India - Combined Cycle Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5831-IN STAFF APPRAISAL REPORT INDIA COMBINED CYCLE POWER PROJECT February 28, 1986 Power and Transportation Division South Asia Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otberwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Rupees (Rs) Rs 1.00 = Paise 100 US$1.00 = Rs 13.00 Rs 1.00 = US$0.0769 Rs 1,000,000 = US$76,923 MEASURES AND EQUIVALENTS 1 Kilometer (km) = 1,000 meters (i) = 0.6214 miles (mi) 1 Meter (m) = 39.37 inches (in) 1 Cubic Meter (M3) 1.31 cubic yard (cu yd) = 35.35 cubic feet (cu ft) 1 Thousand Cubic Meter (MC4) = 1,000 cubic meters 1 Thousand Cubic Meter (MCM) = 1,000 cubic meter 1 Barrel (Bbl) = 0.159 cubic meter 1 Normal Cubic Meter = 37.32 Standard Cubic Feet (SCF) of Natural Gas (Nm3) 1 Ton (t) = 1,000 kilograms (kg) = 2,200 pounds (lbs) 1 Metric Ton of Oil = 7.60 barrels (39 API) 1 Kilocalorie (kcal) 3.91 British Thermal units (BTU) 1 Kilovolt (kV) = 1,000 volts (V) 1 Kilovolt ampere (kVA) = 1,000 volt-amperes (VA) 1 Megawatt (MW) = 1,000 kilowatts (kW) = 1 million watts 1 Kilowatt-hour (kWh) = 1,000 watt-hours 1 Megawatt-hour (MWh) = 1,000 kilowatt-hours 1 Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours 1 Ton of Oil Equivalent (toe)= 10 million kilocalories ABBREVIATIONS AND ACRONYMS CEA - Central Electricity Authority CTG - Combustion Turbo-Generator HRB - Heat Recovery Boiler GAIL - Gas Authority of India Limited SOI - Government of India HBJ - Hazira-Bijaipur-Jagdishpur ICB - International Competitive Bidding LCB - Local Competitive Bidding LSHS - Low Sulphur Heavy Stock LPG - Liquefied Petroleum Gas LRMC - Long Run Marginal Cost MHCMD - Million Cubic Meter per Day MOU - Memorandum of Understanding NGL - Natural Gas Liquids NHPC - National Hydro Electric Power Corporation, Ltd. NPP - National Power Plan NREB - Northern Region Electricity Board NTPC - National Thermal Power Corporation, Ltd. REB - Regional Electricity Board REC - Rural Electrification Corporation SEB - State Electricity Board STG - Steam Turbo-Generator NTPC'S FISCAL YEAR (FY') April 1 - March 31 1/ The US$/Rs exchange rate is subject to change. Conversions in this report have been made at US$1 to Rs 13.0, which represents the projected exchange rate over the disbursement period.  FOR OFFICA USE ONLY INDIA COKBINED CYCLE POWER PROJECT LOAN AND PROJECT SUMKARY Borrower: India, acting by its President Beneficiary: National Thermal Power Corporation Ltd. (NTPC) Amount: US$485 million Terms: Repayment over 20 years, including 5 years grace, at the applicable rate of interest. Onlending Terms: From the Government of India (GOI) to NTPC, with repayment over 20 years, including 5 years' grace, at an interest rate of not less than 13.0Z per annum. GOI would bear the foreign exchange and interest rate risks. Project Description: The Project's main objective is to assist in meeting the electricity demand in the Northern and Western Regions of India through the addition of about 1,500 KW of thermal capacity. The Project comprises the installation of three combined cycle power stations located at Kawas (Gujarat), Anta (Rajasthan) and Auraiya (Uttar Pradesh), as well as the associated transmission system for connection to the grid. This Project will introduce combined cycle as a new technology as well as natural gas as a fuel for power generation. The gas will be provided essentially from the off-shore South Bassein gas field and through the Hazira-Bijaipur- Jagdishpur (HBJ) pipeline. There are no unusual risks. NTPC is experienced in the design and construction of generation and transmission facilities but will receive assistance from consultants in relation to the combined cycle units, as these represent a new technology for both NTPC and India. Thi document hs a nstrited disibution and may be used by recipients only in the performance of the officid dutieL Its contents may not otberwise be disclosedwnthout World Bank mbnoiiaton.  Estimated Cost: 1/ Local Foreign Total US$ million Preliminary and Civil Works 59.9 4.4 64.3 Main Electromechanical 158.9 411.2 570.1 Equipment Auxiliary Electromechanical 67.6 80.8 148.4 Equipment Fuel Supply Equipment 4.4 9.0 13.4 Transmission System 110.1 15.1 125.2 Consultancy and 5.6 5.2 10.8 Technical Assistance Engineering and 62.2 - 62.2 Administration Total Base Cost 468.7 525.7 994.4 Physical Contingencies 24.2 27.5 51.7 Price Contingencies 82.8 112.4 195.2 Total Project Cost 575.7 665.6 1,241.3 Interest during Construction Bank - 37.4 37.4 Other 4.3 3.0 7.3 Total Financing Required 580.0 706.0 1,286.0 Financing Plan: Local Foreign Total ----(US$ million)--- IBRD Loan - 485.0 485.0 GOI/External Borroving 475.2 221.0 696.2 NTPC 104.8 - 104.8 580.0 706.0 1,286.0 1/ Includes taxes and duties of about US$127.3 million.  -iii- Estimted Disbursements: Bank FY FY87 FY88 FY89 FY90 FY91 FY92 -(W$[illion) Annual 37.0 133.0 150.0 90.0 50.0 25.0 Cumulative 37.0 170.0 320.0 410.0 460.0 485.0 Rate of Return: Northern Region 12 Western Region 13%  INDIA COMBINED CYCLE POWER PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. Is SECTORAL CONTEXT .................. 1 Comercial Energy Resources ........ ......... ... 1 Electricity Supply and Demand ........................... .. .... 2 Organization of the Power Subsector .................-......... 3 Finance and Pricing ... ........................................ 4 Power Subsector Planning ...... ......**..0............ 5 Management and Operations ......o ...... .-.......... *......**..* **** 5 GOI's Strategy in the Power Subsector ......... 60.....0........ 6 Bank Group Strategy in the Power Subsector .................... .. 8 Bank Group Participation ............................. ... .. .. 10 II. THE BENEFICIARY - NATIONAL THERMAL POWER CORPORATION LIMITED .. 11 Existing Facilities and Development Program ...............0... 11 Organization and Management . ................................. . 11 Recruitment and Training ... ... .......... .*.... ....... .. .... 12 Performance ..........o.. 0 . . ......... ..... ...... ......... 13 III. THE PROJECT ...........................................s...... 14 Project Setting ............ ................. . 14 Project Objectives .. ................... 14 Project Description .... ................................ 15 Fuel Supply .......... 0.......... .................. ....................... 15 Engineering and Construction ............. ............. . ... 16 Project Preparation and Implementation Schedule ............... 17 Project Costs .....................-.................................. ..... 17 Project Financing .. ........... ..................... 0..... .... 19 Procurement ...... .......* .............................. 19 Disbursement .............................................................. 21 Ecology - ................... ........ 21 Project Risks ............ o ................. 21 Project Monitoring ..... .............. ......... ........ 22 This report has been prepared by Messrs. E. Linard de Guertechin (Power Engineer), Suman Babbar (Power Engineer), John B. Creasor (Financial Analyst), Wynne P. Jones (Economist), and M. Sharma (Consultant).  -ii- IV. FINANCE ................................... 23 Accounting Organization and Systems ........................... 23 Past Financial Performance *......se...................... 23 Future Investment and Financing ............................... 25 Future Financial Performance .................................. 25 Regional Tariffs ......... ................. ............ 27 Commercial Arrangements for Sale of Power ..................... 28 Taration ......................................... ........... 29 Bank Loan for the Proposed Project ...o ......................... 29 Audit ..........................................ss.s........ 29 V. PROJECT JUSTIFICATION AND ECONOKIC ANALYSIS ......o. ............ 30 Least Cost Analysis .... .......... ............................. 30 Internal Economic Rate of Return ............................... 30 Justification for Bank Involvement ............................ 32 V*I. ACREEMENTS AND RECO9EKENDATION ................... 33 Agreements ..................................... 33 Recmmndaio .............................................34  -iii- ANNEXES Page No. 1.1 Electricity Generation, Sale and Pattern of Energy Consumption - All India ............6....................... 35 1.2 Forecast of Regional Power Demand in India FY'86 - FY'95 ....... 36 1.3 Previous Loans and Credits to India Power Sector (June 30, 1985) ...................*......................... 37 2.1 NTPC Schedule of Comfissioning of Power Plants ................ 38 2.2 NTPC Organizational Structure ................................. 40 2.3 NTPC Generation Facilities - Operation Performances .......... 41 3.1 Electricity Generation and Consumption and Power Supply Position of Western Region ................. 42 3.2 Electricity Generation and Consumption and Power Supply Position of Northern Region ........ 44 3.3 Detailed Project Description .................................. 46 3.4 Implementation Schedule ...e.. .. ..... ................. 49 3.5 Project Cost Summary ................................. 52 3.6 Estimated Schedule of Disbursement ............................ 53 4.1 Investment Program ...................... ........ 54 4.2 Financing Plan Covering Fiscal Years FY'77 through FY'96 ...... 59 4.3 Consolidated Income Statements Covering Operations FY'83 through FY'96 ..................... ........ 60 4.4 Balance Sheets Covering FY'83 through FY'96 ........... ......... 61 4.5 Statement of Source and Application of Funds Covering Operations FY'83 through FY'96 ............. ................. 62 4.6 Rate of Return on Net Revalued Assets Covering FY'83 through FY'96 .................. ... ................. . 63 4.7 Projected Regional Tariffs versus Long-Run Marginal Costs ..... 64 4.8 Assumptions for NTPC Financial Projection ............... ....... 65 4.9 Commercial Arrangements for Sale of NTPC Power ................ 72 5.1 Internal Economic Rate of Return ............. ................... 74 6.1 Related Documents in Project File ............................. 79 NAP IBRD 19105  INDIA COMBINED CYCLE POWER PROJECT STAFF APPRAISAL REPORT I. SECTORAL CONTEXT Commercial Energy Resources 1.01 India's principal commercial energy sources comprise coal, oil, gas hydro and nuclear energy. Of the nonrenewable resources, coal is the most abundant. Reserves of thermal coal have been estimated at slightly more than 100 billion tons, of which 25 million are proven. Although reserves are ample, the quality of coal produced is generally low and is deteriorating. The high ash content, up to 5OZ, increases power station capital and operat- ing costs and exacerbates the problems that Indian Railways has in moving the volume of coal required for power generation. GOI's policy of concentrated development of pithead stations helps to address the transport problem but does not reduce the other costs associated with poor coal quality. In any case this policy is constrained by pollution and water availability. COI appointed the Fazal Committee to examine the problems of coal supply to thermal power stations. This committee, which reported in October 1983, made a large number of recommendations, affecting all aspects of supply from coal preparation to railway operations (para 1.14); the great majority of these recommendations have been accepted by GOI. The Bank is supporting GOI's efforts in this area through its lending to the coal sector. The Dudhichua Coal Project includes studies to examine coal linkages and identify potential improvements in handling and transportation facilities. Coal quality is also being addressed, particularly through the inclusion of kppropriate quality incentives in coal supply contracts. 1.02 Proven and probable petroleum reserves comprise approximately 510 million tons of oil and 390 million toe of natural gas. Despite recent increases in domestic production, India still imports about one third of its oil requirements, which in FY'84 cost the equivalent of 40Z of its merchan- dise exports. GOI has therefore given high priority to oil and gas explora- tion and, at the same time, has implemented measures, including economic pricing, to restrain the rapidly growing demand for oil products, par- ticularly middle distillates. In the past, GOI has generally limited natural gas to premium markets such as petrochemicals and fertilizer; however, delays in the construction of gas infrastructure have resulted in substantial volumes of gas being flared. The Bank has encouraged GOI to develop the necessary infrastructure and to allow other economic uses of gas including  -2- power generation. In response, COI has begun to invest in pipelines and has recently revised its policy on the use of gas for power generation (paras 1.14 and 1.15). 1.03 India's hydroelectric potential is equivalent to about 100,000 MW. At present only 14,000 MW have been developed, 4,700 MW are under construc- tion and a further 23,000 MW are being studied for future development. The prominent role of hydro generation in regional least-cost power development plans has led GOI to emphasize the need to accelerate hydro development; however, progress has been slow owing to the lack of financial resources of states with the greatest hydro potential, the time required to resolve water rights and environmental issues, and the limited technical resources avail- able for the simultaneous preparation of a large number of hydro schemes. Attempts to address these issues through increased central sector involvement have so far met with limited success (para 1.07). 1.04 The country's uranium reserves could support a modest nuclear program (8,000 - 10,000 MU), and thorium reserves are enough for a large fast breeder program. India's nuclear power generating capacity is currently 1,095 MW. Electricity Supply and Demand 1.05 Almost 60% of India's electricity is generated from coal, 34% from hydro, and the rest from oil, nuclear energy, and natural gas. Although a number of thermal projects are planned for the short-term, the shares of hydro and nuclear are likely to increase in the long run. Electricity losses have risen slowly but steadily over the last few years and now exceed 26Z of gross generation. The deteriorating quality of coal has increased sta- tion-use and the large expansion in very low load density rural electrifica- tion, together with otherwise inadequate investment in transmission and distribution, has increased system losses. The Bank has stressed the impor- tance of balanced investment to reduce system losses and will continue to support transmission and distribution investments designed to achieve this objective. 