India - Technical Assistance For Private Power Development Project

Docimnu of The World Bank FOR OmCIL4 USE ONLY MICROFICHE COPY Report No. :P- 6073-IN Type: (PR) q poP603I Title: TECHNICAL ASSISTANCE FOR PRIVAo P-6073-IN Author: CHASSARD, J Ext. :81873 Room:G3071 Dept. :SA2EG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$20 MILLIC1 TO THE POWER FINANCE CORPORATION LIMITED (WITH THE GUARANTEE OF INDIA) FOR A TECHNICAL ASSISTANCE PROJECT FOR PRIVATE POWER DEVELOPMENT June 2, 1993 Th. d hds a ra"mca distribuion aod y be used by recipiets oly i the performance Of thlir ofM"a dties. its contn may not otherwise be disclosed _ihu Wworl Bank wthorization.  CURRENCY EQUTVALENS Cuncy unit = Rupees(R&) One Rupee - =0i036 One USDolar = Rs. 30.2 ABBREVIATIONS AND ACRONYMS GOI - Government of India IPC - Investm ent Promotion Cell IPP - Idependent Power Producer IOI - Letter of Invitation MOP - Minitry of Power MOU - Memorandum of Understading PFC - Power Finance Corporation Lidted PHD - Policy and Human Resource Development Fund (apan) PIU - Project Implementation Unit PPA - Power Purchase Agreement SEB - State ElectIcity Board SG - State Government TA - Technical Assistance LUSAID - United States Agency for Interational Development ISCALYEAR Aprill - March31  FOR OMCLIAL Use ONLY INDIA TECHNICAL ASSISTANCE PROJECr FOR PRIVATE POWER DEVELOPMENT Loan and Project Summary Borrower: Power Finance Corporation Limited (FC) Beneficiares: State Electricity Boards and other power utlities Guarantor: India, acting by its President Amount: US$20 million equivalent Terms: Repayable over 20 years, including five years of grace, at the Banlks standard variable Interest rate. Onlending Terms: From PFC to the final b ar at the prevaling P-c lending rates for tecnidcal assistance, to be adjusted for foreign eachange rik Guarantee fee: The Govenment of India (GO) would charge a guarantee fee of not less than 1% on the prlncipal amounts of the Bank loan wfithdrawn and outstanding. Fianing Pla IBRD US$20.0 milion PFC US$ Q5 million Total US$20.5 million Economic Rate of Retumr Not applicable Staff Appraisal Report: Not applicable This document has a rmsticted 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.  -2- MEMORANDUM AND RECOMMENDATION OF TM PRESIIENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN TO THEECUTIVE DMECTORS ON A PROPOSED LOAN TO THE POWE FINANCE CORPORATION LIMTED FOR A TECHNICAL ASSISTANCE PROJECT FOR PRIVATE POWER DEVELOPMENT 1. I submit, for your approval, the following memorandum and reommendation on a proposed loan to the Power Finane Corporation Limited (PP), with te guarantee of India, for the equivalent of US$20 milon to help finance a TechcalAssistance Project for Private Power Development. The lon would be at the Bankfs sandard variable interest rate and repayable over 20 years, Including five years of grace. Country and Sector Background 2. Quite proninent among the long-term pediments to economk growth and Ldusial investment In India are the dincentves and oassociated wifth the Inadequate supply and reliability of power in the country. Even If substantal effidency are acieved, sizable investments are needed to mitigate the negadve Impact of power shortages on the economic Lberalization proamBecause public utilities are unable to undertake such investments due to a lack of fumds, the Government of India (GO{) has taWen steps towards opening the sector to ptivate nvestment with a view to mobilize private finance for power development. The Electicty (Supply) Act, 1948, was amended in September 1991 to lift many of the regulatory disincentives to private investment in the power sector, su tly, high- level promotional efforts were undertaken by the govermment in the spring of 1992. This Initiative, launched at a propitious time when utilities i developed counties are looidng for new Investment opportunities abroad, has been quite sInessful in encouraging private investors, both domestc and foreign, to propose investments In power projecs About 43 proposals are now under active conslderation by private entrepreneum; for 38 of them, Memornda of Understanding (MOUs) havebe signed between various State Electricty Boards (SEBs) and private developers, giving theatter exlusive rights for the development of their projMect Eight projecs are today at an advanced stage of negotiation in six diffrent states or union teito 3. GOrs poliy for private sector ppaton In the power sector focuses heavily on encouraging Independent power produceM MPs) to set up and operate power generaing faciities In Idia and has not yet establshed a dear framework for other forms of prvatization, such as manament contracts for utility operations, the abilition of existing power plants, or the prvatzatn of distron. Fureme, the poicy defines the round les and broad pa s within wic IPPs may consider investmts in dia, but its ment has confirmed that there are st a number of isues to resolve, at the c and state levels, before actual Investments can take place under sustainable conditions. This is due, in large part, to the fict that the power sector is going through a transition period and that the prevailing weakness of the sector place unuly high risks on private developers. WhUle It is isportant for GOI to show responsiveness to private investors' concens and recognize that this Is a transition perlod, It is also ucial at this stage to cary assess the impications fr the countty