Documont of The World Bank FOR OMCIAL USE ONLY Repw No. P-4062-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$250 MILLION TO INDIA FOR THE RIHAND POWER TRANSMISSION PROJECT May 7, 1985 This doaeM hs a restrickd distinlhuim md *ay be used by reipiens mly in dte perfornmanc of dhir officd dutes s lbcotnts any no othrwise be disosed witbout Wodd Bank authoioatibm. CURRENCY EOUIVALENTS (As of April 29, 1985) US41.00 - Rs12.454 Rs 1.00 - US40.0803 Rs 1 million - US$80,300 . The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as othervise noted, made at the rate of US$1 to Rs 12.0. FISCAL YEAR April 1 - March 31 Abbreviaticns and Acronyms AC - Alternating Current CE& - Central Electricity Authority DC - Direct Current GOI - Government of India GWh - Gigawatt-hour HQI - Hydro Quebec International HVDC - High-voltage direct current ICB - International Competitive Bidding LCB - Local Competitive Bidding LREC - Long-Run Marginal Cost MW - Megawatt NEPC - National Hydroelectric Power Corporation Limited NPP - National Power Plan NTPC - National Thermal Power Corporation Limited REB - Regional Electricity Board REC - Rural Electrification Corporation SEB - State Electricity Board TOE - Tons of oil equivalent FOR OMCIAL USE ONLY INDIA RIHAND POWER TRANSMISSION PROJECT QAN AND PROJECT SUMMARY Borrover: India, acting by its President. Beneficiarv: National Thermal Power Corporation (NTPC) Amount: USS250 million. Terms: Repayment over 20 years, including five years' grace, at the applicable rate of interest. Onlendint Terms: From the Government of India (GOI) to NTPC, with repayment over 20 years, including five years' grace, at an interest rate of not less than 12.5Z per annum. GOI will bear the foreign exchange and interest rate risks. Project Description: The project's main objective is to help meet the demand for electricity in the Northern Region of India by providing transmission linkage between the thermal power plants at Singrauli-Rihand in the State of Uttar Pradesh and the main load centers in the Northern Region, and to ensure the evacuation of power from these plants at least cost to the economy. The project comprises the installation of about 910 km of 500-kV direct current (DC) power transmission line between Rihand and Delhi, and the associated converting stations, together with about 1,450 km of 400-kV alternating current (AC) line connecting Singrauli-Rihand with the main load centers at Kanpur, Delhi, Panipat, and Jaipur and related substations in the Northern Region. The project will introduce long-distance, high-voltage, direct current (HVDC) power transmission technology in India. There are no risks other than those * normally associated with this type of project. NTPC will be assisted by consultants for the implementation of the DC component. NTPC has experience vith transmission line installation so risk of slippage will be minimal. Most of the major equipment components, with the exception of the converting stations, are manufactured in India, and there is adequate understanding of, and experience with, their installation. Ibis document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -ii- Estimated Cost: Jj (USS millions) Item Local Foreizn Total 400 kV AC lines 90.9 34.0 124.9 400 kV substations 81.8 11.7 93.5 HVDC line 55.2 25.1 80.3 HVDC terminals 65.4 122.1 187.5 Consultancy and Technical Assistance - 4.6 4.6 Engineering and Administration 32.5 - 32.5 Base Cost 325.8 197.5 523.3 Physical Contingencies 16.9 9.6 26.5 Price Contingencies 60.2 55.9 116.1 Total Project Cost 402.9 263.0 665.9 Interest during Construction Bank - 18.8 18.8 Other 8.3 - 8.3 Total Financing Requirements 411.2 281.8 693.0 Financing Plan: (USS millions) Local Foreian Total I-RD 122.0 128.0 250.0 Cofinanciers - 135.0 135.0 GOI and MTPC 289.2 18.8 308.0 Total 411.2 281.8 693.0 O/ Including about US$86.7 million in taxes and duties. -iii- Estimated Disbursements: (US$ millions) Bank FY FY86 FY87 FY88 FY89 FY90 Annual 23.0 64.5 81.0 45.0 36.5 Cumulative 23.0 87.5 168.5 213.5 250.0 Rate of Return: About 13Z. . Appraisal Re,ssrt: No. 5410-lN, dated May 3. 1985. . INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE RIHAND POWER TRANSMISSION PROJECT 1. I submit the following report and recommendation on a proposed loan to India, for US$250 million to help finance the Rihand Power Transmission Project, designed primarily to assist in meeting the electricity demand in the Northern Region of India by providing power transmission linkage between the thermal power plants at the Singrauli-Rihand complex and the main load centers in the Northern Region. The proceeds of the loan will be onlent by the Government to the National Thermal Power Corporation for twenty years, includ- ing five years' grace, at an interest rate of not less than 12.5% per annum. Additional financing for the project, in an amount equivalent to about US$135 million, may be provided from official bilateral assistance, export credits, or suppliers' credits to cover the foreign exchange cost of the high-voltage terminal equipment. The foreign exchange and interest rate risks will be borne by the Covernment of India. PART I - THE ECONOMY 1/ 2. An economic report, "Structural Change and Development Perspectives" (5593-IN, dated April 24, 1985), was distributed to the Executive Directors on May 1, 1985. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 750 mil- lion (in mid-1984) and an annual per capita income of US$260. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those who own little or no land. Growth of value-added in agriculture -- 2.2Z since 1950/51 - has been slower than growth of industrial value-added (5.3% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 52% in 1950/51 to about 33% in 1981/82, while the share of industry rose from 20% to around 26Z. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6Z per annum since 1950/51. 4. Nevertheless, there has been steady progress, with per capita income rising by about 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imporcs through significant 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the Chandrapur Thermal Power Project (No.P-4041-1N), dated April 24, 1985. -2- improvements in agricultural production. Savings and investment have increased markedly since 1950/51: the gross national savings rate more than doubled from 10.82 of GDP (at factor cost) to 22.72 in 1983/84, while the gross domestic investment rate rose from 12.52 of GDP to 24.82 in 1983/84. Foreign savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20% was reached during the early 1960s. Currently, foreign savings account for about 8% of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3% of GDP and averaging below 1% for the past five years. Net use of foreign savings has never risen above 3Z of GDP, and presently stands at 2.1%. 5. Before the 1970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2% per annum, while the volume growth of imports over the same period was 4.3Z. In the early to mid-1970s, however, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India's exports grew on average about 7.3% per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularly in the nearby Middle East, contributed to this growth, liberalized access to imported inputs and more effective export incentives pLayed a major role. 6h Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a resuLt, growth in real GDP and in agricultural and industrial value-added substantially exceeded the historical 30-year trends (paragraph 3) averaging 5.3X, 3.3% and 8.1%, respectively, during the 1975/76 to 1978/79 period. In 1979/80, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a relatively large trade deficit. Severe inflationary pres- sures also emerged after several years of virtual price stability. These setbacks coincided with the preparation of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, remov- ing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2% per annum. Recent Trends 7. Despite the effects of two severe droughts in 1979/80 and 1982/83, India's economy in the early l980s continued to grow at the faster pace of the second half of the 1970s. Between the two droughts (from 1979/80 to 1982/83), GDP growth averaged almost 5% per annum, while between the two recovery years (from 1980/81 to 1983/84), it was 4.5% per annum -- substantially higher than India's long-term growth rate of 3.6%. Continued rapid economic growth has resulted from a development strategy which includes higher investment levels and liberalized policies on imports, industrial licensing, prices, and commer- -3- cial borrowing. These policies, by easing constraints on the supply of infrastructure and basic comnodities, were a determining factor in the improved performance of the economy and the industrial sector. This overall improvement in performance, combined with a more restrictive monetary policy in 1981/82 and 1982/83, resulted in a sharp decline in the rate of inflaticn. The growth rate of wholesale prices declined from over 18% in 1980/81 to only 2.6% in 1982/83, but rose to over 9% in 1983/84, mainly due to the effect of the 1982/83 drought * on food prices. Further improvements in the policy environment will be required to maintain these higher levels of economic growth and investment without putting undue pressure on the balance of payments or reviving infla- tionary expectations. 