India - Technical Assistance Project for Private Power Development

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16617 IMPLEMENTATION COMPLETION REPORT INDIA TECHNICAL ASSISTANCE PROJECT FOR PRIVATE POWER DEVELOPMENT (LOAN 3630-IN) MAY 27, 1997 Energy and Infrastructure Operations Division Country Department II South Asia Region 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 (Currency Unit Rupee (Rs.) Year = US$I = Rs. 1992 = 25.92 1993 = 30.49 1994 = 31.37 1995 = 32.43 1996 = 35.30 FISCAL YEAR OF BORROWER April I to March 31 ABBREVIATIONS AND ACRONYMS GOI = Government of India GOM = Government of Maharashtra IPP = Independent Power Producer MOP = Ministry of Power MOU = Memorandum of Understanding ODA = Overseas Development Administration OFAP = Operational and Financial Action Plan PFC = Power Finance Corporation PIU = IProject Implementation Unit PPA = IPower Purchase Agreement PPF = Project Preparation Facility RM = Resident Mission SAR = Staff Appraisal Report SEB = State Electricity Board TOR = Terms of Reference Vice President: Mieko Nishimizu Director: Robert S. Drysdale Division Chief: Jean-Francois Bauer Staff Member: Joelle Chassard  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT INDIA TECHNICAL ASSISTANCE PROJECT FOR PRIVATE POWER DEVELOPMENT (Loan 3630-IN) TABLE OF CONTENTS PREFACE EVALUATION SUMMARY PART I: PROJECT IMPLEMENTATION ASSESSMENT. I A. Project Objectives ...............................................1I B. Achievement of Project Objectives ................................................2 C. Major Factors Affecting the Project ................................................2 D. Project Sustainability ................................................5 E. Bank Performance. 5 F. Borrower Performance ................................................6 G. Guarantor Performance ................................................6 H. Assessment of Outcome. 6 I. Future Operations ............................................... 7 J. Key Lessons Learned ................................................7 Part II: STATISTICAL ANNEXES Table I Summary of Assessments Table 2 Related Bank Loans and Credits Table 3 Project Timetable Table 4 Loan and Credit Disbursements: Cumulative Estimated Actual Table 5 Key Indicators for Project Implementation Table 6 Key Indicators for Project Operation Table 7 Studies Included in Project Table 8a Project Costs Table 8b Project Financing Table 9 Economic Costs and Benefits Table 10 Status of Legal Covenants Table 11 Compliance with Operational Manual Statements Table 12 Bank Resources: Staff Inputs Table 13 Bank Resources: Missions 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.   IMPLEMENTATION COMPLETION REPORT INDIA TECHNICAL ASSISTANCE PROJECT FOR PRIVATE POWER DEVELOPMENT (Loan 3630-IN) PREFACE This is the Implementation Completion Report (ICR) for the Technical Assistance Project for Private Power Development (the Project) for which a Loan of US$20 million to the Power Finance Corporation Limited (PFC), with the Guarantee of India, was approved on June 24, 1993. The Project became effective on August 23, 1993. The Loan was closed on December 31, 1996, after being extended from the original closing date of December 31, 1995. Final disbursement took place May 21, 1997. In total, US$ 1,207,71 1.11 were disbursed and US$ 18,792,288.89 remaining undisbursed in the Loan account were canceled as of May 21, 1997. The ICR was prepared by Sunil Mathrani (Consultant) and reviewed by Mr. Jean Fran,ois Bauer, Chief, Energy and Infrastructure Operations Division and Ms. Kazuko Uchimura, Project Adviser, Country Department II, South Asia Region. Because of budgetary considerations, no Implementation Completion Mission was carried out. The ICR is based on material in the project file and information provided by the Borrower. The Borrower's comments on the ICR have been included in the Preface and Part I as footnotes.  I  IMPLEMENTATION COMPLETION REPORT INDIA TECHNICAL ASSISTANCE PROJECT FOR PRIVATE POWER DEVELOPMENT (Loan 3630-IN) EVALUATION SUMMARY Introduction 1. Although inadequate power supply has long been a hindrance to economic growth in India, no substantial attempt was made to encourage private investment in the sector till 1991, when key legal obstacles were removed. Following the promotional efforts of the Government of India (GOI) in 1992 to attract private capital to invest in the power sector, over thirty Memoranda of Understanding (MOUs) were rapidly signed by the state governments with private developers seeking to set up as Independent Power Producers (IPPs). These MOUs were signed on a first-come, first-served basis without competition between potential investors. State Electricity Boards (SEBs) had to negotiate Power Purchase Agreements (PPAs) without any basis of comparison or any assurance that they were getting the best offers. After signing the MOUs and PPAs, private developers submitted to GOI their requests for various guarantees. 