India - NTPC Power Generation Project

Document of The World Bank fiOtd OFFICIAL USE ONLY Report No. 11827-IN STAFF APPRAISAL REPORT INDIA NTPC POWER GENERATION PROJECT JUNE 4, 1993 MICROFICHE COPY Report No.:11827-IN Types (SAR) Title: NATIONAL THERMAL POWER CORPORA Author: STORM, T. Ext. :81461 Room:G 3074 Dept.:SA2EG Energy Operations Division Country Department II South Asia Region Thiscna d iat n and may be used by reidpients only in the peato thi flja uis ts conents may gm Otherwise be disc.ied wi.t_ W.1d Dan _uthori=6io.  CURRENCY EQUIVALENTS (as of April 26, 1993) Currency Unit Rupees (Rs) Rs 1.00 - Paise 100 Rs 1,000,000 = US$ 33,113 US$1.00 Rs 30.2 MEASURES AND EQUIVALENTS 1 Kilometer (km) = 1,000 meters (m) = 0.6214 miles (mi) 1 Meter (m) = 39.37 inches (in) 1 Cubic Meter (m3) = 1.31 cubic yard (cu yd) - 35.35 cu. ft. 1 Ton tt) = 1,000 kilograms (kg) = 2,200 lbs 1 Kilovolt (kV) = 1,000 volts (V) 1 Kilovolt-ampere (kVA) - 1,000 volts-amperes (VA) 1 Megawatt (MW) = 1,000 kilowatts (Kw) = 1 million watts 1 Kilowatt-hour (kWh) = 1,000 watt-hours 1 Megawatt-hour (MWh) = 1,000 kilowatts-hours 1 Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank AEC Abmedabad Electricity Company BSES Bombay Suburban Electric Supply Ltd. CEA Central Electricity Authority CESC Calcutta Electric Supply Corporation GOI Government of India HVDC High Voltage Direct Current ICB International Competitive Bidding LCB Local Competitive Bidding LICB Limited International Competitive Bidding LRMC Long-run Marginal Cost LTIPS Long Term Issues in the Power Sector study MOP Ministry of Power NHPC National Hydroelectric Power Corporation NTPC National Thermal Power Corporation ODA Overseas Development Administration PFC Power Finance Corporation Limited POWERGRID Power Grid Corporation of India SEB State Electricity Board SCF Standard Conversion Factor The Act Electricity Supply Act of 1948 USAID United States Agency for International Development FISCAL YEAR April 1 - March 31  IFOR OFFICIAL USE ONLY INDIA NTPC POWER GENERATION PROJECT STAF APPRAISAL REPORT Table of Contents Pate No. Loan and Project Sumary . . . . . . . . . . . . . . . . . . . . . . . . . iv Ie SECTORAL CONTEXT I * * * * * * * * * * * * * * * * * * * * * * e * * 1 Eoergy - Economy Interface . . . . . . .. ... . . 1 Organization and Regulation of the Power Sector . . . . . . . . 2 Electricity Supply, Demand and Tariffs . . . . . . . . . . . . . 4 Past Bank Group Operations in the Power Sector . . . . . . . . . 5 Power Sector Reform . . . . . . . . . * . a . . . . . ... 7 Rationale and Strategy for Bank Support for Power Sector Reforms . . . . . . . . . . . . 10 II. THE BORROWER - NATIONAL THERMAL POUR CORPORATION . . . . . . . . . . 11 Zntroducetion . . . . . . . . . . . ......... 11 te*00 Recent Power Sector Policy Reforms Affecting NTPC . . . . . . . . 12 organization and Mansement . . . . . . . . . . ... .....1 Staffing and Training . . . . . . . .... . .. .... .. 14 Generation Facilities and Operational Performance . . . . . . . 15 Environment, Rehabilitation and Resettlement . . . . . . . . . . 1S NTPC Tariffs and the Emrging Bulk Power Market . . . . . . . . . 16 .TPC's Investment Program .. . . . . . . . . . . . . . . . . . . 20 NTPC'sFuture Role in the Indian Power Sector . . . .*. . .* . . 23 This report was prepared by Messrs. Tjaarda P. Storm van Leenwen (Senior Financial Analyst), Argun Ceyban (Senior Power Engineer). Hiroyaki Fujii (Power Engineer), Iara Hyman (Energy Economist), Alfred Picardi (Environmental Consultant) with contributions from David Butcher (ASTIR), Gregor Dolenc (SA2CI), Ashraf Ohani (ASTIR), Akbar Eaaja (Financial Analyst), Tod Ragsdale (Consultant) Sam Thangaraj (NDO) and Yaacov Ziv (ASTEN). Administrative assistance was provided by Ms. Vivi Scott. The report has been endorsed by Mr. Heinz Vergin, Director, India Department and Mr. Jean-FranBois Bauer, Division Chief, Energy Operations Division, India Department. This dcuont has a reatticted distributloo ad may be used by teipients only ir the. premc of their oficial duties. Its conts may not otherwise be disclosed wtht World isuthordon.  - At - EPLe go. ProjectDesciptives . . . . . . . . . . . . . . . . . . . . . . . 24 ProJect DOb3cCtIves . . . . . . . . . . . . . . . . . . . . . . 