8. Economic growth in the early 1980s has not been steady, mainly because of the effect of uneven rainfall on agricultural production during the period. In 1980/81 and 1981/82, the economy substantially recovered from the 1979 drought, with real CDP growing by 7.6% and 5.3%, respectively. While industrial output expanded by 4Z in 1980/81 and 8.6Z in 1981/82, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15Z and 5.5%, respectively. The supply of power, coal, and rail transport, already improved in 1980/81, was further expanded in 1981/82, recording growth rates of about 10%, 9.6Z and 12.5%, respectively. This over- all improvement in the Indian economy was halted in 1982/83 by a severe drought in mid-1982 which reduced agricultural production by 4Z, brought down the GDP growth rate to 1.8%, and put further strains on the already difficult balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain imports; procurement and distribution, and the allocation of power to irrigation pumps mitigated the otherwise very distressing effects of the poor monsoon. The economy recovered in 1983/84, led by a robust agricultural sector - GDP grew by about 6.5% to 7Z with agricultural production growth in the 9Z-10 range and industrial growth of 4.52. The major factors contributing to the good economic performance during 1983/84 were the excellent monsoon, combined with adequate agricultural policies and programs, and satisfactory performance of the coal and transport sectors. The power sector, however, emerged again as a constraint on higher growth, especially in industry. 9. Agricultural production rebounded strongly in 1983/84 in response to the monsoon, improved use of inputs and continued expansion of irrigation. Overall foodgrain production rose by 10X-12X over the previous year, reaching a new record of 142-144 million tons, a substantial increase over the previous peak of 133 million tons in 1981/82. Corrected for weather variations, foodgrain production continues to grow at a trend oE 2.6% per annum-sufficient to maintain a broad balance between supply and steadily increasing domestic demand. Nonetheless, the balance remains delicate, and the need for foodgrain imports to maintain consumer supplies or adequate buffer stocks could arise from time to time. Thus, adequate management of foodgrain stocks and programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs ccntinue to receive high priority. -4- 10. Basic infrastructure services had a mixed performance in 1983184, partially because of sluggish demand from industry during the first half of the year but also due to a failure to maintain the productivity gains of 1980-82. Electricity generation grew only by about 3.7% due to low reservoir water levels during the first half of the year, delays in the commissioning of new capacity, and a deterioration of capacity utilization in thermal plants. As a result, power generation was about 11.5% below requirements and con- stituted a major bottleneck in the economy. Key industries which were adver- sely affected by power constraints included steel, fertilizers, cement, and coal. To improve performance in the power sector, the Government recently increased incentives for higher labor and management productivity in thermal plants. Railway freight traffic, measured in ton-kms, grew by only 0.5X in 1983/84, reflecting sluggish demand. Coal production increased by about 6.5Z in 1983/84 reaching 139 million tons. When combined with stocks already avail- able this level of production was sufficient to meet the relatively slow demand growth. Infrastructural constraints would have emerged much more sharply had the pace of industrial growth and demand been more rapid. It is therefore critically important that India maintain the pace of investment in these key sectors, mobilize sufficient resources to do so, and implement programs to enhance productivity. 11. The Indian economy has reverted from a situation of resource surplus in the late 1970s to an aggregate resource deficit. The gap between gross invest- ment and national savings increased from negligible levels during the late 1970s to an average equivalent to 2.1X of CDP in 1980-84. India's gross national savings rate, which averaged 22.6% of GDP in the last four years, is high by any standard, particularly considering India's low income and the large proportion of its population below the poverty line. The scope for a substan- tial increase in the savings rate is therefore quite limited. If India is to maintain investment at about 25% of GDP, a major effort will be required to raise additional domestic resources particularly in the public sector. Future increases in savings will depend heavily upon the enhAnced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. This would also allow a marginal decline in the use of foreign savings from the recent 2.1Z-2.3Z of GDP to 1.5X-1.8Z, to ensure a sustainable external debt service burden. 12. India's external resource position has changed notably since the late 1970s. The current account balance, which recorded surpluses from 1976/77 to 1978/79, reverted to deficits averaging US$3.5 billion and 2.1% of CDP during 1980/81 to 1983/84. Several developments contributed to these relatively larger current account deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and continued to move against India during the first three years of the 1980s. Second, a more liberal import policy towards industrial inputs was pursued. Third, net invisibles declined as travel receipts fell off, workers' remittances stagnated (reflecting slower developmeLt activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Faced with severe infrastructural constraints and a deterioration in its balance of payments, India initiated an adjustment program in 1980/81 designed to raise the growth -5- rate from its historical level of 3.6% to 5.2% while adjusting the country's external balance to the adverse price developments in the world markets. The main elements of this strategy, which is being successfully implemented, are export promotion, import substitution where economically justifiable, implemen- tation of a coherent energy policy designed to meet the energy needs of the economy while curbing the growth of oil imports, and continued movement toward a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. 13. A positive development in India's balance of payments is the reduction in the trade deficit from US$7.7 billion in 1980/81 to US$5.9 billion in 1983184 despite unfavorable world market conditions and import liberalization. Export volume growth and import substitution of oil and petroleum proWducts, metals and fertilizers more than offset the substantial increase in "other" imports. These "other" imports consist mainly of industrial imports and capi- tal goods which historically have been in chronic short supply and which are of critical importance to capacity utilization, product quality, and plant modern- ization and expansion. A major factor in the decline of the trade deficit was the lower net import bill for petroleum, which dropped from US$6.7 billion in 1980/81 to US$3.4 billion in 1983/84 in response to a successful oil develop- ment program that reduced import needs and allowed crude oil exports, which totalled about US$1.5 billion in 1983/84. These structural changes in the balance of payments are to a significant degree the result of India's develop- ment and adjustment efforts over the past three years. It is expected that the balance of payments will continue to be under strain for the next several years, since the adjustment strategy will continue to require high levels of imports. 14. Even assuming a favorable export performance, India will need external capital flows to augment its own resources for the foreseeable future, given the low per capita income level in the country, the already high savings rate, and the structural adjustment process. Faced with a growing need for external capital inflows and stagnation in the availability of concessional assistance, India decided at the start of the Sixth Plan to increase borrowings from the International Monetary Fund (IMF) and commercial banks to substantial levels. In the period covering the fiscal years 1981/82 to 1983/84, India A ew SDR 3.9 billion from the Extended Fund Facility of the IMF. In addition, India bor- rowed significant amounts on commercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. In the period 1980-84, India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,000 million. The bulk of this borrowing has been used for specific development projects in the public and private sector (mostly for petroleum exploration and development, steel, power, aluminum and shipping). India's favorable debt service position and the nature of its borrowings, for project-related purposes instead of direct balance of payments support, enabled it to tap commercial capital markets at favorable spreads. This larger commercial borrowing and transfer of funds under the arrangement with the IMF has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. Development Prospects 15. I.e experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India also has a wide range of institutions capable of fostering development and is well- endowed with human resources. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 16. The Government is currently preparing the Seventh Plan which will lay down the development strategy for 1985/86-19B9/90. This strategy is expected to continue the emphasis of the Sixth Plan on agriculture, energy development, export promotion, domestic import substitution where economically justifiable and the removal of infrastructural bottlenecks. Overall Sixth Plan performance has been encouraging, with aggregate real investment projected to be about 30% higher than in the period 1975-80--a creditable performance indeed. The Sixth Plan expenditure targets, however, will not be fulfilled as resource mobi- lization by the public sector will fall short of the financing requirements of planned public investment. Actual aggregate real investment is projected to be about 7% below the original target for the period 1980-85, private investment being 5% to 10% higher and public investment about 20% lower in real terms than actually projected. In terms of meeting Plan expenditure targets, the perfor- mance of the Central Government is considerably better than that of the State Governments. The Central Government's Plan outlays are likely to reach about 80% to 90% of the original Plan allocation in real terms, while the States' will probably achieve only about 50% of their targets, due principally to shortfalls in resource generation. Bottlenecks in key sectors such as power, transport and irrigation are likely to persist as a consequence of real invest- ment shortfalls relative to original Plan allocations. 