India - Korba Thermal Power Project

FILE COPY = rDocument of FILE COPY The World Bank FOR OFFICIAL USE ONLY Repoer No. P-2186-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE KORBA THERMAL POWER PROJECT March 29, 1978 This doumet bs a reicted dIstibudin ad may be used by recipient ly In the perfonnaunce of their offi duies. Its cotents ay not odtewie be discloed witbout World Banck &horibatlon.  CURRENCY EQUIVALENTS Currency Unit = Rupee (Rs) Rs 1 = Paise 100 US$1.00 = Rs 8.6 Rs 1.00 = US$0.1163 Rs 1 million = US$116,279.06 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the U.S. Dollar/Rupee ex- change rate is subject to change. As of March 17, 1978, the exchange rate was Rs 8.18 to US$1.0). FISCAL YEAR April 1 - March 31 LIST OF ABBREVIATIONS AND ACRONYMS USED IN THIS REPORT GOI = Government of India NTPC = National Thermal Power Corporation Ltd. CEA = Central Electricity Authority SEB = State Electricity Board TDO = Thermal Design Organization DESU = Delhi Electricity Supply Undertaking kV = kilovolt = 1,000 volts kWh = kilowatt hour = 1,000 watt-hours MW = Megawatt = 1,000 kilowatts km = kilometer  FOR OTflCS1 US ONLY INDIA KORBA THERMAL POWER PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: National Thermal Power Corporation Limited. Amount: US$200 million. Terms: Standard. On-Lending Terms: From GOI to NTPC, with repayment over 20 years, including 5 years' grace, at an interest rate of 10-1/4% per annum. Project Description: Construction of the three 200 MW generating units at the Korba thermal power station, in the State of Madhya Pradesh, together with ancillary equipment and related works, and about 880 circuit km of associated transmission lines. The risks involved are no greater than can normally be expected with operations of this type. Estimated Cost: (uS$ millions) Items Local Foreign Total Preliminary Works 5.6 - 5.6 Main Civil Works 57.3 1.0 58.3 Electrical and Mechanical 107.7 24.9 132.6 Coal Transportation 25.0 4.5 29.5 Transmission 62.4 7.7 70.1 Training Simulator 1.4 3.0 4.4 Sub-total 259.4 41.1 300.5 Contingency (Physical) 15.6 2.0 17.6 Contingency (Price) 54.2 8.4 62.6 Engineering and Administration 23.3 1.9 25.2 Project Cost 352.5 53.4 405.9 Interest during Construction 33.1 - 33.1 Total Financing Required 385.6 53.4 439.0 This document ha a restricted distribution and may be used by recipients only in the perfomance of their official duties. Its contents may not otherwise be discloed without Worid Bank authorization.  Financing Plan: (US$ millions) Local Foreign Total IDA 146.6 53.4 200.0 GOI loan and equity 239.0 - 239.0 Total 385.6 53.4 439.0 . Estimated Disbursements: (US$ uiiliiuns) FY79 FY80 FY81 FY82 FY83 FY84 FY85 Total Annual 25.0 19.0 63.0 67.0 14.0 9.0 3.0 200.0 Cumulative 25.0 44.0 107.0 174.0 188.0 197.0 200.0 200.0 Rate of Return: 13% (using bulk supply tariff as indicator of benefits). Appraisal Report: Report No. 1733b-IN; dated March 10, 1978.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE KORBA THERMAL POWER PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to US$200 million on standard IDA terms, to help finance a project for the construction of the first phase of a proposed 2,100 MW thermal power station. The proceeds of the credit would be relent by the Government to the National Thermal Power Corporation Limited for 20 years, including five years' grace, at an interest rate of 10-1/4% per annum. PART I - THE ECONOMY 11 2. An economic report, "Economic Situation and Prospects of India" (1529-IN dated April 25, 1977), was distributed to the Executive Directors on May 3, 1977. Country data sheets are attached as Annex I. Background 3. India is exceptional among the Bank Group's member countries for its size and diversity; the country is divided into more than 20 States with a population of some 630 million speaking over 60 languages. Since Independ- ence the trend in growth of GNP has been about 3.5% per annum, or a little over 1% per annum in per capita terms, while over the five years 1971/72 - 1975/76 it fell to as low as 2.5% per annum, in spite of the record harvest of 1975/76. This unsatisfactory performance is only in part the result of the low availability of investable resources: while India's domestic savings effort compares well with other countries at the same average income levels, however, the net transfer of resources from abroad has never been above 3% of GNP, and fell to as little as 0.8% between 1969/70 and 1973/74. More signi- ficant perhaps is the fact that in spite of a marked rise in the investment rate from about 10% in the early 1950s to about 18% over the past fifteen years, the trend in GNP growth has remained about the same. This indicates a marked decline in the efficiency of capital use, as a result of increasing capacity underutilization, long project gestation, and increased emphasis on relatively capital intensive projects and sectors. 4. Since Independence the growth of the socio-economic infrastructure (transport, education, health services, etc.) has been impressive, but has often been achieved at high cost and has yielded results of variable quality. 1/ Parts I and II of this report are substantially the same as Parts I and II of the President's Report for the Karnataka Irrigation Project Report No. P-2223-IN), dated March 15, 1978.  Many industrial and agricultural investment schemes have been highly success- ful, but others have taken excessively long to be completed and have operated well below full capacity. In some regions of the country, growth and struc- tural change have been rapid and compare favorably with developments in many other parts of the world; in other regions there has been stagnation, and in some, decline. Although national income has increased in most years, there has been no rise in the living stanclards of the vast mass of rural and urban poor, conservatively estimated at 200 million people with per capita incomes of US$70 per annum. 