Document of The World Bank FOR OFFICIAL USE ONLY FLE COPY Report No. 4909-IN STAFF APPRAISAL REPORT INDIA BODHGHAT HYDROELECTRIC PROJECT April 16, 1984 RIu South Asia Projects Department Power and Transportation Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may. not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Rupee (Rs) Rs 1 = Paise 100 Us$ 1 Rs 10.0 Rs 1 US$ 0.10 Rs 1 million = US$ 100,000 MEASURES AND EQUIVALENTS 1 Kilometer (km) = 1,000 meters (n) = 0.6214 miles (mi) 1 Meter (m) = 39.37 inches (in) L Cubic meter (m3) = 1.31 cubic yard (cu yd) = 35.35 cubic feet (cu ft) I Hectare (ha) = 10,000 m2 = 2.471 acres (ac) 1 Kilogram (kg) = 2.2046 pounds (lb) 1 Ton (t) = I metric ton = 2,200 lbs 1 Kilocalories (kcal) = 3.968 British thermal unit (Btu) 1. Kilovolt (kV) = 1,000 volts (V) 1. Kilovolt-ampere (kVA) = 1,000 volt-amperes (VA) 1. Megawatt (MW) = 1,000 kilowatts (kW) =1 million watts 1 Gigawatt hour (GWh) = 1,000,000 kilowatt hours (kWh) ABBREVIATIONS AND ACRONYMS CIF - Cost Insurance Freight CEA - Central ELectricity Authority CWC - Central Water Commission DOE - Department of Environment DRP - Dam Review Panel GOI - Governmnent of India GOMP - Government of Madhya Pradesh GSI - Geological Service of India HT - High Tension IBRD - International Bank for Reconstruction and Development IDA - International Development Association LRMC - Long Run Marginal Cost MPEB - Madhya Pradesh Electricity Board N:HPC - National Hydro-Electric Power Corporation NPP - National Power Plan NTPC - National Thermal Power Corporation REC - Rural Electrification Corporation REB - Regional Electricity Board SEB - State Electricity Board SOE - Statement of Expenditures FISCAL YEAR ENDS MARCH 31 FOR OFFICIAL USE ONLY INDIA BODHGHAT HYDROELECTRIC PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. LOAN, CREDIT AND PROJECT SUMMARY ................................. i-iii I. THE ENERGY SECTOR .........................1................. Energy Resources . ...................................., 1 Energy Prospects ....... 2 Energy Pricing Policies . 2 The Power Subsector. 3 Power Supply and Demand . 3 Bank Group Operations in the Power Sector. 4 Sector Institutions . 5 Bank Group Strategy in the Power Sector. 6 Power Supply and Demand in the Western Region. 9 Supply and Demand of Electricity in Madhya Pradesh .10 II. THE BORROWER, THE IMPLEMENTING AGENCY AND THE BENEFICIARY .. 11 The Borrower ...11 Lending Arrangements . ..... . .11 The Implementing Agency and the Beneficiary . .11 Madhya Pradesh State Electricity Board (MPEB) . .11 Organization and Management . . .11 Staffing ...12 Training ... 12 MPEB Accounts ... 12 Data Processing Facilities . . .13 Audit ...13 Transmission and Distribution Losses . . .13 Insurance ...14 Taxes .............................................. . 14 This project was appraised by Messrs. A. Sanchez, Senior Engineer, M. El-Menshawy, Financial Analyst. Mr. Gazoni assisted in the economic appraisal of the project. 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. -ii- Page No. III. THE PROJECT ................................................ 15 Background ............................15 Project Objectives ..16 Project Description ..16 Transmission ..17 Project Cost ............................................... 17 Project Financing ..19 Construction Schedule ..19 Project Engineering ..20 Project Implementation ..21 Procurement ..22 Disbursements ..24 Water Rights ..25 Land Acquisition and Resettlement . .25 Environmental Aspects ..26 Project Operation ..26 Project Monitoring ..27 Project Risks ..27 IV. FINANCIAL ANALYSIS .29 Background to SEBs Finances ..29 MPEB Financial Performance ..29 Billing and Collection ..31 MPEB-s Financial Projections . .31 Future Financial Situation ..32 Debt/Equity Situation ..32 Financial Plan ......................... 33 V. PROJECT JUSTIFICATION AND ECONOMIC ANALYSIS .... ............ 34 Least Cost System Expansion and Project Sizing .... ......... 34 Capacity Optimization ...................................... 35 Cost Benefit Analysis ...................................... 36 Justification for Bank Participation ....................... 37 VI. AGREEMENTS AND RECOMMENDATIONS ..38 Recommendation . .39 - iii- Page No. ANNEXES 1 Energy Generation, Sale and Pattern of Energy Consumption - All India .so...................es...*o ... oo-o-e. 40 2 Projections of Energy Requirement and Peak Demand on Utility Systems - All India ....................... 41 3 Electricity (Supply) Act, 1984 Approved Amendments, August 1983 ...................... 000-6 42-47 4 Energy Generation, Sale and Pattern of Energy Consumption - Western Region ......... . ... ... ....... . ... ..- .... * * * 48 5 Western Region - Installed Capacity .................... 49 6 Western Regional Electricity Board ...se.............. 50 7 Western Region - Power Supply Position ................. 51 New Schemes to be commissioned during 1985-95 e.......... 52 Commissioning Programme of Ongoing Schemes ...-...... . 53 8 MPEB - Power Supply Position ............... ,.......... o.... 54 9 Energy Generation, Sale and Pattern of Energy Consumption - Madhya Pradesh .............................. 55 10 MPEB - Category Wise Units Sold in GWh .................. 56 11 Organization Chart 57 Analysis of Madhya Pradesh Electricity Board's Staff Strength As on March 31, 1983 .........o.....58 12 In-House Training Courses Organized by the Madhya Pradesh Electricity Board's Institute During Last Three Years (April 1980 to March 1983) ............................ 59 In-House Training Projections for coming 3 years ....... 60 Outside Training 6...... 0.*... .....-*.0*000*****. 61 13 Detailed Cost Estimates ............ ................. 62 14 Construction Schedule 63 15 Suggested Terms of Reference ..... ....................... 64-66 16 Proposed Field Organization 67 17 Schedule of Estimated Disbursements ..*........68 18 Cost Versus Realisation Rate for Supply to Different Categories of Consumers ..o ... . . . .... . ..... 69 19 Statement Showing the Category-Wise Demand & Collections in Respect of HT Consumers During the Year 1982-83 .... 70 20 MPEB - Tariff ............ . .... 71 21 Notes on CEA Assumptions for the Financial Projections so 72-74 Actual and Forecast Income Statement 1978/79 - 1991/92 75 Actual and Forecast Net Cash Generation-1980/81-1991/92 . 76 Actual and Forecast Sources and Applications of Funds ..o 77 Actual and Forecast Balance Sheet - 1978/79-1991/92 ..... 78 -iv- Page No. Annex 22 Investment Program ...*.... o..* ..*.***............. 79 23 Calculations for Cost Benefit Analysis *......... 80--81 24 Least Cost Solution and System ERR ................... 82 Optimization of Capacity .............. ............ * .* ...**** 83 Optimization Analysis - Basic Assumptions 84 25 Documents in Prolect File ............................. 85 Table T-1 Load Duration Curve - Western Region Chart C1 Average Load Duration Curve-Western Region, August 1990 C2 Average Load Duration Curve-Western Region, December 1990 C3 Average Load Duration Curve-Western Region, March 1991 C4 Average Load Duration Curve-Western Region, July 1991 C5 General Layout C6 Maximum Dam Sections C7 Power House Cross-Section C8 Longitudinal Section of Power House Map IBRD No. 17747 INDIA BODHGHAT HYDROELECTRIC PROJECT LOAN, CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: Madhya Pradesh Electricity Board (MPEB). Amount: Bank Loan: US$157.4 million, including capitalized front-end fee. Special Fund Credit: SDR 134.4 million (US$143 million equivalent). Terms: Bank Loan: Repayment over 20 years, including five years' grace, at the applicable variable rate of interest; front-end fee of 0.25% of the base loan amount. Special Fund Credit: Standard IDA terms, Relending Terms: Government of India (GOI) to Government of Madhya Pradesh (GOMP): As part of Central assistance to States for development projects on terms and conditions applicable at the time. Government of Madhva Pradesh to MPEB: Repayment over 25 years, including five years' grace, at GOMP's current applicable rate of interest, not less than 7.5% per annum. GOI will bear the exchange and interest rate risks. Proiect Description: The project's main objective is to assist in meeting the electricity demand in the State of Madhya Pradesh and in. the Western Region of India through the addition of 500 MW of hydro-power capacity and better use of the existing thermal plants. The project comprises the construction of a 500 MW (4 x 125 MW) hydro-power station includ- ing all equipment, civil works and a transmission line to the Western Regional grid. Main works include a 90 m high, 1650 m long combined gravity and rock-fill dam, about 4500 m of tunnels and shafts, a powerhouse, and 5 km of discharge channel. The project also includes a pilot ther- mal plant rehabilitation program designed to provide for more efficient use of MPEB s thermal stations, which would serve as a basis for even- tual development of an India-wide rehabilitation program, and improvement and expansion of MPEB's - ii- data processing unit and services. There are no risks other than those normally associated with this kind of project. All physical components to be constructed are well within the boundaries of known technology. The Central Electricity Authority and the Central Water Commission will provide assistance as necessary to MPEB in design, supervision and management of the works. Estimated Cost: 1/ (Us$ millions) Item Local Foreign Total Land and Relocation 22.0 - 22.0 Dam 136.4 51.2 187.5 Water Conductor System 58.4 14.6 73.0 Power Station 107.0 72.9 179.8 Switchyard and Transmission 5.9 0.8 6.8 Thermal Plant Rehabilitation 17.5 17.5 35.0 Training and Consulting Services 1.5 1.5 3.0 Miscellaneous 16.5 - _16.5 Base Cost 365.1 158.5 523.6 Physical Contingencies 43.8 14.1 57.9 Price Contingencies 101.1 40.2 141.4 Total Project Cost 510.0 212.8 722.8 Front-end Fee on Bank Loan - 0.4 0.4 Intere6t during Construction Bank - 41.4 41.4 Other 172.9 - 172.9 Total Financing required 682.9 254.6 937.5 Total project cost net of taxes and duties amounts to US$637.6 million. 1/ Includes taxes and duties of US$85.2 million. -iii- Financing Plan: (US$ millions) Local Foreign Total IBRD Loan 28.3 129.1 157.4 Special Fund Credit 72.6 70.4 143.0 GOI/Cofinanciers 395.0 55.1 450.1 MPEB 187.0 - 187.0 Total 682.9 254.6 937.5 Estimated Disbursements: (US$ millions) IBRD/IDA FY FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Annual 24.4 | 39.0 57.0 63.0 69.0 24.0 15.0 9.0 Cumulative 24.4 63.4 120.4 183.4 252.4 276.4 291.4 300.4 Rate of Return: About 11%. Appraisal Report: No. 4909-IN, dated April 16, 1984. 1/ Including payment of front-end fee of about US$0.4 million. INDIA BODHGHAT HYDROELECTRIC PROJECT I. THE ENERGY SECTOR Energy Resources 1.01 India's commercially exploitable energy resources consist of coal, oil, gas, hydro potential and uranium, which account for about 46% of the total primary energy supply. Noncommercial energy, firewood and agricultural and animal waste account for the rest. Coal is the main domestic source of primary energy, with potential reserves estimated at about 85 billion tons, of which 25 billion tons are proven reserves. Most of the coal is of low to medium quality (3,500 to 5,500 kcal/kg). India's remaining proven and potential reserves of petroleum are currently estimated at 800 million tons of oil equivalent, of which 470 million tons is oil and the remainder natural gas. Domestic production of oil has increased from 0.5 million tons in 1961 to 16.2 million tons in 1982 and currently meets about 44% of the country's oil requirements. Annual gas production is estimated at about 3.1 million tons of oil equivalent, of which about 60% is used as fuel or feedstock, and the balance is flared, mainly because there is no market within reasonable distance. The economically exploitable hydroelectric potential of India is about 100,000 MW, of which only about 12,000 MW has been developed. Another 4,700 MW is under construction, and 23,000 MW is under investigation. India also has sufficient uranium (about 15,000 ton equivalent of uranium oxide economically exploitable) and thorium reserves to meet the country's demand for nuclear power in the foreseeable future. 1.02 India's energy policy has been geared to limiting the use of petroleum only in sectors where it cannot be economically substituted by other energy resources, particularly coal. Despite the recent development of the offshore petroleum reserves, the country remains dependent, to a large extent, on imported oil to meet growing demand for transportation, fertilizers and petrochemicals, as well as in agriculture where substitution by electricity continues to be limited by insufficient power generation and distribution facilities. The cost of oil imports in 1981/82 was US$6 billion, representing about 70% of India's estimated merchandise export earnings. Well identified domestic energy resserves of coal and hydroelectricity are large enough to supply most of India's future commercial energy requirements for industry and power generation. However, proven oil and gas reserves are not sufficient to meet the demand for oil in sectors where substitution by other fuels is not economically viable. 