India - Second Maharashtra Power Project

4-Aj H /6jf ,/J Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 10604-IN Type: (SNR) ReportNo. 10604-IN CHASSARD, // X81873 / ElO1Ol/ SA2EG STAFF APPRAISAL REPORT INDIA SECOND MAHARASHTRA POWER PROJECT JUNE 3, 1992 Energy Operations Division India Country Department This document has a resticted distribution and may be used by reipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of March, 1992) Currency Unit = Rupees (Rs) Rs 1.00 = Paise 100 Rs 1,000,000 US$39,216 US$1.00 = Rs 25.5 MEASURES AND EQUIVALENTS 1 Kilometer (km) = 1,000 meters (m) = 0.6214 miles (mi) 1 Meter (m) = 39.37 inches (in) 1 Cubic Meter (mi) = 1.31 cubic yard (cu yd) = 35.35 cu. ft. 1 Ton (t) = 1,000 kilograms (kg) = 2,200 lbs 1 Kilovolt (kV) = 1,000 volts (V) 1 Kilovolt-ampere (kVA) = 1,000 volts-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 kilowatts-hours 1 Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BSES Bombay Suburban Electric Supply Ltd. CEA Central Electricity Auithority DEA Department of Economic Affairs DOP Department of Power EDF Electricite de France ERR Economic Rate of Return GOI Government of India HVDC High-Voltage Direct Current ICB International Competitive Bidding LCB Local Competitive Bidding LICB Limited International Competitive Bidding LRMC Long-run Marginal Cost LTIPS Long-Term Issues in the Power Sector study MSEB Maharashtra State Electricity Board MIS Management Information System NHPC National Hydroelectric Power Corporation NICG Net Internal Cash Generation NPTC National Power Transmission Corporation NTPC National Thermal Power Corporation ODA Overseas Development Administration OFAP Operational and Financial Action Plan PFC Power Finance Corporation REB Regional Electricity Board SEB State Electricity Board SCF Standard Conversion Factor TEC Tata Electric Companies The Act Electricity Supply Act of 1948 USAID United States Agency for International Development FISCAL YEAR April 1 - March 31  FOR OmCIAL USE ONLY INDIA SECOND MAHARASHTRA POWER PROJECT Loar. and Project Summary Borrowers India, acting by its President Beneficiarys Maharashtra State Electricity Board (HSEB) Amount: US$350 million Terms: Repayment over 20 years, including five years grace, at the Bank's standard variable interest rate. Onlending Terms: The Government of India (GOI) will make the proceeds of the loan available to the Government of Maharashtra (GOM) under the standard terms for central assistance to the states. GOM will retain US$1 million for part of the technical assistance component, and onlend US$349 million to HSEB, at an interest rate not less than the prevailing coupon for GOI long-dated securities, currently 12.5Z per annum, with a repayment period of 20 years, including a grace period of 5 years. Project Description: The proposed project comprisess (a) the construction of the last stage of Chandrapur thermal power station by the addition of a 500 MW coal-fired unit; (b) the construction of a + 500 kV, 1,500 MV HVDC line from Chandrapur to Padghe, near Bombay (about 735 km), and the related terminal stations; (c) the implementation of an accelerated distribution reinforcement program aimed at reducing losses in selected areas; and (d) consulting services to be provided in the following four areas: Ci) load research and preparation of electricity demand management measures; (ii) development of MSEB's environmental management capabilities at the corporate level; (iii) preparation of private power projects in Maharashtra; and (iv) institutional review of the power sector in Maharashtra. Benefits: The main benefits of the project are: (a) an increase in power supply and improvements in the quality of service in Maharashtra; (b) strengthening of MSEB's finances and managerial autonomy; (c) more economic use of generating capacity through better pricing policies, demand management and loss reduction measures; (d) reduced reliance on the central government for financing investment requirements by increasing MSEB's self-financing capabilities and improving external resource mobilization as well as facilitating private sector investments; and (e) strengthening of NSEB's environmental impact management capability. Risks: The project does not pose any particular technical risks, in view of the proven designs and engagement of well-qualified consultants to assist MSEB in project implementation. The main project risks relate to: (a) the availability of supplier 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.  - li - financing for the HVDC link, on reasonable terms; (b) possible delays in the procurement process; and (c) the pace at which tariff and other institutional reforms will be implemented. These risks will be minimized by: (a) assisting MSEB in preparing the tender documents for the HVDC link to help obtain the most attractive financing offers; (b) having finalized during project preparation a model bid document, contract packages and the associated procurement plan; (c) having the first tariff adjustment, involving major improvements in the structure of tariffs as well as a significant increase in their level, implemented before Board presentation; (d) establishing realistic targets for MSEB's financial performance and the implementation of further tariff adjustments, demand management measures and institutional reforms; and (e) providing technical assistance to help MSEB and GOM implement these measures.  Estimated Cost: a/ Local Foreign Total --------(US$ million)------ A. Chandrapur Unit 7 (500 HW) 172 236 408 B. Hl")C Transmission Link 133 181 314 C. Accelerated Distribution Program 65 41 106 D. Consulting Services and Equipment 1 2 3 TOTAL BASE COSTS 371 460 831 Physical Contingencies 23 26 49 Price Contingencies 1.7 60 77 TOTAL CONTINGENCIES 40 86 126 TOTAL PROJECT COST 411 546 957 Interest During Construction (IDC) World Bank 43 74 117 Others 95 55 150 TOTAL IDC 138 129 267 TOTAL FINANCING REQUIRED 549 675 1,224 Financing Plan: IBRD - 350 350 29 Export Credits - 200 200 16 GOM 305 - 305 25 M3SEB 244 125 369 30 Total 549 675 1,224 100 _m - = Estimated Disbursements (US$ million): Bank Fiscal Year FY93b/ FY94 FY95 FY96 FY97 FY98 Annual 39.8 34.9 71.8 113.2 83.1 7.2 Cumulative 39.8 74.7 146.5 259.7 342.8 350.0 Economic Rates of Return: In excess of 12X. a/ Including taxes and duties of about US$72 million equivalent. b/ Including special account initial deposit of US$19 million.  INDIA SECOND MAHARASHTRA POWER PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. Loan and Project Summary ................. .................. i I. SECTORAL CONTEXT.. ................ ........... . ...... 1 Overview .................. ; ;. *....- Electricity Supply, Demand and Tariffs ................ 2 Organization of the Power Sector ... . .................. 3 GOI Strategy in the Power Sector ............... ........4 Past Bank Group Operations and Strategy ....... 5 Towards a New Approach in the Power Sector ............ 8 II. THE BENEFICIARY - MAHARASHTRA STATE ELECTRICITY BOARD ...... 9 Organization and Manpower ...................................... . 9 Operational and Managerial Performance ............... 10 Electricity Tariffs ......................... ...... 10 MSEB's Investment Plan ............ ..... ... ........ .11 Institutional Development ....... ... ........ 1.- Private Sector Power Development in Maharashtra ......13 III. THE PROJECT ............ .................. 14 Project Objectives ...... .. .................. 14 Project Description .1................................ 14 Cost Estimates .....................1 Project Financing . ......... .1....... *, . .. .15 Project Management ..... ..... .. se ..... ... . . 17 Status of Project Preparation ......... ............. 17 Project Schedule ....... ..... ............. 18 This report was prepared by Mmes. Joulle Chassard (Senior Financial Analyst) and Nandita Parshad (Economist) and Messrs. Argun Ceyhan (Senior Power Engineer), Akbar Khawaja (Financial Analyst), Mihir Mitra (Power Engineer), and Kari Nyman (Energy Economist). The report has been reviewed by Mrs. Zoubeida Ladhibi-Belk (Senior Power Engineer, SA3EI) and Mr. John Besant-Jones (Principal Economist, IENED). The report has been endorsed by Mr. Heinz Vergin, Director, India Country Department, and Mr. Jean-Francois Bauer, Division Chief, Energy Operations Division, India Country Department.  - ii - Page No. Procurement ........................ ........... 18 Disbursements ................................. ..... 19 Resettlement and Land Acquisition .................... 20 Environmental Aspects .... .... . .... ................. 20 Benefits ....................................... 23 Risks ....................... o . 23 Project Monitoring and Supervision ................... 23 IV. FINANCE ... * ...... * .......... .. .. ........................ 