5. The structure of the economy has been slow to change. Agriculture remains the dominant sector, wiith its share of national product declining only gradually from about 50% to 42% over the last twenty years. The share of manufacturing industry has increased only slowly and, since the late 1960s, has remained approximately constant at about 16%. There has, however, been a shift in the composition of manufacturing production, with consumer, inter- mediate, and capital goods now contributing about one third each, compared with an overwhelming preponderance of consumer goods 25 years ago. Recent Trends 6. In March, 1977, a part:y other than Congress formed a Government for the first time since Independence. The Janata, or People's Party, is a heterogeneous amalgamation of smaller parties which had never before been able to form a united front. TLe state of the economy was not a prominent election issue; in fact the economy was generally stronger than at any time in the last ten years. Over the two years 1975/76 and 1976/77, the growth of GDP averaged 5.4% per annum. Agricultural production in 1976/77 did fall by about 3% but only because of a return to a more normal harvest of 111 million tons after the record 121 million ton output in 1975/76. In fact, the 1976/77 figure is the second largest harvest on record. The growth of industrial production accelerated over the past two years from 6.1% in 1975/76 to 9.2% in 1976/77. The volume growth of exports continued its impressive recent performance, and averaged approximately 13% per annum over the past two years. This export growth, together with hardly any in- crease in import levels, has resulted in dramatic balance of trade improve- ments with an estimated deficit for 1976/77 of less than US$500 million. In sum, the overall resource position with record foreign exchange and food- grain reserves, is exceptionally strong, and gives the Government considerable room for maneuver. 7. In agriculture the bumper crop of 1975/76 was largely due to remark- ably good rainfall, both in amount and distribution, while the good crop in 1976/77 was produced under somewhat less than normal weather conditions. A conspicuous change was the increase in fertilizer use, which rose by about 25% over 1975/76, following marked declines in fertilizer prices. Industrial production benefited from fewer labor disputes, fuller utilization of in- stalled capacity in both private and public sectors, a more liberal import policy, relatively good power availability, and increased demand because of  - 3 - higher consumer incomes, expanded exports and higher public expenditures. Inflation re-emerged in 1976/77 as an important issue of economic management. During 1975/76 the wholesale price index had fallen by 8.5%; but in 1976/77 it rose by 11.6%. The key characteristic of this rise was that it occurred largely in a few agricultural commodities for which prices had dramatically fallen in the previous year. In the twelve months ending September 1977, the increase was less than 5%. The overall price index has shown virtually no trend over the past three years taken together. 8. The balance of payments situation has improved dramatically since the 1973-1975 period. In 1975/76 the trade deficit was $1,530 million, which was more than covered by US$1,560 million in net aid, US$205 million in net purchases of currency from the IMF, and US$559 million in net miscellaneous capital and invisibles (mostly private remittances); indeed, this large aggregate net resource inflow led to a US$794 million increase in foreign exchange reserves, to a level of almost US$2.2 billion. In 1976/77, the balance of payments continued to improve, with exports provisionally, esti- mated to have increased by US$1,145 million against an imports increase of only US$85 million, so that the trade balance deficit is now estimated at only US$470 million. The sharply decreased trade deficit, along with a further increase in the net inflow of miscellaneous capital and invisibles from abroad of US$640 million, more than offset the fall of US$350 million in net aid and the US$365 million repurchases of currency from the IMF, and allowed a US$1.5 billion addition to reserves, which reached a level of US$3.7 billion at the end of March 1977. The developments have continued in the current year, with reserves estimated at US$4.8 billion as of October 1977. Development Prospects 9. The favorable economic situation gives the Government the opportun- ity to address the longer-term constraints on growth. The basic task is to raise the overall rate of growth from its historic range of 3% to 4%. In the long run this will require raising more resources for investment. But it will also be important to achieve significantly better utilization of avail- able resources, partly through an immediate boost to industrial demand. 10. In agriculture, the basic problem remains that, despite the record foodgrain crop in 1975/76 and the good crop in 1976/77, the long-term growth rate of foodgrain production has been unacceptably low, less than 3% per annum over the last twenty-five years, and less than 2% since 1967/68. This has meant that only in good years has there been any margin of production to cater to per capita growth in food consumption, and in normal years it has been necessary to import food. There is considerable scope for stepping up growth both by increasing the use of inputs and by raising the productivity of exist- ing capacity. Three promising developments in regard to the first are the sharply higher outlays on irrigation in the Fifth Plan period along with a renewed determination to increase public investment in irrigation even more beginning in 1978/79 and to complete on-going projects expeditiously, the indications that private investment in tubewells is picking up again after a slowdown in the early 1970s, and the continued recovery of fertilizer demand. With regard to more productive use of existing capacity, there is increased  awareness in the Government that: the benefits of irrigation projects can be much increased not only through command area development but also through more efficient design and operation of major surface irrigation infrastructure. Also, hopes have been generated for increasing productivity on both irrigated and rainfed farms through a reorganized and improved extension and research system, which has been recently introduced in several States in northern and eastern India. 