. ( I I . I I .1.1 1 I .II I I I b Il , . Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10854 PERFORMANCE AUDIT REPORT INDIA KORBA THERMAL POWER PROJECT (CREDIT 793-IN) RAMAGUNDAM THERMAL POWER PROJECT (CREDIT 874-IN AND LOAN 1648-IN) SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN) AND 1ARAKA THERMAL POWER PROJECT (CREDIT 1053-IN AND LOAN 1887-IN) FEBRUARY 3, 1993 MICROFICHE CoPY Report No.: 1 8.4 TN Type: (PPAR) Tit, I e: KnRBA THERMAL; PAMAGINDAN THERI Author: MAUPTIVEZ, M. Ext. :31709 Roorn:Ti j'73 Dept(.:0ELD Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Name of Currency - Rupee Appraisal year (1977 Average) - US$1 - Rs 8.6 Completion year (1989 Average) - US$1 - Re 15.0 GLOSSARY OF ABBREVIATIONS CEA - Central Electricity Authority DOP - Department of Power DVC - Damodar Valley Corporation EdF - Electricitd de France GOI - Government of India IDA - International Development Association KfW - Kreditanstalt fuer Wiederaufbau LRMC - Loan Run Marginal Cost MSEB - Maharashtra State Electricity Board MOU - Memorandum of Understanding MPEB - Madhya Pradesh State Electricity Board NHPC - National Hydroelectric Power Corporation NTPC - National Thermal Power Corporation OED - Operations Evaluation Department PAR - Performance Audit Report PCR - Project Completion Report REB - Regional Electricity Board REC - Rural Electrification Board SAR - Staff Appraisal Report SEB - State Electricity Board TEC - TATA Electric Companies UPSEB - Utar Pradesh State Electricity Board WIP - Work in Progress GOVERNMENT OF INDIA FISCAL YEAR April 1 to March 31 THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation February 3, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Audit Report on India Korba Thermal Power Project (Credit 793-IN); Ramagundam Thermal Power Project (Credit 874-IN and Loan 1648-IN); Second Singrauli Thermal Power Project (Credit 1027-IN), and Farakka Thermal Power Proiect (Credit 1053-IN and Loan 1887-IN) Attached is a copy of the report entitled "Project Audit Report on India - Korba Thermal Power Project (Credit 793-IN), Ramagundam Thermal Power Project (Credit 874-IN and Loan 1648-IN), Second Singrauli Thermal Power Project (Credit 1027-IN), and Farakka Thermal Power Project (Credit 1053-IN and Loan 1887-IN)" prepared by OED. The Audit covers the Second, Third, Fourth, and Fifth projects in a series of thirteen loans/credits approved between 1977 and 1987 totalling US$4.0 billion to support the National Thermal Power Corporation (NTPC), the Central Government-owned thermal generation utility. The audited projects helped reduce the chronic shortfall of electricity country-wide (PAR, para. 140) and contributed to make NTPC a large, efficient and viable company (PAR, para. 142). They failed in their objective to induce improvements in the recovery of supply coste by NTPC and its sole customers, the State Electricity Boards (SEBs) (PAR, para. 146). The Audit concludes that a solution to this critical problem will require a clarification of sector objectives and a more effective allocation of functions between the Central Government and the States responsible for the SEBs. Follow-up is needed regarding two major issues: (i) environmental management around lake Rihand, one of NTPC's major plant sites; and (ii) improved SEBs' financial performance which is fast becoming a prerequisite to NTPC's own cost effective expansion. 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. FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT INDIA KORBA THERMAL POWER PROJECT (CREDIT 793-IN) RAMAGUNDAM THERMAL POWER PROJECT (CRRDIT 874-IN AND LOAN 1648-IN) SECOND SINGRAULI THERMW: POWER PROJECT (CREDIT 1027-IN) and FARAKKA THERMAL POWER PRJECT (CREDIT 1053-IN AND LOAN 1887-IN) TABLE OF CONTENTS Page No. Preface..*.. .. ... ........ ....se.... . . . . . . . . . . . . . . Basic Data Sheets ........... ......................... ii Evaluation Summary................................................ xiii I. BACKGROUND......o..o.................... o ......... 1 A. Salient Features of Power Sector Development........... I B. The Setting for the Projects Audited and Reviewed....... 3 II. BUILDING NTPC: A SUCCESS STORY ............................ 4 A. The "Secrets" of Success ............................... 4 Internal Strengths........................... 4 External Advantages ......... ......... ... ........ 4 B. Institutional Evolution ................................ 7 C. Institutional Efficiency .....................00.. 9 D. Personnel Indices ........... . . . 13 E. The Bank Contribution ............................. 14 F. Links to Other Sector Institutions .................... 15 G. Sustainability ........ . ............... .........o... . 16 III. NTPC AND SECTOR CHANGE ................................... 18 A. Sector Dialogue ...................................... 18 B. NTPC as an Agent of Change ... . . .......... . ......... ... 21 C. Operations ....................00...........f.............. 21 D. Finances o... ..... .... ... .... ....... 22 E. Overall Impact ......................................... 22 IV. INCREMENTAL COSTS AND TARIFFS ............. . ... ............ 24 A. The Pre-1983 Projects with NTPC ........................ 25 B. The Post-1982 Operations with NTPC ..................... 26 C. Tariff Levels .................. 27 D. Average Incremental Costs and Tariffs .................. 28 V. NTPC's FINANCIAL PERFORMANCE ............................. 29 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. TABLE OF CONTENTS (Cont.) Page No. VI. ENVIRONMENTAL ISSUES ................ .*0,................. . 41 A. Background ...........o................................ 41 B. Early Development ............................... .... 42 C. Post-1985 Development ...*.......... ....... ........ 43 D. The Bank's Role ............................. 43 VII. CONCLUSIONS AND LESSONS .... ..............o....o........... 45 A. Accomplishments ......00.0.......................... 45 B. Shortcomings ......................... .... ...... 46 C. The Basis for Sector Improvement ........-........... 47 D. Lessons Learned ........ 48 ATTACHMENTS 1. Power Sector Operations.................... . ............. 51 2. NTPC - Organizational Structure............................ 52 3. Bank Group-Supported NTPC and TATA Thermal Power Projects.. 55 4. Cost Analysis of NTPC and Other Projects.....o............. 60 5. Plant Availability and Loan Factors.......o....ee9e........ 64 6. NTPC: Non-Technical Performance Indicators................ 66 7. NTPC: Incremental Cost and Tariff........................ 70 8. Accounts Receivables....o ........... . ... ......... .. 77 9. Bank Involvement in the Power Sector ..................... 85 ANNEX Comments from the Borrower..... ............. ...... ..... 93 PERFORMANCE AUDIT REPORT INDIA KORBA THERMAL POWER PROJECT (CREDIT 793-IN) RAM&GUUDAM THERMAL POWER PROJECT (CREDIT 874-IN AND LOAN 1648-IN) SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN) FA THERMAL POWER PROJECT (CREDIT 1053-IN AND LOAN 1887-IN) PREFACE 1. This is a Project Performance Audit Report (PAR) on the Second, Third, Fourth, and Fifth Thermal Power Projects for which the National Thermal Power Corporation (NTPC), the thermal generation and transmission utility owned by the Government of India (001), was the Beneficiary. The Operations Evaluation Department ,0ED) had audited the one operation preceding these projects already in 1986.11 The 001 was the Borrower for the Bank Group operations supporting these projects, which all included as their main physical. component thermal generation units, in particular the first two 500 MW coal-fired steam powered unite installed in India. The audit covers US$1.0 billion in lending for VTPC projects (US$925 million in International Development Association (IDA) -redits and US$75 million in Bank loans). It specifically includes: - NTPC's Korba Thermal Power Project (3 x 200 MW) supported by Credit 793-IN of US$200 million approved in April 1978, made effective in August 1978 and closed in March 1986, one year later than the date set in the credit documents and after cancellation of US$0.08 million; - NTPC's Ramagundasm Thermal Power Project (3 x 200 MW) supported by Credit 874-IN of US$200 million and Loan 1648-IN of US$50 million approved in January 1979 and made effective in May 1979; the Credit was closed in December 1985, at the date expected at appraisal; the Loan, in turn, was closed in June 1987 some 18 months after the date originally foreseen; - NTPC's Second Singrauli Thermal Project (2 x 200 MW and 2 x 500 MW) supported by Credit 1027-IN of US$300 million approved in May 1980, made effective in July 1980 and closed in July 1989, 15 months later than foreseen in the credit documents; Kreditanstalt fuer Wiederaufbau of Germany contributed DM 240 million (about US$140 million) to the financing of the 500 MW turbo-generator sets for the project; - NTPC's Farakka Thermal Power Project (3 x 200 KW) supported by Credit 1053-IN of US$225 million and Loan 1887-IN of US$25 million approved in June 1980 and made effective in December 1980; the credit was closed in December 1988, 21 months later than planned at appraisal; the Loan, in turn, was closed in June 1989, 27 months after the date foreseen in the 11 See PPAR Singrauli Thermal Power Project, Report No. 6784 dated