1.03 Renewable energy resources accounted for about 59% of the total supply of primary energy in 1975/76, but since then its share has been -2- declining. Wood, charcoal, dung and vegetable waste accounted for an estimated 92% of this supply. The rest was in the form of hydroelectric pDwer. It is expected that renewable energy (especially traditional fuels) will continue to play an important, though decreasing, role in the supply of energy in rural areas in the coming decades. Energy Prospects 1.04 Studies prepared in 1979 by a Working Group on Energy Policy appointed by GOI indicate that the availability of commercial energy may become a serious constraint to India's economic development and recommended a systematic program for energy conservation and demand management. The main policy measures recommended are: (i) improvement in the efficiency of energy utiiization; (ii) introduction of fuel-efficient technologies; (iii) reduction of the demand for transportation through improved planning of production and consumption locations; (iv) reduction of the energy intensity of industries; and (v) inter-fuel substitution from commercial energy resources to noncommercial and renewable energy resources. According to the studies, such measures, supplemented by appropriate pricing policies are expected to restrain commercial energy consumption without impeding economic growth. Energy Pricing Policies 1.05 India has consistently followed a policy of maintaining composite retail prices of oil products at international levels. All products except kerosene and naptha are priced at or above border prices. Although there is a cross-subsidy from gasoline to kerosene, based on social and environmental considerations, the weighted average prices for all products are higher than import prices. Coal prices are generally below the economic cost of supply to the country. Although most of the Indian coal is non-tradeable due to its low quality, there are substantial amounts of steam and coking coal. Adjusting for quality, quantity and duration of contracts, the estimated economic cost for tradeable Indian steam coal would be, at the pithead, between US$29 to US$37 per ton, compared to current price which ranges between US$17 to US$21 per ton. The situation is similar for coking coal whose pithead estimated trading f.o.b. price is between US$30 and US$54, while the domestic price is between US$18 and US$23. For the non-tradeable coal there are indications that it is priced below the long-run marginal cost (IRMC) given the financial losses incurred by the producers and the relatively low levels of resources mobilized by the industry. There is no uniform pricing system for gas in India. Currently, its price is fixed on the basis of form of production (associated or free) and on the type of supply contract. There are no studies on its economic cost. Although there are variations among SEBs in the price of electricity, the average tariff is below the estimated LRMC. In 10 out of 15 SEBs, average industrial tariffs approach LRMC whilst for domestic consumers LRMC is about three times the average tariff, and for agricultural consumers it is about four times the -3- average tariff. The weighted average LRMC for all consumers is nearly twice the average revenue. GOI is aware of this disrepancy and has made explicit its policy for rationalizing energy prices. Coal prices were increased by 30% in February 1982, 16.5% in May 1982, and 20% in November 1983. There also has been a considerable improvement in the power sector prices. In the 21 month period between March 1981 and December 1982, electricity prices increased by about 28% compared to a 6.3% increase in the general wholesale price index in the same period. The Power Subsector 1.06 In recognition of the need to develop indigenous energy resources, coal based generation and hydroelectricity have been receiving top priority in Central and State Government policy planning. The power sector now receives the largest share of India's public investment resources (20% of the Sixth Five-Year Plan outlay). In spite of this emphasis, demand for power continues to exceed supply. In keeping with the global energy policy, GOI has also indicated the need to increase the hydropower capacity to achieve a more efficient operation of power system, which presently is predominantly thermal (coal based), and to make better use of the existing thermal capacity through upgrading and improved operation and maintenance. Power Supply and Demand 1.07 In the 1950s and 1960s, installed capacity and power generation managed to keep pace with the nation's demand for power, both growing at an average annual rate of about 11%. Since 1970, however, the situation has deteriorated. Delays in the commissioning of new power plants, operating and maintenance problems, mostly due to lower than expected coal quality, and insufficient investment under severe budget constraints have led to a critical shortage of power. Between 1970-1975, power generation increased at an average annual rate of about 5%. The situation improved considerably between 1975-1980, with growth in both generation and capacity averaging 7%-9% annually. This was largely due successively to good monsoons in 1975/76 and 1976/77, improved coal supply, and a concerted effort to improve project implementation, thermal capacity utilization and overall power system management. Since 1979/80 power generation has been increasing at a higher rate than installed capacity. Data for 1980/81 and 1982/82 indicate an average annual increase for these two years of about 8.0% for power generation and 6.5% for installed capacity, indicating better utilization of existing resources. Nevertheless, power shortages have persisted in many parts of the country. 1.08 As of March 1983, India's total installed generating capacity, including non-utility plant, was about 38,100 MW. Of this, about 63% was conventional thermal, 35% hydro, and 2% nuclear. Annex 1 shows the relevant figures for the power sector in India between 1951 and 1983. Industrial consumptions accounts for about 60% of all electricity sold in the country, -4- agriculture (mainly irrigation) for about 18%, domestic use for about 12%, and other consumers for aboit 10%. As a result of accelerated agricultural development, there has been a marked growth of power consumption in the rural areas where more than 80% of India's population lives. The number of electrified villages, for example, grew from approximately 3,000 in 1950/51 to an estimated 300,000, or about 52% of all villages in India by the end of 1982. Projections made by India's Central Electricity Authority (CEA) for its National Power Plan (NPP) indicate that over the thirteen-year period 1981/82-1994/95, utility generating capacity should grow at an average annual rate of about 9.5%, to a total of about 106,000 MW. Of this, about 59,000 MW (56%) would be thermal, 44,000 MW (41%) hydro and 3,500 MW (3%) nuclear. Annex 2 shows the forecasted capacity and energy requirements for India up to year 2000 as estimated by CEA, for the NPP. Bank Group Operations in the Power Sector 1.09 Since 1954, the Bank Group has made 15 loans to India for power projects amounting to US$1,389.6 million, and 16 IDA credits totalling US$2,266 million. Of these, US$2,465.4 million was for generating plant; US$23 million for construction equipment for the Beas hydro-electric project; US$630.7 million for the provision of high-voltage transmission; and US$536.5 million for the support of rural electrification schemes. Sixteen projects have been completed: ten for generating plant, the Beas Project, four for power transmission, and the First Rural Electrification Project. The First Singrauli (Credit 685-IN of April 1977), Third Trombay (Loan 1549-IN of June 1978), and Second Rural Electrification (Credit 911-IN of June 1979) Projects are scheduled to be completed this year. The First Korba (Credit 793-IN of May 1978) and First Ramagundam (Credit 874-IN and Loan 1648-IN of February 1979) Thermal Power Projects are in an advanced stage of implementation. The loan for the Third Rural Electrification Project (Loan 2165-IN) was approved in June 1982. The loan for the Central Power Transmission Project (Loan 2283-IN), and the loan and credit for the Upper Indravati Hydro Project (Loan 2278-IN and Credit 1356-IN), were approved in May 1983. The Singrauli, Korba, and Second and Third Rural Electrification projects are on schedule. The first four units of the Singrauli project and the first two units of the Korba project were commissioned on schedule. The Farakka and Ramagundam projects are proceeding satisfactorily, the first unit at Ramagundam having been commissioned four months ahead of schedule. The Third Trombay Project (Unit 5) is expected to be commissioned early in 1984, about a year behind schedule. 1.10 A project performance audit was conducted in 1980 for the Second Power Transmission Project (Credit 242-IN). The project was considered to have been successful in assisting the nine beneficiary State Electricity Boards (SEBs) in extending their transmission systems to meet their growing power requirements. Utilization of generating capacity in these SEBs exceeded the appraisal forecast. Rehabilitation of the finances of SEBs, which commenced under this project, is continuing under subsequent projects. -5- The audit highlighted the difficulties of adequately supervising this project, which consisted of many widely scattered subprojects, and of effecting institutional improvements in the absence of a close working relationship between the Bank Group and the beneficiary SEBs. With the assumption of increased responsibility by CEA in the power sector, a more effective relationship with SEBs is envisaged. Sector Institutions 1.11 Under the Indian Constitution, the responsibility for supplying power is shared by the Central and State Governments, and full agreement between the two is required for the implementation of most actions. The principal agencies in the sector are: the State Electricity Boards (SEBs), the Regional Electricity Boards (REBs), the Central Electricity Authority (CEA), the National Thermal Power Corporation (NTPC), the National Hydro-Electric Power Corporation (NHPC), and the Rural Electrification Corporation (REC). 1.12 SEBs were constituted by the State Governments under the provisions of the Electricity (Supply) Act of 1948 to promote the efficient and coordinated development of generation, transmission and distributiorn of electricity, and to control and regulate private licensees and utilities within the states. The States effectively own or control over 90% of electricity supply facilities. Although SEBs are corporate entities and enjoy some autonomy in the management of their day-to-day operations, they are under the control of State Governments in matters covering capital investment, tariffs, borrowings, pay scales and personnel policies. 1.13 With the physical interconnection of the States' systems forming regional systems, there has been an increased need for interstate coordination. In response to improved operation and planning, REBs have been set up for each of the Northern, Southern, Eastern, Western and North-Eastern Regions. The general function of an REB is to coordinate the operation of the power system to the maximum benefit of the Region as a whole, to coordinate overhaul and maintenance programs, to determine generation schedules and power available for transfer between States, and to determine tariffs for the transfer of power within the Region. 1.14 CEA was constituted in 1950 with responsibility for formulating national power policies and coordinating the activities of the various agencies involved in electricity supply. Its powers were extended by amendments to the Electricity (Supply) Act of 1948 in 1976. It is now also responsible for the formulation and coordination of plans for power development, optimization of investments in the power sector for the whole country, development of intercDnnected system, operation, training of personnel, and research and development. CEA accumulates data on economic, financial and accounting aspects of the power industry, both at the Center and State levels, with particular reference to the operations of SEBs, and advises them on financial matters. In addition, CEA plays the role of -6- consultant to SEBs for the engineering of electromechanical elements of the systems. Working in coordination with CEA, the Central Water Commission (CWC), under the Ministry of Irrigation, is responsible for the preparation and approval of all civil engineering aspects of the hydroelectric projects and serveE as the consultant to SEB's in this regard. 1.15 Economic and technical considerations indicated the need to construct and operate major generationt and transmission facilities, whose size exceeds SEB's needs and capabilities. With this purpose, in 1975 GOI incorporated NTPC and NHPC, whose main purpose is to construct, own and operate large power stations, as well as high-voltage power transmission lines and associated substations. NTPC has under construction and partly in operation six large thermal power stations, while NHPC is building three hydro stations. Although the Central Government is becoming increasingly important in the sector, the SEBs will continue to play a major role, particularly in hydro-electric projects. The States own most hydro sites and are unlikely to turn over these sources of comparatively inexpensive energy to the Center. NHPC can develop hydro sites only when the water rights are clear and the State has surrendered its claim on them. 1.16 The REC was constituted in 1969 and registered under the Companies Act of 1956 as a limited company wholly owned by GOI. Its primary objective is to finance rural electrification schemes prepared by SEBs throughout India, functioning as a financial intermediary with technical expertise, and ensuring the efficient onlending of funds drawn primarily from GOI. REC coordinates its lending operations with the activities of other agencies which provide financing for rural development. Although the amount of REC financial support is small in relation to total SEB operations, REC today finances more than half of total rural electrification expenditures. Bank Group Strategy in the Power Sector 1.17 The Bank Group's strategy in the Indian power sector has been to cooperate with GOI in finding solutions to the many difficult and politically sensitive problems confronting the Indian electricity supply industry. The Bank's main objectives in the sector are: (a) to eliminate power shortages by the installation of generation and transmission capacity, and the promotion of measures to improve the operation and maintenance of existing plant; (b) to introduce long-range system planning on a nationwide basis so as to assure implementation of a least-cost power deveelopment program; (c) to promote improvements in sector organization and training; and -7- (d) to strengthen the finances of the institutions in the sector, particularly the State Electricity Boards. 