24 Project Components . . . . . . . . . . . . . . . . . . . . . . . 25 3mCI' Investment Program and Fnancin Plan ... . . . . . . . 27 Basis for Cost Estimates ........ ........ * 2 Lending Arrangemento and Security Arransements . . . . . . . . . 29 Generation Capacity Additions . . . . . . . . . . . . . . . . 29 Procurement . . * . *. . . . . ...*... .a . . ..... - a . . . . s30 Disbursements . . . . . . . . . . . * 32 Enviromental Aspects .....................33 Resettlement and Rehabilitation .......... 34 Project Monitoring and Implmentation Review . . . . . . . . . . 35 I. FINNCE . . . . * 9 * 9 9 * 9 * * ...... . . . 35 wnancial Managemt . 9 * * * * * ..* .*. 9 9 9 9 9 9 9 9 9 9 35 Paver Sales . . . .............. . . . . . . . . . . 37 * 37 Billing and Collection . .................... 38 NTPCsHistoricFinancialPerformnce .............. . 5S9 NTPC's Current inancialPosition . . . . . . . . . . . . . . .40 Financing andInvestmt Program . . . . . . . . . . . . . . . . 41 Future Finances . . . . . . . . . . . . . . . . . . . . . . . . 43 V. PKOJECT JUSTIFICATION * * *.. * # . . . . * . . . .. ... . *. * 44 Economic Analysis . . . .*. . . .*. . . . . . . . . . . . . . . 44 NeedforIncreasedPowerSupply . . . . . . . . . .. o. 0 9 9 945 ProjectRisks . . . . . . . . . . . . . . .9. .9.9 . . ..... 46 VI. AGREDE5NTS AND RECXfENDATION . . . . . . . . . . . . . . . . . . . 47  - tiii - PART II -ARM Page no. 1.1 Previous Loans and Credits to the Indian Power Sector . . . . . 1 C 2.1 NTPC Organization Chart .... ...... . ......... 2 2.2 Transfer of Transmission Assets . . . . . . . . .. . . . . . . 3 2.3 NTPC Main Plant Characteristics and Operating Perforance . . . S 2.4 NTPC Environmental Perfornmnce and R&R . . . . . . . . . .. . . 8 2.5 Termsof Reference Tariff Study . . . . . . .. . . . . . . . . 34 2.6 NTPC Power Development Program . . . . ..... ....... . 41 3.1 Detailed Project Description Vindhyachal II and RLhand It . . . 49 3.2 Environmental Action Plan . . . . . . . . . . . . . . . . . . . 57 3.3 Project Component Cost lstimstes . . . . . . . . . . . . . . .. 78 3.4 Project Managemsnt Arrangements ................SO * * 0 3.5 Project Implementation Schedules . . . . . . . . . . . . . . 81 3.6 Procutement Arrangements and Packaging . . . . . . . . . . . . . 88 3.7 Schedule of Estimated Disbursements . . . . . . . . . . . . . 89 3.8 FAS of Rlihand II and VindhyachallI . ......... ... .90 3.9 Supervision Pian . . . . . . . ....... . 95 4.1 NTPC Actual Financial Statements ......... ..... .98 4.2 NTPC Projected Financial Statements . . . . . . . . . . . . 101 4.3 Assumptions Used for Financial Projections . . . . . . . . . . 104 4.4 Terms of Reference Study on Alternative Strategies for . . . 107 Financing.NTPC s Long Term Development 5.1 Economic Analysis . . . . . . . . . . . . . . . . . . . . . 110 6.1 Related Documents in the Project File . . . . . . . . . . . . 113 MAP Project Site for Rihand II and Vindhyachal II Power Stations IBRD no. 24799  - iv - INDIA PM POWER ENEATION PROJECT Loan and Proiect Summary iorrowers National Thermal Power Corporation Limited (NtPC) Guarantors India, acting by its President Amounts US$400 million Terms: 20 years, Including five years grace, at the Bank's standard variable interest rate. NTPC would bear the foreign exchange and Interest rate risks. Guarantee Fees The Government of India (GOI) would charge a guarantee fee of 12 on the outstanding amount of the Bank Loan. Project Description: The project comprisess (a) Generation CaLacity Additions: a five year time-slice of NTPC's least cost investment program of new coal and gas-based power stations for which full funding has not yet been arranged; (b) Private Sector Components support to NTPC to un4ertake several joint venture operations; and (c) EnviLronmental Strengthening and Resettlement and Rehabilitations implementation of an Environmental Action Plan (RAP) which Includes environmental upgrading projects, training and technical assistance for the strengthening of NTPC's environmental and R&R management capability and the Implementation of the RAP. benefits8 The proposed project would: (a) improve commercial discipline In the power system in India through the implementation of NTPC'8 new commercial and investment policies; (b) help NTPC meet