India - Ramagundam Thermal Power Project

Document of The World Bank FOR OFFICIAL USEONLY Report No. 2175b-IN INDTA STAFF APPRAISAL REPORT RAMAGUNDAM THERMAL POWER PROJECT December 11, 1978 Regional Projects Department South Asia Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit = Rupee (R) Rupee 1 Paise 100 Rupee 1 = US$0.1163 Rupee 1,000,000 US$116,279.06 US$1 = Rupees 8.6 1/ US$1,000,000 = Rupees 8,600,000 ABBREVIATIONS AND ACRONYMS V - volt kV - kilovolt = 1,000 volts kWh - kilowatt-hour = 1,000 watt-hours GWh - Gigawatt-hour = 1,000,000 kilowatt-hours MW - Megawatt = 1,000 kilowatts ton e - metric ton = 2,000 lbs t/m - tons per square meter HVDC - High Voltage Direct Current kn - kilometer GOI - Government of India NTPC - National Thermal Power Corporation Ltd. NHPC - National Hydro Power Corporation Ltd. CEA - Central Electricity Authority SEB - State Electricity Board REB - Regional Electricity Board CWPC - Central Water and Power Commission APSEB - Andhra Pradesh State Electricity Board TDO - Thermal Design Organization BHEL - Bharat Heavy Electricals Limited KfW - Kreditanstalt fur Wiederaufbau NTPC's FISCAL YEAR ENDS MARCH 31 1/ Until September 24, 1975, the Rupee was officially valued at a fixed Pound Sterling rate. Since then it has been fixed against a "basket" of currencies. As these currencies are floating, the US Dollar/Rupee ex- change rate is subject to change. Conversions in this report have been made at US$1 to Rs 8.6.  FOR OFFICIAL USE ONLY INDIA RAMAGUNDAM THERMAL POWER PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE POWER SECTOR ..................................... 1 Background ...................................... 1 Previous Bank Involvement in the Power Sector ... 1 Energy Resources ................................ 2 The Power Sector ................................ 3 Existing Facilities ............................. 5 Future Development .............................. 5 Future Integrated Systems Operation .... ......... 7 II. THE BENEFICIARY - NATIONAL THERMAL POWER CORPORATION LIMITED .................................. 10 Bulk Supply Tariffs ............................. 11 Organization and Management ..................... 12 Training ........................................ 12 Accounting Systems .............................. 13 Audit .................................. 13 III. DEMAND AND MARKET ASPECTS ............................ 14 Demand for Power - All India ..... ............... 14 Demand for Power - Southern Region .... .......... 15 IV. THE PROGRAM AND THE PROJECT .......................... 18 The Program ........ ............................. 18 The Project ........ ............................. 19 Estimated Cost .................................. 19 Basis for Estimates ............................. 20 Status of Engineering and Implementation .... .... 21 Consultants .................. 21 Procurement .................. 23 Disbursements .................. 23 Ecological Aspects .................. 24 Completion Report .................. 25 This report is based on information provided by CEA and NTPC and on an appraisal carried out by Messrs. A.E. Bailey and S.S. Scales during April/ May 1978. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- Page No. V. FINANCIAL ANALYSIS ................................... 26 Introduction .................................... 26 Future Earnings ................................. 26 NTPC's Financing Plan FY1977-FY1986 .... ......... 28 Future Finances ................................. 30 Debt Restriction ................................ 31 VI. JUSTIFICATION ......... ............................... 32 The Need for Ramagundam's Power Capacity in the Southern Region ........................ 32 Comparison of Alternatives ..... ................. 32 Return on Investment .................... 34 Project Risks .................... 34 VII. SUMMARY OF AGREEMENTS ................................. 35 LIST OF ANNEXES ANNEX 1 - 400 kV System Development - Phase I ANNEX 2 - Organization Chart - NTPC ANNEX 3 - Project Cost Estimates ANNEX 4 - Implementation and Construction Schedule - Power Station ANNEX 5 - Implementation and Construction Schedule - Transmission ANNEX 6 - NTPC - Income Statements FY1979 through FY1991 ANNEX 7 - NTPC - Forecast Sources and Applications of Funds State- ments FY1979 through FY1990 ANNEX 8 - NTPC - Balance Sheets FY1977 through FY1990 ANNEX 9 - Assumptions on Financial Projections ANNEX 10 - Projections of Energy Requirement and Peak Demand - Southern Region ANNEX 11 - Economic Justification of the Project ANNEX 12 - Related Data and Documents Available in Project File MAP  INDIA RAMAGUNDAM THERMAL POWER PROJECT 1. THE POWER SECTOR Background 1.01 Planning for power in India has, in the past, been on a State-wise basis, although during more recent years, a start has been made to coordinate planning on a regional basis with inter-State transfers of power. However, the sheer size and increasing complexity of India's power sector, as well as economic considerations, entail the construction of ever larger power stations and extra high voltage transmission lines. This in turn necessitates an increasingly sophisticated approach to power planning to ensure that systems are expanded in the national context to meet developing demand on the most efficient basis. 1.02 The Government of India (GOI) recognizes the problems, and its strategy envisages increasing centralized planning of generation and trans- mission projects and, ultimately, centralized control of a national grid with the operation of generating plant on a merit order basis. Actions taken by GOI to date in implementing this policy are the formation of the National Thermal Power Corporation (NTPC) and the National Hydro Power Corporation (NHPC) to construct and operate large thermal and hydro power stations and associated transmission, and the engagement of consultants to assist the Central Electricity Authority (CEA) in the formulation of a national power plan which includes a 400 kV system study to determine the configuration and parameters of the future interconnected national power system. The decision to proceed with the construction and commissioning of several large thermal power stations of 1,600 MW to 2,100 MW capacity, located on coal fields and supplying bulk power to the States via an interconnected 400 kV transmission system, is another move in this direction. The construction of two such developments, the 2,000 MW Singrauli and 2,100 MW Korba projects, has been started, with IDA assisting in financing the first stages of both. In each case this comprises 600 MW of generating plant and associated transmission (Credits 685-IN Singrauli and 793-IN Korba). The 2,100 MW Ramagundam devel- opment, which is the third in this series of developments, is the subject of this report. As in the cases of Singrauli and Korba, GOI has asked the Association to assist in financing the first stage of this development (3 x 200 MW generating units and associated plant and transmission). Bank Group finance of US$250 million is proposed comprising a Credit of US$200 million and a Loan of US$50 million. Previous Bank Group Involvement in the Sector 1.03 The Bank has made eight loans to India for power projects amounting to US$284.5 million and IDA ten credits totalling US$796 million. Of this amount US$620.5 million has financed or is financing the construction of generating plants, US$23 million has financed the purchase of construction equipment for the Beas hydroelectric project, US$380 million was used on projects for high voltage transmission and US$57 million was for rural  electrification. Nine loans and credits for generating plant, the Beas project (Credit 89-IN) and the first three transmission projects (Loan 416-IN, Credits 242-IN and 377-IN) have been completed. The fourth transmission pro- ject (Credit 604-IN) is under implementation. Approximately US$94 million of the credit amount of US$150 million had been committed up to the end of September 1978. The Korba and Trombay thermal power projects (Credit 783-IN and Loan 1549-IN) which were approved in April 1978 are still in the preli- minary implementation stage and no disbursements have yet been made. Commit- ments to November 30, 1978 totalled US$104 million on the Singrauli project (Credit 685-IN) and US$55.2 million on the Rural Electrification project (Credit 572-IN). 1.04 The fourth power transmission project and the rural electrification project are proceeding satisfactorily notwithstanding initial delays in imple- mentation and the substantial delay in preparation of specifications for the more sophisticated load dispatch equipment in the case of the transmission project. Energy Resources 1.05 India's main commercial energy resources are coal, oil and natural gas and hydro power. There are also resources of nuclear fuels, principally uranium and thorium, and India's power program includes the construction of further "CANDU" type heavy water reactors using domestically produced natural uranium as fuel. Two nuclear power stations have been constructed to date and a third is under construction. Some geothermal energy sites have also been identified, but the potential appears to be limited. 1.06 Coal is by far the most extensive indigenous fossil fuel; reserves are estimated at 83 billion tons of which some 21 billion tons have been proven. Additionally, total reserves of lignite at the Neyveli field in Tamil Nadu are estimated at around 2 billion tons. If generally unworkable coal, e.g. coal with high ash and moisture content, is excluded, this estimate of recoverable and saleable coal and lignite is reduced to approximately 24 billion tons which, on a forecast country-wide usage, would be adequate for some 50 years under current assumptions of economic growth. 1.07 By comparison with coal, proven reserves of oil in India are present- ly small. Exploration and drilling activities to date have proven an estimated 230 million tons on shore, and recent new off-shore discoveries west of Bombay in the Arabian sea have led to delineation of fields with proven recoverable reserves of about 250 million tons of crude oil and 30 billion cubic meters of natural gas. Other reserves of natural gas, which is found in India both alone and in association with crude oil, are estimated at over 100 billion cubic meters. 