1.18 Despite many difficulties, improvements achieved so far have been encouraging. With the establishment of Regional Electricity Boards (REBsW the National Thermal Power Corporation (NTPC) and the National Hydro Power Corporation (NHPC), important steps towards an improved organizational structure of the power sector have been made. CEA was reorganised and its powers enlarged; amendments in the financial provisions of the Electricity (Supply) Act 1948 clarified the requirements to be followed in tariff setting, the financial performance of SEBs has improved; the majority of SEBs have completed tariff studies based on marginal cost pricing principles; CEA has prepared a long-term National Power Plan; and the increased investment in the sector will help eliminate the power deficits. 1.19 Because of the rapid expansion of the power industry, all aspects of the sector needed to be reviewed and solutions found for its various problems. GOI established in 1978 the Committee on Power, which submitted its conclusions to GOI in September 1980. They refer to all major aspects of the power sector including planning, project formulation and implementation; operation and maintenance; organization and management; finance, and tariffs; rural electrification; and research and development. The recommendations of the Committee on Power, most of which are satisfactory in light of the Bank Group's strategy, form a basis for improvement of all those aspects of the power sector. 1.20 In accordance with undertakings agreed during negotiations for the Second Korba Thermal Power Project, GOI furnished, in May 1982, a program for the implementation of five categories of power sector improvements which the Bank Group considered areas of high priority. Satisfactory progress has been made in these five areas for which some of the more recent activities and achievements are as follows: (a) Performance of Thermal Power Plants The Department of Power in GOI has established teams of specialists, including representatives from CEA, SEBs and manufacturers, to visit all thermal power plants with 100/120 MW and 200/210 MW generating units in the country to diagnose technical and operational problems, propose solutions and assign responsibilities for their implementation. Repeat visits are planned to assess progress. (b) Coordination of Power Development and Growth in Other Sectors The Bank Group received the draft National Power Plan for power development in September 1982. This plan provides fore- casts of power demand, and projects the generating capacity and -8- equipment that will be required to meet this demand. It will provide the basis both for five-year plans and annual investment programs. (c) Intensification of Hydro-Electric Power Development GOI is progressing with plans for a number of hydro projects, some of which will be proposed for Bank Group financing and others for bilateral assistance. Several projects - among them Vishnu Prayag (UP), Lohari Nag (UP), Naphtha Zhakri (HP), Puyan Kutti (Kerala), and Lower Periyar (Kerala) - have reached advanced stages of project preparation. The Upper Indravati project, the first hydro power project in India to be proposed for Bank Group financing, was approved on May 10, 1983. In addition, GOI is planning to begin investigations on what would be one of the largest bydro power projects in the world - the 15,000 MW Dihand project-in north eastern India where a number of other projects are also under consideration. (d) Strengthening the role of the Central Sector in Power Generation and interstate High Voltage Transmission (i) GOI, through NTPC, has under construction and partly in operation about 10,000 MW of power generating capacity. In addition to the four Bank Group-financed thermal stations at Singrauli, Korba, Ramagudam and Farakka (which, except for Farakka, are now in their second phases of construction), a 1000 MW plant at Rihand (UP) and a 1260 MW plant at Vindhyachal (MP) are also being undertaken by NTPC. Agreements have been signed with the UK and USSR, respectively, for the financing of these plants. A 840 MW plant near Delhi is also under consideration by NTPC. (ii) The Central Power Transmission project will reinforce the Centrally owned power transmission grid, and provide the first stage of integration of the Northern, Western and Southern regional grids, taking into account compatability for eventual energy pooling. (e) Establishment of Financial Objectives and Policies for their Implementation; Principles for Evolving Rational Tariff Policies; and Improvements in Management Information and Accounting Systems for State Electricity Boards. (i) Legislation for amendment of the financial provisions of the Electricity (Supply) Act, 1948 was enacted by GOI in August 1983. These amendments will remove some of the -9- anomalies in the Act which have resulted in the SEBs all following different and inconsistent accounting practices, thereby rendering their financial performance impossible to measure or compare. (ii) Management consultants have completed a review of present accounting practices in two of the SEBs (Punjab and Gujarat); they are now engaged in developing a uniform system of commercial accounting for adoption by all SEBs. Their review was followed by preparation of a draft report and accounting manual completed in January 1984 which will form the basis of the new accounting system scheduled for introduction in 1985. CEA is charged with monitoring the development of the new accounting system and the financial performance of the SEBs. (iii) With the Third Rural Electrification Project, approved in June 1982, new financial performance criteria for the SEBs were introduced. These were designed to provide for reasonable contributions by the SEBs to power investment, and to reduce gradually State Government subsidies for rural electrification losses. Power Supply and Demand in the Western Region 1.21 The Western Region, in which the project would be located, comprises the states of Gujarat, Madhya Pradesh, and Maharashtra and the Union Territories of Goa, Daman and Diu, and Dadra and Nagar Haveli. The Region covers about 29% of the country's area and has an estimated population of 149 million. Industrial electricity consumption represents about 62% of the region's total, compared with 57% nationwide, agricultural uses account for 13% (against 18% for India), and the rest (25%) is consumed by residential and commercial users. Overall electricity sales have been increased between 1975 and 1983 at an average annual rate of about 8% p.a. Industrial consumption increased at an annual rate of 6.2%, agricultural at 14% and domestic at 12%. Maharashtra consumes about 54% of the total production, followed by Gujarat (28%) and Madhya Pradesh (18%) (Annex 4). 1.22 As of March 1983, the total installed utility capacity in the Region was about 10,045 MW, consisting of 78% thermal, 18% hydro and 4% nuclear (Annex 5). This capacity, with the exception of 210 MW owned and operated by NTPC and 420 MW owned and operated by Department of Atomic Energy, is owned by SEBs. There are in addition,some 660 MW of captive industrial generating plants (above 600 kW per set). About 51% of total regional capacity is located in Maharashtra, 28% in Gujarat and 21% in Madhya Pradesh. Although installed capacity increased at about 10.4% p.a. during 1975-83, available capacity grew at about 8.3% p.a., indicating a significant deterioration in plant availability (only about 62% of installed capacity in 1982/83). Causes of low availability range from lower than expected quality of coal and -10- equipment to overloading of plants due to capacity shortages. Although interconnection of the Region's states is established, operations are not yet fully integrated due to operational constraints in Madhya Pradesh (Annex 6). The pooling and dispatching arrangements are coordinated through REB and are expected to substantially improve with a new load dispatch facility based on a real time computer currently under installation. 1.23 Annex 7 shows the past and projected power supply situation for the Region and the expected capacity additions during 1984-92. The peak and energy requirements shown are based on the forecast prepared for the National Power Plan, adjusted on the basis of the actual demand observed in 1982/83 in the Western Regiorn. Currently the power shortage in the region is critical resulting in severe supply restriction in all three States, especially in Maharashtra and Madhya Pradesh. Regulatory measures for power cuts and restrictions and load shedding were imposed throughout the year which affected the industrial and agricultural consumers as well as domestic users above a minimum level. Due to the existing shortage of peaking capacity, the constrained peak demand has grown at an average rate of only 7.4% p.a. during the last five years. Demand for peak capacity is expected to grow at about 8.5% p.a. until 1992. The present estimated capacity shortage of about 1300 MW or 17% of the potential demand would be eliminated, according to current plans, around 1990. New addition to capacity during 1980s will be priedominantly thermal, but in 1988/89-1992/93 additional hydel capacity of 2,386 MW is expected to be commissioned, including 500 MW from the propoised Bodhghat Project. Supply and Demand of Electricity in Madhya Pradesh 1.24 As of March 1983, the total installed capacity of MPEB, the beneficiary of the project, was about 1,841 MW, consisting of 90% thermal (mostly coal fired) and 10% hydro. During the last 10 years, both the peak load and the installed capacity grew under restricted supply conditions at an annual rate of 9.5% (Annex 8). Electricity sales have grown at 8.1% p.a. during 1978/79-1982/83 reaching 5,878 GWh in 1982/83 (Annex 9). Due to capacity shortages, imports were always needed to partially cover the deficits. It is estimated that the unconstrained estimated peak load would reach about 4,800 MW in 1991/92 at a rate of growth of about 12.5% p.a. and that the current capacity deficit of about 17% (320 MW) in 1983 will increase to some 19% (900 MW) in 1991/92. Energy requirements are also expected to increase at a rate of 12.5% p.a. between now and 1991/92, but the existing deficit in energy availability will, however, decrease from about 23% to about 13% in the same period. Of the total electricity consumption in Ml' in 1982/83, 94% was for productive uses (commerce, industry, agriculture, traction) leaving the balance to domestic users, whose consumption is one of the lowest in India. In the same year, industry consumed 71.4% of the electricity, followed by irrigation (9.4%), domestic uses (7.5%) and railways and waterworks (5.7%). While the share of industrial consumption, the single largest consumer, remained relatively unchanged during 1975-83, agricultural consumption grew at 16.6%, from 5.5% of the total in 1975 to 9.4% in 1983. Annex 10 shows the consumption by consumer categories for 1974-83. -:1.1- II. THE BORROWER, THE IMPLEMENTING AGENCY AND THE BENEFICIARY A. The Borrower Lending Arrangements 2.01 GOI would be the borrower and recipient of the Loan and Credit, and would channel the proceeds to the Government of Madhya Pradesh (GOMP) in accordance with its standard arrangements for development assistance to the States. GOMP, in turn, will make available these funds to MPEB as part of its lending contribution to the latter's investment program. MPEB would implement the Project and, upon completion, it would carry out its operation and maintenance. It was agreed that Madhya Pradesh will onlend to the Board the proceeds of the Bank Group funds for a term of 25 years, including a period of grace of 5 years, at an interest rate of not less than 7.5% per annum. GOI and GOMP also confirmed that the remainder of the funds provided for the Project would also be made available to MPEB on a loan basis under the same terms. These terms are acceptable considering that GOMP's contribution to the project, including IDA and IBRD funds, are made available to SEB in its entirety as a loan. The onlending rate is positive in real terms and will be adjusted annually by GOMP to keep it so. B. The Implementing Agency and The Beneficiary Madhya Pradesh State Electricity Board (MPEB) Organization and Management 2.02 MPEB was constituted in 1950 under the Electricity (Supply) Act of 1948, and is responsible for generation, transmission and distribution of electricity throughout the State. It constructs and operates thermal and hydroelectric generating stations, and transmission and distribution networks to supply ultimate consumers and licencees with electric power. However, MPEB is not fully autonomous in executing these responsibilities, since it is controlled, according to statutory power, by the State Government, especially in matters of staffing, borrowing and tariff-setting. MPEB-s capital investment program is determined within the overall State and national planning framework. 