its targets for capacity additions through Increased mobilization of funds fro internal resources, domestic and foreign capital markets as well as from the private sector through joint venture operationsa (c) upgrade environmental performance of WTMC power stations and make its new power plants environmentally more sustainable; and (d) strengthen NSPC's environmental and resettlement and rehabilitation management capability. Of India's proposed inwestments in thermal generation capacity, those of NMPC are among the lowest-cost options and warrant support when overall investment resources are constrained and an increasing share of the total funds available is devoted to rehabilitatlon of ezisting generating facilities and strengthening the transmLssion and distribution system.  - v ' It would help meet the energy needs of the Indian economy at a relatively low cost and high efficiency to support the far reaching macro-economic and structural adjustment program. Risks* The project does not pose any particular technical risks as proven technologies will be utilized and project implementation will follow practices well-established at NTPC. Its Investment program is constrained more by the availabilityof financing than by the demand for electricity or by its implementation capability. The core investment program has been prepared taking Into account NTPC's capability to raise resources through internal cash generation and from the capital markets. NTPC's main risk is financial and relates to its ability to recover its charges from its clients, the State Electricity Boards. As long as it recovers, the level and structure of the tariff will safeguard its financial position and provide adequate self-financing for the implementation of its investment program. Special attention has therefore been paid during project processing to developing satisfactory commercial policies and arrangements which would ensure satisfactory revenue recovery, and would allow NTPC to divert supply fron non paying customers and direct investments to the financially viable SEBs. The environmental risks associated with this project will be minimized through the implementation of an Environmental Action Plan (ZAP), which Includes an institutional strengthening component and provides for implementation of improved resettlement and rehabilitation policies. Implementation of the ZAP will ensure that NTPC power stations will operate in an environmentally sustainable manner.  - i - Estimated Cost and FauaCila Plans c..pon.nt. ,VOI~v 1119-rnooa FTMuvo pV,s-u,Oo -b b.i I I leo- -. USt m 1 lo_-aa- Fmdim R s Oning Project* .6 10.7 208 68 - To L Initiatod During 6h Plan 9U.S 1.6 1,64? 6,412 - To be Initiatod Ourting Vh PIFa - 99.9 - 2,124 - Subol - NW Projecs 98.0 60.6 2,647 ,76 Total - o.retlon 178.8 J80.2 4,1SO 9,08@ Jolnt Seator Project(s) 4.0 - 110 - Total Fnanclog Requirement 177.8 J86. 4,910 9,O*D F!inacna Plan NTPC's Nb4 Internal Cash Rnaraetlon 41.4 16.6 1.187 1,680 Sorrosi no I Loans Contracted 86.0 - 1,978 - Proponed Bank Loan 14.8 400 _ Future Bak Lmadln1 10.4 10.0 610 m7 Obber Loans to :: rraaw d86.9 246.6 987 5,62 Bonds 1. 48.0 604 1,140 Total Borrowing 124.6 804.4 8,44S 7,216 EquIty 11.1 - no - Total Sourc 177.8 J80.2 4.900 9,089 -~~ Estimted Bank Disbursements: Bank Fiscal Year FY94 FY95 FY96 FY97 Annual 80 160 120 40 Cumlative 80 240 360 400 ltate of returns 14.7?  MIA NTPC POUER GENERATION PROJECT STAFF APPRAISAL REPORT T. SECTORAL CONTEXT Eneray - Economy Interfaces 3.1 Develo2Lent Dolicy, energy production and use. India's long- standing development policies sought to promote self sufficiency and growth through a combination of public ownership and control of key strategic institutions, planned investment, administered pricing of key coumodties, control over domestic markets, and protection from external competition. This strategy resulted in a capital- and energy-intensive pattern of development and inefficient production and use of energy - in a capital and, in relatlve terms, energy-poor country. Cost-plus pricing provided no incentive for efficiency to fuel producers and bulk power generators; below-cost retail prices of electricity have caused substantial losses and severe financial difficulties to many power utilities. Agricultural and residential sectors have enjoyed artificially low energy prices, and have had no reason to focus on efficiency. Cost-plus pricing in protected markets and lack of competitive pressures have provided little incentive for effieient use of energy to industries and commerce, even if energy supplies to them have generally been more appropriately priced. 