1.08 The potential of hydro-electric power resources is estimated at 41,000 MW of which some 10,000 MW has already been developed. Some 30% is in the North Eastern region with the balance spread over the Northern (25%), Southern (20%), Western (18%), and Eastern (7%) regions.  - 3 - 1.09 Oil and natural gas have important alternative uses and it is improbable they will be a significant factor in the generation of electric power. Development of generating facilities for the foreseeable future, therefore, will be based on coal or lignite burning thermal stations and hydroelectric power stations with a small but gradually developing nuclear program. The Power Sector 1.10 Under the Electricity (Supply) Act, 1948, power supply is a concur- rent subject, meaning that legal responsibility is shared bptween the Central Government and State Governments. The principal agencies in the industry ares (1) the State Electricity Boards (SEBs); (2) the Atomic Energy Commission; (3) the Central Electricity Authority (CEA); and (4) the two Central Power Corporations (NTPC and NHPC). 1.11 The SEBs are constituted by the State Governments under the pro- visions of the Electricity (Supply) Act, 1948, to promote the coordinated development of the generation, supply and distribution of electricity within their respective States in the most efficient and economical manner, and for the control and regulation of other supply undertakings which are private licensees. These comprise municipal utilities such as Bombay Suburban Electric Supply Undertaking, and private utilities, the largest of which are Tata Electric Companies Ltd. (Bombay), Calcutta Electric Supply Company, and Ahmedabad Electric Supply Company. At the present time, the States effectively own or control well over ninety percent of electricity supply facilities. Most of the SEBs are financially weak and in some cases unable even to meet their interest obligations to State Governments. Amendments to the financiaL provisions of the Act, which were recently enacted, are designed to enable SEBs to become financially viable to the extent that tariffs can be set to ensure revenues are sufficient to meet operating expenses including deprecia-- tion, taxes and interest and leave sufficient surplus for amortization of debt, increases in working capital and to cover a reasonable proportion of the cost of future construction. 1.12 The financial position of the SEBs has been the subject of con- tinuing dialogue with GOI, and improvements have been effected through rate of return covenants in connection with previous Credits. Future missions dealing with the power sector will continue this dialogue with particular emphasis on the steps which should be taken to provide a basis for improving SEB financial and accounting practices, now that the financial amendments to the Act have been enacted into law. In the meantime GOI has formally noti- fied the State Governments of the financial amendments to the Act, setting out their responsibilities in complying with these amendments and asking for an indication of the actions which are to be taken. 1.13 The CEA was formally created in 1950 with responsibility for develop- ing a national policy for power development and coordinating the activities of the various planning agencies involved in electricity supply. At that time it came under the Power Wing of the Central Water and Power Commission (CWPC) which in turn was under the the Ministry of Irrigation and Power. As a result of administrative changes introduced in October 1974, responsibility for power  - 4 - was transferred to the Ministry of Energy, which was created at that time to bring together ministerial responsibility for coal and power. This involved the transfer of the Power Wing of the former CWPC to the CEA, which now comes under the Department of Power of the Ministry of Energy and is responsible for developing a sound national policy for the electricity supply industry. The Department of Atomic Energy, which comes directly under the Prime Minister, is responsible for nuclear power generation. 1.14 CEA's powers were enlarged through amendments to the Electricity (Supply) Act, 1948, which were enacted into law on November 30, 1976. In addi- tion to its general responsibilities for national power policies, it is now responsible for the formulation and coordination of plans for power develop- ment, optimization of investments in the power sector in the country, devel- opment of interconnected system operation, training of personnel and research and development. It includes specialist engineering organizations which pro- vide comprehensive project engineering services to the electricity supply industry. The Thermal Department also takes rsponsibility for monitoring the performance and maintenance records of thermal power stations and for organiz- ing the training of power station personnel. 1.15 The SEBs and the other licensed electricity undertakings are re- quired to submit their investment proposals to the CEA for technical and economic appraisal and to the Energy Division of the Planning Commission for inclusion in the plan. The Planning Commission is responsible for the allo- cation of plan funds between the States and between sectors. 1.16 As a means of improving collaboration between the SEBs and estab- lishing power systems on a regional rather than a State basis, Regional Electricity Boards (REBs) have been set up for the Northern, Southern, Eastern and Western Regions. The chairmanship of each REB is assumed in rotation by the chairmen of the SEBs within the region and they have staffs of engineers seconded from their constituent SEBs. The general functions of the REBs are to plan integrated operation of the power systems in the region for the maximum benefit of the region as a whole, coordinate overhaul and maintenance programs, determine generation schedules to be followed and the power avail- able for transfer between States, and determine a suitable tariff structure for the transfer of power within the region. The Boards function mainly in an advisory role in relation to the SEBs over which they have no control. The REBs will need to be strengthened if they are to fulfill a meaningful role in the developing power sector (see para 1.37). 1.17 The two Central Power Corporations (NTPC and NHPC) were established by GOI in 1975 to construct and operate large thermal and hydro power stations. NTPC and NHPC are not intended to take a leading role in the generation and sale of power in the States. In most States the SEB will continue to be the largest power undertaking, a situation which is unlikely to change. 1.18 At the present time, four large central thermal power stations have been planned and, as stated in paragraph 1.02, work has started on the Singrauli and Korba projects. The next is the 2,100 MW Ramagundam development with associated transmission. All of these developments will be constructed and operated by NTPC. NHPC will construct and operate large hydroelectric  - 5 - projects. A transmission wing has also been established in NHPC to design and construct the 220 kV and 400 kV overhead transmission associated with hydro projects, and any other transmission work which it might be commis- sioned to undertake. Existing Facilities 1.19 The total installed generating capacity in the whole of India at March 31, 1978 was just over 26,000 MW, including about 2,200 MW of non- utility capacity, mostly thermal, which is owned by major industrial consumers to meet their own needs. The generating capacity is shown in Table 1.1 below. Table 1.1 Installed Generating Capacity at March 31, 1978 (MW) Conventional Region Thermal Nuclear Hydro Total Northern 3,359 220 3,243 6,822 Western 4,112 420 1,662 6,194 Southern 1,985 - 4,118 6,103 Eastern 3,601 - 885 4,486 North Eastern 204 - 69 273 Andaman and Nicobar Lakshadweep 6 - - 6 Non-Utility Capacity 2,200 2,200 15,467 640 9,977 26,084 Source: CEA. 1.20 Intra-State and inter-State transmission is at 132 kV and 220 kV and, generally, major load centers are interconnected by 132 kV and 33 kV subtransmission lines. Distribution voltages are 11 kV and 415/240 V. The supply, in general, is reliable, but power shortages, especially during the summer months, necessitate shutdowns and brownouts. About 20% of units sent out are unaccounted for because of system losses and pilferage. These losses are high and should be reduced to a maximum of around 15%. Future Development 1.21 The country wide peak demand in 1976/77 was 14,490 MW; this is expected to increase to 17,900 MW by 1978/79, with output in that year esti- mated at about 100,000 GWh. Installed capacity by 1978/79 is expected to reach about 29,500 MW of which 27,300 MW would be utility plant with the balance of 2,200 MW non-utility.  - 6 - 1.22 The development program provides for an expansion of generating capacity during the five-year period 1979/80-1983/84 by about 19,000 MW so that the total planned installed capacity would be a little over 46,000 MW by 1983/84. The additional capacity sc6ieduled for commissioning during this period is shown in more detail in Table 1.2. Furthermore, the construction of some 15,000 km of 400 kV transmission, plus about 1,000 km of High Voltage Direct Current (HVDC) transmission, is planned to enable full integration of the regional systems and the evacuation of the output from the proposed large thermal power stations. This is a very ambitious program which is unlikely to be achieved unless there is a substantial improvement in the implementation of projects. Table 1.2 Schedule of Planned Additions to Capacity During the Period 1979/80-1983/84 MW Thermal Hydro Total Northern 2,630 1,414 4,044 Western 5,810 401 6,211 Southern 3,465 1,790 5,255 Eastern 2,610 400 3,010 North Eastern 202 261 463 Totals 14,717 4,266 18,983 Source: CEA. 1.23 Table 1.3 shows the planned annual additions to capacity, aggregat- ing 18,983 MW, and the forecast of annual capacity (peak load) and energy requirements and availability. This demonstrates that if the program of generation developments can be achieved, there will be surplus energy from 1979/80 through 1983/84 and a small but, generally, decreasing capacity deficit through the five-year period. These forecasts of peak load and energy requirements which are based upon continuous monitoring of development trends during the preparation of the annual electric power surveys of India, appear to be conservative. 