2.03 MPEB is a corporate body consisting of six members including a full-time Chairman and three full-timae members for Generation, Transmission and Distribution, and for Finance. The other two members of the Board are part time and comprise GOMP-s Finance Secretary and Energy Secretary (Annex 11). MPEB-s organizational charts suggest well defined responsibilities for its operating units in the headquarters, regional divisions and prdject sites. Transmission and distribution responsibilities, including commercial -12- activities, are carried out by four regional Chief Engineers who supervise about nineteen circles each headed by a superintending engineer. MPEB executes considerable part of its development program with its departmental organization. It also owns and runs two workshops for fabrication of towers for high-tension lines, up to 400 kV, and structures for substations. Staffing 2.04 At the enid of 1982/83, MPEB had about 63,000 regular employees and about 30,000 workers employed on a daily wage basis (Annex 11). About 18,000 employees of its regular labor force and at least 90% of the daily wage workers are engaged in construction activities. On this basis, operat:ion and maintenance staff total 44,000 employees, giving a ratio of about 48 consumers per employee which, although high, is acceptable when compared to other SEBs in India. All the sanctioned positions in MPEB at the top management and middle management levels are filled. Vacancies at lower levels do not represent more than 8% of the sanctioned posts. Training 2.05 MPEBs Central Training Institute at Jabalpur conducts intensive induction courses for engineers and chemists prior to their regular appointment. The normal training period is one year for engineers and. 15 months for chemists, and covers technical, administrative and accountinLg subjects. For diploma holders, induction courses are provided for 3 months in four training centres. There are also two training centres which provide training for linemen. Similarly, thermal power plant operators are trained for 3 to 6 months under supervision of training staff at the Korba and Amarkantak power plants. In addition to these in-house training arrangements, the Board has been sending its personnel to attend various courses organized by institutions in the country or abroad on managerial and engineering aspects related to its activities (Annex 12). MPEB Accounts 2.06 MPEB's accounting system is not fully in line with accepted commercial accounting practices. Moreover, it has not implemented the State Government directive issued in July 1979 to adopt the revised forms of annual accounts prescribed by CEA in consultation with the Comptroller and Auditor General of India. However, M1PEB, under the Third Rural Electrification Project, agreed to introduce, from April 1, 1984, a system of commercial accounting to be prescribed by GOI (similar undertakings have been submitted by fourteen SEBs). GOI has initiated the preparation of a suitable unified SEB accounting system. The consultant retained by GOI to develop the nlew system completed, in January 1984, a preparatory report which was due in June 1983. In view of this slippage and other considerations, GOI now proposes to initroduce the new accounting system from April 1985 and that local consultants be hired by each SEB to verify and adjust the existing accounts -13- and to provide the necessary guidance and training during the initial stage of the system implementation. GOI provided in February 1, 1984 (letter DO:10(4)83-FIN) the schedule for the implementation of the uniform commercial accounting system in all SEBs starting from April 1985. This schedule was confirmed during negotiations. It was also agreed that MPEB will introduce, from April 1985, a uniform commercial accounting system satisfactory to GOI, with the assistance of a local consultant whose terms of reference will be provided to the Bank by June 30, 1984. In addition, it was agreed that, given the delay in the introduction of the uniform commercial accounting system for the SEB, the proposed system of Project accounting including manuals, regulations, and formats would be provided to the Bank by October 31, 1984. Data Processing Facilities 2.07 MPEB-s existing computer is used for billing (25% of MPEB's urban consumers), inventory control for transmission and distribution stores, revenue returns, staff records, and payroll for the Jabalpur District (2,200 employees). Expansion of existing computer applications and introduction of new ones, considered essential to MPEB's proper management and operation, are not possible however due to the limited capab:ilities of the existing data processing facilities. In this regard, the computer services should be extended to cover new areas such as system operation (plant dispatch, load management, interruption analysis, demand and consumption analysis), managerial accounting, budgetary control, project management and cost control. In addition, the existing services should also be extended to cover billing for all consumers and inventory control for all power generation stores. These improvements are part of the proposed Project. It was agreed that the consultants required for the upgrading of MPEB's data processing facilities will be retained by December 31, 1984. Audit 2.08 The audit of MPEB is undertaken by the Comptroller and Auditor- General of India, who has satisfactory completed the audit report for 1981/ 82 with substantial emphasis on MPEB-s performance as a commercially oriented entity. It was agreed that Madhya Pradesh shall cause the Board to furnish the Bank, not later than nine months after each fiscal year, with its financial statements for such year as certified by an independent auditor and not later than twelve months after the end of such year, the audit report by said auditor. Transmission and Distribution Losses 2.09 At present MPEB-s transmission and distribution losses are about 22.2% of the energy supplied, which is the highest in India. MPEB attributes the high losses mainly to low load density (kW/Km2), restrictions on power supply and to the extension of the low tension distribution system. In -14- MPEB's financial projections system losses have been progressively reduced to reach 18% in 1989/90 and contained at that level. However, the measures required to produce this gradual reduction in system losses have yet to be confirmed. MPEB and GOI have been asked to submit, by negotiations, a plan of specific and quantified measures designed to gradually reduce the system losses to 18% by 1989/90; this plan should address both technical and nontechnical losses, and include proposals to reduce each category with annual targets to be achieved. The Indian delegation furnished to the Bank a program for the control and reduction of system losses. However, the program needs to be worked out in further detail to meet the Bank-s requirements. Therefore, it was agreed that MPEB will provide a more detailed program satisfactory to the Bank before May 31, 1984, and control its energy losses in accordance with the agreed program. Insurance 2.10 MPEB follows standard practices for insuring elements being procured for ongoing projects against total or partial loss. For permanent installations MPEB holds policies which conform to the accepted utility practices in India in terms of the nature and amount of coverage. Taxes 2.11 SEBs are liable to income tax; however, because of the nature and size of the investment program MPEB is not charged tax payments. Due to the intensive capital expenditure of MPEB between 1983/84 and 1991/92, an income tax liability will not arise in the foreseeable future and accordingly, a tax equalization reserve is not necessary. Besides, GOI is now considering a recommendation of the Committee on Power to exempt SEBs from income tax. -15- III. THE PROJECT Background 3.01 The proposed 500 MW hydropower station under the Project is located in the Bastar District in the State of Madhya Pradesh, some 1,200 km southeast of New Delhi on the Indravati river (Map No. IBRD 17747). The project was prepared by CEA, CWC, and MPEB staff and was submitted by GOI for Bank consideration in September 1982. Two preparatory missions visited India in October 1982 and June 1983, and appraisal took place in October 1983. 3.02 GOI, as part of its policy to rationalize the use of the country's energy resources and to make a more efficient use of its power generating potential, has decided to emphasize hydropower development. India's power system is predominantly thermal, based on coal fired plants, and the absence of a balanced blend with hydropower has led to either improper and expensive operation of thermal stations as peaking facilities or, even worse, peak shortages. This situation is particularly serious in the Western Region where 78% of the capacity is thermal and in MP where 90% of the total is coal fired plant. The chronic peaking shortages in the region have resulted in widespread load shedding, overloading of the existing plants, increased operating costs and, as a consequence, less than required thermal unit maintenance. The proposed Project, which is the least cost option for the Western System expansion, is geared to alleviate this situation. 3.03 In parallel with the more intensive development of its hydropower potential, GOI is committed to the improvement of the performance and utilization of the thermal plant already in place. Due to a number of factors, thermal plant availability in India (65%-70%) is much less than what would be a reasonably good performance (about 80%) for India's conditions. The main reasons for this situation appear to be: a) lower than expected quality of coal, leading to overloading of coal handling facilities and to rapid wearing of the equipment, b) poor quality of some equipment components resulting in increased forced outages, c) problems with instrumentation and monitoring of the units, and d) impossibility of performing proper maintenance due to system overloading. In order to remedy this situation, GOI is considering a major national thermal rehabilitation program. However, the problems and issues to be faced in a nationwide program of this magnitude are not fully clear and a smaller pilot project is indicated as a first phase. Such a pilot project of this nature has been included as part of the proposed Project, with the intention to replicate it in other States. -16- Project Objectives 3.04 In addition to the primary objective of increasing the generating capacity of the state of Madhya Pradesh and thence of the Western Region, the project will assist GOI in achieving objectives on which the Bank has agreed, namely: (a) More efficient use of existing plant, through the implementation of the pilot program of thermal plant rehabilitation in Madhya Pradesh, and (b) Improvement of MPEB operations by expanding and modernizing data processing services to cope with the commercial and managerial needs of the Board. In addition, to assist in the definition of electricity metering policy in in India, GOI has agreed to carry out a study on metering practices in a number of selected states which is expected to be completed before May 1986. Terms of reference for a proposed metering study were provided previously to GOI by the Bank and these have been taken into account in defining the scope of the GOI study. The results of the study will be made available to the Bank for comments. Project Description 3.05 The proposed project will include the following components: (a) The construction of a 500 MW hydropower station, including: (i) A powerhouse housing 4x125 MW turbogenerating sets and associated electrical and mechanical equipment. (ii) A combined gravity rock-fill dam about 90 m high and 1,650 m long in the Indravati River. (iii) A water conductor system composed of a head race tunnel of about 12 m in diameter and 3,000 m long, a surge tank, and four pressure shafts about 400 m long and 6 m in diameter; (iv) About 5 km of open tailrace channel; (v) Step-up transformers (11/220 kV), switchyard equipment, and about 5 km of 220 kV double circuit transmission line to connect the project, to the nearby existing Barsoor substation. -17- (b) The execution of a thermal plant rehabilitation program in the State of Madhya Pradesh, including the purchase and installation of elements for repair and upgrading of the thermal units. (c) The expansion and modernization of the MPEB data processing facilities, including development of software and purchases of necessary computer equipment. (d) The necessary site services and facilities. (e) The associated consulting, engineering, training, and administrative services required to carry out parts (a) to (d) of the project. Transmission 3.06 Load flow analyses carried out by CEA for the Western Regional grid indicated that it will be necessary to reinforce the existing Barsoor-Bhilai transmission system when the project is commissioned. MPEB's medium term investment program includes for this purpose a 400 kV single circuit line (to be initially energized at 220 kV) between the two substations. The line is not financed under the proposed Project but assurances were obtained that MPEB will complete the necessary transmission works before December 31, 1990, and that the detailed engineering for this transmission system will be completed not later than June 30, 1986. Project Cost 3.07 Table 3.1 shows a summary of project costs. The total cost of the Project, including contingencies but excluding about US$85 million in taxes and duties is estimated at US$638 million equivalent, of which US$213 million (33% of the base cost) represents the foreign exchange costs. Interest during construction adds another US$214 million to the financing required. A capitalized front end fee on the proposed Bank loan adds approximately a further US$0.4 million. The project cost estimates are based on December 1983 actual prices for similar works. Price contingencies, amounting to about 27% of the base cost, are based on expected inflation rates of 7% for FYs84 and 85, 8% for FYs86 and 87, and 6% thereafter for local costs, and 7.5% for FY84, 7% for FY85, and 6% thereafter for foreign costs. Physical contingencies of about 15% on civil works and 5% on mechanical and electrical equipment have been allowed, amounting to about 11% of base cost. The cost of civil works is based on recent quotations received in India for similar projects and on updated State rates applicable to Government contracts in Madhya Pradesh. The cost of the turbo-generator sets has been estimated after consultations with manufacturers of major rotating equipment. The cost of electrical and mechanical equipment is also based on data on recent purchases of similar items by MPEB. The cost of the elements of the thermal rehabilitation program was estimated on the basis of quotations for similar I -18- equipment and materials received by MPEB. The cost of the consulting services required