increase in-state power sales to match growing demand, as well as increased self-reliance in power supply and increased power exports

HPERC tariff orders Electricity data from utilities HPERC tariff orders HPPCL annual reports Electricity data from utilities

Assumptions • Macroeconomic growth

remains stable • GOHP remains committed to

power sector reforms and institutional improvement

Outcome Increased hydropower production, as well as improved planning, implementation, management and sector governance

State’s hydroelectric capacity to increase from 2007 baseline of 413.5 MW to 1,221.5 MW by 2016 About 2.3 million emission reductions (e.g. carbon credits based on tons/year CO2 emission avoided) sold per annum a

Reports from HPPCL and HPSEB HPERC tariff orders CDM project monitoring and verification reports according to selected CDM methodology

Assumptions • Commitment of HPPCL to

construct and operate the new hydropower projects

• Timely conclusion of setting applicable tariffs for the subprojects and/or on arrangements for sale of excess power

• Proposed projects will be eligible for CDM financing and the CDM is extended beyond its current end date in 2012.

Increase in state revenues

from increased self-reliance in power supply (due to an additional 3,102.24 GWh per annum of hydropower generated by 2016

Annual state budgets and financial statements Reports from HPPCL and HPSEB HPERC tariff orders

Risks • Lack of, or delay in,

counterpart funding • Delays in construction

process and/or in safeguard sanctions

Corporatized HPPCL, with

fully functioning board, internal audit, control, and reporting systems

Due diligence reports, HPPCL reports, and HPERC reports

Completed plans for transmission system upgrades

ADB review mission reports HPSEB reports

Outputs 1. Hydropower generation Infrastructure constructed (i) Subprojects proposed for tranches 1 and 2: 111 MW Sawra Kuddu subproject and the Kashang I, II and III projects (totaling195 MW) (ii) Future program subprojects to come from state sector investment

386 GWh and 735 GWh of energy produced annually from 306 MW of

Quarterly and semiannual progress reports

Assumptions • Feasibility reports and due

diligence requirements for the subprojects are accomplished according to standards and approved on time

• Subprojects are constructed on time

Risks • Lack of, or delay in,

counterpart funding, including funds to HPSEB for

30 Appendix 1

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

plan, expected to include: 100 MW Sainj Hydroelectric subproject; and 402 MW Shongtong Karcham Hydroelectric subproject

incremental state hydropower capacity 2,135 GWh of incremental energy produced annually from 502 MW of state hydropower capacity additions (from these assumed subprojects)

Loan review missions Payment certificates for contracts Review of project accounts Project completion report

construction of the transmission interconnections and required transmission lines

• Increase in project cost and implementation time frame caused by (i) commodity price increases, (ii) poor design (greatest risk is weak site geology), or (iii) poor contractor performance

• Decrease in energy production caused by inaccurate hydrological data

2. Capacity development component (i) Project-oriented: Implemented capacity development of various departments of HPPCL, focusing on (a) project preparation, implementation and management (including procurement, disbursements, safeguards compliance, and reporting); (b) financial management and accountability; and (c) knowledge transfer for compliance with ADB policies and procedures (ii) Corporate development: (a) Implemented capacity development to improve governance, fiduciary oversight, and organizational structuring; and (b) Developing in-house expertise within HPPCL on private sector participation modalities and CDM procedures. (iii) Implement enterprise resource planning solution at HPSEB

Project management units in place by 2008 Proper training provided in project development, design, and implementation by 2009 Proper training in mainstreaming safeguard issues by 2009 Management information systems installed by 2009 Reinforced capacity for CDM application process and ongoing management of carbon credit opportunities. Management information systems installed at HPSEB by 2011

Consultants’ final report and ADB review missions Evaluation reports HPPCL reports Consultants’ final report and review missions Evaluation reports HPPCL reports Carbon Market Initiative documentation Review missions Evaluation reports HPSEB reports

Assumption • Government continues to

support capacity development • Implementing Agency staff

assumes ownership of the capacity development programs

Activities with Milestones 1.1. Endorsement and disclosure of resettlement plan, resettlement framework, and

IPDF to affected people for tranche 1 subprojects (completed in February 2008). 1.2. Endorsement and disclosure of SEIA for tranche 1 subprojects (completed in April

Inputs ADB: $800 million Government: $450 million Commercial borrowing:

Appendix 1 31

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

2008). 1.3. Procurement of consulting services for tendering, and implementation of subproject

services beginning Q4 2008. 1.4 Call for contractor bids for the tranche 1 subprojects (completed in Q2 2008). 1.5 Procurement of consulting services for institutional strengthening: consultants

appointed beginning Q4 2008, with services completed by the end of the MFF. 1.6 Capacity development activities to ensure sustainability of all project components:

ADB-supported orientation began in March 2008; key training activities to continue through 2010.

1.7 Required land acquisition and compensation completed by Q3 2008. 1.8. Procurement and construction for Sawra Kuddu and Kashang hydroelectric plant

subprojects start by Q1 2009 and construction completed by Q1 2013 for Sawra Kuddu and Q2 2013 for Kashang.

1.9 Procurement for the electromechanical works for Kashang hydroelectric plant subproject starts by Q1 2009 (construction completed by Q3 2013).

Other proposed subprojects for future loan tranches (substitutions are possible provided

they meet eligibility criteria): 2.1 Project preparation for the Sainj hydroelectric plant subproject starts by end of 2009

and construction completed by 2014. 2.2 Project preparation for the Shongtong Karcham hydroelectric plant subproject starts

by Q4 2009 and construction completed by Q4 2016. 2.3 Timely preparation and implementation of resettlement plans and IPDPs in line with

project preparation timeframes.

$250 million • Consultancy services for

project management, design, implementation of safeguards, construction oversight, and CDM initiatives

• Civil works and equipment for the hydropower plants and associated power evacuation systems

ADB = Asian Development Bank, CDM = clean development mechanism, CO2 = carbon dioxide, FY = fiscal year, GOHP = government of Himachal Pradesh, GWh = gigawatt-hour, HPPCL = Himachal Pradesh Power Corporation Limited, HPERC = Himachal Pradesh Electricity Regulatory Commission, HPSEB = Himachal Pradesh State Electricity Board, IPDF = indigenous peoples development framework, IPDP = indigenous peoples development plan, MFF = multitranche financing facility, MW = megawatt, Q = quarter, SEIA = summary environmental impact assessment. a Using initial full output projections of proposed subprojects and based on an ADB consultant estimate of northern regional

grid emission factor of 750 tons per GWh. Assumes full output rather than power exports are eligible for carbon credits. Post-2012 carbon credit prices are not yet known.

32 Appendix 1

B. Sector Road Map Objectives Impact Performance Target Measurement Government

Role

1. Policy and Regulatory Framework

It is a national objective to fully develop the hydropower potential in India. The “50,000 MW hydropower initiative” of the Government of India aims to achieve this objective.

State Hydro Power Policy, 2006 a

o Development of Himachal Pradesh as a "hydro power state" of the country, to provide affordable, reliable and quality power to consumers, create avenues for employment to state residents, and at the same time mitigate the social, economic and environmental impacts.

o Speed up power

development to achieve capacity additions by the end of the 11th Five Year Plan.

o Make the power

sector a source of revenue for the state

Be self-sufficient for providing state residents with clean power, as well as have excess during peak river flow periods for export. Improve state finances.

Achieve commercial operations on the Sawra Kuddu and Kashang I hydroelectric projects (176 MW) by the end of the 11th Five Year Plan (2012), out of the 290.5 MW of state sector-allocated hydropower capacity additions. (Kashang II & III to be commissioned post-2012). Over 8 major hydropower generation projects totaling 1,488 MW commissioned by IPPs by the end of the 11th Five Year Plan (through 2012). Increased per capita electricity consumption in the state.

GOHP reports and budget reports. HPERC annual reports and tariff orders. HPERC annual reports and tariff orders, HPPCL and HPSEB annual reports.

GOHP hydropower policy is in place since 2006. GOHP to establish related implementation procedures and institutional mechanisms (ongoing).

Private Sector Participation

o Policies and guidelines in place to promote and attract privately developed and financed hydro projects in Himachal Pradesh

Additional clean energy capacity to benefit the northern grid, and the state of Himachal Pradesh via royalty revenues

Implement effective mechanisms for prompt resolution of investor issues and disputes. Implement procedures for signing MOUs, and for efficient bid selection and contract negotiation. Pilot PPP initiated by 2011.

GOHP reports. CEA reports. HPPCL reports.

State hydro power policy, 2006 outlines procedures and incentives. GOHP to implement procedures. HPPCL to enter pilot PPP joint venture.

Appendix 1 33

Objectives Impact Performance Target Measurement Government Role

Electricity Act, 2003

o Promote competition, protect consumer interests, tariff rationalization, subsidy rationalization, strengthening regulatory institutions and providing open access to users.

Achieve financially viable, power sector in the state.

Full compliance with orders issued by HPERC (ongoing). Restructuring of HPSEB as per Electricity Act, 2003. Open access to all consumers above 1 MW by 2009. Maintain and improve utility's financial health (ongoing)

GOHP reports CEA reports HPERC orders

State hydro power policy, 2006 addresses meeting the mandates of the act. Further reforms by HPSEB as mandated by the act.

State Environmental Policy b

o Promote the development of an economically and environmentally sound ecosystem while endeavoring to improve the living standards of the people in the state.

Conserve and enhance the environment and follow a policy of sustainable development

Formulation of a formal Environmental Policy for the state by 2012. Implementation of provisions of Himachal Pradesh Land Preservation Act, 1978 and the Forest Conservation Act, 1980.

GOHP reports

State environmental policy document already drafted (outlining the approach, identifying issues, preparing guidelines).

2. Project Implementation

Investment in Power Sector Infrastructure

o Investment in Generation Capacity: Make available necessary resources

Realized investments in the hydropower sector of Himachal Pradesh

Completed design and financing of ADB funded hydropower programs by 2015 totaling 808 MW. (Excludes additional capacity added by central and private sectors).

Installed hydropower systems by type, capacity, and location. Commercial operations starting in 2011–2012.

GOHP to allocate resources, HPPCL to implement. Central sector agencies to implement their planned projects

o Investment in Transmission Capacity: Expand the transmission network to accommodate the wheeling of additional power that will result from the state's investment plan.

Efficient transmission of electricity out of state, thus enhancing state revenues and supporting power supply to the northern grid.

Additional capacity to come on line as required per the hydropower project development schedule.

Additional kilometers of transmission lines and additional MW of transmission capacity as reported in CEA reports.

HPSEB is primarily responsible for transmission development in the state. Power Grid Corporation of India, Ltd. is also developing certain

34 Appendix 1

Objectives Impact Performance Target Measurement Government Role transmission segments.

o Investment in the Distribution System

Further reduction of system losses

Additional reduction of AT&C losses.

Achieve 100% metering of distribution transformers and on feeders up to 33 kV (currently 90% metered). Meet international benchmarks for technical and non-technical losses by 2012

HPSEB reports. HPERC orders.

HPSEB as distribution utility to continue enhancing its network.

o Increased private sector investment in the state power sector

Increase investment and competition resulting in enhanced power sector efficiency.

Continued increase of private investment in generating plants. 1,488 MW of hydropower capacity added by the private sector by end of the 11th Five Year Plan.

Hydropower related private investments starting 2008. Requests for proposals and competitive bidding processes launched.

GOHP transparent management of the bidding processes. HPPCL to implement pilot joint venture.

Implementation of Socio Economic Development Activities

o Activities identified and implemented by affected communities and funded with the 1.5% of total project cost as provided by hydro power policy, 2006.

Development activities in project-affected communities

Number of activities implemented and number of positively affected people.

Community-based committees reports

3. Capacity Development

Corporate Development of HPPCL

• Governance

o HPPCL as a corporatized entity with a fully functioning organizational structure and independent board of directors

Efficient, financially viable state sector hydropower generating company will properly serve state residents for their power needs

Approval of appointment of general manager of finance and recruitment of adequate staff. The functioning of HPPCL’s board shall be in accordance with prevailing Indian law. This will include: (i) internal audit functions strengthened and internal audit guidelines in line with current law and best practices, HPPCL’s

GOHP reports HPPCL reports

GOHP to ensure timely corporate development of HPPCL. GOHP will ensure that HPPCL’s corporate governance measures are

Appendix 1 35

Objectives Impact Performance Target Measurement Government Role

internal audit scope to cover revenue audit; and internal audit reports to the audit committee of the board; and (ii) internal controllers are appointed and report to the managing director of HPPCL.

in compliance with Indian law, namely the Companies Act, 1956 and its amendments.

o Financial management – MIS and Accounting. Computerize accounting and MIS , design and project monitoring and management functions consistent with Companies Act 1956, and international best practice and benchmarks

Project management and monitoring functions – costs and physical progress Hydro operations management and monitoring Improve monthly management reporting Project accounting functions and training in ADB project accounting and reporting procedures Internal audit functions strengthened Annual financial reporting – accuracy and timeliness

Assist HPPCL to develop computerized accounting, project accounting, project management systems, with process beginning upon loan approval and being completed 18–24 months from loan effectiveness. MIS needs assessment completed, system procured, installed, training conducted, and maintenance contract with supplier entered into by 2009. Provision of management reports on a timely basis to management on project costs and comparison with estimates. Timely preparation of quarterly financial and progress reports to ADB

Quarterly reports provided to ADB Monthly management reports to HPPCL management and board Annual audited financial statements

HPPCL will ensure that the current capacity development program that covers financial management and human resources development is implemented on a timely basis from 2008 to 2010.

o Planning –

develop and update least-cost sector expansion plans

Plan, design, and implement least-cost generation and transmission system expansion program.

