India - Rural Electrification Project

Report No. 688a-IN India Appraisal of Rural Electrification Project June 23, 1975 FILE COPY South Asia Projects Department Power Division Not for Public Use Document of the Internatonal Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS US$1 = Rs 8.0 Rs 1 = US$0.125 Rs 1,000 = US$125 Rs 1,000,000 US$125,000 Rs 1 Paise 100 ABBREVIATIONS RE = Rural Electrification REC = Rural Electrification Corporation SEB = State Electricity Board CEA = Central Electricity Authority CWPC = Central Water and Power Commission GOI ' Government of India MNP - Minimum Needs Program NCAER - National Council for Applied Economic Research kwh = kilowatt hour kw = kilowatt kv = kilovolt v = volt KVA = kilovolt-ampere MVA = megavolt-ampere FISCAL YEAR April 1 - March 31  INDIA RURAL ELECTRIFICATION PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS ........................ ...... . i-ii I. INTRODUCTION .....****.. **..................... *.. . 1 II. BACKGROUND ........................................... . 1 Historical Background on RE Development in India . 1 RE Programs Envisaged in the Draft Fifth Plan 3 The Power Sector .... 3 III. THE BORROWER AND THE BENEFICIARIES ........5 Rural Electrification Corporation ............... 6 Functions 6...... ......... .6 Organization of the REC 7 Impact of Rural Electrification on SEBs ......... 7 Relending of Credit by GOI to the REC 8 Financing of REC Loans ... 9 REC's Lending Terms and Financial Criteria for Loans ...*** ...*......*......... 10 Ex-post Evaluation of REC-financed Schemes ....... 10 Audit .....*...... o.o, *999....**9.*9.9.9** 999*999 11 IV. THE PROJECT ..... *..................*.............. 11 Definition ......................... 11 Estimated Costs of the Project ................... 11 Preparation and Construction of REC-financed RE Schemes . 12 Procurement .......................... 12 Disbursements 13.............................. 13 V. PROJECT ECONOMIC JUSTIFICATION ........ ................ 14 Pricing Policy ... ................................. 15 This report is based on information obtained by Messrs. J. Beach, B. Montfort and S.S. Scales during missions to India in December 1972, April 1973, Novem- ber/December 1973, and February 1975.  -2- Page No. VI. FINANCIAL ASPECTS ..................................... 16 Financial Position .............. *................ 16 Financing Plan .................................. 17 Future Finance .......................... 18 VII. AGREEMENTS REACHED DURING NEGOTIATIONS ................ 19 LIST OF ANNEXES Annex Appendix 1 Rural Electrification Project Establishment of the REC ............... 1 Objectives and Operational Policy ...... 1 Organization and Management ... ......... 2 Personnel Hiring and Training .......... 3 REC Lending Terms and Financial Criteria for Sanctioning Loans .................... 4 REC's Economic Evaluation of Projects ... 6 Project Approach and Coordination with Other Concerned Agencies ................... 7 Technical Coordination - Standardization 8 Rural Electric Cooperatives ............ 9 Operations of REC ...................... 10 1 1A REC, Board of Directors 1 1B REC, Organization Chart 1 iC REC, Organization Chart (Project Appraisal, Coordination & Evaluation) 1 1D Organization Chart (Finance and Accounts Division) 1 1E Directives from GOI to REC 1 1F REC Loans - Rates of Interest, Terms of Repayment, Minimum Returns Required on Loans Sanctioned to March 31, 1974 1 1G REC Loans - Rates of Interest, Terms of Repayment, Minimum Returns Required on Loans Sanctioned from April 1, 1974 1 1H Physical Targets Envisaged under REC-financed Schemes in FY 1974  -3- Annex Appendix 1 1I Connected Load of RE Schemes in FY 1974 1 1J Cumulative Physical Targets under REC-financed Schemes up to FY 1974 1 1K RE and Harijan Basti Loans in FY 1974 2 _ Rural Electrification Development Envisaged in the Draft Fifth Plan 3 - Estimated Association Disbursements 4 - Economic Justification Sunmmary ...... *....... ... 1 Least Cost Comparison between Electricity and Diesel Pumping for Minor Irrigation ... 2 Basic Case .............................. 3 Sensitivity to Shadow Pricing of Foreign Exchange ..... ........... 4 Justification of the Minor Irrigation Component in a Typical REC-financed Project 5 Economics of Well Electrification Component Alone 6 Justification of the Village Electrification Component in a Typical REC-financed Project 8 Return on Investment for the Typical REC- financed Project .......... 9 Rates of Return Computed by REC Staff on Specific Sub-Projects ......... . 11 Returns on Minor Irrigation Investments in IDA Agricultural Credits .............. 11 NCAER's Study on the Impact of Rural Elec- trification in Punjab ................. 12 4 4A Cost of a 5 HP Diesel Pump Set 4 4B Cost of a 5 HP Electric Pump Set 4 4C Electricity/Diesel Least Cost Comparison for 5 HP Well/Basic Case 4 4D Electricity/Diesel Least Cost Comparison for 5HP Well/50% Premium on Foreign Exchange 5 Average Rates for Agricultural, Industrial, Commercial and Domestic Consumption 6 REC Balance Sheets for Fiscal Years 1970-1974 (Actual) and Fiscal Years 1975 through 1979 (Forecast)  -4- Annex Appendix 7 REC, Statement Showing Loan Sanctions, Disbursements, and Balances Undisbursed 8 REC, Sources and Application of Funds for FY 1970-1974 (Actual) and FY 1975-1979 (Forecast) 9 REC, Income Statements for FY 1970-1974 Actual and FY 1975-1979 (Forecast) 10 Statement Showing Calculation of Debt Service Coverage  INDIA RURAL ELECTRIFICATION PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a Rural Electrification Project for which the Government of India (GOI) has requested financial assistance. The Project, which would help implement the GOIts policy of accelerating rural electrification with emphasis on the energization of minor irrigation wells, would be undertaken by the Rural Electrification Corporation (REC), a govern- ment Corporation under the general supervision of the Ministry of Energy. ii. A Credit of US$57 million equivalent is proposed, to be onlent by GOI to the REC on terms acceptable to the Association. It would finance loans to State Electricity Boards (SEBs) whose earnings enable them to meet their rate-of-return obligations under Loan 416-IN and any other SEB whose State Government has agreed to subsidize rural electrification operations in a manner satisfactory to the Association. The loans would be restricted to projects which meet specific viability criteria. iii. The REC was established in 1969 to channel public funds to State Electricity Boards for rural electrification development. Capital amounting to Rs 1,500 million was made available to meet the REC's anticipated require- ments during the IVth Plan period (FY 1970 - FY 1974). Its annual revenues come from the interest on its loans and the investment of surplus cash. In FY 1974, administration cost was equivalent to 9% of revenue while the in- terest cost was 17% of revenue. At March 31, 1974, REC's debt was only Rs 353 million out of a total capital of about Rs 1,761 million and loan interest at 6% per annum represented an expense of less than 1% of capital. By March 31, 1974, REC had appraised and approved schemes amounting to about Rs 3,040 million. Against this it had disbursed about Rs 1,643 million leaving undis- charged commitments of Rs 1,397 million. The REC does not reserve funds to meet the full commitments when approving a loan and relies mostly on the GOI to provide adequate funds annually to meet the subsequent years' commitments on existing loans. iv. SEBs whose projects meet the REC's lending criteria are the benefi- ciaries of loans for RE development. Up to March 31, 1974, these criteria generally required a proposed project to earn a small revenue surplus by the fifth year. From April 1974 GOI raised the interest on its loans and reduced its equity participation, and REC had to raise its lending rates as well and to relax its lending criteria. The present lending criteria call for revenue and expenses breaking even by the seventh to the fifteenth year of operations dependent upon the type of scheme, and recognize an extended initial period when losses from RE operations are expected to be borne by SEBs. In conventional terms these break-even points are equivalent to internal financial H'ates of return ranging from about 10% to 5%.  - ii - v. The REC is a strong organization supported by competent professional and technical staff. It has taken the lead in the rural electrification sub- sector by establishing sound policies and procedures for project appraisal, evaluation and approval; it monitors the implementation of sanctioned schemes and co-ordinates the standardization of equipment and construction practices. vi. The project would consist of a tranche of about 140 REC-approved rural electrification schemes to be carried out by designated SEBs and would involve about 40,000 km of primary and secondary distribution lines, trans- formers with an aggregate capacity of 500 MVA, poles and miscellaneous equip- ment. The total project cost is estimated at US$114 million equivalent, of which US$57 million equivalent would represent the cost of line conductors, transformers, circuit breakers, capacitors, insulators and meters, together with 50% of the cost of locally procured poles. vii. Each designated SEB would be responsible for its own procurement of items to be financed by the credit. With the exception of poles, these items would be procured after international competitive bidding. Indian manu- facturers would be awarded the Association's usual preference in the com- parison of bids. Based on experience gained from Credits 242-IN and 377-IN (Power Transmission Projects II and III), it is likely that at least 80% of the conductor contracts would be placed with Indian manufacturers. Although less is known about the competitiveness of Indian manufacturers of other equipment for which international bids will be sought, it is estimated that they might win 70% of orders. viii. GOI's policy of rapidly expanding rural electrification throughout the country is a key element in co-ordinated rural development programs de- signed to achieve large economic benefits and to improve the living conditions, of the rural people. The main economic benefits to the community at large result from increased agricultural production. A further benefit would be the speedier introduction of small scale industry, particularly agro-industry, which augments the value added in rural areas, supplements the farmer's income and creates new employment opportunities. The extension of electricity service to village consumers provides benefits which are difficult to quantify, such as (a) resource savings over substitutes (e.g. kerosene); (b) value of quality benefits over alternatives (e.g. lighting, ironing); (c) value of extra output (e.g. more lighting, fans); and (d) savings in urban costs foregone due to a curb in the rural-urban migration. Finally, there are income distribution benefits resulting from the policy of paying particular attention and granting relaxed financial terms to help start the development process in the poorest and most backward areas. ix. The project would benefit about 55,000 farmers - mostly small - and their dependents and about 210,000 domestic/commercial consumers who would receive connections in 6,250 villages where 35,000 street lights would also be installed. More than one half of the connected load would be for irrigation pumping, the remaining half being divided equally between small industries and domestic and commercial connections, while street lighting  - iii - would represent less than 1% of the total load. Based on the value of in- cremental output from agriculture and small industry and the expected revenues from domestic/commercial consumers, and after making appropriate adjustments in respect of taxes, the return on investment on a typical REC-financed project is estimated at 23%. This is a conservative calculation which does not take full account of the socio-economic benefits of village electrification. x. The Project constitutes a suitable basis for a Credit of US$57 million equivalent.   INDIA RURAL ELECTRIFICATION PROJECT I. INTRODUCTION 1.01 The Government of India (GOI) has requested assistance from the Association to help implement its policy of accelerating rural electrifica- tion (RE) with emphasis on the energization of minor irrigation wells. A credit of US$57 million is proposed, to be made to GOI for onlending to the Rural Electrification Corporation (REC), a central government financing institution and by far the largest investor in the Indian RE sector. The credit would finance the conductors, transformers, circuit breakers, capaci- tors, insulators, and meters, together with 50% of the cost of locally procured poles in RE loans made by the REC to the State Electricity Boards (SEBs). 1.02 This would be the first credit to the REC. Its nature makes it an adjunct to both the Bank Group's agricultural and power operations. On the power side, the Bank has made eight loans to India, amounting to US$198.0 million, and IDA six credits totalling US$239.0 million. The last three Bank Group power operations, namely Loan 416-IN made in 1965, Credit 242-IN made in 1971 and Credit 377-IN made in 1973, aimed at expanding the high- voltage transmission facilities and improving the financial viability/man- agement of the SEBs. Bank Group lending for India's agricultural sector - US$824 million to date - supports GOI's strategy of giving increased emphasis to farm investments. 1.03 This report is based on information obtained by Messrs. J. Beach, B. Montfort and S.S. Scales during missions to India in December 1972, April 1973, November/December 1973, and February 1975. 