1.24 The installed capacity shown in Table 1.3 is the sum of the name- plate ratings of maximum continuous kilowatt capacity of all serviceable generating equipment in the system at the end of the year. Considerations which have to be taken into account when determining peak availability are: seasonal availability of hydro plant, planned outages for maintenance, forced outages, auxiliary consumption, reduction in the rated capacity due to physical condition of the facilities, and the need for spinning reserve. Taking all these factors into consideration, the peak availability in India, under present operating conditions, is in the neighborhood of 60% of installed capacity. This availability factor should gradually improve as system inter- connection progresses and maintenance practices are improved.  - 7 - Table 1.3 Installed Capacity, Peak Availability, Peak Load Energy Availability and Energy Requirement All India 1978/79 - 1983/84 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 Installed Capacity (MW) /a 27,267 30,830 33,753 37,875 42,289 46,250 Peak Availability (MW) 16,314 19,310 21,631 24,258 26,602 29,467 Peak Load (MW) 17,902 20,345 22,440 24,718 27,335 30,064 Surplus/(Deficit) (MW) (1,588) (1,035) (809) (460) (733) (597) Energy Availability (GWh) 100,837 112,977 129,516 144,987 160,375 176,358 Energy Requirement (GWh) 101,934 112,690 124,398 137,093 150,822 166,283 Surplus/(Deficit) (GWh) (1,097) 287 5,118 7,894 9,553 10,075 /a Excludes non-utility capacity. Source: CEA. 1.25 Table 1.3 demonstrates that peak load and energy requirement are both estimated to grow at an average annual rate of around 10% during the five year period 1978/79 - 1983/84. 1.26 Table 1.3 also demonstrates that there will be a slight deficit in peak availability relative to demand and forecast energy availability will be slightly surplus to energy requirements. The forecast capacity deficit de- creases from around 5% of the system load in 1979/80 to around 2% in 1983/84 and the energy surplus, which is negligible in 1979/80, amounts to less than 62 of energy availability in 1983/84. These are minor variations which are much less than the accuracy of any of the forecast data inputs, but they do demon- strate that, if anything, a case could be made for sanctioning more capacity than presently planned, for commissioning during the five-year period ending 1983/84, particularly since data for All-India can mask shortages in specific regions. Planning in the power sector cannot be "fine-tuned" too precisely and there should be some leeway to assure good system reliability. Future Integrated Systems Operation 1.27 Planning of generation and transmission development has traditionally been undertaken by SEBs on the basis of individual projects since they operate within their own States and have no authority to make evaluation of possible projects in a regional context to optimize investment decisions. The REBs have an important role in this planning. With the rapid growth of the power sector and with the resultant increasing complexity of operation, GOI also sees the necessity for an integrated national approach to sector development. The technical, economic and financial aspects of developing regional and national power systems require considerable analysis, discussion or alternatives, determination of design criteria for uniform adoption, and agreement among the States and the Center on the broad principles to be followed. The operation of such systems would require large numbers of personnel who would have to be trained in the use of sophisticated load dispatch equipment and interconnected systems operation.  - 8 - 1.28 A beginning was made with the creation of Regional Boards during the period 1964-66. However, since the REBs have no statutory powers and their effectiveness depend upon the cooperation of their constituent SEBs, progress in the development of regional power systems has been slow. Collaboration with the SEBs has been most successful in the Southern Region, where the regional load dispatch center at Bangalore has successfully encouraged the exchange of power between States and facilitated integrated operation of the power systems in the region. Equipment for the establishment of regional and State load control centers, financed through Credits 377-IN and 604-IN, has been or is being ordered and, when installed, will facilitate the progressive integration of power systems in other regions. 1.29 UNDP is assisting CEA in establishing a systems operation organiza- tion and in developing programs for training staff that would be needed to run the regional and national power systems when they are established. The UNDP project covers, principally, the purchase and installation of sophisti- cated training equipment and the training of engineers to operate the load despatch centers. Progress on this project was discussed during negotiations. The GOI representatives explained that the scope of the project had been redefined and discussion of the revised scope was awaiting the appointment by UNDP of a new Project Manager. In the meantime however CEA is proceeding with the procurement of load despatch equipment (largely financed by the Association under Credits 377-IN and 604-IN) and with the recruitment and training of engineers. A large number are already under training in India and some 80 or more engineers have been identified for training fellowships; of the latter 39 have already been taken up. 1.30 GOI has established a committee to determine standard design para- meters to be adopted in the construction of 400 kV transmission lines, and Teshmont Consultants, Inc. of Canada has been engaged by CEA to assist in the detailed studies for developing the 400 kV system. CEA has also started work on the development of a long term national plan for power development in India 1/; the 400 kV system study is an essential part of this study. 1.31 The organizations which are to construct and operate the regional and national grid and the status of work regarding the development of policies for the technical, economic and commercial operations of the national power system were discussed with representatives of GOI and CEA during appraisal. These matters have been the subject of continuing dialogue during the past 2-3 years and, although GOI and CEA have expressed a clear understanding of the issues involved, they have consistently expressed the view that it is too early to formulate policy decisions on these issues. However, the first phase of the 400 kV system studies has now been completed. This recommends full integrated regional operation throughout India by 1985 and includes some 15,000 km of 400 kV AC transmission plus around 1,000 km of HVDC line and four HVDC back-to-back regional "interties" (see map). Details are shown in Annex 1. I/ IDA Credit 604-IN (Fourth Power Transmission Project, approved in January 1976) includes provision to help finance the cost of consultants for this study.  - 9 - 1.32 Some of the transmission lines itemized in Annex 1 are already being contructed by the SEBs under their own development programs and by NTPC in association with the central thermal power projects but a great deal of con- struction work remains to be done, which highlights the need for central control to ensure efficient coordination of construction. 1.33 Although centralized responsibility for the construction and ulti- mately for the operation of the national inter-connected grid would appear to be the ideal solution and a central organization for this purpose might ultimately be set up, because of unacceptable legislative delays (bearing in mind the time schedule) and GOI's reluctance to set up yet another organiza- tion at this stage, it would seem that the SEBs, NTPC and NHPC will continue to construct these transmission lines as they fall within their respective areas of responsibility. 1.34 Discussions were also held with representatives of the manufacturing and contracting industries during appraisal. Manufacturing capacity does not present a problem as GOI is willing to import material to supplement domestic production capacity as required. There are three firms in India capable of constructing 400 kV transmission lines. Their total capacity is 2,000 km per annum, whereas at the peak the 400 kV program will require construction of more than 4,000 km per annum. All three firms confirmed that they would be capable of mobilizing to meet an annual target of this magnitude provided they obtained a clear signal and necessary approvals from GOI in good time. 1.35 The above issues were discussed further during negotiations. With regard to the 400 kV construction recommended by Teshmont in the first phase of the system studies, GOI explained that a reduction in the forecast generat- ing capacity consequent upon a review of the Tenth Annual Power Survey has necessitated rephasing the tramsmission program. In particular, the HVDC recommendations are being carefully evaluated by CEA and a decision regarding the adoption of HVDC "interties" and long distance transmission as an alter- native to Alternating Current has yet to be made. If the HVDC component is decided upon GOI agreed that the technology would need to be imported. GOI further explained that CEA is setting up a central coordination and monitoring team comprising the Chairmen of NTPC and NHPC, two Joint Secretaries and the CEA Chairman and Member for Power Systems, to coordinate and monitor the construction of the 400 kV power system. 1.36 With regard to the capacity of industry in India to fabricate and construct the equipment for the transmission development program, the GOI representatives explained that the situation had been very carefully analyzed. Some of the SEB are now able to do their own fabrication and construction and taking this into consideration together with the facilities of the construc- tion companies, expanded as necessary, there was every confidence that the program could be handled within the time span planned. 