Timely published expansion plans and performance targets (reviewed and updated annually) with immediate and continuous development. Continued system expansion and increase in public and private investments in the state's power sector.

GOHP reports HPPCL reports & tariff orders. HPSEB reports CEA regional system generation planning studies, Power Grid Corp. regional transmission planning studies

Incorporate planning function into sector entities. CEA & Power Grid Corp. Ltd. to carry out system studies HPSEB provide input data and critically review results

36 Appendix 1

Objectives Impact Performance Target Measurement Government Role

o CDM Capacity: Promote investments in carbon-neutral projects

Increase of hydropower generation capacity

Register and trade carbon credits under Clean Development Mechanism

Incremental revenue from sale of carbon credits

Coordination at national and international level for marketing credits

o Power Trading Capacity: Promote the establishment of an independent, state-level power trading cell and implements a power trading system at HPPCL

Non-reliance on central sector trading entities. Enhanced state power sector independence and trading capabilities.

Formation of power trading system at HPPCL, including hired and trained personnel and installation of required IT systems by 2010–2011.

State-level power trading statistics Incremental revenue from trading

Formation of the trading cell within HPPCL

Successful Implementation of ADB-funded investments

o Project

management and project implementation units

Bidding in accordance with ADB Procurement Guidelines. Financial management systems in accordance with Indian national accounting standards by 2008.

Open recruitment of professional management and staff was initiated in 2006 and is in place. In-time and on-budget subproject implementation beginning in 2009. Strengthening of technical departments (design, engineering) with IT training by 2009.

HPPCL and HPSEB project monitoring reports

HPPCL recruitment of staff, developing contract procedures, implementing monitoring and reporting systems. HPPCL to ensure that as part of annual audit process, audit of capacity development initiatives is included.

o Design, Procurement, contract management, and subproject management

Design capability investments to ensure project design and construction drawing evaluation capabilities at international level standards.

Investment in hardware and software, human resources by 2009.

Future project design, etc. to be conducted with in-house resources

HPPCL to implement specialized training in design, procurement, MIS and accounting for HPPCL staff through consultants. c

o Environmental and social safeguards Implementation

Incorporate environmental and social mitigation

Incorporate environmental and social mitigation measures in contract documents in line with state environment policy and

Contractor reports, HPPCL reports.

GOHP will ensure HPPCL complies with Resettlement

Appendix 1 37

Objectives Impact Performance Target Measurement Government Role

for the residents of the project affected areas

measures in all project activities

R&R measures by 2009.

Pollution Control Board reports, and from Forestry Dept., Land Acquisition Dept.

Frameworks, Resettlement Plans and Environmental Frameworks and all applicable Indian laws and regulations.

ADB = Asian Development Bank; AT&C = aggregate technical and commercial; CEA = Central Electricity Authority; CDM = clean development mechanism; GOHP = Government of Himachal Pradesh; HPPCL = Himachal Pradesh Power Corporation Limited; HPERC = Himachal Pradesh Electricity Regulatory Commission; HPSEB = Himachal Pradesh State Electricity Board; IPP = independent power producer; IT = information technology; kV = kilovolt; MOU = memorandum of understanding; MW = megawatt; R&R = resettlement and rehabilitation; MIS = management information system; PPP = public-private partnerships. a Government of Himachal Pradesh. 2006. Hydro Power Policy 2006. Shimla. b Government of Himachal Pradesh, Department of Science & Technology. 2007. Environmental Policy. Shimla. c This can be implemented alongside accounting and MIS installation and training using same consultant. Sources: GOHP and ADB.

38 Appendix 2

POWER SECTOR ASSESSMENT A. National Sector Structure

1. The Ministry of Power (MOP), Government of India (the Government), provides overall policy level guidance for development of the country’s power sector. State governments also have an important role to play in power development conforming to the policies of the Government. The Electricity Act, 2003, requires MOP, in consultation with state governments, to review and update the National Electricity Policy1 and the National Tariff Policy2 from time to time. In all technical and techno-economic matters, MOP is assisted by the Central Electricity Authority (CEA), a statutory body constituted under the Electricity Act. CEA is also mandated every 5 years to prepare and ratify the national electricity plan in accordance with the national electricity policy, after obtaining the approval of MOP. The Central Electricity Regulatory Commission (CERC) and the state electricity regulatory commissions, which function in a quasi-judicial manner, are responsible for regulation of the sector—including licensing, tariff setting, and protection of consumer interests. An appellate tribunal for electricity under the 2003 legislation was established to hear appeals against regulatory commissions or adjudicating officers. Nuclear power generation is under the purview of the Department of Atomic Energy. 2. The power generation, transmission, generation, and transmission facilities are mostly in the central sector and state sector, and to a small extent in the private sector; there are also a few joint ventures. Power trading is now a licensed activity, and a power exchange is operational. A broad schematic of the organizational and regulatory structure of Indian power sector is in Figure A2.

1 Ministry of Power, Government of India. 2005. National Electricity Policy. New Delhi. 2 Ministry of Power, Government of India. 2006. National Tariff Policy. New Delhi.

Appendix 2 39

Source: The Energy and Resources Institute, New Delhi, India. B. Provisions of the Electricity Act, 2003

3. Electricity Act, 2003, is the cornerstone legislation for the power sector in India. The act primarily mandates continued restructuring of state electricity boards, full metering for all consumer classes, open access to transmission systems, facilitation of power trading, and tariff rationalization. It provides the framework for future development of the power sector. The Energy Conservation Act, 2001, which came into effect in March 2002, is another important legislation having significant impact on power development. This act laid down concrete measures to ensure efficient use of energy and its conservation. A Bureau of Energy Efficiency has been set up to make wide-ranging regulations to further the objectives of the act. In addition, the central and state governments have been empowered to facilitate and enforce efficient use of energy and its conservation. 4. The Electricity Act, 2003, includes a provision for MOP to update and publish a national electricity policy regularly. The current policy document is dated 12 February 2005. Its broad policy objectives include: (i) access to electricity for all households by 2010; (ii) demand to be fully met by 2012, with energy and peaking shortages to be overcome, and with adequate spinning reserves available; (iii) supply of reliable and quality power of specified standards in an efficient manner and at reasonable rates; (iv) per capita availability of electricity to be increased to over 1,000 kilowatt-hours (kWh) by 2012; (v) minimum lifeline consumption of 1 kWh per household per day as a merit good by 2012; (vi) financial turnaround and commercial viability of the sector; and (vii) protection of consumers’ interests.

Figure A2: Regulatory Structure of Indian Power Sector

StateSector

Generation

DistributionCompanies

IndependentPower

Producers

State Government Government of India

Central Electricity Regulatory

Commission

State LoadDispatch Center

Regional LoadDispatch Center

StateElectricity Regulatory Authority

Central Electricity Authority

Policy Role

Regulatory Role(Technical regulation and Overall Planning)

Operational Role

Central Transmission

Utility

CentralSector

Generation

Inter-State

Generation

PowerTraders

PowerTraders

State Transmission

Utility

Licensees

Figure A2: Regulatory Structure of Indian Power Sector

StateSector

Generation

StateSector

Generation

DistributionCompaniesDistributionCompanies

IndependentPower

Producers

IndependentPower

Producers

State GovernmentState Government Government of IndiaGovernment of India

Central Electricity Regulatory

Commission

Central Electricity Regulatory

Commission

State LoadDispatch Center

State LoadDispatch Center

Regional LoadDispatch CenterRegional Load

Dispatch Center

StateElectricity Regulatory Authority

StateElectricity Regulatory Authority

Central Electricity Authority

Central Electricity Authority

Policy Role

Regulatory Role(Technical regulation and Overall Planning)

Operational Role

Central Transmission

Utility

Central Transmission

Utility

CentralSector

Generation

CentralSector

Generation

Inter-State

Generation

Inter-State

Generation

PowerTradersPower

TradersPower

TradersPower

Traders

State Transmission

Utility

State Transmission

Utility

Licensees

40 Appendix 2

5. In compliance with the Electricity Act, 2003, the Government has issued the national electricity policy and the national tariff policy. The broad objectives of the policies are to:

(i) ensure availability of electricity to consumers at reasonable and competitive rates;

(ii) ensure financial viability of the sector and attract investments; (iii) promote transparency, consistency, and predictability in regulatory approaches

across jurisdictions and minimize perceptions of regulatory risks; and (iv) promote competition, efficiency in operations, and improvement in quality of

supply. C. Indian Energy Road Map

6. To ensure energy security for the country, India has decided to fully develop all domestically available energy options. Though India has abundant reserves of coal and coal shall remain an important source for power generation in the medium term, India has also decided to tread a low carbon path for meeting energy needs. Therefore, thermal power projects deploying more efficient, super critical technology are being encouraged. Gas based power generation shall be dependent upon the availability and pricing of gas. Nuclear power generation shall be dependent upon the access to civilian nuclear technology and availability of nuclear fuel. With about 9,000 MW of installed capacity, India is the 4th largest producer of wind power in the world. To address climate change issues, India has drawn up a National Action Plan, under which a Solar Mission has been detailed to promote solar power. India is also giving emphasis to the conservation of energy. D. 50,000 MW Hydro Initiative

7. Hydroelectric power is recognized as one of the most economic and preferred energy sources because it is a low variable cost, clean, renewable energy source; and it is able to improve system reliability via its instantaneous starting, stopping, and load-following capabilities. However, India’s share of hydropower has been steadily declining during the last three decades, resulting in reductions in overall system efficiency. The Government recognizes the importance of increasing the share of hydropower generation in the energy mix and introduced the “50,000 megawatts (MW) hydropower initiative” in 2003. Under this Program, pre-feasibility reports of 162 new projects, with an aggregate capacity of 47,930 MW distributed across 16 states, have been prepared. Out of these 162 schemes, 73 schemes having first year indicative tariffs below Rs2.50 have been selected for preparation of detailed project reports and subsequent implementation.3 The installed capacity of these schemes is about 33,000 MW. Under this hydropower initiative, the north western and north eastern states, including Himachal Pradesh, are given special incentives to promote hydropower development. E. New Hydro Policy 2008

8. In order to further address the rehabilitation and resettlement issues linked to the construction of the country’s hydropower resources, the Government of India has announced the New Hydro Policy 2008. This policy provides a level playing field to private developers, and elucidates transparent selection criteria to be used by states for awarding sites to such developers. The policy enables developers to earn revenues through merchant sales up to a maximum of 40% of saleable energy (with penalties that reduce this benefit if there are delays in reaching commercial operations), with the balance to be sold under long term power purchase agreements. The policy seeks to balance incentives for private developers while containing 3 The cost of preparation of detailed project reports is proposed to be recovered later from the developers.

Appendix 2 41

provisions designed to ensure that benefits flow to the project-affected persons. These benefits include 100 kWh of electricity per month to each project-affected family (in cash or kind or combination), requirements for the project developer to assists in rural electrification in the project-affected area by contributing 10% of the states’ share of electricity into Rajiv Gandhi Gramin Vidyutikan Yojana (a rural electrification scheme initiated in 2005 by the Government of India), contributions to local area development funds, and the setting up of industrial training institutes in the project-affected areas to improve employment opportunities for project affected persons. The rehabilitation and resettlement package for hydropower projects as specified in this policy are more generous than the requirements of the National Rehabilitation & Resettlement Policy, 2007. The new hydro policy aims to make the project-affected families stakeholders in the project. F. Himachal Pradesh Sector Structure

9. MPP and Power Department. The Multipurpose Projects (MPP) and Power Department of the government of Himachal Pradesh (GOHP) was formed in April 1964 after realizing the need for exploiting the substantial hydropower potential available in the state’s river basins. After transferring power development and operations functions to Himachal Pradesh State Electricity Board (HPSEB) upon its formation in 1971, the department has focused on formulating and implementing sector policies. 10. Himachal Pradesh State Electricity Board. HPSEB is a vertically integrated utility with responsibility for electricity generation, transmission, and distribution in the state since its formation in 1971. HPSEB operates under state direction and interacts with the central power utilities for planning and coordination. The installed capacity of the state is 413.5 MW, with total availability including purchased power of around 1,900 MW. HPSEB’s electric tariff is one of the lowest in the country, and ranges from a subsidized Rs0.70 per kWh to Rs4.0 per kWh, depending on consumer type. 11. Himachal Pradesh Power Corporation Limited (HPPCL). HPPCL was incorporated in December 2006 as a joint venture of GOHP and HPSEB to develop and operate new hydropower projects in the state. GOHP and HPSEB have a 60:40 participation, respectively. 12. Himachal Pradesh Energy Development Agency (HIMURJA). HIMURJA is the nodal alternative energy agency responsible for promoting small hydropower projects up to 5 MW capacity. A total of 750 MW of small-scale hydropower projects has been identified by HIMURJA for development. 13. Himachal Pradesh Electricity Regulatory Commission (HPERC). HPERC was established and incorporated by GOHP on 30 December 2000. It is mandated to take measures conducive to the development and management of the electricity industry in an efficient, economic, and competitive manner. HPERC also acts to safeguard consumer interests and improve the quality of service. It functions in a quasi-judicial manner, and has the power to make regulations for the conduct of its proceedings and discharge of its functions. Its main functions include determining electricity tariffs (bulk, grid, and retail) and transmission tariffs, regulating the power purchase process and promotion of competition, efficiency, and economy in the electricity sector.