for the implementation of the Project was estimated at US$11,500 per man-month for foreign consultants and at US$3,500 equivalent for local consultants, including fees, travel, and subsistence expenses. An amount of 10% of the base cost has been assumed for engineering and administration. Interest during construction has been added, assuming that 80% of the cost would be financed through borrowings from GOMP (paras 2.01 and 3.08). The rates for GOMP loans to MPEB have been established by the State Government as follows: 1983/84, 7.4%; 1984/85, 7.5%; 1985/86, 7.6%; 19886/87, 7.7%; 1987/88, 7.7%; 1988/89, 7.8%; 1989/90, 7.9%; 1990/91, 8.0%; 1991/92, 8.1%. The front end fee on the Bank loan has been calculated at 0.25 of 1%, assumed to be capitalized under the loan. Annex 13 presents detailed cost estimates for the project. Table 3.1: Project Cost Summary % of ---Rupee Million -- US$ Million---- Foreign % of Total Local Foreign Total Local Foreign Total Exchange Base Costs Land and Relocation 220.0 - 220.0 22.0 - 22.0 - 4.2 Preliminary Works 143.0 - 143.0 14.3 - 14.3 - 2.7 Dam 1,364.0 511.5 1,875.5 136.4 51.2 187.5 27.3 35.8 Water Conductor System 368.6 124.2 492.8 36.9 12.4 49.3 25.2 9.4 Civil Works Power House 91.8 17.1 108.9 9.2 1.7 10.9 15.7 2.1 Tail Race Duct and Channel 215.0 21.5 236.5 21.5 2.2 23.7 9.1 4.5 Miscellaneous Civil Works 22.0 - 22.0 2.2 - 2.2 - 0.4 Turbo Generators and Auxiliary Equipment 827.5 674.4 1,502.0 82.8 67.4 150.2 44.9 28.7 Station Auxiliary Services 71.0 27.1 98.2 7.1 2.7 9.8 27.6 1.9 Step Up Transformers 78.6 10.7 89.2 7.9 1.1 8.9 12.0 1.7 Switcnyard and Transmission Line 59.5 8.1 67.6 5.9 0.8 6.8 12.0 1.3 Thermal Plant Rehabilitation 175.0 175.0 350.0 17.5 17.5 35.0 50.0 6.7 Training, Consulting Services, and DPU upgrading 15.0 15.0 30.0 1.5 1.5 3.0 50.0 0.6 Total Base Cost 3,651.0 1,584.6 5,235.6 365.1 158.5 523.6 30.3 100.0 Physical Contingencies 437.7 140.8 578.5 43.8 14.1 57.8 24.3 11.0 Price Contingencies 1,011.5 402.3 1,413.8 101.1 40.2 141.4 28.5 27.0 Total Project Cost 5,100.2 2,127.7 7,227.9 510.0 212.8 7I278 29.4 138.1 Interest during construction - - Bank - 414.0 414.0 - 41.4 41.4 100.0 7.9 Other 1,729.0 - 1,729.0 172.9 - 172.9 30.1 Front-end fee on Bank loan - 4.0 4.0 - 0.4 0.4 100.0 - Total financing required 6,829.2 2,545.7 9,374.9 682.9 254.6 937.5 22.7 -19- Project Financing 3.08 The proposed Bank Group financing for the project amounts to US$300.4 million, representing 47X of the total cost, net of duties and taxes. Of this total, SDR 134.4 million (US$143 million equivalent) will be financed from IDA's Special Fund under stanidard terms for such credits, and US$157.4 million (including the capitalized front end fee of about US$0.4 million) will be an IBRD loan at the prevailing variable rate of interest to be repaid over 20 years, including a 5 year grace period. Bank Group funds will finance about US$200 million (79%) of the total foreign exchange costs and US$101 million (15%) of local costs, net of taxes and duties. MPEB will cover 20% of the total financing required (US$187 million equivalent), and the balance, US$450 million equivalent, will be financed by GOI, through GOMP, in accordance with the onlending terms outlined in para 2.01. It has been agreed that GOI will seek to finance about US$85 million equivalent, representing the foreign component of the turbogenerator sets and associated equipment, through suppliers' credits, export credits or commercial bank loans, if the contract for turbogenerators is won by a foreign supplier. All cost overrun, interest rate and foreign exchange risks will be borne by the GOI. Assurances were obtained that MPEB and GOT, through GOI4P, will provide for the necessary funds for project implementation in a timely manner. It was also agreed that, if cofinancing is arranged for the turbogenerators, the Bank would seek to reallocate any Bank Group funds not required for this purpose to other elements of the project as appropriate. Table 3.2 shows the proposed financing plan. Table 3.2: Project Financing Plan (US$ Million) Local Foreign Total IBRD Loan 28.3 129.1 157.4 IDA Special Fund Credit 72.6 70.4 143.0 GOI/Cofinanciers 395.0 55.1 450.1 MPEB internal generation 187.0 - 187.0 Total 682.9 254.6 937.5 The US$55.1 million in foreign exchange not financed by the Bank corresponds to interest on the IBRD loan, (about US$41.4 million) and to part of the foreign component of locally procured equipment (about US$14 million). Construction Schedule 3.09 The project will be executed over a period of 7.5 years, starting early 1984. Commissioning of the first unit is expected in October 1989 with -20- the other 3 units following at 3 months intervals. The last unit is expected to be commissioned by June 1990. Final works on the dam, not affecting operation of the units, will be completed by September 1991. To achieve this, the following schedule needs to be met: Award of Contracts for Dam October 20, 1984 Award of Contract for the Wiater Conductor System October 20, 1984 Award of Contract for the Excavation for the Powerhouse August 1, 1984 Award of Turbogenerators Contract November 30, 1984 Award of Contract for the Tail Race Channel October 20, 1984 The proposed construction schedule prepared by HPEB, shown in Annex 14, is considered realistic. Project Engineering 3.10 The Project site has been investigated for several decades but systematic studies began only in the early sixties. Since then GSI has carried-out the geological site investigation, including about 3,500 m of exploratory drilling. Moreover, between 1965 and 1979, CWC collected and analysed hydrological information, developed the project concept and prepared preliminary designs. These works served as the basis for the formal adoption of the project by GOI in 1979. Since then, designs have been refined and additional explorations have been carried out as needed. Following the Indian practice in this respect, CWC has been responsible for the civil engineering of the project and CEA for ,he electromechanical aspects. Both organizations have experience in similar projects as they have served as the engineers for most of the hydropower and irrigation schemes in India for several decades. The engineering for the hydroelectric plant has been completed at a level sufficient for bid invitations and detailed construction drawings are under preparation. Bids for major civil works will be invited by late May 1984. 3.11 At the request of the Bank Group, MPEB appointed, in July 1983, a Dam Review Panel (DRP), consisting of independent experts retained under terms of reference acceptable to the Bank, to oversee the technical design and construction aspects of the Project. DRP in its first meeting in August 1983, concurred with the general layout of the Project. In addition, the Bank Group retained specialists in geology, hydrology and concrete dams to assist the appraisal mission in carrying out the technical review of the Project. After their review, the Bank Group consultants found the Project technically sound and endorsed the proposed layout and design. The consultants proposed a number of modifications to the designs and location of the dam to improve the reliability and economy of the Project, These changes do not imply substantial alterations to the Project as proposed by GOI and -21- would be accommodated during the completion of the final design. Moreover, although nearby geological exploration and surface geology of the modified dam site location indicate a sound foundation, the consultants recommended a program consisting of about 1,350 m of additional deep borehole drilling, to confirm the geological conditions and the final foundation treatment. At the time of negotiations 35% of the total exploration program had been completed under the gravity section of the dam revealing a problem free foundation as expected. Project Implementation 3.12 MPEB will be the implementing agency for the Project. CEA and CWC will provide engineering and consulting services to MPEB. Their responsibilities will include, but are not limited to, the preparation of tender documents, specification and construction drawings, the review of costs, and general technical assistance during project construction. MPEB has assigned part of its staff to work on project design with and under the direction of CEA and CWC. In addition, it has been estimated that about 400 man-months of private consulting services, as outlined below, will be required for the project, of which about 130 man-months are expected to be external and 270 local consultants. MPEB has also created a project executing unit under the Chief Engineer and proposed a 3 year staffing plan which will be reviewed annually with the Bank Group. The organization (Annex 16) and functions of the unit are satisfactory. This unit would be responsible for the overall field construction management and supervision. 3.13 MPEB has units experienced in general construction management, procurement, store management, etc. which will assist the Project unit, when needed. MPEB, and the Bodhghat executing unit in particular, might need assistance in contract management and in the supervision of tunnelling work. In fact, MPEB's staff has had limited exposure in the areas of international contracts management and underground excavation works. The appraisal mission estimate that around 200 man-months of consulting services will be required for this purpose. The proposed Project provides for this assistance. It is estimated that assistance will be needed in project management, and dam construction (95 man-months), tunnel construction (60 man-months) and specialized consulting services in various aspects as needed (about 45 man-months). 3.14 MPEB staff have prepared a unitwise preliminary diagnostic of the needs for the rehabilitation of thermal plants including cost estimates. This assessment was used in defining the scope of the rehabilitation component of the Project. However, in view of the nature of the works involved, the rehabilitation program will be executed in the following phased manner: (a) review of the MPEB proposal by specialized consultants and confirmation, and, revision if needed, of the physical works -22- to be carried out, including their economic justification and ranking in merit order, relative priorities and of the necessary improvements in operation and unit monitoring practices, including an evaluation of the potential cost savings to the system; (b) preparation of the implementation plan comprising detailed schedule for purchases, determination of quantities, specifications and tender documents, schedule for execution of works, manpower estimates, training, power substitution, administrative measures, monitoring system, etc; and (c) physical execution of works and training of operations and maintenance staff. It was agreed that, in regard to the improvement of the operations and maintenance practices, MPEB will also prepare, before March 31, 1985 a diagnostic for discussion with the Bank identifying the areas for improvement and proposing the scope for further consultants review. The proposed terms of reference for the planning and implementation of this component are included as Annex 15. 3.15 The thermal rehabilitation component will be executed by MPEB with the assistance of consultants retained in accordance with terms of reference acceptable to the Bank Group. It is estimated that about 100 man-months of consulting services would be needed. MPEB has extensive experience with different sizes of thermal units totalling over 2,000 MW and staff qualifications and numbers are considered adequate to properly carry out the rehabilitation work. MPEB agreed to recruit and appoint consultants for assisting in the identification, preparation and execution of the pilot component of the project for thermal station rehabilitation in accordance with terms of reference acceptable to the Bank Group, not later than December 31, 1984. 3.16 The upgrading of the data processing facility in MPEB will include the development of additional software, purchase of computer equipment and training of staff. It will be executed with the assistance of consultants and in accordance with terms of reference satisfactory to the Bank Group. Arouand 100 man-months of consulting services are estimated to be required after a review of the studies already available on the Subject. The consultants would assist MPEB in: a) defining the scope and priority of the new computer applications or the expansion of the existing area, b) formulating a plan for its implementation including selection of hardware and software, according to GOI's norms and practices, c) setting a training program for MPEB staff and d) assisting in the implementation of the expanded system. Assurances were obtained that consultants for assisting in the imp:Lementation of the upgrading of MPEB data processing facility will be retained not later than December 31, 1984. Procurement 3.17 Procurement arrangements for the project are summarized in Table 3.3. -23- Table 3.3: Procurement Arrangements (Million of US$) 1/ Project Element Procurement Method Total ICB LCB Other N.A.3/ Cost A. Civil Works Dam 237.5 237.5 (143.0)2/ (143.0) Water Conductor System 47.8 47.8 (28.7) (28.7) Tail Race Channel 30.8 30.8 Other Civil Works 31.2 31.2 (8.7) (8.7) B. Equipment T-G sets and auxilliary eqpt. 88.1 89.2 88.1 (88.1) (88.1) Main step-up transformers 8.4 8.4 (8.4) (8.4) Other equipment 3.5 33.6 37.1 (3.5) (3.5) Transport, insurance, erection 33.3 33.3 (4.6) (4.6) C. Training, Consulting Services and DPU upgrading 3.8 3.8 (2.0) (2.0) D. Land and Relocation 27.8 27.8 (-) (-) E. Engineering and Administration 60.4 60.4 (-) (-) F. Thermal plant rehabilitation 9.0 11.0 11.4 31.4 (9.0) _(4.0) (13.0) Total 425.1 75.8 48.5 88.2 637.6 (280.7) (8.7) (10.6) (-) (300.0) 1/ Amounts net of duties and taxes. 2/ Figures in parentheses indicate Bank financed portion. 