1.37 Looking ahead, it appears that the systems will operate on a regional basis on completion of Phase 1 (1985) with the REBs responsible for operation and control until around 1990 when the national power system is set up. It would seem that overall control, when the national system comes into  - 10 - operation, should be the responsibility of a central authority such as CEA whose function would be to optimize the operation of generating plant nation- wide on a merit-order basis. If this is the likely scenario, the roles of the REBs and CEA would have to be cleariy established. Both the REBs and CEA would have to be strengthened to perform these functions. These matters were also discussed during negotiations. The GOI representatives explained that CEA is responsible for ensuring the REBs would be adequately equipped and staffed to handle their responsibilities for the operation of an inter- connected system. Selection and training of staff and acquisition of equip- ment is already underway and is expected to be substantially completed within 4-5 years. A continuing dialogue between the Bank and GOI will be maintained on these aspects as part of the project supervision program and appraisal of future power projects. II. THE BENEFICIARY - NATIONAL THERMAL POWER CORPORATION LIMITED 2.01 The Borrower of the proposed Credit and Loan would be the Government of India and the Beneficiary would be NTPC. A Development Credit Agreement and a Loan Agreement would be entered into between GOI and the Association, a Project Agreement between NTPC and the Association and a Subsidiary Loan Agreement between GOI and NTPC to cover the onlending of the Credit and the Loan. 2.02 NTPC was established in 1975 under the Companies Act 1956, and the Electricity (Supply) Act, 1948 has been amended to give the Corporation statu- tory recognition. NTPC is responsible to GOI and has an initial authorized share capital of Rs 1,250 million (US$145 million). The Corporation is managed by a Board of Directors of not less than four and not more than fifteen, some of whom are part-time. 2.03 The main objectives for which the Corporation has been established are: (i) to design, construct, and operate large central thermal power stations and projects; and (ii) to distributt and sell the power generated. NTPC would initially own and operate the associated 400 kV transmission system over which power would be distributed and sold in bulk to State Electricty Boards, but this will eventually become part of the 400 kV interconnected system forming the national grid. 2.04 NTPC presently plans to construct four central thermal power sta- tions, one with a capacity of 2,000 MW, two with a capacity of 2,100 MW each and one with a capacity of 1,100 MW (to be expanded ultimately to 1,600 MW). The first to be constructed is Singrauli, located on the coal fields in Uttar Pradesh; the second is at Korba on the coal fields in Madhya Pradesh; the third is at Ramagundam on the coal fields in Andhra Pradesh and the fourth  - 11 - (ultimate planned capacity 1,600 MW) is at Farakka on the coal fields in West Bengal. It is also possible that NTPC might ultimately take over the 300 MW Badarpur station near Delhi (ultimate planned capacity 700 MW), presently owned by GOI. (Presently NTPC is in charge of the operation of Badarpur on a management fee basis). 2.05 The construction of the Korba and Singrauli projects has commenced (see paragraph 1.02) and work is progressing satisfactorily. In the case of Singrauli, project engineering is proceeding according to schedule, founda- tion work and piling is well ahead of schedule and major contracts for plant and equipment have been awarded. The Korba project which commenced some twelve months behind Singrauli is also proceeding satisfactorily; preliminary site works comprising the construction of roads, railway siding and water and power supplies are in hand, engineering and design works are proceeding on schedule and tenders for the main plant and equipment have been issued (contracts for the generators and boilers should be awarded shortly). Bulk Supply Tariffs 2.06 NTPC will in due course enter into contracts with the recipient SEBs for the sale of bulk power. In view of the pattern of future development in the power sector which, on present planning, envisages NTPC power stations forming part of a national power system by the early 1990s, the formulation of a long-term bulk tariff policy is likely to be complicated by the different: types of bulk transfers which will by then be involved. Thus, it is premature to go much beyond a brief outline of principles at this juncture. 2.07 The general principle of a bulk tariff which, ideally, should con- sist of an annual demand charge per kW of capacity allocated based on total fixed costs (which would be a minimum charge) plus an energy charge which would reflect short-run marginal costs was discussed with GOI at the time of the Singrauli appraisal. This principle was agreed by GOI and it was also agreed that from time to time such a bulk tariff would have to be revised to take account of changes in both fixed and variable costs and to meet rate of return targets (see paragraph 5.10). As in the cases of Singrauli and Korba, GOI's proposal is that 85% of Ramagundam's power would be allocated, the remaining 15% being sold in accordance with priorities, to be determined by CEA, to States with the greatest need. An important consideration is to protect NTPC's revenues to ensure that income from the sale of bulk power will be adequate at all times to meet fixed and variable costs and provide the agreed rate of return. To the extent that there is likely to be a continuing capacity shortage for the foreseeable future, GOI's proposal outlined above would be acceptable for the Project, comprising the first 600 MW of a planned 2,100 MW power station. During negotiations the GOI representatives advised that four of the recipient areas (Andhra Pradesh, Karnataka, Tamil Nadu and Goa) have already given written undertakings to purchase 85% of the output of power from the Project. A written undertaking from the remaining SEB (Kerala) is to be forwarded to the Bank shortly. NTPC agreed during negotiations to sell the output of power from the Project to SEBs under bulk supply contracts satisfactory to the Bank. NTPC has prepared a form of bulk supply contract for the sale of power to SEBs during the period prior to the formation of a national power system. This is presently being examined in the Bank.  - 12 - 2.08 The bulk supply tariff would be based on marginal cost pricing principles adjusted, as necessary, to meet financial requirements and insure the financial viability of NTPC. This would encourage the recipient SEBs to modify their own tariffs and tariff policies accordingly. A study of the Andhra Pradesh power tariffs based on marginal cost principles was carried out by the Bank in 1975 and nine other SEBs have since carried out similar studies in connection with various credits. GOI stated during negotiations that undertakings had been given by Karnataka Tamil Nadu and Kerala - the other States in the Southern Region-to carry out similar tariff studies. 2.09 A high level committee has been established to review the power supply industry in India, including the financial workings of the SEBs. This review is, inter alia, to examine issues connected with rationalizing the tariff structures of the SEBs, and the marginal cost based tariff studies carried out by the SEBs should provide a useful input to this review. It was agreed during the Korba negotiations (Credit 783-IN) that any decisions on the timing for introducing modifications to the SEB's tariff policies would await the recommendations of this review. This matter was discussed during negotiations and the GOI representatives advised that the committee's report is expected within 12 months. Organization and Management 2.10 NTPC's organization is shown in Annex 2. Good progress has been made in building up the organization since early 1976 when the Chairman was appointed. The principal departments have been established, including the Mechanical and Electrical Design Departments, which together form the Plant and Equipment Engineering Group, the Civil Design and Systems Engineering Departments, which form the Civil and Systems Engineering Group, and the Operation Services Department. The number of staff appointed as of March 31, 1978 was 454. 2.11 NTPC is developing along sound lines and has a Chairman and Managing Director who is a competent administrator with an established reputation in the formation and development of large industrial undertakings. He has taken great personal interest in developing a comprehensive project management system as well as designing the organization and procedures. Providing there is no deterioration in its management NTPC should, with appropriate expansion and with the assistance of consultants, be capable of handling the present large development program (see paragraph 4.16). Training 2.12 In India, training of engineers and operators for the operation and maintenance of thermal stations has been inadequate and this has been reflected in the under-utilization of generating plant with outages for periods longer than normally required for maintenance. With the proposed growth of power generation by 1983/84, involving an increase in the work force of some 40,000 highly skilled workers, the need for training cannot be too highly stressed.  - 13 - 2.13 NTPC places special importance on this aspect of its organization and training programs are being developed by the Corporation which will, in due course, be backed by a training school equipped with a simulator, financed with Credit 793-IN, and other modern facilities for instructing and training the operating staff. 2.14 The first generating units are not scheduled to go into commercial operation until 1981/82, and the formulation of programs for the training of operating staff is not of immediate importance. Consequently, earlier train- ing will concentrate on pre-operational spheres of activity such as Planning, Design, Construction, and Management. Most of the activities so far are related to a one-year professional engineering training course for fresh graduates in civil, mechanical, electrical and instrumentation engineering. The training of the first intake of 35 executive trainees was completed on February 4, 1978 and these engineers have now assumed executive responsibil- ities. The training program for the second intake of 46 trainees was in progress at the time of appraisal. Formulation of training courses for operational staff will be undertaken in due course. 