2. In contrast to the very experienced technical, legal and financial teams brought in by the private sector, there was almost total inexperience on the part of the state governments. The SEBs and the GOI authorities in dealing with the complex issues encountered during the negotiations were inexperienced. The picture was made more complicated because of the non- competitive nature of the selection process preceding the signature of MOUs and PPAs. Both the Bank and GOI correctly felt that the Ministry of Finance (MOF), the Ministry of Power (MOP) of GOI, appropriate authorities of the state governments, and the SEBs needed outside expertise to assist them in negotiating with private investors, which led to the preparation of the Project. However, towards the end of the appraisal process, as GOI did not want to borrow for technical assistance, GOI and the Bank agreed that PFC would be the Borrower, while India would guarantee the Loan. This decision restricted the proposed assistance to SEBs only. To compensate for the fact that GOI would not have access to the loan, a PHRD grant of about US$2 million was obtained to finance the technical assistance needs of GOI ministries (Power, Finance). Statement of Objectives 3. The purpose of the Project was to ensure that the basic objectives of GOI's 1992 private power development initiative were achieved. The Project therefore aimed to facilitate the implementation of private power projects by establishing adequate administrative processes for soliciting and evaluating project proposals and by providing outside expertise during negotiations with project developers. As such, the Project had two specific objectives:  - 11 - (i) to help manage the implementation of the GOI's private power policy during a transitional period; and (ii) to set the stage for the introduction of market mechanisms in the sector as a whole. Achievement of Objectives 4. The Project failed to meet its objectives because of the fundamental reluctance of the SEBs to seek advice'. The Project's success was also closely linked to progress in the development of private power production, which has turned out to be extremely slow. Despite a one-year extension to the closing date, only US$1,207,711.11 (6 percent of the Loan) were disbursed. GOI/Bank perception of SEB needs was not shared by the SEBs themselves. At the same time, GOI was obliged to insist on the renegotiation of several draft project agreements and PPAs between private investors and SEBs which had not received adequate advice. Major Factors Affecting Achievement 5. Slow pace of GOI's private power initiative and other sector reforms. At the time the Loan was approved, a clear policy framework at the state level and creditworthy clients for the IPPs were lacking. The shortcomings in power sector policies and the slow progress in restructuring state power sectors or even in improving SEBs' finances have prevented a major influx of private investment in power generation. This had consequent repercussions for the project that was based on the expectation of a massive increase in private investment. 6. Involvement of the Borrower (PFC) late in project processing and its unfamiliarity with private power development. At the time the Loan was made, GOI was not willing to borrow directly for technical assistance. It was at a late stage of project processing that GOI, the Bank and PFC agreed that PFC was going to borrow under the guarantee of India. PFC was not familiar with private power developmente. Thus, PFC was not the correct intermediary for the 3 Loan . PFC does not agree with this assessment. With its letter dated April 22, 1997, PFC stated: "It would be appropriate to state that the Project has partially met its objectives ... as four SEBs have utilized the services of intemational consultants, which will have a demonstration effect for other states to follow." 2 PFC does not agree with this assessment. With its letter dated April 22, 1997, PFC stated: "It is incorrect to state that PFC was unfamiliar with private power development. It was due to extraneous factors that the loan could not be utilized to the expected level. It would be relevant to point out that PFC sanctioned subloans totaling US$20.38 million. However, undue competition from PPF/other grants made available to SEBs by the Multilateral Agencies and the undue delay in clearing the bid/other documents by the World Bank resulted in that the SEBs got the loans cancelled." -- Bank's Note: It is noted that PPF advances were utilized for consultants services for state power sector reform and not for the objectives of the Project. 3 PFC does not agree with this assessment. With its letter dated April 22, 1997, PFC stated: "Bank's direct lending to the SEBs to meet the technical assistance financing requirements would not have made any difference. Rather the Bank was right in choosing PFC as an interlocutor, as PFC is the only Financial Institution that is totally dedicated to the Indian Power Sector and has the real feel of events taking place therein."  - ill - 7. SEBs were unwilling to seek external assistance for several reasons. The perception of GOI and the Bank at the time of project preparation regarding the SEBs' "needs" for expert advice was not shared by the latter. For reasons explained below, SEBs were unwilling to seek external assistance: a) Real Degree of Interest by Private Investors was Unknown. Initially it was impossible for SEBs to assess the real degree of interest of private firms in investing, which turned out to be much less than anticipated because of policy shortcomings mentioned in para. 5 above.; b) Services of International Financial and Legal Consultants are Very Expensive. The high cost of specialized advisory services required in negotiating PPAs were an additional deterrent to SEBs who were not accustomed to hiring international consultants; c) SEBs had a Marked Preference for Local Consultants. PFC and the SEBs generally felt that with the exception of legal advice, there were competent local consultants available to act as advisers. However, the Bank did not share their assessment of local consulting capabilities and thus would not agree to fund the services of local consultants alone under the Loan but insisted on mixed teams that would include international project finance expertise; d) SEBs may have been Unwilling to Share Sensitive Information with Outsiders. Some SEBs may have been reluctant to permit outsiders to have access to details of sensitive information on their negotiations with private firms; e) PFC Onlending was Expensive. 