3/ Not subject to commercial procurement. -24- The 3 major civil works contracts for the dam, water conductor system, and tail race channel will be awarded after ICB, and the balance (civil works for the powerhouse, access roads, site buildings, staff quarters, and site utilities) under LCB procedures acceptable to the Bank. Prequalification will be required for the 3 major civil works contracts. Major local firms are expected to be competitive for the civil works. Since the civil works of dam will be financed from IDA's Special Fund, only certain selected countriesl/ would be eligible to participate in the procurement of this item. The turbogenerators, the main step-up transformers and the steel plates for penstocks and gates, amounting to about US$100 million, will be subject to ICB whereas miscellaneous equipment, amounting to about US$44 million, will be procured under LCB procedures acceptable to the Bank Group. Foreign suppliers will not be precluded to participate in LCB. It is expected that local manufacturers will be competitive for all the equipment contracts. Most of the items necessary for the thermal rehabilitation program are expected to be subject to ICB (boilers, turbine rotors, pumps, etc.), some of them, however, might need to be procured through limited tendering if the amounts involved are small or the number of suppliers is limited, or through direct purchases in the case of proprietary items. MPRB will furnish in advance for Bank approval lists of the items to be procured through limited tendering or direct pruchase. About 75% of the goods, works and services for the project will be procured under ICB. Local contractors, competing under ICB, will have 7.5% preference margin for civil works and local manufacturers a 15% preference or the applicable duty, whichever is less, for supply of goods. Consultants would be selected in accordance with Bank guidelines. All civil works contracts with an estimated cost of US$3 million or more equivalent will be subject to Bank Group's prior review. All equipment contracts with an estimated cost of US$800,000 or more equivalent would also be subject to prior Bank review. Prior review will capture about 85% of the estimated cost of the elements subject to commercial procurement. Other contracts would be subject to selective post-award review. Disbursements 3.18 Disbursements of IDA/Bank funds will be made against: (a) 100% of CIF price of imported goods; (b) 100% of the ex-factory cost of locally manufactured goods; (c) 50% of local expenditure for other items procured locally; (d) 100% of consultants' services; and (e) 60% of the civil works. Disbursements would be fully documented except for (a) payments under civil works contracts for one or more progress payments not exceeding Rs300,000 each, and (b) payments for locally procured items of equipment not exceeding 11 The eligible countries as of March 31, 1984 are: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, New Zealand, Norway, Sweden, United Kingdom, and Part Dwo Countries. -25- Rs150,000 each. Such disbursements will be made against statements of expenditures (SOEs), the documentation of which will not be submitted to the Bank Group but retained for inspection by the supervision missions. The standard procedure for auditing SOEs will apply. Annex 17 shows the estimated disbursements schedule as derived from the construction program, considering the normal commercial payment terms for the types of contracts envisaged for this project. The schedule is considered realistic for this kind of project. Since there is no previous information on typical disbursement profiles for hydro power projects in India, (this is the second Bank Group financed hydro station in India), no meaningful comparison can be made in that respect. However, the Project's disbursement profile fits closely the Bankwide pattern for similar power projects. The closing date would be June 30, 1992. Water Rights 3.19 The Indravati river, in which the project is located, is an interstate river flowing from Orissa into Madhya Pradesh. Further downstream, it forms the boundary between Madhya Pradesh and Maharashtra. The joint utilization of the Indravati is regulated by the agreements reached among the States. The agreements are part of the final report of the Godavari Water Disputes Tribunal. According to the agreement, Orissa will ensure at its border 45 billion cubic feet in the Indravati and its tributaries at 75% dependability. The planning of the Bodhghat project takes into account the interstate agreements. Thus, there are no standing interstate water rights issues regarding this project. Land Acquisition and Resettlement 3.20 Total land area required for the project is about 13,250 ha of which about 4,650 ha (35%) is private property, 5,480 ha (41%) is State owned forest land, and the balance (24%) is owned by the Revenue Department of India. The surveying and valuation of the private plots, have been already completed and the notifications of purchase to the landowners have been issued. Valuation of property (houses, fruit bearing trees etc.) is also underway. Land for compensatory afforestation and relocation of outsees has also been identified and is already owned by the State. 3.21 About 2300 families are expected to be displaced during 6-7 years construction and reservoir filling period, of which about 75% are tribals. MPEB has prepared a resettlement program setting priorities for the transfer of the affected population in a sequence consistent with the construction of the project. The Government of Madhya Pradesh has constituted since 1982 a Rehabilitation Committee under the chairmanship of the Bastar Divisional Commissioner. This committee is represented by district level officers of Revenue and Tribal Welfare, and other concerned departments and elected representatives of the people of the affected region. The committee is responsible for the identification of suitable areas for resettlement of the -26- outsees from the project area and to ensure that the affected population are provided with alternative means of subsistance in addition to payment of adequate compensation for any private properties acquired. The committee will also oversee the execution of the environmental protection program (para 3.22). Of the 2300 families to be relocated 519 own more than 5 acres of land, 403 own less than 5 acres, and the balance are landless peasants. All will receive 5 acres plots each and adequate cash compenssation as applicable. MPEB has already selected four adjointing tribal areas where state land is available to compensate the affected population. Sufficient funding provision have been made in the project estimates for acquisition of land and properties and no problems are expected in this regard. Sufficient funds have been also allocated for the construction of housing and related infrastructure and facilities to relocate the displaced population. It was agreed that MPEB will report quarterly, starting in December 1984, on the progress of the resettlement program. MPEB will also provide, by June 30, 1985, a plan for proposed Tribal Training Center at Barsoor, which will provide training for tribals affected by land subsurgence. Environmental Aspects 3.22 The Project has been cleared by the Department of Environment (DOE), GOI, and by the Wild Life Wing of the Madhya Pradesh State Forest Department. The studies carried out by the Forest Department indicate that the project area does not have any flora or fauna or any rare species which would suffer by the construction of the project. DOE has indicated that the project authorities should take a number of measures to promote preservation of wild life, minimize soil erosion, and prevent health problems as a consequence of the project. Adequate funding provisions have been made in the project estimates to carry out the environmental protection program including the compensatory afforestation of around 5,000 ha, and the promotion of fish farming in the reservoir itself. Since a number of the envisaged environmental actions need to be planned in further detail assurances were obtained that MPEB will furnish the Bank Group, before June 30, 1985, with: a) Detailed plan for the wildlife buffer zone around the perimeter of the reservoir shore line including map, schedule, staffing and detailed budget. b) Details of the fisheries and water management program (locations, budget, staff, schedule). c) Details of the compensatory planting component (sites, schedule, detailed budget, etc.). Project Operation 3.23 The catchment area of the Indravati river at Bodhghat (15,280 km2) amounts to 37% of the total basin area and the project is located in the -Z7- middle range land of the basin. As mentioned in para 3.19, the interstate agreements have been considered in the planning of the project and there are no meaningful water uses downstream of the powerhouse than may in any manner constrain the plant operation as planned. The average annual inf ow into the reservoir over a period of 34 years has been estimated at 5287 Mm of which 4998 Mm (95%) occur during the monsoon period (June to October) and the balance during the Son-monsoon season (November to May). Live reservoir capacity is 3715 Mm or 70% of the average annual inflow (74% of the average monsoon season inflow). According to the inflow series, the reservoir filling can be accomplished in one year, as planned, with 90% probability. 3.24 Reservoir operation analysis indicate that with the full abstraction of Orissa's water share, as per the interstate agreements, the proposed project will generate 104 MW (911 GWh) of firm power at 90% dependability and 241 GWh annually as secondary energy during the monsoon season. During the initial 10-15 years of operation, however, generation will be more since Orissa's development of water uses is planned in two stages. In this initial period the firm power will be 111.5 MW (966 GWh) and the annual secondary energy, 380 GWh. The plant is planned to be operated as a peaking facility. It is expected that, when fully commissioned, the plant will operate five hours daily during the dry months at full capacity and between nine and seven hours daily during monsoon, allowing adequate time in the season for scheduled maintenance of the units. Charts C-1 to C-4 show typical daily dispatch of the station in different wet and dry months in 1990-91. Details are provided in Table T-1. Project Monitoring 3.25 MPEB has agreed to submit quarterly reports covering physical progress, consultants work progress, costs, disbursements, and administrative aspects of the project. In addition there will be annual reports on the financial position and management situation of the Board. Progress on the loss reduction program will be reported quarterly and evaluated against the agreed program (para 2.09). Special provision has been made to monitor the pilot thermal plant rehabilitation project including the evaluation of results (Annex 15). Finally, assurances have been obtained during negotiations that MPEB will arrange, in a manner satisfactory to the Bank, for periodic inspections of the works constructed under the project in order to ensure their safe operation and proper maintenance. Project Risks 3.26 There are no extraordinary technical risks associated with the Project since the works to be constructed are well within the boundaries of known engineering technology. Necessary modifications to the layout and design concept of the Project have been introduced to improve safety and reliability of the proposed structures. Confirmatory site exploration have indicated a sound foundation for the dam. Reservoir watertightness and bank -28- stability has been confirmed by the Bank Group's independent consultants. Sediment loads have been investigated and studies show that the 700 miLlion cubic meters of dead storage would be sufficient for around 100 years, or twice the economic life of the project, which is considered satisfactory. The risks associated with potential poor construction, supervision or contract management have been kept within acceptable limits by the provision of appropriate consultant assistance to MPEB as needed. The risk of an inadequate supply of funds to the project is low, considering that MPEB's annual contribution to it would represent less than 5% of its annual investments in 1983 and is expected to remain so during project implementaion. Thus, the project does not pose an unduly heavily burden on MPEB's finances. Satisfactory assurances were obtained during negotiations that the necessary GOI contribution of funds to the project will be allocated in 1984/85 and in the Seventh Five-Year Plan starting 1985/86. -29- IV. FINANCIAL ANALYSIS Background to SEBs Finances 4.01 The financial operations of SEBs are regulated by the Electricity (Supply) Act of 1948, amended from time to time to accommodate changes in the environment of the subsector. In June 1978, several amendments were introduced to enable SEBs to reorganize their finances along commercial lines. The States, however, have not progressed much in adopting cormimercial practices, mainly because of anomalies in the Act. SEBs are allowed to avoid operating losses by not paying interest on Government loans, or by charging less than full depreciation on their assets in operation; in addition, they are not capitalizing interest during construction. Recently, following discussion with the Bank Group, GOI has proposed new amendments to the Act, aimed at removing the legal obstacles to the adherence by the SEBs to the commercial principles of utility operations. These amendments would (i) set financial objectives for SEBs based on accounting practices; (ii) outline proper accounting procedures for handling debt service and the capitalization of interest during construction; and (iii) introduce uniform commercial accounting. These amendments were approved by Parliament in August 1983 (Annex 3). During negotiations GOI has agreed that the Electricity (Supply) Amendment Act of 1983 shall come into force not later than April 1, 1985. 