India - Second Powergrid System Development Project

Report No. PIC4104 Project Name India-Second Powergrid System Development Project (@ Region South Asia Sector Electric Power & Other Energy Product ID INPA35173 Borrower Power Grid Corporation of India (POWERGRID) Implementing Agency POWERGRID Hemkunt Chambers, 89 Nehru Place, New Delhi, India Contact: Mr. S. Majumdar, Addl.General Manager, Corporate Planning Fax: (91-11) 647-2044 Date this PID prepared May 23, 1997 Projected Appraisal Date November 1997 Projected Board Date April 14, 1998 1. Country/Sector Background. India"s power system has grown steadily and its generation capacity now exceeds 80,000 MW. However, plant availability and efficiency are generally low and there are high system losses throughout India's transmission and distribution networks. The financial performance of the sector as a whole is also unsatisfactory, with low returns and no contribution to investment from internal resources. Commercial losses of the State Electricity Boards (SEBs) furthermore, are rising. They have reached the equivalent of about US$3 billion, or about 1 percent of India's GDP. Potential demand for electricity continues to outstrip available supply. Frequent power interruptions, uneconomic (out of merit order) plant dispatch and wide variations in system frequency are common features in power system operations. Current shortages are estimated at about 10t of energy and 20t of peak capacity and are expected to grow in the years ahead due to insufficient investments in the first half of the 1990s. 2. In India the states" budgetary allocations are set by an automatic allocation formula, making it difficult for the Government of India to condition central assistance to the states. Within this overall budgetary and central assistance framework, the Government uses its own agencies and the private sector as agents of reform to promote operational and financial improvements in the SEBs. The investment and commercial policies of POWERGRID and NTPC (the National Thermal Power Corporation, India's main generating utility) allow them to shut off or restrict power and defer future investment if their clients (mostly SEBs) are in default of their bulk supply agreements. The Power Finance Corporation (PFC) provides resources only to those state utilities that have committed themselves to improve their performance under time-bound Operational and Financial Action Plans aimed at improving the utilities' resource mobilization, operational efficiency, and commercialization. The Government has opened the sector to private  investors, but has refused to guarantee their projects (apart from selected initial "fast-track" generation projects) thus adding pressure on the states to make their utilities viable in order to be able to attract private investment. The Government supports those states which are willing to examine the issues and reform options in their power sectors under what has been entitled a state power sector restructuring program. The Bank supports this strategy in its operations (paras. 14-16). 3. India's power transmission and system operations are going through an extensive restructuring program with active Bank support. POWERGRID is being developed to build a national power grid and improve the efficiency of system operations, facilitate private generation and promote competition among generators (to supply viable clients) and sector reform among clients (to secure additional power and investment). After initial difficulties, POWERGRID"s institutional growth has been remarkable and its role in India's power sector is now widely accepted and supported. POWERGRID has also been able to attract funding to support its ambitious investment program to build a national power grid and develop modern coordination and control systems, breaking past patterns of chronic under-investment in transmission and system operations. The Bank has been closely involved in POWERGRID"s development from the beginning of its operations and currently provides support under two major loans, POWERGRID System Development Project (Ln. 3577-IN) and the Northern Region Transmission Project (Ln. 3237-IN). The proposed project would extend further Bank support to India's reform program for power transmission and system operations and the institutional development of POWERGRID as an agent of reform in the sector. 4. Project Objectives are to: (a) assist the Government of India in restructuring the power transmission sub-sector, improve coordination in power system operations and promote inter-regional and interstate power trading through regulatory, tariff and institutional reforms; (b) support POWERGRID"s institutional development and promote satisfactory financial and commercial performance and the implementation of POWERGRID"s investment and commercial policy; and (c) assist POWERGRID in the development of modern system coordination and control facilities and reinforcement of its transmission system towards a national grid by financing selected components of POWERGRID"s investment program. 5. Project Description. The project would support the FY98-2003 time-slice of POWERGRID's investment program and is expected to help implement: (a) coordination and control systems for the Eastern and Western regions; (b) inter-regional transmission links between Eastern and Western and Eastern and Northern regions; (c) regional transmission system reinforcement programs (integrated programs for loss reduction, reliability and regulation of supply) and conventional transmission projects; and (d) technical assistance for institutional development. POWERGRID's possible joint ventures with private partners for the implementation of transmission projects could also be supported. - 2-  6. Project Cost and Financing. The overall investments requirements of POWERGRID in the FY98-2003 period are estimated at about US$3 billion. POWERGRID would generate from its operations about US$700 million. About US$1.0 billion has already been committed by the Bank (under Loans 3577-IN and 3237-IN), ADB, EIB, ODA and OECF to ongoing projects. The proposed loan would provide US$400 million. The balance is to be from local and external sources including commercial borrowings from the local and international markets, and from the Export-Import-Bank of Japan and POWERGRID's existing financiers. 