1/ II. BACKGROUND Historical Background on RE Development in India 2.01 India initiated its rural electrification program in the early fifties with emphasis on village electrification. However, in 1967, follow- ing a series of severe droughts, GOI shifted the emphasis of its RE policies toward well electrification for irrigation pumping in order to accelerate agricultural production. By April 1, 1969, the starting date of the Fourth 1/ Appraisal of the proposed project was completed in April 1973. Process- ing was delayed because of the severe power shortages then prevailing in India and because organizational measures required by the Associa- tion-reactivation of the CEA--took longer than expected.  - 2 - Five-year Plan, the cumulative RE investment, of Rs 4.2 billion, had involved the electrification of about 1.1 million minor irrigation wells and about 74,300 villages (about 13% of the total). During the Fourth Plan period (1969/70-1973/74), RE investment amounted to Rs 4.45 billion and it is esti- mated that, by March 31, 1974, nearly 2.5 million minor irrigation wells were electrified and about 148,000 villages were receiving electricity service. But the level of achievement between the States varied widely. The table shows the history of RE investment and development through the Fourth Plan and the targets envisaged in the Draft Fifth Five-Year Plan: RE Investment and Development (All-India) No. of % of Cumulative No. of Energized Electrified Electrified Date Investment Irrigation Pumps Villages Villages (Rs million) 1951 Actual N.A. 19,000 3,600 .6 3-31-66 Actual 2,400 513,000 45,800 8.0 3-31-69 Actual 4,210 1,100,000 74,300 13.1 3-31-74 Estimated 8,650 2,440,000 148,000 26.1 3-31-79 Targets 19,630 4,000,000 250,000 44.1 2.02 State Electricity Boards (SEBs) - the operating organizations responsible for developing generation, transmission and distribution of power within each state - were given the responsibility of implementing the Government RE policy. This was initially financed mainly by capital advanced by state governments. However, as the increased tempo of rural electrification and the heavy responsibility devolving on the SEBs on this account began to be felt, GOI decided to investigate the cooperative system of electricity distribution for rural areas. Accordingly, based on a study carried out by a team of experts from the National Rural Electric Coopera- tive Association of USA, an experiment was launched in 1969 with the crea- tion of five pilot rural electric cooperatives in five different states. An investment of Rs 128.6 million phased over a five year period was in- volved. Evaluation of these schemes has shown that so far success has not been sufficient to warrant the launching of large cooperative programs 1/. Next, to help implement its policy of accelerating RE development to reduce regional disparities in availability of electricity service, GOI took the important step, on July 25, 1969, of establishing the Rural Electrification Corporation (REC) as a public financial institution. REC, placed under the l/ Based on the recommendations of a special Committee set up by the REC to evaluate the performance of the first five pilot cooperatives, the REC has recently resumed lending for a few more cooperatives, but on a different set of norms in regard to pattern of funding, organizational structure, etc. (Annex 1, para 34).  supervision of the Ministry of Irrigation and Power (now Ministry of Energy), was designed to play a central role in the promotion and financing of RE projects and cooperatives throughout the country; it has now emerged as by far the largest single investor in RE. It lends to the SEBs on a project basis, requiring projects to meet certain viability criteria and to be prepared and implemented in coordination with related aspects of rural development. During the Fourth Plan period REC sanctioned loans which add up to over Rs 3 billion for 618 schemes and disbursed over Rs 1.6 billion or 37% of total RE investment during that period. REC's organization, management, objectives and accomplishments are described in detail in Annex 1. RE Programs Envisaged in the Draft Fifth Plan 2.03 The Draft Fifth Plan allocates Rs 10.98 billion 1/ for RE during the period (1974/75 - 1978/79), which GOI estimates will permit the energization of an additional 1.5 million wells and the electrification of 110,000 villages (Annex 2). This investment is planned in three components, namely: (a) Rs 4 billion (or 36.4% of the total) would be disbursed to the SEBs by the REC for projects meeting viability criteria set by the latter. This is considered adequate by GOI for the energization of 760,000 pumpsets and the electrification of about 41,000 villages; (b) Rs 2.72 billion would be spent under the Minimum Needs Program (NNP) 2/ to make electricity available in the backward regions in the States. This allocation is considered adequate by GOI for spreading electricity in the rural areas in States where electrification covers less than 40% of the population. It is expected that about 36,500 villages would benefit in 15 States. A project approach is also used here and the REC channels the funds in accordance with viability criteria similar to the most relaxed ones applicable to normal projects under the above component (a); and (c) Rs 4.26 billion would be spent by the States (and Union Territories) themselves. The Power Sector 2.04 Several agencies at the uppermost central policy making level influence resource allocations and development priorities affecting the 1/ This is about 17% of the power sector allocation, and about 2% of total outlay envisaged under the Draft Plan. 2/ The MNP is designed to provide the infrastructure for development in the backward regions in the States. The States prepare integrated programs under the MNP which include energization of irrigation pumpsets, the provision of drinking water facilities, the construction of reads, the establishment of health centers, etc.  power sector. These include inter alia the Ministry of Finance and the Planning Commission which attempt to reconcile the needs of the power sector with those of other sectors; the Ministry of Industrial Development which greatly influences the capital investment programs of the power sector; the Ministry of Energy which represents the sector itself (the REC is under its supervision), and the Department of Atomic Energy which is an autonomous agency. At the intermediate level of national planning and coordination, provisions in the Electricity (Supply) Act envisaged a Central Electricity Authority (CEA) with powers commensurate with responsibility for the develop- ment of national power plans and coordination of the utilization of power resources. However, for all practical purposes, the CEA was until recently a non-functioning entity except for a minor role as arbitrator. It was the Power Wing of the Central Water and Power Commission (CWPC) which discharged the planning and coordination functions. Its effectiveness in this capacity was constrained by an important limitation which did not bind the CEA, the CWPC being simply a technical advisory subordinate agency of the Ministry of Energy. It had no independent statutory status (as did the CEA), and no legal powers to direct or control, or to carry out investigations. To achieve its objectives it relied solely upon its powers of "persuasion". At the operational and state level, the Electricity (Supply) Act gives State Electricity Boards responsibility for developing the generation, transmission and distribution of power within each state. But they too possess little autonomy and for all practical purposes function largely as state government departments. CWPC s influence on them has been minimal. In connection with the most recent power sector credit (Credit 377-IN of May 1973) the GOI con- firmed its understanding that further Bank Group financial assistance to the sector would be contingent upon a meaningful reactivation of the CEA. The GOI recently started moving in this direction when it split the CWPC. The irrigation function is now being carried out by the Central Water Commission which reports to the Ministry of Agriculture and the power function is undertaken by the Central Electricity Authority reporting to the Ministry of Energy. Although the CEA has formally existed since 1950, much still needs to be done to complete 'activation'. The new organization, as planned, would have a chairman and six members, respectively for: Planning, Thermal, Hydroelectric, Systems, Operations, and Economics & Commercial. Four of the members have been transferred from the former CWPC and the Association was informed that appointment of the chairman was imminent. Although the new organization is not yet complete and is therefore not fully operational and would de facto act only in an advisory capacity to the Ministry, it is believed that the GOI's intentions regarding reactivation of the CEA are sincere and sufficient progress has been made to permit processing of the proposed Rural Electrification Credit. 2.05 Extensive power cuts have been a regular feature in most parts of India during the recent past. This resulted from inadequate long-term planning, insufficient transmission facilities, drastic slippages in construction schedules for new plant, inordinate procurement delays, unreliability of coal and lignite supplies, a high rate of enforced shut  down of thermal plant and the failure of the 1971 and 1972 monsoons. Because of a more favorable mownsoon in 1973 and the improvement in thermal plant availability, the situation has improved 1/, however many States still experience power deficits to a more or less extent. In accordance with GOI and States priority policiess agricultural loads have generally been met satisfactorily with regard to energy requirements even though load rostering had to be instituted, i.e., the farmers were restricted in most states to the use of their pumpsets only during certain hours of the day. But the output of the industrial sector has been affected negatively because of the curtailments imposed. 2.06 The prospects of continuing serious power shortages together with the inadequacy of sector planning have been of serious concern to the GOI and the Association, and have delayed the processing of the proposed credit. However, the power supply situation, which will remain tight during the first half of the Fifth Plan period, should improve thereafter in most parts of the country as (i) the preparation of the power portion of the Fifth Plan has been made in a more careful and detailed manner than in the past (ii) central monitoring units created about a year ago in the Planning Com- mission and the CWPC (now CEA) have already demonstrated their effectiveness in keeping a close watch on power projects and ensuring that bottlenecks are identified well in time and corrective measures taken at an early stage, and (iii) the current reactivation of the CEA should also have beneficial consequences in this respect. In spite of these efforts to improve the situation on the supply side, it is expected that deficits will still be part of the Indian power scene for some years, at least in some areas, if the demand itself is not periodically monitored and regulated whenever necessary to maintain it within the limits of supply capability. For meeting existing demand in the short term, GOI and the States are expected to continue their priority policy of favoring agricultural loads at the expense of industry and other users. This is acceptable to the Association. Regarding the build-up of demand over the longer term, GOI confirmed during negotiations that it takes into account the information collected by the central monitor- ing units mentioned above to regulate the licensing of new industrial projects, particularly the power intensive ones, through the Industrial Licensing Committee and the Public Investment Board. III. THE BORROWER AND THE BENEFICIARIES 3.01 The GOI would be the borrower, which would relend the proceeds of the credit to the REC, the beneficiary. REC would in turn on-lend to the SEBs to finance specific RE schemes meeting its viability criteria. I/ For example, the West Bengal power situation has improved markedly during the latter half of 1974. Factories presently have their power supply cut off only one day a week and they are allowed to work one additional night shift. Power supply for agriculture is restricted only during the power system peak hours, I.e. 6:00 p.m. to 10:00 p.m.  -6- Rural Electrification Corporation 3.02 The REC was established in July 1969 under the Indian Companies Act as an autonomous company under the general supervision of the Ministry of Irrigation and Power (now Ministry of Energy). The authorized share capital at June 30, 1973, was Rs 500 million of which Rs 200 million was fully paid and owned by GOI. The initial arrangement was that REC would be provided with capital of Rs 1,500 million, Rs 1,050 million of which would be sub- scribed by the US during FY 1970 through FY 1974 as a grant subject to a matching contribution of Rs 450 million by GOI. In making this initial con- tribution GOI provided 50% as equity share capital and 50% in loan at 6% interest. All these funds and more have now been used by REC which needs additional financing to carry on its business. Functions 3.03 REC's chief objectives are: (a) to finance rural electrification schemes throughout India; (b) to subscribe to special rural electrification bonds issued by SEBs; (c) to promote and finance Rural Electric Cooperatives; and (d) to administer funds received from GOI and other sources for financing rural electrification. 3.04 The REC's Articles of Association provide that the President of India issue directives for the conduct of its business. To date the main directives (Annex 1, Appendix 1-E) require REC to: (a) establish policies and procedures for the consideration, approval and implementation of rural electrification schemes which are to be financed by the REC; (b) develop and apply criteria for establishing priorities as regards the choice of schemes, and for assessing their economic viability; and (c) adopt a 'project approach' so that development of rural electrification along with other investments results in increased agricultural production.  - 7 - 3.05 REC regards itself not merely as a lending institution but as an integral part of rural development. This means that rural electrification schemes being considered for financial assistance require appraisal to confirm the availability of groundwater, the willingness of the farmer to invest in an irrigation well and the installation of a pumpset, the avail- ability of institutional credit facilities to the farmer, the adequacy of fertilizers and seeds, and the potential for the type of crops to be grown. Similarly, for the rural industries it is necessary to consider the potential for growth of the particular type of industry, the availability of entrepre- neurial abilities, credit facilities, and markets for finished products. As a result, committees at State and District levels have been set up to ensure that coordination is extended to all relevant sectors of the infrastructure of the district, and to the related development inputs in the individual schemes. Organization of the REC 3.06 REC management is vested in a Board of Directors consisting of not less than three, and not more than twelve, all of whom are appointed by the President. The Board consists of a part-time Chairman, who has wide banking and financial experience, a full time Managing Director, a full time Technical Director, and nine part-time Directors, some of whom are government or quasi-government officials. The Managing Director is the Chief Executive in charge of all divisions, with the exception of the Technical Division which is the special responsibility of the Technical Director. The REC is a strong organization supported by competent professional and technical staff. It has taken a lead in the rural electrification subsector by establishing sound policies and procedures for project appraisal, evaluation, and approval; it monitors the implementation of sanctioned schenes and coordinates the standardization of equipment and construction practices. As the schemes come into service it also monitors the financial results. Impact of Rural Electrification on SEBs 3.07 When GOI shifted the emphasis of its rural electrification policy from domestic lighting to the electrification of irrigation pumping in 1967, the SEBs were made responsible for implementation. Unfortunately their ability to undertake the massive investment and at the same time maintain financial viability from the inherently low yields from energy sales in rural areas was not considered. When the implications on the SEBs finances were reviewed in connection with Power Transmission Credits 242-IN and 377-IN it became clear that the low yielding RE investments made impossible the attainment of the rate-of-return targets which State Governments and SEBs had agreed to achieve under Loan 416-IN. 3.08 Financial data which are now prepared annually by SEBs in connection with Credit 242-IN separate rural electrification from total operations and quantify the financial losses associated with rural electrification operations. These are considerable in most states and are primarily attributable to tariffs which do not recover the cost of rural  - 8 - electrification in the early years, and to unwillingness to charge higher agricultural pumping tariffs, which could be well afforded by most farmers. Credit 377-IN established that annual losses incurred by SEBs from rural electrification operations should be subsidized by their State Governments instead of by the SEBs themselvess as it is the State Governments' reluctance to permit tariff increases which causes the problem. Six State Governments and their SEBs were directly involved in the credit. 1/ GOI has given little encouragement to other State Governments to subsidize rural electrification operations, or to raise agricultural tariffs to help SEBs achieve their agreed rates of return. Cross subsidization could be considered as a method to meet losses from rural electrification operations. But in view of the mas- sive investment made by SEBs the losses cannot reasonably be met in this way and the farmers should cover a larger proportion of long term electricity costs. 3.09 Also likely to affect adversely the finances of the SEBs are GOI plans under the Draft Pifth Plan to make additional capital available to REC under the "Minimum Needs Program" to finance RE schemes in the back- ward regions of the States. This capital is to be routed through the REC in order to utilize its expertise in project formulation and appraisal. But in view of the unremunerative nature of these investments, REC's viability criteria would be similar to the most relaxed ones applicable to normal projects. 3.10 To be consistent with the underlying policy of encouraging SEBs to become financially viable and at the same time support the effort made by Power Credit 377-IN, GOI has agreed that REC would relend the funds representing the Association credit only to those SEBs 2/ whose earnings enable them to meet their rate-of-return obligations under Loan 416-IN and any other SEB whose State Government agrees to provide it with a subsidy for RE operations either in accordance with the terms of Credit 377-IN or to the extent required to meet its rate-of-return obligation, whichever is lower. OI has also agreed that REC would relend the funds representing the proposed credit for financing only those projects which met specific viability criteria described in para 3.16. Relending of Credit by GOI to the REC 3.11 Due to the large interest free grant from the US and the low cost capital made available by GOI (para 3.02) the overall cost of capital to 1/ Those of Assam, Karnataka, Kerala, Madhya Pradesh, Orissa and Tamil Nadu. It is likely that four more State Governments (Bihar, West Bengal, Maharashtra and Gujarat) would agree to subsidization as part of a pro- posed credit for power transmission. There are indications that the State Government of Uttar Pradesh might agree as well. 2/ Initially this would cover the SEBs of Assam, Kerala, Madhya Pradesh, Karnataka, Orissa and Tamil Nadu.  - 9 - the REC has been about 1% in the past. REC has made relatively soft loans to the SEBs, yielding an average of about 5.5% per annum. 3.12 GOI's past capital contributions were made in equal proportions of equity and debt but this proportion will not be maintained in future. GOI has indicated that of the Rs 630 million capital contribution for FY 1975, Rs 190 million would be equity and the balance debt. REC expects to raise additional capital in the form of market loans. 1/ The growing proportion of debt capital together with the increased interest rates on it will increase the cost of REC's financial resources considerably. REC raised its lending rates on new loans from April 1, 1974 (Annex 1, Appendix 1-G). 3.13 GOI has agreed to onlend the sum of Rs 456 million (the equivalent of US$57 million converted at the rate of Rs 8.00 to the dollar) on its normal terms for such lending. For the Minimum Needs Program these loans are for 30 years, including 5 years of grace, at an interest of 5-1/4% for the first 10 years, 5-3/4% for the second 10 years and 6-1/4% for the last ten years. For other loans, the terms are 20 years' maturity, including 5 years' grace, and interest at 7-3/4%. Financing of REC Loans 3.14 From FY 1970 through 1974 REC was provided with capital of approxi- mately Rs 1,715 million to finance rural electrification and Harijan Bastis 2/ schemes. It sanctioned loans of Rs 3,040 million, of which it still had commitments for future disbursements of Rs 1,397 million as at March 31, 1974 as follows (Annex 7): FY 75 FY 76 FY 77 FY 78 FY 79 FY 80 --------(in million of Rupees)- 282 210 320 330 250 5 Funds are not retained by REC to meet future disbursements on loans sanctioned. 3/ In FY 1975 there would be no problem as the GOI's capital contribution of Rs 630 million, together with market borrowings of Rs 82.5 million and REC's cash balances, would provide more funds than necessary to meet the year's disbursements of REs 282 million on existing loans sanctioned 1/ REC was recently cleared to go to the market for an amount of RB 82.5 million and preliminary indications are that it should be successful in raising that amount at reasonable terms. 2/ The most underprivileged section of the population (see Annex 1, para 19). Harijan Bastis schemes are not covered by the proposed Credit as they do not have to meet any particular viability criteria. 3/ If REC reserved funds to meet future disbursements of loans sanctioned, fewer loans would be sanctioned e.g. each Rs 100 million of capital would finance 20 loans of Rs 5 million each with funds reserved to meet disbursements; with funds not so reserved each Rs 100 million finances the initial advance of about 60 schemes of Rs 5 million.  - 10 - to March 31, 1974. The balance of Rs 488 million would be used by REC during FY 1975 to make initial advances on about 335 additional schemes 1/ sanctioned during that year which would add Rs 720 million to REC's commitments for future disbursements as at March 31, 1975 (Annex 7). GOI has agreed to provide REC with capital each year not only to cover initial advances required for RE schemes included in the project but also to close any financial gap REC might experience to meet that year's disbursements on loans existing at the beginning of the year. REC's Lending Terms and Financial Criteria for Loans 3.15 Except for consumers' contributions, REC loans normally cover the total cost of approved schemes. They were initially supposed to be disbursed over a five-year period, however REC's recent disbursement forecasts indicate a two-year slippage in the progress of schemes (para 3.17). Loans sanctioned through March 31, 1974 carry low interest in the early years of 4%, 5% or 6% per annum increasing by steps to 8% after 15, 20 or 25 years depending on the type of schemes (Annex 1, Appendix 1-F), the hypothesis being that the borrower should be able to afford higher interest as the scheme matures. Through March 31, 1974 REC's financial criteria for lending required that projects produce an estimated annual revenue by the fifth year sufficient to meet expenses of operation (including depreciation) and interest, and to generate a small surplus. 3.16 REC has increased its lending rates on loans sanctioned since April 1, 1974 to 5-3/4%, 6-1/2%, and 7-1/2% in the early years with stepped increases to 9% . Its financial criteria for lending from April 1, 1974 require only break-even points in the seventh, tenth and fifteenth year for so-called Ordinary Advanced (OA), Ordinary Backward (OB) and Specially Underdeveloped (SU) as well as Minimum Needs Program (MNP) schemes, res- pectively (Annex 1, Appendix 1-G). In conventional terms these break-even points are equivalent to internal financial rates of return ranging from about 10% to 5%. As explained in para. 5.03, economic returns would generally be substantially higher and, consequently, the REC's present sanctioning criteria are acceptable as a screening process ensuring adequate economic viability. In addition to 0A, OB, SU and MNP schemes, Mini Farm (MF) and System Improvement (SS) schemes would also be eligible for Association financing, the former because they are exclusively for minor irrigation loads located close to the main grid and the latter because they are highly justified by the substantial reduction in line losses in existing overloaded rural distribution networks. REC7s sanctioning criteria for these schemes also ensure adequate economic viability. Ex-post Evaluation of REC-financed Schemes 3.17 As mentioned in para. 3.15, REC's recent disbursement forecast indicates a two-year slippage in the progress of schemes. This raises the broader question as to whether sanctioned schemes actually meet the via- bility criteria envisaged at the stage of appraisal. It would have been 1/ Including 35 Harijan Basti schemes.  - 11 - difficult until now to address this question meaningfully because of the too short period of existence of REC. However, schemes sanctioned in the early years of operation of REC should soon reach an advanced stage of implementa- tion. It is proposed that an Association supervision mission be sent to India within a year or so after Board sanctioning of the proposed credit to review REC's ex-post evaluation of schemes sanctioned. This exercise could serve as a basis for deciding on whether or not the Association should con- sider going ahead with a repeater rural electrification credit. Audit 3.18 The Comptroller and Auditor General of India is empowered to appoint an independent auditor registered under the Indian Companies Act, 1956 to audit REC's accounts. He is also empowered to direct the manner in which the REC's accounts are audited, to conduct a 'test' audit as he may think fit, and make comment upon or supplement the audit report made by the pro- fessional auditor. The audit of REC's books as at March 31, 1974 was under- taken by M. Pal and Coy, Chartered Accountants (India) and was carried out satisfactorily. REC has agreed to furnish within six months of the end of each fiscal year its financial statements as audited by independent auditors acceptable to the Association. IV. THE PROJECT Definition 4.01 The project would consist of a tranche of about 140 rural electri- fication schemes each of about Rs 5 million for those SEBs referred to in paragraph 3.10. These schemes - which would become identified only as SEBs would request REC financing - would involve about 40,000 km of primary and secondary distribution lines, distribution transformers with an aggregate capacity of 500 MVA, poles and miscellaneous equipment. More than half of the connected load would be for irrigation pumping (para 5.02). The schemes would be carried out by the SEBs concerned. The total project cost is estimated at US$114 million. The proposed credit of US$57 million, re- presenting 50% of the total cost of the project, would be available to cover the cost of conductors, transformers, circuit breakers, capacitors, insula- tors and meters and 50% of the cost of poles. At present six SEBs are eligible. Disbursement of the credit would be accelerated as other SEBs become eligible (para 3.10). Estimated Costs of the Project 4.02 Based on the average RE