1.06 Over the past two decades, the consumption of electricity has grown approximately twice as fast as total commercial energy consumption and now accounts for more than 30% of the latter. Even though the power subsector receives 20-25% of total public investment, electricity supply has not kept pace with demand and shortages have been prevalent throughout the country. During the last five years, shortages have been estimated at, on average, about 13Z of electricity requirements. The principal sectoral shares of total electricity consumption are: induscrial, 512; agricultural, 18Z; and domestic, 9%, (Annex 1.1). Agriculture's share has grown steadily owing to increased electrical irrigation pumping made possible by rural electrifica- tion and encouraged by heavy subsidies. Total consumption has grown at an average annual rate of 8% during the past two decades although the increasing severity of power shortages suggests that potential demand has grown more  -3- rapidly. The Central Electricity Authority (CEA) has forecast demand growth in the range 10-llZ per year between FY85 and FY95 (Annex 1.2). However, actual growth will continue to be supply constrained. Organization of the Power Subsector 1.07 Responsibility for the supply of electricity is shared between the Central and State Governments. The state electricity boards (SEBs) and the regional electricity boards (REBs) are controlled by states; CEA is administered by the Department of Power within the Ministry of Energy and the National Thermal Power Corporation (NTPC), the National Hydro-Electric Power Corporation (NHPC), and the Rural Electrification Corporation (REC) are central sector corporations responsible to the Department of Power. SEBs were instituted under the Electricity (Supply) Act, 1948 (the Act), to promote the development of the power subsector and to regulate private licen- sees such as the Tata Electric Companies. Although SEBs are supposed to be autonomous in managing their day-to-day operations, in practice they are under the control of State Governments in such matters as capital investment, tariffs, borrowings, pay, and personnel policies. As a first step towards national integration, the SEBs have been grouped into five regional systems, each coordinated by an REB. Coordination responsibilities include overhaul and maintenance programs, generation schedules, interstate power transfers and concomitant tariffs. CEA was created in 1950 to develop national power policy and to coordinate the various agencies involved in supplying elec- tricity. It is formally responsible for vetting investment proposals, providing consulting support to SEBs, assisting in the integration of supply systems, training oi personnel, and tesearch and development. However, in its execution of these responsibilities, CEA has been severely limited by shortages of skilled staff and other resources. Without any direct respon- sibility for the provision of finance it has been unable to assume a very positive role in the development of the subsector. In view of this, GOI is contemplating the formation of a Power Finance Corporation to complement CEA in fostering development of the subsector (para 1.16). NTPC and NHPC were formed in 1975 to construct and operate large power stations and associated transmission facilities. They sell bulk power to the SEBs for distribution. NTPC has had marked success and has grown rapidly. In contrast, NHPC is still struggling to establish a role for itself; the states control water rights and are reluctant to relinquish hydro sites to the Center. This has prompted GOI to explore joint ventures between the Center and states for the development of hydro schemes. REC was established in 1969 to coordinate rural electrification and provide financial and technical expertise for SEB schemes. Currently, REC finances more than 70% of total rural electrifica- tion investment. At present there is no organization with responsibility for the development of a national transmission grid, although GOI is contemplat- ing the formation of such a body (para 1.17).  -4- Finance and Pricing 1.08 Although four SEBs are estimated to have made a profit in FY'85, the SEBs as a vhole are astimated to have made a combined loss in that year of approximately Rs 11,230 million (US$935 million) exclusive of subsidies, corresponding to a return on historically valued net fixed assets of +2.3% before interest and -8.1Z after interest. Internal cash generation, which was equivalent to only about 2.71 of capital expenditure in FY'85, has been correspondingly poor. Almost all SEB capital expenditure is financed by debt, primarily loans from state governments. Recognising the unsatisfactory state of SEB finances GOI has, through an amendment to the Act notified in April 1985, required SEBs to earn an annual return, after meeting operating expenses, taxes, depreciation and interest, of at least 3Z on their histori- cally valued net fixed assets (GOI does not accept the principle of revalua- tion of assets). The Bank supports this initiative by GOI and has, under the Chandrapur Thermal Power Project (Loan 2544-IN), changed the form of its financial covenant to reflect this. Although, in terms of the Bank's conven- tional method of calculation, the return specified in the Act corresponds to a modest return on revalued assets in the range of 4 to 6Z, it, nevertheless, represents a very substantial improvement on current performance. Many SEBs, particularly those of the poorer states, are expected to experience con- siderable difficulty achieving this level of performance. NTPC's tariffs are approximately equal to its long-run marginal costs (LRMC); however, as is to be expected from their current financial performance, SEB's tariffs do not adequately reflect LRMCs. An analysis of 1981 SEB tariffs indicated that they were on average only 521 of LRMC. While adherence to the stipulated rate of return would improve the overall level of the tariff, the structure is still unsatisfactory. Tariffs are frequently excessively complex and very little has been done through tariffs either to achieve load management or to tap selectively consumers' willingness to pay, where this substantially exceeds existing tariff levels. At the instigation of the Bank, LRMC tariff studies were carried out for almost all of the states in the late 1970's. However, these studies were generally of poor quality and the Bank has since endeavored to agree with GOI on a methodology for LRMC tariff studies. Progress has been slow as GOI continues to oppose economic pricing of power for reasons associated with social and agricultural objectives. In lending to individual SEB's the Bank will continue to address state-specific programs to improve resource mobilization, for example, by developing financial programs capable, as a minimum, of achieving the rate of return specified in the Act. Where higher returns are both feasible and desirable the Bank will press state governments to use their discretion under the Act to notify a higher rate of retuiri. So far as tariff structure is concerned the Bank will continue to require tariff studies wherever tariff structures appear to be badly distorted, in order to impress on the relevant authorities the true costs of cross-subsidisation. This has been done under both the Chandrapur Thermal Power Project (Loan 2455-IN) and the Kerala State Power Project (Loan 2582-IN). However, resistance to economic pricing is such that progress in pricing reform is likely to be slow (para 1.18).  -5- Power Subsector Planning 1.09 The Bank has consistently encouraged GOI to pursue integrated plan- ning and coordinated operation of the country's electricity supply systems. In response, GOI has prepared a set of regional least cost development plans, published as the National Power Plan (NPP) in 1983. Although the NPP repre- sents a good first step towards integrated planning, it needs further refine- ment and regular updating. In addition, such a plan can only lead to effec- tive improvements if complemented by measures to bring about coordinated system operation. At present only the Northern Region is achieving this. GOI is encouraging states to reach the necessary agreements on operating parameters but progress is likely to be slow so long as severe power shortages exist. Even if coordinated intra-regional operation is achieved, inter-regional transfers will be very difficult without the use of direct current facilities to overcome problems of frequency control. The first such facility, a link between Northern and Western Regions, is being financed by the Dank under the Central Power Transmission Project Loan 2283-IN). A second direct current link has been included in the Rihand Power Trans:ssion Project (Loan 2535-IN). . To facilitate further integration GOI has agreed, under the latter project, to undertake a study of the long-term development of a national transmission system and to examine related institutional and commercial issues. Disparities between the long-term NPP, national five-year plans, short-term budgets and actual performance have been substantial. Owing to the lack of resources, fewer projects have been included in the five-year plans than in the NPP and, as a result of inadequate allowance for escalation and delays in project implementation, still fewer have been executed. Consequently, the shortage of power has become more acute and, over the next decade, India expects its power deficit to increase substan- tially. This deficit has undermined rational planning by encouraging rapid expansion of supply rather than least-cost development; for example, shorter gestation thermal plant has been favored at the expense of lower cost hydro. Furthermore, it has prompted overinvestment in captive plant, a second best measure leading to excessive use of high-value petroleum products for power generation. In addition to supporting GOI's efforts to increase the supply of power, the Bank will continue to stress to GOI the role of pricing and load management in eliminating the deficit, and the importance of integrating planning and pricing. Management and Operations 1.10 In contrast to the good performance of NTPC, the SEBs' management and operational capabilities have not kept pace with the expansion of supply. In general, SEBs have adequately qualified engineering staff, but lack expeiienced personnel in financial planning and control. The relatively low status and pay of these personnel exacerbates the already significant pay differential between the public and private sectors and makes it difficult to recruit competent staff. Management practices are generally outmoded and  inadequate. Accounts have been maintained principally to track cash receipts and expenditures, and there has been little use of accounting information for managerial purposes. Consequently, the Bank has encouraged GOI to develop a new uniform accounting system for SEBs. After initial delays, implementation i.s now proceeding. In addition, the Bank will continue to support institu- tional development programs through lending to individual SEBs. 1.11 The operations of many SEBs are hampered by the poor condition of their plant and equipment. Factors that have contributed to the poor state of thermal plant include inadequate maintenance (due to capacity shortages), deficiencies in manufacture, lack of spares, and the poor quality of coal; in general, these problems have been recognized by the relevant authorities and corrective steps are being taken. Distribution systems have suffered from inadequate maintenance and overloading owing to inadequate investment. Rehabilitation, particularly of thermal plant and distribution networks, appears to be a very cost-effective way to improve efficiency and system capacity. GOI is currently preparing a rehabilitation program for thermal plant but is less able to effect improvements in distribution. The Bank will continue, whenever appropriate, to include rehabilitation components under loans made to SEBs. GOI's Strategy in the Power Subsector 1.12 In essence the Five Year Plan constitutes the only formal statement of GOI's energy and power policies. Although formalisation of power policy, in particular, is made difficult by the constitutional arrangement in which responsibility for power is shared between Center and states (para 1.07), the Seventh Plan, nonetheless, reflects a broad consensus of the objectives of energy and power policies. The principal objectives of GOI's energy policy may be summarized as to: (a) develop energy supplies economically at a rate cowmensurate with growth in the economy and social needs; (b) substitute indigenous energy resources for imported petroleum wherever this is both technically and economically feasible; and (c) encourage the rational and efficient use of energy resources. Although power policy is governed by essentially the same objectives, alleviation (or at least con- tainment) of acute power shortages suffered nationwide dominates GOI's short-term strategy. Over the longer term, achievement of least-cost development assumes greater importance. In addition to the initial steps of its long-term strategy, GOI's short-term strategy provides for a number of specific measures to address power shortages, including: (a) rehabilitation of thermal plant - a program involving some 30 plants is currently being finalized (para 1.11); (b) accelerating the implementation of ongoing projects - a recent reorganization of Government created a new ministry specifically to monitor and improve implementation of public sector projects;  -7- (c) permitting industries to invest in captive generation; (d) permitting the construction of shorter gestation gas or oil-fired plants (para 1.02), for example the proposed Project; and (e) improving the quality and reliability ef coal supplies, through implementation of the majority of the recommendations of the Fazal Committee (para 1.01). 