42 Appendix 2

G. Himachal Pradesh Power Sector

1. Government Strategy

14. Himachal Pradesh has abundant water resources in the five major rivers flowing through the state from the western Himalayas. The power generation potential of Himachal Pradesh is 20,415 MW, out of which only about 6,150 MW has been developed. GOHP’s main strategy, outlined in its state hydropower policy,4 is the development of the state as the “hydropower state” of the country, by providing affordable, reliable, and quality power to its residents and exporting power to the national grid as a major source of revenue to the state. GOHP views the exploitation of the immense hydropower potential as a means for prosperity. Thus, it intends to speed up hydropower development in the state and plans to add about 4,021.5 MW of additional capacity during the 11th Five Year Plan (FYP).

2. Capacity and Constraints

15. Generation. The electricity supply for the people of Himachal Pradesh comes from its own state sector resources and allocated share of central sector-owned generation in the state. As of March 2007, the installed capacity of the state sector, which is predominantly hydropower, is 523 MW. Himachal Pradesh experiences energy shortages, especially in the winter months of December to February when river flows are at their lowest, although some peak shortages are experienced throughout the year. Currently, it is able to meet about 50% of demand from its own resources. During peak shortages, the state must draw power from the national grid, depending on the system conditions. Conversely, the state supplies power to the national grid when generating excess hydropower. The power requirement of the state during FY2007 was 5,136 million units of energy and 873 MW in terms of peak demand. The availability of power was less than the requirement, and the state experienced an energy shortage of 2.7% as a result. However, there was no peaking shortage during FY2006.5 16. According to the 17th Electric Power Survey,6 power demand in Himachal Pradesh is expected to increase from 4,861 gigawatt-hours (GWh) in 2006 to 9,504 GWh (1,611 MW peak) by FY2011 and 13,136 GWh (2,194 MW peak) by 2017. This implies compound average growth rates of energy demand of 11.37% from FY2006 to FY2011 and 6.69% from FY2012 to FY2016. To meet this growing demand, GOHP’s hydropower development plans must fructify. As both the central sector and private investors are interested in developing hydropower in Himachal Pradesh for export to the national grid, the capacity additions earmarked for the state sector will serve local customers, with excesses during peak hydropower periods exported. Of the 4,021.5 MW of additional capacity to be added by the end of the 11th FYP, the identified hydropower sites have been allocated to state, central, and private sector investors. Central public sector utilities are expected to develop about 2,243 MW, the private sector about 1,488 MW, and the state sector about 290.5 MW (with an additional 810 MW intended to be commissioned post-2012). An additional 750 MW of mini-hydropower (< 5 MW per site) is to be developed privately under the lead of HIMURJA. 17. Transmission. The state’s transmission system consists of 2,100 kilometers (km) of transmission lines rated 66 kilovolts (kV) and above, and about 100 power transformers aggregating to around 2,000 megavolt-amperes (MVA) of capacity. The transmission system requirements in Himachal Pradesh are different from most of India’s power utilities in that, besides meeting in-state demand, it also transfers significant amounts of power outside the 4 Government of Himachal Pradesh. 2006. Hydro Power Policy 2006. Shimla. 5 Source: Annual power supply position as published by CEA but the Northern Regional Load Dispatch Centre

records a marginal shortage in meeting peak demand for electricity in January 2007. 6 Central Electricity Authority, Government of India. 2007. 17th Electric Power Survey, 2007. New Delhi.

Appendix 2 43

state, particularly in the surplus months of April to October. The in-state transmission system is capable of handling the additional capacity to be added through this proposed multitranche financing facility (MFF). However, with the considerable hydropower capacity additions in various stages of planning, development, and construction—including central and private sector investments—there will be a corresponding need for additional transmission capacity to be able to wheel the ensuing increase in power production. Such investments, however, are handled by Power Grid Corporation of India Limited, the national transmission company responsible for interstate electricity transmission. Investments in this area have been announced and are in various stages of development. 18. Distribution. In 1988, Himachal Pradesh became the first hill state to achieve 100% electrification of all census villages—an impressive accomplishment given the dispersed customer base and mountainous terrain. Currently, Himachal Pradesh has around 19,000 distribution transformers, 28,000 km of high tension lines, and 50,000 km of low tension lines. Himachal Pradesh is one of the few states in the country where energy delivered to consumers is 100% metered. In addition, its distribution system has a high 97.4% availability. It is essential that every unit generated and delivered is accounted for and audited at different voltage levels. Himachal Pradesh has achieved more than 90% metering on the distribution transformers and on the feeders up to 33 kV, resulting in transmission and distribution losses of a comparatively low 16.3% and aggregate technical and commercial losses of 26%. 19. The power sector of Himachal Pradesh compares favorable to that of India as a whole, as shown in Table A2.1. However, the state still experiences power shortages due to the lack of generating capacity within the state.

Table A2.1: Salient Village and Household Level Power Statistics

Item National Average

Himachal Pradesh Average

Village Electrification (%) 86.6 100.0 Household Electrification (%) 55.8 98.2 Per Capita Consumption (kWh) 636.0 775.0

kWh = kilowatt-hour. Source: Ministry of Power, Government of India.

20. Institutional Capacity. Given the investment plans for additional hydropower capacity in Himachal Pradesh, there are capacity development needs within HPPCL in project development, planning, and construction supervision. Additional needs include financial management and analysis, record keeping, environmental impact assessment, and environmental management planning. HPERC’s capacity development objectives are to support enhancing institutional capacity, and to promote and update the regulatory framework to address upcoming sectoral issues effectively, especially implementation of the multiyear tariff regime as mandated by the Electricity Act, 2003.

3. Regulatory Reform Process

21. The Electricity Act, 2003, came into force on 9 June 2003. Himachal Pradesh already had an established, functioning regulatory commission as of 2001, and has been issuing tariff orders since then. Annually, HPSEB and other licensees are required to petition HPERC for tariffs, and after consideration of stakeholders’ inputs, HPERC rules on tariff applications. The resulting tariff orders are the key instrument of regulation and sector governance. Licensees are allowed to appeal the tariff orders, which may eventually be resolved by court rulings.

44 Appendix 2

22. HPERC holds regular review meetings to monitor compliance with the various directives. In its tariff order for FY2006, it made efforts to reduce cross-subsidies and optimize power purchase costs by mandating the procurement of power on a merit order dispatch basis. HPERC has also taken steps toward complying with the provisions of the Electricity Act, 2003, from a regulatory perspective, including issuing and monitoring performance standards for HPSEB, constituting a forum for addressing consumer grievances, and appointing an ombudsman. In June 2005, it issued open access regulations. 23. Sector Restructuring. HPSEB currently owns very little generation (329 MW total). HPPCL is to own and operate all planned state sector hydropower development, so it will become the state generating company. The corporatization of HPPCL, supported by this proposed MFF, thus effectively unbundles generation from HPSEB’s predominantly transmission and distribution operations, and an eventual transfer of HPSEB’s few generating assets to HPPCL is envisioned. Further to the process of HPSEB’s restructuring, HPSEB has drawn up a proposal for its unbundling. The first step is to unbundle the distinct operations internally and account for them separately. In its FY2007 and FY2008 tariff filings, HPSEB unbundled its costs into generation, transmission, and distribution elements; and has adopted an approach toward unbundling, identifying, and isolating assets, costs, and revenues.

4. State Investment Plan

24. GOHP’s investment plan involves allocating identified hydropower sites to state, central, and private sectors for development. For hydropower plants allotted and under execution, central public sector utilities are expected to take up about 3,100 MW, private sector about 1,800 MW, and the state sector about 1,200 MW, with about 400 MW to be developed jointly. An additional 750 MW of mini-hydropower (< 5 MW per site) is to be developed under the lead of HIMURJA. 25. At the state level, additional new projects totaling about 1,700 MW will be allocated to both HPSEB and HPPCL, which will each develop six to seven new projects. Looking beyond the projects for which financing has been secured, additional funding of several billion US dollar equivalent is needed for future development. 26. HPSEB is preparing a transmission system master plan for the state. It will complete the plan by the end of 2008, including a schedule of capital expenditures for the next 5 years. This plan will include substation upgrades and additional transmission lines required for accommodating the anticipated growth in hydropower generation capacity. HPSEB will also continue its improvement of distribution system transformer metering to reach the goal of 100% metering.

5. Private Sector Participation

27. GOHP has taken several initiatives to encourage private sector participation in hydropower development. Himachal Pradesh is among the few states that have streamlined and crystallized the various procedures to minimize bottlenecks, and has come up with an investor-friendly hydropower policy in place to attract private sector investment. The key features of the policy are as follows:

(i) Selection of developers via memorandums of understanding (MOUs) is allowed for projects up to 100 MW.

(ii) Selection of developers via international competitive bidding is applied for projects above 100 MW.

(iii) No clearances are necessary from CEA for projects selected via a competitive bidding process costing up to Rs2.5 billion, provided that (a) the scheme is

Appendix 2 45

included in the national electricity plan as notified by CEA, and (b) the site for setting up the generating stations has been allocated through a transparent bidding process in accordance with the guidelines issued by the Government. In case of any other scheme, the Rs5 billion limit will apply.7

(iv) The secondary energy rate is at a par with primary energy. A premium is proposed on peak power.

(v) Simplification of process of transferring clearances to independent power producers (IPPs).

(vi) Permission of 100% foreign equity on automatic approval route, provided it does exceed Rs15 billion.

(vii) Tariff determination by State Electricity Regulatory Commission or CERC as applicable.

28. The project developer will be required to provide a royalty in the form of free power from the project to GOHP in the amount of 12% of the deliverable energy of the project for up to 12 years from the date of commercial operation of the project; at 18% of deliverable energy of the project for the next 18 years and thereafter; and at 30% of the deliverable energy for the balance agreement period beyond 30 years. 29. GOHP will constitute a local area development authority for project(s) being implemented in each river valley. Activities of the authority during execution will be financed by the project itself. For this purpose, the developer shall make a provision of 1.5% of total capital cost in the detailed project report other than the funds required for resettlement and rehabilitation schemes and catchment area treatment plans. The authority’s activities should be financed from the 1.5% provision proposed in the detailed project report and not from free power royalty. Activities under the local area development authority are as follows:

(i) oversee the restoration of facilities adversely affected by implementation of the project;

(ii) oversee the implementation of rehabilitation and relief plan; (iii) oversee the implementation of catchment area treatment plan and compensatory

afforestation; (iv) local development activities related to development of agriculture, horticulture,

animal husbandry, health and forest development, and other social activities; and (v) the developer is to ensure minimum flow of 15% water immediately downstream

of the dam to protect the rights of the local inhabitants for irrigation and drinking water requirements.

30. The project developer will be required to arrange for evacuation of power from the project to the applicable HPSEB or Power Grid Corporation of India’s substation (designated as the interconnection point). For evacuation of power beyond the interconnection point, the developer shall work with HPSEB or Power Grid Corporation of India as applicable to arrange a suitable integrated transmission system at mutually agreed wheeling charges.

7 According to the Electricity Act, 2003, any generating company can establish, operate, and maintain a generating

station without obtaining a license if it complies with the technical standards relating to grid connectivity specified by CEA. However, certain clearances and approvals are required for taking up hydropower projects.

46 Appendix 3

ORGANIZATION STRUCTURE OF THE IMPLEMENTING AGENCY

Himachal Pradesh Power Corporation Limited

PMU = project management unit, R&R = resettlement and rehabilitation Source: Himachal Pradesh Power Corporation Limited.