May 14, 1987. loan documents; at that time, US$12.2 million of the loan remained unused and was canceled. The PAR iA based on the Project Completion Reports (PCRs) for the respective projects as prepared by the Transport and Energy Operations Division of Country Department 1V and by the Energy Division of the Technizal Department, both of the former Asia Regional Office. The ORD evaluation also reviewed the corresponding President e Reports (PRe), the Staff Appraisal Reports (SARa), the loan documents, the project files, and the transcripts of the discussions at the meetings at which the Bank Group's Executive Directors approved the operations reviewed here. Further, in order to widen the perspective of the audit, the OED team studied the seven follow-on NTPC projects and the three projects for which the privately-owned TAT& Electric Companies (TEC) was the Beneficiary, the PCR for the first of these projects having been sent to the Bank's Board in June 1986. The team also interviewed Bank staff involved in the various projects and, in September/October 1991, visited India to discuss the effectiveness of the Bank Group's asistance with Government officials, management of NTPC, as well as with Indian personalities formerly associated with the Indian power sector in general and NTPC, in particular. During its stay in India, the team had also ths opportunity to visit the project facilities at Ramagundam in the Southern Region and at Singrauli in the Northern Region. The participating staff team wishes to extend its sincere thanks to all those who helped it carry out this evaluation. Unfortunately, several postponements of scheduled meetings impeded the discussion of the environmental isouee with the relevant Indian authorities. 3. All the PCRe which, in part, complement each other, set forth a good account and assessment of the projects and of the experience their implementation provided. They adequately discuss the performance of the Bank Group and of the Indian entities involved in the execution of the projects. The PAR, therefore, concentrates on the wider perspective offered by the review of the projects in a cluster and by the integration of some of the results from follow-on projects which, in part, are still under implementation. In particular, it analyzes in some details (i) the evolving Bank approach to the institutional sector issues in the context of the projects reviewed herel (ii) NTPC's operational efficiency as compared with that of other entities of the sector; (iii) bulk supply tariffs and their relation to incremental costs and to the retail tariffs of the State Electricity Boards (SEB), and (iv) financial issues, especially the arrears as they are dealt with in the context of NTPC. 4. Following standard procedures, OED sent copies of the draft PAR to GOI and the Beneficiary for comments. The comments received from GOI and NTPC have bo"n reproduced verbatim as an Annex to the document and, as far as possible, incorporated in the body of the report. PELORM=NC AMIX EPO INDIA KOP.BA THERMAL POWER PROJECT (CREDIT 793-IN) BAZ-C DATA SHEET KE1Y PROJECT DATA Original ...man.. Assnel Projects Cost (US$ million) 405.90 491.10 Credit Amount (US$ million) 200.00 200.00 Disbursed 200.00 199.42 Cancelled - 0.58 Repaid - Outstanding - Date for completion of physical Sept. 83 March 84 components Proportion completed by 1001 91.4Z target date (Z) Economic rate of return (%) 13.0% 14.01 Institutional Performance - Commendable CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Appvaleal (US$ aillion) etiate 25.0 44.3 107.0 174.0 188.0 197.0 200.0 200.0 200.0 Actual 18.8 26.6 61.7 119.8 151.6 165.4 182.8 194.8 199.4 Actal as X of Estimtr 75.2 60.4 57.7 68.8 80.6 84.5 91.4 97.4 99.9 (Staff Weeks) HI 27 R I. I. HER~ WIA Ill 218i IIRZ III. Pre-Appraisal 4.1 Appraisal 17.4 Negotiations 8.0 Project Supervision 4.1. 14.1 17.6 1.8 3.3 6.5 2.1 3.5 2.4 .3 Project Administration 11.4 Subtotal 40.9 4.1 14.1 17.6 1.8 3.3 6.5 2.1 3.5 2.4 .3 M1SSION DATA Month/ No. of No. of Man- Date of Year Xv.ekg Persons weke RE Appraisal 8/77 - 3 - 3/78 Post-Appraisal - - - - - Supersion 1 11/78 4 3 12 1/79 Supervision 2 11/79 4 1 4 2/80 Supervision 3 10/80 5 4 20 12/80 Supervision 4 5/83 3 2 6 8/83 Supervision 5 '/ 5/85 4 2 8 8/85 OTHER PROJECT DATA kem Origgal Plan Revisions ALUa Concept 1976 - - Negotiations 2/78 - 2/78 Board/Credit Signing 5/78 - 5/78 Effectiveness 8/78 - 8/78 Closing Date 3/85 - 3/86 Beneficiary Agency National Thermal Power Corporation Executing Agency National Thermal Power Corporation Fiscal Year of Borrower April 1-March 31 Follow-up Project Korba II Thermal Power Project Credit 1172-IN Project performance v .s monitored by the Association on an ongoing basis during the appraisal of subsequent NTPC projects, including tne follow-up of Korba II Thermal Power Project (Credit 1172-IN). v PERORMANCE AUDIT EPORT INDIA RAMAGUNDAM TREUMAL POWER PROJECT (Credit 87AA-1 and Loa.164-ID EX PRICT.. DATA OrtainalActual Project Cost (US$ 511 693 million) Loan Amount (US$ 50 50 million) Credit Amount (US$ 200 200 million) Disbursed (US$ M) 250 250 Cancelled (US$ million) -- -- Repaid -- 13 Outstanding 250 237 Date of completion of 6/84 12/84 physical component Portion completed by 100 86.5 target date (Z) Economic rate of return 10Z 12.5 Institutional -- Commendable Performance CUMULATIM STIE RAD_ACTUAL DISBURSEMENTS IRA IMA IR& IBI UIR IRU fIIS 281 fIR Appraisal 28.0 70.0 164.0 224.0 239.0 246.00 250.0 250.0 250.0 estiate Actual 20.0 28.8 84.4 152.4 186.5 207.5 216.2 243.7 250.0 Actual as 2 of 7i.4 41.1 51.5 68.0 78.0 84.3 86.5 97.5 100.0 estimate vi (Staff Weeks) =IA MI2 EMB I =l&E&$ I RM IA Ill.EZ Ill IIl9 Pre-Appraisal 15.9 Project Appraisal 8.6 Negotiation3 4.3 Supervision .6 .6.6 8.7 4.7 .4 6.1 5.7 1.8 1.4 .7 2.0 Other .3 I 2/ Month/ No. of No. of Man Date of IME K2.A Peonj= ][qek-t EREt Pre-Appraisal 1/78 - 2 - 11/77 (Project Brief) Appraisal 4/78 - 2 - 12/78 Supervision 1 11/78 L 3 6 1/78 Supervision 2 12179 4 1 4 2/80 Supervision 3 6/84 3 1 3 8/84 Supervision 4 6/85 2 2 4 8/85 Supervision 5 10/86 2 2 4 11/86 OTRBR .PROJBCT DATA rtem Original Agtua Concept in Bank - 2/75 Negotiation 12/78 Loan/Credit Signing 2/79 Effectiveness 5/79 Closing Date 12/85 6/87 Last Disbursement 6/86 3/88 Beneficiary National Thermal Power Corporation Ltd. Executing Agency National Thermal Power Corporation LTd. Fiscal year of Borrower April 1 - March 31 Follow-up Project Second Ramagundom Thermal Power Project Loan 2076-IN Project performance was monitored by the Bank Group on an on-going basis during the appraisal of subsequeni NTPC projects including the proposed Regional Power Systems Project (FT90). |I| I.1 i d I I9 vit PEro1fACE AUDIT REUt INDIA FARAEMA TURZEA. POWE ?ROJCT pCREDIT 1053-IM AND LOAN 1887-iNi BASIC DATA .SHET CUMUJLATIVE ESTDIATED AND ACTUAL DISBURSEMENTS. IDA/rænk Fiseal Year satimated Actual Actual Z of ad, SERmestet C m-ula&.Av.eCmltv *Køiat 1981 1. - - - 2 20 23.84 119.20 1982 1 35 24.37 69.63 2 85 30.76 36.19 1983 1 140 30.77 21.98 2 170 49.18 28.93 1984 1 180 67.21 37.34 2 185 108.53 58.66 1985 1 190 116.51 61.32 2 210 151.93 72.35 1986 1 220 159.95 72.70 2 235 189.17 80.50 1987 1 240 192.66 80.28 2 250 213.86 85.54 1988 1 214.18 85.67 2 215.76 86.30 1989 1 215.82 86.33 2 218.13 87.25 1990 1 227.56 91.02 2 237.78 95.11 An undisbursed balance of US$1216,283.43 was cance~d fram the Loan on Februay 1, 1990. viii 02HRILROJECT DATA DM Rate Plaed Date Revised Date Actual Appraisal mission 06179 Loan/Creol t 05/80 Negotiation Board Approval 06/26/80 Loan/Credit Signature 07111/80 Loan/Credit 12/10180 Effectiveness Loan/Cridit Closing 03/37 12/88 Credit 12/31/88 Loan 06/30/89 Loan/Credit Completion Credit 08/08/89 Loan 02/01/90 '/ (Staff Weeks) Eal EM MI M2 Y83 84 Y85 Y7 M FY88 FY89 Preappraisal 5.0 Appraisal 9.9 23.0 Negotiation 7.4 Supervision 1.6 5.3 9.9 13.5 7.8 1.0 3.5 5.6 3.9 2.3 Other 2.3 7.4 Subtotal 16.2 38.4 5.3 9.9 13.5 7.8 1.0 3.5 5.6 3.9 2.3 The last disbursement was made on February 1, 1990, with authorization on an eceptional basis by the Regional Vice President. ix MISSION DATA Number Number Perform. Noath/ of of Special- ance Type of Project Cycle Year PeKgAs DaE LZAo9 'I 3 aung 6/ wm I/ Identification 8/ Preparation e/ Preappraisal 9/ Appraisal 05/79 4 25 Supervision Supervision 1 06/82 4 19 E, LO,PA I Supervision 2 06/83 2 20 E, FA 1 Supervision 3 06/85 1 14 E 2 I,PR Supervision 4 09/86 4 18 E 1 Supervision 5 09/87 3 10 E, EA 1 Supervision 6 01/88 3 20 Eq PA 1 PR Supervision 7 09/88 3 29 E, FA 1 I Supervision 8 07/89 1 11 E 1 Project Completion 1 9 E Report SE: Engineer, LO: Loan Officer, FA* Financial Analyst. 