1.2 New Directions in Energy Strategy. The energy sector has accounted for nearly 30Z of Plan expenditures. This heavy investment has yielded substantial results in terms of increases in output, but earlier achievements in meeting energy demand increasingly from domestic sources have not been sustained. Indigenous energy development has not kept up with the increasing demand and is now being curtailed by public finance constraints. In the face of the current and medium-term budgetary difficulties, the sector can no longer rely on net budgetary support by the Government of India (GOI) along the lines of the past. GOI's new energy strategy reflects the financial realities and has begun to pay more attention to efficiency issues is production, use and pricing of energy. ihereas previous Plans gave highest priority to accelerated exploitation of domestic energy resources, the Zighth Plan (FY93-FY97) places more emphasis on sustainable development, giving greater attention to development of renewable energy, demand management, conservation and efficiency. GOI is also relying to a greater extent on private initiative and investment. However, given the long gestation period of most energy projects and the time required for the consumers to respond to GOI's ongoing economic liberalization efforts, further deterioration of the supply/demand situation and increasing reliance on energy imports, with adverse balance of payments implications, are expected in the coming years. Unless India is able to implement fundamental changes in the structure, management and financing of the sector and shift to a less energy-intensive development path, increasing cost of energy and supply limitations threaten future economic growth. 1.3 Power Situation and Challenge. Over the past decade, electricity consumption in India increased at an average annual rate of about 91, but with a per capita level of about 270 Kwh per annum, remains among the lowest in the world. Power shortages persist and, in FY92, were equivalent to about 9t of  - 2 - total energy and 18Z of peak capacity,yequirements. As pointed out in a recent Bank study of the power sector- in India, increased emphasis needs to be placed on improving the efficiency of supply, consumption and pricing of electricity. Supply capacity expansion alone will not substantially improve the critical power demand/supply situation and is likely to be financially unsustainable. A major challenge for 001 in the power sector In the 1990. will, thus, be to strike a better balance between supply expansion and efficiency improvement. Demand is expected to continue to expand at an average growth rate of 8? per annum and massive investments in rehabilitation and new power supply facilities are required even taking into account efficiency improvements. GOI funding of the sector's investment program is likely to be insufficient and the sector will have to rely increasingly on internal resources of state aud central government-owned utilities as well as private investment. rgranization and Regulation of the Power Sector 1.4 Regulatory Framework. Responsibility for electricity supply is shared constitutionally between GOI and the states. The Electricity (Supply) Act (The Act) of 1948 as amended, provides the overall regulatory framework for the sector. The Act charges the Central Electricity Authority (CIA) with developing a national power policy and planning, coordinating and regulating sector development. The Act also empowers the central government, currently the Ministry of Power (MOP), to make rules for carrying out CeA's objectives, by notification in the Official Gazette. The Act created state electricity boards (SEBs) and entrusted them with primary responsibility for public power supply as well as for related state-level regulation - i.e., the SEBs were envisioned as largely self-governing entitiev, including tariff setting (para. 1.6). The Industrial Policy Resolution of 1956 subsequently defined aspects of generation and distribution which were to be the exclusive responsibility of the states and the once significant role of private utilities has gradually diminished (para. 1.8). While it is recognized that various sections of the Act could be modernized, following recent amendmnts (para 1.8), there are no fundamental legal obstacles for the power sector entities to operate on a commercial basis or for the private sector to enter into the sector. 