Managing Director

- Electrical Design Department - Electrical Contracts

Department Quality Assurance,

Inspection & Control

Department - Information Technology &

Communications - Corporate

Planning - Corporate Monitoring

Company Secretary

Director (Electrical) Director (Civil) Director/General Manager (Finance)

Director/General Manager (Personnel)

- Civil Design Department - Corporate Contract &

Procurement Department - Corporate

Design & Quality Control

Department

- Accounts, Taxation, Cash Book & Banks

- External Funding, Budget,

Contracts, Concurrence and

Cost - Audit

- Personnel & Administration I

(land acquisition, R&R, legal)

- Administration and human

resources, policy and training

Projects Divisions (PMUs)

(Kashang, Sawra Kuddu, Sainj, Shongtong

Karcham and other projects)

For each Project: Construction, Contract,

Procurement, Monitoring & Cost Control, Erection &

Commissioning, Environment, R&R,

Finance and Personnel

Chairman

Appendix 4 47

EXTERNAL ASSISTANCE TO THE POWER SECTOR 1. India’s power sector has received a major portion of its external assistance from the Japan Bank for International Cooperation, World Bank, Asian Development Bank (ADB), Department for International Development of the United Kingdom, German development cooperation through KfW, United States Agency for International Development, and the Canadian International Development Agency. Previous ADB loan assistance is listed in Table A4.

Table A4: Previous ADB Loans to the Power Sector in India Loan No. Amount DatePublic Sector Project ($ million) Approved0798-IND North Madras Thermal Power 150 18-Nov-860907-IND Unchahar Thermal Power Extension 160 29-Sep-880988-IND Rayalaseema Thermal Power 230 21-Nov-891029-IND Second North Madras Thermal Power 200 30-Aug-901081-IND Special Assistance 150 04-Apr-911117-IND Gandhar Field Development 267 14-Nov-911148-IND Hydrocarbon Sector Program 250 17-Dec-911161-IND Power Efficiency (Sector) Project 250 26-Mar-921212-IND Energy Conservation and Environment Improvement 147 17-Dec-921222-IND Gas Flaring Reduction 300 30-Mar-931285-IND Gas Rehabilitation and Expansion 260 07-Dec-931343-IND Industrial Energy Efficiency 150 13-Dec-941405-IND Power Transmission (Sector) 275 16-Nov-951465-IND Renewable Energy Development 100 26-Sep-961591-IND LPG Pipeline 150 16-Dec-971764-IND Power Transmission Improvement (Sector) 250 06-Oct-001803/1804-IND Gujarat Power Sector Development Program 350 13-Dec-001868/1869-IND Madhya Pradesh Power Sector Development Program 350 06-Dec-011968-IND State Power Sector Reform 150 12-Dec-022036/2037-IND Assam Power Sector Development Program (Program Loan) 250 10-Dec-032152-IND Power Grid Transmission (Sector) Project 400 22-Dec-042309-IND Uttarakhand Power Sector Investment Program 300 16-Mar-062323/2324-IND Madhya Pradesh Power Sector Investment Program 600 29-Mar-07 Subtotal 5,689Private Sector7058/1036 Calcutta Electricity Supply Company Transmission 18 04-Oct-907082/1142 Calcutta Electricity Supply Company Thermal Power Plant 32 13-Dec-917138 Infrastructure Development Finance Company, Ltd. 30 14-Oct-977183/1991 Tala–Delhi Transmission Project 62 16-Jan-037192 Dahej Liquefied Natural Gas Terminal Project 75 13-Jan-047227 Central Uttar Pradesh Gas Limited (CUGL) 3 17-Jan-067242/2249 NTPC Capacity Expansion Financing Facility 300 27-Jul-067253/2326 Tata Power Wind Energy Financing Facility 79 17-Apr-07 Subtotal 599C-19-IND Power Finance Corporation for Tamil Nadu and Andhra

Pradesh SEBs 111 13-Nov-902193(L)-IND Energy Efficiency Support 3 27-Oct-94 Subtotal 114 Total 6,402 Source: Asian Development Bank.

48 Appendix 5

PROJECT READINESS (Tranche 1)

Readiness Criteria Target Status Responsibility

Date ____________________________________________________________________________________ 1. Government clearances (environmental, techno-economic) Done GOHP/GOI 2. Project management

a. Project management units for subprojects Done IA b. Essential staffing Done GOHP/IA c. Full staffing Oct 2008 In process GOHP/IA

3. Allocation of counterpart funding Available GOHP 4. Recruitment of consultants

Project management a. TORs Done IA/ADB b. Shortlist Oct 2008 Expected IA c. Award of contract(s) for first phase Dec 2008 Expected IA Capacity development a. TORs Done IA/ADB b. Shortlist Oct 2008 Expected IA c. Award of contract(s) for first phase Dec 2008 Expected IA

5. Procurement

a. Procurement plan Done (tranches 1 and 2) IA b. Issuance of bidding documents Done (tranche 1) IA c. Award of contract(s) for first tranche Nov 2008 Expected IA

6. Financial management

a. Financial management system Dec 2008 In process IA b. Auditing arrangements Done IA

7. Project performance management system/

project administration memorandum Oct 2008 Expected IA/ADB 8. Project-specific (as appropriate):

Land acquisition for first-tranche subprojects Done IA Resettlement plan(s) for first-tranche subprojects Done IA Environmental clearances, EIA and EMP Done IA for first-tranche projects 30% of contracts awarded by loan signing Expected IA Cofinancing Not required for tranche 1

ADB = Asian Development Bank, EIA = environmental impact assessment, EMP = environmental management plan, GOI = government of India, GOHP = government of Himachal Pradesh, IA = implementing agency, TOR = terms of reference. Source: Asian Development Bank.

Appendix 6 49

CAPACITY DEVELOPMENT AND ACTION PLAN 1. The multitranche financing facility (MFF) combines physical investments with capacity development work, as there are considerable capacity development needs. The capacity development component contains a main subcomponent focusing on addressing constraints at the Implementing Agency (IA) level. It is designed to address weaknesses identified by the procurement capacity assessment (Supplementary Appendix E) and the financial management assessment (Supplementary Appendix D). The main focus will be on project preparation, implementation, and management, including (i) helping the Executing Agency prepare future projects; (ii) implementing and administering approved projects; and (iii) monitoring, reviewing, evaluating, and reporting on program and project implementation. This includes project planning, construction supervision, contract management, procurement, disbursements, safeguards compliance, and monitoring and reporting systems. It will also include setting up the requisite project management units within Himachal Pradesh Power Corporation Limited (HPPCL). Financial management and accountability will be another major focus. This includes improved accounting and auditing systems, while incorporating adequate financial management standards to ensure fiduciary oversight of disbursed funds. A third focus will be the knowledge transfer required for compliance with Asian Development Bank (ADB) policies and procedures, as none of the agencies have experience with ADB policies. 2. In addition to project-oriented capacity development, the capacity development component will include corporate development assistance to HPPCL. There will be support for formulating an effective organizational structure with well-functioning project management units encompassing the duties, responsibilities, lines of supervision, and limits of authority for all officers, managers, and other staff. Support will include hardware and software installation, policy reformulation, and promoting private sector participation modalities. Training in the clean development mechanism (CDM) and public–private partnership (PPP) modalities will round out HPPCL’s functional expertise as the state’s power generation company. HPPCL will thus be transformed into a commercially oriented entity with a functioning board of directors supported by operating teams, finance, and administration. 3. Because of the large amount of hydropower capacity additions earmarked for Himachal Pradesh, Himachal Pradesh State Electricity Board (HPSEB), the state’s transmission utility, is responsible for the design and construction of the evacuation systems from hydropower projects to the transmission system, as well as ensuring adequate transmission capacity. Therefore, there is a need for building capacity at HPSEB to introduce modern, computerized accounting systems and management information systems (MIS) to ensure that HPSEB is able to manage and report on its operational activities properly. Taking this into account under the capacity building component of the MFF, it was agreed to assist HPSEB in acquiring an enterprise resource planning solution to cover all its future computer accounting and MIS applications; and to finance the purchase of software, hardware, training, and initial system maintenance. HPSEB has conducted the initial steps, such as carrying out a review of HPSEB’s financial accounting and management information system requirements with particular emphasis on project accounting and project management systems, financial management, financial reporting, and information requirements of Himachal Pradesh Electricity Regulatory Commission (HPERC). HPSEB is in the process of developing the tendering documents. For this subcomponent, HPSEB will be the IA and will provide office space and counterpart staff for implementation. HPSEB will appoint a suitably qualified project manager to manage implementation of the enterprise resource planning solution. The estimated costs of the overall capacity development component are shown in Table A6 below.

50 Appendix 6

Table A6: Indicative Capacity Development Budget

Description

Estimated Cost ($ million)

1. Project Preparation, Implementation and Management 5.5 2. Financial Management and Accountability 2.5 3. HPPCL Training CDM 0.3 Private sector participation assistance 0.2 All other training 0.5 Subtotal 1.0 4. HPSEB enterprise resource planning 3.0 Total 12.0 CDM = clean development mechanism, HPPCL = Himachal Pradesh Power Corporation Limited, HPSEB = Himachal Pradesh State Electricity Board. Source: Asian Development Bank estimates.

4. Additional information is available in Supplementary Appendix H.

Appendix 7 51

DETAILED COST ESTIMATES FOR TRANCHE 1 SUBPROJECTS

Table A7.1: Tranche 1 Cost Estimate by Expenditure Category a Rs million $ million

ForeignExchange

LocalCurrency

TotalCost

ForeignExchange

LocalCurrency

TotalCost

% ofBase Cost

A.1 Land 0 31 31 0.0 0.8 0.82 Civil Works 0 4,945 4,945 0.0 123.6 123.6 733 Mechanical and Equipment 794 333 1,095 19.9 8.3 28.2 164 Environment and Social Mitigation 0 163 163 0.0 4.1 4.1 25 Consultants 0

a. Project Implementation Support 158 4 162 4.0 0.1 4.0 2b. MFF Future Tranche Preparation 5 1 6 0.1 0.0 0.2 0c. Institutional Building 0 82 82 0.0 2.1 2.1 1

6 Other Capacity Development (MIS Equipment, Training)

83 108 190 2.1 2.7 4.8 3

7 Taxes and Duties 49 55 104 1.2 1.4 2.6 2Subtotal (A) 1,088 5,722 6,777 27.2 143.0 170.2 100Total Base Cost 1,088 5,722 6,777 27.2 143.0 170.2 100

B.1 Physical c 33 172 204 0.8 4.3 5.1 32 Price d 26 909 935 0.7 22.7 23.4 14

Subtotal (B) 59 1,081 1,140 1.5 27.0 28.5 17C.

1 Interest During Implementation e 467 388 855 11.7 13.9 25.6 132 Commitment Charges 21 0 21 0.5 0.0 0.5 03 Front-End Fees 0 0 0 0.0 0.0 0.0 0

Subtotal (C) 488 388 877 12.2 13.9 26.1 131,636 7,191 8,794 40.9 183.9 224.8 130

Contingencies

Financing Charges During Implementation

Total Project Cost (A+B+C)

`

Investment Costs b

MFF = mulitranche financing facility, MIS = management information system. a Figures shown are rounded figures. b In March 2008 prices. c Computed at 3% of base costs. d Computed at 0.8% of foreign costs and 5.0% of domestic costs. e Computed at the 5-year forward London interbank-offered rate plus a spread of 3.2%. Source: Himachal Pradesh Power Corporation Limited and Asian Development Bank estimates.

52 Appendix 7

Table A7.2: Tranche 1 Cost Estimate by Financier ($ million)

Cost Amounta% of Cost Category Amount

% of Cost Category

A.1 Land 0.8 0.0 0 0.8 1002 Civil Works 123.6 93.3 75 30.3 253 Mechanical and Equipment 28.2 24.2 86 4.0 144 Environment and Social Mitigation 4.1 0.0 0 4.1 1005 Consultants

a. Project Implementation Support 4.0 4.0 100 0.0 0b. MFF Future Tranche Preparation 0.2 0.2 100 0.0 0c. Institutional Building 2.1 2.1 100 0.0 0

6 Other Capacity Development (MIS Equipment, Training) 4.8 4.8 100 0.0 0

7 Taxes and Dutiesa. Taxes and Duties on Mechanical and Equipment 0.7 0.0 0 0.7 100b. Taxes and Duties on Consultants 1.9 0.0 0 1.9 100Total Base Cost 170.3 128.5 75 41.7 25

B. 28.5 21.5 75 7.0 25C.

26.1 0.0 0 26.1 100224.8 150.0 67 74.8 33

67 33

Government

Total Project Costs% Total Project Costs

ItemBase Costs

Contingencies

ADB

Financing Charges During Implementation

ADB = Asian Development Bank; MFF = multitranche financing facility; MIS = management information system. a Amount of ADB loan proceeds allocated to the cost category. Source: Himachal Pradesh Power Corporation Limited and Asian Development Bank estimates.

Appendix 8 53

MULTITRANCHE FINANCING FACILITY IMPLEMENTATION STRUCTURE

a Implementing Agency (IA) for its $3 million capacity development subcomponent. Source: Himachal Pradesh Power Corporation Ltd. and Asian Development Bank.

Government of India

State Government (Himachal Pradesh)

Himachal Pradesh Power

Corporation Limited (HPPCL)

Federal Level

State Level

Implementing Agency

(IA)

Project Management

Unit (PMU)

For Sawra Kuddu

Project Management

Unit (PMU)

For Kashang

Field Level

Executing Agency (EA) – MPP and

Power Dept.