1 = No or minor problem, 2 = moderate problem, 3 = major problem. I I Implementation delays, PR: Procurement problems and delays. * Identification was made by GOI in 1974. Preparation and preappraisal were made by NTPC in 1978. PERLO2mmN AUI MUPR INDIA SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN) BASIC DATA ISIXE ET PROJECT DATA Date Date Date aINMd Reised Amfil Appraisal Mission 05/79 05/79 (US$ million) Credit 05/80 Negotiation Board Approval 05/22/80 Credit Signature 06/05/80 Credit 07/30/80 Effectiveness Credit Closing 03/31/88 06/30/89 12/31/89 ONZUATI E ETM=T AMD ACTM DISIUMENTS IDA Fiscal Year Estimated Actual Actual Z of and Smester Culatie uative Ettaed 1981 1 20 10.78 53.90 2 50 20.85 41.70 1982 1 75 24.70 32.93 2 140 59.35 42.39 1983 1 180 61.41 34.12 2 220 80.43 36.56 1984 1 250 92.93 37.20 265 129.70 48.94 1985 1 275 140.38 51.05 2 280 182.45 65.16 1986 1 285 192.68 67.71 2 290.00 234.00 80.69 1987 1 295 240.19 81.42 2 300 273.77 91.26 1988 1 280.07 93.36 2 285.18 95.06 1989 1 285.18 95.06 2 292.84 97.61 1990 1 293.26 97.75 2 300.00 100.00 II (Staff Weeks) EL3 EI4 I EZi EZ EZI ER EM HS.M FY83 Preappraisal .3 21.5 Appraisal 75.9 Negotiation 8.2 1.3 Supervision 52.6 16.0 14.5 4.4 4.9 2.2 8.1 9.9 4.6 Other 9.5 1.2 Total .3 115.1 54.1 16.0 14.5 4.4 4.9 2.2 8.1 9.0 4.6 Ttg Date Date Date Planned Revised Agwil Appraisal Mission 05/79 05/79 Credit 05/80 Negotiation Board Approval 05/22/80 Credit Signature 06/05/80 Credit 07/30/80 Effectiveness Credit Closing 03/31/88 0630/89 06/30/89 Credit Completion 12/31/89 / 'The last disbursements were made in February 1990, with authorization on an enceptional basis by the Regional Vice President Kil Number Days Perfo.- Month/ of in Speciali- anee P1oJect Cycle Xear Pereons Feld saio-n 0 &IAa uI Identification"/ Preparation 121 Preappraisal 121 Appraisal 05/79 4 25 Supervision 1 12/84 2 20 qEA 1 Supervision 2 05185 1 ENV - Supervision 3 03/86 1 NV - Supervision 4 09187 4 18 E 1 Supervision 5 09/87 4 10 E, EA 1 Supervision 6 01/88 4 20 3, PA I Supervision 7 09/88 4 29 1 ,PA,C,EC,ENV Supervision 8 07/89 1 11 E 1 PCR 02/90 1 9 3 10 E Engineer, FA* Financial Analyst, EC: Economist, ENV* Environmental Engineer. n 1 = No or minor problem, 2 = Moderate problem, 3 = Major problem ~ Identification was made by GOI in 1974. Preparation and preappraisal were made by NTPC in 197& xi PERFORMANCE AUDIT REPORT INDIA KORBA THERMAL POWER PROJECT (CREDIT 793-IN) RAMAGUNDAM THERMAL POWER PROJECT (CREDIT 874-IN AND LOAN 1648-IN) SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN) FARAKKA THERMAL POWER PROJECT (CREDIT 1053-IN AND LOAN 1887-IN) EVALUATION SUMMARY Introduction US$300 million which closed in June 1989 (i.e. 15 months late) af ter 1. This report reviews the complete disbursement; the project following four projects for which the included (i) a 2x2O0MW and 2x5OOMW Government of India (GOI) was the second phase of the coal fired mine Borrower and the National Thermal mouth steam power plant with an Power Corporation (NTPC), the GOI ultimate capacity of 2000MW in the owned utility created in 1975, was the Northern Power Region and (ii) Beneficiary: associated transmission facilities; - the Korba Thermal Power Proiect the FaraWm Thermal Power Project approved in 1977 and supported by approved in 1980 and supported by Credit 793-IN of US$200 million Credit 1053-IN of US$225 million and closed in March 1986 (i.e. 12 months Loan 1887-IN of US$25 million; the late) after cancellation of US$0.08 credit was closed in December 1988 million; the project included (i) a (i.e. 22 months late) after full 3x200 MW first phase of a coal-fired disbursement; the loan closed in mine mouth steam power plant in the February 1990 (i.e. 37 months late) Western Power Region, with an after cancellation of US$12.2 ultimate capacity of 2100MW and (ii) million; the project included (i) a associated transmission facilities; 3x200MW first phase of the coal- fired mine mouth steam power plant - the Ramagaundam Thermal Power Prolect with an ultimate capacity of 2100MW approved in 1978 and supported by in the Eastern Power Region and Credit 874-IN of US$200 million and (ii) associated transmission Loan 1648-IN of US$50 million, which facilities. both were closed in June 1987 (i.e. 18 months late) after complete 2. The present report is also bnsed disbursement; the project included on the 1986 audit of the 1977 (i) a 3x200MW first phase of the Singrauli Thermal Power Project coal-fired mine mouth steam power (Report No. 6784) as well as on plant with an ultimate capacity of results of the eight follow-on 2100MW in the Southern Power Region projects for NTPC and of the three and (ii) associated transmission Bank projects with the privately owned facilities; TATA Electric Companies (TEC) of which the f irst has been covered in a PCR - the Second Singrauli Thermal Power which OED processed in 1986 (Report Project approved in 1980 and No. 6253). supported by Credit 1027-IN of xiv Objectives and Setting explicit. This continued under the follow-on projects until the mid- 3. In the mid-1970s the power eighties when the Bank'. sector, i.e. by and large the State disenchantment with progress achieved Electricity Boards (SEBEs) was unable on the issues related to the SEBs led to meet demand and to commission to the conclusion that only through enough generating plant to contain lending directly to SEBs could power shortages, let alone to catch up adequate improvement in these with demand. Thus, in 1975, the GOI institutions be achieved (PAR, created NTPC as a wholly-owned Attachment 9, paras. 19 and 20). utility to build large thermal power plants and associated transmission Lmet facilities. The Bank agreed to support the development of NTPC, and 6. In general, NTPC was successful over the period 1977-87 made nine in constructing the plants in loans for about US$1.5 billion and six accordance with its schedules that credits for approximately US$2.5 allowed for a construction time of 4 billion for thirteen projects. years for 200W units and 5 years for 500MW units. However, it usually 4. All four projects audited here incurred substantial delays at the as well as the preceding and pre-construction stage (PAR, paras. 27 immediately following projects aimed to 29). Costs of the 200MW units at (i) accelerating expansion of resulted at 1990 US$700 to US$1000 per generation and transmission capacity W, which, though higher than the in India and (ii) building a central appraisal estimates, is reasonable institution that could efficiently (PAR, para. 30). construct and operate large thermal plants and high voltage transmission 7. Implementation of the four systems (PAR, Attachment 9, para. 9). audited projects came out as follows: Besides these NTPC-related objectives, the Bank, through its involvement, - the 200MW units of the Korba I pursued sector objectives, in project (see Footnote 8) were particular: (i) long-term sector completed 6 to 7 months late because development planning at the national award of the main contracts was late level and on a least cost basis; (ii) by about the same amount of time; integrated system operation, and (iii) actual cost was, in real terms, SEB reform (PAR, Attachment 9, paras. about 10Z higher than estimated at 9 to 19). The Bank hoped, in appraisal (PCR, Korba 1, para. 3.02; particular, that increasing the role PAR, parase 27 and 30, and of the Centre by building up NTPC and Attachments 3 and 4); emphasizing centralized planning would lead to more SEB reform than it had thq 200W units rif the RamaWndam I been able to induce through financing project were tompleted 4 to 5 months (with the Central Electricity late after a delay of 7 months in Authority -- CEA -- as an the award of the main contracts; the intermediary) the development of the cost overrun (always in real terms), state entities in the context of however, was about 40Z mainly due to earlier operations. underestimated costs of preliminary and civil works (PCR, Ramagundam 1, 5. The above objectives were common paras. 3.02 to 3.10; PAR, paras. 27 to all audited projects. However, and 30; Attachments 3 and 4); their formulation became increasingly - the 200MW units of the Sinrauli 11 capacity installed for public supply project started operation on in India) had become the largest schedule, while the 500MW units were Indian utility in terms of generation completed 10 months late and nine capability (PAR, para. 10). In months early, respectively, the main addition, it had become an example contracts having been awarded 7 (but until now followed only to a months late; project costs in real limited degree) in many aspects of terms were 15 to 20% higher than Indian power sector activities, inter anticipated at appraisal, in part alia, throughi due to changes in the scope of both the power station and transmission - emphasizing corporate planning; facilities (PCR, Singrauli II, paras. 11 to 14, and 19; PAR, paras. - utilizing the systems approach as a 27 and 30; and Attachments 3 and 4); primary management tool; - the completion of the 200MW - establishing a systematic quality Farakka I units suffered delays of assurance program; 15 to 22 months after the award of the main contracts occurred already - building up a high quality in-house 5 months late; costs in constant engineering capability to be fully terms increased by some 50% with accountable for its technical respect to the appraisal estimate; development; both delays and cost overruns were closely related to the contractor's - implementing an exemplary industrial relations problems and comprehensive manpower development the civil unrest in the region; (PCR program; and Farakka I, paras. 9, 10, and 15; PAR, paras. 