1.13 GOI's long-term strategy requires a blend of policies designed to address investment, organizationall institutional and financiaL issues. With respect to investment policy, resource constraints will severely limit the quantum of investment available to the power subsector. The Seventh Plan allocation is almost exactly half the sum sought by the Working Group on Power, a sum which was itself inadequate to eliminate power shortages. However, broad agreement within India has been reached on qualitative aspects of long-term investment policy which will emphasize: (a) accelerated hydro development (para 1.03); (b) an increased proportion of investment in transmission and distribution (para 1.05); Cc) the formation of a national grid (para 1.09); (d) coal beneficiation to improve both quality and homogeneity (para 1.01); Ce) diversification of the modes in which coal for power generation is transported, possible examples include the introduction of coastal shipping or slurry pipelines; Cf) diversification of the fuels used for power generation, GOI now recognizes that gas fired plant, especially combined cycle, has an economic role to play in system development (para 1.02); and (g) steady growth in the development of nuclear power (para 1.04). 1.14 Long-term organizational/institutional and financial issues are more controversial and GOI still needs to identify clearly defined strategies in these areas. GOI recognizes the institutional and financial weakness of many of the SEBs but constitutional constraints limit the rate at which the Center can bring about improvement. Measures which GOI is following include: (a) increasing the role of efficient central sector institutions, particularly NTPC (para 1.07);  (b) implementation of a uniform system of commercial accounting for all SEBs (para 1.10); (c) requiring, through recent amendment of the Act, that SEBs earn a rate of return of 3Z after all expenses and interest (para 1.08), a significantly more stringent financial requirement than hitherto; and (d) a more receptive treatment of private sector proposals for power generation, particularly when it can be demonstrated that such developments are mobilizing resources which would not otherwise be available to the public sector. In addition, GOI is contemplating the formation of a Power Finance Corpora- tion as a financial intermediary serving the subsector. Funds lent by the Corporation r'ould be attractive to SEBs because, at least in part, they would be additional to agreed plan outlays. However, loans would be subject to conditionality designed to improve the efficiency and financial strength of beneficiaries. 1.15 GOI recognises that the development and operation of an integrated national grid will be difficult to achieve with the present organization of the subsector and, as previously noted (para 1.07), COI is contemplating the formation of a separate body with responsibility for the grid. However, many commercial and institutional problems remain and, as yet, GOI has no strategy for their solution; although, under the Rihand Power Transmission Project, GOI has accepted that these aspects of grid development need to be addressed (para 1.09). Bank Group Strategy in the Power Subsector 1.16 The Bank supports the elements of GOI's strategy identified above but feels that, while each of these elements is desirable, they do not address all of the serious deficiencies in the subsector. In particular, additional efforts are needed to address problems in the areas of planning, pricing/load management, institutional development and finance. The prevalent nature of these problems suggests that a sector-wide approach should be sought. However, the comparative autonomy of the states/SEBs from the Center makes it difficult to achieve progress in this way. With the exception of the intro- duction of uniform commercial accounting in SEBs, few improvements at the state level have been realized through umbrella projects coordinated by CEA or REC, primarily owing to the very weak control that these institutions are able to exercise over SEBs. Consequently, the Bank is changing the mix of its lending to the subsector away from umbrella projects, coordinated by CEA or REC, towards a more direct involvement with individual SEBs, where state-specific programs can be designed to address areas of deficiency. Initial experience with individual SEBs suggests that the prospects for improvement are encouraging in most areas except pricing. Despite espousing  -9- energy prices "which reflect true costs" in both the Sixth and Seventh Plans, GOI and the states have, until now, opposed the principle of economic pricing of power, for reasons associated with social and agricultural objectives (para 1.08). The Bank will continue to press for improvements in both pric- ing and the other areas identified above, e.g. through finan-ial recovery and institutional development programs tailored to the requirements of individual SEBs. However, as indicated earlier (para 1.08), there is con- siderable resistance to financial reforms within the sector. While the Bank Group will continue to encourage the Central and State Government to improve the financial performance and viability of the SEBs, it is beginning, as a matter of strategy, to work only with those SEBs that are prepared to intro- duce measures to bring about improvements in their financial condition and performance. 1.17 In parallel with lending to individual SEBs the Bank proposes con- tinued support for expansion of the central sector, because: (a) increased reliance of the states on central sector generation appears to be the best way to encourage decisions at the state level consistent with the national interest; and (b) a high proportion of central sector generation sold at economic tariffs will help to improve tariffs to final consumers. The dif- ficulties that GOI has experienced in bringing hydro projects into the central sector mean that NTPC will continue to be the main vehicle for the Bank's support of the central sector. NTPC's record to date is impressive. However, it is still far from being a mature institution and, owing to its rapid development, it will continue to face problems in which it could benefit from Bank support. As far as CEA is concerned, the Bank feels that a review of its organization and functions would now be timely and, in its dialogue with GOI, the Bank will discuss the possibility of such a review, coupled with technical assistance to improve CEA's capability to meet its responsibilities, which may require redefinition as a result of the review (para 1.07). 