11. A strong effort to raise agricultural growth is essential, not only to meet food requirements, but also because of the pervasive influence of agriculture on the levels of activity in other sectors of the economy. This effort must also be so structured as to increase the incomes of small and marginal farmers, in order to increase production since they operate 25% of the cultivated land and account for somewhat more than 25% of production, and for welfare reasons, since they make up about 70% of rural population and constitute the majority of those living below the poverty level. 12. The industrial sector is poised for growth, as serious constraints on the supply side have been removed by the improved situation, particularly with respect to coal and imported raw materials and components; however, the power supply situation is once more somewhat worrisome (paragraph 13 below). There has been a progressive liberalization of controls and the 1976/77 Central Budget announced a reduction of some taxes on private industry. In many cases management of public enterprises has improved, as is reflected in their markedlv higher production and profitability as a group. In the medium term it is the demand for industrial output that will determine indus- trial growth. In certain industries, export demand will provide a strong pull on production; this is true, for example, for certain chemicals, some electrical equipment, processed agricultural products, vehicles and automobile ancillaries. But the impact of increased exports on overall industrial demand will grow only slowly given the current low share of exports in sales. If the higher growth and productivity in agriculture discussed earlier were to materialize, it would provide a significant stimulus to industry. It is difficult to specify the linkages explicitly; but because of the large share that agriculture holds in GNP, the coefficients do not have to be large for agricultural growth and the concomitant growth in demand for industrially produced inputs and mass consumption goods to boost overall industrial demand significantly. A higher public deficit and increased public investments are the instruments most directly under Government control, and also those that can increase demand for industrial products most immediately. While the first budget of the new government projects a relatively small deficit, it does maintain a 20-22% increase in spending over the likely outlay in 1976/77. The projected deficit is contingent on the utilization of foreign exchange reserves; to the extent they are not utilized though increased imports, the deficit will increase. 13. The general improvement in the supply of energy augurs well for India's ability to meet the needs of a more rapidly growing economy. Organ- izational and transportation problems in the coal industry have largely been overcome, production is generally sufficient to meet demand, stocks are  comfortable, and the industry has good prospects for meeting domestic demand although exports have been cut back as a result of a disruption in the supply of explosives early in the year. However, the supply of electricity continues to be a concern, since the power situation is not uniformly good. Power shortages affect a number of the more industrialized States, particularly Maharashtra, Punjab, Haryana and West Bengal; as a result, there is a con- tinued constraint on the expansion of industry. This is despite a number of favorable factors: greatly improved capacity utilization in thermal power stations, more efficient exchange of power between States, accelerated imple- mentation of power projects, and somewhat improved availability,of finance for power investment. The inderlying reason for the weak power supply posi- tion is that capacity shortages continue despite the improved investment program. The prospects for the oil and gas sector have been further improved by new finds of oil and gas near the large offshore Bombay High field. Crude oil from Bombay High was brought to shore for the first time in May 1976; production reached an annual rate of 2 million tons by March 1977, and will rise to a level of 12-13 million tons by 1984/85. Although India will con- tinue to import crude at or somewhat above the current level, much of the foreign exchange burden of rapidly rising imports will be avoided by the development of these resources. Prospects are also bright for further dis- coveries off-shore, given the current high level of exploration activity. 14. Underlying all other development issues is that of population. Although India's population growth rate of a little over 2% is not high in comparison with most LDCs, the size of the absolute increment - 13 million annually - is daunting. It appears, however, that population growth may have passed its peak in the 1960s, and it is expected to continue to slow down, both because the birth rate will continue to decline and because the death rate will not fall as steeply as in the past. It is apparent that India's family planning efforts suffered a setback following the end of the recent emergency period, and acceptor rates are at very low levels currently. However, the new Government has announced its commitment to a voluntary family planning program and has maintained ambitious performance targets. Although it will take some time, adoption of family planning practices is expected to increase to higher levels. Over the longer term, with a sustained family planning effort, it should be possible to lower the population growth rate to 1.1% per annum by the end of the century. Our "best guess" projection of India's population by the year 2000 is 890 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century, but the decline in fertility will bring about an early change in the age struc- ture of the population. The school age group will grow more slowly or not at all after 1981, thereby reducing the pressures on the primary and second- ary education system. The labor force, however, will continue to grow at a fast rate until the end of the century. 