27 and 31; and - reaching agreement with the G01 on Attachments 3 and 4). annual Memoranda of Understanding (MOU) defining the specific Proiect Results performance targets the utility would have to achieve, on the one 8. The projects have been a success hand, and the G01's support on the insofar as the two major Bank other (PAR, pars. 11 to 21). objectives spelled out in para. 4 have been achieved. On the one hand, they 9. The underestimation of the cost helped increase the annual growth of of the projects following Korba 1, was the capacity installed in India from one of the main shortcomings of the 5Z in the first half of the 1970s to reviewed projects that were unrelated 8% in the 1980s. On the other hand, to sector issues. It masked the they substantially contributed to the severity of the discrepancy between creation of a strong and efficient tariffs and economic costs of NTPC central institution that strengthened power (PAR# Chapter IV) and is likely the 001's position in the power sector to have contributed to the Bank's as NTPC proved increasingly able to assigning, for a long time, relatively efficiently plan, design, construct, low priority to the issue of NTPC's and operate large thermal power plants tariffs. and extensive high-voltage transmission facilities. By early 10. The main shortfalls in the 1991, after some 8 years of operation imrlementation of the NTPC projects NTPC, with over 10,000MW of capacity are, until now, to be found in the installed (i.e. about 151 of total area of broad sector objectives: xvi - The preparation of a long-term utilities to adjust their tariffs national power plan, which was a downward. A less optimistic view part of the Bank's 1975 Power should have held that the SEBs would Transmission Project continued to be exercise strong pressure to keep a main topic of the sector dialogue. UTPC's tariffs low and would be In 1982, India completed a plan tempted to delay payments to the covering the period 1985-2000, central utility (PAR, pars. 4 and which, however, had little influence 76). on what went into the GOI's Five- Year Plans and annual investment 12. In the late 1970s, when the programs; further, the audited projects were under abovementioned dialogue failed to preparation, there was ample time to change the 001's focus from a finalize tariff arrangements in the supply-side outlook to one including form of contracts with the SEBs, but a major energy conservation the Bank did not intensely pursue this component (PAR, paras. 56 to 58). issue. This changed in 1983 when Singrauli started operating and the - The GOI addressed integrated systems SEBs had still not reached full operations, a crucial factor for the agreement with NTPC on the two-part optimal use of NTPC's facilities, tariff envisaged all along, forcing without conviction, producing, in the central utility to bill its sales the framework of the national on the basis of a provisional flat development plan, a program for the rate. Despite the Bank's subsequent physical interconnection of the continuous efforts the procedure Indian grids, but avoiding continued to be applied until 1991, discussion of grid operation. CEA's with the rates being adjusted to 1289 national transmission plan does reflect general inflation and not seem to have brought the sector fluctuations in fuel costs, etc., but nearer to the implementation of not the increased cost of investments economically cost-effective grid such as those of the Ramagundam and operation (PAR, paras. 59 to 61). Farakka plants. It is now hoped that an agreement recently reached between - The Bank hoped that the the GOI and the state governments will establishment of NTPC would permit NTPC to charge a more adequate stimulate reform in the rest of the two-part tariff on the basis of sector. Though the utility has contracts including full adjustment become a positive influence in the mechanisms (PAR, paras. 77 to 84). sectorg its direct impact has been limited (PAR, paras. 64 to 69). 13. The latest calculations of the Bank's operations' staff and the NTPC's Tariffs results of the present audit suggest that the previously calculated 11. In connection with the economic cost of supply was much below Singrauli I project preceding the the real figure because it had been operations audited here, the GOI and determined on the basis of the Bank had already agreed on a underestimated investment costs (PAR, minimum return on assets in operation paras. 85 and 91). to assure NTPC's financial viability. Indeed, the Bank had hoped that the NTPC's Finances fact that NTPC's tariffs were high compared to those the SEBe could 14, Over the period FY85-FY91, NTPC's afford would encourage the state assets, sales, and cash flow have xvii grown at an average rate of about 40% SEBs, HTPC has not been able to comply per year. Self-financing of capital with the covenant. investment after debt service was 32.7% in FY91 before adjustment for 18. Following the Bank's advice, increases in receivables, and 17.5% NTPC induced the SEBs to have their after such adjustments; 14.4% of Work banks issue letters of credit for in Progress represented the exchange their purchases from the central risk on foreign borrowing and utility. By 1991, over 50% of NTPC's accumulated capitalized operations and sales were covered by such guarantees financial costs of which large parts of payment. are usually not financed by cash flows. Accordingly, the income 19. In FY91, the utility's returns statements do not include as costs the on assets and on equity (PAR, pars. annual deferments mentioned above. In 107 and 108) were at a still FY91, the capitalization referred to significant level of about 142 and above amounted to some US$120 million 12%, respectively, after accounting (PAR, paras. 95, 97, 100, and 101). for the increases in receivables. A better control of the growth in NTPC9s 15. A remarkable development of NTPC sales is likely to reduce the yearly has been the issuance of domestic flow of arrears. Further, the bonds ten years after the utility was receivables are mostly late payments established and four years after it rather than uncollectibles. To date began to earn revenues. Until 1991 they have not compromised NTPC9s this has added some Rp. 21 billion financial viability. Arrears become, (some US$1.5 billion) to NTPC's hmever, a serious problem in the funding (PAR, paras. 103 and 104). perspective of meeting the high rates NTPC has also borrowed long-term from of growth for NTPC's investment and commercial banks, to which, by FY91 it sales that are called for in the owed some US$900 million including the future (PAR, paras. 119 and 124). appropriate exchange risk (PAR, paras. 96 to 98). 20. NTPC9s sales will not be handled in a strict commercial fashion until a 16. Eighty percent of NTPC's cash political consensus emerges to impose flows were derived from net profits this discipline in the SEBs. In the and twenty percent from depreciation. meantime, alternatives to accounts Until 1991 depreciation was regulated receivables covenants should be on the basis of a rather low rate of considered. For instance, a current about 2.5% per year. An accelerated ratio covenant, while still forcing depreciation schedule which would NTPC to pay due attention to bill increase this rate was recently collection, would encourage the approved (PAR, para. 99). utility to take measures on the components of current assets and 17. Practically since NTPC started liabilities which are under its selling power, accounts receivable control to a higher degree than the have been an issue which has acquired receivables. Alternatively, a debt a high profile with the introduction service coverage covenant applied in 1985 of a covenant limiting the after accounting for increases in permissible uncollected amounts to two receivables would also be appropriate months' billings. Despite the fact (PAR, paras. 125 to 128), that the GOI repeatedly paid off part of the arrears on behalf of delinquent 21. The cO, like many governments of less developed countries, does not xviti receive dividends from the utility it on limiting the detrimental physical wns. However, the Audit considers impact of new facilities on the that paying such dividends would environment (PAR, para. 154). contributing to enhance NTPC's image in the financial community and to the 24. In the context of the audited tra isparency of the utility's projects, NTPC complied with the GOI operations, although this would imply and Bank environmental standards of a corresponding increase in the GO's the late 1970s which were required at contributions (PAR, para. 110). project appraisal and were essentially limited to the plants' potential 22. In general, NTPC is in good physical impact on the environment. financial health. It is adhering to However, in Singrauli and Ramagundamp conservative financial policies. NTPC ran intc difficulties in There is no doubt that the high level connection with (i) resettlement, of accounts receivable represent a mostly in the mining areas and (ii) major problem. The current solution public health in the agglomerations of having the 001 reduce financial around the plants, where the appropriations to the states and population influx had by far exceeded contribute the correspondft amounts what had been expected, i.e in areas to NTPC to pay off the receivables of where NTPC has little control. These these states' SEBs was a stop gap developments, nevertheless, showed to measure which should be replaced by all parties that the socioeconomic more sustainable measures on tariffs issues had to be assigned high and collections. There are at least priority at the design stage of the four