1.18 In addition to ridressing areas in which GOI's strategy appears deficient, it is approl. ate that the Bank should focus on aspects of the strategy already adopted, where the Bank can do most to catalyze progress. In this respect specific aspects identified include: (a) the formation of the national grid - the Bank will continue to support projects such as the Central and Rihand Power Transmission Projects, the latter will afford the Bank the opportunity for an active involvement in studies of long-term transmission development (para 1.09); (b) accelerated hydro development - by broadening lending operations to encompass individual SEBs the Bank is able to support hydro projects and, where the additionality of the Bank's funds to plan outlays is crucial, it is able to bring about developments which might not otherwise take place; and  -10- (c) elements of strategy that involve concerted action by organizations, both inside and outside the power subsector - the Bank can coordinate its own lending operations within the different subsectors in order to improve intersectoral cooperation. Priority examples concern improvements in coal quality and transportation, and the use of natural gas for power generation. Bank Group Participation 1.19 The Bank has made 21 loans (US$2,709 million) and 17 IDA credits (US$2,409 million) for Indian power projects (Annex 1.3). Nineteen projects have been completed: 12 generation, 5 transmission, and 2 rural electrifica- tion. Projects currently under implementation include 11 generation, 3 of which are hydro, 2 transmission, 1 rural electrification, and the Kerala Power Project, the most recent project to be approved by the Bank, which includes a broad spectrum of generation, transmission and distribution. With respect to NTPC projects, the first-phase projects at Singrauli, Korba, and Ramagundam were commissioned on or ahead of schedule. The second-phase extension at these sites, the Farakka and the Rihand Power Transmission Projects are proceeding satisfactorily. The Third Rural Electrification Project, which has suffered significant procurement problems, is about two years behind schedule. 1.20 A performance audit conducted in 1980 for the Second Power Transmis- sion Project (Credit 242-IN) concluded that the project succeeded in helping the nine SEBs extend their transmission systems to meet their growing power requirements. Utilization of generating capacity in these SEBs exceeded the appraisal forecast. However, the audit highlighted the difficulties of effecting institutional improvements in the absence of a close working relationship between the Bank and beneficiary SEBs.  -1l- II. THE BENEFICIARY - NATIONAL THERKAL POWER CORPORATION LIMITED 2.01 NTPC, the beneficiary of the proposed loan, was established in 1975 an a publicly owned utility, under the general supervision of the Ministry of Energy. It is responsible for designing, constructing, and operating large thermal power stations and transmission lines, and for the sale of power generated to the SEBs. NTPC has broad powers to carry out its operations except for decisions on investment plans and financing which require Govern- ment approval before implementation. NTPC is also subject to periodic examination by the Committee on Public Undertakings, a body established by GOI to monitor the performance of public sector enterprises. Existing Facilities and Development Program 2.02 NTPC commenced generating electricity in 1982 and, by the end of FY85, operated 11 new 200 MW units (5 at Singrauli, 3 at Korba and 3 at Ramagundam) and 2,130 km of 400-kV transmission lines. In addition, it has under construction 7 power plants with a total capacity of 810C MW and 11,000 km of transmission lines; NTPC also operates the 720 MW Badarpur station near Delhi, and is responsible for construction of the 270 MW captive power station being established at Korba for the Bharat Aluminium Company, on a management-fee basis. NTPC has formulated a corporate development plan for the period 1986-2000 reflecting NTPC projects identified in the NPP (Annex 2.1). Although the plan is feasible in terms of NTPC's technical capability, it is likely to be revised downwards to reflect the resources allocated to NTPC in the Seventh Plan, which is presently being finalized. Organization and Management 2.03 In response to the rapid increase in NTPC's operational and construc- tion activities, a study to develop a decentralized organizational structure was initiated in 1981, with assistance from power utilities/ consultants in the UK and the USA. On the basis of this study, NTPC adopted a regional organizational structure in August 1982, with each Region under the charge of an executive director responsible for the design, construction and operation or generation and transmission facilities. Regional headquarters have been established for: (a) the Northern Region, with responsibility for the power stations at Singrauli and Rihand, together with the associated transmission system; (b) the National Capital Region, with responsibility for the power station at Badarpur and the planned station at Muradnagar;  -12- (c) the Western Region, with responsibility for the power stations at Korba and Vindhyachal, together with the associated transmission system; (d) the Southern Region, with responsibility for the power station at Ramagundam and the Southern Regional Transmission System; (e) the Eastern Region with responsibility for power stations at Farakka, Kahalgaon and Talcher, together with the associated transmission systen,. Recently, NTPC has centralized design and procurement in order to utilize trained manpower more efficiently. It has also created the post of Director (Projects and Operations) to ensure that adequate attention is given to power plant operations. 2.04 With decentralization, the corporate headquarters is progressively concentrating its role on policy-making and the provision of functional guidance to the Regions and operating divisions. The principal corporate functions are finance, personnel and administration, planning and monitoring design, procurement and commercial. The finance, personnel and design groups are headed by Directors who are members of NTPC's Board. The procurement group is responsible to the Executive Director (Corporate Contracts and Materials). The planning and monitoring group reports to the Chairman and Managing Director and the commercial group to Director Finance. The present corporate organization structure is shown in Annex 2.2. Recruitment and Training 2.05 Recruitment is progressing satisfactorily and is expected to meet NTPC's expanding operational needs. By April 1985, NTPC had about 14,200 employees. This number is expected to reach about 32,000 by the end of FY'90. Initially, NTPC emphasized the recruitment and training of execu- tives, engineers and supervisors, who account at present for nearly 40X of its staff. However, with the increase in operating plant, the emphasis has been gradually shifting toward the recruitment and training of skilled workmen and plant operators, who will account for about 70% of staff by FY'90. Training centers have been established at NTPC's plant locations. These centers, with workshops, training materials, and hostel facilities, are designed to train young graduates, diploma holders and operating staff. NTPC also provides specialized training in management and other aspects of the power sector at the Centre for Education in Power Management in Delhi, the Central Institute of Training at Badarpur and other academic institutions. In addition, specific programs are organized in collaboration with power organizations of international repute, e.g. the Central Electricity Gener- ating Board (U.K.).  -13- Performance 2.06 NTPC's construction performance has been satisfactory with most of the generating units and transmission lines being completed within the planned construction time. Such delays as have arisen in projects have been primarily due to delays in placement of orders for the major equipment (boiler and turbo-generators) and not in actual construction. Transition from construction to operation is also being carried out successfully. ?TPC has, with the assistance of Central Electricity Generating Board (U.K.), prepared detaiLed procedures for plant commissioning, operation and main- tenance. Major emphasis has been placed on the introduction of maintenance planning using computers and standard work procedures. Generating units under operation have achieved satisfactory generation levels (Annex 2.3). A Research and Development unit has been established to carry out applied research and to assist in outage analysis.  -14- III. THE PROJECT Project Setting 3.01 India's chronic power shortages together with the slow progress in the implementation of hydro projects (para 1.03) have led to an emphasis on coal-fired generation projects. Consequently, over the past 14 years the annual consumption of coal used in power generation has risen from 15 million tons to 65 million tons. This expansion has placed a severe burden on both the coal industry and the railways with the consequence that deterioratidg coal quality and transportation problems have increasingly affected the operation of power plants (para 1.01). In order to relieve some of the pressure on the coal and transport sectors, which would result from increased reliance on coal-fired plants, the Bank has encouraged COI to review its gas policy, which has in the past reserved gas for uses such as fertilizer and petrochemicals (para 1.02). Economic opportunities to extend the uses of gas are provided by the development of the large South Bassein and satellite gas fields, together with associated gas from the Bombay High field. Natural gas production could triple or quadruple in the next decade. A priori, use of such gas for power generation would be attractive for parts of the Northern and Western Regions which are remote from both the coal fields in the east of India and the hydro resources in the far north. To provide the infrastruc- ture necessary for the use of gas, OI has decided to construct a 1,700 km gas pipeline from Hazira to Jagdishpur, the HBJ pipeline, which will traverse the states of Gujarat, Madhya Pradesh and Uttar Pradesh, with a spur into Rajasthan (Kap IBRD 19105). Although the initial purpose of the pipeline was to supply gas to six fertilizer plants and a number of liquid petroleum gas (LPG) plants, the prevailing power shortages in both regions (Annexes 3.1 and 3.2) and difficulties in coal transport make short gestation, high efficiency, gas or liquid fueled combined cycle plants attractive. In the light of this, OI has agreed to allow the use of gas for power generation and has sanctioned three combined cycle stations with a total capacity of about 1,500 MW. These would be located at Kawas in Cujarat, Anta in Rajas- than and Auraiya in Uttar Pradesh. Project Objectives 3.02 The objectives of the proposed Project are to: (a) provide power in the Northern and Western Regions which are currently suffering acute power shortages; (b) diversify the fuels used in power generation, through the use of gas or liquid fuels, in regions which are short of hydro and coal resour- ces; (c) relieve pressures on the railway and coal sectors; and  -15- (d) introduce into India combined cycle technology which would provide an efficient, reliable, flexible and economic source of power. Project Description 3.03 The proposed Project consists of: (a) three combined cycle power stations at Kawas (Gujarat), Anta (Rajas- than), and Auraiya (Uttar Pradesh), comprising combustion tur- bogenerators, heat recovery boilers, and steam turbogenerators, with a total installed capacity of about 1,500 NW (site rated); electrical and mechanical auxiliary equipment; and the provision of associated civil works and ancillary facilities; (b) about 950 km of 220-kV and 375 km of 400-kV single- and double-circuit transmission lines connecting: the Kawas station with Navsari, Baruch, and Valthan in Gujarat; the Anta station with Bhil- wara, and Dausa in Rajasthan; and the Auraiya station with Agra and Ballabgarh in Uttar Pradesh; together with new or extended substa- tions and associated auxiliaries; and (c) technical assistance for the engineering, testing and commissioning of the combined cycle power stations. Details are described in Annex 3.3. Fuel Supply 3.04 The power stations which comprise the proposed Project will burn primarily gas but will be constructed with provision for the use of liquid fuels in order to maximize flexibility. Cas supplies will come principally from the South Bassein field which has reserves of about 205 billion cubic meters and is being developed under Bank financing (Loan 2241-IN). The field has recently been connected to the mainland at Hazira, which is the site for the gas treatment plant and is close to the proposed Kawas power station. From Hazira, gas will be transported by the BRJ pipeline to inland consumers which include six fertilizer plants and the proposed Anta and Auraiya power stations. The HBJ pipeline, which was appraised by the Bank, is to be imple- mented and operated by the Gas Authority of India Limited (GAIL), a public sector corporation responsible to the Kinistry of Petroleum. GAIL has recently awarded contracts for the supply of pipes and tenders have been received for a turnkey contract for all associated equipment and pipeline construction. GAIL expect. to award this contract very shortly. The planned construction timetable is consistent with NTPC's schedule for the three combined cycle units (para 3.08). In order to ensure coordinated development of the HBJ pipeline and the combined cycle units, confirmation by GOI that the contract for the pipeline construction has been awarded, would be a  -16- condition of effectiveness for the proposed loan (para 6.01(a)). In addition GOI agreed that disbursement under the loan would be conditional on signature of the pipeline construction contract by October 31, 1986 (para 6.02(a)). At the moment OOI's plans for fertilizer development are such that it can only guarantee 4 million cubic meters per day (MMCMD) of gas for the proposed Project as against the 6 MMCMD required for complete gas operation of the three combined cycle plants. However, the fertilizer plans on which this is predicated appear overoptimistic and, in addition, Bank Industry Depart- ment data indicate that the specific consumption of the fertilizer factories has been overestimated. It therefore seems very likely that a full 6 MMCMD of gas will be available for power generation. However, in view of the possible shortfall, provision will, as previously noted, be made for Liquid fuel operation. The Bank is satisfied that, in the absence of gas (para 5.02), such operation would be economically justified. In any case provision for liquid fuels (natural gas liquids (NGL) or naphtha) is desirable in order to cater for possible interruptions to gas supplies. During negotiations GOI gave an assurance that 4 MMCMD of gas wiLl be made available for the proposed Project and that, to the extent that a full 6 MNCMD of gas is not available, liquid fuels will be made available (para 6.02(b)>. 