2.15 Special emphasis is placed on on-the-job training. The methodology includes classroom lectures, participation in group exercises and discussions supported by direct reading, audio-visual presentations and plant visits. Other training programs are currently being designed in Supervisory Develop- ment, Management Development and Induction-cum-Orientation. Overall training plans and arrangements at this time are satisfactory. Accounting Systems 2.16 Good progress has been made in planning NTPC's accounting organiza- tion. It has prepared and introduced a comprehensive chart of accounts and is maintaining adequate records. It has employed accounting consultants, Messrs. A.F. Ferguson and Co. of Bombay to assist in designing and developing systems in areas of financial accounting such as plant accounting, procurement and inventory control and for financial reporting generally. Audit 2.17 The audit of NTPC books would be made by an independent auditor appointed by the Company Law Audit Board, on the recommendation of the Auditor General of India. The auditor appointed would normally be a member of the Indian Institute of Chartered Accountants and his audit report on NTPC's financial statements would be subject to comment by the Auditor General. Messrs. V.K. Mehta and Company, Chartered Accountants, Delhi, were appointed to audit NTPC's accounts. Audits covering the financial periods November 7, 1975 to March 31, 1977 and April 1, 1977 to March 31, 1978 have been completed and these audit reports expressed satisfaction with the state of the company's affairs during these periods. NTPC has already undertaken, in connection with Credits 685-IN and 793-IN, to submit to the Association audited financial statements within seven months of the close of the year to which they relate, together with a certified report by the auditor and a review of the accounts by the Director of Commercial Audits. This has been restated in connection with the proposed Credit/Loan.  - 14 - III. DEMAND AND MARKET ASPECTS Demand for Power - All India 3.01 The demand for power in India has consistently been greater than available capacity, principally because of financial constraints and lack of plant maintenance but also because of failure, through poor planning, to meet the targets for bringing new plant into operation. Installed generating capa- city reached 18,500 MW by 1973/74 compared to the target of 23,000 MW, and load restrictions, which have been mainly directed at industry, have adversely affected the economic performance of the country. This, together with the oil crisis in 1973/74 and the failure of two monsoons, which reduced the avail- ability of hydro power, were the main reasons for the slow down in load growth during the early 1970s. For the 20 years or so prior to 1970, sales of kWh had been increasing at an average of 11-12% per year. The statistics shown in Table 3.1 below indicate that the average annual growth rate declined from about 10% in 1969/70 to just over 5% in 1974/75, resuming the previous trend with a growth rate of about 13% in 1975/76 and 1976/77 and falling again to less than 5% in 1977/78. Table 3.1 Sales and Energy Data for 1969/70, 1974/75, 1975/76, 1976/77 and 1977/78 1969/70 1974/75 1975/76 1976/77 1977/78 (Estimated) Installed Capacity (excl. non-utility plant (MW) 14,102 18,317 20,117 21,468 23,884 Electricity Generated (GWh) 51,988 70,191 79,231 88,333 91,185 Electricity Sold (GWh) 41,061 52,632 60,246 66,608 68,760 Electricty Generation per Capita (kWh) 96.2 119.2 132.5 147.2 152.0 Electricity Consumption per Capita (kWh) 76.0 89.9 100.3 111.0 114.6 Average Annual Load Factor (%) 49.7 51.4 52.2 54.2 50.8 Proportion of Sales (%): Agriculture and Irrigation 9.2 14.5 14.5 14.4 14.5 Railway Traction 3.5 2.9 3.1 3.3 3.0 Industry 69.1 62.1 62.4 62.5 62.5 Commercial and Government 6.5 8.5 7.3 7.3 7.5 Public Lighting 1.0 1.1 1.0 0.9 1.0 Domestic 8.6 8.5 9.7 9.5 9.5 Public Waterworks, Drainage, etc. 2.1 2.4 2.2 2.1 2.0 Average Annual Growth of Sales (%) 9.9 5.3 14.5 10.5 3.2 Losses as % of units sent out 16.8 20.5 19.4 19.7 19.8 Source: Statistics supplied by NTPC.  - 15 - 3.02 The improved performance in 1975/76 and 1976/77 was due to a variety of factors, including better monsoons, commissioning of new capacity and better utilization of existing plant. The decline in the growth rate in 1977/78 to close to 3% was due to a number of unforeseeable factors; one of the nuclear generating units was out of service for most of the year because of damaged turbine blades and labor unrest, some of the major generating units had very long outage periods and the periods of stabilization of the new large generat- ing units were longer than anticipated. Power cuts due to capacity shortage in some of the States - e.g., Maharashtra - was also a contributory factor. However, GOI expects a resumption of the higher growth rate of 1975/76 and 1976/77, and an average annual growth rate of about 10% has been forecast through 1984 (see paragraph 1.25). This is a reasonable growth rate for India at its present stage of economic development. Demand for Power - Southern Region 3.03 The central thermal power stations will, ultimately, form part of the national power system but in the medium term they are intended to supply power to the SEBs in the Region in which they are located. The Ramagundam project is in the Southern Region and its power will be available to the Andhra Pradesh, Kerala, Karnataka and Tamil Nadu SEBs, with a small allo- cation to Goa. 3.04 Table 3.2 shows the past and future forecast trend of power con- sumption in the four States of the Southern Region. Restrictions were in force in Andhra Pradesh during the early 1970s, because the annual increase in installed capacity did not keep pace with the increasing demand, and load growth was in the neighborhood of 5% per annum. This improved to around 13% per annum by 1975/76 and fell to 9.4% by 1977/78. It is projected to increase to around 12% by 1979/80 and continue at this annual rate through the early 1980s. 3.05 Restrictions were in force in Karnataka and Tamil Nadu for similar reasons during the early 1970s, but after 1976, with surplus power available for transfer from Kerala and Andhra Pradesh, restrictions were lifted. Load growth in Kerala, Karnataka and Tamil Nadu during the early 1970s was restricted by plant availability and, in the case of Kerala, poor monsoons. It picked up during the late 1970s and is forecast to increase at an average annual rate of around 9% through the early 1980s in all three States. Indus- try accounts for about 60% of the sales of electrical energy in the Southern Region; agriculture and irrigation about 20%.  - 16 - Table 3.2 Andhra Pradesh Kerala Karnataka Tamil Nadu Energy Growth Energy Growth Energy Growth Energy Growth Year Sent Out Rate Sent Out Rate Sent Out Rate Sent Out Rate Actual GWh % GWH % GWh _ GWh % 1973/74 3,343 - 2,221 - 4,558 - 6,850 - 1974/75 3,514 5.1 2,238 0.8 4,692 2.9 7,123 4.0 1975/76 3,971 13.0 2,461 10.0 5,401 15.1 7,717 8.3 1976/77 4,583 15.4 2,643 7.4 5,648 4.6 7,883 2.2 1977/78 5,014 9.4 2,851 8.0 5,215 -7.6 8,986 14.0 Estimated 1978/79 5,471 9.1 3,240 13.6 7,314 40.2 9,829 9.4 1979/80 6,159 12.6 3,534 9.1 8,067 10.3 10,635 8.2 1980/81 6,920 12.3 3,845 8.8 8,886 10.1 11,491 8.0 1981/82 7,761 12.1 4,169 8.4 9,774 10.0 12,393 7.8 1982/83 8,686 11.9 4,501 7.9 10,739 9.9 13,339 7.1 1983/84 9,720 11.9 4,900 8.8 11,790 9.8 14,400 7.9 Source: NTPC and CEA. 3.06 Table 3.3 shows the forecast capacity and energy availability for each of the SEBs in the Southern Region for the year 1983/84 which is the year during which the Project is progressively commissioned. It will be seen from this table that Andhra Pradesh and, to a lesser degree, Kerala are fore- cast to have surplus capacity and energy and Karnataka and Tamil Nadu are forecast to have capacity and energy shortages. The transmission system in- cluded in the Project provides for power to be wheeled through Andhra Pradesh via Nagajunasagar and Cuddapah to Bangalore in Karnataka, and to Katpadi in Tamil Nadu. Power would be wheeled from Bangalore to Kerala over the existing system.  - 17 - Table 3.3 Tamil Central Nadu Sector Total Andhra (including (Including Southern Pradesh Kerala Karnataka Pondicherry) Ramagundam) Region 1983/84 Installed Capacity (MW) 3,145 1,137 2,644 3,359 1,500 /a 11,785 Peak Avail- ability (MW) 2,251 940 1,836 2,091 540 7,658 Peak Load (MW) 1,747 917 1,979 2,713 - 7,356 Surplus/ (De- ficit) (MW) 504 23 (143) (622) 540 302 Energy Avail- ability (GWh) 13,636 5,531 10,006 11,661 3,500 44,334 Energy Require- ments (GWh) 9,720 4,900 11,790 14,400 - 40,810 Surplus/(De- ficit) (GWh) 3,916 631 (1,784) (2,739) 3,500 3,524 /a All newly commissioned plants which do not come fully on stream until after 1983/84. Source: NTPC and CEA. 3.07 The forecast power and energy requirements of the Southern Region until 1983/84 assumes that the generation development program will be adequate to meet the forecast load growth. In 1983/84 a small capacity deficit is forecast which would be offset by the commissioning of the first two Ramagundam 200 MW units in that year to give a capacity surplus of just over 300 MW. This is sound planning, essential to secure a reliable power supply. The estimates of capacity available by 1983/84 assume that eight ongoing projects and nine newly sanctioned projects, comprising, in aggregate 12 hydro and five thermal projects, all due to yield benefits during the period 1978 through 1983, will be completed and commissioned on schedule. There have always been slippages in the past and it would be unreasonable to assume that all 17 projects will be commissioned on schedule without slippage. Secondly, demand estimates in the above forecasts include very little contingency. Thirdly, even if all projects are commissioned on schedule, the surplus capacity represents onlY about four months growth in power demand in the region. However, in the un- likely event that the Southern Region has surplus capacity for any reasonable period, power will be available for transfer to deficit SEBs in the Western Region over existing or planned transmission lines.  - 18 - IV. THE PROGRAM AND THE PROJECT The Program 4.01 NTPC's present program of development, comprising the four Central thermal power stations (Singrauli, Korba, Ramagundam and Farakka) together with associated 400 kV transmission, is part of the future power development program for India which is described in paragraphs 1.22 through 1.26. 4.02 The Ramagundam 2,100 MW development is the third planned devplop- ment in the series of large thermal power stations, proposed by GOI, to feed into a 400 kV interconnected transmission system and supply bulk power to the SEBs. GOI proposes to construct Ramagundam concurrently with the Korba and Singrauli developments but with commencement of work and commissioning of units lagging about sixteen months behind Singrauli and six months behind Korba. In the case of Ramagundam, major contract awards are planned for July 1979 and commissioning of the last unit (500 MW) is scheduled for July 1987. 4.03 The proposed site of the Ramagundam development is in the Karimnagar District of Andhra Pradesh south of the Godavari river and in the vicinity of the South Godavari coal fields. Site selection was based on ready avail- ability of cooling water, coal and transportation facilities. Two thermal power stations belonging to The Andhra Preadesh State Electricity Board (APSEB) are already operating in the area and, consequently, infrastructure facilities are available. Preliminary soil investigations indicate that the main foundations for the turbine house, boiler and stack could rest directly on rock at a depth of 6.0 meters with a safe bearing capacity of 35 t/m . Condenser cooling will be by cooling tower with cooling water drawn through the right bank irrigation canal from the Pochampad dam which is located some 100 km upstream of the power station. This canal has already been constructed up to 10 km from the project area. A balancing reservoir is to be constructed at the end of this canal which will store up to three months requirement of water in the unlikely event of a serious canal breach. Agreement has been reached with the Irrigation Department of Andhra Pradesh that the requirements of the power station for 365 days will be supplied in a period of 300 days. This implies a maximum shutdown of the canal of two months for any reason. These arrangements are satisfactory. 4.04 As in the case of Korba the proposal is that the 2,100 MW Ramagundam development should consist of 3 x 200 14W and 3 x 500 MW generating units together with associated 400 kV transmission, in the case of Ramagundam amounting to about 1,200 circuit km. 4.05 Coal for the power station will come from the South Godavari coal fields of the Singareni collieries, and the mines to be linked with the power station are located some 15 km from the proposed power station site. Con- sumption will be about 7 million tonnes per year when fully developed and production of power grade coal, which was around 3 million tonnes in 1976/77,  - 19 - will be stepped up to meet this additional requirement as and when necessary (see paragraph 4.12). As in the cases of Singrauli and Korba, coal will be transported to the power station by double track unit train on the merry-go- round system. The Project 4.06 The Project, which represents the first phase of the Ramagundam development, consists of: (a) civil works comprising acquisition of land, con- struction of roads, culverts, railways and other miscellaneous preliminary works, power station and residential buildings, plant foundations, canals, ducts, cooling towers and other works associated with the circulating water system; (b) three 200 MW turbo-generating units and three 680 tonnes/hr boilers complete with all auxiliaries and ancillary electrical and mechanical equipment and the switchyard; and (c) the 400 kV transmission comprising two 200 km lines from Ramagundam to Hyderabad in Andhra Pradesh, a 400 km line from Hyderabad to Cuddapah via Nagar- junasagar, a 230 km line from Cuddapah to Bangalore in Karnataka and a 200 km line from Cuddapah to Katpadi in Tamil Nadu. Estimated Cost 4.07 The estimated cost of the Ramagundam 2,100 MW power station together with associated transmission is about Rs 11.4 billion (US$1.3 billion). The estimated cost of the Project as defined in paragraph 4.06 is Rs 4,395 million (US$511 million) excluding interest during construction. On the assumption that most contracts will be won by Indian suppliers, the direct and indirect foreign currency costs are estimated at Rs 555 million (US$64 million). The estimated costs of the principal features of the Project are shown in Table 4.1 below and in more detail in Annex 3.  - 20 - Table 4.1 ---Rupees (million)-- ---US$ (millions)--- Local Foreign Total Local Foreign Total Preliminary Works 24.1 - 24.1 2.8 - 2.8 Main Civil works 512.8 8.8 521.6 59.6 1.0 60.6 Electrical and Mechanical Plant 1,270.2 278.1 1,548.3 147.8 32.3 180.1 Coal Handling and Trans- portation Equipment 244.7 26.6 271.3 28.5 3.1 31.6 Transmission 863.5 107.0 970.5 100.4 12.4 112.8 Sub-total 2,915.3 420.5 3,335.8 339.1 48.8 387.9 Contingencies (Physical) 170.2 21.5 191.7 19.8 2.5 22.3 Contingencies (Price) 537.9 81.2 619.1 62.5 9.4 71.9 Total 3,623.4 523.2 4,146.6 421.4 60.7 482.1 Engineering and Administration 217.0 31.4 248.4 25.2 3.7 28.9 Total Cost of Project 3,840.4 554.6 4,395.0 446.6 64.4 511.0 Interest During Construction 562.0 - 562.0 65.0 - 65.0 Total Financing Required 4,402.4 554.6 4,957.0 511.6 64.4 576.0 4.08 The proposed Credit and Loan aggregating US$250 million, represent- ing 49% of the cost of the Project, should be applied to the cif and/or ex- factory costs of plant and equipment (see paragraph 4.18). Civil works, plant erection costs, inland transportation costs, interest during construction and any other costs, including plant and equipment costs not financed from the Credit, aggregating about US$326 million, would be financed by GOI in the form of loan and equity capital. Basis for Estimates 4.09 The estimates for the 200 MW units and boilers are based on quota- tions received in mid-1978 for similar plant for the Korba project,escalated by 7% per annum to bring these to estimated base prices for 1979, the year in which the Ramagundam plant is to be ordered. The estimates for associated equipment are based on the latest cost of similar equipment which is presently being manufactured in India and,- where available, on actual prices quoted for similar equipment for Singrauli and Korba, escalated by 7% per annum to the year of placing order. Transmission estimates are based on the costs of 400 kV construction at various locations in India, as advised by CEA. A physical contingency of 10% has been allowed on civil works to provide for unforesee- able factors and possible delay in project completion, and a physical contin- gency of 5% has been allowed on plant and transmission costs. In assessing price contingency, it has been assumed that fixed-price contracts will be obtainable for coal handling equipment. Base 1978 costs for such plant plus physical contingencies have been escalated at 7% per annum to the year of placing contracts and then held constant; erection costs have been escalated at 7% throughout the construction period, thus giving an overall price con- tingency of 13%. Other electrical and mechanical equipment, transmission  - 21 - costs and civil works have been escalated at 7% per annum throughout the con- struction period, giving respective overall price contingencies of 21%, 17% and 18%. The maximum price contingency of 20% embodied in the Korba contract has been assumed for the generating units and boilers for Ramagundam. 4.10 The breakdown between foreign and local costs is based on the probability that local manufacturers will submit the lowest conforming bids for major items of plant under international bidding procedures. Status of Engineering and Implementation 4.11 As in the cases of Singrauli and Korba, the Ramagundam development comprises a number of major works which must be carefully coordinated to en- sure efficient progress to completion. The Project implementation and con- struction schedules shown in Annexes 4 and 5 set out the program of work fron the preparation of specifications and award of contract through the construc- tion stages for both the power station and transmission facilities to the point of commissioning. Much of the detailed power station engineering and design work carried out for the Singrauli and Korba projects is applicable to Ramagundam and consequently this work should proceed rapidly. The preparation of specifications for the power station is already in hand. The construction schedule assumes that major power station equipment contracts can be placed by mid 1979 and transmission contracts by end 1979 for the towers, and September 1980 for conductor and hardware. The first 200 MW unit is scheduled for com-- missioning by July 1983 and the Project will be completed by July 1984. NTPC's implementation and construction schedules were discussed during ap- praisal and it was agreed that these assumptions are realistic if the Projeci: is considered in isolation. However, this Project is part of an overall devel- opment program which is being undertaken by NTPC, with some 7,300 MW of plant and some thousands of km of 400 kV transmission coming into operation at phased intervals over the next ten years. Even with the most careful coor- dination and efficient supervision of construction, there is considerable risk of slippage. This problem is discussed further in paragraphs 4.15 and 4.16. 