as a whole of any new polic decsion that could be take in response to specfic  -3. demands put forward by individual project proponents, as any concession rade in respect of one particular project could set aprecedent for ote. 4. Furthermore, the process by which the policy is being implemented raises a mber of concr: for the most advanced projects, negotations of power purhse agreements (PPA) between SEBs and private developers have a stage where the SEs have serious apprehensions about the nature and extent of the rs volved i. the proposed tractions and the long-term liabbities embedded in the draft agreements. This is due not ordy to the novelty of the process and the SEW' lack of fimiliarity wift some key contractual provisons but first and foremost to the fact that SEWs have little basis to compare with; as the signing of MOUs has taken place mainly on a first-come first-served basis, and thus no real competition has taken place among project sponsors, most SBBs find themseves in a situation where they have no assurance hiat they are getting the best offers. The proposed technical assistance would help addres these various issues in a timely and consistent manner. Past Bank Involvement 5. Bank support to GOrs private power develoment Initiative has been Limted so far to: (O assistnce in arranging a grant from the PHRD fundl in early 1992, to help establish two private power projects in the state of Maharshtra, and (H) provision, in the Second Maharashtra Power Project Lx 3498-IN), approved in June 1992, of additional consultig services to assist the Government of Mihaashtra (GOM) and the Mah a Stat Electriety Board (MSEB), in completng the contracting proess for these projects. The grant has enabled the Bank to quidy resond to the Indian authorities' request for assistance in evaluating an uno project proposal submitted by Enron, USA, for a 2,000-MW LNG-based power plant at Dbhol, and develop documentation for two other Mal projects. A second PHRD grant was approved in late 1992 to provide dsilar assistance to other states. 6. The Bank's support has been inumental in ntfying the polky issues and the weaknesses of tie Implementation process. It has also helped the various agencies involved in the program recognize the complexities Inherent In private power development, and the need, given the size of the program, to stegthen the existing Institutional setup and access spedallzed consultancy services on a much larger se, to ensure that the objectives of the private power initiative are fuly meL Expert advisory services have already been engaged by WSEB to assist in their ongoing negotiations with Enron, under fhandng from the above-mentioned loan. Bank Srategy in the Power Sector and Rationale for Expanded Bank Involvement 7. The Country Asistance Strategy seeks and supports renforms by GOI to address the fndamental operational, financi and institutional sues in the power sector. The reform process in the power sector has ond just begun and much remains to be done, particularly at the state level The Bank's lenig pram wlll be used to condnue the dialogue and provide some of the incentives needed to make the required diffiult decsions I addition, the Bank will continue to use the management of the existing portfolio to support the needed refom. Bank lg focused on: ( p ting domestc and forign private Investments; (b) supporting GOrs agt of reform, Pi, the National Thermal Power Corporation P), and the Power Grid Corporation of Idia (POWEID), and (c) assisting SEBs whih perform In a Polcy and Human Resoure Depment Pund, establsed by the Governmet of Japan.  -4- satisfactory manner or have started Implementing cedie plas underwritten by their states to improve their performance and finances. Prepantory work is underway on an SEB Restucturing project to assist states willing to undertake up-front refoms towards the corporatzation of their SEBs and the establishment of a more transparent regtlaqy framework. & Witin this overall strategy, the proposd projedt ;m at facilitating the implementation of private power projects by establshing adequate administtive processes for solidp and evaluatingepfrlc ls. and provkding e de durin negotiations with proct developets. tl wo ensure Inter alia that possible future Bank involvement In the finanng of sudc projects is based on sound and dearly defined selection procedue GOI has also nicated that the Bank's involvement in the implementation of the private power initiative would help to ensre the technal qualty and independence of policy advice and project reviews. Project Objeetives 9. The overall purpose of the proposed TA project is to emure that the basic objectives of the private power Initiative are achieved, Le., that additional investment capital and management exptise are mobUized and that the potential effidency gains n power supply are fuly realized and passed on to the final consmer In the short em, the project would help to marnge the implementation of the private power pohcy during the present transition period, but would also set the stage for the introduction of market mechanisms In the sector as a whole. To that effect, assistance would be provided to state electicity boards and other public utilities for (O) the review by private power speialists of the offers currently under consideration (par 2) to ensure that the projectsbelng negotiated are ececuted under accepfble and sustainable conditions; 