3.05 To date GOI has not made a formal decision on the way in which gas will be priced for power generation. However, during appraisal of the HBJ pipeline, GOI has intimated that the price of gas for uses other than fer- tilizer would be based on fuel oil parity, which at this time was approximately Rs 1,800 per thousand cubic meters (MCM). At least in the medium term, a price related to fuel oil would adequately cover the estimated economic opportunity cost of gas and, in so far as this price may exceed the opportunity cost, it would not cause significant economic distortion (higher plant availability would still leave gas as the preferred fuel) and it would be desirable for reasons of resource mobilization. During negotiations GOI corfirmed that the minimum price of gas supplied to the proposed Project will be based on fuel oil Parity (para 6.02(c)). In addition, GOI and NTPC gave an undertaking that supply contracts between NTPC and the appropriate authorities for the supply of gas for the operation of the proposed Project will be concluded at least six months prior to the commissioning of the first combustion turbine under the proposed Project. The supply contract will be furnished to the Bank for prior review and comment (para 6.03(a)). Engineering and Construction 3.06 NTPC has considerable experience in installing and operating thermal power stations and associated high voltage transmission systems. However, combined cycle units will introduce a new technology and the corporation does not yet have tne appropriate expertise. Although NTPC has prepared the bidding documents, it will need assistance in defining performance criteria, evaluating bids, finalizing the design proposed by the selected bidder, and in monitoring the manufacture, testing and commissioning of equipment. NTPC  -17- would engage consultants, satisfactory to the Bank, to assist them in per- forming these tasks. These technical services, estimated at about 170 man-months, would be financed under the proposed Project. NTPC has adequate experience in the design and construction of 220-kV and 400-kV transmission lines. 3.07 The stations at Kawas and Auraiya will be located close to the gas pipeline, while, owing to difficulties in water supply, the Anta station will require a spur pipeline of about 16 km. Cooling water will be supplied from irrigation canals with the installation of pondages in order to secure water availability during periods of maintenance. In order to reduce water con- sumption the stations will be equipped with cooling towers. The three sta- tions will be located close to major roads and railways, which will facilitate transport of equipment and materials during construction and liquid fuels, if required, during operation. NTPC is establishing a new division responsible for the implementation of the proposed Project. However, design and procurement for the Project would be carried out by specialized groups in the respective functional divisions of NTPC. Construction would be supervised and coordinated by resident engineers with the assistance of consultants as necessary. NTPC will arrange for the timely training of operations and maintenance staff either through the equipment contracts or with utilities operating similar plants. Project Preparation and Implementation Schedule 3.08 NTPC has completed the basic design for the proposed Project. Bids for the major equipment package (combustion turbogenerators, heat recovery boilers, and steam turbogenerators) were invited in February 1986 and the award is expected to be announced in December 1986. Land acquisition is currently proceeding. Project completion is expected in 1990. The detailed implementation schedule for the proposed Project is shown in Annex 3.4. Project Costs 3.09 The estimated cost of the proposed Project, including contingencies but excluding duties and taxes, is Rs 14,490 million (US$1,114.0 million). Taxes and duties would amount to about Rs 1,653 million (US$127.3 million). Interest during construction adds Rs 582 million (US$44.7 million) to the financing required. The direct and indirect foreign currency costs are estimated at about Rs 9,190 miLlion (US$706 million), equivalent to 55X of the total financing required. The estimated costs of the Project are set out in Annex 3.5 and suimmarized in Table 3.1.  -18- Table 3.1: Estimated Project Costs /a Local Foreign Total Local Foreign Total ---Rs Million ------ --US$ million- Preliminary and Civil Works 779 57 836 59.9 4.4 64.3 Main Electromechanical 2,066 5,346 7,412 158.9 411.2 570.1 Equipment Auxiliary Electromechanical 879 1,050 1,929 67.6 80.8 148.4 Equipment Fuel Supply Equipment 57 117 174 4.4 9.0 13.4 Transmission System 1,431 196 1,627 110.1 15.1 125.2 Consultancy and 73 68 141 5.6 5.2 10.8 Technical Assistance Engineering and 809 - 809 62.2 - 62.2 Administration Total Base Cost 6,094 6,834 12,928 468.7 525.7 994.4 Physical Contingencies 316 358 674 24.2 27.5 51.7 Price Contingencies, 1,070 1,471 2,541 82.8 112.4 195.2 Total Project Cost 7,480 8,663 16,143 575.7 665.6 1,241.3 Interest during Construction Bank - 488 488 - 37.4 37.4 Other 55 39 94 4.3 3.0 7.3 Total Financing Required 7,535 9,190 16,725 580.0 706.0 1,286.0 /a Figures may not add due to rounding. For the combined cycle units, estimates are based on indicative proposals made by firms with extensive experience in combined cycle installation and are comparable with recent prices for similar works in other countries. Cost estimates for other equipment and materials are based on the most recent quotations received for similar projects with prices updated to end-1985 levels. The estimated cost of consulting services is based on current experience with other projects in India. The cost of the technical assis- tance for overseas training was determined on the basis of standard prices provided by internationally reputable firms. Physical contingencies of 10Z on civil works and 5% on equipment were assumed on the basis of experience with similar projects and are considered adequate. Price contingencies for local costs are assumed at 7.0% for FY86, 7.52 annually for FY87 to FY90, and 5.0% per year thereafter. Price contingencies for foreign costs are assumed  -19- at 7.5X for FY86, 8Z annually from FY87 to FY90, and 5X per year thereafter. Interest during construction reflects the progressive comissioning of each power station. Project Financing 3.10 The proposed Bank loan of US$485.0 million would provide 43Z of the total project cost net of duties and taxes, equivalent to 692 of the estimated foreign cost of the project. The balance of the foreign exchange financing requirement, amounting to about US$221.0 million is expected to be met from external borrowing or COI foreign exchange reserves. The remainder will be met by NTPC's internal cash generation plus equity and loans from GOI. Table 3.2 shows the propos'ed financing plan. TabLe 3.2: Project Financing Plan Local Foreign Total