24 Introduction . ......... ...... ........... 24 Past Performance and Present Financial Situation ..... 24 Billing and Collection .............................. 26 Future Financial Performance ......................... 27 Accounting and Auditing ... ........................ 29 V. ECONOMIC ANALYSIS ......................................... 30 Electricity Demand in the Western Region ............. 30 Least-Cost Analysis ................... 31 Economic Viability of the Western Region Program ..... 31 Project Analysis ....... 32 VI. AGREEMENTS AND RECOMMENDATION ............................. 33 Agreements reached during Negotiations .............. 33 Recommendation ......... 35  - iii - ANNEXES 1.1 All-India: Electricity Demand and Supply 1.2 Previous Loans and Credits to Indian Power Sector 2.1 MSEB's Head Office Staff Set-up as of March 1992 2.2 A Comparison of the Performance of MSEB and Other SEBs 2.3 MSEB's Electricity Tariff 3.1 Project Description - Design Features 3.2 Project Cost Summary 3.3 Consultants Employed by MSEB for Project Engineering & Implementation 3.4 Project Management Structure 3.5 Project Implementation Schedule 3.6 Key Dates for the Construction of the Project Components 3.7 Procurement Arrangements 3.8 Procurement Schedule 3.9 Schedule of Disbursements 3.10 Environmental Assessment - Summary 3.11 Environmental Management Program 3.12 Supervision Plan 4.1 Actual and Forecast Income Statements 4.2 Actual and Forecast Balance Sheets 4.3 Actual and Forecast Sources and Applications of Funds 4.4 Assumptions followed for Financial Projections 5.1 Western Region: Past and Projected Power and Energy Demand 5.2 Western Region: Electricity Consumption by Consumer Category 5.3 Comparison of the Economic Cost of Generation 5.4 Comparative Cost Analysis of HVDC and 800-kVA Options 5.5 Western Region: Average Power Prices by State and Union Territory 5.6 Western Region: Average Power Prices by Main Consumer Category 5.7 Estimated Economic Costs of Autogeneration 5.8 Estimated Financial Costs of Autogeneration 5.9 Valuation of Economic Benefits for Each Consumer Category 5.10 Program Benefits and Economic Rate of Return 5.11 Project Benefits and Economic Rate of Return 6.1 Related Documents in the Project File MAPS IBRD 23691 IBRD 23692  INDIA SECOND MAHARASHTRA POWER PROJECT STAFF APPRAISAL REPORT I. SECTORAL CONTEXT Overview 1.01 Over the past decade, electricity consumption in India increased at ar. average annual rate of about 91. Despite significant progress in system expansion, power shortars continue and, in FY92, were equivalent to about 92 of total energy and 1L i peak capacity requirements. Power supply is likely to continue to constrairn economic growth in India well into the next century. As pointed out in a recent Bank study of the power sector1, unless increased emphasis is placed on improving the efficiency of supply, consumption and pricing of electricity, continued focus on supply capacity expansion will aggravate the critical power demand/supply situation and is likely to be financially unsustainable. A major challenge for the Government of India (GOI) in the power sector in the 1990s will thus be to attain a better balance in sector development between supply expansion and efficiency improvements. 1.02 The growing power gap (difference between potential deman4 for electricity and available supply) is attributable to a combination of institutional, pricing and operational inefficiencies. Closing it would require bold actions on institutional arrangements as well as bulk and retail power tariffs, billing and collection, in a country where the responsibilities for managing the sector are split between GOI and the states, and where, as a result, electricity has become a highly charged political issue. State governments, often at the highest political level, have effectively assumed control of most major decisions of the state utilities, including those on investments, tariffs, borrowings, salary and personnel policies. Improving sector efficiency will require the commercialization of the state electricity boards (SEBs), involving the establishment of a transparent regulatory framework to provide them with operational and financial autonomy while maintaining accountability for performance. The proposed project addresses these power sector efficiency issues in the state of Maharashtra. 1.03 With a per capita level of about 270 kWh per annum, electricity consumption in India is among the lowest in the world, and demand is expected to continue to expand at an average growth rate of 8Z per annum. Massive investments in additional capacity will be required, even if GOI and the state governments pursue efficiency improvements in the sector. In the face of the current and medium-term budgetary constraints, central government funding of the sector's investment program is likely to be insufficient; the state and central government-owned utilities will thus have to rely increasingly on Long Term Issues in the Power Sector (LTIPS), December 1991. The study was prepared in 1990-91, with financing from the Overseas Development Administration (ODA) of the United Kingdom and the United States Agency for International Development (USAID). It was formally discussed with GOI in February 1992.  -2- their own internal resources as well as private inv~estment. However, the ability of the SEBs to mobilize internal resources is hampered by their poor financial condition. 1.04 Although GOI has opened the power sector to private investment, remaining uncertainties in the regulatory framework and the poor financial position of most SEBs will constrain the realization of the potential contribution of private power. The project will assist Maharashtra in developing its private power policy and regulatory framework within GOI's national guidelines and to contract with private developers for two major power generatiun projects. Electricity Supply, Demand and Tariffs 1.05 India's power system has an installed capacity of over 69,000 MW. This makes its size comparable with that of France, the United Kingdom. or all of sub-Saharan Africa excluding the Republic of South Africa. In FY92, this system generated about 283,500 GWh, about 70? from coal-fired power stations, 25Z from hydro stations, and 5? from gas, oil and nuclear stations (Annex 1.1 provides additional statistics). Supply has expanded quickly: in FY82 installed capacity was only 32,350 MW, and generation 114,000 GWh. In parallel with the growth of supply, operational efficiency has improved. For example, the plant load factor has increased from 442 to about 55? over the last ten years and the rate of coal consumption by power stations has been cut by about 1O0. These improvements reflect a strengthening of r.lant maintenance and operations and are commendable in view of the deteriorating quality of coal the sector is receiving. However, auxiliary consumption exceeds 1OZ, technical and commercial losses in transmission and distribution are estimated at 22? of net generation and interruptions and reductions in supply and voltage are common. The poor quality and unrcliability of public supplies cause consumers to purchase costly back-up generating capacity. 1.06 Industry consumes about ha.f (51?) of all eleLLric power; agriculture uses 22Z; residences 15Z; ctmmerce 62; and public services the balance (Annex 1.1). The growth in electricity demand has been accelerated by relatively low power tariffs which have fLstered wasteful end-use of energy. Average retail tariff rates have increased only slightly since FY82 in real terms and remain at about 50? of the long-run marginal cost (LRMC). Increases in real costs (particularly for fuel and wages) have offset the increases in efficiency and real tariffs. In the meantime, tariff differentials among consumer groups have widened. Industrial consumers have taken the brunt of the increases over the last ten years and the rates to large industrial consumers are in most states now close to, and in some cases even above, LRMC. Agricultural tariffs, on the other hand, have fallen in absolute terms and now cover less than 10? of their supply costs. Partly as a result of this subsidization, agriculture's share in total consumption has grown from about 17? in FY82 to 22Z in FY90. Compounding the problem is the poor collection from farmers, and high transmission and distribution losses. They contribute to an increasing financial burden imposed by agriculture on the power sector. A similar situation applies to the residential uses of electr4city. 1.07 GOI's intensified pressure on the states to raise tariffs has yielded encouraging results: since April 1990, most state governments have authorized their SEBs to increase their tariffs. In addition, in September  1991, the State Power Ministers agreed to