17. Although Sixth Plan expenditure targets will not be met, India's capi- tal formation rates have increased from 22.6% in 1975-80 to 24.7% of GDP in 1980-84. Recent higher capital formation rates are encouraging for future income growth, but returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure services which have inherently high capital-output ratios. However, there is scope to reduce capital-output ratios through improvements in efficiency. As discussed in greater detail in our recent economic reports, performance in the basic service sectors can be improved through better plan- ning and management, thus leading to higher productivity and capacity utiliza- -7- tion throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the requirements of the rest of the economy will be vital for sustained growth. 18. Under the Sixth Plan, India has an ambitious oil development program backed by substantial financial commitment. Performance under the program has been excellent with real investment and oil production levels running well ahead of Plan Targets. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. While the gap between domestic consumption of petroleum and production remains large, India's dependence on oil imports dropped from 63Z of consumption in 1979/80 to about 41X in 1983/84 and is expected to decrease to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake from known fields, offers much encouragement for India's longer-term energy prospects. At the same time, the increases in domestic petroleum prices have helped encourage conservation and slow demand growth. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. This will require the continuation of the current development strategy which assigns high priority to export promotion, public finance discipline, improve- ment of economic efficiency, and investment in infrastructure, supported by adequate flows of external borrowing and aid. In the short term, a relatively large level of external borrowing, including an increased emphasis on commer- cial borrowing, will be necessary to cope with the balance of payments conse- quences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of conces- sional assistance since India is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. Although India is currently in a position to increase borrow- ing on coumercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. Nevertheless, with a more open trade policy and expanded efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of both foreign and domestic savings, India is demonstrating that it can sustain a rate of growth closer to 5.0% per annum than to the long-run trend of 3.6Z per annum. If the rate of population growth can be brought to below 2.0% per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census indicated there was no decline in the rate of population growth, which remained about 2.2% per -8- annum in the 1970. despite a measurable decline in fertility rates. The population growth rate failed to decLine in the past decade due to a reduction in the infant mortaLity rate and an increase in life expectancy, reflecting larger availability of food and health services. While this is a welcome development, it impLies a greater strain on the economy and re-emphasizes the need for continuing efforts to strengthen the health and family planning programs in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from its estimated 1979/80 level of about 23% to over 35% by 1984/85. The Government is reviewing its population policy for the Seventh Plan, with indications of a determination to retain the emphasis on the implementation of family planning, health, education and literacy programs aimed at reducing fertility rates. 21. Reduction of poverty remains the central goal of Indian economic and social policy. More than one-third of the world's poor live in India, and more than 80% of the Indian poor belong to the rural households of landless laborers and small farmers. About 51% of the rural population and 40Z of the urban population subsist below the poverty line. Significant reductions in poverty will depend primarily on an acceleration of economic growth, particularly in agriculture, combined with effective implementation of poverty alleviation programs. India's poverty alleviation strategy appropriately recognizes that production-oriented programs, which aim at accelerating the overall pace of economic growth, and poverty alleviation programs, targetted at those least able to participate in the general growth of the economy, can be mutually reinforcing rather than substituting for each other. Major poverty programs operating on a nationwide basis at present include: the Minimum Needs Program (MNP), the Integrated Rural Development Program (IRDP), and the National Rural Employment Program (NREP). The IRDP and NREP are targeted programs aimed at increasing the incomes of the poor rapidly, either through the transfer of productive assets or direct employment. The MNP, aims at broadening the provi- sion of social infrastructure and basic services which enhance the human capi- tal of the poor and improve living standards. These programs represent a vitally important commitment of the Government to address the needs of the poorest. The scale of the poverty problem in India, combined with the inherent difficulties in implementing poverty programs in any country, imply the need for continued efforts to enhance the effectiveness of these programs. PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 82 loans and 165 development credits to India totalling US$6,526 million and US$12,268 million (both net of cancellation), respectively. Of these amounts, US$1,524 million has been repaid, and US$6,207 million was still undisbursed as of September, 30, 1984. Bank Group disbursements to India in the current fiscal year through September 30, 1984 totalled US$171 million, representing a decrease of about 40 percent over the same period last year. Annex II contains a sutmary state- ment of disbursements as of September 30, 1984. -9- 23. Since 1959, IFC has made 29 commitments in India totalling US$223 million, of which US$34 million has been repaid, US$56 million sold and US$34 million cancelled. Of the balance of US$98 million, US$91 million repre- sents loans and US$7 million equity. A summary statement of IFC disbursements as of September 30, 1984, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consi'tent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of develop- ment finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan and in the approach being taken by GOI in the preparation of the Seventh Plan. First, high priority will continue to be given to GOI's agricultural program. While India has made significant progress in agriculture, productivity growth will have to be sus- tained to improve the balance between food demand and supply and to contribute to poverty alleviation and employment. Thus, the Bank Group will continue to support irrigation, fertilizer production and distribution, and agricultural extension and credit. Second, alongside COI's efforts in promoting greater efficiency and faster development of the industrial sector, increased assis- tance will be provided for industrial development. Third, the review of per- formance under the Sixth Plan confirms the high priority that should continue to be given to the expansion and more efficient use of basic infrastructure capacity and to the development of India's indigenous hydrocarbon resources. Accordingly the Bank Group will continue to support the development of the energy, transport and telecommunications sectors to alleviate critical shortages which constrain output in both agricultural and industrial sectors. Fourth, support of urban development and other GOI basic social services programs for the poor will also continue in light of the growth in population which, despite successes in lowering birth and death rates, still increases by about 16 million each year. 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid community, India successfully -10- adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to sustain the relatively higher investment and growth rates achieved during the first four years of the Sixth Plan. As in the past, Bank Croup assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture and irrigation. 27. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past was provided from IDA. However, IDA lending to India is declining from a peak of US$1.6 billion in FY82, mostly due to funding constraints related to IDA. The amount of IDA funds available to India is likely to remain small in relation to India's needs for external support. Thus, this requirement for additional assistance will have to be met, in part, through larger Bank lending. Civen its development prospects and policies, India is judged creditworthy for Bank lending to sup- plement IDA assistance. A continuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic growth and improvement in the balance of payments. India's debt service ratio is estimated at about 15.2% in 1984/85. This ratio is projected to rise to around 20% by 1989/90, mainly due to the hardening structure of India's debt; and to increase slightly over this level through the mid-1990's. Although the projected debt service ratios are con- siderably above historical levels, they are still manageable and will not adversely affect India's creditworthiness. 28. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34Z of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with 622, 33% and 37Z, respectively, in 1983/84. In 1983/84, about 19.0% of India's total debt service payments were tD the Bank Group. On March 31, 1984, India's outstanding and disbursed external public debt was estimated to be about US$26.9 billion, of which the Bank Group's share was US$9.6 billion or 36Z (IDA's US$7.8 billion and IBRD's US$1.8 billion). As of September 30, 1984, outstanding loans and credits to India held by the Bank totalled US$17,271 million, of which US$6,207 million remain to be disbursed, leaving a net amount outstanding of US$11,064 million. -11- PART III - THE POWER SECTOR 29. India's commercially exploitable energy resources consist of coal, oil, gas, hydro, uranium, and thorium. Of the nonrenewable resources, coal is the most abundant. Reserves of thermal coal have been estimated at slightly more than 100 billion tons, of which 25 billion tons are proven. Although reserves are ample, the quality of coal produced is generally low and is deteriorating. Proven and probable petroleum reserves comprise approximately 530 million tons of oil and 390 million toe of natural gas. Despite recent increases in domestic production, India still imports 35Z of its oil requirements, which in 1983/84 cost the equivalent of 40Z ot its merchandise exports. Consequently, the Government of India has attempted to stimulate exploration while restricting petroleum and natural gas consumption by emphasizing premium uses such as transportation, petrochemicals and fertilizer. However, in the case of natural gas, the slow development of premium uses has led to substantial volumes of associated gas being flared. India's hydroelectric potential is about 100,000 NW. At present, only 13,000 NW have been developed, 4,700 SW are under construction, and a further 23,000 MW are being studied-for future development. The prominent role of hydro in regional least-cost development plans prepared in 1982 has led GOI to emphasize the need to accelerate its development; however, progress has been slow owing to the limited resources available for the simultaneous preparation of a large numrber of schemes and the time required to resolve water rights and environmental issues. The country's uranium reserves could support a modest nuclear program (8,000-10,000 MW), and its thorium reserves are enough for a large fast breeder program. 30. Planning the best use of India's indigenous energy resources for power generation raises a number of issues. First, the high ash content of coal, which can reach 50X, increases transport costs, as well as power station capital and operating costs. The development of minemouth stations, which is constrained by pollution limitations and the availability of cooling water, helps to solve only the transport problem, and thus priority needs to be given to more selective mining and improved coal preparation. Even though a lower ash content might help to alleviate transport problems, they would still persist. Two studies included in the Dudhichua Coal Project (Loan 2393-IN) are designed to help formulate a strategy to deal with these problems: one study will examine ways of improving the linkages between the sources of supply and demand, and the other will concentrate on improvements in handling and transportation facilities. Second, with the recent increases in the supplies of both associated ana free gas, there is a need for a coherent policy on the utilization of gas. A Bank study planned for 1985 will focus on, among other things, the potential for the economic use of gas in power generation. Third, if hydro development is to accelerate, further resources, including consultants if necessary, need to be deployed to prepare hydro schemes. Furthermore, it water rights and environmental issues cannot be resolved quickly, appropriate procedures need to be -12- initiatea to ensure that an adequate number of schemes are available for development. Supply and Demand of Electricity - Inaia 31. Approximately 50% of India's electricity is generated from coal, 40% from hydro, ana the rest from oil, nuclear power, and natural gas. Although a number of large thermal projects are planned for the short term, the share of hydro is expected to increase in the long run. Electricity losses have risen slowly but steadily over the last few years and now exceed 26% of gross generation. The deteriorating quality of coal has been at least partly responsible for this trend, with coal stations' own consumption now approaching 10% of gross generation against a desirable 5% or 6Z. Distribution networks have been overloaded because inadequate attention has been given to systematic analysis and planning of this part of the system. As a result, distribution losses are high by generally accepted standards and, although they are lower than in several countries in the region, they need to be reduced. Under its lending program, the Bank has supported pilot studies to reduce system losses, ana it will continue to tollow this approach in its future lending. However, the Bank can only pursue this on a State-by-State basis, vith loss reduction targets reflecting the particular circumstances of each State. 32. Over the past two decades, the consumption of electricity has grown approximately twice as fast as total commercial energy consumption and now accounts for more than 30Z of the latter. As a result, shortages have prevailed throughout the country and, during the last five years, averaged an estimated 13% of electricity requirements. The principal sectoral shares of total electricity consumption are: industrial, 56X; agricultural, 19%; and domestic, 12X. Agriculture-s share has grown steadily owing to increased electrical irrigation pumping made possible by rural electrification and encouraged by heavy subsidies. Total consumption has grown at an average rate of 1UX per annum during the past two decades, and the Central Electricity Authority (CR4) has forecast growth of 9X per annum between 1984/85 and 1989/90. Whether such growth can take place will depend on the utilities'-success in installing new capacity. Supply and Demand of Electricity - Northern Region 33. The Northern Region comprises the States of Uttar Pradesh, Punjab, Haryana, Rajasthan, Himachal Pradesh, Jammu and Kashmir, and the Union Territories of Delhi and Chandigarh. As of March 31, 1984, the installed capacity in the Region was about 11,200 H, consisting of 5,958 M (53%) of thermal power, 4,771 MW (452) of hydro power, and 440 MM (4%) of nuclear power. The Region's installed capacity is expected to reach almost 20,000 MW by 1990, representing an average increase of 10.4% per year. NTPC's share of installed capacity in the Region is expected to increase from 1,770 MW in 1983/84 to 4,600 MW in 1989/90, the increase being provided from the ongoing extension at Singrauli (1,000 MW), the new Rihand plant (1,000 MW), and a proposed 800 MW station at Muradnagar. Electricity consumption in the period 1978/79 through 1983/84 grew at an -13- average rate of 7.1X per year, reaching 28,200 GCh in 1983/84 with a peak demand of about 8,700 NW. Industry is the largest consumer of electricity in the Region with a share of about 521 of total consumption, followed by agriculture at 30%. Over the period 1984/85 to 1992/93, energy requirements are expected to increase at an average rate of 10.2Z per year to 102,432 GWh, and peak demand to increase by 10.8Z per year to 20,024 MW over the same period. Forecast demands are unlikely to be met because of capacity shortages and operational problems; deficits in both peak demand and energy are therefore expected to continue. Organization of the Power Subsector 34. Responsibility for the supply of electricity is shared between the Central and State Governments. The State Electricity Boards (SEBs) and the Regional Electricity Boards (RE5s) are controlled by States; the Central Electricity Authority, the National Thermal Power Corporation, the National Hydro-Electric Power Corporation (NHPC), and the Rural Electrification Corporation (REC) are controlled by the Central Government. SEBs were instituted under the Electricity Supply Act of 1948 to promote the development of the power subsector and to regulate private licensees. Although, in principle, SEBs are supposed to be autonomous in managing their day-to-day operations, in practice they are under the control of State Governments in such matters as capital investment, tariffs, borrowings, pay, and personnel policies. As a first step toward national integration, the SEBs have been grouped into five regional systems, each coordinated by an REB. Coordination responsibilities include overhaul and maintenance programs and determination of generation schedules, inter-State power transfers, and concomitant tariffs. CEA was created in 1950 to develop national power policy and to coordinate the various agencies involved in supplying electricity. It is responsible for the formulation of countrywide investment plans for approval by the Cen;ral Government, the development of integrated system operation, the training of personnel, and research and development. It maintains operational, economic, and financial data at both the Central and State levels, and provides consulting support to SEBs. NTPC and NHPC were incorporated in 1975 by GOI to construct and operate large power stations and associated transmission facilities. They sell bulk power to the SEBs for distribution. NTPC has had marked success and has grown rapidly. In contrast, NHPC is still struggling to establish a role for itself. The States own most hydro sites and are reluctant to relinquish these sources of comparatively inexpensive energy to the Central Government. REC was established in 1969 to coordinate rural electrification and provide financial and technical expertise for SEB schemes. At present, REC finances more than half of total rural electrification investment. Pricing and Resource Mobilization 35. Through