Himachal Pradesh State

Electricity Board (HPSEB) a

Ministry of PowerMinistry of FinanceAsian

Development Bank (ADB)

54 Appendix 9

SUBPROJECT IMPLEMENTATION SCHEDULE (TRANCHES 1 AND 2) PROJECT IMPLEMENTATION SCHEDULE (HCEDIP)

Preparatory ActivitiesGovernments ApprovalsTariff Negotiation and PPALand Acquisition, Compensation, Resettlement (Various tasks ongoing)PAO & PMU Formulation PFR1 ApprovalAdditional Survey, Construction of Access Roads VPart A: Sawra Kuddu Hydropower PlantHead Tunnel Construction (54 months from July 2007)(Other 2 Civil packages) Design, Cost Estimates and Bidding DocumentsBidding + Contract Signing (7 months)Construction (42 months)(Electro-Mechanical)Design, Cost Estimates and Bidding DocumentsBidding + Contract Signing (7 months)Manufacture and Installation of Equipment (42 months)Testing and Commissioning (5 months)Part B: Kashang Hydropower Plant (Civil Works)(Civil Work package) Design, Cost Estimates and Bidding DocumentsBidding + Contract Signing (7 months)Construction (45 months)Part C: Kashang (E&M) and Kerang-Kashang Link Tunnel, by Tranche 2(Electro-Mechanical)Design, Cost Estimates and Bidding DocumentsBidding + Contract SigningManufacture and Installation of Equipment (41 months)Testing and Commissioning (5 months)(Civil Work package) Design, Cost Estimates and Bidding DocumentsBidding + Contract Signing (7 months)Construction (45 months)

Capacity Building(Part A) Inplementation Support of PMUProject Management SpecialistConst. Supervision/Claim Avoidance Project Implementation & Supervision(Part B) MFF Future Tranchs PrelarationMFF Tranche Processing (Part C) Institutional BuildingCDMManagement Information System (MIS)Human Resources Development + Training

2013Q-1 Q-2

2012Q-1 Q-2 Q-3 Q-4

2011Q-1 Q-2 Q-3 Q-4

2010Q-1 Q-2 Q-3 Q-4

2009Q-1 Q-2 Q-3 Q-4Q-3 Q-4

2007 2008Q-3 Q-4 Q-1 Q-2

CDM = clean development mechanism; MFF = multitranche financing facility; PAO = project administration office; PFR1 = periodic financing request 1; PMU = project management unit; PPA = power purchase agreement. Source: Asian Development Bank estimates.

Appendix 10 55

IMPLEMENTATION SCHEDULE OF THE MULTITRANCHE FINANCING FACILITY

$40 million Sawra Kuddu

Barrage, Intake and Desilting

$100 million Kashang

final stage

1st Tranche $150 million

2nd Tranche $110 million

3rd Tranche $100 million

4th Tranche $150 million

Total $800 million

5th Tranche $290 million

$67 million Sawra Kuddu Hydroelectric

Project (111 MW)

Year 2009Oct 2008 2012a2010 2011a

$71 million Kashang I

Hydroelectric Project—Civil

Works

$12 million Capacity

Development Component

$150 million Sainj

Hydroelectric Project

(100 MW)

$290 million Shongtom-Karcham

Hydroelectric Project

(402 MW)

Note: Tranche 3 is indicative, and along with tranches 4 and 5, indicative in amounts and timing. a Tentative dates; may be accelerated upon a project readiness basis. Source: Asian Development Bank estimates.

$70 million Kashang I, II & III Electro-mechanical

Works

56 Appendix 11

PROCUREMENT PLAN (Tranche 1)

Project Information Country India Name of Borrower India Project Name Himachal Clean Energy Development

Investment Program (HPCEDIP) Loan or TA Reference To be determined (TBD) Date of Effectiveness Tentative (October 2008) Amount US$ (total from all financiers): $224,800,000 Of which Committed, US$ $150,000,000 Executing Agency MPP & Power Department of the

Government of Himachal Pradesh Implementing Agencies Himachal Pradesh Power Corporation Ltd.

and Himachal Pradesh State Electricity Board

Approval Date of Original Procurement Plan 10 March 2008 Approval of Most Recent Procurement Plan 27 May 2008 Publication for Local Advertisement a 10 March 2008 Period Covered by this Plan 2008 – 2012 a General procurement notice, invitations to pre-qualify and to bid, calls for expressions of interest Procurement Thresholds, Goods & Related Services, Works and Supply & Install Procurement Methods To be used above/below ($) ICB works At least $10,000,000 ICB goods At least $ 1,000,000 NCB works Less than $10,000,000 NCB goods Less than $ 1,000,000 Shopping Works Less than $ 100,000 Shopping Goods Less than $ 100,000 Procurement Thresholds, Consultants Services Procurement Methods To be used above/below ($) Quality Cost Based Selection (QCBS) At least $ 200,000 Consultants Qualifications Selection (CQS) Less than $ 200,000 Least Cost Selection (LCS) Less than $ 100,000 List of Contract Packages in Excess of $100,000, Goods, Works and Consulting Services

Ref

Contract Description

Estimated Costs

($ million)

Procurement Methods

Expected Date of

Advertisement

Prior Review

Y/N

Comments

I II

III

IV

Sawra Kuddu HP Head Race Tunnel Surge Shaft, Penstocks, Power House & Tail Race Tunnel Electro-Mechanical Works Transmission Interconnection

29.4

22.0

24.2

4.0

HPPCL's own method

ICB (Civil)

ICB (Plant)

HPPCL's own method

Already Awarded

10 March 08 (Actual Date)

25 April 08 (Actual Date)

3rd Quarter 08

N

Y

Y

N

Financed by HPPCL Financed by ADB Financed by ADB Financed by HPPCL

Appendix 11 57

V

Barrage, Intake and Desilting Basin

To be financed in Tranche 2

Kashang I, II and III All Civil & Hydro-mechanical Works for Kashang I (and common power house)

71.3

ICB (Civil)

10 March 08 (Actual Date)

Y

Financed by ADB

Electro-Mechanical Works Kerang-Kashang Link Tunnel

Tranche 2

I

II III IV Transmission Interconnection

I II

III

IV

V

VI

VII

VIII

HPPCL Capacity Development Project Management Specialist (18 PM, 1P, Internationally recruited) Construction Supervision / Claim Avoidance (Site) (18 PMx2P, Internationally recruited) Project Implementation & Supervision Consultant (108 PM, 4 Intl. & 4 Natl.) MFF Tranche Planning (10 PM, 3 Intl. & 2 Natl.) CDM (24PM, 1P, National) MIS (24 PM, 2P, National) Equipment – Computer Hardware & Software Human Resources Development & Training (6 PM, 1P, National)

0.58

1.16

3.13

0.20

0.25

0.50

2.0 (Total) several

packages

1.15 a

Individual - Bio data Individual - Bio data Firm –QCBS Individual-Bio data Individual-Bio data Individual- Bio data ICB/NCB / Shopping Individual- Bio data & NCB /Shopping

3rd Quarter 08 3rd Quarter 08 3rd Quarter 08 3rd Quarter 08 3rd Quarter 08 3rd Quarter 08 2009 3rd Quarter 08

Y

Y

Y

Y

Y

Y

Y/N

Y/N

Retroactive Financed by ADB Retroactive Financed by ADB Financed by ADB Retroactive Financed by ADB Financed by ADB Financed by ADB Financed by ADB Financed by ADB

I

HPSEB Capacity Development Enterprise Resource Planning System

3.00

Individual- Bio data & NCB /Shopping

1st Quarter 09

Y/N

Financed by ADB

a Miscellaneous training costs included under consultant’s contract.

58 Appendix 12

FINANCIAL ANALYSIS (Tranche 1 Subprojects)

A. Methodology and Major Assumptions 1. The financial analysis of the proposed subprojects under tranche 1 has been carried out in accordance with Financial Management and Analysis of Projects of the Asian Development Bank (ADB).1 2. All financial costs and benefits have been expressed in constant 2008 prices. Cost streams used for financial internal rate of return (FIRR) determination, i.e., capital investment and operations and maintenance, reflect the costs of delivering the estimated benefits. The current methodology to calculate tariffs for energy sales of hydropower generating stations was used to estimate the financial benefits. The weighted average cost of capital (WACC) of Himachal Pradesh Power Corporation Limited (HPPCL) was calculated for the proposed subprojects under tranche 1 and compared with the project FIRRs to ascertain the financial viability of the subprojects. The sensitivity of the FIRR to adverse movements in the underlying assumptions was also assessed. Based on this analysis, it is concluded that the subprojects under tranche 1 are financially viable. 3. While tranche 1 of the MFF will finance the 110 megawatt (MW) Sawra Kuddu hydropower project except for the barrage, intake and desilting basin,2 and the civil works for the 195 MW Integrated Kashang hydropower project, the evaluation must include the total project costs. Therefore, costs include all civil works, electrical and mechanical works, resettlement, and environmental costs associated with each hydropower subproject. Financial viability was examined by comparing the incremental costs and benefits of the with- and without-investment scenarios. The incremental benefits arise through the increased generation of power. It is assumed that the subprojects will have a 30-year economic life and residual value of 33% of the original investment at the end of the 20-year evaluation period. 4. The tariff principles set by the regulatory agency, Central Electric Regulatory Commission (CERC) in March 2004 allow HPPCL to pass through full cost recovery of the loan capital (assuming a debt–equity ratio of 70:30); depreciation (to cover principal repayments); return on equity (14%); operation and maintenance expenses (based on 1.5% of investment costs); and interest on loans and working capital. The above tariff revenue streams are converted to real terms by adjusting for domestic inflation. 5. While tranche 1 subprojects are also expected to produce positive environmental benefits (from the clean development mechanism [CDM]), primarily in relation to the displaced electricity generation from thermal sources, these have been excluded from the analysis. B. Calculation Weighted Average Cost of Capital 6. To compute the WACC, it is assumed that the financing sources would consist of government of Himachal Pradesh (GOHP) equity contributions and foreign loans. The cost of HPPCL’s equity is calculated at 14% as allowed by CERC tariff norms for pass-through in the tariff calculation. The analysis assumes that the ADB loan is passed through to GOHP and HPPCL in Indian rupees with interest rate including allowance for the Government’s guarantee

1 Asian Development Bank. 2005. Financial Management and Analysis of Projects (2005). Manila 2 This particular contract package will be financed in tranche 2.

Appendix 12 59

fee and foreign exchange premium. The WACC is calculated on a pre-tax basis as taxes (33.6% of net profits)3 are allowed as a pass-through in the CERC regulations. The other assumption is domestic inflation rate of 5.0%. Table A12.1 shows that the average WACC for the hydropower generating projects, both Kashang and Sawra Kuddu, is 3.6%.4

Table A12.1: Weighted Average Cost of Capital—Kashang Subproject (%)

Source ADB Loan Equity Amount ($ million) 208.0 89.0 Weighting 70.0 30.0 Nominal Cost 6.6 14.0 Tax Rate 0.0 0.0 Tax Adjusted Nominal Cost 6.6 14.0 Inflation Rate 5.0 5.0 Real Cost 1.5 8.6 Weighted WACC 1.1 2.6 3.6% ADB = Asian Development Bank, WACC = weighted average cost of capital. Source: Asian Development Bank estimates. C. Calculation of Financial Internal Rate of Return, Risk Assessment, and Sensitivity Analyses 7. The FIRR is calculated at 7.0% for the Sawra Kuddu project and 6.7% for the Kashang integrated project. These rates for the individual projects compare favorably with the estimated value of WACC at 3.6%, substantiating the financial viability of the tranche 1 subprojects.

1. Risk Assessment and Sensitivity Analyses

8. External Risks. Regulatory or tariff revision risk for the tranche 1 subprojects is minimal. The current tariff has taken the investment plan into account and, if necessary, regulated entities can submit revised asset capitalization and financing plans and Himachal Pradesh Electricity Regulatory Commission (HPERC)5 will adjust the determination accordingly. There is no risk of downward revision since tariffs will not be changed unless HPERC is petitioned by the regulated entities to do so. Volume (i.e., demand) risk is minimal since the tariff allows for the bulk of revenues to be provided based on the capacity availability index, and Himachal Pradesh State Electricity Board (HPSEB) plants have exceeded the minimum 90% availability in the past, averaging 92% available capacity over the last 5 years. Geopolitical and political risks are present for all projects in India. However, the nature of the investments and the overall shortage of power in India diversify this risk. Therefore, the overall risk to the financial sustainability of HPPCL is deemed to be minimal. 9. Project Specific Risks. Financial risks at subproject level include the following: (i) an increase in the price of civil works and equipment, (ii) delays in project implementation, and (iii) failure to have access to necessary counterpart funds. These risks are considered low since (i) the cost estimates were based on recent tenders received, and advance procurement will reduce the time between loan effectiveness and disbursement; (ii) HPPCL’s implementation capacity (based on projects undertaken by HPSEB) has been proven in recent project 3 Energy projects also attract a tax holiday of 10 years. 4 The WACC is the same for the Sawra Kuddu subproject, as the ratio of ADB loans to equity is also 70:30. 5 Provided that the increases in costs can be substantiated, rather than simply cost overruns as a result of poor

management and construction practices.

