India - Combined Cycle Power Project

Docormmnt of The World Bank FOR OMCLIAL USE ONLY g<k'. 2 " /_7 p Report No. P-4254-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOP. RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$485 MILLION To INDIA FOR THE COMBINED CYCLE POWER PROJECT March 10, 1986 This 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.  CURRENCY EQUIVALENTS (As of March 6, 1986) US$1.00 = Rs12.32 Rs 1.00 = US$0.081 Rs 1 million = US$81,731 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, expect as otherwise noted, made at the rate of US$1 to Rs 13.0. FISCAL YEAR April 1 - March 31 Abbreviations and Acronyms CEA - Central Electricity Authority CAIL - Gas Authority of India, Ltd. GOI - Government of India CWh - Gigawatt-hour HBJ - Hazira-Bijaipur-Jagdishpur ICB - International Competitive Bidding LCB - Local Competitive Bidding LRMC - Long-Run Marginal Cost MW - Megawatt NHPC - National Hydroelectric Power Corporation, Ltd. NPP - National Power Plan NTPC - National Thermal Power Corporation, Ltd. REB - Regional Electricity Board REC - Rural Electrification Corporation SEB - State Electricity BLard TOE - Tons of oil equivalent  FOR OMCIAL USE ONLY INDIA COMBINED CYCLE POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiary: National Thermal Power Corporation Ltd. (NTPC) Amount: US$485 million Terms: Repayment over 20 years, including 5 years' grace, at the applicable rate of interest. Onlending Terms: From the Government of India (GOI) to NTPC, with repayment over 20 years, including 5 years' grace, at an interest rate of not less than 13.0Z per annum. GOI would bear the foreign exchange and interest rate risks. Project Description: The project's main objective is to assist in meeting the electricity demand in the Northern and Western Regions of India through the addition of about 1,500 KW of thermal capacity. The project comprises the installation of three combined cycle power stations located at Kawas (Gujarat), Anta (Rajasthan), and Auraiya (Uttar Pradesh), as well as associated transmission lines for connection to the transmis- sion grid. This project will introduce combined cycle operation as a new technology as well as the use of natural gas as a fuel for power generation in India. The gas will be provided primarily from the offshore South Bassein gas field and through the lazira-Bijaipur-Jagdishpur (HBJ) pipeline. There are no unusual risks. NTPC is experienced in the design and construction of generation and transmis- sion facilities but will receive assistance from consultants in the engineering and implementation of the combined cycle units, as these represent a new technology for both NTPC and India. Thi document ha a noretricd dtibution and may be used by recpients only in the perfonmance of their ofici dute Its contents may mo otherwie be disclosednwthout World Bank autwhoution.  Estimated Cost: I/ (US$ Millions) Local Foreign Total Preliminary and Civil Works 59.9 4.4 64.3 Main Electromechanical Equipment 158.9 411.2 570.1 Auxiliary Electromechanical Equipment 67.6 80.8 148.4 Fuel Supply Equipment 4.4 9.0 13.4 Transmission System 110.1 15.1 125.2 Consultancy and Technical Assistance 5.6 5.2 10.8 Engineering and Administration 62.2 - 62.2 Base Cost 468.7 525.7 994.4 Physical Contingencies 24.2 27.5 51.7 Price Contingencies 82.8 112.4 195.2 Total Project Cost 575.7 665.6 1,241.3 Interest during Construction Bank - 37.4 37.4 Other 4.3 3.0 7.3 Total Financing Requirements 580.0 706.0 1,286.0 1/ Includes taxes and duties of US$127.3 million.  (US$ Millions) Financing Plan Local Foreign Total IBRD - 485.0 485.0 GOI/Eexternal Borrowing 475.2 221.0 696.2 NTPC 104.8 - 104.8 580.0 706.0 1,286.0 Estimated Disbursements: (US$ Millions) Bank FY FY87 FY88 FY89 FY90 FY91 FY92 Annual 37.0 133.0 150.0 90.0 50.0 25.0 Cumulative 37.0 170.0 320.0 410.0 460.0 485.0 Rate of Return: Northern Region 12%; Western Region 13Z Appraisal Report: No. 5831-IN, dated February 28, 1986.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPHENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE COMBINED CYCLE POWER PROJECT 1. I submit the following report and recoramendation an a proposed loan to India for US$485 million equivalent to help finance a project to assist in meeting the electricity demand in the Northern and Western Regions of India through the construction of three power plants in the States of Cujarat, Rajasthan, and Uttar Pradesh. The loan would have a term of 20 years, including five years' grace, at the applicable Bank rate of interest. The proceeds of the loan would be relent to the National Thermal Power Corporation, Ltd. for 20 years, including five years' grace, at an interest rate of not less than 13X per annum. Additional financing for the project, up to an amount of about US$221 million, may be secured through commercial bank loans or from other sources of cofinancing to help meet the foreign exchange cost of the major items of equipment. PART I - THE ECONOMY I/ 2. An economic report, "India: Structural Change and Development Perspectives" (5593-IN, dated April 24, 1985), was distributed to the Executive Directors on May 1, 1985. Couatry data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 160 million (in mid-1985) and an :ierage per capita income of about US$260. Agriculture continues to dominate the economy, accounting for 36% of CDP, 23Z of exports and about two-thirds of employment. The steady increase in population, which continues at a rate of 2.2% a year, has put increasing pressure on natural resources, in particular cultivable land. By the mid-1960s, nearly all productive land had been brought under cultivation. While irrigation continues to increase total cultivable area, an increasing share of the labor force will have to be absorbed in non-agricultural activities. Industrial development has not progressed rapidly enough to provide employment opportunities for the growing labor force, or to bring about a rapid economic transformation, with sig-- nificantly higher productivity and income levels. As a result the long- term growth of per capita income has only averaged about 1.4% p.a. and close to one-half of India's population continues to live below the poverty line. The pervasiveness and intensity of poverty is such that its alleviation has been and remains at the core of India's development strategy. 1/ Parts I and [I of the report are similar to Parts I and II of the President's Report for the Second Andhra Pradesh Irrigation Project (No. P-4238-IN), dated February 27, 1986).  -2- 4. During the 1950s and 1960s, India'.s economic performance was generally characterized by slow economic growth, moderate inflation and a sustainable external position. GDP rose at about 3.5%, witfi agriculture and industry growing at 1.8% and 4.82 respectively; imports increased by 4.6Z and exports by 5.8% a year. India was able to reduce its dependence on foodgrain imports from a peak of 14% of total foodgrain consumption in 1966/67 to 4.5% by 1969/70 through improvements in agricultural production, but progress in poverty alleviation was slow mainly because of continued high population growth. 5. In the early to mid-1970s, in response to a sharp deterioration in India's terms of trade, the Government introduced various policy measures designed to stimulate exports. This resulted in a large increase in export growth to about 7.3X per annum in the 1970s compared with only 2.2% per annum between 1950/51 and 1969/70. While expanding world markets, particularly in the Middle East, contributed to this growth, liberalized access to imported inputs and more effective export incentives played a major role. The success in the export expansion effort coupled with continued import substitution, particularly of foodgrains resulted in a surplus on current account between 1976/77 and 1978/79, which was further enhanced by increased concessional aid flows. India was thus in a rela- tively favorable position to deal with the increases in international oil prices, the'sharp deterioration in the terms of trade and a series of poor harvests. The comfortable foreign exchange position also played a major role in the Government's decision to initiate import liberalization. 6. Towards the end of the 1970s, India again faced considerable domestic difficulties. In 1979/80 it experienced one of the country's worst droughts which caused a large reduction in agricultural production. In addition, industrial production, plagued by labor unrest and a vicious circle of supply shortages (coal, power and transportation), failed to expand. These events coincided with a second round of international oil price increases. As a result, the current account reverted to a deficit position and the remarkable price stability that the Indian economy enjoyed after 1975 came to an abrupt end. The Government responded by mounting an adjustment program, which was embodied in the Sixth Five Year Plan (1980/81 - 1984/85). The program aimed at raising the GDP growth rate from its historical level of 3.6% to 5.2Z per annum while adjusting the country's external balance to the adverse price developments in world markets. The major elements of the program were alleviation of infrastructure and supply constraints, increased energy independence, improved efficiency in resource use, promotion of exports and efficient import substitution. Economic Performance Under the Sixth Plan 7. Overall the Government's adjustment program has been effective despite the severe drought in 1982/83 and a worsening of the external environment in the early 1980s. During the Sixth Plan period, GDP grew by  -3- 5.1X per annum, 1I/ well above India's long-term growth rate of 3.6%. However, overall growth during the first half of the 1980s has not been steady, mainly because of the effect of uneven rainfall on agricultural production. In 1980/81 and 1981/82, the economy substantially recovered from the 1979 drought, with real GDP growing by 7.6Z and 5.3Z, respectively. The recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15X in 1980/81 and 5.5Z in 1981/82. A severe drought in mid-1982 brought the economic recovery to a halt. Agricultural output declined by 4Z, which in turn reduced GDP growth to only 1.8%, and put further strains on the balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain imports, procurement and distribution, and the increased allocation of power to irrigation pumps mitigated the adverse effects of the poor monsoon. An excellent monsoon combined with satisfactory performance of the infrastructure sectors, in particular coal and transport, led to a recovery of the economy in 1983/84. Agricultural output rose by 9Z, industrial output by 4.5Z and overall GDP by 7.4Z. The power sector, however, emerged again as a con- straint on higher growth, especialLy in industry. In 1984/85, despite a mediocre monsoon and difficult political circumstances, the aggregate growth of the economy is likely to range between 4 and 4.5Z. 8. During the Sixth Plan period, foodgrain production continued to grow at an average annual rate of 2.6% a year sufficient to maintain a broad balance between supply and steadily increasing domestic demand. The progress achieved is an indication of the effectiveness of programs to expand irrigation, strengthen extension and encourage efficient use of other agricultural inputs which are being implemented. Bountiful harvests have led to record foodgrain stocks in recent years. Over the past year, Government held stocks have increased by more than 40%. Kaintenance of ample, balanced operating stocks to ensure smooth operation and even expansion of the public distribution system remains a top priority of Indian agricultural policy. Yet, the financial cost of foodgrain storage and subsidies represent a rapidly growing burden on the budget. 