01) the introduction of competitive bidding for the selecion of roject sponsor; and WV the preparation of other privatlzation projects in response to GOFs efforts at promotng other forms of private sector partidpation, in addition to IPP project (pam. 3). Project deciption 10. The proposed project will cover technical asistance activities to be essentially canied out In the form of advisory servces extended to SEBs and other power utilities planning to enter into agreements with private parties for the purche of power, the takeover of distribution activities or the maragement of existing facilities They will inude inter alla the provision of f lega and techmical advisory services to review outstanding project proposals and assist in conact negotiations, and assistance to SEBs to enable them to prepare and "package" new projects wel enough for them to invite meaninghfl bids, and help them in the biding, evaluation, selection, and negotiation process. The latter would focus on insilling to the extent possible some degree of competition among project developers, and on assisting in the implementation of other forms of private sector partdipation. A Technica Annex provides a full descrption of the project as well as details on the implemaon arrangemets 11. In parallel with the implementation of the project, GOI will pursue a program of policy and institutional development under which advisory services will be provided to refine the existing policy fmnework for IPP projects and extend it to iude other forms of private sector partcipation, provide general guidance to those entities in the states that are actually Implementing the policy, establis the prope conditions for private developers to mobilize the required resources, review fuel supply policies, contribute to the formulation of a proper regulatory fcamework In the sector, and enhance the calpabilities of the vrous Institutions in charge of coordinating and  overseeing the implementation of the program as well as those that are implemeti it. Ths program will be caried out under th-e umbrela of the Ministry of Power (GOD, with the nvestment Promotion Cell MPC) of the Ministry acthig as coordinating agey hnded out of gnts evectd to be made avaflable by the Govement of Japan (PHRb fund) 2 and USAID, for a total amount of US$7.5 million. Agreements reached 12. Agreement has been reached with PPC on the folowing major actonst (1) A Project Implementation Unit (PI), under the Dirctor, Institutional Development, will be set up at PFC to admilister and mmage the activities supported by the projectJ Undertadings have also been reached on the scope of operations of the cell, the staff posions to be created, their level, and the related reruitment plan; (ii) PFC will have Its annual accouzts, Induding the special account and the statement of expeditr for the project, if any, audited and submt the audito?s report to the Bank wiftin six months of the end of each finandal year. In addition, PPC will submdt to the Bank its unaudited financal satements withn two months of the end of each fitadal year; (I3) Model documentation accepable to the Bank will be utilzed for the letter of invitation aWI) and for consultant' contracts by the final be es 13. In addition, an understanding was reached during negotiations that, to ensure adequate coordination between the acvites carded out under the project and those undertaken In paralel by GOI (para. 11), the operation of the PIU along wft the he poicy and institutional development program to be supervised by IPC wfll be monitored by a Steerng Commttee to b constituted by the Mnisy of Power. Environmental Aspects 14. Plans and designs for private power projects reviewed and prepared under the proposed proe will fully incorrate environmental considerations, To this end, G0I environmental standards will guide the epon of pre-feasibit studies and design work for individual projects at the proect develomt stage. In addition, an undersg will be sought from sOI at gotiations thiat the scop of the environmental impact assessments that may be carred out for selected projects under the second component would broadly cover the range of Issues that are considered In siilar studies prepared for Bank-financed projects PPs P EnvironrmentW Monitoring Unit whose establisment has benefitted from the Banlc<s guidance under the ongoing Power Utilities Efficiency Improvement Project (Ln. 3436-IN) would be primarily responsible for monitoring compliance with such provisions. Spec Operational Emphases 15. The proposed project would support the Bank's emphasis on premoting the role of the private sector in the Indian economy in general and in the provision of inrastructure services in partcular. 2 A US$2 million funding proposal was submdtted to the PHRD fumd by the Barn in April 1993, with OIrs concuren.  -6- 16. The proposed project would ensure that the private power development Initiative launched a year ago by GOI moves quicldy, witi a f&mrework that fostes not only greater efficency In the procurem t and maagement of ower faiklities, but also the mobllizatbn of additional finance for the development of the power sector. It wM also set the stage for developing indigeneous capadties for the evaluation of private powerproct proposals, Including their finacal structure, and negotiations of contractual agreeents with private investors. Pect Risk 17. One of the main risks may arise from ndla's taditional reluctne to use loan fundw to finance tedhnical assistance, and from the SEWs' lmited experience with engaging externl advisors, except in extenaly funded projects in which the consultnt costs are generally met through grants or concessional f g. Such risk, If not addressed upfront, would traste into slow disbursementa To mitigate this isk, pro preparation has focussed extnsively on gaining a dear understanding from GOI and selected state governments and electricity boards of their needs for tecl assistance, the nature and objectives of it. In partcular, it was emhasized that the proceeds of the loan would finance high-value services that will iiltmrately either be passed on to the private developers as development costs (e.g., in the case of pre- esi or envirornmental Impact studies), or help ensure that the long-term supply of private power is provided at a reasonable and sustainable cost, not only to the purchaser, but also to the country as a whole. 18. Another risk relates to PPCs mixed performance record under the ongoing Power Utilities Efficency Improvent Project. A fu evaluation of PPCs performance has just been carried out as part of the supervision of the above-metioned project and the Bank is satisfied that GOI, through MOP, is taking the necessary measues to correct the deviations from the Corporation's Operational Polkiy Statement. Furthennore, extnsive and detailed discussions have taken place during negotiations on the institutional anangements that will be put in place at PlC to implement the technical assistance project Progress nade In strengthening PFCs institutional capabilities wil be dosely monitored under both project 19. A final risk stems from the fict that, in Its efforts not to be seen as a delaying factor In the conclusion of power purchasgements currently under negotiations, GOI makes policy decisions without thebenefit of a full assesmet of their long-term Implications, thus undermining the ratiorale for bringing in experts to help finalize new policy undeings or contacal comments To address ths, the aink has already Initiated some of the TA activities under the project to serve as a demonstration effect and has maintained a dose dialogue with GOI on some key factors affecting the Implementation of private power projects.  -7- Recommedaon 20. I am satsfied that fhe proposed loan would comply with the Articles of Agreement of the Bank and I recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments Wasgton,. DC June3, 1993  -8- INDIA TECHNICAL ASSISTANCE PROJECr FOR PRIVATE POWER DEVELOP1IENT Technical Annex A. Insttutlional Settig 1. The private power Iniiative was launched by the Government of lnia (GOI) in September 1991, when amendment to the Electricity (Supply) Act, 1948, were promulgated settig out a scheme to promote "greater partidpation by private enterprises in electiity genration, supply, ard dtribston' The molifations Introduced h the fnncial, administrative and legal environment aim at making investments more attractive and at encouraging private enterprises to consider new projecs in the power sector, either as licensees for the generation and dsibutton of eecticity within a predetmined geogphical area, or by establishing generating companies forsupply of power to the grid3 Detadled guidelines for detemining the tarf for sale of eltr by generating companies were subsewently publised by ;OI in March 1992. An Investment Promotion CeU (IPC) was established in the Ministry of Power (MOP), to directly interface with prospective private investors In the power sector and help them In obtaining all required dearances. In additon, a High Powered Board, under the cIa p of the Cabinet Secetary (GOI) and comprised of Secrtares of the concerned goverment ministries, was set up to monitor the Issue of clearances and resolve any ousanding issues pertaining to clearnces as well as foreign investmet 2 While the overall policy famework emanates to a large extent from the central govenmment, responsibility for actually Implementing the polic rests maily with the states and the state electicity boards SE) sice lecrt, in he Constitution, Is on the concunent list As a result, it is up to the states and the SEBs to select new projects and ivite proposals from private developers, establsh the partdcular nrles under w the projects may be implementt 4, and enter Into contacts with the developes The Power Finance Corporation was established as a development fance institution to strengthen the operations of public power utilities and pbys a central role in the development of the power sectorin India as one of the mn flndersofthe state elecWtrity boards. B. Project Description 3. The proposed project would aim at providng the SEBs and other public power utilities with adequate means for implementing GOrs plrivate power development policy in an infomed manner. Ts assitance is consiered crucial at this sage, to bulup the skis and expertise that are required from the SEBs and other publc utilities to negotiate with private developerm More spedfcally, private power expers would be hired direcly by these agencies to provde advice in the following areas (this is further summarie in thieattached matrix): 3 The new scheme provides inter alia for a guaranteed rate of return on Investment, the settng of tariffs on the basis of standard operadonal noms, 100 % frIgn ownrsip, miimum financing strct, etc.  g9. "~~~~~~~~~~~~~~~~~- - - - - - - - -- (I)