reasons to suggest that there is projects. As a consequence, later a need to adjust the rates to assure NTPC projects were submitted to a full that NTPC's finances continue to be environmental impact assessment at the sound: (i) the pending increase of the design stage. The 1987 Bank project minimum return required from NTPC to for the Talcher plant was the first 12% (or even beyond); (ii) the that went through this new procedure. capitalized operating and financial The Bank, on the basis of its costs are unusually high by experience with the audited projects, international standards; (iii) the (i) induced NTPC to prepare and desirability of the utility's paying implement a comprehensive out dividends, and (iv) the GOe' need Environmental Action Plan and (ii) to keep for budgetary reasons its sponsored the study of the impact of contributions to NTPC to a minimum exiattug and planned developments (by (PAR, para. 135). This latter stance NTPC and others) in the Lake Rihand of budgetary retrenchment could have area, where NTPC runs three plants exceedingly grave consequences for (Singrauli, Rihand, and Vindhyachal) NTPC, if not accompanied by a drastic (PAR, para. 134). Further, it change in the way SEBs are allowed to continues its dialogue with the G01, operate. inter alia, on (i) problems posed by nitrogen oxides and carbon dioxide, Environmental Issues still little recognized in India (PAR, para. 135), and (ii) the need for 23. At the project preparation stage streamlining the environmental project of the audited projects, the 001, approval procedure, especially the NTPC, and the Bank were at early coordination between the Centre and stages of developing their respective the states. This would help eliminate approaches to environmental issues. one of the main obstacles which lately This was characterized by an emphasis slowed down NTPCs project development. The Bank will need to justments in the relations between keep monitoring 001's handling of this central and state institutions highly issue and of the problems around Lake political. This was the main reason Rihand. (PAR, para. 132) for the Bank's cautious approach emphasizing persuasion rather than Suetainability of Project Benefits leverage Another reason may have been the heavy reliance of the Bank's 25. NTPC is presently a strong lending program on power sector institution with an impressive record operations (PAR, para. 72). of achievement. However, in view of the expected vigorous long-term 28. Progress must be made to growth, insufficient tariffs and an establish in the SEBs the financial unchecked increase of receivables and commercial discipline needed to could endanger NTPC's financial ensure the sustainability of the sustainability. This, in turn, depends benefits derived from the Bank's large on improvements in the SEBes investments in NTPC The inadequacy performance. To the extent that 001's of SEB reforms has put the sector in a contributions to NTPC are limited, parlous financial state, leading the they could only be made up by adequate Bank to adopt a tougher stance (PM, tariffs and a much improved bill para. 73). Specifically, the Bank is collection from SEBEs. In that respect making lending to the se0or the Audit notes as hopeful signs the contingent on improvements in cost agreements between the 001 and the recovery in line with its sector states on the NTPC tariffe, to be policy. implemented in the first half of 1992 and the very substantial rate increas- 29. The next step ought to be taken es decided in several states. in a forum bringing together the 001 and the state governments (not only 26. Some progress achieved most the SEBs)9 e.g. like that which recently, i.e. after the Audit recently adopted the conclusions on mission's visit to India, is set NTPC1s tariffs set forth by the K.P. forth in the 001's comments on the Rao Committee. One of the objectives draft of the present report (see of such a form could be to secure a Annex). consensus for institutional change, leading to a compact between the GO1 Conclusions and the states on the way the sector should work in the medium term and 27. Most of the shortf alls in the what intermediate steps should be implementation of the Bank projects taken in the short run. It would were with respect to the broad sector involve (PAR, paras. 172 to i74)t objectives not directly related to the projects. Even where TPC did not - a confirmation or redefinition of perform as expected (especially in the the set of objectives for the sector areas of tariffs and accounts at national, regional, and state receivable), this inadequacy was level, with emphasis on consistency largely due to the lack of progress on and comprehensiveness; and sector organization and SE tariff issues. One of the major factors a review of the adequacy of the contributing to these shortfalls in setup and mechanisms of the sector performance is the fact that sector to achieve the abovementioned goals institutions have to work within a and suggest ways to make them more federal setup, making even minor ad- efficient and transparent. been ** th heavyI reiac of th Bank xx Lessons Learned eliminate India's power shortages by accelerating the expansion of 30. The principal lessons of the capacity alone has proved NTPC operations reviewed are as insufficient. India clearly needs a follows: sector strategy that gives at least equal priority to demand management - Enclave Prolects: Where favorable and to increasing the efficiency conditions exist, as they did in with which existing resources are India, the creation of new used. institutions free of established sector constraints can be a highly Consensus on Main Issues: A pre- effective means of getting requisite for the success of complex particular jobs done. But, the operations or major components of enclave is unlikely to serve as a such operations is the consensus by model for sector reform, and cannot all major stakeholders on escape the penalties imposed by its development objectives and the means surroundings, for a sustained period to achieve them. Conditionality of time. should complement but cannot replace such a broad common outlook. The - Support for Central Institutionst success of the build-up of NTPC Bank support for NTPC has proved where the views of the GOI and the ineffective as a vehicle for sector Bank coincided and the failure to reform, largely because it has not achieve the sectoral objectives provided leverage with the states where there was a divergence - first where it is most needed. Support subtle, later clearer - are cases in for the Centre is likely to help point. achieve sector objectives only where it can be tightly linked tj SEB The Bank's Pervasive fttimism: PRs, reform. SARs, and other documents addressed to Senior Management and/or the - Public Sector Utilities: When free Board tended to convey a pervasively to do so, public utilities in India optimistic view of the projects, of can make effective use of the latest their sectoral environment, of the technology and management techniques difficulties the proposed or on- and achieve high standards of going operations were facing, of the efficiency in design, management, risks involved, and of the time and and operation of major power cost required to implement critical projects. measures (especially at the sector level). There is a clear need for a - Su2ply Side Strategy: Even with more realistic presentation of massive and efficient investment by policy and project features subject NTPC of the kind that is unlikely to to constraints and risks. be replicated, the effort to PERFORMANCE AUDIT REPORT INDIA KORBA THERMAL POWER PROJECT (CREDIT 793-IN) RAMAGUNDAM THERMAL POWER PROJECT (CREDIT 874-IN AND LOAN 1648-IN) SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN) FARAKKA THERMAL POWER PROJECT (CREDIT 1053-IN AND LOAN 1887-IN) I. BACKGROUND A. Salient Features of Power Sector Development 1. Since 1948, when the Indian power sector was nationalized in the wake of the country's accession to independence, the capacity installed to provide public electriiity supply increased from some 1500 MW to about 61,000 MW, i.e. at an average rate exceeding 9% per annum. During the past two decades, the growth rate was about 10%. In terms of installed capacity, the sector now compares with that of the UK and of France. However, despite the fast growth, India's population has still limited access to electricity, as suggested by the 270 kWh/year per capita consumption in the late 1980s (up from some 140 kWh/year in the mid-1970s/l) which compares with about 300 kWh/year in Pakistan, 480 kWh/year in China, and 180 kWh/year in Indonesia as well as Sri Lanka.J2 2. The principles of federalism embodied in the Indian constitution are reflected in the way the document assigns both the Centre and the states a major role in legislating on power. The Electricity Supply Act of 1948 more formally establishes the distribution of such authority. It provides, inter alia, for the creation of the Central Electricity Authority (CEA) and of state electricity boards (SEBs). CRA, as the main arm of the Centre in the sector, was to develop national power policy, report on the progress and performance of the electricity supply industry, provide technical assistance, promote research and, in general, facilitate efficient power supply. Thus, its role was essentially advisory rather than executive. In contrast, the abovementioned act vested much more effective power in the SEBs formed and owned by the state governments, as it assigned to them the authority to build, own, and operate power systems as well as sell the output in their respective states. 