the 1983 amendments to the Act, GOI has set a financial objective for the SEBs to produce an annual return of at least 3Z on their historically valued net fixed assets, after meeting operating expenses, taxes, depreciation and interest. The 31 return would represent, in terms of the Bank's conventional method of calculation, a rate of return on -14- historically valued assets in the range of 102 to 13%. The Bank considers this objective to be a reasonable minimum but believes that because of their investment requirements, a number of SEBs need to achieve internal cash generation which implies returns higher than this minimum. Higher returns may be possible in some cases through reclassification of consumers. However, substantial improvements are only achievable through tariff increases. Present tariffs are in most cases inadequate, not only in economic terms but also in financial terms, and most SEBs are unable to finance a reasonable share of their investment programs. On average, SEB tariffs are equivalent to only about 502 of the long run marginal cost (LRhC) of producing power. In contrast, NTPC's tariff approximates LRMC. Industrial tariffs are almost 90Z of LRMC, whereas agricultural and domestic tariffs, which are considered politically sensitive and have been consistently subsidized, are only 272 and 36% of LRMC, respectively. State-specific financial programs are needed to provide both an increased return on investment and a simpler, efficient and affordable tariff structure. Such programs will be addressed through the Bank's lending to individual SEBs. Power Suusector Planning 36. Because the demand for electricity has increased rapidly, GOI at present allocates about 20% of public investment to power development. To ensure that the subsector would be developed in the most economic manner, the Bank encouraged GOI to prepare a comprehensive least-cost National Power Plan (NPP), which was completed in September 1982. Although this plan represents substantial progress, further refinement is needed. To assist GOI in this task, the Bank has planned a study for FY85 that will review the assumptions and methodology employed in formulating the least-cost plan. There appears to be a need for further national integration and greater coordination between power and other sectors, especially coal and gas. Since it will not be possible to achieve full national integration im-ediarely, the Bank will continue to ensure that each Bank-financed project forms a part of an up-to-date regional least-cost development plan In due course, the sources of supply considered in the formulatior of each regional least-cost plan should be widened to include the option of importing from neighboring regions. This approach would eventually lead to integrated planning at a national level. A further problem has arisen in the coordination of the long-term NPP with the national five-year plan and shorter-term budgets. Because of inadequate resources, fewer projects have been included in the five-year plan than in the NPP and, as a result of underestimation of project costs and delays in project implementation, st;11 rewer have been executed. Consequently, the shortage of power has bacome more and more acute, and over the next decade, India expects its power deficit to increase severalfold. This deficit will tend To Undermine rational planning because emphasis is likely to be places on rapid expansion of supply rather than on least-cost development. Furthermore, it may prompt overinvestment in captive plant and excessive use of high-value energy products in the generation of power. In addition to supporting GOI's efforts to increase the supply, the Bank will continue to stress to GOI -15- the role of pricing in eliminating the deficit and the importance of integrating planning and pricing. Management and Operations 37. SEBs' organization and management capabilities have not kept pace with the expansion of supply. The quality of service, reliability, and financial performance are the principal areas of concern. In gene&al, SEBs have high-quality engineering staff, but lack experienced personnel in the areas of financial planning and control. The relatively poor status and pay of these personnel merely add to the already significant pay differential between the public and private sectors, and make it difficult to recruit competent staff. Management practices are generally outmoded and inadequate. The SEBs' inefficient accounting systems are an example. At present, accounts are maintained principally to track cash receipts and expenditures, and accounting information is seldom used for managerial purposes. GOI has decided that a new and uniform accounting system should be installed in all SEBs. After initial delays, preparations are now proceeding and implementation is scheduled to begin in April 1985. 38. In the area of operations, one of the main concerns has been the poor performance of thermal plant. Factors that have contributed to thia are inadequate maintenance (due to capacity shortages), deficiencies in plant manufacture, lack of spares, and the poor quality of coal; in general, these problems have been recognized by the relevant authorities and corrective steps are being taken. GOI is currently preparing a rehabilitation program for thermal plant which may be financed by the Bank. Until this program is compiled, the Bank will, whenever appropriate, include a thermal rehabilitation component under each of the loans made to the SEBs. Bank Group Participation in the Past 39. The Bank Ias made 18 loans for Indian power projects amounting to US$1,983 million, and 17 IDA credits totaling US$2,409 million. Seventeen projects financed under the following loans and credits have been completed: ten generating projects, the Beas Project (Credit 98-IN), the first four transmission projects (Loan 416-IN, Credits 242-IN, 377-IN and 604-IN), and the First and Second Rural Electrification Projects (Credits 572-IN and 911-IN). The Fourth Transmission Project (Credit 604-IN) was completed in 1983, and the Second Rural Electrification Project in 1984. The Singrauli (Credit 685-IN), Korba (Credit 793-IN), and Ramagundam (Credit 874-IN and Loan 1648-IN) Thermal Power Projects are in advanced stages of implementation. The credit for the Second Singrauli Thermal Power Project (Credit 1027-IN) and the credit/loan for the first stage of the Farakka Thermal Power Project (Credit 1053-IN and Loan 1887-IN) were approved in May and June 1980. Korba II (Credit 1172-IN) was approved in July 1981, Ramagundam II (Loan 2076-IN) in December 1981, and the Third Rural Electrification Project (Loan 2165-IN) in June 1982. The Upper Indravati Hydro Project (Credit 1356-IN and Loan 2278-IN) and the Central Power Transmission Project (Loan 2283-IN) were approved in May 1983, and -16- the Bodhghat Hydroelectric Power Project in May 1984. The Second Farakka Thermal Power Projec. (Loan 2442-IN) was approved in June 1984, and the Trombay IV Thermal Power Project (Loan 2452-IN) in June of the same year. The Third Rural Electrification Project is about a year behind schedule. The first five units of the Singrauli Project and the first two units of the Korba project were commissioned on schedule. The Farakka and Ramagundam projects are proceeding satisfactorily, the first unit at Ramagundam having been commissioned four months ahead of schedule. The Third Trombay Project (Unit 5) (Loan 1549-IN) was first synchronized in January 1984, about a year behind schedule; time was lost mainly because parts for the boiler were not delivered on time, and because of delays in its construction. 40. A performance audit conducted in 1980 for the Second Power Transmission Project (Credit 242-IN) concluded that the project has succeeded in helping the nine beneficiary SEBs extend their transmission systems and meet their growing power requirements. Utilization of generating capacity in these SEBs has exceeded the appraisal forecast. The upgrading of the SEBs' financial management practices that began under this project will continue under subsequent projects. The audit highlighted the difficulties of adequately supervising this project (because it consisted of many widely scattered subprojects), and of effecting institutional improvements in the absence of a close working relationship between the Bank Group and the beneficiary SEBs. The Bank has therefore sought more direct involvement with the SEBs through State-specific projects. Bank Group Strategy in the Power Subsector 41. Over the last ten years the Bank Group has assisted GOI in substantially expanding its centrally-owned generation capacity, which is currently being run relatively efficiently. In the past two years, however, the emphasis of Bank Group lending has begun to shift from supporting projects owned and operated by the Central Government to projects owned and operated by the SEBs. This gradual shift has come about in support of GOI's desire to accelerate the development of India's hydroelectric power resources (most of which are owned by the State Governments), and because of the considerable need to improve the operational and project implementation efficiency and the financial viability of the State-owned power sector institutions. In parallel with this shift in Bank Group lending, sector-wide objectives for power system operation at both Center and State levels--such as improving efficiency in the use of existing power generation, transmission and distribution systems, strengthening Central and State level sector institutions, improving country-wide power system planning, and increasing resource mobilizarion within the sector--will continue to be pursued by the Bank Group. More specifically, the principal objectives of the Bank Group's assistance in the subsector are: (a) the better use of existing facilities--through transmission projects improving regional interconnections and through rehabilitation of