scheme, the estimated costs of the various project components are:  - 12 - Component Local Foreign Total Pcrcentage - US$ (millions) - Conductors 9.2 19.4 28.6 25.0% Transformers & Circuit Breakers 4.8 6.6 11.4 10.0% Poles 17.1 - 17.1 15.0% Capacitors, Insulators & Meters 4.8 3.7 8.5 7.5% Miscellaneous Equipment & Service Connections 20.0 - 20.0 17.5% Transport and Erection 11.4 - 11.4 10.0% Supervision, Overhead, Audit, Physical Contingency 17.1 - 17.1 15.0% Total 84.4 29.7 114.1 100.0% The estimates are based on the current cost pattern of schemes prepared by the SEBs and reviewed by the REC. They are generally considered adequate in view of the large degree of equipment standardization and the experience of the SEBs and the REC. Estimates for equipment and materials are on the basis of the current production of domestic manufacturers since the bulk of the orders are expected to be placed in India. A physical contingency allowance of 3% of the total cost of each scheme has been included. Since the schemes are well-defined when approved by the REC, this should be adequate. However REC loans for specific SEB schemes should cover price escalation as the SEBs may not be able to secure additional funds elsewhere. During negotiations, REC agreed to set aside a fixed percentage, initially 15%, of the value of all newly sanctioned loans to cover the estimated price escalation over the construction period. Specific price contingencies have not been taken into account in the Association Credit in view of the nature of the overall project, i.e. a tranche of REC program. However, the estimated volume of work covered by the Credit is based on expected amounts of materials obtainable during the full disbursement period at prices expected to be in effect in each procurement year. Preparation and Construction of REC-financed RE Schemes 4.03 After a project report has been submitted by a SEB to REC, an REC appraisal mission reviews the project features and coordinates other related rural development programs. Once sanctioned, the projects are executed by the SEBs which have competent construction departments, in some cases a separate RE department. Procurement 4.04 The credit would finance overhead line conductors, transformers, circuit breakers, capacitors, insulators and meters, required for REC financed schemes, and procured after international competitive bidding, in accordance with the Association's guidelines. Each SEB would be responsible for its  - 13 - own procurement using standard technical specifications already prepared by REC and standard General Conditions of Contract approved by the Association in connection with Credits 242-IN and 377-IN (Power Transmission Projects ii and III). REC would provide assistance to the SEBs in the preparation of b-id documentation and would check that the quantities of items for which bids are solicited accord with those required for sanctioned schemes. REC would also review and comment upon the evaluation of bids prepared by the SEBs before seeking Association approval to place orders. 4.05 The items to be procured by each SEB through international com- petitive bidding would be grouped into packages each estimated to cost not less than US$1.0 million, provided, however, that for those SEBs whose annual requirements of equipment for REC financed schemes are less than this amount, each SEB would group its total estimated annual requirement for these items in a single bid invitation. Poles, valued at about US$17.1 million, would be procured after local competitive bidding since their weight, and the resulting transportation cost, makes them unsuitable for international tendering. 4.06 Indian manufacturers are expected to participate in bidding for conductors, transformers, circuit breakers, capacitors, insulators and meters with a domestic preference, in the case of preferred 1/ Indian bidders, of 15% or the import duty, whichever is lower, in the evaluation of bids. Based on experience gained from Credits 242-IN and 377-IN (Power Transmission Projects II and III) it is likely that at least 80% of the conductor contracts would be placed with Indian manufacturers. Although less is known about the competitiveness of Indian manufacturers of other equipment for which inter- national bids will be sought, it is estimated that they might win about 70% of orders. Given that the estimated foreign exchange component of ex-factory costs for conductors, transformers and other equipment is 60%, 40% and 20%, respectively, the foreign exchange requirement of the project for these items would be about US$30 million. 4.07 Assurances were obtained from the GOI during negotiations (as was the case for Credits 242-IN and 377-IN) that when, after international com- petitive bidding and the application of preferences in the manner described above, the lowest evaluated bid is from a foreign manufacturer, permission to import will be forthcoming immediately without review by the Directorate General of Technical Development, or any other agency of the central govern- ment. Disbursements 4.08 Disbursements from the Credit would cover (i) the c.i.f. cost of im- ported goods or ex-factory cost of goods procured in India after international bidding, and (ii) 50% of the cost of poles after local competitive bidding. 4.09 It is expected that substantial disbursements would commence about twelve months after the signing of the proposed Credit and would be completed 1/ i.e. those bidders for whom the manufacturing cost of goods include a value added in India equal to at least 20% of the ex-factory bid price.  - 14 - four years later or earlier depending upon the number of beneficiary SEBs. Estimated cumulative disbursements by half-year periods are shown in Annex 3. V. PROJECT ECONOMIC JUSTIFICATION 5.01 GOI's policy of rapidly expanding RE throughout the country is a key element in coordinated rural development programs designed to achieve increased economic benefits and improve living conditions in rural areas. The main economic benefits to the community at large result from increased agricultural production. Irrigation pumpsets, for which electrical power is generally more economical than diesel power in the proposed project would provide farmers with adequate water supply throughout the year. This permits intensified land use and the enhancement of agricultural output by use of high yielding seed varieties. A second class of benefits is the hastened introduction of small scale industry, particularly agro-industries, which augments the value added in rural areas, supplements the farmer's income and creates new employment opportunities. The extension of electricity service to domestic/commercial consumers provides several benefits that are only partly quantifiable, especially ex ante. They include: (a) resource savings over substitutes (e.g. kerosene); (b) value of quality benefits of electricity over alternatives (e.g. lighting, ironing); (c) value of extra output (e.g. more lighting, fans); and (d) possible savings in urban costs foregone due to a curb in the rural-urban migration. Finally there are the income distribution benefits resulting from the policy of paying particular attention and granting relaxed financial terms to help start the development process in the poorest and most backwards areas. The nature of the program - including particularly the fact that the location of individual schemes will only be known once the SEBs have made their requests - makes it impossible to describe in advance the income levels of beneficiaries. Therefore, no attempt was made to quantify income distribution benefits, and only consumers payments are available as partial measures of domestic connection benefits. 5.02 The Project would benefit about 55,000 farmers - mostly small - and their dependents and 210,000 domestic/commercial consumers who would receive connections in 6,250 villages where 35,000 street lights would also be installed. More than one half of the connected load would be for irriga- tion pumping, the remaining half being divided equally between small industries and domestic and commercial connections, while street lighting would represent less than 1% of the total load. Based on the value of agricultural and small industry incremental output and the expected revenues from domestic/commercial consumers, and after making appropriate adjustments in respect of taxes, the economic rate of return on investment on a typical REC-financed project (including generation and transmission costs and consumers' costs) is estimated at 23%. This is a minimum estimate in as much as it does not take full account of the socio-economic benefits of village electrification. Annex 4 further shows that in the average REC-financed project where a well cluster approach  - 15 - is used (a) electric pumping is more economical than diesel pumping 1/; (b) the benefits of minor irrigation investments based on electric pumping are larger than the costs associated with the supply of electricity only to the wells; and (c) the revenues from village electrification are of the same order of magnitude incremental electrification costs once the main distri- bution lines are justified on the basis of the benefits of minor irrigation. 5.03 REC does not directly ensure that individual rural electrification schemes are economically justified as it sanctions them on the basis of purely financial criteria (para. 3.16). However the net economic benefits depend on some of the same variables as the net financial revenues (such as cost of scheme, electric load per kilometer of distribution line, etc.). Under almost all reasonable assumptions, economic rates of return substantially exceed the internal financial returns which range from about 5% to 10% depend- ing on the type of scheme (para. 3.16). The 23% return on a typical REC- financed scheme (para. 5.02) is an all-India average and there is no ironclad guaranty against the occasional sanctioning of an economically unjustified scheme. However a review of the conditions prevailing in each State indicates that it is unlikely that schemes meeting REC's financial criteria would have economic rates of return below 10%. REC's present sanctioning criteria are acceptable to the Association as a screening process ensuring adequate economic viability. Pricing Policy 5.04 GOI's pricing policy regarding rural electricity supplies is clearly one of subsidizing both agricultural and village consumers. Admittedly, subsidization is generally necessary in the first years of operations by the very nature of RE, i.e. relatively long distribution lines and small and seasonally fluctuating loads tend to raise the short-term economic cost of electricity to levels that most rural consumers cannot afford. However, a specific feature of Indian rural electrification programs is the heavy emphasis on minor irrigation investments from which most farmers are making large profits. Annex 4, para 11 shows that the return on typical minor irrigation investments is 27% under assumptions equivalent to an electricity charge of .45 Rs per kWh, whereas most farmers enjoy rates ranging from .12 to .28 Rs/kWh 2/ (See Annex 5 for average rates of rural electricity supplies). Except perhaps in those areas where an incentive is still neces- sary to promote the development of "minor" irrigation practices, there is clearly scope for a substantial increase in electricity rates for agriculture. The issue of RE tariffs cannot normally be dealt with separately, as cross subsidization could be considered as a method to meet losses from rural electrification operations. But in view of the massive RE investments made 1/ Diesel pumping still has an important role to play as it is the appro- priate alternative when wells are too scattered or located too far away from the main transmission lines. 2/ A recent Bank tariff study in Andra Pradesh indicates that farmers pay less than half the long-term development cost of power supplies for agriculture in that state.  - 16 - by SEBs the losses cannot reasonably be met in this way and the farmers should cover a larger proportion of long-term electricity costs (paras 3.08 and 3.10). VI. FINANCIAL ASPECTS 6.01 REC's annual revenues come from the interest on its loans and the investment of surplus cash. They are used to meet administration expenses and interest on Government loans. In FY 1974 administration cost was equiv- alent to 9% of revenue, while the interest cost was 17% of revenue. At March 31, 1974, REC's debt was Rs 353 million out of total capital of Rs 1,761 million. Interest at 6% per annum on the loan component resulted in an expense of less than 1% on capital. Financial Position 6.02 REC's financial situation is satisfactory. Its position as at March 31, 1974, is summarized below: Rs. Million US$ Million % Capitalization Share Capital 310.0 38.7 17 US Grant 1,050.0 131.2 60 Retained Earnings 48.5 6.1 3 1,408.5 176.0 80 Long Term Debt 353.4 44.2 20 1S761.9 220.2 100 Represented by: Fixed Assets 0.6 0.1 Loans Disbursed (net of repayment) 1,642.5 205.3 93 Temporary Investment /1 118.0 14.7 7 Current Assets less Liabilities 0.8 0.1 1,761.9 220.2 100 /1 In Government Securities. By March 31, 1974, REC had received Rs 1,050 million from the US in the form of a grant, Rs 620 million for rural electrification purposes from 0OI in equal portions of equity shares and 6% loan, additional loans of Rs 45 million for minimal street lighting in Harijan Bastis areas, and had retained earnings of Rs 48 million. Long term debt represented 20% of total capitalization. Balance sheets, actual FY 1970 through FY 1974 and forecast FY 1975 through 1979 are shown in Annex 6. 6.03 REC had by March 31, 1974 appraised and approved 618 1, Rural Elec- trification Schemes and 75 Harijan Basti Schemes (Annex 7), amounting to 1/ REC approved a further 340 schemes during FY1975.  - 17 - Rs 3,004.2 million and Rs 36.7 million, respectively, i.e. a total of Rs 3,040.9 million. Against this, it had disbursed Rs 1,643.7 million (representing 93% of its capital) leaving undischarged commitments of Rs 1,397.2 million, the funds for which are being sought from GOI (paragraph 3.14). 