implement a minimum agricultural tariff. In their April 1992 meeting, they set the minimum rate at RB. 0.50/kIWh. At the moment, two SEBs (Assam and West Bengal) comply with the new minimum agricultural rate. The tariff reform process has at best only just started and the challenges ahead are formidablet regular tariff adjustments and better collection practices, starting with but going well beyond the implementation of the agreed minimum tariff, would be needed to restore the financial viability of SEBs. Organization of the Power Sector 1.08 Central Sector. Responsibility for electricity supply is shared constitutionally between GOI and the states. Through the Department of Power (DOP) of the Ministry of Power and Non-Conventional Energy Sources, GOI controls the Centra.. Electricity Authority (CRA), the National Thermal Power Corporation (NTPC), the National Hydroelectric Power Corporation (NHPC), the North Eastern Electric Power Corporation (!sEEPCO) and the newly-created National Power Transmission Corporation (NPTC), and, through CEA, supports the operations of the Regional Electricity Boards (REBs). DOP also controls the Energy Management Centre (EMC) and two financial intermediaries, the Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC). CEA's tasks are to develop a national power policy and coordinate sector development. NTPC and NEPPC are bulk supply utilities which sell power to the SEBs. REC plans and finances most investments in rural electrification. PFC mobilizes resources for and promotes operational and financial reforms in the SEBs. NPTC ie consolidating the development of the transmission system and is being developed to facilitate improvements in the operation of the generation and transmission system. Under the same Ministry, the Department of Non- Conventional Energy Sources administers GOI's renewable energy program, which seeks to supplement conventional power supply with alternative energy systems, e.g., mini-hydro, biomass, wind and solar energy, as well as meet the decentralized energy needs of the rural sector. 1.09 State Sector. The states control the SEBs and the State Generation Companies (SGCs), which together generate about 75Z of electricity supply and provide most of the distribution to final consumers. Although the Electricity (Supply) Act of 1948 (the Act) grants them considerable autonomy, in practice the SEBs and SGCs must obtain state government approval (often at the highest political level) for mast major decisions including those on investments, tariffs, borrowings, salary and personnel policies. The SEBs and SGCs are grouped into five regional interconnected power systems. The REBs coordinate generation and maintenance schedules including plant dispatch and inter-state power exchanges in these five regional systems. The effectiveness of REBs is, however, limited by their lack of authority on their member SEBs, severe deficiencies in system control and communication facilities and weaknesses in the structure of bulk power tariffs. 1.10 Private Utilities. At independence, private utilities and licensed local authorities together provided about 80Z of public electricity supply. The Act created the SEBs and entrusted them with primary responsibility for public power supply. The Act also made the SEBs responsible for regulating p.-ivate utilities. The Industrial Policy Resolution of 1956 subsequently defined aspects of generation and distribution which were to be the exclusive responsibility of the states. Most licensees  4- were taken over by the SEBs when their licenses expired, and no new licenses have been granted since 1956. Only five private utilities remain: Bombay Suburban Electric Supply Limited (BSES), Tata Electric Companies (TEC), Ahmedabad Electricity Company (AEC), Surat Electric Company (SEC), and CESC Ltd. (formerly Calcutta Electric Supply Corporation). All but BSES generate at least some of the power they distribute2; their generation capacity totals about 2,800 MW. In addition, an estimated 6,250 MW of captive generating facilities are operated by industries. GOI Stratszy in the Power Sector 1.11 The objectives of GOI's energ policy are to: (a) achieve energy self-relian:e; (b) reduce oil import dependence; (c) meet rural energy needs; and (d) improve the efficiency of energy production nnd use. Specific investment objectives in the power sector under the Eighth Plan (FY93-97) are expected to include: (a) accelerating the completion of ongoing projects, particularly hydroelectric investments; (b) encouraging the construction of energy efficient and environmentally benign gas-based combined cycle plants; (c) rehabilitating existing plants; and (d) increasing investments in transmission and distribution relative to investments in generation. 1.12 To achieve the Plan objectives, it is essential that GOI and the state governments tackle the sector's financial and institutional problems. In Inada's federal structure it is difficult to condition central assistance to the states as budgetary allocations are set by an automatic allocation formula. Within this framework, GOI is using more intensively the investment selection and project implementation monitoring process to accelerate improvements in the sector, by emphasizing investments in operational improvements, earmarking funds to specific projects and monitoring the use of funds and SEB performance more closely on a project-by-project basis. GOI has also started to promote reforms by exercising its leverage in the use of discretionary funds not subject to the automatic allocation formula. These funds essentially include PFC financing and funds from external assistance. PFC will lend only to utilities which have undertaken to implement an Operational and Financial Action Plan (OFAP), endorsed by their state governments and aimed at improving the utilities' resource mobilization and operational efficiency. GOI's efforts to develop PFC into a viable and effective instrument for promoting improvements in the power sector are supported by the Bank (Loan 3436-IN: Power Utilities Efficiency Improvement Project approved in January 1992), the Asian Development Bank (ADB) under a parallel operation approved in March 1992, and by USAID under a related technical assistance program for PFC's institutiondl development. 1.13 Faced with a growing power gap and diminishing public resources available for the sector, GOI has also taken steps towards opening the power sector to the private sector. In the July 1991 modificat!in to the Industrial roLicy Resolution, power was remn%ed from the list of activities reserved for the public sector. In September 1991, the Act was amended to lift many of the regulatory disincentives to private investment in the power sector. In particular, it allows full ownership of power companies by the private sector, 2 BSES is now in the process of constructing its first generating plant, a 2x250-MW coal-fired unit at Dahanu.  - 5 - an extended period of license of 30 years with 20-year renewals and increased financial returns. Provision is made for private generating companies and captive plants to sell power to the SEBs. Foreign companies are also allowed to implement power projects. A High Powered Board chaired by the Cabinet Secretacy was established in October 1991 to promote private investment and accelerate the clearance of projects. So far, a total of about 23,000 MW of generating plant projects have been advertised by various states for private sector investment. About 2,300 MW have been classified by DOP as awarded to selected developers although no agreements have yet been finalized. In addition to supply expansion, GOI's increased reliance on the private sector will also lead to improved financial discipline among the SEBs since private investment would only go to states with an attractive policy environment and a financially sound SEB. However, in the near term, the regulatory uncertainties that remain despite GOI's policy initiatives, and the poor financial position of most SEBs constrain the realization of the potential contribution of private power. The proposed project will assist Maharashtra in developing its private power policy and regulatory framework within GOI's national guiedelines and to contract out with private developers for two major generation projects (para. 2.12). 