plant, particularly of thermal power -17- stations and distribution networks: these measures will improve the efficiency of energy use and reduce system losses, thereby helping to minimize system capital and operating costs; (b) institution building-although the Bank will continue to maintain an interest in Central institutions, its efforts will be broadened to encompass individual SEBs, where substantial efforts are needed to strengthen management, operations, and finances; (c) improved planning-particularly by extending the scope of planning from the State through the regional to the national level and through greater integration of planning with other sectors in the economy, both those that consume electricity and those that supply other forms of energy; and (d) improved resource mobilization from electricity consumers - the principal vehicle for this has been and will continue to be financial covenants in relation to beneficiaries; however, the Bank will also continue to stress the importance of relating tariffs to the economic costs of supply. PART IV - THE PROJECT 42. The project was prepared by NTPC and appraised by a mission that visited India in August 1984. A Staff Appraisal Report is being distributed separately to the Executive Directors. Negotiations were held in Washington in April 1985. GOI and NTPC were represented by a delegation with Mr. Arjun Thapan of the Department of Economic Affairs as coordinator. A Supplementary Project Data Sheet is attached as Annex III. Project Objectives and Rationale for Bank Involvement 43. The primary objective of the project is to help meet the demand for electricity in the Northern Region of India by providing a power transmission linkage between the thermal power plants in the Singrauli-Rihand complex in the State of Uttar Pradesh and the main load centers of the Region, and to ensure the evacuation of power from these plants at least cost to the economy. The three large thermal power stations in the area-at Singrauli, Rihand, and Vindbyachal--will ultimately have a combined total capacity of about 7,300 M4. Five units at Singrauli, with a total capacity of 1,000 MW, are already in operation. A least-cost program for the transmission system necessary to ensure the efficient evacuation of power from the Singrauli-Rihand stations into the Northern Regional transmission grid has been developed by CEA, in cooperation with a firm of consulting engineers. The proposed project is designed to implement this program. A secondary objective of the project is to continue the institution-building efforts initiated under earlier Bank Group lending operations in the sector by strengthening CEA's -18- planning capabilities, particularly in the area of power transmission. Though not a Bank-financed component of the project, a series of long-term planning studies will be undertaken to provide the basis for the formulation of a long-term (15- to 20-year) national plan for the development of the country's extra-high-voltage power transmission system. The policies and procedures for its operation will also receive close attention in view of the increased size of power generating units and plants, the expansion of the interconnected transmission grid, and the introduction of high-voltage, direct-current facilities which has become necessary to keep up with the growth of the power sector. Another objective of the proposed project is to increase the technological capabilities and experience of NTPC and other power sector institutions by introducing long-distance HVDC transmission technology in India. 44. Through its participation in the project, the Bank would be supporting GOI's objectives and efforts to alleviate power shortages and reduce transmission losses. Through its involvement with the power transmission studies, the Bank would also help to ensure sound planning in power transmission throughout the country and at the same time help CEA to strengthen its capabilities in this area. The HVDC facilities in the project will not only acquaint Indian engineers with this type of equipment, but should also encourage the mobilization of foreign exchange for the project through official bilateral assistance or other sources of cofinancing. Project Description 45. The project is made up of the following components: (a) about 910 km of 500-kV DC transmission line connecting Rihand and Delhi, together with the associated AC/DC converting stations and auxiliary equipment; (b) about 1,450 km of 400-kV single- and double-circuit AC transmission lines connecting the Rihand and Singrauli stations with Kanpur, Delhi, Panipat, and Jaipur, together with new or extended substations, and associated auxiliaries; and (c) technical assistance for the engineering, testing, and commissioning of the project. Project Implementation 46. The project will be implemented over a five-year period (FY85-FY89) by NTPC, as part of its ongoing power development program. NTPC will construct, own, and operate the proposed transmission facilities from the Singrauli-Rihand complex from which power will be distributed and sold in bulk to SEBs in the Northern Region-in Darticular to those of Uttar Pradesh, Rajasthan, and Haryana-and to the Delhi Electricity Supply Undertaking. The AC transmission lines to be constructed under the -19- project will form part of the 400-kV system for that region, which will eventually be integrated into the national grid. 47. NTPC has developed its expertise in building 400-kV transmission systems through the transmission components of its large thermal power projects. With the commissioning of nine 200-MW units in rapid succession since the beginning of 1982, the organization has moved from the construction phase to the operational phase, and has accomplished this transition efficiently. In support of this process, the corporation in 1982 adopted an organizational structure that made regional headquarters units responsible for the design, construction, and operation of generation and transmission facilities within the region. More recent organizational changes provide for a division that will be responsible for the construction of power transmission facilities in the Northern and Western Regions, including the introduction of HVDC facilities. Most of NTPC's operations have now been decentralized. Recruitment is progressing satisfactorily to meet NTPC's expanding operational needs. UTPC places special importance on the training of engineers, supervisors, and operating staff as well as managerial and administrative staff, and detailed programs have been developed to meet the training needs of all categories of staff. 48. Detailed system and engineering studies for the project were completed in September 1984 by NTPC in close association with its consultant, Hydro Quebec International (HQI) of Canada, and financed by the Canadian International Development Agency. As part of the process, HQI helped CEA and MTPC staff become familiar with power systems analysis and equipment performance specifications. NTPC is now preparing detailed specifications for the HVDC component of the project, and will retain consultants to assist in supervising the engineering activities during the equipment supply, construction, testing, and comhissioning phases of that component. The 400-kV Lines and substations in the project are based on standardized designs adopted by India in similar projects in the past. With the aid of contractors, NTPC is currently installing 400-kV lines and substations associated with a number of the thermal power plants that are under construction. The same arrangement will be followed for the construction of the 400-kV AC facilities (lines and substations) under the proposed project. 49. In conjunction with the project, CEA will carry out a series of power transmission studies, to be financed by GOI from its own resources. These studies will be undertaken for each of the Regions and will form the basis for the formulation of a least-cost, long-term (15- to 20-year) national power transmission plan for the development of the high-voltage power transmission system; the plan will include the configuration of a primary grid, interregional linkages, and system control requirements. Further studies will be undertaken by GOI as necessary to address the responsibilities, policies, and procedures pertaining to the institutional, commercial, operational and training aspects of the system at the State, regional, and national levels. The scope and terms of reference for the power transmission studies will be prepared by CEA in collaboration with the Bank by December 31, 1985, and consultants will be , -20- appointed or retained as necessary to assist and train CEA staff in their execution. The studies and the national power transmission plan will be completed, and the results reviewed with the Bank, by June 30, 1987. 