6.04 Its Articles of Association empower REC to create Reserve Funds for extending and improving its property and for other purposes conducive to the interests of the Corporation. The REC has indicated that part of its earned surplus would be used to finance rural electrification schemes. By March 31, 1974, the REC had created a Special Development Reserve (Rs 14.0 million) and a Special Reserve (Rs 10.3 million) by appropriation of retained earnings. The Special Development Reserve was created to (i) provide special term loans to State Governments to assist them to subscribe to the share capital of Rural Electric Cooperatives, (ii) provide grants to approved organizations for research and development and (iii) provide grants toward construction cost in specially under-developed areas. The Special Reserve was created under the Income Tax Act 1961 to enable annual deduction for Income Tax purposes of about 9.1% of the taxable income. Financing Plan 6.05 Annex 7 sets out the estimated disbursements of RE loans spread over five years. Harijan Basti loans are disbursed over two years. In FY 1974 the REC disbursed Rs 246.2 million on existing RE loans, Rs 10.4 mil- lion on Harijan Basti loans and Rs 265.8 million as initial advances of new loans. In FY 1975 forecast disbursements on loans amount to Rs 770 million, Rs 282 million in respect of existing RE loans sanctioned up to March 31, 1974 and Rs 488 for initial advances on new loan sanctions of Rs 1,200 mil- lion and Rs 20 million on Harijan Basti schemes. Based on the Draft Fifth Plan, GOI would provide most of the capital required by REC (para. 3.14). A small part would come from bond issues and from repayments of loans by borrowers. 6.06 Due to difficulty in forecasting the annual capital which may be available to REC, its forecasts are used as the basis of the Source and Application of Funds through FY 1979 in Annex 8. The following statement summarizes the transactions during FY 1975 and FY 1976-79 when the proposed IDA Credit would be disbursed.  - 18 - FY 75 FY76-79 US$ Million % --Rs Million-- Source of Funds Internal Cash Generation 65.7 281.1 Less Tax (33.4) (144.0) Dividend (3.1) (27.7) Repayment of GOI loans (3.0) (31.1) Net Cash Generation 26.2 78.3 9.8 1 Capital Subscribed GOI Equity 190.0 500.0 GOI Loans 440.0 5,097.5 /a Market Loans 82.5 400.0 712.5 5,997.5 749.7 95 Sales of Government Securities 56.3 57.3 7.1 1 Repayment of Loans by SEB 2.1 167.8 21.0 3 Total Sources 797.1 6,300.9 787.6 100 Application of Funds Assets 0.2 0.8 - Investment in Government Securities - 210.1 26.3 3 Disbursement of Loans 770.0 6,090.0 761.3 97 Working Capital Increase 26.9 - - - 797.1 6,300.9 787.6 100 /a Includes IDA Credit of US$57 million onlent to REC. 6.07 Until priority is established in appropriating profits, it is assumed that net cash generation (net of working capital increases and the repayment of the annual instalments of GOI loans) would be available to finance rural electrification loans. To the extent that funds are appropriated for reserves which may not be available to finance such loans, the GOI's capital contributions to REC would need to be increased. Future Finance 6.08 The projections (Annex 9) show that revenue would increase six fold from Rs 73.6 million in FY 1974 to Rs 430.2 million in FY 1979. Revenue consists of interest on loans, and investment of surplus cash while expenses  - 19 - cover administration costs and interest on borrowed money. Operating income would increase by 24% from Rs 53.9 million in FY 1974 to Rs 66.7 million in FY 1979. The administration cost would fall from 9% of revenue in FY 1974 to 4% in FY 1979 while the interest cost would rise from 17% of revenue in FY 1974 to 80% of revenue by FY 1979. 6.09 Internally generated funds after interest on loans and income tax would amply cover annual debt amortization - ranging from 20 times in FY 1974 to 2 times by FY 1979. Net cash generation would represent 1.5% of the total capital disbursed during the 5th Plan period. REC's commitment to finance undisbursed loans at the end of each year would range between Rs 1,835 million and Rs 2,345 million. Debt as a percentage of capital- ization would increase from 20% in FY 1974 to 74% in FY 1979. 6.10 In order to ensure that REC would have sufficient funds to meet its annual obligations for its debt service, the REC and the GOI have agreed to ensure that: (i) the aggregate amount of the REC annual interest from all sources (net of administration expenses, tax and dividends) and the sums representing the repayments of principal made by borrowers in any financial year shall be not less than 1.2 times its debt service requirements during that financial year. (ii) REC's administrative and interest expenses shall not exceed 90% of its revenues in any year. VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations agreements were reached on the following principal points: (a) The Government of India will: (i) onlend a sum of Rs 456 million (the equivalent of the proposed Credit of $57 million) to the REC on terms and conditions acceptable to the Association (para- graph 3.13); (ii) provide REC with capital each year sufficient to close any financial gap REC might experience to meet its commitments for disbursements on loans sanctioned previously (paragraph 3.14); and (iii) ensure that (a) REC's internally generated funds in any financial year shall not be less than 1.2 times its debt service requirements during that financial year, and (b) REC's administrative expenses and interest payments in  - 20 - any financial year shall not exceed 90% of the aggregate interest charges received by REC from all sources during that financial year (para 6.10). (b) The Rural Electrification Corporation will: (i) relend the funds representing the Association credit only to those SEBs whose earnings enable them to meet their rate-of-return obligations under Loan 416-IN and any other SEB whose State Government agrees to provide it with a subsidy for RE operations either in accordance with the terms of Credit 377-IN or to the extent required to meet its rate-of-return obligation, whichever is lower (para 3.10); (ii) relend the funds representing the Association's credit only in respect of those projects which would meet the specific viability criteria shown in Annex 1, Appendix 1-G (Categories OA, OB, SU, MNP, MF or SS) (paragraph 3.16); and Ciii) set aside a fixed percentage, initially 15%, of the value of all newly sanctioned loans to cover the estimated price escalation over the construction period (paragraph 4.02). 7.02 The Project is suitable for an Association Credit of US$57 million equivalent.  ANNEX 1 Page 1 INDIA RURAL ELECTRIFICATION PROJECT The Rural Electrification Corporation (REC) Establishment of the REC 1. Following the recommendations of the All-India Rural Credit Review Committee (1966-69) under the chairmanship of Shri B. Venkatappiah, the Government established the REC on July 25, 1969 under the Indian Companies Act as an autonomous body placed under the supervision of the Ministry of Irrigation and Power. The Corporation, wholly owned by the Government, was registered with an authorized capital of Rs 100 million (later increased to Rs 500 million). The Central Plan outlay to be channelled through REC during the 4th Plan (1970 through 1974) was initially set at Rs 1,500 million. 70% of this, or Rs 1,050 million was to be provided as a grant from US PL 480 counterpart funds 1/. The remaining 30%, or Rs 450 million was to be con- tributed by GOI in equal parts of equity and loan. Objectives and Operational Policy 2. Extending beyond mere financing of schemes, the functions of REC give it the role of a development financing organization. REC's chief objectives are: (a) to finance rural electrification schemes throughout India; (b) to subscribe to special RE bonds issued by SEBs; (c) to promote and finance rural electric cooperatives; and (d) to administer funds received from GOI and other sources for financing rural electrification. 3. REC's charter provides that MOI may issue directives to the REC for the conduct of its business. To date the main 2/ directives require REC to: (a) establish policies and procedures for consideration, approval and implementation of rural electrification schemes to be financed by it; 1/ The US agreed on July 26, 1969 to provide this grant. 2/ Appendix 1-E shows copies of two letters from GOI to REC, dated July 26, 1969 and September 9, 1974, giving more details on these directives.  ANNEX 1 Page 2 (b) develop and apply criteria for establishing priorities as regards the choice of schemes and the basis of economic viability; and (c) adopt a "project approach" so that extension of electricity along with other investments results in increased agricultural production in the area. Organization and Management 4. REC's management is vested in a Board of Directors which must consist of not less than three, and not more than twelve members, all of whom are appointed by the Government. The Board consists of a part time Chairman, a full time Managing Director, a full time Technical Director, and nine part time Directors (see names and functions of Directors in Appendix 1-A). 5. Appendices 1-B, C, D show the organization chart of REC which is briefly described here. The Managing Director is the Chief Executive Officer and is in charge of all divisions with the exception of the Technical Division which is the special responsibility of the Technical Director. A good liaison exists between these two officers who both report to the Chairman of the Board. 6. The Technical Division comprises four Cells. Three of them are Area Desks, each under the charge of a Chief Engineer (who reports to the Technical Director) and is responsible for technical appraisals and monitor- ing of projects. Additionally, one of the Chief Engineers also looks after the special schemes for transmission, cooperatives, harijan bastis, and small generation, both in respect of pre-sanction technical appraisal and monitoring. The fourth Cell is responsible for Engineering Research and Development besides evolving standards for materials, specifications and construction practices and is headed by the Officer on Special Duty who also reports to the Technical Director. 7. The Project Appraisal and Coordination and Evaluation (current) Division (PACE) comprises four Cells. The Specialists' Cell provides support to all the Divisions in REC in matters relating to such disciplines as management, economics, statistics, agriculture, ground water, etc. The Project Appraisal Cell carries out pre-sanction economic appraisal of projects thus providing team support to the Technical Division in project appraisal. 1/ The Coordination Cell is primarily responsible for matters relating to coordination between SEBs and various other concerned development agencies at the State and Project level as well as on matters relating to coordination 1/ A typical field appraisal mission consists of one engineer from the Technical Appraisal Cell and one economist from the Project Appraisal Cell. A Finance Officer is also associated with the appraisal mission in the appraisal of Composite Schemes. Financial analysis is other- wise carried out at headquarters (para 9).  ANNEX 1 Page 3 between REC on the one hand and other c6ncerned agencies on the other hand. The Evaluation Cell is in charge of current evaluation and accordingly re- views the progress of implementation of projects financed by REC. 8. The Planning, Evaluation, Research and Training Division (PERT) is responsible for carrying out perspective evaluation studies on the performance of projects and the overall impact of REC projects on the rural economy as a whole. PERT Division is also responsible for coordinating the applied research/evaluation studies sponsored by the Corporation. The Division is also responsible for systematizing the training programs for REC staff as well as SEB staff who are engaged in the formulation, implementation, monitor- ing of rural electrification projects. 9. The Finance Division comprises eight units. The Loans Section Unit maintains the accounts of disbursements of loans. The Bills Unit deals with bills of the expenditure of REC. The Internal Audit does the internal audit of the accounts of REC. The Commercial Accounts Unit prepares financial statements as required by the Statute. The Pre-Sanction Appraisal Unit examines the financial viability of projects at the pre-sanction stage in the light of the data furnished in the project reports by the SEBs. The Cooperative Accounts Unit looks after the loan operations relating to the five pilot rural electric cooperative projects financed by REC. The Perform- ance Audit Unit audits the accounts of the projects financed by REC at their implementation stage and also provides team support to the Technical Monitoring Cell. The cost verification unit is responsible for verification of cost data of rural electrification projects and cost of power applied to rural electrification projects in respect of each State Electricity Board. 10. The Cooperative, Organization, Planning and Training Division (COPT) is responsible for organization and development of rural electric co- operatives besides providing guidance to the existing five pilot rural electric cooperatives. 11. The total staff of the REC as of January 1975 was 357 consisting of 11 principal officers, 55 engineers, 72 specialists/professionals (inter- mediate and higher level), 69 junior professionals and the balance were general staff. 1/ Personnel Hiring and Training 12. A major portion of the officers and staff of the REC are drawn from various Central and State Government Departments, State Electricity Boards, Reserve Bank of India and other similar institutions. For the Technical Division, the recruits are electrical engineers mostly drawn on a deputation basis from the SEBs, Central Water and Power Commission/Central Electricity Authority and other similar organizations in the country. The level of recruiting is 1/ While the bulk of the staff is in the head-office in Delhi, REC has recently opened Regional Offices at Calcutta, Lucknow and Jabalpur. More Regional Offices are proposed to be opened in the near future.  