9. Growth of the industrial sector during the Sixth Plan period was slow and uneven. Industrial growth averaged about 3.4Z a year--below the growth rates achieved in the 1960s and 1970s. An inadequate policy environment, coupled with depressed domestic demand, power and raw material shortages, as well as labor unrest are the main causes for the slower than anticipated growth of the industrial sector. After the severe drought in 1979/80, manufacturing output grew at 1.7% in 1980/81 and 3.3% 1981/82. The drought in 1982/83, which led to widespread shortfalls of agro-based raw materials and a sharp drop in the demand for consumer durables, combined with a prolonged textile strike in Bombay, reduced the 1/ Actual GDP growth rate during the 1979/80-1984/85 period was 5.1Z per annum. However, this figure overstates the trend in recent years because of the relatively low base year (1979/80). The 4.5Z GDP growth per annum and 3.3% annual agricultural growth between 1980/81-1983/84 (two "normal" years) are more representative of the growth rates during the period.  -4- growth of industrial output to 1.7% in that year. Following the excellent monsoon in 1983/84, industrial output gained momentum and grew by 5.0%. Preliminary estimates place the growth of the manufacturing sector at about 5.5Z in 1984/85. 10. The performance of the infrastructure sectors was mixed under the Sixth Plan. While electric power generation, coal production and railway traffic grew by 8.7%, 6% and 2.5% a year respectively, oil and gas produc- tion increased by 22.6%. The rapid expansion of domestic oil production is largely the result of India's 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 1984/85 domestic oil production is estimated to have reached 29.4 million tons. While the gap between domestic consump- tion of petroleum and production remains large, India's dependence on oil imports dropped from 63% of consumption in 1979/80 to 30% in 1984/85. About two-thirds of current output comes from offshore fields around Bombay High. As most of these fields have now reached their mature stage, further increases in domestic oil production will have to come mainly from new discoveries. 11. India's economy has reverted from a situation of a resource surplus in the late 1970s to an aggregate resource deficit during the Sixth Plan period. The gap between gross investment and national savings increased from negligible levels to an average of 2.1% of CDP in 1980-85. Cross domestic capital formation increased from an averige of 22.6Z of CDP in 1975-80 to 24.7% in 1980-85 while gross qational savings remained constant at an average of 22.6% of GDP in both periods. The increase in capital formation mainly resulted from an increase in the public invest- ment rate, but it was largely a financial rather than a real phenomenon since prices of investment goots increased considerably faster than the general price level. 12. The basic thrust of fiscal policy during the Sixth Plan was to provide sufficient resources for growth and planned investment while maintaining inflation under control. However, the Sixth Plan period was characterized by significant budgetary resource constraints. Despite massive additional resource mobilization efforts, public sector deficits exceeded 7% of GDP as compared to only 4-5% of GDP during the mid-1970s. The shortfall was met by additional market borrowings, both domestically and from abroad and by deficit financing. Major reasons behind the large deficits were continued losses by most departmentally-run undertakings, unsatisfactory performance of the two major non-departmental undertakings of the States (the State Electricity Boards and the State Road Transport Corporations), and the increasing importance of subsidies which are estimated to have reached 2.8% of GDP in 1984/85. Of these, fertiLizer accounted for more than 0.8Z of CDP, and food subsidies nearly 0.5% of GDP. 13. Developments in the savings-investment balances were mirrored in the balance of payments. Thus, India's current account balance, which had recorded surpluses between 1976/77 and 1978/79, reverted to deficits averaging US$3.5 billion and 2.1% of GDP during 1980-85. Several develop- ments contributed to these relatively large deficits. First, the terms of  -5- 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 slnwer development activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Fourth, export growth was sluggish partly due to growing domestic demand, and, perhaps most significantly, due to depressed foreign markets and prices. Faced with a growing need for external capi- tal inflows and stagnation in the availability of concessional assistance, India drew SDR 3.9 billion from the Extended Fund Facility of the IMP and borrowed significant amounts on commercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. 14. Price performance during the Sixth Plan period has been mixed. The overall improvement in economic performance in the early 1980s, com- bined with more restrictive monetary policies in 1981/82 and 1982/83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from 18% in 1980/81 to only 2.6% in 1982/83. The lagged effects of shortages of foodgrains in 1982/83 and of other agricultural products and industrial goods in 1983/84 coupled with a rise in the domestic cost of imports and rapid liquidity growth, gave a boost to inflationary pressures towards the end of 1983/84. The annual average growth of wholesale prices rose to over 9% in 1983/84, and the rate of growth of consumer prices exceeded 12%. In September 1984, the Government took a number of measures to dampen pressure on prices including increased imports of important agricultural commodities (sugar, jute, coconut oil and others), releases of sugar stocks for distribution through fair price shops, and a reduction in wheat prices for flour mills. These measures, together with a decline in cereal prices as a result of the bumper crop in 1983/84 and a generally restrictive budgetary policy, led to a slowdown in the rate of increase of wholesale prices to about 7.1% in 1984/85. 15. Developments in the Indian economy during the Sixth Plan under- score the progress that has been made in recent years towards accelerated GDP growth, external adjustment, and increased investment. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. It is a tribute both to the fundamental soundness of key policies and programs, particularly in agriculture, and to the strength and effectiveness of public administration, that neither the serious political disturbances in Punjab, nor the assassination of Prime Minister Indira Gandhi, resulted in significant disruptions to the performance of the economy in the last year of the Sixth Plan. But the results during the Plan period also highlight the disappointing perfor- mance of industry, the continuing shortfalls in electric power generation, the rising public sector deficits, the importance of regaining and sus- taining momentum in export growth and the need for continued prudent economic management so as to avoid a resurgence of inflation while gener- ating adequate resources for development. This mixture of achievements and challenges provides the context for an assessment of development prospects and policies.  -6- Development Prospects and Policies 16. To deal effectively with its dual challenges of alleviating per- vasive poverty and expanding employment opportunities for a growing labor force, the Seventh Plan is expected to aim at sustaining an annual rate of growth of CDP of at least 5Z. The Seventh Plan which will lay down the development strategy for 1985/86-1989/90 is also likely to continue the emphasis on agriculture, energy development, export promotion, domestic import substitution where economically justifiable and the removal of infrastructural bottlenecks. 17. Achieving a CDP growth of around 52 a year will place heavy demands on policy adjustment and entail major challenges. India will need to: (a) maintain the recent higher rate of expansion of agricultural production; (b) accelerate industrial production and export growth through policy changes which enhance competition and efficiency; (c) expand supply capacities in the economy by improving basic infrastructure services and the availability of energy; (d) imprcve the efficiency with which resour- ces are used, including particularly the existing capital stock in infrastructure and industry; and (e) further improve the already high resource mobilization effort. 18. Agriculture. Despite an impressive performance under the Sixth Plan, Indian agriculture faces many challenges in the second half of the decade. As possibilities for extending cultivated acreage shrink, agricultural growth will depend on finding new ways of increasing the productivity of land through further development of irrigation, better water management, more intensive use of new technology, efficient delivery of inputs and services, and appropriate pricing policies. High priority must be given to the expansion of the country's irrigable area through completion of ongoing irrigation projects, as well as selective investment in new undertakings. Besides creating new irrigation potential, the efficiency of irrigated farming will have to be enhanced through the improvement of water management practices in existing irrigation systems. Greater emphasis should also be given to obtaining higher yields under rainfed and dryland farming conditions. Finally, even greater efforts must be made to build and strengthen institutions to ensure the efficient delivery of agricultural services, input supplies, credit and technology. 19. Industry and Trade. Prospects for raising India's GDP growth rate will, to a large extent, depend on more rapid industrial production and export growth to be attained through improved productivity and efficiency. A key requirement will be greater competitive pressure on industry than has been the case in the past. The size and domestic orien- tation of the Indian economy make it necessary that this competitive pressure come mainly from within the domestic economy. An important complement, however, will be greater exposure to foreign trade to stimu- late domestic competition as well as to induce technological innovation and modernization. 20. To increase domestic competition, domestic policies will need to allow freer entry and exit of firms in the industrial sector and greater reliance on market price signals. While the G3vernment has taken various initiatives in the above directions during the past several years, the  -7- most significant were announced in the context of the 1985/86 Budget. These include the broadening of licensing categories for certain industries, delicensing for others, increases in the size limits for MRTP 1/ and small-scale industries, reductions in the incentive for small- scale industries to stay small and various initiatives to stimulate effi- cient indigenization of 'sunrise' industries (energy exploration equipment, computers, telecommunication equipment, motor vehicles and parts, general electronics). These are significant advances that need to be sustained in future years. 