1.14 PFC and private power initiatives are complemented by: (a) GOI's increased reliance on the central generating companies (NTPC, NHPC) for the expansion of supply in order to improve cost recovery and ensure that priority projects are implemented efficiently; (b) the development of NPTC and related bulk power tariff reforms to improve the operation of India's generation and transmission system; (c) the establishment of a National and five Regional Tariff Advisory Committees to advise GOI, state governments, SEBs and central sector utilities on the level and structure of bulk and retail tariffs needed to ensure the financial viability of all agencies in the sector; and (d) the adoption of energy conservation measures. Following the recent approval of amendments to the Act, GOI has now the authority to set the tariffs of the central utilities and has decided to improve the structure of NTPC's and NHPC's tariffs to help rationalize system operations. Past Bank Group Operations and Strategy in the Power Sector 1.15 Lending. The Bank group has made 33 loans (US$6.3 billion) and 18 credits (US$2.3 billion) for power projects in India (Annex 1.2)3. Twenty-seven loans and credits have been completed: 20 for generation; four for transmission; and three for rural electrification. Ongoing loans and credits include fifteen for generation; three for transmission; and six which include a mix of generation, transmission and distribution. Six loans have been extended to private utilities. The most recent loan was to PFC in January 1992. The physical implementation of most Bank power projects in India has proceeded slowly, but eventually, after significant initial delays, has broadly met expectations. Performance audits conducted for the Second Power Transmission Project (Credit 242-IN) and the First and Second Rural Electrification projects (Credits 572-IN and 911-IN) highlighted the difficulties of effecting institutional improvements in the absence of a clear division of responsibilities between the central entities and the SEBs. Project completion reports show that the Third and Fourth Transmission 8 Loan and credit amounts are net of cancellations.  projects (Credits 377-IN and 604-IN) experienced similar difficulties; despite some progress, in general, SEBs did not respond to GOI's initiatives. These lessons from past operations had an important bearing on the design of the recent PFC operation and have strongly influenced the Bank's current lending strategy. 1.16 Loan and credit disbursements continue to show large outstanding balances (US$3,497.2 million as of April 30, 1992). These are due primarily to the long construction periods for generation projects compounded by frequent delays in procurement, in foreign exchange and import license clearances by the various ministries and in counterpart fund releases from state governments. Undisbursed balances have been pushed up further by frequent cost underruns on major equipment contracts. The latter are due, in some instances, to the softening of international markets in the mid-1980s and, in others, to the depreciation of the Rupee. The Bank has reviewed the level of potential savings in its power loan portfolio for India and on December 5, 1991, canceled US$418.6 million as these funds were no longer required for project implementation. IFC has made five investments totalling US$203 million to AEC and TEC in FY89, TEC and CESC in FY90, and BSES in FY91. 1.17 The Bank has had two lending operations with the Maharashtra State Electricity Board (MSEB): the first one for the Chandrapur Thermal Power Project (Ln. 2544-IN) in 1985, and the second for the Maharashtra Power Project (Ln. 3096-IN) in 1989, part of which is implemented by the Irrigation Department of the Government of Maharashtra (GOMID). These projects are helping MSEB expand its generation, transmission and distribution facilities, renovate and modernize existing power plants, and enhance its capabilities in many areas of utility operation, management and project implementation. Both projects have encountered difficulties in the early stages of their implementation due, to a large extent, to the slow pace of procurement. More recently however, MSEB's extensive use of model bidding documents approved by the Bank has improved the situation considerably. Funds available under Ln. 2544 are now practically fully committed; two thirds have already been disbursed and most of the remaining balance is expected to be disbursed in FY93. Bidding for the part of the Maharashtra Power Project implemented by MSEB is now almost complete and about US$70 million worth of contracts have already been awarded, mainly in the past six months; such progress will soon be reflected in accelerated disbursements. Furthermore, savings of about US$46 million have already been identified, and GOI has requested the Bank to cancel an equivalent amount from the loan. Similar progress has been achieved in the part of the project executed by GOMID, with US$50 million worth of contracts awarded in February 1992 and tenders for the remaining packages expected to be issued at end-June 1992. Compliance with loan covenants has generally been satisfactory. The lessons learned from these projects have had an important bearing on the preparation of the proposed project, particularly as regards the need to improve MSEB's procurement procedures and increase its self-financing capabilities. 1.18 Past Strategy. Over the last decade, IBRD followed a three- pronged strategy in its lending to the power sector in India. Firstly, it supported agencies owned by GOI as a means of effecting sectorwide improvements. Secondly, it financed a selected number of SEBs whose management and state government appeared to be committed to reforms. Finally, and in close cooperation with IFC, it financed existing private power  -7- utilities to improve their financial and economic efficiency and to encourage GOI to lower entry barriers for new investors. The success of this strategy has been uneven. 1.19 Experience with Central Agencies. IBRD has helped NTPC become India's model utility and, in the process, improve operational efficiency nationwide. In FY92 NTPC provided about 212 of India's total power supplies and the operational efficiency of its plants has consistently surpassed that of the state utilities. After some delays in the pre-construction stages, NTPC generally constructed its projects on schedule and within budget, reflecting the strong project management capability it has developed. The procedures introduced by NTPC in quality control helped improve the quality standards of power equipment supplied by Indian manufacturers. However, GOI's and the Bank's efforts to use NTPC to develop the power sector into an efficient and commercially viable part of the economy have fallen considerably short of the objective. The pervasive nature of the sector's financial problems and the relative autonomy of the states in power matters limited what could be achieved through NTPC. 1.20 The financial health of NTPC has been threatened by the continued accumulation of receivables from the SEBs. At the end of May 1990 they stood at the equivalent of about six months of sales and the Bank had to inform GOI and NTPC that support for new projects would no longer be possible unless actions to reduce NTPC's receivables position were taken. NTPC has since enforced financial discipline through means such as letters of credit and in a few cases attempted to limit the supply of power to the level of payments received. In addition, a debt-equity swap with the Uttar Pradesh State Electricity Board (UPSEB), NTPC's main debtor, has been completed. It involved NTPC taking over the two existing units and an ADB loan for the third and fourth units of Uttar Pradesh's Unchahar Power Plant, in exchange for receivables and increasing the value of UPSEB's letter of credit to the level of expected sales from NTPC. With these measures NTPC's accounts receivable were brought down to about 2 months in February 1992, in line with the covenant under the most recent Bank loans. NTPC's collection problems will not be permanently resolved, however, until its commercial arrangements with its clients are strengthened and the SEBs' financial performance is substantially improved through retail tariff adjustments and collection improvements. 1.21 Experience with SEBs. Beginning in the mid-1980s, IBRD attempted to improve the performance of SEBs by direct involvement at the state level. This approach, involving close lending relationship with the SEBs, has been successful in a few cases, such as MSEB. Projects with institutionally and financially weaker SEBs have not met expectations, forcing the Bank to apply increasingly strong remedies, up to loan cancellation in the case of the Delhi Electric Supply Undertaking (DESU) in 1989, suspension of disbursements under the Uttar Pradesh Power Project in April 1991 and formal threat of suspensions of loans to the SEBs in the States of Karnataka, Himachal Pradesh and Kerala in June 1991. The Bank's stance has yielded positive responses from the concerned state governments, including substantial tariff adjustments in Himachal Pradesh, Kerala and Uttar Pradesh. Continued close and frequent rupervision of the SEB loans is necessary to help ensure continued compliance ,ith loan agreements, setting effectively a limit to the number of direct SEB operations.  