India - Kothagudem Power Project

RESTRICTED Report No. p-318 alECOPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE GOVERNMENT OF INDIA FOR THE KOTHAGUDEM POWER PROJECT May 16, 1963  INTERMATTOi'O~J DEVELOPEENT AS i CL " 4I REPORT AND FECOIKIENDATIONS OF THE PRESIDENT TO THE EXECU=IVE DIRECTORS OHl A PROPOSED DEVELOPF1NT CREDIT TO THE GOVERNTEIT OF r,DIA 1. I submit herewith the follow.ing report and recommendations on a proposod development credit to the Government of India in an amount in various currencies equivalent to $20 million to assist in firtancing the Kothagudem Power Project in the State of Andhra Pradesh. PART I - BA CKGROUND 2. The proposed credit would increase the total amount of IDA credits to India to 3300 million, made up as follows: Amount Credit No. Purpose ($ million) 3-IN National Highways 60.0 8-IN Tubewell Irrigation 6.0 13-IN Shetrunji Irrigation 4.5 14-IN Salandi Irrigation 8.0 15-IN Punjab Drainage & Flood Protection 10.0 19-IN Fourth DVC 18.5 21-IN Sone Irrigation L,.O 23-IN Purna Irrigation 13.0 24-I"N Second Koyna. Power 17.5 27-IN Bombay Port 18.0 28-INq Telecommunications 242.0 36-IIN Seventh RailwTays 67.5 Kothagudem Power 20.0 300. Cl/ 1/ All past credits are now effective. As of April 30, 1963, $24.8 milli.on had been disbursed.  - 2 - 3. The Bank has now made 30 loans in India. Their status as of April 30, 1963, is as follows: (. rillion) Total loans, net of cancellation 1/ 817.4 of which has been repaid 124.7 Total now outstanding 692.7 Amount sold 75.7 of which has been repaid 53.9 21.8 Net amount held by Bank 670.9 I/ Including $19.5 million not yet effective and $l29.4 million not yet disbursed. PART II - DESCRIPTION OF THE PROPOSED CREJIT L. The main features of the proposed credit are as follows: Th rpose: To finance about one-half of the total cost of the Kothagudem Power Project. Borrower: India, acting by its President Amount: The equivalent in v2rious currencies of -'620.0 million. Teim of amortization: The term of the credit would be 50 years. One-half of 1% of the principal amount would be repayable semi-annually for teen years beginning December 1, 1973 and l-, of such principal amount would be repayable semi-annually commencing December 1, 1983 and ending June 1, 2013. Payment dates: June 1 and December 1. Beneficiary: The Government of India would relend the proceeds of the credit to the State of Andhra Pradesh which in turn would relend the funds to the State Electricity Board which rill construct and operate the p:oject (for the terms of relending see para. 10 below). The Assoclation would enter into a Project Agreement wiTth the State of AndhrG rE radesh.  - 3 - PART III - APPRAISAL 0F THE PROPOSED CREDIT The Project 5. A detailed appraisal of the project is attached (No.1). 6. The project consists of a 120 111 steam power station at Kothagudem, a reservoir dam on the Kinnerasani river for supplying cooling water ar.d 150 miles of transmission lines. The station is located near the center of the large Singareni coal fields in northern Andhra Pradesh and will be connected with the State grid, feeding the load centers near Hyderabad and in the coastal regions. The total cost of the project is estimated at the equivalent of about $41 million of which over $17 million is in foreign exchange. Construction is expected to be completed in 1966. 7. The project is part of Andhra Pradesh's power program for the Thiud Five-Year Plan. With per capita consumption well below the average for India and only about one-fourth of that of the adjacent States of Madras and Plaharashtra, Andhra Pradesh has suffered from a chronic shortage of power which has hindered the development of its industry and agriculture. The demand for power in Andhra Pradesh has been increasing steadily. It has iLnareased by about 20 per cent per year during each of the first two Five-Year Plans. The maximum demand on the system is expected to rise fiom 12) IT%! at the beginning of the Third Plan to abot 500 11M by the end of the Plan. A simi'ar rate of increase is foreseen thereafter. With this rapid growth in prospect, the iKothagudem station has been designed to allow for a doubling of capacity as a second stage and for an ultimate capacity of 1,000 P11- or more. Over twTo-thirds of the demand is expected to be from industry, including a block of 20 P11 for the fertilizer plant at Kothagudem for which the Bank is currently considering a loan. 8. The Kothagudem Power Project will be built and operated by the ALnd>-ira Pradesh State Electricity Board, wihiclh will be assisted by consultants during the construction period. The Kinnerasani dam will be built by the State Government, which is responsible for public works of this kind. All equipment for the power station, the transmission facilities and the equip- ment for constructing the dam would be purchased on the basis of inter- national competitive bidding. 