India - Fourth Damodar Valley Corporation Expansion Project

R E S T R I C T E D C IRCULATING COPY e p o r t N o. P (IDA) 19 TO BE RETUR?ITED TO ARCHIVFS DIVION This report was prepared for use within the Association. It may not be pub- lished nor may it be quoted as representing the Association's views. The Association accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO INDIA FOR THE DAMODAR VALLEY CORPORATION February 6, 1962  INTERNATIO:iAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE GOVERNMENT OF INDIA FOR A POIXIER PROJECT OF THE DAMODAR VALLEY CORPORATION lo I submit herewith the following report and recommendations on a proposed development credit to the Government of India in an amount in various currencies equivalent to $18.5 million to assist in financing the expansion of Damodar Valley Corporation's (DVC) power facilities. PART I - HISTORICAL BACKGROUND 2. Since its creation in 1948, DVC, in addition to irrigation and flood control works, has constructed various hydro and thermal power plants with an installed capacity of 524 WT. The financing of this construction has been assisted by three Bank loans totalling $63 million ($18.5 million in 195O, $19.5 million in 1953, and $25 million in 19<8). Of this total $13.8 million was cancelled, including $9 rmilion from the second Loan, because of India's desire to use its own resources. Indiats Third Five-Year Plan envisages an increase in DVC's capacity from the present 524 MI to 1,084 W., and the project is part of tlhs planned expansion. The project was examined by a mission in July 1961 and negotiations with representatives of the Government of India and DVC were cormpleted on January 4., 1962. 3. The proposed Credit would be the Associationts sixth Credit to India, bringing the total to $107 million. Credits previously made have been as follows: Amount Credit No. Purpose ($ million) 3 IN Development of National Highways 60.0 8 IN Tubewell Irrigation 6.0 13 IN Shetrunji Irrigation 4.5 14 IN Salandi Irrigation 8.0 15 IN Punjab Drainage and Flood Protection 10.0 The Bank has now made twenty-nine loans for projects in India. Their status as of January 31, 1962 is as follows: ($ million) Total loans, net of cancellations 797.5 of which has been repaid 83.7 Total now outstanding 713,8 Amount sold 6L4..7 of which has been repaid 40=8 23.9 Net Amount held by the Bank 689.9 1/ Including 4$9.5 million not yet effective and $19001 million not yet disbursed.  -2- PART II - DESCRIPTION OF THE PROPOSED CREDIT The main features of the proposed Credit are as follows: Borrower: India, acting by its President. Amount: The equivalent in various currencies of $18.5 million. Pupose: To finance the foreign exchange cost of adding a 14O MJ unit at DVC's existing Durgapur thermal station and constructing new tr&nsmission facilities. Term and Amortization: The te-n of the credit would be 50 years with a grace period of 10 years. From August 1, 1972, one half of one per cent of the principal amount would be repayable semi-annually for ten years, and one and one half per cent semi-arnually commencing August 1, 1982 and ending February 1, 2012. Service Charge: 3/4 of 1 per cent per annum on the principal armount of the credit disbursed and outstanding. Paymnent Dates: February 1 and August 1. Project Agreement: The Association would enter into a Project Agreement with DVC which will construct and operate the project. PART III - LEGAL INSTRUYIENTS AND LEGAL AUTHORITY 5. Attach.ed are a draft Development Credit Agreement between India and the Association (No, 1) and a draft Project Agreement between the Association and DVC (No. 2). The provisions of these two draft documents generally follow the same pattern as the Bank's Loan Agreement and Project Agreemiient for the Third DVC Project, 203 IN of July 23, 1958, except for the provisions mentioned in the succeeding paragraph. 6, Section 4.01(c) of the Development Credit Agreement stipulates that the Borrower shall cause DVC to employ a qualified firm of chartered accountants, and Section 6.01(b) makes their appointment a. condition of effectiveness. Simailarly, in Section 2.01(e) of the Project Agreement, DVC undertakIRes to employ a suitably qualified firm of chartered accountants, their selection and the nature and scope of their responsibilities to be agreed with the Association. 7. In Section 2.07 of the Project Agreement, DVC undertakes to set and maintain power rates which will, after provision for operating expenses,  including adequate maintenance, straight-line depreciation and taxes, achieve a reasonable return on DVCts net fixed power assets in operation. Pursuant to this Section DVC advises the Association in a letter (No. 3) that on the establishment of accounting procedures on a commercial basis, DVC will take steps to achieve a rate of return of not less than 7 per cent. 8. The recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association is attached (No. 4). PART 0I - APPRAISAL OF THE PROPOSED CREDIT The Project 9. A detailed appraisal of the Project (T.O.-310a) is attached (No. 5). 10. During the First and Second Five-Year Plans India's installed electric pmtier capacity increased from 2,300 MP to 5,700 WM, but even this expansion was not enough to keep pace with the growth in demand, and power has had to be rationed. The Third Plan seeks to add another 7,700 101 of capacity, one- fifth of which would be in the States of West Bengal and Bihar. 