4.02 In line with the requirements established in the Third Rural Electrification (Loan 2165-IN) to qualify for financial asssistance, fourteen SEBs gave formal undertakings, which were endorsed by their State Governments, to introduce measures that would improve their financial performance. These included: (a) the realization of a net cash generation of not less than 20% of their average annual investment, starting in 1982/83; and (b) the limitation of the subsidies paid by the States to their SEBs to cover rural electrification losses, to a proportion acceptable to the Bank Group. MPEB Financial Performance 4.03 Prior to Loan 2165-IN, MPEB was required under earlier Bank Group agreements to achieve a rate of return of at least 9.5% on its net fixed assets in operation, based on their historical value. MPEB met this requirement in 1978/79 and 1979/80. However, it fell short of this target in 1980/81 and 1981/82 with rates of return of 8.2% and 7.8% respectively. Furthermore, MPEB realized only a 5% net cash generation instead of the required 20% iTn 1982/83 and it is expected that the net cash generation for 1983/84 will amount to only 1% (Annex 20). This low cash contribution to -30- investment is partly attributable to heavy MPEB investments during the period as well as to less than required tariff increases. 4.04 Tariff increases in the past have favored agricultural and household consumers and as a result industrial tariffs increased between 1978/79 and 1982/83 at an average annual rate of 20%, while low voltage tariffs decreased in real terms. In January 1984, the average tariff paid by bulk and industrial consumers, representing about 75% of the total consumption, was at a level of about 90% of the LRMC while that for low voltage consumers, who account for 25% of total consumption, was at a level of about 36% of the LRMC of supply (Annex 18). In order to achieve the required 20% net cash generation in 1984/85, the average revenue would have to be increased by about 20% by April 1984. As for 1985/86 to 1991/92, yearly increases ranging between 2% and 7% would be required. The heavy initial increases required are partly a consequence of the lumpy investments being carried out by MPEB for a major capacity expansion to be commissioned in the coming two or three years. Such increases would have a more significant effect on the low voltage consumers since their tariffs are considerably less than the economic cost of supply. However substantial increases to the domestic consumers are extremely difficult in view of the low consumption (only 25 kWh/month per connection) and the need to maintain a basic minimum supply at affordable prices. Similarly it is GOI s policy to maintain reduced tariffs for basic irrigation uses on social considerations. The low tension consumption for irrigation averages about 85 kWh/month per connection. In view of these reasons at time of appraisal the State Government felt that a 20% increase in April 1984 would be unattainable. Consequently, during negotiations, the Indian delegation sought more time for complying with this covenant and hence, it was agreed to accept their proposal for a gradual realization of the cash generation target as follows: 8% in 1985/86; 17% in 1986/87; and 20% in 1987/88. The targets would be achieved through the combined results of tariff increases, cost control, improved thermal efficiency, improved billing and metering, and loss reduction. It was also agreed that a new financing plan based on these targets will be prepared by GOI and GOMP and will be provided to the Bank before May 31, 1984. The tariff increases required to achieve the gradual realization of the cash generation covenant will be about 16.4% at the beginning of 1985/86, 9.4% in 1986/87, and 6.7% at the beginning of 1987/88. However, these increases may be revised on the basis of the new financing plan to be provided by GOI. 4.05 In 1979 thirteen LRMC studies were prepared by individual SEBs, under the guidance of the Bank Group. These studies, after being discussed with GOI, have led the Bank to derive a uniform methodology for the calculation of LRMC in India-s SEBs as well as the relevant computer program. The Bank Group provided GOI, in March 1982, with the details of this methodology for its consideration and comments. However GOI has not responded to the Bank Group proposal in this regard. During appraisal it was found necesssary to calculate the LRMC tariff for MPEB. This calculation was prepared on the basis of an earlier study of LRMC carried out by the Board with the guidance -31- and assistance of the Bank Group. Because of the need for a uniform methodology for the calculation of LRMC tariff in all SEBs, GOI agreed to respond to the Bank-s proposed methodology before October 31, 1984. Billing and Collectioil 4.06 At the end of FY83 MPEB had about 2,145,000 consumers, of which 434,000 (20%) were large industrial and commercial consumers, 1,311,000 (61%) domestic, 373,000 irrigation pumps and 27,000 general consumers. Meters are read monthly except for the low voltage sales, where meters are read every two months. Bills are issued every month for all consumers. The bills for low-voltage consumers in the month in which meters are not read are based upon average consumption in the preceding fiscal year. In 1982/83 about 95% of MPEB consumers were billed regularly, and about 72% of the revenue was from HT consumption (950 consumers with individual demand of 5 MW and above). About 94% of the revenues from all categories of consumers are collected during the billing year (Annex 21) and accounts receivable during the last 3 years have been less than the equivalent of 3 months billing, an acceptable level of arrears in India. MPEB-s Financial Projections 4.07 CEA has prepared MPEB-s financial projections covering the period between 1983/84 and 1991/92, based on financial data and information provided by MPEB. CEA used the approved annual investments of the Sixth Five-Year plan for 1983/84 and 1984/85 and the provisional annual investment figures of the Seventh Plan which will commence from 1985/86. These investments are expressed in current prices, escalated in accordance with the price projections used by the Bank Group. The other assumptions used by CEA to prepare the financial projections are included in Annex 21. However, the financial projections suffer two principal shortcomings: (a) the projected tariff increases are lower than needed to achieve the 20% internal cash generation required by the Bank Group, and (b) the annual expenses for operation and maintenance are understated. Consequently, the attached financial projections have been prepared to reflect the gradual realization of the cash generation covenant besides taking in consideration realistic assumptions for operation and maintenance expenses (Annex 21). 4.08 Presently, the security deposits collected annually are included in determining internal cash generation. Consequently, changes in the size of the deposits alters the level of cash generation. At the end of 1982/83, the deposits amounted to about 0.76 of the monthly sales during that fiscal year. In the financial projections prepared by CEA, a two-month level of accumulated security deposits has been assumed. Since GOI and MPEB have indicated that raising the security deposit is the SEB-s prerogative and is achievable, agreement was reached during negotiations that MPEB will gradually raise the level of consumer cash security deposits to reach two -32- months equivalency of sales by 1989/90 based on annual targets provided by the Indian delegatiorn and found acceptable Future Financial Situation 4.09 MPEB-s financial situation is expected to develop over the projected period as follows: Table 4.1: MPEB Projected Financial Situation 1983/84-1991/92 Rate of Return on Net Internal Cash Net Fixed Assets Generation - as % Tariff Operating in Operation of 3 Year Average Increases Fiscal Year Ratio (Historically Valued) Investment Assumed 1/ 84 98 8.1 1 85 101 - 1 86 93 8.1 8 16.4 87 84 8.4 17 9.4 88 89 11.6 20 6.7 89 92 10.3 22 90 93 9.8 20 3.7 91 97 8.1 20 3.0 92 97 7.8 20 5.3 This projected financial situation is based on the gradual realization of the cash generation to achieve 20% in 1987/88 and the required tariff increases. Debt/Equity Situation 4.10 SEBs obtain most of the funds for their investment by borrowing from the State Governments. This practice has resulted in a debt oriented cap.ital structure with almost no equity. Currently 67% of MPEB's outstanding long-term debt is in the form of loans from GOMP, resulting in a debt/equity ratio of about 98/2. Although the States are permitted to convert their loaus to SEBs into equity or to make equity contributions to SEBs' investments, the States have not taken any steps in this direction. The Bank Group has been discussing this issue with GOI, which is aware of the seriousness of the situation. GOI and the Bank Group will continue the discussion in future to seek an acceptable arrangement in this regard. 1/ In real terms. -33- Financial Plan 4.11 MPEB's estimated financial requirements for the period 1984/85 through 1991/92, (the period of construction of the proposed project) and the sources of funds are summarized as follows: Table 4.2: MPEB Financing Plan 1984/85 through 1991/92 Rupees US$ Million Percentage Requirement Million (Equivalent) (%) Annual Investment: Capital Expenditure 46,576 4,657.6 91.5 Interest during construction 3,967 396.7 7.8 Total Investment 50,543 5,054.3 99.3 Other Investment 162 16.2 0.3 Change in Working Capital (1505) (150.5) 0.4 Total Requirement 49,200 4,920.0 100.0 Source of Funds Gross Cash Generation 35,240 3,524.0 72 Less: Debt Service 27,104 2,710.4 55 Contribution to Investment 8,136 813.6 17 Borrowing 40,184 4,018.4 81 Staff Superannuation Fund 880 88.0 2 Total Sources of Funds 49,200 4,920.0 100.0 To finance its investment program (Annex 22), MPEB will depend on borrowing from GOMP and others to meet about 81% of its requirement during the projected period. In accordance with the undertaking given under the Third Rural Electrification (Loan 2165-IN) MPEB will realize from 1984/85 to 1991/92 a total net cash generation equal to about 17% of the total investment program for the period. -34- V. PROJECT JUSTIFICATION AND ECONOMIC ANALYSIS Least Cost System Expansion and Project Sizing 5.01 In September 1982, CEA completed a 15 year least cost expansion plan for each one of the five regional power systems (para 1.13) in India. The computer model used for the exercise (WASP III, adapted) takes the committed projects as fixed input and the new hydro and thermal projects, with their associated capital and operating costs, as variables to determine the optimum expansion sequence to meet the forecast demands. Generally, the results of the plan indicate that, among the different options, the one emphasizing hydropower development is usually the least cost one and that high forced outage rates increase the costs significantly. The plan also indicates that mine-mouth coal fired plants should be generally favored against load center ones. In the Western Region expansion program, Bodhghat was considered as a committed project. To confirm that the project remains part of the least cost expansion, the Western Region program was updated to: a) treat the project as a variable, b) take into consideration slippages that have occured in ongoing and future projects since the plan was prepared, c) update demand forecasts and d) use economic costs. 5.02 The present worth of the updated, previously optimized, expansion program (investment, fuel, and O&M costs) with Bodhghat was compared with the most realistic alternative plan without the proposed project. This alternative would include a pit head thermal station in the Mand-Raigarh area which would be added as base capacity displacing the less efficient and old thermal units towards the peak operation. Gas turbines option as a peaking alternative was found to be more expensive than the mode of operation mentioned above. The thermal equivalent capacity for Bodhghat has been calculated considering the lower availability of the thermal units when compared with the hydro ones, as 840 MW. The necessary allowances for the associated transmission have been included in the base case (with Bodhghat) and in the alternative. 5.03 Costs of the two alternative expansion series have been expressed in economic prices. CIF prices have been applied where possible, otherwise a standard conversion factor of 0.8 has been applied. Unskilled labor was valued at 0.75 of the market wage. The economic cost of coal at the pithead was estimated as its long run marginal cost of extraction due to its -35- non-tradable naturel/ (RsI72/ton). Operation and maintenance for thermal installation has been included at 2.5% for thermal and 1% for the hydro (Annex 24). A summary of the results follows: Present Worth of Plan Discount rate With Bodhghat Thermal Alternative (Million Rs) 12% 61,403 66,054 10% 72,052 78,062 8% 86,234 94,173 Capacity Optimization 5.04 The optimum capacity of Bodhghat is 500 MW. To test the optimum capacity, 400 MW and 300 MW have been analyzed. It has been assumed that if Bodhghat is reduced it would be necessary to install equivalent thermal capacity in the system which will operate at the base displacing the rest of the plants towards a more peaking operation. Given the shape of the load duration curve and the loading pattern when Bodhghat is commissioned, this operation would imply that part of the medium range thermal installations would operate at a lower than present load factor and in a more inefficient manner, although for less time than before the introduction of the new base capacity. This net effect on fuel costs for the system has been considered for the optimization analysis, the net incremental system costs of a capacity lower than 500 MW at Bodhghat are as follows in million Rs: Discount Rate Capacity Net Incremental System Costs (MW) (Million Rs) 8% 300 1018 400 637 10% 300 812 400 521 12% 300 658 400 433 As it can be seen, capacities of Bodhghat lower than 500 MW result in higher present worth of system expansion. A summary of calculations and assumptions 1/ Indian coals have generally low calorific value (4500 kcal/kg) and high ash content (40-45%) which render them non-competitive for export markets. -36- is shown in Annex 24. Site limitations do not permit the development of ;more than 500 MW at Bodhghat due to the impossibility of safely accommodating two power tunnels (which would be required for higher capacities) through the narrowest sections of the ridge under which the water conductor system has been projected. Cost Benefit Analysis 5.05 A two stage approximation approach has been adopted for the quantification of economic benefits arising from an expansion of generating plant that is integrated into an existing and growing system: (i) average retail tariffs in the Region have been assumed to represent a proxy for the minimum willingness to pay for power; and (ii) in order to quantify some additional consumer surplus beyond this minimum, the cost incurred by industrial consumers in maintaining and operating standby generating sets has been assumed to represent a proxy for industrial consumers' maximum willingness to pay for continuous power supply. 