60 Appendix 12

implementation, with further support to be provided under the capacity development component; and (iii) HPPCL’s financial projections demonstrate satisfactory cash flows throughout the forecast period to meet the repayment of debt associated with the investments, once projects are commissioned. 10. Sensitivity Analyses. Separate analyses were carried out to examine the sensitivity of the FIRR and financial net present value to adverse changes in key variables. The variables considered for the sensitivity analyses were a 10% increase in capital costs, a 10% increase in operation and maintenance costs, and a 10% decrease in revenues (allowable costs). Project-specific tests include a 2-year implementation delay with a 20% increase in costs, and no allowance for residual values. 11. Tables A12.2 and A12.3 demonstrate that the results are robust for each subproject with the sensitivities exceeding the WACC. The project is most sensitive to cost overruns and delays. However, justifiable capital cost increases will be allowed by HPERC to be passed through into the tariff, so this risk is minimized where justifiable cost increases and delays are incurred.

Table A12.2: FIRR Sensitivity Analyses—Sawra Kuddu Subproject

Sensitivity Analyses FNPV

(Rs million) FIRR (%)

SI (%)

SV (%)

Base Case 1,583.7 7.0 Capital +10 1,215.8 6.0 14.2 33.9 Operating +10 1,498.1 6.9 2.4 203.3 Benefits –10 971.8 5.7 18.1 (26.6) All the above 518.3 4.7 Two-year delay plus 20% increase capital cost 497.8 4.5 No residual value 943.6 6.1 WACC 3.6 ( ) = negative. FIRR = financial internal rate of return; FNPV = financial net present value, SI = sensitivity indicator; SV = switching value; WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

Table A12.3: FIRR Sensitivity Analyses—Kashang Subproject

Sensitivity Analyses FNPV

(Rs million) FIRR (%)

SI (%)

SV (%)

Base Case 2,780.4 6.7 Capital +10 2,075.2 5.8 14.5 31.7 Operating +10 2,615.7 6.6 2.5 183.7 Benefits –10 1,632.5 5.5 18.6 (24.8) All the above 762.6 4.4 Two-year delay plus 20% increase capital cost 712.0 4.2 No residual value 1,549.3 5.7 WACC 3.6 ( ) = negative. FIRR = financial internal rate of return; FNPV = financial net present value, SI = sensitivity indicator; SV = switching value; WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

Appendix 13 61

SUMMARY OF ECONOMIC ANALYSIS A. Background and Approach 1. Economic analysis was undertaken to determine economic viability for each subproject to be funded from tranche 1. Analysis sought to determine and verify:

(i) electricity demand and supply projections; (ii) the presence of tranche 1 subprojects on the regional and national least-cost

system expansion paths; (iii) economic cost benefit analysis of tranche 1 subprojects, including sensitivities to

key variables; and (iv) distribution of costs and benefits among stakeholders.

2. Economic benefits will accrue from incremental electricity consumption and from displacement of more expensive sources of energy. Environmental benefits will also be achieved from the displacement of fossil fuel sources. Although only the first stage of Kashang is included in tranche 1 funding, economic analysis for the entire Kashang subproject was undertaken, rather than for the first stage as a stand-alone project. B. Calculation of Economic Internal Rate of Return, Risk Assessment, and Sensitivity

Analyses 3. Program Costs. All costs and benefits have been expressed in constant 2007 prices. The domestic price numeraire was used; tradable inputs were valued at their border price equivalent value and were converted to domestic equivalents using an estimated standard exchange rate factor of 1.04. Capital costs included physical contingencies, but excluded taxes, price contingencies, and financial charges during construction. The incremental costs and benefits of the tranche 1 subprojects were estimated by comparing with- and without-project scenarios. Electricity generated from the subprojects was assumed to be consumed within Himachal Pradesh, which is located within the northern region of the national grid.

4. Program Benefits. Electricity generated from the subprojects will be used to meet any unserved demand for electricity in Himachal Pradesh. If there is no unserved demand in Himachal Pradesh, electricity from the subprojects will be sold into the northern region of the national grid where it will be used to meet unserved demand. When there is no unserved demand in the northern region, electricity generated from the subprojects will be used to displace more expensive sources of generation—primarily a diesel captive plant and coal-fired plant that is being used for peaking duties. Non-incremental outputs from the subprojects were valued at the resource cost savings that would accrue if the subprojects were to proceed. In valuing the output from the subprojects, it was assumed that most captive generation will be displaced before coal-fired generation from the grid is displaced. 5. Incremental outputs were valued using Himachal Pradesh and northern region consumers’ estimated willingness to pay for incremental consumption, adjusted for medium voltage and low voltage losses as appropriate. Demand functions relating energy price to energy demand were estimated for each of the three main consumer sectors in Himachal Pradesh (domestic, industrial, and commercial) and the four main consumer sectors in the

62 Appendix 13

northern region (domestic, industrial, commercial, and agricultural), following the methodology outlined in Measuring Willingness to Pay for Electricity1 of the Asian Development Bank (ADB). 6. Tranche 1 subprojects are also expected to produce positive environmental benefits, primarily in relation to the displaced electricity generation from thermal sources. Benefits have only been quantified as a sensitivity case, using a realistic estimate for the value of carbon emission reduction credits that the subprojects could possibly attract in the international marketplace if an application for clean development mechanism (CDM) certification was successful. A conservative value of $10 per credit was used (i.e., $10 per ton of certified carbon dioxide emissions avoided) to reflect uncertainty over credit price and over the continuation of the CDM program beyond 2012. 7. Estimation of Economic Internal Rate of Return. A period of 25 years was used for economic evaluation. Investment is assumed to take place in the period 2008–2014, and benefits are assumed to be realized from 2013. A residual value was assumed, based on an economic asset life of 50 years. Detailed cost–benefit calculations show that the subprojects are expected to deliver significant economic benefits. Kashang delivers an estimated economic internal rate of return (EIRR) of 17.8% and Sawra Kuddu delivers an estimated EIRR of 20.7%. The combined EIRR is estimated to be 18.7% (Table A13.1).

1 P. Choynowski. 2002. Measuring Willingness to Pay for Electricity. ERD Technical Note No. 3. Manila: ADB.

Appendix 13 63

Table A13.1: Economic Internal Rate of Return Calculation for Combined Subprojects (Rs million)

NetYear Incremental Non- Capital Operating Benefits

Output IncrementalOutput

2008 - - 2,160 - (2,160) 2009 - - 2,406 - (2,406) 2010 - - 5,069 - (5,069) 2011 - - 4,592 - (4,592) 2012 - - 1,282 - (1,282) 2013 3,133 1,768 - 308 4,594 2014 3,133 1,645 - 308 4,471 2015 3,133 1,522 - 308 4,348 2016 3,133 1,399 - 308 4,225 2017 3,133 1,276 - 308 4,102 2018 3,133 1,153 - 308 3,979 2019 3,133 1,153 - 308 3,979 2020 3,133 1,153 - 308 3,979 2021 3,133 1,153 - 308 3,979 2022 3,133 1,153 - 308 3,979 2023 3,133 1,153 - 308 3,979 2024 3,133 1,153 - 308 3,979 2025 3,133 1,153 - 308 3,979 2026 3,133 1,153 - 308 3,979 2027 3,133 1,153 - 308 3,979 2028 3,133 1,153 - 308 3,979 2029 3,133 1,153 - 308 3,979 2030 3,133 1,153 - 308 3,979 2031 3,133 1,153 - 308 3,979 2032 3,133 1,153 - 308 3,979 2033 3,133 1,153 (8,635) 308 12,614

18.7%( ) = negative.Source: Asian Development Bank estimates.

Benefits Costs

8. Sensitivity and Risk Analysis. For each of the risks identified, the sensitivity of the EIRR was tested. The EIRR exceeds 12% in all cases. The analysis demonstrates that the economic impact of a rockfall on the intake structure at Kashang is negative, but the EIRR would still be well in excess of the 12% hurdle rate. EIRR sensitivity results are shown in Tables A13.2 and A13.3. Based on these results, both subprojects appear economically robust.

64 Appendix 13

Table A13.2: Sensitivity Analysis for Kashang (%)

Sensitivity Parameter Variation EIRR Switching

ValueBase case 17.8

1 Capital Cost Increase + 10 15.9 30.1 2 WTP Reduction – 10 16.7 (54.3) 3 RCS Reduction + 10 17.3 30.1 4 O&M Increase + 10 17.7 117.5 5 Commissioning Delay 1 year 15.7 528.5 6 Combined (1 through 5) 12.7 7 Kashang Stage I Left Bank Rock Fall Damage

Capital Cost + 1.5Lost Prodcution 6 months 16.5

8 CDM Benefit Included 17.8 ( ) = negative; CDM = clean development mechanism; EIRR = economic internal rate of return; O&M = operations and maintenance; RCS = resource cost saving; WTP = willingness to pay Source: Asian Development Bank estimates.

Table A13.3: Sensitivity Analysis for Sawra Kuddu (%)

Sensitivity Parameter Variation EIRR SwitchingValue

Base case 20.7 1 Capital Cost Increase + 15 18.5 59.9 2 WTP Reduction - 10 19.4 (69.5) 3 RCS Reduction + 10 20.2 174.0 4 Hydrology Reduction – 15 17.6 5 O&M Increase + 10 20.6 815.5 6 Delay 1 year 18.0 7 Combined 1 and 4 16.0 8 Combined 1 through 6 14.8 9 CDM Benefit Included 20.7

( ) = negative; CDM = clean development mechanism; EIRR = economic internal rate of return; operations and maintenance; RCS = resource cost saving; WTP = willingness to pay Source: Asian Development Bank estimates.

9. Distribution Analysis. The distribution of costs and benefits among stakeholders was assessed by comparing financial costs and benefits to economic costs and benefits. Overall, the economic net present value exceeds the financial net present value by Rs12.3 million. Consumers are the greatest beneficiary, with net benefits of about Rs9.6 million. Unskilled labor benefits by about Rs0.1 million and India’s economy benefits by about Rs2.7 million. Himachal Pradesh Power Corporation Limited (HPPCL) is the net loser in this analysis—its weighted average cost of capital, and therefore its expected financial internal rate of internal on the investment, are well below the 12% discount rate used in the analysis. C. Conclusion 10. The economic analysis confirms that both subprojects in the first tranche are in the path of the least-cost expansion plan for India and are economically viable. Sensitivity analysis demonstrates that the expected economic performance is robust. From an economic perspective, tranche 1 investment should proceed.

Appendix 14 65

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: India: Himachal Pradesh Clean Energy Development Investment Program Lending/Financing Modality: Multitranche Financing Facility Department/

Division: South Asia Department

Energy Division

I. POVERTY ANALYSIS AND STRATEGY

A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy The power sector has great potential to contribute to economic development and social well-being, but infrastructure facilities need to be expanded and managed more effectively to ensure consistent economic growth in India. Development of the power sector is connected to poverty reduction. Clean power development ensures that the poor will benefit, as they bear a larger share of the adverse impacts of pollution and environmental degradation. In addition, stable electricity supplies promote business expansion and increase employment opportunities, which can have a positive impact on reducing poverty. Policy reforms that lead to sector sustainability can free up resources for other pro-poor initiatives. Policy reforms that will lead to private sector development in the sector will also support improvements in service accountability, transparency, and accessibility. More specifically, the Program will contribute to economic development, health, and education in India through expanded power supplies; and will develop clean energy by supporting selected investments in hydropower generation and associated transmission system expansion to facilitate sector sustainability and protect the environment. As Himachal Pradesh is 100% electrified, the local population will benefit from a more reliable power supply. Electricity from the proposed hydropower plants under the Investment Program will go directly to the local grid, helping to fulfill local demand for greater energy resources. The overall objective of expanding clean energy generation will contribute to state level economic development on several fronts. Finally, social services in Himachal Pradesh will improve as poor and vulnerable consumers (including hospitals, schools, and other social utilities) that are often hardest hit by inadequate power supply, load shedding, and poor power quality, will benefit directly from the Investment Program. B. Poverty Analysis Targeting Classification: General Intervention 1. Key Issues Himachal Pradesh is quite a rich state, compared to the rest of the country. Having obtained the status of “tribal” state, its population has benefited from investments and subsidies form the central Government. In addition, the state government has approved a series of pro-poor policies, including the abolition of tenancy, which resulted in a redistribution of land to the landless to fight exploitation of labor and increase the productivity of the land. Now, 100% of the Himachal Pradesh population owns land (with the exception of Nepali labor) and most of them have invested in the highly profitable apple orchards business. The local population will still benefit from the Project, as it will provide them with a more secure and reliable source of electricity. In addition, in its hydropower policy a, the government of Himachal Pradesh provided that 1.5% of the Program’s total cost would go back to the affected communities, which will decide (in a fully participatory way) how to use it for socioeconomic development activities. Contractors are expected to hire skilled and unskilled workers for a period of 10 years for civil works. There will also be jobs available beyond the construction phase throughout the projects’ life cycles. Nonetheless, as labor comes usually from the landless segment of the population, the number of people hired locally is expected to be limited. 2. Design Features No direct impact on poverty is envisaged to occur as result of the implementation of this Program. Nonetheless, it will have indirect impacts on both Himachal Pradesh and India as a whole.