11. Outside Calcutta nearly all the power for the industrialized region in the States of Bihar and West Bengal is provided 'by three agencies: DVC, the BiharState Electricity Board and the West Bengal State Electricity Board. DVC, as the leading power producer in the region, is selling bulk power not only to the two State Boards but also to large consumers such as the Calcutta Electric Supply Company and the Tata Iron and Steel Company, both of which are outside DVC's operational area proper. In the face of growing demand outside that area, however, the two State Boards have in recent years embarked on programs to expand their owm generating capacity. After conclusion of a power survey in 1959, the Central Government and the State Governments of Bihar and West Bengal decided that from then on DVC would supply power outside its operational area only to the extent already contracted for but that any increase in demand outside this operational area would be looked after by the two State Boards. 12. Even with this curtailment of its potential market, DVC will be under some strain to supply the needs in its operational area, since the Damodar Valley has been developing into one of the most heavily industrialized regions in India. The present project would add one 140 MAT unit to the Durgapur plant, but this is only a small part of the additions DVC proposes to make to its facilities in the Third Plan period. DVC is also constructing two units of 140 lL.O each at Chandrapura, with the help of loans from the U.S. Government, and plans the construction of still another unit of 140 MW either at Chandrapura or at Durgepur. This expansion, which will more than double DVCts installed capacity will, however, only allow DVC to catch up with demand at the end of 1965. Thereafter, if rationing is to be avoided, DVC will have to .bring into operation an additional 70 SE every year to take care of the growing needs of the Fourth Plan period.  13, It is the declared policy of the Central Government to charge such rates as will place the burden of financing the expansion of power on the consumer rather than on the local or central government. in recent years DVC?s financial position has deteriorated due to delays in commissioning new capacity and this criterion has not been met. In these circumstances we have agreed with the Government and DVC that DVC will adjust its rates not later than the end of June 1962 so as to obtain a return of at least 7 per cent on its net power assets in operation. To facilitate this step DVC will, wi^th the assistance of chartered accountants, set up its electricity accounts on a commercial basis. 14. Under the Damodar Valley Corporation Act, the Participating Governments (i.e. the Centre, lWest Bengal and Bihar) provide the capital to DVC for its construction program. This is being done in the form of non-repayable advances carrying interest at a rate fixed by the Central Government from time to time. As to power, this rate has been 41 per cent per annum in recent years and it is expected that the proposed IDA credit will be made available to DVC on these terms. 15. The project will be executed by DVC, which will employ engineering consultants. Cost estimates are reasonable and the contingencies allowed are likely to cover any foreseeable cost increases that may occur during the construction period. All major items of machinery and equiprment will be purchased on the basis of iriternational competitive bidding. Economic Situation 16. There has been little change in the econromic situation since my recent reports to you on India. The fifth meeting of the Indian consortium was held in Washington on January 29 and 30 to review the action taken by members toward the provision of the $1,295 million indicated in June 1961 for the first year of the Third Plan. It was noted that, while some delays had been experienced in the early part of the year in the conclusion of aid agreements, the total allocation of funds for agreed purposes during the year would probably come close to the figure indicated in June. However, utilization of the aid indicated at the June meeting has been much slower than expected at that time and the Government of India is considering what can be done to speed up disbursements0 It was recognized at the recent consortium meeting that further external assistance would be required in 1962/63, beyond that already committed, if the momentum of expansion was to be maintained, and members agreed to meet again in May 1962. There was general agreement at the meeting on the desirability of widening the membership of the consortium. PART V - COMPLIANCE UITH ARTICLES OF AGREMRENT 17. I am satisfied that the proposed development credit willl comply with the Articles of Agreement of the Association.  -5- PART VI - RECOMMENDATIONS 18. I recommend that the Association make available a development credit to India in an amount in various currencies equivalent to $18.5 million for a total term of 50 years with service charge of 3/4 of one per cent per annum and on such other texms as are specified in the draft Development Credit Agreement and draft Project Agreement and that the Executive Directors adopt a resolution to that effect in the form attached (No. 6). Eugene R. Black President February 6, 1962 Washington, D.C.