21. Changes in external trade policy will also be required to stimu- late export growth which is essential not only for current financing of imports, but to enhance borrowing capacity, to service debt, to provide an impetus to the economy from the demand side, and to expose entrepreneurs to the quality-consciousness of competitive external markets. While some changes have been recently introduced, there remains a need to: (a) provide greater access to imported inputs and capital goods through continued import liberalization (b) review tariffs, eliminating anomalies and lowering their overall level; and (c) modify trade policies in such a way that the net impact of incentives is more neutral between exports and import substitution. 22. Infrastructure Sectors. Investments in these sectors currently constitute about one-third of total investment in India, and the efficiency with which these investments are managed has an important bearing on the efficiency of total investment and the growth rate of the entire economy.- There is substantial evidence that better planning and management of public investments in power, coal, railways and irrigation could improve returns and lower the current capital-output ratios. For example, more efficient use of investment could be achieved by better water management in irrigation projects, improved load factors in thermal power generation, better capacity utilization in the fertilizer industry and improved efficiency in railway transport. 23. Resource Mobilization. India's gross national savings rate (22.6% in i980-855 is already high for a country at India's level of income. Nevertheless, the investment required to sustain the relatively high GDP growth rates realized during the Sixth Plan period--while holding foreign savings as a share of GDP at prudent levels--will require some further increase in the aggregate savings rate especially in public savings. Because there will continue to be well-founded demands for expansion of current and capital expenditures in the public sector, the burden for a reduction in the savings investment gap has to be put on the revenue side. Increasing tax rates beyond their current high levels would be counter productive. Thus, economically efficient pricing policies in public enterprises, supported by improvements in their operational efficiency, are to be preferred over tax increases as vehicles for increased public resource mobilization. The sheer size of past and present public enterprise investment indicates that if proper returns were made even only a part of them, an increase in revenues of about 3Z of GDP would be 1/ Monopolies and Restrictive Trade Practices Act, 1969.  -8- attainable. In a number of sectors, e.g. thermal power, railways, and fertilizer, concerted efforts are being made--with Bank assistance-to increase efficiency and reduce costs. These efforts need to be improved and expanded into new areas. 24. Balance of Payments. A policy of sustained GDP growth of 5 per annum will need to be complemented by measures which assure a viable balance of payments position. Acceleration of industrial growth will lead to a substantial increase in import requirements, even after allowing for continued import substitution of key bulk commodity items. Bank staff estimates place the export volume growth necessary to support these grow- ing import requirements without excessive increases in external borrowing at about 8% a year over the Seventh Plan period. Prospects for India to attain the needed higher export growth rates appear to be reasonably good because India's share in total world exports in value terms is only about 0.4%, leaving ample room for growth. Furthermore, India's exports are relatively less sensitive to fluctuations in demand in the OECD industrial countries because exports are well diversified with respect to both products and markets. Nevertheless, success in India's export drive will depend heavily on changes in domestic policy to improve the supply and profitability of exports. 25. Even assuming favorable export performance, India will continue to need substantial external capital flows to augment its own resources for the foreseeable future. Even with 8% export growth, the 5% GDP growth implies an increase in gross capital inflows from US$17.5 billion to US$34.5 billion between the Sixth and Seventh Plan periods. In the past, the bulk of this financing was provided in the form of official develop- ment assistance. In more recent years the availability of concessional assistance to India has declined. Total bilateral grants and concessional loans declined from a level of about US$1.3 billion per annum over the years 1979/80-1981/82 to US$1 billion in 1983/84. Moreover, there was a large deterioration in the terms of aid from multilateral sources. For example, while total lending from the Bank Group continued to increase in nominal terms, the grant element declined from 71% to 41X as new com- mitments of IDA declined from a peak of $1,535 million in FY80 to $673 mil- lion in FY85. 26. In the event that official development assistance does not increase significantly from recent levels, nearly the full additional financing required would have to be provided from additional non- concessional borrowing from official and commercial sources. This will increase India's debt service ratio from the present level of 15.5X to 21.62 by 1989/90. Provided India can in fact, expand export earnings along the lines described earlier, and provided India's past record of prudent borrowing and debt management continues, the country should be able to raise the projected amounts. While its foreign resource require- ments would be manageable, the increase in its external debt exposure would leave it with little cushion to deal with unfavorable eventualities and with the risks of policy change. 27. In the short term, a relatively large level of external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of the growth strategy  -9- described earlier. Although India is currently in a position to increase borrowing on conmercial 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. While therefore a greater volume of both official concessional and non- concessional assistance is warranted, concessional assistance, in particular, will be invaluable in moderating the build-up in India's debt service burden. Apart from'the quantitative arguments for concessional aid, there remains the imperative to assist India in addressing the problems of pervasive poverty. While India is now better placed than other poor countries to tackle its development problems, the mobilization of additional resources to address poverty problems is heavily constrained. goncessional assistance can also play a very important role in relieving this constraint. 28. Summary. India has demonstrated 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 vould 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. 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, improveme:t of economic efficiency, and investment in infrastructure, supported by adequate flows of external borrowing and aid. PART II - BANK GROUP OPERATIONS IN INDIA 29. Since 1949, the Bank Group has made 91 loans and 182 development credits to India totalling US$8,487 million and US$13,753 million (both net of cancellation), respectively. Of these amounts, US$1,544 million has been repaid, and US$7,360 million was still undisbursed as of September 30, 1985. Bank Group disbursements to India in the current fiscal year through September 30, 1985 totalled US$179 million, repre- senting an increase of about 5 percent over the same period last year. Annex II contains a summary statement of disbursements as of September 30, 1985. 30. Since 1959, IFC has made 35 commitments in India totalling US$301 million, of which a total of US$168 million has been repaid, sold, terminated or cancelled. Of the balance of US$133 million, US$126 million represents loans and US$7 million equity. A summary sLatement of IFC disbursements as of September 30, 1985, is also included in Annex II (page 5). 31. The thrust of Bank Group assistance to India has been consistent 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 praductivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer,  -10- 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 development finance institutions. Recognizing th'e 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 infrastruc- ture projects. 32. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the 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 sustained 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 GOI's efforts in promoting greater efficiency and faster development of the industrial sector, increased assistance will be provided for industrial development. Third, in line with the stress which the Seventh Plan gives to the expansion and more efficient use of basic infrastructure capacity and to the development of India's indigenous hydrocarbon resources, the Bank Group will continue to provide substantial support to the development of the energy, transport and telecommunications sectors to alleviate critical shortages which constrain output in both the 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 succes- ses in lowering birth and death rates, still increases by about 16 million each year. 33. 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 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 Sixth Plan period. As in the past, Bank Group 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. 34. India's poverty and needs are such that whenever possible, exter- nal capital requirements should be provided on concessional terms.  -11- 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$1.5 billion in FY80, 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. Given its development prospects and policies, India is judged creditworthy for Bank lending to supplement 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 considerably above historical levels, they are still manageable and will not adversely affect India's creditworthiness. 35. Of the external assistance received by India, the proportion contributed by the Bank Group has grown significantly. In 1970/71, the Bank Group accounted for 22% of total commitments, 11% of gross disbursements, and 10% of net disbursements as compared with 68%, 38% and 47%, respectively, in 1984/85. In 1984/85, about 26.3% of India's total debt service payments were to the Bank Group. On March 31, 1985, India's outstanding and disbursed external public debt was estimated to be about US$26.5 billion, of which the Bank Group's share was US$11.1 billion or 42% (IDA's US$8.9 billion and IBRD's US$2.2 billion). As of September 30, 1985 outstanding loans and credits to India held by the Bank totalled US$20,696 million, of which US$7,360 million remain to be disbursed, leaving a net amount outstanding of US$13,336 million. PART III - THE POWER SECTOR Commercial Energy Resources 36. India's principal commercial energy sources comprise coal, oil, gas hydro and nuclear energy. 