1.22 Experience with Private Utilities. The Bank and IFC's experience with the private utilities has been generally satisfactory. Unlike the SEBs, private utilities have been allowed by their respective state governments to operate autonomously and in a technically and financially viable manner. They have not suffered from the institutional and financial problems of the GOI- owned entities either, because the power they generate is largely fed into their own distribution networks which supply financially lucrative urban residential and industrial consumers. Towards a New Approach in the Power Sector 1.23 The Bank supports GOI's recent major policy reforms in the sector, namely the creation of PFC and NPTC, the channelling of discretienary funds by the center only to the performing SEBs, and an increased role for the private sector. The key constraints to be addressed are the lack of financial autonomy and the poor financial discipline of most publicly-owned utilities, combined with the absence of commercial incentives and subsidized power prices in most states. Physically, these constraints cause India's power system to provide less power and of a poorer quality, at higher cost, than it otherwise would be able to provide. The economic costs of shortages and poor quality of supply are exacerbated by inefficient use of power which is encouraged by inefficient pricing and non-collection of dues. 1.24 The evolving lending strategy would continue to support capacity additions through the private sector and efficient public utilities while at the same time giving increased attention to improvements in the utilization and efficiency of existing operating assets. It would seek and support actions by GOI to address fundamental issues in the power sector such as imbalances between capacity expansion and efficiency improvements in the investment plamning and fund allocation process, problems in the current central sector power (and also coal and natural gas) allocation process, the operational efficiency of the power system, the institutional structure of the state utilities and poor resource mobilization in the power sector. In addition, issues relating to energy conservation, environmental and sociological aspects of power development will be taken up. Bank lending for power would focus on: (a) promoting domestic and foreign private investments, including support to joint ventures between the private sector and well- managed public utilities and assistance to the states for developing policy framework and contracting private power; (b) projects implemented by either center or state utilities benefiting states whose SEBs either perform in a satisfactory manner or have started implementing credible plans underwritten by their states to improve their performance and finances, with emphasis on significant up-front tariff adjustments. Loans to such agencies would in particular support investments designed to improve the utilization, operations and efficiency of existing power generation, transmission and distribution facilities; (c) investments that promote energy conservation and demand-side management; and  --9- (d) innovative, small-scale developments such as mini-hydro, co- generation and non-conventional energy schemes which are environmentally sound and cost-effective. 1.25 The first operation prepared in line with the above strategy was approved in January 1992, in support of GOI's efforts to develop PFC into an agent of reform in the power sector (para. 1.12). The proposed project also fits into this strategy. It addresses key power sector issues in Maharashtra and promotes: (a) operational efficiency improvements including the reduction of transmission and distribution system losses and load management; (b) improved internal and external resource mobilization and electricity pricing reforms; and (c) institutional reforms including the enhancement of the role of the private sector. II. THE BENEFICIARY - MAHARASHTRA STATE ELECTRICITY BOARD Organization and Manpower 2.01 The Maharashtra State Electricity Board (MSEB) was constituted in 1954 under the Act and is responsible for generation, transmission and distribution of electricity throughout the State of Maharashtra. It constructs and operates generating stations and transmission and distribution networks to supply electric power to final consumers and a licensee (TEC). It also issues licenses to private power utilities in Maharashtra4 and for private captive generation. MSEB operates the largest state power system in India, with an installed generating capacity of 6,934 MW as of March 31, 1992 (10Z of all India), of which 1,296 MW is hydro, 4,966 MW is coal-fired, and 672 MW is gas-fired. MSEB's network consists of about 177,000 km of transmission lines (11 kV and above) and 317,000 km of distribution lines (below 11 kV), and includes transformer substations with an aggregated capacity of 42,989 MVA. MSEB serves about 8.3 million customers, comprising 5.6 million domestic, 1.6 million agricultural, 0.8 million commercial, and 0.2 million industrial consumers. 2.02 MSEB is managed by a Board consisting of a full-time Chairman and three full-time Members (for Accounts, Technical, and Administration). Board members are appointed by the state government and define MSEB's general policies as well as manage their respective sectors. At the end of FY91, MSEB had about 106,000 regular employees and about 14,500 skilled workers employed in non-permanent positions. MSEB's organizational chart, presented in Annex 2.1, reveals well-defined responsibilities for its operating units at its headquarters, regional divisions and project sites. Transmission and distribution responsibilities, including commercial activities, are carried out by six regional chief engineers who supervise twenty-four districts, each headed by a superintendent engineer. Generation (operations and maintenance) 4 The Tata Electric Companies (TEC) and Bombay Suburban Electricity Supply (BSES), both operating in Bombay. TEC generate about two thirds of their peak load requirements and purchase the balance from MSEB; in addition, TEC transmit power through their lines to MSEB's clients and sell power to MSEB to meet the latter's energy requirements.  - 10 - is organized in eight zones corresponding to the main power plants and transmission substations. MSEB executes itself a considerable part of its development program, especially transmission lines and substations. Operational and Managerial Performance 2.03 MSEB compares favorably with other SEBs in India according to most productivity indicators (Annex 2.2). Labor productivity is well above the average for India's state electricity boards, measured both in terms of number of employees per GWh sold (3.7 against an average of 5.8 for all SEBs) and per 1,000 consumers (12.8 versus an average of 17.1). MSEB's management has since FY89 placed a freeze on recruitment for all lower level staff. MSEB's thermal plant load factor reached 60.6Z6 in FY91 compared to the national average of about 55Z; average availability was close to 77Z. While transmission and distribution losses in FY91 were at 15.52 against a national average of about 22Z, system losses have slightly increased over the last'\few years, essentially as a result of the rapid expansion of the distribution system. The proposed project will help MSEB to reverse this trend (para. 2.09). 2.04 As part of the execution of the Maharashtra Power Project (Loan 3096-IN), MSEB launched in 1990 a comprehensive program of managerial development to strengthen its overall operational and managerial performance, particularly in the areas of organization, management information systems and planning. MSEB also engaged a team of consultants to prepare a human resources development plan, including monitorable annual staff productivity targets, and a manpower plan; the consultants' recommendations are expected to be available by July 1992 and will be reviewed with the Bank. While overall progress in the implementation of the program has been satisfactory, delays have incurred in: (a) strengthening the Internal Control Unit into an autonomous Internal Audit Unit reporting directly to the Chairman; and (b) establishing the much needed corporate planning unit. MSEB is taking steps to accelerate the formation and staffing of such units. An Operational and Financial Action Plan (OFAP) signed with GOM and PFC in January 1992 contains specific actions to correct critical deficiencies in stock management, cost control, plant maintenance, billing and collection. In view of PFC's anticipated role as one of MSEB's major financiers and to reinforce the significance of the action plan, it was confirmed during negotiations that MSEB will implement the OFAP and that its key quantified targets will be inc: 4ed in the key performance indicators to be closely monitored during projeLi supervision (para. 3.25). Electricity Tariffs 2.05 Against the Indian context of heavy political interference in tariff setting, the pace of tariff reform in Maharashtra has been impressive in recent years, with the tariff level increasing at an average annual rate of 7.4Z in real terms in the FY85-91 period. MSEB's tariff was last adjusted in May 1990. The adjustment raised MSEB's average tariff revenue to about Rs. 6 This indicator would have been much higher had coal supply been adequate: the loss of generation during FY91 due to coal shortage was 1,873 GWh, equivalent to about 112 of total thermal generation.  - 11 - 1.09/kWh, equivalent to about 63Z of the revenue that would result from strict LRMC-based pricing. This ratio is well above the Indian average of about 502 of LRMC, and along with MSEB's better than average operational efficiency, has enabled MSEB to achieve a reasonable financial performance. State government subsidies have, however, been necessary to compensate for the losses caused by the low agricultural tariffs and meet the statutory 32 minimum after-interest return on net fixed assets. It should be noted that MSEB's 3Z after-interest return in FY90-91 corresponds to a conventional (before-interest) rate of return of about 111 (Table 4.1). However, the current tariff structure still includes sharp divergences from the LRMC structure. While the tariff to large industrial and bulk supply customers is reasonably well in line with LRMC, tariffs to other industrial and commercial customers are about 50-602 of LRMC, and the rates to residential and agriculture customers, at about 25X and 52 of LRMC respectively, are even below MSEB's average financial cost of supply. 2.06 During project preparation an intensive dialogue took place between GOM, MSEB and the Bank on further tariff reforms, focusing in: (a) the need to raise MSEB's tariff revenue in order to ensure satisfactory financial performance and increase contribution to future investment from internal resources; and (b) improvements in the tariff structure to reduce the remaining distortions. A new tariff, presented in Annex 2.3, was introduced on May 21, 1992. The adjustments made raise the average revenue by more than 202 and bring MSEB's conventional (before-interest) rate of return to about 122, corresponding to an after-interest rate of return of about 5Z, well above GOI's statutory 32 minimum. While agricultural tariffs could not be adjusted due to the persistent severe drought conditions in Maharashtra, the new tariff includes the following changes: (a) limit on the application of the financial subsidy to low-income residential consumers only (defined as those consuming less than 50 kWh/month) and progressive increase in the rates applicable to relatively well-off consumers to bring them closer to their estimated LRMC; (b) significant increases in the tariff for commercial and low-voltage industrial consumers; (c) adjustment in the level and structure of the high- voltage industrial tariff to bring the structure better in line with LRMC; and (d) introduction of an adjustment clause for the automatic recovery of increases in MSEB's purchased power cost, i.e., from NTPC, TEC and the Tarapur Atomic Power Station. MSEB plans to pursue its power pricing reforms and include in its next tariff adjustment proposal the implementation of the Rs. 0.50/kWh minimum agricultural tariff rate to meet the new national target (para. 1.07), the introduction of an effective time-of-day (TOD) tariff for large industrial consumers and MSEB's supply to TEC, and further increases in all other categories (particularly large residential and commercial consumers and low-voltage industrial consumers). MSEB's Investment Plan 2.07 While MSEB's operational efficiency compares favorably with other SEBs (para. 2.03), a further increase in the relative share and volume of investments to reinforce MSEB's transmission and distribution system is needed. GOM and MSEB have decided to make efficiency improvement a priority area for MSEB. Accordingly, proposed generation and rural electrification investments have been cut in MSEB's investment plan and several major programs and projects have been initiated to reduce system losses and improve operational efficiency. MSEB's investments in the Eighth Plan period are projected at about Rs. 90 billion in current terms (including interest during  - 12 - construction). The plan has been reviewed during project preparation and found to be technically, financially and economically sound. The major components of this efficiency-oriented plan are discussed below. 2.08 Generation. MSEB's investments in new generation projects have been reduced radically and entail only one new plant, Chandrapur Unit 7, under the proposed project. The other two new generation projects, the extension of the Khaperkheda coal station and the new Nagothane combined cycle plant, have been taken out of MSEB's investment program and assigned to the private sector (para. 2.12). MSEB will also convert its existing Uran gas turbine plant to combined cycle, to increase its capacity and generating efficiency. In addition, MSEB is implementing a comprehensive program of rehabilitation and renovation of its other existing generation stations, for operational and environmental improvements. 2.09 Transmission and Distribution. The transmission system from Chandrapur (MSEB's main mine-mouth generation center in the eastern part of Maharashtra) to the Bombay area (the main load center) will be reinforced under the proposed project. Projects for urban distribution rehabilitation and reinforcement, covering the major part of the 55 cities with a population of 50,000 or higher, have already been prepared and projects for the remaining cities are under preparation. Distribution master plans for each of the 32 districts in Maharashtra have also been prepared. Given the resource constraints, it is not, however, possible to rapidly implement a statewide program for distribution efficiency improvement outside the main urban areas. In order to initiate such a program and make it financially more affordable, the following actions have been agreed under the proposed project: (a) selected district master plans (those with the highest potential for loss reduction) have been packaged into an Accelerated Distribution Reinforcement Program, for implementation under the project; (b) a technical assistance component has been formulated to help design additional efficiency improvement and demand management measures. The project will help initiate the program and train concerned MSEB staff; (c) the May 1992 tariff adjustment includes major increases in residential and commercial rates (para. 2.06), to contain the demand growth and reduce the financial burden of supply of these consumer groups, and will be complemented, in the next tariff revision, by the introduction of the minimum Rs. 0.50/kWh agricultural tariff; and (d) MSEB's target for annual pump connections has been cut from about 100,000 to about 60,000 in the new investment plan. This is regarded by GOM as the absolute minimum number of new connections as the cut extends the average waiting time of the 300,000 applicants on the waiting list from 3 years to 5 years.  - 13 - Institutional Development 2.10 As seen above, severe resource constraints limit MSEB's ability to implement all the investments that would be required to meet fully the potential demand and improve the quality of power supply while achieving a higher degree of operational efficiency. The need to mobilize a significant amount of additional financing outside the traditional Plan allocations from GOI/GOM has become paramount. HSEB's success in tapping new sources of finance (such as PFC, capital markets and export credits) will depend to a large extent on its ability to develop from a relatively well-run SEB into a viable commercially oriented entity, with increased managerial, financial and administrative autonomy. This would require not only that HSEB pursue its efforts at improving its operational and managerial performance, but also that its role, organization and modus operandi be reexamined against the background of the evolving longer-term institutional development and performance objectives of the power sector in Haharashtra. 