5.06 The incremental amount of energy sold is adjusted to account for system losses typical of the Region. The weighted average of expected 1984 tariff revenue at retail level in the Region has been estimated at RsO.536/kWh (USc54/kWh), and converted to border prices for purposes of the comparison with economic cost. The industrial tariff revenue is replaced by the observed average willingness to pay for continuous power supply, amounting to about RsO.64/kWh (USc6/kWh) in economic terms (Annex 23). 5.07 Corresponding to the definition of economic benefits as willingness to pay at the retail level, additional costs of transmission and distribution investment (including operating and maintenance expenses) have been allocated to the cost of the expanded system in line with the general Regional investment pattern. Benefit and cost streams as well as the ERR calculations are presented in Annex 24. 5.08 The minimum economic rate of return is about 11%, falling to about 9.2% if more pessimistic cost and benefit assumptions are tested. The true internal rate of return is likely to be considerably higher than the minimum quantifiable estimate if the consumers' and derived producers' surpluses cf industrial, agricultural, and commercial consumers are taken into account. It would be even higher if indirect benefits accruing to the Indian economy are fully considered. Benefits accruing to the non-industrial consumers are likely to be understated by the use of the tariff as benefit proxy. Using only retail tariffs as measure of the benefit, the internal rate of return of the program is about 8.5%, falling to about 7.3% with more pessimistic scenarios. These results indicate that retail tariffs including electricity duty in the Region are economically inadequate to ensure an acceptable financial return on the proposed expansion program. -37- 5.09 It is not possible to prepare a meaningful quantitative economic justification of the thermal plant rehabilitation program at this stage due to its pilot nature. Adequate provisions have been made for the consultants to assess the cost effectiveness of the different actions to be taken and of the program in its entirety. Preliminary estimates indicate that some 100 MW of additional power could be obtained with the program at an average cost of US$250/kW, which is indicative of its high cost-effectiveness. Justification for Bank Participation 5.10 Bank participation in the project would facilitate the continuing dialogue with GOI about the achievement of agreed sector objectives. This project will offer the Bank the opportunity to be directly involved for the first time in a SEB-owned project enabling it to promote the implementation of managerial and financial procedures established for the sector (commercial accounting, adequate cash generation, improved management, etc). On the technical side the standards currently used for preparation of engineering and contract documents intended for international bidding need to be imrpoved. In fact, there is no substantial experience in this regard in the hydropower sector in India, since most of the existing projects have been constructed through a combination of local contractors and force account. With the increased emphasis on hydropower in India and increased external financial assistance for hydropower projects engineering standards more in line with the international procurement practice will be necessary. This project would expose CWC and MPEB to major international procurement and through the envisaged independent consultants assistance it is expected that substantial improvements in the engineering standards can be achieved to be used in future projects. The project also addresses one of the more pressing needs in India, the better use of existing thermal facilities. It is expected that based on the results of the proposed thermal plant rehabilitation pilot project, GOI will have a better understanding of the issues involved in the preparation of a more ambitious, project. Finally the project will serve as a vehicle for studies on electricity metering practices, leading eventually to a definition of a general policy in this respect, and to better billing and collection practices. -38- VI. AGREEMENTS AND RECOMMENDATION 6.01 The following agreements were reached at negotiations: (a) Loans from GOMP to MPEB will be repaid over a period of 25 years with the rate of interest then applicable for GOMP lending to MPEB or 7.5% p.a. whichever may be higher (para 2.01); (b) MPEB will furnish for Bank Group approval, before October 31, 1984, the proposed system of accounts for the Project, including manuals, regulations and report formats (para 2.06); (c) MIPEB will introduce commercial accounting from April 1, 1985. MPEB will retain local consultants to assist in the implementation of the system. TOR for these consultants will be furnished to the Bank by October 31, 1984 (para 2.06); (d) MPEB will furnish a detailed loss reduction program before May 31, 1984. MPEB will implement the electricity loss reduction program agreed with the Bank Group (para 2.09); (e) The metering study in selected states will be completed by May 1986 (para 3.04); (f) MPEB will complete the necessary transmission works to evacuate the power from the project before 1990. Detailed engineering for these transmission facilities will be completed not later than June 30, 1986 (para 3.06); (g) GOI wiLl seek cofinancing for the turbogenerator sets if the contract is won by a foreign supplier after ICB (para 3.08); (h) Consultants for the thermal plant rehabilitation program and for the upgrading of the data processing unit will be retained no later than December 31, 1984 (paras 3.15 and 3.16); (i) MPEB will furnish before June 30, 1985: i) Details for the organization of the Tribal Training Center at Barsoor, ii) Details of the fisheries and water management program, and iii) Details of the compensatory planting program (paras 3.21 and 3.22); -39- (j) MPEB will furnish to the Bank a detailed plan for the wild life buffer zone before June 30, 1985 (para 3.22); (k) The Electricity (Supply) Act of 1983 shall come into force not later than April 1, 1985 (para 4.01); (1) MPEB shall realize a net cash generation equal to 8% of its average annual investment in 1985/86, 17% in 1986/87 and 20% in 1987/88. GOI and GOMP will provide to the Bank before May 3l, 1984, a new financing plan based on these targets (para 4.04); and (m) MPEB will gradually raise the level of consumer cash security deposits from consumers to reach two months equivalency of sales by 1989/90 based on a program acceptable to the Bank Group (para 4.08). (n) GOI will respond to the Bank-s proposed methodology for the calculation of the LRMC before October 31, 1984 (para 4.05); Recommendation 6.02 The proposed Project is suitable for a Bank Loan of US$157.4 million and an IDA Credit (Special fund) of SDR 134.4 million (US$143 million equivalent). INDIA BODHGHAT HYDROELECTRIC PROJECT Energy Generation, Sale and Pattern of Energy Consumption - All India 82-83 Description 1951 56-57 60-61 65-66 68-69 73-74 78-79 79-80 80-81 81-82 (Prov.) Installed Capacity (MW) 1835 2886 4653 9027 12957 16664 26680 28448 30214 32344 35363 Electricity Generated (GWh) 5858 9662 16937 32990 47433 66689 102523 104627 110821 122010 131525 Electricity Consumption (GWh) (Utilities only) 4793 7959 13953 26735 37352 50246 77293 78124 82473 90237 94226 Per Capita Generation (KWh) 20.80 30.90 43.90 73.81 97.82 126.26 159.60 160.00 166.20 182 194 Per Capita Consumption (KWh) (Utilities only) 13.30 20 70 31.90 53.70 70.80 87.15 120.48 119.40 123.70 132 139 Consumption Pattern (%) Domestic Light & Small Power 12.40 11.70 10.70 8.80 8.50 9.20 9.80 10.76 11.28 11.50 NA Commercial Light & Small Power 6.90 6.80 6.10 6.20 5.70 6.00 5.60 5.96 5.95 5.98 NA Industrial Power 63.70 66.90 69.40 70.60 69.30 64.60 61.35 58.86 58.60 58.75 NA Railway/Traction 6.90 5.10 3.30 4.00 3.30 3.00 2.83 2.95 2.82 2.78' NA Agriculture Pumps 4.30 4.00 6.00 7.10 9.30 12.60 15.56 17.23 17.48 16.71 NA Public Water Works, Sewage Pumping, Public Lighting & Others 5.80 5.50 4.50 3.30 3.90 4.60 4.86 4.24 3.87 4.28 NA Total Z 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 NA - Not Available -41- ANNEX 2 INDIA BODHGHAT HYDROELECTRIC PROJECT Projections of Energy Requirement and Peak Demand on Utility Sysems - All India 11 Region Scenario 1984-85 1989-90 1994-95 2000-01 Electricity Requirements - GWh (at Power Station bus) Northern High 49411 77666 116420 178836 Low 47173 71713 104943 155215 Western High 50406 76382 112979 175626 Low 47458 68480 97096 144020 Southern High 40314 60032 86583 133368 Low 37983 53777 74016 108361 Eastern High 27393 41356 59916 91900 Low 25595 36516 50111 72206 North- Eastern High 2120 4028 6943 13051 Low 2004 3710 6299 11772 Peak Demand MW Northern High 9563 14938 22213 34025 Low 9157 13906 20193 29779 Western High 8618 13211 19541 30377 Low 8221 11935 17052 25293 Southern High 7204 10709 15444 23789 Low 6835 9669 13306 19480 Eastern High 4767 7263 10523 16140 Low 4458 6463 8869 12779 North- Eastern High 443 855 1495 2865 Low 420 792 1370 2635 1/ Demand forecasts prepared for the National Power Plan by CEA, using different methods for different consumer categories. The industrial demand forecast is based on empirical relationships between growth of electricity consumption and growth of value added in Industry; irrigatiou pumping forecasts are dependent on the planned rate of new pump connections, the expected utilization rates, and the replacement rate of diesel pumps. Residential and commercial use is extrapolated from past relationships over time. Two scenarios, depending on assumptions of higher or lower growth of industrial value added, have been developed. INDIA BODHGHAT HYDROELECTRIC PROJECT Electricity (Supply) Act, 1948 Approved Amendments, August 1983 ORIGINAL PROPOSED APPROVED S.59 (Addition/Deletion/Modification) (Addition/Deletion/Modification) General principles for Board's Subsection (1) of Section 59 shall be Subsection (1) of Section 59 is finance - (1) The Board shall, substituted by the following:- substituted by the following:- after taking credit for any subvention from the State "The Board shall, after taking credit "The Board shall, after taking credit Government under section 63, for any subvention from the State for any subvention from the State carry on its operations under Government under section 63, carry Government under section 63, carry this Act and adjust its tariffs on its operations under this Act and on its operations under this Act and so as to ensure that the total adjust its tariffs so as to ensure adjust its tariffs so as to ensure revenues in any year of Account that the total revenues in any year that the total revenues in any year shall, after meeting all of Account shall, after meeting all of Account shall, after meeting all I expenses properly chargeable expenses properly chargeable to expenses properly chargeable to . to revenues, including revenues, including operating, revenues, including operating, I operating, maintenance and maintenance and management expenses, maintenance and management expenses, management expenses, taxes (if taxes (if any) on income and profits, taxes (if any) on income and profits, any) on income and profits, depreciation and interest payable on depreciation and interest payable on depreciation and interest all debentures, bonds and loans, all debentures, bonds and loans, payable on all debentures, leave such surplus which shall not leave such surplus as is not less than bonds and loans, leave such be less than 3% of the net fixed three percent, or such higher percentage, surplus, as the State Govern- assets employed by rhe Board or such as the State Government may, by notifica- ment may, from time to time, higher percentage of such assets as tion in the Official Gazette, specify in specify. the State Government may, from time this behalf, of the value of the fixed to time, specify." assets of the Board in services at the (2) In specifying the surplus beginning of such year. under subsection (1), the State Government shall have due regard For the purposes of this subsection value to the availability of amounts of the fixed assets of the Board in service accrued by way of depreciation at the beginning of the year means the and the liability for loan original cost of such fixed assets as re- amortization and leave:- duced by the aggregate of the cumulative depreciation in respect of such assets (a) a reasonable sum to calculated in accordance with the provisions contribute towards the of the Act and consumer's contributions for cost of capital works and service lines. (b) where in respect of the Board a notification has been issued under sub- t section (1) of sectiorn 12-A,
Группа Всемирного банка · Staff Appraisal Report
India - Bodhghat (Indira Sarovar) Hydroelectric Project
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