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 million are proven. Although reserves are ample, the quality of coal produced is generally low and is deteriorating. The high ash content, up to 50Z, increases power station capital and operating costs and exacerbates the problems that Indian Railways has in moving the volume of coal required for power generation. GOI's policy of concentrated development of pithead stations helps to address the transport problem but does not reduce the other costs associated with poor coal quality. In any case this policy is constrained by pollution and water availability. GOI appointed the Fazal Committee to examine th- problems of coal supply to thermal power stations. This committee, which reported in October 1983, made a large number of recommendations, affecting all aspects of supply from coal preparation to railway operations; the great majority of these recommendations have been  -12- accepted.by GOI. The Bank is supporting GOI's efforts in this area through its lending to the coal sector. The Dudhichua Coal Project includes studies to examine coal linkages and identify potential improve- ments in handling and transportation facilities. Coal quality is also being addressed, particularly through the inclusion of appropriate quality incentives in coal supply contracts. 37. Proven and probable petroleum reserves comprise approximately 510 million tons of oil and 390 million toe of natural gas. Despite recent increases in domestic production, India still imports about one third of its oil requirements, which in 1983/84 cost the equivalent of 40% of its merchandise exports. GOI has therefore given high priority to oil and gas exploration and, at the same time, has implemented measures, including economic pricing, to restrain the rapidly growing demand for oil products, particularly middle distillates. In the past, GOI has generally limited natural gas to premium markets such as petrochemicals and fertilizer; however, delays in the construction of gas infrastructure have resulted in substantial volumes of gas being flared. The Bank has encouraged GOI to develop the necessary infrastructure and to allow other economic uses of gas including power generation. In response, GOI has begun to invest in pipelines and has recently revised its policy on the use of gas for power generation. 38. India's hydroelectric potential is equivalent to about 100,000 MW. At present only 14,000 MW have been developed, 4,700 MW are under con- struction and a further 23,000 MW are being studied for future development. The prominent role of hydro generation in regional least- cost power development plans has led GOI to emphasize the need to accelerate hydro development; however, progress has been slow owing to the lack of financial resources of States with the greatest hydro potential, the time required to resolve water rights and environmental issues, and the limited technical resources available for the simultaneous preparation of a large number of hydro schemes. Attempts to address these issues through increased central sector involvement have so far met with limited success (para 46). 39. The country's uranium reserves could support a modest nuclear program (8,000 - 10,000 MW), and thorium reserves are enough for a large fast breeder program. India's nuclear power generating capacity is cur- rently 1,095 MW. GOI's Strategy in the Power Subsector 40. In essence, the Five-Year Plan constitutes the only formal state- ment of GOI's energy and power policies. Although formalization of power policy, in particular, is made difficult by the constitutional arrangement in which responsibility for power is shared between Center and States (para 46), the Seventh Plan nevertheless reflects a broad consensus of the objectives of energy and power policies. The principal objectives of GOI's energy policy may be sunmmarized as to: (a) develop energy supplies economically at a rate commensurate with growth in the economy and social needs; (b) substitute indigenous energy resources for imported petroleum wherever this is both technically and economically feasible; and (c) encourage the rational and efficient use of energy resources. Although  -13- power policy is governed by essentially the same objectives, alleviation (or at least containment) of acute power shortages suffered nationwide dominates GOI's short-term strategy. Over the longer term, achievement of Least-cost development assumes greater importance. In addition to the initial steps of its long-term strategy, GOI's short-term strategy provides for a number of specific measures to address power shortages, including: (a) rehabilitation of thermal plant - a program involving some 30 plants is currently being finalized; (b) accelerating the implementation of ongoing projects - a recent reorganization of Government created a new ministry specifically to monitor and improve implementation of public sector projects; (c) permitting industries to invest in captive generation; (d) permitting the construction of shorter gestation gas or oil-fired plants; and (e) improving the quality and reliability of coal supplies, through implementation of the majority of the recommendations of the Fazal Comittee. 41. GOI's long-term strategy requires a blend of policies designed to address investment, organizational/institutional and financial issues. With respect to investment policy, resource constraints will severely limit the quantum of investment available to the power subsector. The Seventh Plan allocation is almost exactly half the sum sought by the Working Group on Power, a sum which was itself inadequate to eliminate power shortages. However, broad agreement within India has been reached on qualitative aspects of long-term investment policy which will emphasize: (a) accelerated hydro development; (b) an increased proportion of investment in transmission and distribution; (c) the formation of a national grid; (d) coal beneficiation to improve both quality and homogeneity; (e) diversification of the modes in which coal for power generation is transported, possible examples in_lude the introduction of coastal shipping or slurry pipelines; (f) diversification of the fuels used for power generation, GOI now recognizes that gas fired plant, especially combined cycle, has an economic role to play in system development; and (g) steady growth in the development of nuclear power.  -14- 42. Long-term organizational/institutional and financial issues are more controversial and GOI still needs to identify clearly defined strategies in these areas. GOI recognizes the institutionaL and financial weakness of many of the SEBs but constitutional constraints limit the rate at which the Center can bring about improvement. Measures which GOI is following include: (a) increasing the role of efficient central sector institutions, particularly NTPC; (b) implementation of a uniform system of commercial accounting for all SEBs; (c) requiring, through recent amendment of the Electricity (Supply) Act, that SEBs earn a rate of return of 3Z after all expenses and interest--a significantly more stringent financial requirement than hitherto; and (d) a more receptive treatment of private sector proposals for power generation, particularly when it can be demonstrated that such developments are mobilizing resources which would not otherwise be available to the public sector. In addition, GOI is contemplating the formation of a Power Finance Corporation as a financial intermediary serving the subsector. Funds lent by the Corporation would be attractive to SEBs because, at least in part, they would be additional to agreed plan outlays. However, loans would be subject to conditionality designed to improve the efficiency and financial strength of beneficiaries. 43. GOI recognizes that the development and operation of an integrated national grid will be difficult to achieve with the present organization of the subsector and, as noted below (para 46), GOI is contemplating the formation of a separate body with responsibility for the grid. However, many commercial and institutional problems remain and, as yet, GOI has no strategy for their solution; although, under the Rihand Power Transmission Project, GOI has accepted that these aspects of grid development need to be addressed. Electricity Supply and Demand 44. Almost 60% of India's eLectricity is generated from coal, 34% from hydro, and the rest from oil, nuclear energy, and natural gas. Although a number of thermal projects are planned for the short-term, the shares of hydro and nuclear are likely to increase in the long run. Electricity losses have risen slowly but steadily over the last few years and now exceed 26Z of gross generation. The deteriorating quality of coal has increased station use and the large expansion in very low load density rural electrification, together with otherwise inadequate investment in transmission and distribution, has increased system losses. The Bank has stressed the importance of balanced investment to reduce system losses and will continue to support transmission and distribution investments designed to achieve this objective.  -15- 45. 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 30% of the latter. Even though the power subsector receives 20-25% of total public investment, electricity supply has not kept pace with demand and shortages have been prevalent throughout the country. During the last five years, shortages have been estimated at, on average, about 13X of electricity require,nents. The principal sectoral shares of total electricity consumption are: industrial, 51Z; agricultural, 182; and domestic, 9%. Agriculture's share has grown steadily owing to increased electrical irrigation pumping made possible by rural electrification and encouraged by heavy subsidies. Total consump- tion has grown at an average annual rate of 8% during the past two decades although the increasing severity of power shortages suggests that poten- tial demand has grown more rapidly. The Central Electricity Authority (CEA) has forecast demand growth in the range 10-11% per year between 1984/85 and 1994/95. However, actual growth will continue to be supply constrained. Organization of the Power Subsector 46. Responsibility for the supply of electricity is shared between the Central and State Governments. The State Electricity Boards (SEBs) and the Regional Electricity Boards (REBs) are controlled by States; CEA is administered by the Department of Power within the Ministry of Energy, and the National Thermal Power Corporation (NTPC), the National Hydro-Electric Power Corporation (NHPC), and the Rural Electrification Corporation (REC) are central sector corporations responsible to the Department of Power. SEBs were instituted under the Electricity (Supply) Act, 1948 (the Act), to promote the development of the power subsector and to regulate private licensees such as the Tata Electric Companies. Although 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 towards national integration, the SEBs have been grouped into five regional systems, each coordinated by an REB. Coordination respon- sibilities include overhaul and maintenance programs, generation! schedules, interstate 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 formally responsible