50. No ecological problems are expected. The area of the transmission corridor required for the HVDC Line is significantly smaller than that required for an AC line of similar capacity. There are no land acquisition or resettlement problems. Conductor sizes and spacing will be designed to keep energy losses and radio interference within acceptable limits. Project Cost and Financing 51. The total cost of the project, including contingencies but excluding about US$87 million in taxes and duties, is estimated at about US$579 million equivalent, of which about US$263 million (45Z) represents the estimated foreign exchange costs. Interest during construction adds about US$27 million to the financing required. The principal costs, net of physical and price contingencies, but including taxes and duties, will be as follows: 400-kV AC lines, US$125 million; 400-kV AC substations, US$94 million; HVDC line, US$80 million; HVDC terminals, US$188 million; engineering and administration, US$33 million; consultancy and technical assistance, US$5 million. The estimates of project costs for the main items of equipment and materials related to the 400-kV AC facilities are based on the most recent price quotations for similar projects, with prices updated to December 1984 levels. Estimates for the HVDC facilities are based on indicative proposals of firms with extensive experience in the installation of HVDC equipment. Price contingencies, amounting to 22Z of base cost, are based on expected annual inflation rates of 8.5Z for 1985/86 through 1990/91, and 6% thereafter for local costs, and 9Z for 1985/86 through 1987/88, 7.5% for 1988/89, and 6% thereafter for foreign costs. Physical contingencies of about 10 on civil works and 5% on equipment have been allowed, and these amount to abo t 5Z of base cost. 52. The proposed Bank loan of US$250 million will finance about US$128 million (45%) of the total foreign exchange financing requirement of about US$282 million, together with about US$122 million of the local costs, and would cover about 431 of the total project cost net of taxes and duties. Additional financing of about US$135 million may be obtained from external cofinancing sources in the form of official bilateral assistance, export credits, or suppliers' credits, to meet the foreign cost of the HVDC terminal equipment. This amount would finance about 47% of the foreign exchange costs, or about 23% of the total project costs net of taxes and duties. The balance of the funds required, totaling about US$308 million equivalent, wilL be provided by GOI in the form of loan and share capital, and by NTPC from its own resources. 53. The proceeds of the proposed loan will be onlent by GOI to NTPC at an interest rate of not less than 12.52 per annum, with repayment over 20 years, including five years' grace, under a subsidiary loan agreement between GOI and NTPC (Section 3.01(b) of Loan Agreement). Execution of the subsidiary loan agreement between GOI and NTPC will be a condition of -21- effectiveness for the loan (Section 5.01 of Loan Agreement). The average inflation rate is not expected to exceed 8.5Z per annum over the next five years. GOI's onlending rate to NTPC is therefore expected to remain positive in real terms. The foreign exchange and interest rate risks will be borne by GOI. Procurement and Disbursement 54. Procurement arrangements are summarized in Annex IV. Most of the major items of equipment associated with the 400-kV AC lines and substations under the project--conductors, insulators, hardware, metering, telecommunications, and substation equipment, and the construction of the substations themselves (US$150 million)--together with the supply and erection of towers and auxiliary equipment associated with the construction of the HVDC transmission line and converting stations (US$108 million), will be subject to international competitive bidding (ICB), in accordance with Bank guidelines. The main AC/DC terminal equipment (converting stations) would be purchased through negotiated contract in the event that external cofinancing becomes available (para 53); otherwise it would be procured through ICB. This contract, which also includes erection works, is eatimated to amount to US$176 million. The contract would also include provision for the training of NTPC staff since the HVDC facilities are being introduced in the Indian power sector for the first time. Contracts for the supply and erection of towers for the 400-kV lines (US$59 million), and the construction of buildings and other works associated with the HVDC converting stations (US$26 million), will be awarded on the basis of local competitive bidding (LCB); these components are not being financed from the Bank loan. Consultants for project supervision, including the engineering, testing, and commissioning of the project, would be selected in accordance with Bank guidelines. Local manufacturers are expected to be competitive for all equipment and materials contracts associated with the AC facilities and HVDC lines. Local manufacturers competing under ICB will be allowed a margin of preference of 15Z of the c.i.f. bid price of imported goods, or the actual customs duties and import taxes, whichever is less. All contracts costing US$3,500,000 or more will be subject to the Bank's prior review. 55. The project is scheduled to be completed by the end of 1988, to coincide approximately with the completion of the Rihand thermal plant which is currently under construction. Under the schedule for the procurement of the equipment and material to be financed from the proposed Bank loan, the first award decision is expected by mid-May 1985. Accordingly, advance procurement and retroactive financing of up to US$20 million is being proposed to cover expenditures under contracts awarded after April 15, 1985 and prior to loan signing, and in accordance with Bank procurement guidelines, in respect of the supply of equipment for the AC facilities and HVDC line, and associated consultancy services (Schedule 1, para. 3 of Loan Agreement). 56. The proceeds of the loan will be disbursed over a four and one half year period (FY86-90) and will cover 100% of the c.i.f. cost of imported goods or of the ex-factory cost of goods manufactured in India, -22- 902 of the civil and erection works subject to ICB, and 100X of the cost of consultancy services associated with the HVDC facilities. The disbursement period for this loan is shorter than the Bank-wide average for power transmission and distribution projects, but is reasonable considering NTPC's experience in the construction of transmission lines and the advanced stage of project preparation. NTPC Finances 57. NTPC is currently in the ninth year of an investment program bLgun in 1977 under which it expects to construct and commission by 1995/96 a number of large-scale thermal power stations with an aggregate generating capacity of 21,580 MW and about 10,700 km of high-voltage transmission lines. The Government's investment in this development has undergone continuous review during the past five years in an attempt to accommodate the increased demand for power. As a result, the original investment program, which was designed to provide generating capacity of 7,300 MW and about 6,000 km of associated transmission lines at a cost of about US$3,417 million, has been extended in stages by eight years through 1995/96 and increased to about US$35,243 million equivalent. By the end of 1983/84, NTPC had an installed generating capacity of 1,800 MW. Financing for the increased investment program will come from NTPC's increased internal resources accruing during the extended construction program (about 30%), from GOI in the form of long-term loans and equity share capital (about 40%), and from foreign sources in the form of Bank loans, bilateral assistance, and cofinancing (about 30%). NTPC's contribution to the investment is expected to increase to about 40% in the latter years of the program. NTPr's investment program and financing plan through 1995/96 are satisfactory. 58. NTPC began commercial operations in 1982 shortly after its first 200-MW generating unit at Singrauli was commissioned. Since then, eight additional 200-MW units have been commissioned--four more at Singrauli, three at Korba, and one at Ramagundam. Operations in 1982/83 were minimal owing to the stabilization requirements of the newly commissioned generating units. However, NTPC's net earnings for that year compared favorably with the forecast. For 1983/84, operating income and net income exceeded previous forecasLs and yielded a rate of return of about 11 on historically valued assets, which compares favorably with the 7% minimum rate of return required for this year (para. 59). The equivalent rate of return on revalued assets, calculated on a pro-forma basis, is slightly less than 9%. Cash generation measured as a percentage of average annual capital investment requirements was only about 3%, but this low level of contribution was due to the fact that generation during the year was only about 43Z of the potential output, mainly because of the time required to stabilize the units, and that 1,000 MW of the 1,800 MW year-end capacity wer2 progressively commissioned and in operation only during the last six months of the year. Cash generation will increase significantly in future years (para. 61). NTPC's debt-equity ratio at year end is 26:74, which is satisfactory. Alt;.ough NTPC still needs to improve in accounts receivables collections (para. 62), its overall financial performance in 1983/84 and its financial position at year end were satisfactory. -23- 59. Estimates of NTPC's future earnings are based on the assumption that it will supply bulk power to its customers at regional tariff levels sufficient to achieve high enough minimum rates of return to ensure its financial viability. In accordance with agreements reached under the Second Farakka Thermal Power Project (Ln. 2442-IN), approved in FY84, NTPC is to set tariffs at the levels required to achieve annual rates of return of not less than 7% on historically valued assets for the period 1984/85 through 1989/90, not less than 9.5% for the period 1990/91 through 1994/95, and at levels sufficient to ensure its viability thereafter. It was also agreed that since the Government does not wish to use asset revaluation to determine a realistic basis for estimating returns to capital, a rate of return of about 15% in 1995/96 (which would be equivalent to a rate of return of about 7.5Z on revalued assets), based on current projections, would be required. The progressive step-wise increase in the rate of return takes into account the schedule for the stabilization of new units, and the dampening effect on the rate of return when large new investments are undertaken. In view of the high initial capital investment in the early stages of NTPC's power development program and the time involved in commissioning generating capacity, this approach to tariff setting is appropriate. Similar measures will be adopted