7. Project Implementation. POWERGRID would implement the project, with the assistance of consultants for the coordination and control systems. Installation and erection works would be carried out by local and foreign contractors engaged through international competitive bidding. 8. Project Sustainability. POWERGRID has demonstrated its capability to implement and operate major transmission projects. The sustainability of POWERGRID, including the facilities to be developed under the proposed project, is threatened primarily by non-payment of its service charges by the client SEBs. POWERGRID has since 1994 applied its new investment and commercial policies and has brought its accounts receivable under control. Sustained efforts will be required - with continued support by the Government - in bill collection and when necessary the application of the investment and commercial policies. The achievement of POWERGRID's corporate mission to improve the efficiency of power system operations will also require structural improvements in bulk power tariffs as agreed under an action plan prepared under Ln. 3577-IN and currently under implementation. 9. Environmental and Social Aspects. Overall, the environmental impact of POWERGRID"s operations is expected to be positive as its focus is to improve the efficiency of power transmission and power system operations. The investment components to be financed under the proposed project are not expected to have significant adverse impacts on the environment. The Bank has nevertheless assigned an "A" rating to the project, reflecting the large size of POWERGRID"s investment program and the scale of current and proposed Bank investment in POWERGRID. Large-scale resettlement is not expected to be required and no major social issues are envisaged. A sectoral environmental and social assessment is underway and its final report, entitled "POWERGRID's Environmental and Social Policy and Procedures", will be submitted to the Public Information Center prior to appraisal. 10. Project Benefits. Project investments will help POWERGRID improve the efficiency of power transmission and system operations and reinforce its transmission system. Improved coordination and power transmission and trading within and across regions will help reduce generation costs, system losses and unserved energy. The project supports POWERGRID"s institutional development, facilitates private investment in generation and promotes competition among generators and sector reform among their clients. - 3 -  11. Project Risks. The project does not pose any particular technical, operational or institutional risks, given POWERGRID"s capabilities and the use of proven technologies and implementation practices. The main risks are commercial and financial and relate to the timeliness of the Government's tariff notifications and POWERGRID"s ability to collect its service charges. Persistent collection shortfalls would limit self-financing and threaten project implementation. They would also make raising new financing increasingly difficult and thereby threaten the implementation of POWERGRID"s entire investment program and its sustainability. POWERGRID has demonstrated its ability to collect, but the Bank"s current monthly monitoring will continue - and remedial actions would be considered if necessary (such actions were successfully applied in early 1994 to help POWERGRID get its bill collection under control). 12. Program Objective Categories are economic management (public enterprise reform), environmentally sustainable development and private sector development. 13. Poverty Category. Not applicable. 14. Lessons from Sector Work and Previous Bank/IDA operations: The success of Bank operations in the Indian power sector has been uneven, reflecting fundamental sectoral weaknesses. Operations with central sector and private utilities have been generally successful. This includes transmission projects earlier implemented by NTPC and subsequently transferred to POWERGRID in connection with the ongoing restructuring of transmission and system operations. POWERGRID's performance in the implementation of Ln. 3577-IN and Ln. 3237-IN has been rated satisfactory since 1994. 15. Bank power sector investment operations in India with several states and state electricity boards in the 1980s, helped strengthen their power systems. They were, however, accompanied by limited financial and institutional improvements, and therefore provided mainly temporary relief rather than sustainable solutions to their power problems. The revitalization of institutionally and financially weak SEBs did not turn out to be feasible. Projects in such states failed to meet expectations beyond the physical construction of facilities and the Bank was forced to take such strong measures as suspending disbursement and subsequently canceling loans. By the mid-1990s, politically-inspired tariffs and the lack of autonomy from state governments have weakened most state power utilities to the point of operational and financial crisis. It has become painfully clear that a sustainable solution to the sector"s problems will have to focus on SEBs and cannot resolve the power crisis through central and private sector generation capacity additions alone. 16. The Bank"s current power lending is focused on: (a) promoting domestic and foreign private investments; (b) supporting the Government's agents of reform, POWERGRID, NTPC and PFC; and (c) supporting the central government's state power sector restructuring program by assisting states which are implementing - 4 -  credible plans to improve the performance and finances of the state power sector. The Orissa Power Sector Restructuring Project, for which Ln. 4014-IN was approved in May 1996, is the first of a planned series of Bank loans to support the program. Dialogue on sector reforms and preparatory work on restructuring projects is underway in several other states. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending May 30, 1997. - 5 -