for vetting investment proposals, providing consulting support to SEBs, assisting in the integration of supply systems, training of personnel, and research and development. However, in its execution of these responsibilities, CEA has been severely limited by shortages of skilled staff and other resources. Without any direct responsibility for the provision of finance it has been unable to assume a very positive roLe in the development of the subsector. In view of this, GOI is contemplat- ing the formation of a Power Finance Corporation to complement CEA in fostering development of the subsector. NTPC and NHPC were formed in 1975 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 control water rights and are reluctant to relinquish hydro sites to the Center. This has prompted GOI to explore joint ventures between the Center and States for  -16- the development of hydro schemes. REC was established in 1969 to coor- dinate rural electrification and provide financial and technical expertise for SEB schemes. Currently, REC finances more than 70% of totaL rural electrification investment. At present there is no organization with responsibility for the development of a national transmission grid, although GOI is contemplating the formation of such a body. Finance and Pricing 47. Although four SEBs are estimated to have made a profit in 1984/85 the SEBs as a whole are estimated to have made a combined loss in that year of approximately Rs 11,230 million (US$ 935 million) exclusive of subsidies, corresponding to a return on historically valued net fixed assets-of +2.3% before interest and -8.1% after interest. Internal cash generation, which was equivalent to only about 2.7% of capital expenditure in 1984/85, has been corresponuingly poor. Almost all SEB capital expen- diture is financed by debt, primarily loans from State governments. Recognizing the unsatisfactory state of SEB finances GOI has, through an amendment to the Act notified in April 1985, required SEBs to earn an annuai return, after meeting operating expenses, taxes, depreciation and interest, of at least 3% on their historically valued net fixed assets (GOI does not accept the principle of revaluation of assets). The Bank supports this initiative by GOI and has, under the Chandrapur Thermal Power Project (Loan 2544-IN), changed the form of its financial covenant to reflect this. Although in terms of the Bank's conventional method of calculation, the return specified in the Act corresponds to a modest return on revalued assets in the range of 4% to 62, it, nevertheless, represents a very substantial improvement on current performance. Many SEBs, particularly those of the poorer States, are expected to experience considerable difficulty achieving this level of performance. NTPC's tariffs are approximately equal to its long-run marginal costs (LRMC); however, as is to be expected from their current financial performance, SEB's tariffs do not adequately reflect LRMCs. An analysis of 1981 SEB tariffs indicated that they were on average only 52% of LRMC. While adherence to the stipulated rate of return would improve the overall level of the tariff, the structure is still unsatisfactory. Tariffs are fre- quently excessively complex and very little has been done through tariffs either to achieve load management or to tap selectively consumers' will- ingness to pay, where this substantially exceeds existing tariff levels. At the instigation of the Bank, LRMC tariff studies were carried out for almosL all of the States in the late 1970s. However, these studies were generally of poor quality and the Bank has since endeavored to agree with GOI on a methodology for LRMC tariff studies. Progress has been slow as GOI continues to oppose economic pricing of power for reasons associated with social and agricultural objectives. In lending to individual SEBs the Bank will continue to address State-specific programs to improve resource mobilization, for example, by developing financial programs capable, as a minimum, of achieving the rate of :-turn specified in the Act. Where higher returns are both feasible and desirable the Bank will press State governments to use their discretion under the Act to notify a higher rate of return. So far as tariff structure is concerned, the Bank will continue to require tariff studies wherever tariff structures appear to be badly distorted, in order to impress on the relevant authorities the true costs of cross-subsidization. This has been done under both the  -17- Chandrapur Thermal Power Project and the Kerala Power Project (Loan 2582-IN). However, resistance to economic pricing is such that progress in pricing reform is likely to be slow. Power Subsector Planning 48. The Bank has consistently encouraged GOI to pursue integrated planning and coordinated operation of the country's electricity supply systems. In response, GOI has prepared a set of regional least cost development plans, published as the National Power Plan (NPP) in 1983. Although the NPP represents a good first step towards integrated planning, it needs further refinement and regular updating. In addition, such a plan can only lead to effective improvements if complemented by measures to bring about coordinated system operation. At present only the Northern Region is achieving this. GOI is encouraging States to reach the neces- sary agreements on operating parameters but progress is likely to be slow so long as severe power shortages exist. Even if coordinated intra- regional operation is achieved, inter-regional transfers will be very difficult without the use of direct current facilities to overcome problems of frequency control. The first such facility, a link between Northern and Western Regions, is being financed by the Bank under the Central Power Transmission Project (Loan 2283-IN). A second direct cur- rent link has been included in the Rihand Power Transmission Project (Loan 2555-IN). To facilitate further integration GOI has agreed, under the latter projects to undertake a study of the long-term development of a national transmission system and to examine related institutional and commercial issues. Disparities between the long-term NPP, national five- year plans, short-term budgets and actual performance have been substantial. Owing to the lack of resources, fewer projects have been included in the five-year plans than in the NPP and, as a result of inade- quate allowance for escalation and delays in project implementation, still fewer have been executed. Consequently, the shortage of power has become more acute and, over the next decade, India expects its power deficit to increase substantially. This deficit has undermined rational planning by encouraging rapid expansion of supply rather than least-cost development; for example, shorter gestation thermal plant has been favored at the expense of lower cost hydro. Furthermore, it has prompted overinvestment in captive plant, a second best measure leading to excessive use of high- value petroleum products for power generation. In addition to supporting GOI's efforts to increase the supply of power, the Bank will continue to stress to GOI the role of pricing and load management in eliminating the deficit, and the importance of integrating planning and pricing. Management and Operations 49. In contrast to the good performance of NTPC, the SEBs' management and operational capabilities have not kept pace with the expansion of supply. In general, SEBs have adequately qualified engineering staff, but lack experienced personnel in financial planning and control. The rela- tively low status and pay of these personnel exAcerbates the already significant pay differential between the pubLic and private sectors and makes it difficult to recruit competent staff. Management practices are generally outmoded and inadequate. Accounts have been maintained prin- cipally to track cash receipts and expenditures, and there has been little  -18- use of accounting information for managerial purposes. Consequently, the Bank has encouraged GOI to develop a new uniform accounting system for SEBs. After initial delays, implementation is now proceeding. In addition, the Bank will continue to support institutional development programs through lending to individual SEBs. 50. The operations of many SEBs are hampered by the poor condition of their plant and equipment. Factors that have contributed to the poor state of thermal plant include inadequate maintenance (due to capacity shortages), deficiencies in manufacture, lack of spares, and the poor qiuality of coal; in general, these problems have been recognized by the relevant authorities and corrective steps are being taken. Distribution systems have suffered from inadequate maintenance and overloading owing to inadequate investment. Rehabilitation, particularly of thermal plant and distribution networks, appears to be a very cost-effective way to improve efficiency and system capacity. GOI is currently preparing a rehabilita- tion program for thermal plant but is less able to effect improvements in distribution. The Bank will continue, whenever appropriate, to include rehabilitation components under loans made to SEBs. Bank Group Strategy in the Power Subsector 51. The Bank supports the elements of GOI's strategy identified above but feels that, while each of these elements is desirable, they do not address all of the serious deficiencies in the subsector. In particular, additional efforts are needed to address problems in the areas of planning, pricing/load management, institutional development and finance. The prevalent nature of these problems suggests that a sector-wide approach should be sought. However, the comparative autonomy of the States/SEBs from the Center makes it difficult to achieve progress in this way. With the exception of the introduction of uniform commercial accounting in SEBs, few improvements at the State level have been realized through umbrella projects coordinated by CEA or REC, primarily owing to the very weak control that these institutions are able to exe-cise over SEBs. Consequently, the Bank is changing the mix of its lending to the subsector away from umbrella projects, coordinated by CEA or REC, towards a more direct involvement with individual SEBs, where State-specific programs can be designed to address areas of deficiency. Initial experience with individual SEBs suggests that the prospects for improve- ment are encouraging in most areas except pricing. Despite espousing energy prices "which reflect true costs" in both the Sixth and Seventh Plans, GOI and the States have, until now, opposed the principle of economic pricing of power, for reasons associated with social and agricul- tural objectives. The Bank will continue to press for improvements in both pricing and the other areas identified above, e.g. through financial recovery and institutional development programs tailored to the require- ments of individual SEBs. However, as indicated earlier, there is con- siderable resistance to financial reforms within the sector. While the Bank Group will continue to encourage the Central and State Governments to improve the financial performance and viability of the SEBs, it is beginning, as a matter of strategy, to work only with those SEBs that are prepared to introduce measures to bring about improvements in their finan- cial condition and performance.  -19- 52. In parallel with lending to individual SEBs the Bank proposes continued support for expansion of the central sector, because: (a) increased reliance of the States on central sector generation appears to be the best way to encourage decisions at the State level consistent with the national interest; and (b) a high proportion of central sector generation sold at economic tariffs will help to improve tariffs to final consumers. The difficulties that OI has experienced in bringing hydro projects into the central sector mean that NTPC will continue to be the main vehicle for the Bank's support of the central sector. NTPC's record to date is impressive. However, it is still far from being a mature institution and, owing to its rapid development, it will continue to face problems in which it could benefit from Bank support. As far as CEA is concerned, the Bank feels that a review of its organization and functions would now be timely and, in its dialogue with GOI, the Bank will discuss the possibility of such a review, coupled with technical assistance to improve CEA's capability to meet its responsibilities, which may require redefinition as a result of the review. 53. In addition to addressing areas in which GOI's strategy appears deficient, it is appropriate that the Bank shouLd focus on aspects of the strategy already adopted, where the Bank can do most to catalyze progress. In this respect specific aspects identified include: (a) the formation of the national grid - the Bank will continue to support projects such as the Central and Rihand Power Transmission Projects; the latter will afford the Bank the opportunity for an active involvement in studies of long-term transmission development; (b) accelerated hydro development - by broadening lending operations to encompass individual SEBs the Bank is able to support hydro projects and, where the additionality of the Bank's funds to plan outlays is crucial, it is able to bring about developments which might not otherwise take place; and (c) elements of strategy that involve concerted action by organizations, both inside and outside the power subsector - the Bank can coordinate its own lending operations within the different subsectors in order to improve intersectoral cooperation. Priority examples concern improvements in coal quality and transportation, and the use of natural gas for power generation. Bank Group Participation 54. The Bank has made 21 loans (US$2,709 million) and 17 IDA credits (US$2,409 million) for Indian power projects. Nineteen projects have been completed: 12 generation, 5 transmission, and 2 rural electrification. Projects currently under implementation include 11 generation, 2 of which are hydro, 2 transmission, 1 rural electrification, and the Kerala Power Project, the most recent project to be approved by the Bank, which includes a broad spectrum of generation, transmission and distribution. With respect to NTPC projects, the first-phase projects at Singrauli, Korba, and Ramagundam were commissioned on or ahead of schedule. The  -20- second-phase extension at these sites, the Farakka and the Rihand Power Transmission Projects are proceeding satisfactoriLy. The Third Rural Electrification Project, which has suffered significant procurement problems, is about two years behind scbedule. 55. A performance audit conducted in 1980 for the Second Power Transmission Project (Credit 242-IN) concluded that the project succeeded in helping the nine SEBs extend their transmission systems to meet their growing power requirements. Utilization of generating capacity in these SEBs exceeded the appraisal forecast. However, the audit highlighted the difficulties of effecting institutional improvements in the absence of a close working relationship between the Bank and beneficiary SEBs. Disbursements 56. The rate of loan and credit disbursement under Bank-financed projects in the power sector has been unsatisfactory in recent years. At the beginning of FY86, the undisbursed balance for Bank Group-financed power projects was US$2.6 billion. First-half data for FY86, annualized over the entire year, indicate that FY86 disbursements in the sector would lie within a range of about US$190 million-250 million. Disbursements in general have lagged considerably behind appraisal estimates, primarily because of procurement-related problems but occasionally because of delays in loan and credit effectiveness. The procurement delays have arisen from delays in the award of major contracts, additional time required for the preparation of bidding documents and for bidder prequalification, and time required to resolve disputes among suppliers on the larger contracts. For a number of ongoing projects in the sector, major contracts have now been awarded or are expected to be awarded in early 1986, so disbursements should improve significantly during the second half of the fiscal year. GOI will nevertheless need to take steps to improve the general unsatis- factory disbursement performance in the sector, if the Bank is to continue lending for power sector projects in India. The disbursement situation will be closely monitored in the ensuing months to ensure that actions are being taken to address this problem. PART IV - THE PROJECT 57. The project was prepared by NTPC and appraised by a mission that visited India in May 1985. A Staff Appraisal Report is being distributed separately to the Executive Directors. Negotiations were held in Washington in Februar-r 1986. GOI and NTPC were represented by a delega- tion with Mr. Bose 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 58. The primary objective of the project is to help meet the demand for electricity in the Northern and Western Regions of India by providing additional power generation capacity of about 1,500 MW using combined cycle technology, which is new to India and would provide an efficient, reliable, and economic source of power. A secondary objective of the project is to diversify the fuels used in power generation through the use of gas or liquid fuels in regions that are short of hydro and coal  -21- resources. The increase in recent years in the number of coal-fired stations has placed a severe burden on both the coal industry and the railways; the project will relieve pressures on these sectors. The development of the large South Bassein and satellite gas fields, together with the associated gas available from the Bombay High field, could triple or quadruple natural gas production in the next decade and thus provide considerable economic opportunity to extend the uses of gas. Use of such gas for power generation would be attractive for some areas of the Northern and Western Regions that are remote from the coal fields in the eastern parts of India. To provide the inf1astructure necessary for the use of gas in industrial and power plants, COI has decided to construct a 1,700-km gas pipeline from Hazira to Jagdishpur--the HBJ pipeline--which will traverse the States of Gujarat, Madhya Pradesh, and Uttar Pradesh, with a spur into Rajasthan. Although the initial purpose of the pipeline was to supply gas to six fertilizer plants and a number of liquid petroleum gas plants, the prevailing power shortages in both regions and difficulties in coal transport make short gestation, high efficiency, gas or Liquid fueled combined cycle plants attractive. In light of this, GOI has agreed to allow the use of gas for power generation and has sanctioned the construction of three combined cycle stations, with a total capacity of about 1,500 NW. 59. Through its participation in the project, the Bank would be sup- porting GOI's objectives and efforts to alleviate power shortages in regions that are currently suffering acute power shortages. Through its support of the use of gas and liquid fuels for power generation, the Bank would continue to encourage GOI to diversify fuel supply to the power subsector, to develop natural gas resources, and to expand the use of gas beyond fertilizer manufacturing. This diversification in fuel use will also help relieve pressures on the raiLway and coal sectors. The intro- duction into India of the combined cycLe technology will not only provide a reliable, flexible, and economic means of power generation, but will also provide an opportunity to acquaint Indian engineers with this type of equipment. Support will also be provided to NTPC under the project through measures to improve its financial position (accounts receivable) and through a study to address aspects of NTPC's tariffs that will require attention as the institution expands. Project Description 60. The project comprises the following components: (a) three combined cycle power stations-at Kawas (Gujarat), Anta (Rajasthan), and Auraiya (Uttar Pradesh)- comprising combus- tion turbogenerators, heat recovery boilers, and steam turbogenerators, with a total installed capacity of about 1,500 MW; electrical and mechanical auxiLiary equipment; and the provision of associated civil works and ancillary facilities; (b) about 950 km of 220-kV and about 375 km of 400-kV single- circuit and double-circuit transmission lines, connecting: the Kawas station with Navsari, Baruch, and Valthan in Gujarat; the Anta station with Bhilwara and Dausa in  -22- Rajasthan; and the Auraiya station-with Agra and Ballabgarh in Uttar Pradesh; together with new or extended substations and associated auxiliaries; and (c) technical assistance for the engineering, testing, and com- missioning of the combined cycle power stations. Project Implementation 61. The project will be implemented over a Zive-year period (FY87-FY91) by NTPC, as part of the ongoing power development program. NTPC will construct, own, and operate the generation and transmission facilities included in the project. NTPC has had considerable experience in installing and operating thermal power stations and associated high voltage transmission systems. However, the installation of combined cycle units will introduce a new technology, and the corporation does not yet have the appropriate expertise. NTPC has prepared the bidding documents, but will need assistance in defining performance criteria, evaluating bids, finalizing the design proposed by the selected bidder, and in monitoring the manufacture, testing, and comissioning of equipment. NTPC would engage consultants to assist in performing these tasks. NTPC has adequate experience in the design and construction of 220-kV and 400-kV transmission lines. 62. The stations at Kawas and Auraiya will be located close to the HBJ gas pipeline. Because of water supply requirements, the Anta station will be located some distance from the HBJ pipeline and thus a spur pipeline of about 16 km will have to be constructed to connect it to the HBJ line. Cooling water will be supplied from irrigation canals; pondages will be constructed to ensure water availability during the periods of annual closure for maintenance. In order to reduce water consumption, the sta- tions will be equipped with cooling towers. The three stations will be located close to major roads and railways, which will facilitate transport of equipment, materials and liquid fuels, if required, during operation. 