3. These basic institutional facts of life lie at the root of much of the frustration the Bank has experienced in its quest for sector reform. The GOI cannot direct the SEBes to make desired changes in their operations, management, tariffs, or most anything else. Moreover, the COI's power of the purse is limited by the fact that it can do little in practice to control Plan allocations to the states, as such allocations are based on negotiated formulas, which also apply to the annual budget shares which often substantially differ from the annual tranches of the Plan. However, there is more room for negotiation in the Ai President's Report for Korba Thermal Power Project, para. 25. 12 India: Long Term Issues of the Power Sector, report dated 12/13/91, para. 25. 2 allocation to individual sectors within the individual state's share. This means that change must be pursued through persuasion and negotiation, a process that is always lengthy, fraught with political obstacles and frequently inconclusive. These are factors the impact of which the Bank, in its presentations of operations in the Indian power sector, has tended to play down.J3 4. CEA was formally created in 1950. However, for many years, the Central Water and Power Commission, the technical arm of the Ministry of Irrigation and Power, carried out CEA's functions. In 1974, 001 created a new Ministry of Energy. The Commission, in turn, was split and its departments dealing with power bec-*Ae the nucleus of a revitalized CIA reporting to the Ministry of Energy. However, even so, CRA remained severely limited in its activities by shortages of skilled staff and other resources.LA In contrast, the 1966 Atomic Energy Act increased the Centre's influence in the power sector by providing for the 001 to retain control over construction, commissioning, and operation of commercial nuclear power generation. A further strengthening of the Centre's role in the sector occurred in 1975 with the creation of the central generation and transmission utilities, National Thermal Power Corporation (NTPC) and National Hydroelectric Power Corporation (NHPC), discussed further in para. 8 below. 5. In parallel with this evolution of the structures within G01, the electricity supply industry, which comprised over 300 private licensees and about 270 state and municipal utilities, in 1951 achieved substantial concentration. Accordingly, in the mid-1970s, it comprised 18 SEBs, 49 private licensees (among them the Tata Electric Companies -- TEC), and 21 municipal utilities, the SEe accounting for 76% of total sector sales to ultimate consumers, the other public sector enterprises for 122, and the private licensees for the remaining 12%. In principle the SEBes are largely autonomous in matters relating to operations, but are subject to state government control in many other areas such as investment and tariffs. In practice, in many cases, state government intervention is more pervasive and covers much of day-to-day management of the utility. The private licensees operate mostly in states providing an environment allowing private utilities thc minimum of autonomy and, in particular, the tariffs that are required to keep private capital in such ventures. It is evident that this is also an environment in which the SEs can develop more freely. Therefore, it is not surprising to find some of the best performing SBs in states with reasonably flourishing private utilities. This is the case in particular for the state of Maharashtra in which the TEC group operates. 6. The desirability of closer cooperation between utilities at regional level became already apparent, in the 1960s, and led to the creation of regional electricity boards (REBs), a relatively loose association of the electricity utilities of a given region. The chairmen of the censtituent SEBes take turns chairing the REBs whose objective is to coordinate planning and operations of L3 Loc. cit. paras. 1.39 to 1.42. L4 See e.g. SAR for Nathpa Jhakri Power Project, para. 1.11. L5 Indias Economic Issues in the Power Sector, April 1979, paras. 14 to 23. 3 power utilities in the region. However, there is no formal mechanism for enforcing the decisions of an REB, as it is essentially a voluntary association. Nonetheless, the REB's role has become more operational in particular with the building of regional dispatching centers cellecting system data, preparing generation schedules, coordinating emergency power exchanges, and providing periodic reports on the performance of the regional systems. The development of NTPC into a major player in the sector has also enhanced the role of the RBs which, as weak as they st-ill may be, constitute the best hope for the integration of the operations of India's power systems.Lj B. The Setting for the Proiects Audited and Revigwed 7. The past two decades cover the preparation and implementation time of the projects audited here and of several follow-on projects, which are also discussed in this review. For India, the early 1970s were a period of slow economic growth (barely positive in real per capita terms), which the Bank attributed to a marked decline in the efficiency of capital use resulting from capacity under- utilization, long gestation of projects, and increased emphasis on capital intensive projects and sectors.LZ These inefficiencies at large were also present in the particularly capital intensive power sector, where they reduced capacity growth to a slow 62 per annum while consumption grew at up to 132 per year, a discrepancy that quickly led to sharp increases in frequency and duration of power shortages, which, in the 1960s, had only played a minor role. The reasons for the worsening sector performance in the first half of the 1970. were complex and, in part, closely related, on the one hand, to developments in the country as a whole such as poor monsoons and unreliable coal supply and, on the other hand, to weaknesses in management and operation of the power sector in general and the utilities in particular. 8. The performance of many SEBe deteriorated to a degree that made it highly improbable that these utilities would be able to fulfill their obligations and, in particular, to develop at the pace dictated by the high growth in demand. This led the GOI, in 1975, to create the National Thermal Power Corporation (NTPC) and the National Hydroelectric Power Corporation (NHPC) as centrally owned utilities which were to provide bulk power from thermal and hydro powerplants respectively. This move was to lead to a substantial strengthening of the GOI's leverage in the sector. While, as discussed further in the following chapters of the present report, the development of NTPC was, by and large, a major success, that of NHPC was less satisfactory, one of the main reasons for the difference in the measure of achievement being that NTPC uses resources (coal and natural gas) controlled by the GOI, whereas the water rights which NHPC needs to be granted in order to build and operate its hydroplants are controlled by the states. Therefore, the preparation of NHPC's projects is a complex process involving politically sensitive -- and, therefore, protracted -- negotiations between Centre and states. L6 India, Economic Issues in the Power Sector, April 1979, parse. 43 to 46. LQ President's Report for Korba I project, para. 3. 4 II. BUILDING NTPC: A SUCCESS STORY 9. As already indicated, there was a strong techucal, economic and political case for the establishment of NTPC. However, the odds on success could not have been high. As alluring as the notion of very large, mine-mouth power plants was, the facts that the scale of the proposed facilities was vell beyond anything seen in India, and that they would involve the introduction of advanced technologies new to India, made this a very risky venture that would stretch the country's industrial and managerial resources. Similarly, entrusting all this to a brand new institution that would have to achieve unprecedented levels of efficiency involved an act of faith in the potential of the Indian public sector for which there was little, if any, ground in experience to date. Yet, despite the odds, HTPC has been an all-too-rare institutional development success, achieving virtually all that was expected of it and, in some areas, more. A. The "Secrets" of Success 10. In a relatively short period of time, NTPC has become India's leading power utility, operating approximately 162 of the country's generating capacity, and producing some 191 of the nation's electricity in 1990-91. NTPC's record in plant construction, cost containment and operating efficiency has been exceptional (see later in this report), while as an institution it has broken new ground in organization and management, successfully navigated the transition from construction to operating company and generally coped quite well with the problems of rapid expansion. What made NTPC bloom in a sector that was, and is, so much of a desert? The auditors' review of the PCRs and their interviews with Bank staff, 001 officials, and present and former NTPC managers indicate that the answer lies in the combination of a number of factors, both internal (i.e. intrinsic to the NTPC concept and/or within its control) and external (i.e., advantages given to NTPC): Interal strengths - starting with a clean slatel - dynamic leadership; - the emphasis given to organization and management systems development and corporate planning; - the attention paid to recruitment and training; - the high priority accorded to quality assurance, and - the drive for technical self-sufficiency and technological innovation. External advantages - operating autonomy and political support; 5 - ample funding, and - the role of the Bank. 11. Startina from scratch was NTPC's greatest opportunity as well as its most severe challenge. It made it possible to create a new institution that was unencumbered by the sector's general bad habits and, in particular, by its inefficient construction, procurement and operating practices and by its overstaffing and bureaucratic deadwood. Most importantly, it opened the door to building a new corporate culture that was commercially oriented, rather than infused with the prevailing government department/public service mentality; that prized efficiency, promoted innovation, both technical and institutional, and rewarded merit. 