1.5 Central Sector. The central government has been actively involved in power development since the 19708, by establishing its own utilities to complement the efforts of the states in order to accelerate power development in India. GOI currently ownss (a) several generating companies including the National Thermal Power Corporation (NTPC), the National Hydroelectric Power Corporation (NHPC); and (b) the Power Grid Corporation of India (POWERGRID), a transmission company and grid operator. These utilities were incorporated under the Companies Act - the Electricity Act covers them as generating companies. Tariff setting principles for the centrally-owned entities are approved by MOP, actual tariff proposals are reviewed by CIA as the regulatory authority and notified for implementation by MOP. Tariffs are determined on a cost plus basis and provided the utilities collect tariff revenues, their .1/ Long Term Issues in the Indian Power Sector CLTIPS), December 1991. The study was prepared in 1990-91, with financing fromz the Overseas Development Administration (ODA) of the United Ringdon and the United States Agency for International Development (USAID). It was formally discussed with 0OI in February 1992.  W3.. financial viability Is ensured to the extent that they would be able to fully cover their operation cost including debt service. More ambitious financial objectives have been adopted for POWIERORID (under Ln. 3577-IN for the POWSRGRID System Development Project) and for NTPC under the proposed project. GOI also owns two power sector financial intermediaries, Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC). The Ministry of Von-Conventional Energy Sources administers 60I's renewable energy program, which seeks to supplement conventional po.-er supply with alternative energy systeme, e.g., mini-hydro, biomass, wind and solar energy, as vell as meet the decentralized energy needs of the rural sector. 1.6 State Sector. The states own the SEBs and the State Generating Companies (SGC), which together generate about 75X of electricity supply and provide most of the distribution to final consumers. The ElectricIty Act explicitly requires the SEBs to operate 'in the most efficient and economical manner' and also mandates the SEBs to adjust their own tariffs so as to achieve a minimum (and no maximum) return after interest of 32 on average fixed assets in operation. The Act furthers (a) allows a state to specify a higher minimum return for its SEB; (b) specifies that interest on loans from the state governments is to be paid by the SEB only after meeting the minimum return; and (c) introduces the concept of subventions to be paid by the states to help the SEns meet the minimum return requirement, in compensation for using the SE as8 administratively convenient vehicles for agricultural input subsidies. For most SEBs meeting the 32 after-interest return would allow them to cover operating cost and debt service, provided rural electrification subsidies are fully paid in time and bill collection is reasonable. Most SEBs do not, however, reach the Act's statutory minimum returns and their aggregate operating losses ranged from Rs. 3.2 billion in FY86 to Rs. 14.7 billion in FY92 (in total about US$3 billion). Net internal cash generation has been negative every year since FY86 and all capital expenditures were financed from borrowing and/or state budgetary resources. "his is attributable to the poor operational efficiency of the SE8s, low tarix-a amd even more importantly, to political interference by the state governments. Although the Act grants the state utilities considerable autonomy, in practice they must obtain state government approval (often at the highest political level) for most major decisions including those on investments, tariffs, borrowing, salary and personnel policies. 