ANNEX 1 Page 4 normally not below that of executive engineer so that these officers already possess adequate technical expertise and can be given proper stature in the field as the SEB counterparts whom they meet during appraisal missions will generally have a lower rank. Training in this case consists of orientation and on the job training by attaching the fresh recruits to experienced personnel in the Division, as under-study. The personnel attached to the PACE Division, PERT Division and COPT Division, are professional eco- nomists, regional planners, geo-hydrologists, statisticians and econometri- cians, etc. holding Master's degree or Doctorates in the relevant disciplines with experience in project formulation and appraisal. The newly appointed personnel are required to undergo a probation period of at least six months. During this period, they are required to study REC's procedures and method- ology in the processing of projects and sanction of loans and are attached with experienced personnel in the Division as under-study officers. For the Finance Division, the senior and middle officers are recruited on a deputation basis from Audit and Account services, commercial banks and SEBs. Informal short duration on the job orientation and training are provided to them. 13. In addition to on-the-job training provided within REC, key officers are sponsored for training programs, seminars, etc., both within the country and abroad. For example REC has already sponsored 6 officers for training in the USA in the field of organization, development and management of rural electric cooperatives. Also top level executives have attended seminars organized by the management institutions and consultancy organi- zations in India. REC has recently organized a five week training course in rural electrification, project formulation and appraisal for the middle level executives of the SEBs and State Departments in collaboration with the National Training Centre for Agricultural Development and Project Planning in the Indian Agricultural Research Institute at Delhi. REC was actively asso- ciated in the development of the course program and providing the faculty and also sponsored 3 of its middle level officers to attend this course. REC's Lending Terms and Financial Criteria for Sanctioning Loans 14. Up to March 31, 1974 the chief criterion was that the estimated revenue from a project should be sufficient by the fifth year to meet expenses of operation (including depreciation) and interest on Loans, and produce a surplus at least equal to 0.5% of the investment, except in the case of Specially Under-developed (SU) category of schemes in which case 0.5% return was expected at the end of the 10th year. As a result of the findings of studies commissioned by the Corporation (in respect of materialization of loads in the light of actual field conditions) the Corporation modified its viability criteria for its loans from April 1, 1974 which now call for revenue breaking even with expenses in the seventh, tenth and fifteenth year of certain loans instead of maintaining the criteria 1/ and requiring increased tariffs by SEBs to compensate for the increased interest expense. 1/ As REC's financial criteria do not tell us what the internal financial rates of return (IFR) are over the life of the projects, the Association staff computed that these would be 9.9% (OA), 8.3% (OB), 5.9% (SU) and 5.4% (MNP) under the assumption that REC targets are just achieved for projects sanctioned after April 1, 1974.  ANNEX 1 Page 5 The funding pattern of REC has also undergone some major changes. Now REC raises its resources for the major part from Government (half equity and half loan so far) and partly by way of open market borrowings. REC is no longer in receipt of any grant funds as it had during the Fourth Five Year Plan from the US. The rate of lending by the GOI to REC on the loan portion of its contribution was stepped up from April 1, 1974. In the light of the change in the funding pattern, REC also stepped up its rate of interest on its loans to SEBs. 15. Apart from a small consumer's contribution REC normally finances 100% of project costs. There are exceptions for Special Transmission (ST) projects (para 17), System Improvement (SS) projects (para 18) and, in some cases, Ordinary Advanced (OA) projects 1/. Regarding the latter category of projects, REC decided to limit its direct assistance to 60% of the proJect cost whenever a former OA loan has already been sanctioned in the same district and the project is located in a state above the all-India level of village electrification. In the event, however, of the SEB choosing to raise the balance 40% by floatation of rural electrification bonds, the REC would subscribe to the bonds on a 50/50 basis and also accept a lower rate of interest for its subscription. 16. REC has allowed a differentiation with regards to terms of repayment and minimum return targets favorable to "backward" areas. This is in recog- nition of the fact that in these areas it takes a longer time for electricity demand to build up and, therefore, a longer time for a project to become financially viable. A further relaxation has been made in the case of "spe- cially underdeveloped hill areas" 2/ where it takes even longer for a project to become viable. In order to classify projects in one of the above categories, REC examines socio-economic indicators related to income, cropping patterns, intensity, and yields, size of holdings per cultivator, existing infrastructure including utilities, transportation, credit facilities and industrial devel- opment, rainfall conditions, etc. In general, States with socio-economic indicators below the all-India average (or Districts with indicators below the State average) qualify as "backward" or "specially underdeveloped", as appropriate. 17. During FY 1971-72, REC decided to create a special category of loans for transmission systems in States which were at or below the all-India average level of village electrification. This was later extended to all States in the country. The following conditions are presently attached to these Special Transmission (ST) loans: (a) the financial outlay of each scheme should not exceed Rs 15 million and REC financing is limited to 80% of the project cost, the balance of 20% being borne by the SEB; (b) the loan 1/ As of January 31, 1975, loans sanctioned by REC represented 85% of project costs. 2/ This category was later extended to include underdeveloped desert and tribal areas as well.  ANNEX 1 Page 6 is for a period of 12 years 1/ with a grace period of 2 years and carries an interest of 7-1/2% to 8%; (c) the loan has to be fully guaranteed by the State Government; and (d) the load potential in the area to be served by the proposed ST transmission facilities should be such that within 5 years of project completion, RE projects for extending electricity to the rural areas can be developed in such a manner that those projects involve an investment not less than twice the investment made under the ST project and meet the relevant viability criteria. 18. Also during FY 1971-72, REC decided to create a special category of loans to help SEBs undertake the improvement of existing distribution systems. This is to reduce the amount of physical line losses and also to improve the economic outputs of the system in terms of electrical energy and rural production. Such loans for System Improvement (SS) are for a period of 8 years with a grace period of 2 years, and carry an interest of 7-1/2 to 8%. 2/ They are applicable to all States under the conditions that a net return of at least 3-1/2% is reached at the end of the fifth year and that the project cost does not exceed Rs 5 million nor is it higher than 20% of the market value of the existing assets in the area. Furthermore, in the case of States which are above the all-India level of village electrification, REC financing is limited to 16% of the existing market value of the existing assets. 19. In February 1972, REC started to provide assistance to the SEBs on behalf of GOI for the purpose of providing street lighting to Harijan Bastis adjoining villages already electrified. The total 4th Plan alloca- tion for this purpose was Rs 50 million to be channelled in part through REC. Unlike other loans, these do not have to meet any particular viability criteria. 20. In October 1972, REC introduced two more categories of loan assistance to SEBs in the nature of Mini projects designed to extend electri- city to villages which could be identified as Growth Centres on the basis of certain key indicators (MG category) and Primary Health Centres (MH category along with a few dependent villages (not more than 5 to 10), which together formed a strip or a cluster in some of the more backward among the community development/National Extension Service Blocks. These projects consist of two parts, one pertaining to the distribution of electricity to the area and the other pertaining to the transmission line to the project area. The area based part of the project is governed by the viability criteria as relevant for the area i.e. OB or SU. The total project cost in either category should not ordinarily exceed Rs. 1.5 million. 1/ Reduced to 10 years for States which are above the all-India level of village electrification. 2/ 7% for loans sanctioned up to Ilarch 31, 1974.  A NNEX 1 Page 7 21. In August 1974, REC introduced a new category of loan - an advance loan called AL-PPA (Advance Loan - Potential Project Areas) - so as to assist the SEBs in electrification of areas which offer ready potential in agricultural production but in respect of which formulation of a regular area project may take some time. This advance loan is to be ultimately merged with a regular scheme. The cost of an individual PPA scheme is normally limited to Rs. 2 million. 22. It has been decided by the Government of India in September 1974 that the funds provided for rural electrification under the National Mini- mum Needs Program (MNP) in the Fifth Five Year Plan will be administered by REC in accordance with the directions given by the Government (Annex 1, Appendix 1-E, page 4). The total financial assistance to States out of MNP funds are determined each year by the Government of India. Within these limits, REC sanctions loans for individual projects (cost of which is limited to Rs. 7.5 to 8 million). The estimated revenue from each project should be sufficient by the 15th year to meet the expenses of operation, depreciation and interest on loan and attain a net return of 3-1/2% by the end of 25th year. 23. In January 1975, REC decided to extend the scope of loan assis- tance to SEBs for Mini projects for extension of electricity to such rural industrial centres (MI loans) as are located in areas which are classified as industrially backward and where the industries are eligible for a capital subsidy under the Central Government scheme to the extent of 15% of the capital cost. The loan outlay for this category is limited to Rs. 1.5 mil- lion per project. 24. In January 1975, the Corporation also decided to introduce a new category of Mini Loan for Farm Production. These Loans (MF loans) are for extension of electricity to one or more groups of villages (5-7 villages in each- group) in a Community Development Block with a sizeable demand im- mediately for pumpset energization existing in each group of villages. The loan outlay is limited to a maximum of Rs. 1.5 million per project. REC's Economic Evaluation of Projects 25. As indicated in paras 6, 7, and 9, the evaluation of projects is carried out by the staff of the various divisions in REC. Whereas the organizational, technical and financial areas are fairly well defined, the economic evaluation is less so as it covers a wider range of fields. It is briefly discussed here in its three principal aspects: (a) whether the project is economically integrated in an optimal manner within the develop- ment of the area; (b) whether rural electrification is in general a sound proposition on an all-India basis; and (c) whether individual projects under- go a satisfactory economic screening process before being sanctioned. 26. The coordination aspect is normally covered by REC as part of its appraisal procedure which includes an investigation of the power market assumptions, the coordination of the project with other programs in the  ANNEX 1 Page 8 area, the availability of the various inputs into tne project, etc. As far as the availability of electric energy is concerned however REC only ensures that plans for connecting the project area to the main power grid are ade- quate. But it is not - and could hardly be - REC's function to check the overall power supply/demand balance at bulk supply level. Past inadequate control in this respect can only be remedied in the context of the whole power sector. 27. Concerning the general economic justification of RL in India, a number of studies carried out by various Indian organizations conclude tnat RE is a sound investment even if based only on increased agricultural output and comparative cost saving. Moreover, beyond these net efficiency benefits, RE is conceived partly as investment to achieve social justice and equality in rural areas, particularly witih respect to income distribution, creation of new employment possibilities and non-quantifiable benefits related to health, education through improvement of reading habits, participation in community institutions and curbing migration to urban areas. As a result, both on economic and social grounds Indians are convinced that RE is in general justified beyond debate. This report generally concurs with this point of view provided that the necessary complementary inputs are normally available. (For details on the economic justification, see Annex 4). 28. As far as sanctioning of projects is concerned, REC relies on the tenet explained above that RE is in general economically justified and it screens projects on the basis of the financial criteria indicated in paras. 