15. India's balance of payments position should be comfortable for the next few years. The combination of past global inflation and increased ex- ports have reduced the proportion of export earnings needed for debt service from 30% in 1970/71 to 16% in 1976/77. The ratio is not likely to rise above this level in the next few years. Given continuing favorable policies, the volume of exports should grow by at least 7% to 10% annually in the near  - 6 - future; and import needs for fertilizer, POL and foodgrains will continue to require a diminishing proportion of available foreign exchange. The large inflow of private remittances shows no immediate signs of declining and should continue to bolster the foreign exchange position in the medium-term. Imports, including a variety of capital goods, have already been liberalized signifi- cantly. Increased public investment and a revival of the domestic economy is likely to generate substantial additional import demand. However, this should be quite manageable, given the currently comfortable foreign exchange position, continued export efforts, and maiintenance of the current real level of net aid. The present situation presents an opportunity to raise the level of investment and, consequently, reach a more satisfactory level of long-term growth. PART II - BANK GROU'P OPERATIONS IN INDIA 16. Since 1949, the Bank Group has made 53 loans and 97 development credits to India totalling US$2,0)15 million and US$4,934 million (both net of cancellation), respectively. Of these amounts, US$886 million has been repaid, and US$2,014 million was still undisbursed as of February 28, 1978. Annex II contains a summary statement of disbursements as of February 28, 1978, and notes on the execution of ongoing projects. 17. Since 1957, IFC has macle 14 commitments in India totalling US$58.4 million, of which US$13.8 million has been renaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$30.1 million, US$23.6 mil- lion represents loans and US$6.5 million equity. A summary statement of IFC operations as of February 28, 1978, is also included in Annex II (page 2). 18. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit opera- tions. Major irrigation, marketing, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and, through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of irndustrial raw materials and components for selected priority sectors has been instrumental in facilitating better capac- ity utilization in industry. The Bank Group has also been active in support- ing infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 19. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, urban development and water supply remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irrigation schemes, intensification and streamlining of extension systems, and seed production  - 7 - form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefitting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 20. The need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic re- ports and of the discussions within the India Consortium. Thanks in large part to the response of the aid community, India has successfully adjusted to the changed world price situation. However, the basic need for readily usable foreign exchange assistance, to augment domestic resources, assure effective utilization of existing capacity, stimulate investment and accel- erate economic growth, remains. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity of the domestic capital goods industry. The import component of projects tends to be especially low in such high-priority areas as agricul- ture, education, and family planning. For the Bank Group to be able to make an appropriate contribution to the financing of projects in these sectors, it is important to cover a proportion of local expenditures. 21. It is clear from the review of the Indian economy that as much as possible of India's external capital requirements should be provided on con- cessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and some Bank lending to India, for which the country is creditworthy, is appropriate. As of January 31, 1978, outstanding loans to India totaled US$1,168 million, of which US$662 million remained to be disbursed, leaving a net amount out- standing of US$506 million. 22. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 58%, 24% and 29%, respectively, in 1975/76. On March 31, 1976, India's outstanding and dis- bursed external public debt was US$13.1 billion, of which the Bank Group's share was 25%. The Bank Group's share is expected to remain around this level in the future. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1976/77, about 14% of India's total debt service payments were to the Bank Group.  -8- PART III - THE POWER SECTOR Developments in the Power Sector 23. The Indian power sector is within the concurrent jurisdiction of the Central Government and the State Governments. The Electricity (Supply) Act, 1948 assigns extensive responsibilities to the State authorities, but it also provides for the broad guidance and coordination of the Central Gov- ernment. The principal agencies in the industry are the State Electricity Boards (SEBs), which are responsible for the generation. transmission and distribution of electricity within each State; the Central Electricity Authority (CEA); and the two CentraL Power Corporations, the National Thermal Power Corporation (NTPC) and the National Hydro Power Corporation (NHPC). 