under the proposed project (Section 4.03 of Project Agreement). On the basis of current projections, NTPC's rates of return through 1994/95 are expected to exceed the minimum levels specified; in addition, its projected rate of return of 14.7% for 1995196 is considered adequate to ensure a satisfactory level of financial performance in that year. 60. Under previous loans and credits, GOI and NTPC agreed to sell the power from NTPC's power plants to its customers under contracts satisfactory to the Bank Group. Contracts have now been concluded between NTPC and the Delhi Electricity Supply Undertaking, the Damodar Valley Corporation, the Electricity Department of the Union Territory of Goa, and all but two of the SEBs, with respect to sales of electricity from the four major Regional plants-Singrauli (Northern Region), Korba (Western Region), Ramagundam (Southern Region), and Farakka (Eastern Region). The Bihar and West Bengal SEBs are not expected to receive power from the Farakka plant for some time, as the first 200 MW unit there is yet to be commissioned. Contracts in respect of these SEBs are expected to be concluded, however, by August 31, 1985. The Electricity Department of the Union Territory of Pondicherry is not expected to receive power from the Ramagundam plant until the commissioning of the second stage, which begins in early 1988. A contract in respect of this entity is therefore not required at this time, but will be concluded as appropriate in the event it becomes necessary. The contracts concluded to date are interim contracts only, since certain additional provisione--contract renewal, tariff revision, capacity charge, and NTPC's return on equity-need to be included. GOI and NTPC propose in due course to replace these interim contracts with either individual or regional supply contracts (one for each Region) that will provide uniform terms and conditions for the sale of electricity by NTPC to all SEBs and other customers within a region. Accordingly, GOI and NTPC will provide to the Bank, by March 31, 1986, revised electricity supply contracts incorporating the necessary -24- additional provisions with respect to the SEBs and other customers of the Northern, Western, Southern and Eastern Regions. In the interim, the terms of the existing contracts will continue to apply (Section 3.04 of Project Agreement). 61. With regard to NTPC',s future operations, power generation is expected to increase from 1,109 GWh in 1982/83 to 106,161 GWh in 1995/96. NTPC's average tariff is expected to increase at an average rate of about 8.5X per annum, from 32.30 paise/kWh to 93.22 paise/kWh, over the same period. Average tariffs would be maintained approximately on par with the long-run marginal cost of electricity generation. Operating income is expected to increase from Rs 675 million (US$56 million) in 1983/84 to Rs 42,236 million (USS3,520 million) in 1995/96, and net income from Rs 449 million (US$37 million) to Rs 25,622 million (US$2,135 million) during the same period, yielding financial rates of return on historically valued assets ranging from about 9.4% to 14.7Z. Both the financial rate of return and the internal cash generation would increase to acceptable levels of about 12% and 52%, respectively, by 1993/94. NTPC's projected rates of return are realistic and achievable, and its forecast of future financial performance and cash generation are satisfactory. 62. NTPC's capitalization as of March 31, 1983--which is the end of the financial year in which NTPC began to earn revenues--was about USS1,254 million, divided betweeu GOI loans (including the onlending of Bank Group finance) and equity capital in the ratio of 21:79. In March 1990, after the completion of the proposed project, total capitalization will be about US$15,299 million, with a debt-equity ratio of 34:66. The debt-equity ratio would increase slightly to 35:65 by March 1995, at which time total capitalization will be about US$33,133 million. Debt service coverage is expected to decrease from 3.5:1 in 1983/84 to 2.0:1 in 1989/90, then to increase to 2.7:1 by 1994/95. NTPC's issuea share capital will rise progressively during this period from a level of about US$1,305 million at the end of 1983/84 to US$14,419 million by the end of 1994/95. NTPC's financial position, debt-equity ratios, and debt service coverage are, and will remain, satisfactory. 63. NTPC's collection of accounts receivable has been slower than is considered acceptable. As of July 31, 1984, outstanding receivables on the average represented about 3.9 months of NTPC's total sales. According to the terms of the bulk supply coatracts (para. 60), NTPC's customers are required to remit payment for power purchases within 30 days of receiving bills from NTPC. The contracts also require that customers open revolving bank letters of credit in favor of NTPC for an amount equivalent to one month's power purchases. At present, five of the nine customers concerned in the Northern and Western Regions have complied with this requirement; none of those in the Southern and Eastern Regions has yet done so as bulk supply contracts for these were concluded only recently, only a limited amount of power is available from NTPC's Ramagundam plant, and NTPCs Farakka plant is yet to be conmissioned. NTPC has encountered resistance trom some of its customers concerning the opening of letters of credit, because at this stage of development of the transmission network, power frequently has to be routed through one or more States before it reaches -25- its ultimate destination, and as a result NTPC is not able to ensure that they receive their allocated shares of power. In view of this situation, it has been agreed that the required letters of credit should be opened for each NTPC customer within 30 days of their receiving their allocated sbares of power. In the meantime, NIPC will continue to make every effort to obtain letters of credit from those customers that have not yet opened them. With regard to the arrears in NTlC'Bs accounts receivable, these have arisen primarily in connection vith NTPC',s sales of electricity prior to the signings of the bulk supply agreements vith its customers, during which time electricity was being sold at interim rates vhich were subject to subsequent aajustment. By December 31, 1985, NTPC will provide the Bank with repayment schedules drawn up in conjunction with each of the customers in arrears in its payments, with the objective of liquidating the outstanding arrears within two years. NTPC will also ensure that with respect to its sales of electricity since the signing of the bulk supply agreements, its total monthly accounts receivable will be maintained, from March 31, 1986, at a level equivalent to not more than two months'. sales (Section 4.02 of Project Agreement). Proiect Justification and Risks 64. The proposed project is justified as part of the least-cost high-voltage transmission system for the Northern Region. Long-term planning studies of the region'.s high-voltage transmission system carried out by CEA in 1982, with the assistance of HQI, showed that of the three options considered (expansion of existing 400-kV network, introduction of a 735-kV grid, and a combined AC-DC system), a combined AC-DC system would provide the least-cost option. The proposed project was formulated on this basis. The proposed national power transmission studies to be carried out in conjunction with the project are also expected to confirm the need for a transmission line between RihAnd and Delhi in any comprehensive national transmission plan, given the geographic distribution of electricity supply and demand in the country. The economic rate of return for the Northern Region's expansion program is about 13Z, according to benefits based on incremental revenues at average retail tariffs, and quantifiable industrial and agricultural consumers6, surplus. The actual rate of return is likely to be considerably higher it domestic consumers', surplus or industrial output made possible Dy the alleviation of power shortages is taken into account. 65. Project risks are no greater than can normally be expected in operations of this type. Risk of slippage in the implementation schedule is expected to be minimal in view of NTPC's previous experience with transmission facilities construction. In addition, suppliers of HVDC terminal equipment have indicated that terminals can be commissioned on a turnkey basis within 36 months of the placement of orders. The HVDC line also is simpler to construct and install than the AC lines. NTPC will closely monitor the implementation of the proposed project and the ongoing Riband thermal power plant to ensure that the commissioning of these is appropriately coordinated. -26- PART V - LEGAL INSTRUMENTS AND AUTHORITY 66. The draft Loan Agreement between India and the Bank, the draft Project Agreement between the Bank and NTPC, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 67. Special conditions of the project are listed in Section III of Annex III. Execution of the Subsidiary Loan Agreement between India and NTPC has been made an additional condition of loan effectiveness (Section 5.01 of Loan Agreement). 68. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMEMDATION 69. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President May 7, 1985 AID= I Page 1 of 5 TAILS 3* INDIA _ UCILAL UUC&T0 DATA NEMTY 1151* ~ ~ ~ ~ ~ mREPO 089013 (WEEUIHeD, AVEUNAcm) Is ROUT (OST AECWT STINTO) fb 39k ,L Low INCOME KIDuDI INCOE 1 1970^-I rArolk xi ML" ASIA tAc FACrrEC LIlA & PAC LIA CSI*S. -)-- TOTAL 3267.6 3267.6 3287.6 ACRICULTtUAL 1763.S 1780.5 1312.3 CuNM CAPITA (CM) 40.0
Groupe de la Banque mondiale · Memorandum & Recommendation of the President
India - Rihand Power Transmission Project
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Memorandum & Recommendation of the President
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Banque mondiale