2.11 GOM has established a high-level committee to review the present institutional setup for the sector, assess the need to adapt it to the changing environment (financial constraints, increased number of private power suppliers and coordination of their respective development plans), and reconmend ways to make MSEB a financially autonomous and accountable entity. On the basis of terms of reference agreed at negotiations, the committee will examine inter alia the appropriate regulatory framework that would: (a) provide MSEB autonomy, with accountability for results; (b) reduce political intervention in MSEB's affairs, the tariff adjustment process in particular, and set clear technical and financial performance criteria, on the basis of which the appropriateness of investment decisions and tariff revisions could be determined in an objective and transparent manner; (c) provide a forum for interaction with other interested parties including electricity consumers; and (d) define MSEB's role in the development of private power in Maharashtra. Agreement was reached at negotiations that GOM will discuss the committee's findings and recommendations with the Bank not later than December 31, 1993 (para. 6.02 (a)). Provisionis for consulting services have been included in the project to enable the committee to benefit from the experience and advice of internationally-renowned experts in the field of power sector regulation and organization. Private Sector Power Development in Maharashtra 2.12 The private sector has long maintained a strong presence in Maharashtra, with TEC and BSES serving a large part of the Bombay metropolitan area. In view of the prevailing resource constraints and in line with GOI's recent policy initiatives, GOM and MSEB have decided to encourage the private sector to assume an even wider presence and to allocate two of MSEB's three new generation projects for the Eighth Plan (para. 2.09) for implementation by the private sector: (a) the 2x210-MW extension of MSEB's existing 2x210-MW coal-fired power station at Khaperkheda; and (b) Nagothane, stage 1 (410 MV) of an ultimate 2x410-MW gas-fired combined-cycle power station. Six potential project sponsors have been prequalified and requested to submit technical and price proposals. A technical assistance grant was recently approved under the Japan Grant Facility to help GOM and HSEB in private power development, with the Bank as the executing agency. The focus of the technical assistance is on: (a) finalizing the legal and incentive fr&mework for the implementation of  - 14 - the power generation projects by the private sector in Maharashtra within GOI's overall framework; (b) developing an efficient and transparent framework for evaluating the bids, including the preparation of detailed evaluation criteria; and (c) helping GOM and MSEB negotiate and conclude contracts with the selected sponsors during 1993. Given that the grant may only cover part of the work required, the proposed project will provide additional consulting services to enable GOM to complete the contracting process, including financial closure for the two power projects (para. 3.02). III. THE PROJECT Proiect Objectives 3.01 The main objectives of the project are to: (a) support operational efficiency improvement; (b) improve internal and external resource mobilization; and (c) promote institutional reforms including the enhancement of the role of the private sector. Prolect Description 3.02 The componert., of the proposed project, described in detail in Annex 3.1, are: (a) the construction of the last stage of Chandrapur thermal power station by the addition of a 500-MW coal-fired unit (Chandrapur unit 7); Cb) the construction of a + 500-kV, 1,500-MW HVDC line from Chandrapur to Padghe, near Bombay (about 735 km), and the related terminal stations; tc) the implementation of an accelerated distribution reinforcement program aimed at reducing losses in selected areas; and (d) consulting services in the following four areas: (i) load research and preparation of electricity demand management measures; (ii) development of MSEB's environmental management capabilities at the corporate level; (iii) preparation of private power projects in Maharashtra; and (iv) institutional review of the power sector in Maharashtra. Activities to be carried out under (iii) and (iv) would be implemented by GOM. 3.03 Coal for the Chandrapur power plant is mined at the nearby Wardha Valley coal fields and no new coal mine will need to be developed for the purpose of meeting the requirements of the power plant expansion under the project. At negotiations, GOI reaffirmed that it will take all steps necessary to ensure adequate and timely supplies of suitable coal for the proposed power plant (para. 6.01). Cost Estimates 3.04 The estimated cost of the proposed project is summarized in Table 3.1. Details are given in Annex 3.2. Cost estimates for the civil works are  - 15 - based on available data from other projects engineered by MSEB and its various consultants. Cost estimates for equipment and materials are based on estimates received from a number of manufacturers and have been compared with the cost of Chandrapur units 5 and 6 and other similar projects. The estimated cost for consulting services is based on an estimatod 130 man- months, of which about 50 man-months are expected to be from local consultants. Base prices were updated to Harch 1992. Physical contingencies amount to about 5.92 of the base costs (physical contingencies of 4Z on equipment and civil works were assumed on the basis of experience with Units 5 and 6 at Chandrapur and similar power plant projects; 72 on equipment and civil works for the HVDC transmission project; and 102 for equipment and works associated with the accelerated distribution reinforcement program). Price contingencies, which amount to 32.52 and 8.82 of the base costs, in Rupee and US Dollar terms respectively, are based on the expected annual domestic and international inflation rates. The domestic inflation rates used for the cost estimates are as followss 10.52 for 1992, 8.52 for 1993, 7.52 for 1994, 6.5Z for 1995, 62 for 1996, and 52 for 1997 onwards. The international inflation rates used are 3.72 for 1992 and thereafter. Table 8.1: Estimated Pro3ect Cost. I Projoet Components Local Foreign Total Local Foreign Total - Re. million --------- -------USS milion-------- I. Chandrapur Unit 7 (600 MW) 4,401.8 6,012.9 10,414.2 172.6 286.8 408.4 II. Chandrepur-Padgh, HVDC Trnamisoion Link 8,400.6 4,620.0 8,020.5 188.4 181.2 814.6 11. Accelorated Distribution Reinforcement Progrm 1,654.8 1,086.0 2,690.8 64.9 40.6 105.5 IV. Consulting Servicee and Associated Equipmnt 17.9 51.0 68.9 0.7 2.0 2.7 Total Base Coete 9,474.5 11,719.9 21,194.4 871.6 469.6 881.2 - Physical Contingencles 581.9 669.0 1,250.9 22.8 26.2 49.0 - Price Contingencies 2,684.8 4,8a0.5 7,294.8 17.7 59.5 77.2 Totel Contingnclles ,248.2 5,299.5 8,645.7 40.5 85.7 128.2 Total Project Cost 12,720.7 17,019.4 29,740.1 412.1 545.8 957.4 s:c=z. e==~ e== Interest During Construction - Bank Loan 1,882.7 2,401.1 8,788.8 42.8 74.8 117.1 - Other 8,0o5.7 1,767.1 4,822.8 94,4 55.1 149.7 Total - Interest During Construction 4,488.4 4,188.2 8,606.6 187.4 129.4 266.8 Total Financing Required 17,159.1 21,187.6 88,846.7 649.5 674.7 1,224.2 -_ __-E; = == /a Includes taxes and duties of about US872 million. Indirect foreign costs of local contracts amount to USS881 million and are Included In total foreign costa. Pro3ect Financing 3.05 The project is the largest component of MSEB's investment program over the next few years. The proposed Bank loan of US$350 million would cover about 292 of the total financing requirements, net of duties and taxes. The loan would cover part of the estimated foreign exchange requirements and part of the ex-works costs for contracts expected to be awarded to local suppliers under international competitive bidding (ICB) and would help finance  - 16 - Chandrapur Unit 7, the HVDC line, the accelerated distribution reinforcement program and consulting services. Export credits would finance the major part of the foreign exchange costs of the HVDC terminals (para. 3.07). The financing plan is shown in Table 3.2. Table 3.2: Financing Plan Local Foreign Total Currency Currency ----------US$ million----------- z IBRD 350 350 29 Export Credits - 200 200 16 GOM 305 - 305 25 MSEB 244 125 369 30 Total 549 675 1,224 100 3.06 The Bank loar would be lent to India. GOI will make the proceeds of the loan available to GOM under the standard terms for central assistance to the states . GOM will retain US$1 million for part of the technical assistance component (para. 3.02) and onlend US$349 million to MSEB for the implementation of the remaining components, at an interest rate equal to the prevailing coupon rate for GOI long-dated securities, currently at 12.5?, with a repayment period of 20 years, including a grace period of 5 years. GOM and MSEB will enter into a financial arrangement that will include inter alia provisions for the issue of separate government orders for the release of the funds to MSEB to ensure transparency of such lending and the submission to the Bank of copies of the above-mentioned orders on a quarterly basis (para. 6.02 (b)). 