66 Appendix 14

II. SOCIAL ANALYSIS AND STRATEGY

A. Findings of Social Analysis Project-affected communities are expected to be impacted both negatively (resettlement and environmental impacts) and positively (job opportunities and the opportunity to implement local socioeconomic development programs financed through the 1.5% allocated by the program authorities). In addition, health and education conditions and facilities are expected to improve in Himachal Pradesh as well as the rest of the country served by the northern grid, because of access to more reliable electricity.

B. Consultation and Participation

1. Provide a summary of the consultation and participation process during the project preparation. As an integral part of the safeguards planning, affected communities and affected persons were directly and fully involved in the project preparation and during the design. All stakeholders were informed and the stream of information will continue during the implementation of the Program. Consultations were held to ensure participation and minimization of the negative impacts. Moreover, the affected communities will be in charge of deciding how to spend the 1.5% of the project cost for the development of socioeconomic schemes to be implemented locally. 2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring?

Information sharing Consultation Collaborative decision making Empowerment 3. Was a C&P plan prepared? Yes No If a C&P plan was prepared, describe key features and resources provided to implement the plan (including budget, consultant input, etc.). If no, explain why. C&P was considered as a part of the more extensive resettlement planning exercise. Local communities and affected persons were consulted throughout the preparation process to minimize impacts, ensure social acceptance, and increase equitability. The process will continue during the implementation of the Program. Views and concerns of all stakeholders will be taken into consideration and addressed whenever feasible. Finally, local customs, religious practices, and traditional activities have been considered as a fully integrated part of the preparation process to avoid discrimination and/or disruption of activities, as minimization measures.

C. Gender and Development 1. Key Issues. No particular issue is expected to arise from implementation of the Program. Nonetheless, additional compensation will be awarded to female-headed households as they considered more vulnerable. 2. Key Actions. Measures included in the design to promote gender equality and women’s empowerment—access to and use of relevant services, resources, assets, or opportunities and participation in decision-making process:

Gender plan Other actions/measures No action/measure

Appendix 14 67

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS

Issue Significant/Limited/ No Impact

Strategy to Address Issue

Plan or Other Measures Included in Design

Involuntary Resettlement

In Tranche 1, one subproject (Sawra Kuddu) is expected to have significant impacts, as the total number of affected households will be 165, of which 14 are to be considered vulnerable. The second subproject (Kashang stage 1) will have limited impacts, as only 30 households will be adversely affected, as some of the land was acquired 3 years ago, before Asian Development Bank (ADB) involvement, in compliance with the local and national laws and policies. The land acquisition process has already started, and the Executing Agency (EA) has assured that compensation will be awarded according to ADB policy and standards as provided in the agreed resettlement framework and resettlement plans.

For the first subproject (Sawra Kuddu), a full resettlement plan was prepared. For the second subproject (Kashang stage 1), a short resettlement plan was prepared. Additional compensation will be provided to the vulnerable affected persons.

1 Full Plan 1 Short Plan Resettlement Framework No Action

Indigenous Peoples

Limited or no impact Himachal Pradesh is a

tribal state. No particular impact or discrimination is expected on indigenous peoples, minorities, etc. Additional compensation is foreseen for indigenous peoples where vulnerable.

Plan Other Actions Indigenous Peoples

Framework No Action

Labor Employment opportunities Labor retrenchment Core labor standards

Jobs opportunities will open for unskilled labor for a period of 10 years.

Specific assurances will be added for the EA to ensure the enforcement of core labor standards by the contractor on the work camps and sites.

Plan Other Action No Action

Affordability No particular issue is expected.

Action No Action

Other Risks and/or Vulnerabilities

HIV/AIDS Human trafficking Others (conflict,

political instability, etc),

The incoming labor might have negative impacts on the local communities. Project sites are remote and in scarcely populated areas, but risk should be acknowledged.

Plan Other Action No Action

IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? X Yes □ No

a Government of Himachal Pradesh. 2006. Hydro Power Policy 2006. Shimla.

68 Appendix 15

SUMMARY RESETTLEMENT PLAN

A. Overview and Project Description 1. Himachal Pradesh Clean Energy Development Investment Program (the Program) will be provided under a multitranche financing facility (MFF) lending approach over 5 years, which will facilitate clean power generation, transmission, distribution, and sector reforms in Himachal Pradesh with minimum adverse environmental and social impacts. The Program initially will support selected investments in hydropower generation and associated transmission system expansion to facilitate sector sustainability. It will include the following components; (i) Sawra Kuddu Hydroelectric Project, 111 megawatts (MW); (ii) Kashang Hydroelectric Plant, 195 MW (to be built in stages over two tranches); (iii) Sainj Hydroelectric Plant, 100 MW; (v) Shongtong Karcham Hydroelectric Plant, 402 MW; and (vi) the Capacity Development Program for Himachal Pradesh Power Corporation Limited (HPPCL) and other sector agencies. The hydropower development components will provide a total capacity of 745 MW with a combined generation of 3,045 gigawatt-hours (GWh)/year at 90% dependability. The capacity development program will provide support for development of the operating departments, e.g., technical, finance and accounting, environment and social, procurement, personnel, and for carrying out specific tasks such as physical investments and sector reforms and restructuring. The first tranche will cover construction of the Sawra Kuddu project, the civil works for the Kashang project, and the capacity development component.

2. The summary resettlement plans are prepared for first tranche subprojects—Sawra Kuddu and the civil works of Kashang. The Sawra Kuddu project is located in the district of Shimla and the Kashang subproject is in the district of Kinnaur. The impact on land acquisition and resettlement for the Kashang subproject is insignificant, so a short resettlement plan was prepared. The impact for Sawra Kuddu is significant, so a full resettlement plan was prepared. Both the resettlement plans are based on the final engineering design, according to the detailed project reports. Efforts have been made by the engineering team to minimize resettlement.

B. Impact on Land Acquisition and Resettlement

3. The total private land required for acquisition is 49.42 hectares (ha), out of which 45.75 ha is required for Sawra Kuddu and 3.67 ha for Kashang (stage 1). A census and socioeconomic survey was conducted in the subproject affected area to assess the impact. A total of 193 households will be affected. Kashang stage 1 will affect 30 households and Sawra Kuddu will impact 165 households. Only two residential structures will be affected in Sawra Kuddu; the Kashang subproject will not affect any structures. All households are titleholders. There will be no impact on community and cultural property. A total of 2,446 trees will be affected. In Sawra Kuddu, 48 sharecroppers and agricultural laborers will be affected. A total of 878 persons and 50 vulnerable households will be affected. Although recognized tribes and castes will be affected, they will not be considered indigenous peoples as defined within the Policy on Indigenous Peoples (1998) of the Asian Development Bank (ADB). Therefore, no indigenous peoples development plan (IPDP) is prepared for the subprojects. These tribes and castes have been considered vulnerable, and additional assistance has been provided for in the resettlement plan. There will be no negative impact on women; rather, women will benefit from the Program. A summary of land acquisition and resettlement impacts is in Table A15.1.

Appendix 15 69

Table A15.1: Summary of Impacts on Land Acquisition and Resettlement Quantity Summary

Impact No.

Type of Impact Kashang Stage 1

Sawra Kuddu

Total

1 Total area of land for acquisition (ha) 3.67 45.75 49.422 Total number of households affected 30 165 195

3 Total number of households losing agricultural land 30 163 193

4 Total number of residential structures affected 0 2 2

5 Total number of community property resources affected 0 0 0

6 Total number of vulnerable households 36 14 50

7 Total number of sharecroppers and/or agricultural laborer 0 48 48

8 Total number of trees 1196 1250 2446 9 Total number of titleholders 30 165 195 10 Total number of non-titleholders 0 0 0 11 Total number of affected persons 147 731 878

ha = hectare Source: Government of Himachal Pradesh. 4. For the Sawra Kuddu subproject, the Executing Agency (EA) has already started the land acquisition process. About 32 ha of land have already been acquired and compensation for the land has been disbursed to the affected persons. The assessment of land and identification of affected persons for the remaining 13.75 ha of land is in process—section 4 and other relevant sections of the Land Acquisition Act, 1894, have been initiated for this purpose. Compensation for the remaining land has been fixed by the EA through its designated land acquisition officer, and disbursement for the remaining land is due. The compensation is based on the market rate, which is at replacement value. C. Resettlement Policy, Legal Framework, and Entitlement Matrix 5. The policy framework and entitlements for the Program are based on national laws—the Land Acquisition Act, 1894 (amended in 1984), and the national rehabilitation and resettlement policy1—and ADB’s Involuntary Resettlement Policy (1995) and Policy on Indigenous Peoples. The Himachal Pradesh hydropower policy2 is also considered. The core involuntary resettlement principles for the Program to be followed for each subproject, including tranche 1 subprojects, are: (i) land acquisition and other involuntary resettlement impacts will be avoided or minimized, exploring all viable alternative subproject designs; (ii) where unavoidable, time-bound resettlement plans will be prepared and affected persons will be assisted in improving or at least regaining their pre-program standard of living; (iii) consultation with affected persons on compensation, disclosure of resettlement information to affected persons, and participation of affected persons in planning and implementing subprojects, will be ensured; (iv) vulnerable groups will be provided special assistance; (v) compensation will be paid to affected persons, including non-titled persons (e.g., informal dwellers and/or squatters, and encroachers), for acquired assets at replacement rates; (vi) compensation will be paid and resettlement 1 Government of India. 2007. The National Rehabilitation and Resettlement Policy of 2007. New Delhi. 2 Government of Himachal Pradesh. 2006. Hydro Power Policy 2006. Shimla.

70 Appendix 15

assistance will be provided prior to the contractor taking physical acquisition of the land and prior to the commencement of any construction activities; (vii) income restoration and rehabilitation will be provided; and (viii) grievance redress mechanisms will be established. An entitlement matrix has been prepared (Table A15.2) based on the above principles.

Table A15.2: Entitlement Matrix

No. Type of Loss Application

Definition of Entitled Person

Compensation Policy Responsible Agency

Legal titleholders, affected persons with customary land rights, affected persons with permit from local authority

• Compensation at replacement value or land-for-land where feasible

• Land-for-land for landless families with an additional lump sum resettlement grant; fees, taxes, stamp duty, and other charges related to replacement land and assets to be borne by the EA

• Transitional allowance based on 3 months minimum wage rates

• Shifting assistance for households

• Notice to harvest standing seasonal crops; if notice cannot be given, compensation for share of crops will be provided

• Additional compensation for vulnerable households

The EA will (i) determine the replacement value through its land acquisition officer, (ii) ensure provision of notice, (iii) verify the extent of impacts through a 100% survey of affected persons, (iv) determine assistance, and (v) identify vulnerable households.

Tenants and leaseholders (whether or not they have written tenancy or lease documents)

• Compensation for rental deposit or unexpired lease

• Transitional allowance based on 3 months minimum wage rates

• Shifting assistance for households

• Notice to harvest standing seasonal crops; if notice cannot be given, compensation for share of crops will be provided

• Additional compensation for vulnerable households

The EA will (i) confirm land rental, (ii) ensure that tenants and leaseholders receive reimbursement for land rental deposit or unexpired lease, and (ii) ensure provision of notice.

1 Loss of private land

Agricultural land, homestead land, or vacant plot

Sharecroppers for agricultural land

• Notice to harvest standing seasonal crops; if notice cannot be given, compensation for share of crops will be provided

• Additional compensation for vulnerable households

The EA will ensure provision of notice.

2

Loss of residential structure

Residential structures and other assets

Legal titleholders

• Replacement value of the structure and other assets (or part of the structure and other assets, if remainder is viable)

• Fees, taxes, and other charges related to replacement structure

• Shifting assistance at Rs10,000 per household

• Right to salvage materials from structure and other assets with

The EA will (i) verify the replacement value through its land acquisition officer and appropriate department or valuation committee, (ii) verify the extent of impacts through a 100% survey of affected households,

Appendix 15 71

No. Type of Loss Application

Definition of Entitled Person

Compensation Policy Responsible Agency

no deductions from replacement value

• Additional compensation for vulnerable households

(iii) determine assistance, and (iv) verify and identify vulnerable households.