1.7 SEBs and SOCs are grouped into five regional interconnected power systems in the Eastern, Northern, North-Eastern, Southern and Western regions of India. GOI created the Regional Electricity Boards (REWs) in 1964 to bring together the concerned SEBs and central and joint sector utilities to coordinate system operations in their respective regional grids and also entrusted CEA with the development and operation of Regional Load Dispatch Centers (RLDCs) to support the REBs. In 1991, GOI strengthened the authority of the REBs and RLDCs by an amendment of the Electricity Act requiring generating companies and licensees to follow their instructions. The transfer of RLDCs and CEA's operational responsibilities to PONERGRID, to be completed by December 31, 1995, was agreed under Ln. 3577-IN approved on March 23, 1993. 1.8 Private Utilities. At independence, private utilities and licensed local authorities together provided about 80Z of public electricity supply. Most licensees have since been taken over by the SE8s when their licenses expired, and no new licenses have been granted since 1956. OAly five private utilities remains BSES Ltd. (BSIS) and Tata Electric  -4- Companies (TEC) in Bombay, Ahmedabad Electricity Company (AEC), Surat Electric Company, and Calcutta Electric Supply Corporation Ltd (CzSC) in Calcutta. Their generation capacity totals about 2,800 MW and additional plants are under construction. India's long-standing private power policy was radically reversed in 1991* power was removed from the list of activities reserved for the public sector in the Industrial Policy Resolution and the Act was amended to lift many of the regulatory disincentives to private investment in the power sector. This is fully in line and consistent with GOI's economic liberalization objertives, to tap the financial, technical and managerial capabilities of the private sector into areas previously reserved to the public sector. India now allows full ownership of power companies by the private sector (local and foreign), an extended period of license of 30 years with 20-year renewals and increased financial returns. Provision is also made in the Act for private generating companies and captive plants to sell powmr to the SEBs. Additional incentives were introduced in GOI budget for FY94, includings (a) a reduction of import duty on power projects to 20?; and (b) a five-year tax holiday for new private (as well as public sector) power projects. These changes have resulted in remarkable business development activity by private developers (para. 1.19). Electricity SuDSl.L Demand and Tariffs 1.9 India's power system has an installed capacity of over 70,000 MW, in size comparable with that of the United Kingdom. In FY92, this system generated about 283,500 Gwh, about 70X from coal-fired power stations, 25? from hydro stations, and SZ from gas, oil and nuclear stations. Supply has expanded quicklys in FY82 installed capacity was only 32,350 MW, and generation 114,000 Gwh. In parallel with the growth of supply, operational efficiency hbs improved. For example, the plant load factor has increased from 442 to about 552 over the last ten ),ars and the rate of coal consumption by power stations has been cut by about 10X. These improvements reflect a strengthening of plant maintenance and operations and are commendable in view of the deteriorating quality of coal supply. The actual improvements have, however, been uneven among the SEBs and reflect the performance and increasing share of NTPC, which in FY92 provided about 212 of India's total and almost 30X of its thermal power supplies. The operational efficiency of NTPC's plants has consistently surpassed that of the state utilities. Power station auxiliary consumption in India exceeds 10?, technical and commercial losses in transmission and distribution are estimated at 222 of net generation and interruptions and reductions in supply and voltage are common. The poor quality and unreliability of public supplies cause consumers to purchase costly back-up generating capacity: an estimated 6,250 MV of captive generating facilities are operated by industries. 