63. The power stations that comprise the project will burn primarily gas but will be constructed with provision for the use of liquid fuels in order to maximize flexibility. Gas supplies will come principally from the South Bassein field which has reserves of about 205 billion cubic meters. The field is connected to the mainland at Hazira, the site for the gas treatment plant, wh:_ch is close to the proposed Kawas power station. From Hazira, gas will be transported by the HBJ pipeline to inland consumers which include six fertilizer plants and the proposed Anta and Auraiya power stations. The HBJ pipeline is to be implemented and operated by the Gas Authority of India Limited (GAIL), a public sector corporation responsible to the Ministry of Petroleum. GAIL has awarded contracts for the supply of pipes and tenders have been received for a turnkey contract for all associated equipment and pipeline construction. GAIL expects to award this contract shortly. The planned construction timetable is consistent with NTPC's schedule for the three combined cycle units. In order to ensure coordinated development of the HBJ pipeline and the combined cycle units, award of the contract for the pipeline construc- tion will be a condition of effectiveness for the proposed loan. In addition, contracts between NTPC and the appropriate authorities for the  -23- supply of gas will be concluded at least six months prior to the commis- sioning of the first combustion turbine under the project. 64. To date GOI has not made a formal decision on the principles that will govern the pricing of gas for power generation. However, during appraisal of the HBJ pipeline, GOI has indicated that the price of gas for uses other than fertilizer would be based on fuel oil parity, which at that time was approximately Rs 1,800 per thousand cubic meters, and has confirmed this in respect of the piaposed project. At least in the medium term, a price related to fuel oil would adequately cover the estimated economic opportunity cost of gas and, in so far as this price may exceed the opportunity cost, it would not cause significant economic distortion (higher plant availability would still leave gas as the preferred fuel) and would be desirable for reasons of resource mobilization. 65. In light of its plans for fertilizer development, COI can guaran- tee only four million cubic meters per day (mmcmd) of gas for the project plants, as against the six mmcmd required for full gas operation. However, the requirements of gas for the fertilizer facilities may Lsve been overestimated and it is likely that the full szx mucmd will be avail- able for power generation. However, in view of the possible shortfaLl, provision will be made for liquid fuel operation. Operation of the plarts on liquid fuel, in the absence of gas, would be economically justified. In any event, provision for liquid fuel operation is desirable in order to cater for possible interruptions to gas supplies. GOI will ensure that at least four mmcmd of gas will be made available for the proposed project, and, to the extent that the required six mucmd of gas are not available, will ensure that liquid fuels are provided. Environmental clearance for the project has been obtained for both gas-based and liquid-based opera- tion of the plants. NTPC will ensure that the execution and operation of the project is carried out with due regard to ecological snd environmental factors and will comply with GOI's environmental quality standards. 66. To ensure prompt decision making and effective coordination, NTPC is establishing a new division responsible for the implementation of the proposed project. However, design and procurement for the project would be carried out by specialized groups in the respective functional divi- sions of NTPC. Construction would be supervised and coordinated by resi- dent engineers with the assistance of consultants where necessary. NTPC will arrange for the timely training of operations and maintenance staff either in conjunction with the equipment procurement or with utilities operating similar plants. 67. Owing to NTPC's satisfactory construction performance, most of the eleven 200-MW generating units and transmission lines commissioned since the beginning of 1982 have been completed within the planned construction period. Any delays that have arisen in NTPC's projects have been due primarily to delays in ordering major equipment items (boiler and turbogenerators) rather than in actual construction. NTPC's transition from its construction phase to an operational phase is also being carried out successfully. NTPC has prepared, with the assistance of Central Electricity Generating Board (U.K.), detailed procedures for plant commissioning, operation, and maintenance. Major emphasis has been placed on the introduction of maintenance planning using computers and standard  -24- work procedures. Generating units under operation have achieved satisfac- tory generation levels. A Research and Development unit has been estab- lished to carry out applied research and to assist in plant outage analysis. In 1982 the corporation adopted an organizational structure that made regional headquarters units responsible for the construction and operation of generation and transmission facilities within the region. As a result, most of NTPC's operations have now been decentralized, and five regional headquarters have been established. With decentralization, the corporate headquarters is progressively limiting its role to design, policymaking and providing functional guidance to the Regions. The prin- cipal corporate functions are finance, personnel and administration, planning and monitoring design, procurement, and commercial. Recruitment is progressing satisfactorily to meet NTPC's expanding operational needs. NTPC 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. Status of Project Preparation 68. NTPC has completed the basic design for the proposed project and is preparing the bidding documents. Land acquisition is proceeding satisfactorily. Bids for the major equipment package (combustion turbogenerators, heat recovery boilers, and steam turbogenerators) were invited in February 1986, and the award is expected to be announced in December 1986. The project is expected to be completed in 1990. Project Cost and Financing 69. The total cost of the project, including contingencies but exclud- ing about US$127 million in taxes and duties, is estimated at about US$1,114 million equivalent, of which about US$666 million (60Z) repre- sents the estimated foreign exchange costs. Interest during construction adds about US$45 million to the financing required. The principal costs, net of physical and price contingencies, but including taxes and duties, are: civil works, US$64 million; main electromechanical equipment for the combined cycle units, US$570 million; auxiliary equipment, US$148 million; fuel supply equipment, US$13 million; associated transmission system, US$125 million; engineering and administration, US$62 million; consultancy and technical assistance, US$11 million. The estimates of project costs for the civil works and main items of equipment and materials related to the auxiliary and transmission facilities are based on the most recent price quotations for similar projects, and on manufacturers' indicative price quotations for the combined cycle units. These prices have been adjusted for estimated inflation to end-1985 levels. Price contingencies, amounting to 20% of base cost, are based on expected annual inflation rates of 7% for 1985/86, 7.52 for 1986/87 through 1989/90, and 5% there- after for local costs, and 7.52 for 1985/86, 8% for 1986/87 through 1989/90, and 5% thereafter for foreign costs. Physical contingencies of 10% on civil works and 5X on equipment have been allowed, amounting to just over 5% of base cost. 70. The proposed Bank loan of US$485 million will finance about 69% of the total foreign exchange financing requirement of about US$706 million,  -25- and would cover about 43Z of the total project cost net of taxes and duties. The balance of the funds required, aggregating about US$801 million equivalent, will be provided by GOI (US$696 million) in the form of loan and share capital, and by NTPC from its own resources (US$105 million). GOI has indicated that it may seek additional external financ- ing in the form of commercial bank loans to help meet the balance of the foreign exchange requirements (about US$221 miLlion) of the project. GOI may also consider suppliers' or export credits for the major equipment items if a successful bidder or other agency provides an acceptable financing proposal for the lowest evaluated bid in cash terms. In this event, COI's contribution to project financing will be reduced accordingly, and the Bank would seek to reallocate its contribution for the financing of these items to other items in the project, as appropriate. 71. The proceeds of the proposed loan will be onlent by GOI to NTPC. Terms for the onlent Bank funds will provide for repayment over 20 years, including five years' grace, at an interest rate of not less than 13.0% per annum, under a subsidiary loan agreement between GOI and NTPC. Execution of the subsidiary loan agreement between GOI and NTPC will be a condition of effectiveness for the loan. The average inflation rate is not expected to exceed 7.7% per annum. COI'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 72. Procurement arrangements are sunmmarized in Annex IV. The major equipment associated with the combined cycle units, together with the fuel supply equipment and civil works associated with the construction of the plants, costing an estimated US$893 million, will be subject to interna- tional competitive bidding (ICB), in accordance with Bank guidelines. The major equipment and works for the combined cycle units would be grouped for each station in a single supply and erection contract. The transmis- sion facilities (lines and substations), some electromechanical equipment and works associated with the plants, and other civil works will be grouped in separate contracts and procured on the basis of local competi- tive bidding (LCB); these items will not be financed by the Bank. About 72% of works, goods, and services for the project will be procured under ICB. Consultants will be selected in accordance with Bank guidelines. Suppliers competing under ICB for contracts for supply and erection of goods will have a 15% preference or the applicable duty, whichever is less, on the Locally manufactured goods and materials. All equipment contracts costing the equivalent of US$3.5 million or more will be subject to the Bank's prior review. Such review would cover contracts totaling about 90% of the estimated cost of the Bank-financed components. 