16 through 24 and in Appendix 1-G. The social and political objectives at- tached to RE are reflected in the relaxation of the financial criteria for projects in areas classified as "ordinary backwards" or "specially under- developed" with a view to help reduce regional imbalances in level of develop- ment and village electrification. Cost-benefit analysis based on economic cost of inputs and economic value of outputs are normally not systematically carried out on individual projects submitted to REC. However the net econo- mic benefits depend on some of the same variables as the net financial reve- nues (such as cost of scheme, electric load per kilometer of distribution line, etc.). Under almost all reasonable assumptions, economic rates of return would substantially exceed the internal financial returns (which range from about 6% to 10% for SU, OB and OA schemes as indicated in a footnote to para. 14). There is no ironclad guaranty against the occasional sanctioning of an economically unjustified scheme. However a review of the conditions prevailing in each State indicates tnat it is unlikely that schemes meeting REC's financial criteria would have economic rates of return below 10%. The rate of return on a typical REC-financed scheme would be about 23%. Since full economic screening is not feasible financial criteria provide a good second-best alternative for ensuring adequate economic viability. Project Approach and Coordination with Other Concerned Agencies 29. As indicated in para 3 (c), the directives issued by GOI to REC enjoin the latter to adopt a project approach with a view to satisfying itself with the availability of the necessary inputs such as groundwater, credit infrastructure, raw materials, marketing facilities, etc. and to  AINTEX I Page 9 achieve effective coordination of the rural electrification programs filianced by REC with the programs of agricultural and industrial production sponsorej by the State and/or the Central Government. For example a number of programs involving investment in agriculture and small industries - such as SFDA, M&FAL, etc. - are already being implemented by the various departments of Government. Also, institutional finance is being made available for the agricultural sector by the Agricultural Refinance Corporation, the Agricultural Finance Corporation, the Land Development Banks and the Commercial Banks. REC has taken the initiative in pursuing with the SEBs and the State Governments the setting up of Coordinating Committees at the State and District levels consisting, among others, of representatives of SEBs, State Land Development Banks, State Groundwater Organizations and State Planning Departments in order to review the Implementation of ongoing projects and formulate future programs. In most cases RE project proposals are processed along the chain SEB-District Engineer-District Coordinating Committee-SEB-REC. The State Government merely provides legal clearance as SEB's guarantor. At a different level, REC and ARC have been holding mutual consultations in regard to coordination of their programs and mutually exchange letters conveying sanction of schemes. 30. With regards to groundwater, REC insists on sufficient evidence being produced of its availability and suitability for irrigation purposes. In particular, REC satisfies itself that the total draft on account of well energization does not exceed the annual recharge and that electric pumpsets are not installed on wells having insufficient water. Where the appro- priate data are not furnished with the project report, REC asks that it be provided with a certificate from a competent technical authority such as the State Groundwater Organization. In REC, the PACE Division includes a Groundwater Unit composed of two specialists. When necessary the groundwater specialists visit project areas and have a second independent check in regard to data as well as the functioning and technical capability of the State Groundwater Organization. The REC verification procedure appears very similar to that followed by ARC which has been accepted by the Association in con- nection with Agricultural Credits. In the eleven states already covered by Agricultural Credits the Association has helped build up the strength of the State Groundwater Organizations. In Assam, Jammu & Kashmirs, Kerala, and Bihar the State Groundwater Organizations are generally weak. However, this does not create a difficult problem since (a) steps are being taken to strengthen them in Bihar and West Bengal; (b) the scarcity of groundwater is not an issue in the States of Assam, Jammu & Kashmir, or Kerala where the number of existing wells is very low in relation to the quantity of ground- water available; and (c) only about 10% of the wells energized under REC- financed projects are located in the six states mentioned above. Technical Coordination - Standardization 31. REC has taken a leading role in standardization of equipment and construction practices for which it has set up a special cell under the supervision of the Technical Director. Technical Conferences on Standard- ization are held periodically under the auspices of REC and are attended by  ANNEX I Page 10 Chairmen/Technical Members/Chief Engineers of SEBs and representatives of expert bodies such as CWPC, the Indian Standards Institution, etc. REC has already issued specifications - which considerably reduce the variety of materials used - for distribution transformers (25, 63, 100 KVA), for hard- drawn stranded aluminium and steel-cored aluminium conductors for overhead lines, and for 11 kv porcelain insulators and insulator fittings. These specifications, which cover a substantial portion of the cost of RE schemes, are expected to result in lower cost of equipment, reduced inventories, shorter delivery periods and speedier project implementation. Also, REC issued a number of construction standards covering construction of 11 kv and 415/240 v lines, insulators and fittings for both 11 kv and 415/240 v lines and distribution sub-stations. All SEBs agreed that these specifica- tions should be adopted. REC specifications for Energy Meters have now been finalized and issued. Construction and maintenance manuals for service connections, L.T. and H.T. lines and sub-stations for the guidance of field staff of SEBs have also been finalized and are under issue. 32. REC is also taking interest in the SEBs' organizational capability to deal with rural electrification matters. Whereas the SEBs' existing organizational set up was generally adequate in the initial stages, the increased rate of RE development soon made the SEBs themselves reconsider this aspect of their operations and to allocate separate staff for preparing, processing and implementing the REC-financed schemes. In January 1971, REC addressed a circular to all SEBs to recommend the setting up of a separate RE cell at headquarters - preferably headed by a Superintending Engineer - and construction divisions in the field to execute the schemes sanctioned by REC. REC has been following up on this subject. Rural Electric Cooperatives 33. Even before REC was established, GOI felt that, in view of the increase in the tempo of rural electrification and the heavy responsibility devolving on the SEBs on this account, the cooperative system of electricity distribution in rural areas should be investigated. A team of experts from the National Rural Electric Cooperative Association of USA visited India and carried out a study to examine the feasibility and scope for rural electric cooperatives in the country and identify suitable areas where such cooperatives could be promoted as an experimental measure. On the basis of this study, five areas, one each in five States 1/ were identified as suitable for the pilot experiment. When REC was set up in July 1969, preliminary arrangements for establishing the five cooperatives had been completed and all of them came into existence in the few months which followed. In accordance with its charter, REC readily took over the responsibility of financing these societies. It first sanctioned in January 1/ Sircilla Taluk in Karimnagar district, Andra Pradesh; Kodinar Taluk in Amreli district, Gujarat; Rahuri and Mula-Pravara Taluks in Adhmednagar district, Maharashtra; Hukeri Taluk in Belgaum district, Mysore, five blocks in Lucknow district, Uttar Pradesh.  ANNEX 1 Page 11 1970 a pre-construction loan of Rs 100,000 to each of them. Subsequently it approved project loans totalling Rs 128.6 million which cover all the investment cost including the take over of SEBs' existing distribution assets. All five projects went into operation in FY 1970-71 (during which year dis- bursements to the five societies totalled Rs 49.7 million). The five projects are phased over a period of five years and will result, on completion, in energization of 27,600 pumpsets and power supply to 1,530 small industries and 729 villages. 34. For the purpose of helping make policy decisions regarding es- tablishing new cooperatives on a larger scale, REC set up a special commit- tee to evaluate the role and performance of the five pilot cooperatives. A number of evaluation studies have been carried out by the PACE Division of REC or, under its direction, by outside consultants for comparing the performance of the cooperatives with that of reference test areas electrified by the SEBs. The Committee has since submitted its report and its recom- mendations have generally been accepted by the Corporation. The main recom- mendations of the Cormittee relate to the norms to be observed in regard to debt-equity ratio, pattern of funding, fixation of tariff, organizational structure, management and supervision and promotional activities, in respect of future cooperatives. The Corporation has, at the end of February 1975, sanctioned additionally three more cooperative projects, two in Andhra Pradesh and one in Bihar involving a total loan assistance to these projects of the order of Rs. 35.3 million out of a total estimated project cost of Rs. 54.2 million for these projects, the balance being met out of equity raised from contributions by the consumer/prospective consumer members, concerned State Electricity Board and the State Government. Two more cooperatives have been established, one in Orissa and one in Rajasthan. These projects are likely to come up for the consideration of the Corporation shortly. Operations of REC 35. During financial year 1974/75, REC sanctioned 340 schemes 1/. The table below illustrates REC's steady growth since it commenced operations in mid-1969. 1/ This is excluding Harijan Basti Operations.  ANNEX 1 Page 12 /a Amount of Financial No. of schemes sanctioned- loan san- Year OA OB OC SU MF MG MH ST SS PPA MNP Total ctioned (Rs. millions) 1969/70 6 5 - - - - - - - - - 11 53.9 1970/71 51 38/b 5 - - - - - - - - 94 632.6 1971/72 55/c 44 - 2 - - - 4 - - - 105 :645.8 1972/73 104 71 - 16 - - - 8 1 - - 200 932.1 1973/74 62 53 - 38 - 14 14 6 21 - - 208 739.8 1974/75 43 56 3 12 7 12 6 8 20 56 117 340 1,374.7 /a OA - ordinary advanced, OB - ordinary backward, OC - Rural Electric Cooperative, SU - Specially under developed, MF - Mini Farm, MR - Mini Growth, MH - Mini Health, ST - Special Transmission, SS - System Improvement, PPA - Potential Project Area, MNP - Minimum Needs Program. /b This is net of two schemes for Assam for which the sanction was can- celled. /c This is net of one scheme of Tamil Nadu which was cancelled. As can be seen, the bulk of the schemes sanctioned belong to "ordinary advanced" and "ordinary backward" areas. The 340 schemes sanctioned during financial year 1974/75 up to January 31, 1975 cover 29,061 villages, 129,098 pumpsets, 18,931 light industries, 535,554 domestic/commercial connections and 82,249 street lights. 36. In addition to the 340 loans for RE schemes meeting the viability criteria, REC sanctioned 35 special loans (totalling Rs. 8.2 million) during financial year 1974/75 for electrification of Harijan Bastis. In comparison 38 such loans (totalling Rs. 16.7 million) during 1973/74 (state- wise breakdown in Appendix 1-K), 27 such loans (totalling Rs. 14.7 million) during 1972/73 and 10 loans (totalling Rs. 5.5 million) during 1971/72 were sanctioned.  ANNEX 1 APPENDIX 1-A Page 1 INDIA RURAL ELECTRIFICATION CORPORATION Board of Directors 1/ Chairman B. Venkatappiah 2/ Director S.S. Puri Chief Executive, National Cooperative Union of India Director N. Venkatesan Member (Utilization) Central Water & Power Commission Director R. Kapur Director, Ministry of Energy Director V.N. Rajagopalan Director, Ministry of Finance, Department of Economic Affairs. Director C. Laxmipathy 3/ Director N. Chaturvedi 4/ Director M.A. Chidambaram Managing Director, Agricultural Refinance Corporation; 1/ As on February 2, 1975. 2/ Has previously held many important positions, including Member (Agri- culture), Planning Commission; Chairman, State Bank of India; Deputy Governor, Reserve Bank of India; Executive Director, Reserve Bank of India; Finance Secretary, Bombay State. 3/ Formerly Chief Engineer (Electricity), Government of Andhra Pradesh. 4/ Present positions include: Director, Rajasthan Sakahari Kraya Virkraya Sangh Ltd., Jaipur, Director, Rajasthan State Cooperative Bank Ltd; Jaipur, Director, Rajasthan State Industrial Cooperative Bank Ltd; Jaipur, Director, Jaipur Central Cooperative Bank Ltd; Jaipur, Director, State Bank of Bikaner, Jaipur; Chairman & Director, Jaipur Zila Sahakari Bhoomi Vikas Bank Ltd; Director, Jaipur Sahakari Kraya Vikraya Samiti Ltd; Vice-Chairman, All-India Central Bank Development Banks Cooperative Union Ltd; Director, National Cooperative Union of India Ltd; Chairman & Director, Rajasthan Rajya Sahakari Bhoomi Vikas Bank Ltd; Jaipur; Chairman, Rajasthan State Industrial Cooperative Bank Ltd; Jaipur, Member, Hindusthan Samachar Cooperative Samiti Ltd; Delhi.  