3 Loss of livelihood

Livelihood Legal titleholder, tenant, leaseholder, non-titled employee of commercial structure Farmer, agricultural worker

• Assistance for lost income based on 3 months minimum wage rates

• Additional compensation for vulnerable households

• Consideration for project employment

The EA will (i) verify the extent of impacts through a 100% survey of affected households, (ii) determine assistance, and (iii) verify and identify vulnerable households.

4 Loss of trees and crops

Standing trees and crops

Legal titleholder, tenant, leaseholder, sharecropper, non-titled affected person

• Notice to harvest standing seasonal crops

• If notice cannot be provided, compensation for standing crop (or share of crop for sharecroppers) at market value

• Compensation for trees based on timber value at market price, and compensation for perennial crops and fruit trees at annual net product market value multiplied by remaining productive years; to be determined in consultation with the Forest Department for timber trees and the Horticulture Department for other trees and/or crops

The EA will (i) ensure provision of notice; (ii) undertake valuation of standing crops, perennial crops, and trees through its land acquisition officer and appropriate department or valuation committee; and (iii) finalize compensation rates in consultation with affected persons.

5 Impacts on vulnerable affected persons

All impacts Vulnerable affected persons

• In case of total loss of land, a total dependency on agriculture, and a total loss of structures, land-for-land and structure-for-structure compensation if requested by the affected person

• Additional one-time financial assistance equivalent to 500 days minimum agricultural wages

• Vulnerable households will be given priority in project construction employment

The EA will (i) verify the extent of impacts through a 100% survey of affected households, (ii) determine assistance, and (iii) verify and identify vulnerable households.

6 Overall loss to the project impact area

Infrastructure, other social and cultural assets

Local area committee

• 1.5% of the total project cost to be spent for the development of local area (in accordance with Himachal Pradesh’s hydropower policy)a

The EA, PMU, HPPCL, Local Area Development Council, appropriate government entity.

7 Any other loss not identified

— — • Unanticipated involuntary impacts will be documented and mitigated, based on the principles of the resettlement framework

The EA will (i) ascertain the nature and extent of such loss, and (ii) finalize the entitlements in line

72 Appendix 15

No. Type of Loss Application

Definition of Entitled Person

Compensation Policy Responsible Agency

with the resettlement framework.

EA = executing agency, HPPCL = Himachal Pradesh Power Corporation Limited, No. = number, PMU = project management unit. a Government of Himachal Pradesh. 2006. Hydro Power Policy 2006. Shimla. Source: Himachal Pradesh Power Corporation Limited. D. Information Dissemination, Consultation, Disclosure, and Grievance Redress 6. During the preparatory stages, consultations were carried out with various government officials and local communities for both subprojects as part of the social and resettlement study to gather their views on the proposed Program. Different consultative techniques were used with stakeholders, including in-depth interviews, public meetings, and group discussions. To understand the socioeconomic profile of the affected persons, questionnaires were designed and information was collected from the affected persons on a one-to-one basis. Focus group discussions are also in progress in the project influence areas. For the Kashang stage 1 subproject, focus group discussions were conducted at Pangi village and Reckong Peo in November 2007; 30 people participated in the consultation and shared their views. Census surveys of all 30 affected households were conducted on a one-to-one basis. For the Sawra Kuddu subproject, around 100 affected households have been consulted as part of the census survey. Additionally, 98 households were surveyed as part of a sample socioeconomic survey in November and December 2007 in the subproject-affected zone. Focus group discussions were conducted at rural and urban areas of the Sawra Kuddu subproject area, such as Mandhol village (6 December 2007), Sari village (28 November 2007), Jhalta Chowri (3 December 2007), Hatkoti town (29 November 2007), Bharot village (30 November 2007), Mandal (1 December 2007), and Mungra village (2 December 2007). About 85 participants representing various groups participated in the consultations. Consultations have also been carried out with special emphasis on the vulnerable groups. Most of the people are aware of the proposed Program and expressed their cooperation for smooth implementation of the subproject. The consultation process will be continued during the entire project cycle. 7. Draft resettlement plans will be made available in relevant local government departments in Kinnaur district for the Kashang stage 1 subproject and in Shimla district for the Sawra Kuddu subproject. They will also be made available in project implementation unit (PIU) and project management unit (PMU) offices. Resettlement plans will be made available in the local language. Finalized resettlement plans will be disclosed on the ADB website, and information dissemination and consultation will continue throughout implementation of the Investment Program. 8. An efficient grievance redress mechanism will be developed to assist affected persons in resolving queries and complaints. Grievances will first be brought to the attention of the PIU. Grievances not redressed by PIU staff (field level) will be brought to the grievance redress committee, which will have representatives from affected persons, PMU, PIU, environment and social management unit, field level staff, district magistrate and/or commissioner, local administration, revenue authority, and local community. The main responsibilities of the committee are to (i) provide support to affected persons on problems arising from land and/or property acquisition; (ii) record affected persons’ grievances, categorize and prioritize grievances, and resolve them; (iii) inform the PMU immediately of serious cases; and (iv) report to affected persons on developments regarding their grievances and decisions of the committee

Appendix 15 73

and PMU. Other than disputes relating to ownership rights under the court of law, the committee will review grievances involving all resettlement benefits, compensation, relocation, replacement cost, and other assistance. It will meet every month (if grievances are brought to the committee), determine the merit of each grievance, and resolve grievances within a month of receiving the complaint—failing which, the grievance will be referred to the appropriate court of law for redress. Records will be kept of all grievances received, including contact details of the complainant, date the complaint was received, nature of the grievance, agreed corrective actions, date of such action, and final outcome. The committees will continue to function during the life of the Program, including the defects liability period. E. Institutional Arrangements 9. The MPP and Power Department, government of Himachal Pradesh is the executing agency (EA) of the proposed MFF, and HPPCL is the implementing agency (IA). The IA will have a specific PMU and there will be different PIUs. Each of the component hydropower projects will be implemented independently through the PIUs. Keeping in view the capacity of HPPCL, it is proposed that an environment and social management unit be set up within the PMU, along with other engineering units, to address environmental and social issues of the Program. A nongovernment organization (NGO) will oversee implementation of the resettlement plan, along with implementation of resettlement and rehabilitation assistance. The roles and responsibilities of various agencies involved in resettlement activities are summarized in Table A15.3.

74 Appendix 15

Table A15.3: Roles and Responsibilities of Agencies in Resettlement Plan

Implementation Activity Responsible Agency Subproject Initiation Stage Setting up of ESMU and staff HPPCL Finalization of sites for subprojects HPPCL, PMU, PIU Disclosure of proposed land acquisition and subproject details by issuing public notice

HPPCL, PMU, ESMU

Meetings at community and/or household level with affected persons

HPPCL, ESMU, PMU, PIU

Formation of valuation committee HPPCL, PMU, PIU, Appropriate Government

Resettlement Plan Preparation and Updating Stage Conducting census of all affected persons PMU, PIU, ESMU, Land Acquisition

Officer (LAO) Conducting focus group discussions, meetings and workshops PMU, PIU, ESMU Computation of replacement values of land and/or properties proposed for acquisition and for associated assets

PMU, PIU, ESMU

Categorization of affected persons for finalizing entitlements PMU, PIU, ESMU, LAO Formulating compensation and rehabilitation measures PMU, PIU, ESMU, LAO Conducting discussions, meetings and workshops with affected persons and other stakeholders

PMU, PIU, ESMU

Fixing compensation for land and/or property with titleholders VC, PMU, PIU, ESMU, AO Finalizing entitlements and rehabilitation packages PMU, PIU, ESMU, LAO Disclosure of final entitlements and rehabilitation packages PMU, PIU, ESMU Approval of resettlement plan EA, PMU, ESMU, ADB Sale deed execution and payment EA, PMU, ESMU, LAO, Appropriate

Government Taking possession of land EA, HPPCL, PMU Resettlement Plan Implementation Stage Updating of various categories of affected persons PMU, PIU, ESMU, LAO, NGO Implementation of proposed rehabilitation measures PMU, PIU, ESMU, LAO, NGO Consultations with affected persons during rehabilitation activities

PMU, PIU, ESMU, NGO

Grievances redress PMU, PIU, ESMU, GRC, NGO Internal monitoring PMU, PIU, ESMU, NGO External monitoring External Agency EA = executing agency; ESMU = environmental and social management unit; GRC = grievance redress committee; HPPCL = Himachal Pradesh Power Corporation Ltd.; LAO = land acquisition officer; NGO = non government organization; PIU = project implementation unit; PMU = project management unit; VC = village council. Source: Himachal Pradesh Power Corporation Limited. F. Resettlement Budget 10. The resettlement cost estimate for the tranche 1 subprojects include eligible compensation, resettlement assistance, and support cost for implementation of the resettlement plan. These are part of the overall project cost.

11. The major features of this resettlement and rehabilitation cost are (i) compensation for land at replacement value; (ii) compensation for structures (residential) and other immovable assets at replacement cost; (iii) compensation for crops and trees; (iv) assistance instead of loss of business, wage income, employment or livelihood; (v) assistance for shifting the structures; (vi) assistance for documentation and administrative fees; and (vii) assistance for vulnerable

Appendix 15 75

groups’ livelihood restoration and (viii) other costs for implementation of the resettlement plan. Based on the above, it is estimated that the total resettlement and rehabilitation cost is Rs675.42 million, out of which Rs67.25 million is for Kashang stage 1 subproject and Rs608.17 million for the Sawra Kuddu subproject. All land acquisition, resettlement, and compensation will be completed before the start of civil works and adequate budgetary provision has already been initiated by the EA. G. Implementation Schedule

12. The implementation schedule for resettlement plans are structured according to the overall subproject implementation. All activities related to land acquisition and resettlement must be planned to ensure that compensation is paid prior to displacement and commencement of civil works. Public consultation, international monitoring, and grievance redress will be undertaken intermittently throughout each subproject’s duration. However, the schedule is subject to modification depending on the progress of project activities. As part of advance actions, the EA will establish the PMU, PIU, environment and social management unit, and grievance redress committee; and appoint an NGO for resettlement implementation. The proposed subproject resettlement and rehabilitation activities are divided into three broad categories based on the work stages and implementation process: (i) project preparation phase, (ii) resettlement plan implementation phase, and (iii) monitoring and evaluation phase. The implementation schedules for tranche 1 are shown in Tables A15.4 and A15.5 below.

76 Appendix 15

Table A15.4: Implementation Schedule—Sawra Kuddu

2007 2008 2009 2010 2011 Subproject Resettlement and Rehabilitation Component/Activities

1 2 3 4 5 6 1 2 3 4 5 6 1 2 1 2 1 2 A. Project Preparation Phase (Pre Implementation) Identification of subproject and notification Community consultation Identification of land and census survey Submission of resettlement plan for ADB approval Disclosure of resettlement plan Establishment of PMU and PIU Establishment of ESMU Establishment of GRC B. Resettlement Plan Implementation Issue compensation to affected persons for land acquisition Payment of all eligible assistance Initiation of rehabilitation measures Schedule for civil works C. Monitoring and Evaluation Internal monitoring External monitoring ADB = Asian Development Bank; ESMU = environment and social management unit; GRC = grievance redress committee; PIU = project implementation unit; PMU = project management unit Source: Himachal Pradesh Power Corporation Limited.

Appendix 15 77

Table A15.5: Implementation Schedule—Kashang

2007 2008 2009 2010 2011 Subproject Resettlement and Rehabilitation Component/Activities

1 2 3 4 5 6 1 2 3 4 5 6 1 2 1 2 1 2 A. Project Preparation Phase (pre-implementation) Identification of subproject and notification

Community consultation   

Identification of land and census survey Submission of resettlement plan for ADB approval Disclosure of resettlement plan Establishment of PMU and PIU Establishment of ESMU Establishment of GRC B. Resettlement Plan Implementation Issue compensation to affected persons

Payment of all eligible assistance    Initiation of rehabilitation measures Schedule for civil works          C. Monitoring and Evaluation

Internal monitoring by PMU and PIU   

ADB = Asian Development Bank; ESMU = environment and social management unit; GRC = grievance redress committee; PIU = project implementation unit; PMU = project management unit Source: Himachal Pradesh Power Corporation Limited. H. Monitoring and Evaluation 13. Resettlement plan implementation will be closely monitored to provide the PMU with an effective basis for assessing resettlement progress and identifying potential difficulties and problems. Internal monitoring will be undertaken by the PIU, with assistance from the PMU environment and social management unit. Monthly progress reports will be prepared and submitted to the PMU. The EA will appoint an independent agency to undertake external monitoring. The independent agency will monitor subprojects twice a year and submit reports directly to the EA. The EA will submit all external monitoring reports to ADB for review. Broadly, the monitoring and evaluation system will involve (i) administrative monitoring including but not limited to daily planning, implementation, feedback and troubleshooting, individual affected person file maintenance, and progress reporting; (ii) socioeconomic monitoring including but not limited to case studies, using baseline information for comparing affected person socioeconomic conditions, evacuation, demolition, salvaging materials, morbidity and mortality, communal harmony, dates for consultations, number of grievances, and resolutions; and (iii) impact evaluation monitoring including but not limited to income standards restored or improved.