24. Tn the 1950s and 1960s, power generation and the expansion of installed capacity kept pace with consumption, growing on average by about 12% annually. Since 1970, the situation has deteriorated and power shortages have grown in frequency and duration as demand for power has outstripped sup- ply. Between 1970/71 and 1974/75 growth in power generation averaged only 6% annually. The followed two years of more rapid growth at an annual rate of 13%. In the first five years of the decade, the main reason for this poor performance was delays in completing new power projects, which led to shortfalls in capacity below planned levels. Moreover, poor monsoons and an unrealiable coal supply meant: that even available hydro and thermal capa- city was not fully utilized. Weakness in the management of thermal power stations also contributed to the problem. When in 1975/76 and 1976/77 the situation improved, this was the product not only of two good monsoons and of much improved coal supply but: also of a concerted effort in the power sector to improve project implementation, thermal capacity utilization and overall system management. Capacity, grew by 10% in 1975/76 and by 8.3% in 1976/77. However, even these encouraging increases did not eliminate short- ages of power which persisted in 1976/77 and the first half of 1977/78. This reflects a very low rate of capacity expansion rather than inefficiency in the operation of the system. Generating capacity throughout India, excluding 2,000 MW of non-utility capacity, currently stands at about 25,000 MW. 25. While per capita demand for electricity has been rising in India, it remains among the lowest in the world at about 140 kWh per annum. Overall demand is dominated by industry, which accounts for about two-thirds of all electricity sold. Agriculture and irrigation account for another 12 to 13% of demand. Growth of consumption has been particularly rapid in the rural areas, where more than 80% of the total population live. The number of electrified villages grew from just over 3,000 in 1950/51 to some 200,000, or about one-third of all villages in India, by 1975/76. The number of irri- gation pumpsets and tubewells which have been energized increased from 21,000 in 1950/51 to 2.4 million by the end of 1973/74. An additional 1.2 million are expected to be energized by the end of 1978/79 and a further 2.1 million by the end of 1983/84. 26. Since the Korba thermal power station is to be installed in the Western Region, its power will be alLocated to the SEBs in that region --  i.e., Gujarat, Madhya Pradesh, Maharashtra and Goa. These SEB systems are interconnected at 220 kV although the "tie-in" with Madhya Pradesh is at present weak. However, the Korba-Bhilai-Koradi transmission system included in the Project will provide a 400 kV interconnection between Madhya Pradesh and Maharashtra. The average annual growth rate of power sold in Gujarat since 1970 has been in the neighborhood of 10% and in Madhya Pradesh about 15%. In Maharashtra, there have been power cuts on a sustained basis since 1972 amounting to some 30%, the brunt of which have fallen on industrial consumers. The result is that, following a growth rate of around 10% per annum in 1970 and 1971, load growth in Maharashtra fell to an average annual rate of around 5% during the next five years. Industry accounts for about 60% of the sales of power in the Western Region; agriculture and-irrigation about 15%. Demand for power for the whole Western Region in 1977/78 is projected to be about 4,900 MW, or about one quarter of national demand. By 1983/84, in the absence of supply constraints, the forecast power-requirement will grow to 9,100 MW. The Tenth Annual Power Survey for India forecasts an acute power deficiency, in the range of 15% to 20%, in both Maharashtra and Madhya Prades'i through 1983/84, and a smaller deficiency of 5% to 10% in Gujarat over the same period. 27. To help cope with the power scarcity and to strengthen Central planning and coordination of the power system, the Government of India has recently undertaken to construct and operate large Centrally owned generating stations. For this purpose, the National Thermal Power Corporation and the National Hydro Power Corporation were established in November 1975, with authority to design, construct, own and operate generating and transmission facilities and supply power in bulk directly to State Electricity Boards. Planning and Coordination in the Power Sector 28. State Electricity Boards. Planning of power in India has, in the past, been on a Statewise basis. Given the organization of the sector, SEBs have been concerned only with developments within their own State boundaries, and, until recently, little attempt has been made to evaluate the least-cost method of meeting demand on a broader regional or national level. Histori- cally, the financial management of the SEBs has been poor; in particular, financial returns have been adversely affected by inadequate tariff policies. However, there has been some progress in recent years. Under the power transmission credits, SEBs were expected to work toward a rate of return target of 9-1/2% on the capital base. The financial rate of return of Gujarat, Maharashtra and Madhya Pradesh SEBs in 1976/77 was 9.5%, 9.7% and 13.1% respectively. By 1977/78, it is expected that ten SEBs, out of a total of 18, will have achieved this target, and a further five SEBs should do so in 1978/79. As a first step toward more comprehensive tariff reforms, an analysis of the tariff structure of Andhra Pradesh State was carried out in 1976 following recommendations of Bank staff. Nine other SEBs have recently completed pricing studies based on marginal cost pricing principles as a result of undertakings given under previous Credits. 1/ Madhya Pradesh SEB 1/ Maharashtra, West Bengal, Gujarat, Bihar, Uttar Pradesh, Rajasthan, Punjab, Haryana and Delhi Electricity Supply Undertaking (DESU).  - 10 - has agreed to carry out a similar study in connection with the proposed Korba Credit. Thus, all the beneficiary States of the proposed project will soon have at their disposal basic data and analyses needed for improved tariff set- ting. Furthermore, amendments to the financial provisions of the Electricity (Supply) Act, 1948 have been introduced in the Parliament and are expected to be enacted during the current session. The Act, as amended, would require, among other things, that tariffs be set to ensure that revenues will at least meet operating expenses, depreciation and interest and a reasonable surplus for capital investment. 29. Central Electricity Authority. Power planning nation-wide is to be coordinated by the Central Electricity Authority (CEA). The CEA was set up in 1950 to be responsible for devieloping a national policy for power development and for coordinating the activities of the various planning agencies involved in electricity supply. However, without any staff of its own and with no clear and accepted functions to perform, it could not operate effectively. In October 1974, responsibility for the power sector was placed in a newly constituted Ministry of Energy, which was also placed in charge of the coal mining industry. Following the establishment of the Ministry of Energy, the functions of the erstwhiLe Central Water and Power Commission were divided, with its power functions transferred to the CEA, reporting to the Ministry of Energy. An order dated August 12, 1975, promulgated by the President of India, details the new organizational structure of the CEA and the responsibilities of its Chairman and Members. The Electricity (Supply) Act, 1948 was amended, with effect from October 8, 1976, to assign to the CEA new functions, including, in particular, the formulation of short-term and perspective plans for power development, training of personnel, interconnected system operations, and research and development; these are in addition to its general responsibility for developing a sound, adequate and uniform power policy and coordinating the activities of the planning agencies in relation to the control and utilization of national power resources. 30. With the rapid growth of thie power sector -- about 11% annual rate of growth in demand -- and with the resultant increasing complexity of operation, the need for coordination at the national level has increased. In recognition of this, the Government has decided to pursue an integrated national approach to sector development. The unified operation of power systems on a regional basis has already commenced; the Southern Regional Grid went into integrated operation in August 1972 and progressive integration of power systems in other regions is intended to pave the *way for an all-India grid. IDA Credit 604-IN (Fourth Power Transmission project) includes provision to help finance the cost of consultants to study the technical, economic and financial aspects of the long-term national plan for power development in India. GOI has established a committee to agree on the standard design parameters to be adopted in devel- oping the national grid which wiLl comprise initially a 400 kV network. Tesh- mont Consultants, Inc. of Canada has been engaged by CEA to assist in the detailed studies for developing the system. The work on the 400 kV systems studies, which are basic to the ultimate establishment of a national power system, is progressing satisfactorily. CEA is also working with Teshmont Consultants on the development oif a 15-20 year plan which would include, inter alia, detailed demand forecasts, investigations of power generation  - 11 - schemes to meet load growth requirements, determination of resource require- ments and definition of responsibilities and operational policies at the State, regional and national levels. Bank Group Operations in the Power Sector 31. The Bank has made seven loans to India for power projects amounting to US$179.5 million and IDA has made nine credits totalling US$596 million. All the loans and credits for generating plant (excluding the Singrauli thermal power project (Credit 685-IN)), the Beas project (Credit 89-IN) and the first two transmission projects (Credit No. 242-IN and Loan 416-IN) have been completed. The Singrauli project is still at an early implementation stage and no disbursements have yet been made; in the case of the Rural Electrification project (Credit 572-IN), disbursements to February 28, 1978 were US$10.3 million. Of the finance made available for the remaining trans- mission projects (Credit 377-IN of May 1973 and Credit 604-IN of January 1976), US$80.6 million has been disbursed by January 31, 1978 in the case of Credit 377-IN and in the case of Credit 604-IN, approximately US$44 million had been committed by January 31, 1978 in respect of contracts awarded or under issue. The ongoing power transmission projects and the rural electri- fication project are proceeding satisfactorily notwithstanding delays in initial implementation and in preparation of specifications for the more sophisticated load despatch equipment. The Singrauli thermal power project is also proceeding satisfactorily. PART IV - THE PROJECT 32. The project was appraised by a mission which visited India in July/ August 1977. A report entitled "Appraisal of the Korba Thermal Power Project" (No. 1733b-IN, dated March 10, 1978) is being distributed separately to the Executive Directors. Negotiations were held in Washington in February 1978. The Government of India was represented by Mr. R. Swaminathan of the Depart- ment of Economic Affairs and Mrs. 0. Bordia of the Department of Power and Mr. S.S. Murthy of the Central Electricity Authority. The National Thermal Power Corporation was represented by Mr. D.V. Kapur, Chairman and Managing Director. A Supplementary Project Data Sheet is attached as Annex III. Project Description 33. The proposed project consists of construction of the first 600 MW of capacity in the Korba thermal power station, together with ancillary equip- ment and related works and 400 kV transmission facilities to convey bulk power to recipient SEBs -- i.e., Gujarat, Maharashtra and Madhya Pradesh. The