4PFC's lending terms were found by SEBs to be excessively high. The onlending terms of the proceeds of the Loan from PFC to the SEBs were not defined prior to Board approval. Although during implementation, PFC tried to adjust the onlending interest rate, the exchange risk still had to be fully met by the SEBs; and f) SEBs had Alternative Less Expensive Funding Sources. Some SEBs also had access to bilateral grant funds which they logically preferred to use in preference to costly borrowing from PFCs. 4 PFC does not agree with this assessment. With its letter dated April 22, 1997, PFC stated: "The onlending rate of interest did at no point of time hinder the SEBs in utilizing the Loan. It is the SEBs' reluctance and several sector policy issues and the high cost of international consultants that hampered its utilization." With its letter dated April 22, 1997, PFC stated that PPF Advances were part of the less expensive competing sources. It is once again noted that PPF Advances were utilized for consultants services for state power sector reform and not for the objectives of the Project. (PPF Advances were approved for the Haryana, Uttar Pradesh, Rajasthan and Bihar State Power Sector Restructuring (SPSR) Projects. In addition to a grant by the Overseas Development Administration (ODA) of the Government of the United Kingdom, the Bank also agreed to use funds of the Upper Indravati Hydro Power Project (Cr. 1356-IN) for the Orissa SPSR).  - iv - Project Sustainability 8. The project is unlikely to be sustainable. PFC has the resources to continue lending to SEBs for consulting services, should these latter wish to borrow, but there are few signs of a changed outlook among most SEBs with regard to hiring outside expertise using borrowed funds. However, the project's objectives may be furthered by the use of concessionary funds available to some SEBs. Bank Performance 9. The Bank's response to GOI's request for the Project was very fast and the project went from the preparation stage to negotiations in under three months. Given the simplicity of the operation, it was decided that a formal appraisal mission was unnecessary. The Bank had envisaged a loan to GOI with onlending to the states through central assistance, including PFC, but as GOI was unwilling to borrow directly for technical assistance, PFC became the sole borrower. This restricted the assistance to SEBs and the Bank did not fully evaluate its impact on the Project. Overall, the quality of project design, preparation and appraisal was unsatisfactory as a result of the rapidity of processing. Supervision was intense and carried out regularly with the support of the Resident Mission. However, in light of the very little which was achieved, it is assessed that supervision by the Bank was unsatisfactory. Borrower Performance 10. PFC became the Borrower of the Loan and the agency responsible for the implementation of the Project at a late stage of preparation and had been insufficiently involved in project .6 preparation . During its familiarization with the issues and problems relating to private power development, PFC faced difficulties in advising SEBs on the kind of assistance the latter needed. Although PFC made efforts to 'market' the loan facility, and the low utilization rate of the loan was outside PFC's control, overall Borrower performance is considered to have been unsatisfactory. Guarantor Performance 11. Prior to negotiations, GOI could have done more to assess which entities needed most the proposed technical assistance, and to evaluate the real degree of SEB interest in the Project. Although during implementation, GOI tried to convince the SEBs of the benefits of the technical assistance facility provided under the Loan, its performance as Guarantor is considered to have been unsatisfactory. 6 With its letter dated April 22, 1997, PFC stated: "PFC's involvement at the project formulation stage would have helped to avoid such a situation."  v - Assessment of Outcome 12. The project's outcome is unsatisfactory. The non-utilization of the Loan by some SEBs has contributed to delays in the start of construction of private power plants because of the need to renegotiate unsatisfactory PPAs at a late stage. Future Operation 13. PFC will provide SEBs with the funds necessary to meet their commitments under the ongoing contracts with external consultants. SEBs will probably only seek fresh funds from PFC for new advisory services if no other cheaper source of funds exists7. The Bank is focusing its efforts directly on those states which appear ready to undertake sector reforms. Key Lessons 14. The key lessons to be learnt from this operation are: i More attention should be devoted to assessing the real degree of interest in the Project on the part of the ultimate beneficiaries. * The correct financial intermediary should be selected -- the PFC was not the correct intermediary for this Loan. A direct relationship between the Bank and GOI and/or state governments and/or SEBs may have produced better results