4.12 Land acquisition is in hand and no problems are anticipated. Pre- liminary soil tests have been carried out at the power station site (see para- graph 4.03) and availability of adequate coal reserves in the South Godavari coal fields has been proven. Production of power grade coal is to be stepped up gradually to 10 million tonnes per annum to meet present demand and the demand of the Ramagundam development by the time the 2,100 MW plant has been commissioned. GOI agreed during negotiations that necessary steps will be taken to ensure adequate coal supplies for the efficient operation of the Project by the time the first generating unit is commissioned. Consultants 4.13 Consultancy arrangements for the Project were discussed in some de- tail with GOI and NTPC during appraisal. Since the detailed design of the main plant (generating units, boilers and transformers) and specifications would be similar to the Singrauli and Korba projects with minor modifications, which could be handled by NTPC, GOI expressed confidence that NTPC would be  - 22 - capable of managing the project throughout the design and construction stages with a decreasing input from outside consultants. GOI stressed that NTPC had built up its own organization to deal with the coordination of inputs and to administer the Project. It has set up a strong technical services division and established groups to take charge of project planning, site supervision, procurement, expediting and quality assurance. 4.14 The consulting arrangements for the Korba project included the appointment of the Thermal Design Organization (TDO) of CEA as principal review consultant and the appointment of a retainer consultant experienced in the design of large thermal power stations comprising 200 MW units and larger to (i) review NTPC's basic engineering and design; (ii) assist in the more sophisticated areas of design and (iii) provide a back up review of spe- cifications for generating units, boilers, transformers and other specifica- tions as required by NTPC and the Association. A consultant was also appointed to assist in the design and supervision of construction of the 400 kV trans- mission. Additionally NTPC employs sub-consultants to carry out the detailed engineering for the support systems. The extent of continuing assistance from consultants was discussed during negotiations and it was agreed that since the basic designs for the Ramagundam project would be largely of a repetitive nature, a retainer consultant satisfactory to the Bank would be engaged to (i) review deviations from the earlier power station designs and (ii) assist NTPC as necessary in the design of and preparation of spe- cifications for the power station. NTPC will also appoint consultants to assist, as required, in the design and supervision of construction of the 400 kV transmission. 4.15 Another matter which was discussed in detail during appraisal was the capability of NTPC to coordinate and efficiently supervise a construction program comprising some 7,300 MW of generating plant and some 6,000 km of 400 kV transmission and at the same time build up a recruitment and training program for the several thousand staff who are to be engaged, over a period of time, to operate the power stations as these are commissioned in their various stages. GOI expressed confidence in NTPC's capacity to handle this large program efficiently and on schedule. 4.16 NTPC is a growing organization and must, of course, continue to grow to meet its expanding responsibilities. At the present time, a highly motivated team is developing under a competent Managing Director. Although NTPC has no prior experience on any major construction project, much less a massive program of this nature with investment aggregating some US$5,000 million, it is also confident of its ability to handle this work and its per- formance in establishing its management team is good. However, the present consultancy arrangements do not provide for any input on program coordination and supervision of construction of the power stations, and it is in this area where NTPC's lack of experience can result in costly mistakes and delays. This matter was discussed during negotiations and in view of the importance of this program to the development of the Indian power sector, its risks and the costs involved, GOI and NTPC agreed to obtain the services of a consultant, satisfactory to the Bank, with wide experience in the coordination and super- vision of large construction projects to review NTPC's project management and information systems and their initial implementation.  - 23 - Procurement 4.17 Procurement of all equipment to be financed from the proposed Credit and Loan would be on the basis of international competitive bidding in accord- ance with the Association's guidelines. Bidding documents for such equipment, including recommendations for award of contracts, would be prepared by NTPC with the assistance of its consultants, and approved by the Association. Because of NTPC's consultancy arrangements and to avoid problems of contract coordination, the invitations to tender for major plant contracts would be on a supply, deliver and erect basis. This would include civil works in certain cases where these cannot be disassociated from the plant contract - i.e. coal handling, substation structures, transmission lines, etc. Local manufacturers would be expected to bid for all categories of equipment. A domestic prefer- ence of 15% or the import duty, whichever is less, would be applied in bid evaluation. Local manufacturers are likely to win the majority of contract awards, but to prevent procurement delays GOI agreed during negotiations that, in the event the lowest evaluated bidder for any contract is a foreign manu- facturer, permission to import will be forthcoming without further review by any agency of the Government. There are competent local contracting firms in India and also manufacturing facilities covering most of the equipment for the Project. Therefore, all work not financed wholly or in part from,the proposed Credit and Loan will be subject to local procurement and contracting procedures, which are satisfactory. Disbursements 4.18 Disbursements would be made against the cost of consultants retained to assist in the design and supervision of construction of the Project and against the cost of equipment and plant, including transmission equipment, on the following basis: (a) 100% of the ex-factory cost of equipment procured in India after international competitive bidding; and (b) the foreign cost of equipment procured from abroad. The Credit would be disbursed first and any balance of the Loan not used after commitments have been made for all items covered by the list of goods, could, with the agreement of the Bank, be used to finance other project related equip- ment. The estimated schedule of disbursements is shown in Table 4.2 below.  - 24 - Table 4.2 Schedule of Disbursements US$ Millions IBRD/IDA Fiscal Year Cumulative Disbursements and Half-Year at end of each Half-Year 1979/80 December 31, 1979 28 June 30, 1980 48 1980/81 December 31, 1980 70 June 30, 1981 115 1981/82 December 31, 1981 164 June 30, 1982 200 1982/83 December 31, 1982 224 June 30, 1983 235 1983/84 December 31, 1983 239 June 30, 1984 242 1984/85 December 31, 1984 246 June 30, 1985 250 The large disbursement of US$28 million by December 31, 1979 assumes that major plant orders will be placed during the first quarter of FY 1980. Ecological Aspects 4.19 The Indian National Committee on Environmental_Planning and Coordi- nation of the Department of Science and Technology has indicated no objection to the Ramagundam Project on environmental grounds, and during negotiations NTPC agreed to comply with all environmental quality standards prescribed by that committee, in the design, construction and operation of the Project. 4.20 Appropriate action will be taken during the Ramagundam design stage to deal with the principal environmental problems which are described below.  - 25 - (a) Location The proposed Ramagundam power station is a pit head station located in the vicinity of the South Godavari coal fields, and is remote from any settled area other than the colonies associated with the Project, the collieries, APSEB power stations and several indus- trial complexes located in the area. Accordingly, there is only the need to ensure the health and environment of the operating staff of the several plants and their families. (b) Stack Emissions Electrostatic precipitators will be installed and the stack will be of such a height that emitted particulate matter will be spread over a sufficiently wide area to reduce the density of pollutants to an acceptable level. The sulphur content of the coal is in the range of 0.3% to 0.6% which is low and does not present a pollution problem. (c) Ash Disposal The ash will be pumped as a slurry, through a pipeline, to an ash dump area located some 3 miles from the power station. Water will drain away in accordance with the natural configuration of the area and will have no detrimental effect on the local ecological system. 4.21 With regard to the safety and occupational health of employees, safety regulations for power stations, to which all operating personnel must conform, will be strictly enforced. As far as noise levels are concerned, the turbine hall of a modern steam turbine power station, the noisiest area, has a sound pressure level of less than 90 decibles and is well under the maximum acceptable threshold for the normal 8 hour/day shift worker. Completion Report 4.22 In order to inform the Bank and the borrower about the performance of the Project and the lessons learned during its execution, a completion re- port is required following the Closing Date of the credit. This matter was discussed during negotiations and NTPC agreed not later than six months after the Closing Date or such later date as may be agreed for this purpose between NTPC and the Bank, to prepare and furnish to the Bank a report of such scope and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, its cost and the benefit derived and to be derived from it, the performance by the Borrower and the Bank of their respec- tive obligations under the Credit and Loan Agreements and the accomplishment of the purposes of the Credit and the Loan.  - 26 - V. FINANCIAL ANALYSIS Introduction 5.01 NTPC was established in 1975 to construct and operate large Central thermal power stations and associated transmission (see paragraphs 2.02 and 2.03). Its first audited annual report was in respect of FY1977. It has no operating assets at the present time. 5.02 Forecasts of NTPC's annual financial operations for the period FY1979 through FY1990 are presented in Annexes 6 to 9. They are based on an investment program (Annex 7 page 2), which envisages the construction of 7,300 MW of thermal generating plant, together with 6,000 km of 400 kV trans- mission lines, all of which are expected to be commissioned by March 1987. The construction program remains virtually unchanged since the Korba Thermal Power Project was appraised in August 1977. 