3.07 In order to secure foreign exchange financing for project components not financed by the Bank, such as the HVDC terminals, MSEB is seeking cofinancing from expor-,'supplier credits, and the corresponding tenders were floated on March 30, 1992. The tender documents specify that the foreign exchange financing is sought at OECD consensus terms, or better. Three major manufacturers of HVDC equipment have already purchased the documentation and at least one more manufacturer is expected to follow suit. Informally, the prospective bidders have indicated to MSEB their intention to also offer financing packages. Copies of the results of such preliminary consultation has been provided to the Bank. In order to address fully the Bank's concerns regarding the project's financing plan, MSEB has requested the prospective bidders to further ascertain their intentions to provide financing for the terminals and obtain formal preliminary commitments, some of which have already been forwarded to the Bank. It was agreed at negotiations that satisfactory financial arrangements for the construction of the HVDC terminals would need to be finalized before the loan is made effective (para. 6.03 (a)). Given that present GOI guidelines preclude MSEB from direct external 6 These are expected to involve GOI passing 100? of the Bank loan to GOM.  17 - borrowing, it is envisaged that the required export credits will be channelled through PFC, with MSEB assuming the foreign exchange and interest rate risks. Prolect Management 3.08 The Industries, Energy and Labor Department of GOM, through the Secretary, Energy and Environment, will be responsible for supervising the consultants that will assist in the program for private power development and advise the high-level committee in charge cf reviewing the institutional development of the power sector in Maharashtra. MSEB would be responsible for implementing all the other components of the proposed project, with the assistance of consultants, except for the distribution program. The list of consultants employed by MSEB for this project and their respective responsibilities are given in Annex 3.3; in particular, because the technology used for the transmission link will be new to MSEB, the latter has retained the services of Hydro-Quebec International/Lavalin of Canada, as well as a team from NTPC to assist in the preparation of this component of the project. All the consultants are acceptable to the Bank. MSEB has demonstrated competence in project management during the construction of the previous Bank- financed projects. MSEB's proposed project management structure is shown in Annex 3.4, detailing arrangements for Chandrapur Unit 7 and the HVDC link. No special organization is required for the implementation of the accelerated distribution reinforcement program as MSEB is adequately organized to carry out these distribution works as part of its normal distribution operations. The Distribution Department will be responsible for the engineering and management of the Program. ,t has experienced engineers and upgrading of its planning facilities is being financed un4er Loan 3096-IN. Status of Proiect Preparation 3.09 Bidding documents for the two major contracts of the Chandrapur Unit 7 component, viz. boiler and turbine generator, have been submitted to the Bank for approval. These two contracts will account for about 502 of the Bank loan. The documents are expected to be issued for tendering by end-July 1992. Bidding documents for the other contract packages will be finalized based on the technical specifications from the boiler and turbine-generator contractors. Since unit 7 will basically be a replication of units 5 and 6 in its essential design fuatures, no difficulties are envisaged in the preparation of bid specifications incorporating the final design. Bidding documents for the HVDC terminals were reviewed by the Bank although procurement will be under export credits. The scope and final cost estimate of the accelerated distribution reinforcement program was agreed at negotiations. Agreement was also reached that MSEB will submit to the Bank, no later than March 1 of each year, a work plan, including the list of distribution lines and substations to be financed by the Bank during the following year, the list of contract packages for which tenders will be invited, and the associated timetable for the procurement of equipment and materials to be financed by the Bank (para. 6.02 (c)). The implementation schedule of the load management program, described in Annex 3.1, was also confirmed at negotiations. 3.10 A model bidding document for the supply of goods was agreed under Loan 3096-IN and has been updated for use under the proposed project. It was finalized at negotiations.  18 _ Project Schedule 3.11 The project would be implemented over a period of six years and is expected to be completed by December 1997, with the closing date for the loan to be set at June 30, 1998 (Annex 3.5). The imp:ementation schedule for the proposed 7th unit at Chandrapur is based on experience under units 5 and 6 and is substantially shorter than the Bank standard in South Asia, resulting also in substantially faster disbursement of the Bank loan (para. 3.14). The schedule assumes that the contracts for the boiler, turbine-generator and HVDC terminals are awarded ao later than January 1993. Chandrapur Unit 7 is scheduled to be synchronized with the Western Region Interconnected Grid in March 1997, and would be put into commercial operation ty June 1997. The HVDC transmission link would be put into operation by March 1997, in accordance with the timing for commissioning of Unit 7. Key dates for milestone construction activities (Annex 3.6) were confirmed at negotiations. Procurement 3.12 The procurement arrangements are summarized in Table 3.3 and shown in detail in Annex 3.7. This annex also shows the contracts which would be financed under the proposed loan. Major milestones of the procurement process are given in Annex 3.8. The bulk of the equipment (totalling about US$410 million) will be procured through international competitive bidding (ICB) in accordance with the Bank's procurement guidelines; some of them would also include civil works (e.g., substation structure and transmission lines); this would ensure better coordination during implementation. Local manufacturers would be expected to bid for most categories of equipment, and a domestic preference of 152 or the corresponding import duty, whichever is less, would be applied in the comparison of bids for equipment contracts. Contracts worth less than US$100,000 each and with an aggregate value of US$6.3 million (of which the Bank-financed portion is estimated at about US$5 million) may be awarded by receiving bids from at least three suppliers. Contracts worth US$1 million or more would be sabject to prior review by the Bank; this category is estimated to cover about 90Z of the value of all ICB contracts. Smaller contracts would be subject to selective post-award review. The main consultants for the project have already been appointed and are financed by MSEB (para. 3.08). Consultants for the technical assistance component would be appointed in accordance with the Bank guidelines for the selection of consultants. Main civil works, in multiple packages, to be financed under non-Bank funds, will be procured under local competitive bidding (LCB) procedures. The nature of works entailed under this category is unlikely to attract foreign bidders; however, foreign contractors will not be prevented from participating in LCB. To secure satisfactory performance guarantees, the main package for the Chandrapur and Padghe terminal statior.s (US$239 million) would be procured as a single responsibility contract, under Limited International Competitive Bidding (LICB) and on a supply-and-erect basis and will be financed under suppliers' credit (para. 3.07). MSEB will be encouraged to procure the other non Bank-financed equipment and materials packages under ICB procedures.  - 19 - Table 8.8: Suwmariof Proosed Procurement Arrangments g/ (U3S million equivalent) --Procurement Method---- Project Element ICB LCB Other N.B.F. Total Cost 1. Civil Works 16 0 - - 48.6 I 68.6 (11 .0) -) (-)(- ) (11 .0) 2. Goods (Equlpment A 867.0 - 6.8 460.4 828.7 Machinery) (802.0) ( - ) (650) ( - ) (807.0) 8. Erection Services 87. 6/ - - - 87.5 (80.0) (-) (-) C-) (80.0) 4. Consulting Services 4.1 Engneerlng and Supervision - - - 29.9 29.9 C-) (-) (-) (-) (-) 4.2 Technical Assistance - - 2.7 - 2.7 C-_ ) ( - ) (2.0) (2.0) Total 409.5 - 9.0 688.9 957.4 (848.0) ( - ) (7.0) ( - ) (850.0) LI Contract veaues includo contingencies, taxes and duties (US871.6 million).