12. NTPC's leadership seized this opportunity. By all accounts, much of the credit must go to D.V. Kapur, who was chosen as the aew institution's first chairman in an act that was itself an example of "new thinking". Mr. Kapur was something of an outsider, coming not from the power sector but from BBBL (India's large equipment manufacturer), and not from BEL's central management but from a position in which he was responsible for the greenfield construction and operation of a major new plant. From this experience, Mr. Kapur had developed firm ideas about the effective management of such projects, and especially about the importance of corporate culture. To assist in carrying out these ideas he initially recruited a small group of top managers, mostly young and mostly from outside the sector, who he felt had the potential to become starters and builders rather than bureaucrats. Last but not least, he could rely on a supportive Board of Directors. 13. At first Mr. Kapur and his team focussed much of their effort on organization and management issues. Early on, decisions that did much to shape NTPC were taken to: (i) structure the new institution along basically functional lines; (ii) develop detailed management systems and procedures for all phases of the company's operations; (iii) make project managers responsible for implementation on-site; and (iv) give corporate planning a key role. The functional organization plan adopted, under which basic technical and management services were provided from headquarters, marked a departure from the usual SEB practice, which was to make project managers responsible for everything, and was one that was well suited to the needs of a fledgling organization. Even more distinctive was the decision to make systems development a primary management tool, a decision that led to the preparation of detailed operational manuals covering everything from the design process to budgeting, contracting and project oversight. This, in turn, made it possible to combine a high degree of ceutralization with adequate on-site decision making authority for project managers, something that was especially important in view of the remote location of the project sites and relatively poor communications at the time. 14. The early establishment of a high-profile corporate planning unit reflected management's determination to see the new organization develop in a long term framework. While the unit frequently undertook trouble-shooting and various ad-hoc operational tasks for the chairman, its main function was to look over the horizon and make sure that the organization was preparing to meet the next challenge. Thus, even as construction was first getting underway, NTPC began to 6 focus on preparing to operate its plants by recruiting experienced senior staff, systematizing operating procedures, and planning to recruit and train operating personnel.18 15. Naturally recruitment was given top priority and much time and effort was devoted to devising an appropriate strategy and tactics. The desired staffing mix would include recruits from both inside and outside the power sector and both experienced senior personnel and young peoples all would have to be not only well qualified but highly motivated. The broadest possible pool of applicants would be sought through open competition and much attention vas paid to framing the first advertisements to target the desired recruits. This strategy proved eminently successfull not only NTPC was able to elicit thousands of applications for the few hundred positions it initially sought to fill, but it also attracted the cream of the crop. All who were involved in the process agree that the key to NTPC's recruiting success was not the salary and benefits it offered, which were not exceptional, but the extraordinary opportunities for advancement it could offer as a new enterprise. 16. Training was another early high priority. A full one-year professional engineering course was developed for recent graduates recruited for technical positions, while shorter courses were instituted in order, for example, to familiarize managers with the new systems and procedures and to train supervisors. These courses were the seeds for the progressive development, inter alia in NTPC's Central Training Institute, of a much larger and more highly specialized training program that enabled NTPC to keep pace with its rapidly expanding human resource requirements. 17. The establishment of a systematic agality assurance program was another innovation critical to NTPC's success. By preparing detailed construction and performance standards, and developing the supervisory procedures necessary to enforce them, TPC was able to ensure that its needs would be met ex-ante rather than having to deal ex-post with defective goods and services. The effectiveness of its quality assurance program also helped NTPC to develop procurement practices that greatly eased its initial burdens. Instead of procuring large numbers of individual items separately, as was the usual practice in the sector, NTPC was able to order much of its equipment in large packages and to use turnkey-type contracts under which the supplier was responsible for assembly and installation at the project site. 18. The decision early on to acquire sufficient in-house engineerini cavabilitY to meet all of its needs lay another important foundation stone for NTPC. This was reflected in the efforts made to identify and recruit the very best technical staff then working in the sector and related industries, and to make advanced professional training available to recent graduates from the time they joined the company. Becoming technically self-sufficient not only enabled NTPC to be fully accountable for carrying out its responsibilities, but gave it the ability and confidence to identify relevant technological innovations and adapt them to its needs. As a result, NTPC has a number of technical "firsts" /S Paraes. 9.1 to 9.4 of NTPC's comments in the Annex further discusses the role of NTPC's Corporate Planning group. 7 in India to its credit, including the development of a highly automated merry-go-round railway system for transporting coal from the mines and the introduction of.gas combined-cycle power plants and EVDC transmission. 19. As for external advantages, perhaps the most important of all was the fact that NTPC grew up in that most nurturing of all environments for a public enterprise, one in which it had operatgg autoomy counled ith effective political sunpport. Present and former NTPC managers and 001 officials agree that, while enjoying almost a complete free hand in organizing and staffing the company, as well as in project implementation, NTPC could count on the Ministry of Energy to ensure that it had the needed resources and to otherwise promote and protect its interests within the 001. This reflected the GOI officials' natural desire to foster the growth of their prot6g6, their confidence in NTPC's management and their early recognition that their role should be essentially supportive rather than supervisory. 20. The second major advantage given to NTPC was that it grew up rich, having been amply endowed with funds by both its parents and godparents. The 001 provided NTPC with generous budget support in its early years while, as a Bank beneficiary, it was always well supplied with foreign exchange. This meant that NTPC could not only push ahead with its investment program without financial constraints, but also that it could afford to invest adequately in recruitment, training and other long-term institution building efforts. In particular, NTPC's ability to pay in cash and pay promptly goes far to explain its ability to induce suppliers to conform to its quality standards and to meet its delivery deadlines and other requirements. 