73. The proceeds of the loan will be disbursed over a six-year period (FY87-FY92) against 100% of the c.i.f. cost of imported goods or of the ex-factory cost of goods manufactured in India subject to ICB, 40% of the civil and erection works, and 100% of the cost of consultancy services. Expenditures covering consultancy services incurred since July 1, 1985, and prior to loan signing will be financed retroactively up to an amount of US$1 million. The disbursement period for this loan is shorter than  -26- the Bank-wide composite average for power generation projects, but is reasonable considering worldwide experience in combined cycle construction, NTPC's implementation capabilities, and the advanced stage of project preparation. NTPC Finances 74. NTPC is currently in the tenth year of an investment program under which it expects to construct and commission by 1999/2000 a number of large-scale thermal power stations with an aggregate generating capacity of 25,870 MW, and about 23,925 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 a generating capacity of 7,300 NW and about 6,000 km of associated transmission lines at a cost of about US$3,417 million, has been extended in stages and by 1995/96 will amount to about US$31,000 million equivalent. By the end of 1984/85, NTPC had an installed generating capacity of 2,200 NW. Financing for the increased investment program will come from NTPC's 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 exceed 40% in the latter years of the program. NTPC's investment program and financing plan are satisfactory. 75. NTPC began commercial operations in 1982 with the commissioning of its first 200-MW generating unit at Singrauli. Since then, ten additional 200-NW units have been commissioned-four more at Singrauli, three at Korbat and three 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 forecasts and yielded a rate of return of about 11% on histori- cally valued assets, which compares favorably with the 7% minimum rate of return required for this year (para 76). The equivalent rate of return on revalued assets, calculated on a pro-forma basis, is slightly more than 5%. Cash generation measured as a percentage of average annual capital investment requirements was only about 3%, solely because of the scale of existing operations compared to the very large investment program. Cash generation will increase significantly in future years (para 78). NTPC's debt-equity ratio at the end of 1983/84 was 26:74, which is satisfactory. Although NTPC still needs to improve its accounts receivables collections (para 80), its overall financial performance in 1983/84 and its financial position at year end were satisfactory. 76. In accordance with previous agreements, 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 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. Similar measures have been adopted under the proposed project. It has also been agreed that, since the Government does not wish to use asset revaluation as the basis for  -27- estimating returns to capital, on the basis of current projections a rate of return of 14-15% in 1995/96 (which would be equivalent to a rate of return of about 8% on revalued assets), would be adequate to ensure NTPC's financial viability. The progressive 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 com- missioning generating capacity, this approach to tariff setting is appropriate. NTPC's rates of return throug1l 1994/95 are expected to exceed the minimum levels specified, and its projected rate of return of 15.0% for 1995/96 is considered adequate, as indicated above, to ensure a satisfactory level of financial performance in that year. 77. Under previous loans and credits, GOI and NTPC agreed to sell power from NTPC's power plants under contracts satisfactory to the Bank. These contracts have now been concluded with the Delhi Electricity Supply Undertaking, the Damodar Valley Corporation, the Electricity Department of the Union Territory of Goa, and all SEBs designated to receive power from NTPC plants. The Electricity Department of the Union Territory of Pondicherry is not expected to receive power from NTPC until early 1988. A contract in respect of this entity is therefore not yet required but will be concluded at the appropriate time. While the contracts signed to date are satisfactory as an interim measure, a number of additional provi- sions relating to contract renewal, tariff revision, return on equity, and the introduction of capacity charges need to be incorporated in future versions. In addition, NTPC's role in the generation and transmission of electricity is expected to increase substantially, imposing new require- ments on the structure of the bulk supply tariff. These arise from various factors including: (a) the potential multiplicity of tariffs--the existing regionaL bulk supply tariff is set on a station-specific basis, because NTPC is presently operating only one station in each region; (b) recovery of transmission costs-there is no provision in the existing tariffs for recovering costs of transmission facilities that are not associated with specific generating stations; and (c) merit order operation--SEBs, which at times have surplus generating capacity (e.g., at night and during the monsoon), find it cheaper to incur their own short- run marginal costs and avoid the "full" NTPC tariff, even though NTPC's short-run marginal costs are lower than those of the SEBs; as a result, plants are operated out of merit order, and resources wasted. GOI has established a high level committee to examine some of these issues. The committee's report will shortly be provided to the Bank for review. Following the review, additional studies as necessary will be defined by the Bank in conjunction with GOI to ensure that all of the issues of concern relating to NTPC's bulk supply tariff structure are adequately addressed. The additional studies will be carried out by NTPC in col- laboration with the Bank and in accordance with terms of reference and timetables to be agreed by August 31, 1986. 78. With regard to NTPC's future operations, power generation is expected to increase from 1,109 GWh in 1982/83 to 98,202 GWh in 1995/96. NTPC's average tariff is expected to increase at an average rate of about 8.5% per annum, .from 32.30 paise/kWh to 93.50 paise/kHh, over the same period. Average tariffs would be maintained approximately on par with the  -28- long-run marginal cost of electricity generation. Operating income is expected to increase from Rs 675 million (US$52 million) in 1983/84 to Rs 39,889 million (US$3,068 milLion) in 1995/96, and net income from Rs 449 million (US$35 million) to Rs 24,257 million (US$1,866 million) during the same period, yielding financial rates of return on historically valued assets ranging from about 11.3% to 15.0%. Both the financial rate of return and the internal cash generation would increase to acceptable levels of about 14% and 42%, respectively, by 1992/93. NTPC's projected rates of return are realistic and achievable, and its forecasts of future financial performance and cash generation are satisfactory. 79. 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 US$1,158 million, divided between GOI loans (including the onlending of Bank Group finance) and equity capital in the ratio of 21:79. In March 1991, after the completion of the proposed project, total capitalization will be about US$15,178 million, with a debt-equity ratio of 44:56. The debt-equity ratio would drop to 39:61 by March 1995, at which time total capitalization will be about US$26,554 million. Debt service coverage is expected to decrease from 3.5:1 in 1983/84 to 2.3:1 in 1990/91, then to increase to 2.5:1 by 1994/95. NTPC's issucd share capital will rise progressively during this period from a level of about US$1,205 million at the end of 1983/84 to US$10,273 million by the end of 1994/95. NTPC's financial position, debt-equity ratios, and debt-service coverage are, and will remain, satisfactory. 80. NTPC's collection of accounts receivable has been unsatisfactory. As of December 31, 1985, outstanding receivables represented the equiv- alent of about 3.8 months of sales. Under the bulk supply contracts, customers are required to open revolving letters of credit for an amount equivalent to one month's power purchases and to remit payment for power purchases not covered by letters of credit within 30 days of receiving bills from NTPC. At present, all of the customers in the Northern, Western, and Southern Regions have opened letters of credit, except for the SEBs of Rajasthan and Haryana and the Electricity Department of the Union Territory of Goa. NTPC's customers in the Eastern Region have not yet done so because bulk supply contracts for this Region were concluded only recently and NTPC's Farakka plant is yet to be commissioned. NTPC has undertaken to obtain the required letters of credit within six months, from those customers who have not yet opened them. In addition, NTPC has undertaken to seek agreement from its customers on revision of those existing letters of credit for which the amounts specified are not commen- surate with its monthly allocations of power. With regard to the arrears arising from sales of electricity prior to the bulk supply agreements, when electricity was sold at interim rates subject to subsequent adjustment, repayment schedules have been drawn up by NTPC in conjunction with each of the customers in arrears in its payments, for repayment of these arrears by March 1987. With respect to sales after the conclusion of bulk supply agreements, NTPC also agreed to ensure that its total accounts receivable will be maintained at a level equivalent to not more than two months' sales of power.  -29- Project Justification and Risks 81. The proposed project is justified as part of the least-cost system expansion plans for the Western and Northern Regions on the basis of the load forecasts. With the opportunity cost of gas based on fuel oil parity, and assuming the earliest feasible implementation of the Kawas plant in the Western Region and the Anta and Auraiya plants in the Northern Region, the project forms an integral part of both the respective least-cost development plans. Even if these plants were to burn liquid fuels rather than gas, the cost of electricity at the relevant load cen- ters would be comparable with any other source of supply. The combined cycle plants have the added advantages of a short implementation period and low capital cost per kW generated. Both the Northern and Western Regions are large enough to accoomodate unit sizes based on the largest combustion turbogenerators available, and economies of scale dictate that these should be chosen. The range of 95 MW - 115 MW has been specified to ensure competitive bidding among manufacturers with different frame sizes. The economic rates of return for the Northern and Westerr Region's expan- sion program are about 12Z and 13%, respectively, according to benefits based on incremental revenues at average retail tariffs and quantifiable industrial and agricultural consumers' surplus. The actual rates of return are likely to be considerably higher if domestic consumers' surplus is taken into account. 82. No unusual risks are foreseen. NTPC is experienced in the design and construction of generation and transmission facilities, and will receive assistance from consultants in the engineering and implementation of the combined cycle units. These units are a standard type of installa- tion that require limited civil works and relatively little assembly on site. Risk of damage due to fire or explosion would be covered by the respective contractors during the construction phase, and, after commissioning, by NTPC through its insurance policies, which are satisfactory. PART V - RECOMMENDATION 83. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. A. W. Clausen President March 10, 1986  ANNE 1 I^,v A > 10 9 Page I of 6 MIT -OOCUL Itlll (MST 3CUT