power station will be constructed near the coal field at Korba in the State of Madhya Pradesh. Its generation capacity is expected to reach 2,100 MW -- comprising three 200 MW and three 500 MW generating units -- by October 1986. The first 200 MW unit is expected to be commissioned by October 1, 1982, and the com- missioning of the remaining two 200 MW units will follow at six-month intervals. The principal components of the project include civil works; three 200 MW  - 12 - turbo-generating units and three 680 tonnes-per-hour boilers, complete with all auxiliaries, and ancillary electrical and mechanical equipment; coal transportation and handling equipment; a 400 kV transmission system consist- ing of about 880 circuit km of single circuit line, together with associated equipment; and a simulator for "training operators. Project Cost and Financing 34. The total Korba 2,100 MW power development, including associated transmission, is estimated to cost about US$1.3 billion. The project cost, including contingencies. is estimated at USS405.9 million equivalent, of which about US$53.4 million represents the estimated foreign exchange costs. In- terest during construction adds about US$33 million to the financing required. The proposed credit would provide 49% of the project cost, and 46% of the total financing requirement. The balance of the financing would be made available by the Government in the f'orm of loans and equity contribution. Procurement and Disbursement 35. All equipment financed und,er the proposed credit would be procured through international competitive bidding. The proceeds of the credit would be disbursed against the cost ofE consultants' services, electrical and mecha- nical equipment, coal transportationL and handling equipment, transmission and associated equipment, and the training simulator. US$10.0 million would be unallocated. Indian manufacturers competing under international competitive bidding would be granted a preference margin of 15% or the current rate of import duty, whichever is less. Project Implementation 36. The National Thermal Power Corporation Limited (NTPC), which would own and operate the Korba station, was established in 1975 under the Companies Act, 1956, with an initial authorized share capital of Rs 1,250 million (US$145 million). It is managed by a Board, which presently consists of seven Direc- tors, of whom two are full time. Steady progress has been made in building up this institution since early 1976, when a competent and experienced Chairman and Managing Director was appointed. The Mechanical, Electrical Design, Civil Design, Systems Engineering and Operation Services Departments have been established and NTPC is making good progress in the appointment of key staff. As a relatively new organization entrusted with an important task, NTPC places special importance on the need lor training of engineers and operators. It is developing systematic programs for training the operating staff and plans to establish a training school equipped with a simulator and other modern train- ing facilities. 37. Designs and specifications for the turbo-generators, boilers and auxiliary plant and for the transmission towers, which are basically identical with those for the Singrauli the!rmal power project are being prepared. NTPC will carry out basic engineering and preliminary design. Consultants have been appointed to assist in the design, preparation of specifications, and supervision of construction of the various aspects of the project. As in the  - 13 - case of Singrauli, the Thermal Design Organization (TDO) of CEA will function as the principal review consultant for the power station. A retainer consult- ant with experience in the design of large thermal power stations of 2,000 MW and over will assist in the more sophisticated areas and will review specifi- cations for the generating units, boilers and transformer packages and other specifications as required by NTPC and the Association. 38. An acceptable master plan for project implementation has been pre- pared by NTPC. Soil conditions at the power plant site have been investigated and the availability of adequate coal reserves in the Kusmunda block has been confirmed. The Government has agreed to take all necessary steps to ensure that adequate coal supplies will be available by the time the first generating unit is commissioned (Section 3.04 of the Development Credit Agreement). For transportation of coal from the mine to the power station, a merry-go-round railway system would be used. The existing Darri Reservoir in the Hasdeo River would meet the requirement of cooling water for the Korba thermal development up to 1,000 MW. Construction of a new Bango Dam is planned about 20 km up-stream of the Darri Barrage, and this project would provide sufficient water for the planned capacity of Korba and for the other existing and planned thermal stations and industrial projects using water from the Hasdeo River. Construction of the Bango Dam project is expected to be completed within six years, which would match the requirements of the Korba thermal power develop- ment. The Government has obtained an assurance from the Madhya Pradesh State Government that water for the Korba thermal power station will be given first priority over all other commitments for suDply of water from the Hasdeo River and the Darri Reservoir. 39. Adequate measures would be taken to minimize the adverse ecological effects of the project, including stack emissions, heat dissipation and ash disposal. The approval of the National Committee on Environmental Planning and Coordination has been obtained, and appropriate occupational safety standards would be observed (Section 2.10 of the Project Agreement). NTPC Finances 40. NTPC is expected to construct and put on stream four large-scale thermal power stations with an aggregate generating capacity of 7,300 MW (one 2,000 MW at Singrauli in Uttar Pradesh, two 2,100 MW stations at Korba in Madhya Pradesh, and Godavari in Andhra Pradesh, and one 1,100 MW station at Farakka in West Bengal). The Government's investment through 1987/88 in this program and in the 6,040 circuit km of associated 400 kV transmission will be about US$4,800 million equivalent. 