5.03 It is expected that NTPC will continue to expand its thermal genera- tion capacity by the construction of additional large sized plants. GOI con- firmed during negotiations that the transfer of ownership to NTPC of other GOI operating installations was not contemplated at this time. In addition NTPC has assumed responsibility for the management and accounting of the Badarpur thermal power station from April 1, 1978 on a management fee basis. This involves directing operations of the existing 300 MW thermal generating plant, responsibility for the ongoing construction of a 200 MW generating unit about to be commissioned, and for constructing an additional 200 MW generating unit already sanctioned. Future Earnings 5.04 Under present assumptions, NTPC will not become revenue earning until its first 200 MW generating unit is commissioned on January 1, 1982. Additional capacity expected to be brought into commercial operation in sub- sequent years is set out in Annex 6 page 2. Both GOI and NTPC agreed in connection with Credit 793-IN (Korba Thermal Power Project) that NTPC would achieve in FY1989 1/, and thereafter, a rate of return of not less than 9.5% on the historic cost of its average net fixed assets in service, and to set tariffs from the time of commissioning of the first generating unit in Singrauli or Korba, at levels not lower than the estimated tariffs necessary to achieve the required 9.5% return in FY1989. 5.05 During appraisal, the previous forecasts of energy output of the 200 MW and 500 MW generation units assumed in the Singrauli and Korba appraisals were reviewed and modified by extending the period expected to be needed to bring each generating unit up to 5,500 hours of operation a year by one year, and reducing the forecasts of energy output in the intervening periods (Annex 9,paragraph 2). Additionally the costs of the main plant and 1/ The first fiscal year in which all generating units at Singrauli were projected to operate at 5,500 hours a year.  - 27 - equipment have subsequently been increased to reflect the latest available prices. This has also contributed to increased operating costs. 5.06 The impact of the changed assumptions is that: (a) due to increases in both plant and operating costs and to the reduced forecasts of energy sales, the required sell- ing price would rise to about 26 paise/kWh from the 22 paise/kWh calculated in the Korba appraisal to achieve a 9-1/2% rate of return in FY1989; (b) the Singrauli Power Station (2,000 MW) would only achieve full commercial operation (5,500 hours per unit per year) in FY1990 instead of FY1989. The revised bulk supply price of about 26 paise/kWh would produce annual losses of Rs 486 million (US$57 million) during the initial four years of operation from FY1982 to FY1985 compared to losses of Rs 369 million (US$43 million) previously forecast for the initial three years, in the Korba proje!ct appraisal. 5.07 During the "going into business" period of FY1982-1985 when expenses are relatively high and sales relatively low, bulk supply prices of 51 paise, 33 paise, 30 paise, and 28 paise per kWh would have to be charged for operating revenues and expenses to break even. These would be unreasonably high and would be uncompetitive with SEB generating costs. For the short term, therefore, the initial losses should be regarded as an integral part of NTPC's development program. They would be financed by GOI equity subscription. 5.08 The amendment to Section 75A of the Electricity (Supply) Act, 1948, requires GOI to specify the surplus to be earned by NTPC to provide a rea- sonable amount to contribute towards the cost of capital works and for the payment of dividends. In view of the rapid build up of plant by NTPC, the absence of revenue until FY1982, the likelihood that there will be no addi- tional long term construction plans, other than those planned already, and the need to maintain competitive bulk prices for energy sales to SEBs, this would not be achieved by NTPC before FY1988. During negotiations, GOI explained that the determination of the appropriate amount of surplus would depend in part upon NTPC's future investment program at the time the organization be- came revenue-earning, which would not be until FY1982. Thus, it would be pre- mature to specify a surplus at this stage. However GOI confirmed that working capital requirements not met from NTPC's internal cash generation would be provided by financial institutions or GOI. 5.09 There is need for NTPC to consider the real value of assets as well as the original or historic cost. The GOI representatives, however, explained during negotiations that memorandum accounts which would note asset and depre- ciation data at current price levels would not be maintained by NTPC as these accounts were not required for commercial accounting purposes in India. How- ever, appropriate information would be available from the normal accounts  - 28 - maintained by NTPC which would facilitate such an exercise. NTPC must, of course. continue to present historic asset values in its official balance sheets, and depreciation in accordance with the principles to be laid down by GOI in consultation with CEA, as provided for in the financial amendments to the Electricity (Supply) Act, 1948. 5.10 The existing covenant agreed in connection with Credit 793-IN for Korba that NTPC would achieve in FY1989 and maintain thereafter a rate of return not less than 9-1/2% and to set tariffs from the time the first gene- rating unit at Singrauli is commissioned, at levels not lower than estimated to achieve the required 9-1/2% rate of return in FY1989 has been restated in the proposed project agreement. NTPC's Financing Plan FY1977-1986 5.11 NTPC's investment program during the project construction period FY1977 to FY1986 provides for: Work in Progress (a) Generating Plant Commissioned' end FY1986 200 MW 500 MW 500 MW Singrauli 5 2 Korba 3 2 1 Ramagundam 3 1 2 Farakka 3 1 (b) Transmission Lines (400 kV) associated with Km Km Singrauli 1,757 Korba 1,555 Ramagundam 1,230 1,095 Farakka 410 - 4,952 1,095  - 29 - 5.12 Table 5.1 below shows the financing plan for the total ten-year period, FY1977 through FY1986. Table 5.1 Total Total US$ million Rs million equivalent % Sources of Funds Internal Cash Generation 4,480.1 520.9 9 Less Debt Service (4,132.0) (480.4) (9) Deferred Charges ( 11.0) ( 1.3) - Working Capital (Increase) ( 685.2) ( 79.7) (1) Net Cash Generation ( 348.1) ( 40.5) (1) GOI Equity 25,351.1 2,947.8 53 GOI or other Loans and Credits 17,740.0 2,062.8 37 IDA Credit - Singrauli Project 1,290.0 150.0 3 - Korba Project 1,720.0 200.0 4 IDA Credit IBRD Loan - Ramagundam Project 2,150.0 250.0 4 Total Sources 47,903.0 5,570.1 100 To meet Construction Program (Including interest capitalized) 47,903.0 5,570.1 100 5.13 The financing plan provides for the construction of the ongoing Singrauli and Korba projects, the proposed Ramagundam Project and the tent:a- tive Farakka Project together with the continuing construction of the gene- ration and transmission referred to in paragraph 5.11 at an overall cost of Rs 47,903 million (US$5,570 million). The overall cost of the first phases of the Singrauli, Korba and proposed Ramagundam projects represent about 27% of this ten-year program. It is anticipated that GOI will request additional financial assistance for the balance of the program. NTPC expects to maintain a debt/equity ratio not exceeding 50/50. 5.14. The proposed IDA Credit and Bank Loan would be relent by GOI to NTPC on terms acceptable to the Bank. The terms of the onlending agreements in respect of the two previous Credits provide for final maturity in 20 years, including a grace period of 5 years, and repayment of principal in equal semi annual installments together with interest at 10.25% per annum. This is l:he rate at which GOI normally lends to industrial enterprises and compares with about 11% charged by domestic lending institutions for similar types of lending. Assurances were obtained during negotiations that GOI will provide the baLance of the capital needed to complete the Project on terms satisfactory to the Bank.  - 30 - 5.15 The remaining part of the investment program will be accomplished during the period FY1987 through FY1988. The following table indicates the expected growth of internal cash generation (net of debt service and working capital increases), and the surplus funds expected to be generated. Table 5.2 Year to March 31 FY87 FY88 FY89 FY90 ---------Rs millions--------- Net Cash Generation 585 1,340 2,112 2,631 GOI Capital 267 - - - Sources of Funds 852 1,340 2,112 2,631 Current Investment Program 852 171 - - Surplus Funds available for new investment program or dividends - 1,169 2,112 2,631 5.16 From Annex 7, it can be seen that NTPC would not generate sufficient internal funds to meet its requirements for working capital and loan amortiza- tion until FY1987. Until that time GOI's equity contributions would meet the shortfall. 5.17 A financially viable corporation such as NTPC, apart from financing a reasonable proportion of construction from its internal cash generation, would normally be expected to commence paying dividends on its paid-up share capital. Tariffs should therefore be expected to provide funds for this purpose. Assuming allocation of the surplus funds in FY1989 and FY1990 on the basis that annual appropriations to finance construction would equal 25% of a continuing annual investment of Rs 4,000 million (US$465 million), then NTPC might start paying dividends by FY1989. Future Finances 5.18 A Sources and Applications of Funds Statement is included in Annex 7. Condensed Balance Sheets as at March 31, 1977 (actual) through FY1990 (fore- cast) are shown in Annex 8. Table 5.3 below shows NTPC's projected financial position at March 31, 1982 (end of the year when NTPC becomes revenue earning), at March 31, 1985 (end of year following commissioning of the proposed Rama- gundam Project), and at March 31, 1990 (the year in which Singrauli Thermal Power Station (2,000 MW) would be operating 5,500 hours a year).  - 31 - Table 5.3 As at March 31 FY82 FY85 FY90 ------- Rs millions ----