9. In the past, the Electricity Department of the State has had the responsibility for planning and constructing new generating facilities and for representing the State in the operation of inter-state schemes. The State Electricity Board was set up in 1959, under the Electricity (Supply) Act of 1948, and is intended to be the principal power agency of the State. So far, however, its responsibilities have been limited to operating the existing generating facilities, constructing transmission and distribution facilities and selling power throughout the State. The desirability of consolidating the plamning, construction and operation of the State's power facilities in the Board was discussed with the State and Indian Government authorities. As a result, the functions, assets and liabilities of the Electricity Department were transferred to the Board  - 4 - on April 1, 1963, except for projects involving other states. The organization of the Board is being strengthened with particular attention being paid to the department in charge of planning the power expansion program. 10. In accordance with the Government of iridia's customary method of financing power and other major projects, the proceeds of the proposed IDA credit iwould be made available to Andhra Pradesh in the form of annuO.- interest bearing advances repayable on terms related to the expected life of the assets being financed. The interest rate of each annual advance is based on the current borrowJing rate of the Government of India and is now 4-l/2 per cent per annum. It is expected that the loan for the Kothagudem project would be repayable over 20 years, after a grace period corresponding to the construction period. The State Government would in turn lend the proceeds to the State Electricity Board on the same terms. except that it wfould add a handling charge of one-half of one per cent, bringing thle interest rate for the Board to 5 per cent. 11. Rates for the sale of electricity in Andhra Pradesh are required to be set at levels which will provide a reasonable return on the assets of th1e svsterc. Rates were increased substantially on April 1, 1963, and are ex-z cted to yield from 1966 on a return of about 8 per cent on the total net fixed assets of the system, including wfork in progress on facilities operated or to be operated by the Board. The surplus gen- era-ted will be equivalent to aobout 30 per cent of the funds required for the expansion of the system during the Fourth Five-Year Plan. The Economy 12. An economic report (Seci 63-75) was distributed to the Executive Directors on April 16, 1963. This report, among other matters, was discussed at the meeting held April 30 and Hay 1 of the Indian Consortii-a. These discussions were preliminary to another meeting of the Consortiua in June which will consider aid contributions iwith a view to meeting India's foreign exchange requirements in 1963/64, the third year of the Third Plan. The Consortium recognized the need for providing a larger proportion of aid as non-project assistance and on terms which will not impose too heavy a debt repayment burden. Service on present externally held pubL-c debt, now about 'h, 000 million, will reach a peak at the beginning of the Fourth Plan of almost one-fifth of the country's current account earnings at that time. PART IV - LEGAL INSTRUMNITS AMD LEGAL AUTHORITY 13. Attached is a draft Development Credit Agreement between India and the Association (No. 2) and a draft Project Agreement between the State of Andhra Pradesh and the Association (No. 3). The agreements follow substantially the same pattern as those for recent power projects in IndiC.  14. In Section 2.06 of the Project Agreement, Andhra Pradesh under- takes to cause the State Electricity Board to set the rates for the sale of electricity at levels which will provide revenues sufficient to cover all operating expenses and a reasonable return on the State's net fixed power assets. The transfer to the State Electricity Board of the electric utility functions in Andhra Pradesh, and the changes required in the Board's organization in order that it may perform its duties and obligations under the Agreement are the subject of Section 2.08 of the Project Agreement. A portion of the credit, estimated at about $2.6 million, would finance a part of the local currency costs and this wiould be disbursed as a percentage of the expenditures made on the civil worlcs over the period of the Project's execution (Sec. 2.03(b) of the Develop- ment Credit Agreement). l5. The recomm.endation of the Conmittee provided for in Article V, Section l(d) of the Articles of Agreement of the Association is attached (No. 4). PART V - COIPLIANCE WITH ARTICLES OF AGREEvENT 16. I am satisfied that the proposed development credit would comply uth the Articles of Agreement of the Association. PART VI - RECO H b-L TIS 17. I recommend that the Association make available a Development Credit to IT