1.10 Industry consumes almost half (472) of all electric power; agriculture uses 272; residences 16Z; commerce S2; and public services the balance. The growth in electricity demand has been accelerated by relatively low power tariffs which have fostered wasteful end-use of energy. Average retail tariff rates have increased only slightly since FY82 in real terms and remain at about 50 of the long-run marginal cost (LRMC). Increases in real costs (particularly for fuel and wages) have offset the increases in efficiency and real tariffs. In the meantime, tariff differentials among consumer groups have widened. Rates to Industrial consumers are in most states now close to, and in some cases even above, LRMC. Agricultural tariffs, on the other hand, have fallen in absolute terms to an average of  -5 - about paise 16/Kwh in FY92 and cover less than 10 of LRMC. Partly as a result of this subsidization, agriculture's share In total consumption has grown from about 17Z in FY82 to about 27Z in FY92. Compounding the problem is the poor collection from farmers, and the high transmission and distribution losses for rural supply. They contribute to an increasing financial burden imposed by agriculture on the power sector. A similar situation applies to the residential uses of electricity. Past Bank Group Operations in the Power Sector 1.11 Lending. The Bank group has made 36 loans (US$6.8 billion) and 19 credits (US$2.4 billion) for power projects in India (Annex 1.1)1!. IFC has made five investments totalling Us$203 million to AEC and TEC in FY89, TIC and CESC in PY90, and BSES in FY91. The physical implementation of most Bank power projects in India has proceeded slowly, but eventually, after significant initial delays, has broadly met expectations. While the disbursement profile of the portfolio is well in line with the Bank average 1ower disbursement profile. loan and credit disbursements of the Indian portfolio continue to show large outstanding balances (US$3.8 billion as of March 31, 1992). These are due primarily to the long construction periods for generation projects compounded by frequent delays in procurement, in foreign exchange and import license clearances by the various ministries and in counterpart fund releases from state governments. Undisbursed balances have been pushed up further by frequent cost underruns on major equipment contracts. The latter are due, in some instances, to the softening of international markets in the mid-19809 and, in others, to the depreciation of the Rupee. The Bank has reviewed its power loan portfolio for India and has since December 1991 canceled US$864.2 million. 1.12 Past Stratesy. Over the last decade, IBRD followed a three-pronged strategy in its lending to the power sector in India. Firstly, it supported agencies owned by GOI, STPC in particular, as a means of effecting sector-wide Improvements. Secondly, it financed a selected number of SEBs whose management and state government appeared to be committed to reforms. Finally, and in close cooperation with IFC, it financed existing private power utilities to improve their financial and economic efficiency and to encourage 00I to lower entry barriers for new investors. The success of this strategy has been uneven, in line with fundamental sectoral weaknessess despite some progress, SEBs in general did not respond to GOI's initiatives and there was no mechanism to enforce compliance or elicit cooperation, even in case of non- payment for central sector electricity. 1.13 Experience from Previous NTPC OCerations. As of January 31, 1993, the Bank Group had invested US$ 3 billionJ in 15 operations with NTPC. The total undisbursed balance under five ongoing projects amounted to US$461 2/ Loan and credit amounts are net of cancellations. S/ Net of cancellations and after transfer of the transmission assets to POVEIGRID (para 2.6).  - 6 - million. Project completion reports for the first nine NTPC operationsV and the Performance Audit Reports for the first seven recognize the achievements and success of NTPC in implementation; despite some delays in the pre-construction stages, NTPC generally completed the projects on schedule and within budget, reflecting the strong project management capability it has developed. Quality control procedures introduced by NTPC helped improve the quality standards of power equipment supplied by Indian manufacturers. On the negative side, the financial health of NTPC has been threatened by the accumulation of receivables from the SEBs. Intensified collection afforts and central appropriations (direct payments by 600 from budgetary support intended to the concerned states) have reduced NTPC's accounts receivable and further improvements have been achieved after the approval of NTPC's new investment and commercial policies (para. 2.2) by the Government in Oct ber 1992 after a prolonged dialogue with the Bank. The Bank's latest Audit i/ and Project Completion Reports noted that its own efficiency notwithstanding, NTPC did not bring about the expected sectoral improvements. In addition to the above- mentioned commercial issues, the reports also identified areas for further improvement for NTPC itself, highlighting the need to pay more attention to: (a) internal resource mobilization by NTPC for its future investment; (b) adequacy of coal supply arrangements; (c) environmental impact mltigation and rehabilitation and resettlement of project affected persons; and (d) pra- implementation activities including preparation of tender documents and timely award of contracts. These issues have been discussed with NTPC and have been incorporated in the design of the proposed project. 1.14 Experience with SEBs. Beginning in the mid-1980s, IBRD attempted to improve the performance of SEBs by direct involvement at the state level. This approach, involving close lending relationship with the SEBs, has been successful in a few cases, such as Maharashtra. Projects with institutionally and financially weaker SEBs have not met expectations, forcing the Bank to apply increasingly strong remedies, up to suspension of disbursement and subsequent cancellations of loans to the Delhi Electric Supply Undertaking (DESU) and the Uttar Pradesh State Electricity Board, and threat of suspensions of loans to the SEBs in the States of Nimachal Pradesh and Kerala. The Bank's stance has yielded positive responses from some of the concerned state governments, including substantial tariff adjustments in Nimachal Pradesh, Kerala and Uttar Pradesh. Tariffs in Uttar Pradesh were, however, rolled back in June 1992. This event, combined with the failure to implement agreements to settle current power bills of NMPC and fundamental weaknesses in the operations of UPSEB forced the Bank to cancel the US$350 million Ln. 2957- IN for the Uttar Pradesh Power Project in August 1992. The two power loans to Karnataka were suspended on April 8, 1993 due to non-compliance with financial covenants and unresolved environmental and resettlement and rehabilitation issues. Close and frequent supervision of the remaining SEB loans is necessary to help ensure continued compliance with loan agreements, setting effectively a limit to the number of the Bank's direct SEE operations. 4/ Singrauli (Credit 685-IN); Korba (Credit 793-IN); Ramagundam (Credit 84-IN and Loan 1648-IN); Singrauli II (Credit 1027-IN); Farakka (Credit 1053-IN and Loan 1887-IN); Korba II (Credit 1172-IN); and Ramagundam II (Loan 2076-IN). 5/ OED Performance Audit Report No. 10854: [orba Thermal Power project, Ramagundam Thermal Power Project, Second Singrauli Thermal Power Project and Parakka Thermal Power Project, February 3, 1993.  1.15 Exoerience with Private Utilities. The Bank and IFC's experience with the private utilities has been generally satisfactory. Unlike the SIBs, private utilities have been allowed by their respective state governments to operate autonomously and in a technically and financially viable manner. They have not suffered from the Institutional and financial problems of the GOI- owned entities either, because the power they generate is largely fed into their own distribution networks which supply financially lucrative urban residential and industrial consumers. Power Sector Reform 1.16 GOI Strategy in the Power Sector. The growth targets of GOI's economic stabilization and liberalization program will be threatened as long as power supply constrains industrial development and the financial losses of the power sector burden public finance. GOI has adopted a three-pronged approach to remedy the root cause of the sector's efficiency and resource mobilization problems, the poor performance of the SEDs. First,