41. NTPC would not begin to earn revenues until the first 200 MW generat- ing unit is commissioned at Singrauli, scheduled for December 1981. As the generating capacity increases, NTPC's annual revenue is expected to increase at a faster rate than its operating expenses and produce a rate of return on the capital base rising gradually from 1.6% in 1982/83 to 9.5% by 1988/89. By 1983/84, NTPC would have commissioned eight 200 MW generating units, in- cluding those of the Korba Project (600 MW), the Singrauli project (600 MW), together with additional two 200 MW units, and associated 400 kV transmission.  - 14 - The overall investment cost for the years 1977/78 through 1983/84 is estimated to amount to a little over US$4,000 million equivalent. The Government would provide funds so that NTPC's debt/equity ratio would not exceed 1:1, in accordance with the provisions of the Companies Act, and NTPC would inform the Association of any proposal to modify existing limitations on the borrow- ing powers (Section 3.03 of the Project Agreement). Loans would be repayable by NTPC in 20 years, including periods of grace of up to five years, with interest at a rate of 10-1/4% per annum. 42. NTPC has agreed to achieve in 1988/89 and maintain thereafter a rate of return of not less than 9-1/2% on the cost of the average net assets in service, and to set tariffs from the time of commissioning of its first 200 MW generating unit at Singrauli, scheduled for December 1981, at levels not lower than those estimated to be required to meet this target in 1988/89 (Section 4.03 of the Project Agreement). In view of the high capital invest- ment in the early stages and the time involved in commissioning generating units, this approach to setting the tariff and reaching the target rate of return in 1988/89 would be appropriatoe. The forecast average bulk supply price per kWh for the sale of energy is 22.1 paise (US$0.026), excluding fuel surcharge. This rate has been adopted for the purposes of forecasting revenues from 1981/82. NTPC's cash generation would not begin to cover annual debt service and working capital increases fully until 1984/85. The shortfalls of funds during the initial three years 1981/82-1983/84 would be financed from equity capital provided by GOI. 43. NTPC's capitalization as of March 31, 1982 when NTPC begins to earn revenues would be US$2,332 million equivalent, divided between GOI loans (including the relending of the Assoc:Lation's Credits) and equity in a ratio of 49/51. By March 31, 1984, following completion of the project, NTPC's capitalization would have increased to about US$4,020 million equivalent, financed by GOI capital in a debt/equity ratio of 50/50. 44. As in the case of the Singrauli thermal project, NTPC has agreed to sell the project's output of power under bulk supply contracts satisfactory to the Association (Section 2.09 of the Project Agreement), but since deter- mination of the appropriate level of tariffs has to be consistent with the financial viability of NTPC, the tariff would be adjusted, as necessary, to meet the financial requirements. The Government has advised the Association that Maharashtra, Madhya Pradesh and Gujarat States and the Union Territory of Goa indicated their willingness to purchase the power generated under the project. Project Justification and Risks 45. In the recent past, the Western Region has been plagued with power cuts of up to 30%, which have seriously hindered utilization of existing industrial capacity and discouraged installation of new capacity. The power cuts have also constrained agricultural output. Presently planned investment, including the Korba power station, will lead generating capacity to expand by about 7% per annum. However, the demand for power is currently projected to grow at 10-11% per annum through 1984 and about 9% thereafter, so that power  - 15 - shortages and restrictions are likely to continue. The proposed Korba develop- ment offers economies of scale and of relatively low fuel costs due to its location at the coal pithead. Of the other alternatives considered, the only practicable one was the development of smaller thermal units at the load centers. Korba was found to be preferable when compared with this alternative, the equalizing discount rate being 29%. On the basis of the agreed power rate targets (para 42), the internal rate of return, which equalizes the present worth of revenues and the economic costs of the project, is satisfactory at 13%. Both these results are insensitive to changes in the main variables -- i.e., fuel and capital costs. 46. The risks involved in technical aspects of project implementation are no greater than can normally be expected with operations of this type. However, the prospects for attainment of the project's institutional objectives -- namely, the strengthening of power planning by the Central Government and the development of a national power system -- must be viewed with some caution, because the power sector is a "concurrent subject" under the Indian Constitu- tion and is therefore influenced to a significant extent by sensitive Center/ State relations. PART V - LEGAL INSTRUMENTS AND AUTHORITY 47. The draft Development Credit Agreement between India and the Asso- ciation, the draft Project Agreement between the Association and NTPC, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the IDA Articles of Agreement are being distributed to the Executive Directors separately. 48. Special conditions of the project are listed in Section III of Annex III. 49. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 50. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President March 29, 1978   ANNEX I INDIA - SOCIAL INDICATORS DATA SHEET Page 1 of 4 LAND AREA (THOU KM2) --------------------------------