ANNiEX 1 APPENDIX 1-A Page 2 Director N.A. Kalyani 1/ Managing Director M.M.K. Wali Whole time. 1/ Present positions include: Managing Director, Bharat Forge Co. Limited; Director, Copper Engineering Limited, Director, Poona Industrial Hotel Limited; Director, Ugar Sugar Works Limited; Director, Kirloskar Pneumatic Co. Ltd., Director, Industrial Finance Corporation of India; Director, Hiremath Chemicals (P) Ltd.  INDIA RURAL ELECTRIFICATION CORPORATION ORGANIZATION CHART lBADOF DIRECT7R _ CHAIRMAN l ITECHNICAL DIRECTORIl | AAING DIRECTOR ITechnical Divisionl I Secretary & M Senior Chief A [ Chief | | xef | f Chief ] r | Ch0ief\ Chief| + ~~~~~~~~~ni neerl (PC (C 2< ox '0~ 0 C" w .1 I'C R E W , clf- IS '. I K I ' I 0. 0~~~~~~~~~~~~~~~~I' '4." C,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.' 0 Po It~~~ ~~~~~~~~~ 0 0 0 .0 P.~~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~ CI CD' * Positions currently vacant. Secretary was concurrently Head of PACE Division until January 1975. Since January 1975 when the incumbent was r appointed senior Chief, he has been holding additional charge of PACE Division's Chief pending the appointment x of a whole time Chief for the Division. H H Officer on Special Duty. H Financial Adviser & Chief Accounts Officer. Source: REC - March 1975  INDIA RURAL ELECTRIFICATION CORPORATION ORGANIZATION CHART (PACE DIVISION) Chief (PACE)A/ Project Appraisal, Coordination & Evaluation Division Specialists Project Coordination Ev:luation Appraisal Management Economics & Small Agricultural Ground Statistics Industry Credit Water 1/ Project Appraisal, Coordination and Evaluation. Rl(D Source: REC, February 1975 H-  INDIA RURAL ELECTRIFICATION CORPORATION ORGANIZATION CHART - FINANCE AND ACCOUNTS DIVISION Financial Adviser and Chief Accounts Officer Deputy Financial Adviser |ty Financial ser Deputy Financial Adviser] Loan Bills Commer l Internal Cooperative Performance Pre-sanction Cost Verification Accounts Audit Accounts Audit Appraisal Source: REG, February 1975 (D .,, X F'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  ANNEX 1 Appendix 1-E Page 1 INDIA RURAL ELECTRIFICATION PROJECT Directives from GOI to REC No. EL-II-26(21)/68 Government of India Ministry of Irrigation and Power New Delhi, the July 26, 1969 To The Rural Electrification Corporation Private Limited, New Delhi. Dear Sirs, The President is pleased to issue the following directives under Article 126 of the Articles of Association of Rural Electrification Corporation with regard to the conduct of business of the Company: (1) It shall be the responsibility of the Board of Directors of the Corporation to establish sound policies and procedures for the consideration, approval, and implementation of Rural Electrification Schemes which come up for assistance from the Corporation. (2) In formulating such policies and procedures, the Corporation will develop and apply criteria for, and establish priorities regarding, the choice of schemes on the basis of consideration of economic viability of the schemes. Such criteria and priorities will be developed prior to the commencement of lending operations and will be based on suitable economic and financial standards. The Corporation will lay down appropriate stipulations in regard to the technical, economic, financial and managerial soundness of each scheme, as a condition of providing financial assistance for the scheme. (3) In choosing the projects for which loans may be provided to the State Electricity Boards: (a) A 'project approach' will be generally adopted so that extension of electricity along with other investments and inputs results in increased agricultural production and reasonable returns on agricultural investments.  ANNEX 1 Appendix 1-E Page 2 (b) Economic viabilitv shall be understood to entail the prospect of sufficient revenue from sales of electricity to rural users to cover (i) operating costs and (ii) an appropriate return on investments provided that in selected categories of cases, e.g., economically backward areas with future agricultural potential, requirement (ii) may be waived for a short initial period not exceeding five years. (c) hlle loans advanced should carry such terms as may be comparable to the terms advanced by the Government of India to public sector financing institutions. (d) The willingness of farmers to invest their own resources in rural electrification should be a factor in consider- ation of schiemes to be financed. (4) The Corporation sliould support efforts of the State Electricity Boards to raise resources in the form of debentures from the rural areas. In so far as the effective rate of interest paid by State Electricity Boards to cultivators may be highier than that on loans from the Corporation, the Corporation may accept a lower rate of interest on its special corporate debentures so that the overall rate of interest on debentures paid by StateI Electricity Boards is comparable with the interest paid by them on loans from the Corporation. (5) The C.orporation may use its finances to make loans to Rural Electric Coopcratives for construction costs plus operation and maintenance costs unltil the schemes become self-supporting. Five Pilot cooper.tives are now being developed and it is expected that others will be organized on similar lines. The Corporiation will consider providing loans on suitable terms to these cooperatives withi a view to encouraging the coop- erative type of organization for distribution of electricity in rural areas. (6) The Corporation will help State Electricity Boards and Cooperatives in identifying likely areas for projects, in preparing project proposals, and in improving the quality of tlleir project appraisal and presentation. (7) In seeking appropriate security or guarantees for its loans to State Electricity Boards, tne Corporation shall ensure tihat the ability of thie Boards to raise loans from the State Govermments, the Life Insurance Corporation of India, and other substantial sources is not jeopardised tlhereby.  ANTNEX 1 Appendix 1-E Page 3 (8) The initial principal of the Corporation and all other funds received by the Corporation will be invested in Government of India securities to the extent not required for current operations. These directives shall be given immediate effect to by the Directors of the Company. Kindly acknowledge receipt. Yours faithfully, Sd/- C. Chakraburti, Deputy Secretary to the Govt. of India for and on behalf of the President of India.  ANNEX 1 Appendix 1-E Page 4 Further Directives from GOI TO REC No. 48(13)/74-P.E. Government of India Ministry of Irrigation and Power New Delhi, September 9, 1974 To : The Chairman, Rural Electrification Corporation Limited, New Delhi Subject: Directives under Article 126 of the Articles of Association of the Rural Electrification Corporation Limited. Dear Sir, I am directed to refer to this Ministry's letter No. EL-II-26(21)/68, dated July 26, 1969, on the above subject and to say that the President is pleased to issue the following further directives under Article 126 of the Articles of Association of the Rural Electrification Corporation Limited with respect to the conduct of its business in so far as it relates to rural electrification under the National Program of Minimum Needs:- (i) It shall be the responsibility of the Board of Directors of the Corporation to establish sound and systematic policies and procedures for extending financial assis- tances to the State Electricity Boards (or in the absence of a State Electricity Board in a State/Union Territory, to the State Governments/Union Territory, to the State Governments/Union Terriroty Administrations) for formulat- ing, appraising, financing and monitoring the rural electrification schemes under the Minimum Needs Program. (ii) The Corporation shall sanction schemes under this program only in such areas as are broadly identified for this purpose. (iii) In selecting and sanctioning schemes under this program, the Corporation shall follow a project and production oriented approach as indicated in terms of the directives issued on 26th July, 1969. The Corporation shall also lay down and enforce appropriate stipulatlons in regard to the technical, developmental, economic, financial and managerial soundness of each scheme.  ANNEX 1 Appendix 1-E Page 5 (iv) While selecting projects for which financial assistance may be provided under this program, the Corporation shall take steps to ensure that - (a) the projects do have a certain minimum development content so that extension of electricity, along with other investments and inputs, leads to optimum ex- ploitation of the development potential of the areas covered and that the projects result in the extension of the benefits of electricity to as large a rural population as possible; and (b) the projects lay due emphasis on the energization of irrigation pumpsets, agro-industries and other rural industries as well as on the supply of power to growth centres, primary health centres and other similar categories which are important for develop- ment, such as marketing or educational centres. (v) In extending financial assistance to the State Electricity Boards/State Governments/Union Territory Administrations as the case may be, the Corporation shall follow such terms and conditions as may be decided by the Central Government from time to time. (vi) While appraising the viability of the projects, the Cor- poration may have regard to the fact that in the initial stages the returns may fall short of the normal criteria of financial viability, but it will have to be ensured that the projects would ultimately prove to be eco- nomically viable as a result of extension of irrigation facilities, horticultural and other development and rural industrialization, etc. (vii) The Corporation shall guide and assist the State Electri- city Boards/State Governments/Union Territory Adminis- trations in the formulation of production oriented rural electrification projects within the identified MNP areas in such a manner as to ensure - Firstly : that the requisite population coverage is secured; Secondly: that the assumptions underlying eventual viability are realistic and feasible; and Thirdly : that the project itself is appropriately phased with reference to the district or other area concerned.  ANNEX 1 Appendix 1-E Page 6 2. These directives shall be given immediate effect by the Directors of the Company. Yours faithfully, Sd/- (R. Kapur) Director  INDIA RURAL ELECTRIFICATION PROJECT Rural Electrification Corporation REC Loans Rates of Interest, Terms of Repayment_ Minimum Returns Required on aoans Sanctioned to March 31 1974 Category & Area/Type Code Period Interest Rate - l/ Terms of Repayment - 2/ Minimum Return - 3/ of Loan % for Project Factors for Classification Ordinary - advanced OA 20 years 1st 10 years 6 5 years grace, then 2% in 5th year Factors taken into account in deciding 11 - 15 " 7 repayment over 15 years 3%% in 10th year classification of given area are: 16 - 20 " 8 (i) Level of economic development as Or represented by per capita income 11 - 15 ' 6 if repayment in 15 years or per acre yield (in the project area). Ordiniry - backwnrd OB 25 years 1st 10 yeats 5 5 years grace, then t% in 5th year (ii) (a) Irrigation facilities - existing 11 - 15 i 5N repayment over 20 years 2% in 10th year and potential. 16 - 20 " 7 3t% in 15th year (b) Availability of underground water 21 - 25 " 8 resources, or (c) Intensity of cropping as represented 16 - 20 " 6 if repAyrmktt in 20 Yeats by double ayultiple cropped areas. 41 (iii) Intensity of rainfall and extent of dry Ordinaty - cooperatives OC 30 years lit 10 years 4- 5 yesrs grate, then No specific criteria farming. 11 - 15 " 5 tpaymient over 25 yeat s but in assessing (iv) Susceptibility of drought or floods. 16 - 20 " 5~ viability, the minimum (v) Availability of infrastructure other 21 - 25 " 7 standards applicable than electricity i.e. institutional 26 - 30 " 8 to backward areas are arrangements for provision of credit, kept in view. other inputs, marketing etc. (vi) The geographical situation as indicated Specially undetdevel- SU 30 years ist 10 years 4 5 yeats grate, then t in 10th year by hazards to the extension of oped hill, deg6rt, 11 - 15 " 5 repayment ove5 25 years 2% in 15th year electricity on a/c of terrain, location,etc. tribal -ateas, etc. 16 - 20 " S 3k% in 20th year (vii) Degree of electrification already achieved. 21 - 25 7 (viii) Cost of extension of electricity as 26-i0" 8 indicated by cost for energization per Special Transiitisbion ST 12 years I - 12 years 5/ 7 2 years grace, then pumpset. repayment over 10 years System Ixdprovement SS 8 years 1 - 8 yeais 7 2 years grace, thet 337% in 5th year repayment over 6 years J The interest rates shown are net of the rebate of k7. allowed for prompt payment. 2/ Repayment of both principal and interest, based on equated annual installments: In view of the complicated calculations involved, repayment is now by equal installments of principal. In all cases the State Governments are required to furnish full and unconditional guarantees in respect of the payment of interest and repayment of principal by the State Electricity Board/Cooperatives. 3/ Minimum return means the ratio which operating revenues, after providing for operating expenses (including depreciation) and interest, bear to the total investment. x 41 REC may forego interest for first 5 years provided Society credits a sum equivalent to the interest, to a special fund to be used in accordance with rules approved x by the REC. The practical difficulty arises in so far as the schemes would not generate cash sufficient to meet the early year's interest. e 5/ Reduced to 10 years for "AA" states, i.e. those states which are above the all-India level of village electrification (as opposed to "AB" states) i.e. those below the All India level.  INDIA RURAL ELECTRIFICATTON PROJECT Rural Electrification Corporation REC Leans - Bates of Interest, ferms of fepapomot. Minimum fetunn Required on Lan-o Sanctioned from April 1. 1974 1/ 2/ 3/ Category & Area/Type Code Period lorereut Ratr i Z Termo of Repayment - Minimuc Return - Facto for Clossification of Loon for Prolect Ordianay - Advanced OA 20 years 1ot 5 years 7