21. NTPC's relationship with the Bank not only contributed to its financial comfort but also conferred on it a number of other advantages, as discussed below..L B. Institutional Evolution 22. NTPC's organization and management have evolved in response to the twin challenges it has faced of making the transition from construction company to operating utility, and coping with explosive growth. As the series of organization charts in Attachment 2 show, the overall thrust has been toward progressive decentralization. The first major step in this direction was taken in 1982 when NTPC's initial two-tier organization was replaced by a three-tiered structure through the addition of directorates at the regional level. The regional directors were given broad responsibility for the oversight of projects in their area, for the conduct of regional operations, mainly transmission, and for liaison with the SEBes and REBs. Another major move toward decentralization was begun in 1989 when measures were adopted to significantly enhance the authority of both the regional directors and project managers. However, the intended expansion in the role of the regional directors was effectively stymied, at least for the time being, when in 1990 NTPC unexpectedly lost its transmission function to the newly created National Power Transmission Corporation (unbelievably, NPTC1). This deprived the regional offices of their major 19 See also Section 1.0 of NTPC's comments in the Annex. 8 activity and most of their personnel, leaving them staffed by a handful of professionals and uncertain as to their mission. 23. The plant managers have, in practice, been the principal beneficiaries of the latest steps toward decentralization. They now have much increased authority to make spending and operating decisions affecting all phases of their operations, and the managers interviewed for the audit indicated that they regard themselves as largely free to manage their own affairs. This freedom is, however, exercised within a framework of operational and financial controls that seem to make for effective and smooth interaction between Delhi and the field. For example, Operational Review Teams meet monthly at each plant site to review current performance and address issues previously identified. These meetings, which are attended by Delhi and regional directorate staff, not only provide a window on project operations but, more Importantly, serve as a means of mobilizing technical support when needed from Delhi (not from the regions, which have no such technical capability). On the financial side, project management prepares annual budgets that, after review and approval by the regional directors and in Delhi, serve as another important monitoring tool. In addition to tracking the budget, project staff prepare monthly pro-forma accounts as well as annual accounts that are audited before being forwarded to Delhi. 24. The challenge posed by NTPC's rapid expansion is best reflected in the swift growth in employment, averaging some 232 per annum, in the eighties. As could be expected for a new company, the rate of growth was particularly rapid during the early years, but then moderated to "only" about 10% annually during 1985-90 as shown in Table 1. Table 1: NTPC. Employment Executives Non-Executives Total 1980 813 3878 4691 FY 1985 3324 10486 13810 FT 1990 6373 15379 21752 Average Annual Increase (%) 1980 - FY1985 33 22 24 FT1985 - FY1990 14 8 9.5 Source: 1980-SAR, Singrauli II; FY85 and 90-NTPC Annual Report, FY90. 25. To maintain staff quality in the face of the great increase in quantity, NTPC has broadened and deepened its training efforts. The program for newly recruited employees has been expanded to include, in addition to the original program for engineering executives, special programs for finance and personnel executives, for chemists, and for supervisory personnel. In addition, a number of in-house facilities have been established to provide advanced training to existing staff. NTPC's Central Training Institute offers intensive short courses in a wide variety of technical subjects ranging from "Artificial Intelligence Expert Systems" to "Power Station Emergencies", while the Power Management 9 Institute provides training in both general and special management subjects. Moreover, training institutes at each power plant offer specialized courses in operation and maintenance and in the development of supervisory skills. C. Institutional Efficiency 26. The critical test for any institution is, of course, how well it does its job. The audit9s review-of NTPC's performance in constructing ard operating its generation and transmission facilities confirms that it has, by most measures, achieved levels of efficiency that not only far exceed those in most of the rest of the Indian power sector but also compares with those of the best performing utilities in the developing world. Attachments 3 to 7, summarized in paras. 47 to 58 below, discuss some of the more important aspects of the company's efficiency in comparison with other Indian utilities, especially the SEBe and TEC. 27. NTPC's claim that it is highly successful in implementing its projects in accordance with its time schedules has been often repeated, (see e.g. para. 3.18 of the SAR for Farakka II)./1O As this, at first sight, does not seem to be the case since there were substantial delays with respect to the appraisal schedules for several NTPC projects, OED carried out the more detailed analysis set forth in Attachment 3, which also covers the TEC projects and the first stage of the Suralaya project in Indonesia to permit a measure of comparison. 28. Table 2 sumarizes the results of the abovementioned analysis which leads to the conclusion that, although there often were substantial delays in the pre- construction phase, once the main contracts were awarded, NTPC was by and large highly successful in constructing its power plants on schedule, even though its schedules called for substantially shorter construction times than those generally prevailing in India. Further, it seems to have been more successful in this field when it cooperated with the Bank than when it did so with bilateral agencies. TEC's performance was also reasonably good in the construction phase proper, in particular taking into account that the first of the two units which the Bank helped finance was the first 500 MW et ever to be installed in India. In turn, the audit heard only of very few cases of SEBes performing at a level comparable to that achieved by NTPC. NTPC (and TEC) were less successful at the pre-construction stage and will therefore have to find ways to shorten the procedures leading to the award of the contracts as far as such procedures are under their control. In the context of the audited projects the GOI contributed to the pre-construction delays by its reluctance to grant the necessary import permits, a problem that was solved in connection with later projects. 29. OL) found that little can be learned from an analysis of the implementation of transmission facilities associated with NTPC's Bank supported generation projects, as these facilities were, by and large, completed on time to release Li0 The reference to the accuracy of the construction schedules in the Farakka II SAR was somewhat misplaced, as in May 1984, when the document was finalized, it must have been evident that Farakka I would not be completed in September 1984 as foreseen at appraisal. In fact, the first unit at the plant was synchronized in January 19861 10 the energy produced at the plants when these came on line. A somewhat different picture emerges from the results of the Bank supported NTPC projects that included mostly transmission facilitieaLj, as illustrated by -he Central Transmission Project (Loan 2283-IN), which suffered delays in excess of four years, largely because: (U) major changes in the generating plant programs for the regions covered by the project led to drastic modifications of the corresponding transmission system development, and (ii) NTPC was reluctant to start major transmissiow work not directly related to its power plants without a firm agreement with the beneficiary SBe on the charges these would have to pay for NTPC transmission services. Les dramatic but still substantial (about 18 months) were the delays NTPC incurred on the implementation of the 500 kV direct current link between Rihand and Delhi, which, in part, was due to slow approval of the routing by the environmental protection agencies.LU Table 2s Imlementation TUMes of NTPM's TherMal Power Plats Project Unit Delays with Respect to Appraisal Estimates Pre-Construction Construction Phase (months) Phase (months) Singrauli I I 5 0 3 x 200 M 11 3 III 1 Singrauli II IV 0 3 2 x 200 NW V 0 Singrauli II VI 7 -4 2 z 500 MW VII -11 Korba I I 6 0 3 x 200 MW 11 1 III 0 Korba II IV 13 -6 3 x 500 M V -8 VI -9 Ramagundam I I 7 -3 3 x 200 W II -2 III -2 Ramagundam IV 12 -4 it V -10 3 x 500 MW VI -15 Farakka 1 I 5 10 3 x 200 MW II 15 III 17 La1 None of the audited projects belong in this category. LLZ See also paras. 6.1 to 6.3 of HTPC's comments in the Annex. 11 30. The comparison of plant costs presented in detail in Attachment 4 and summarized in Table 3, suggests that the appraisal cost estimates were reasonably good for Singrauli I, Korba I, and to a certain extent also Singrauli II, whereas later they became too optimistic. Although the 1980 estimates for Singrault II and Farakka were prepared with the bidding for the main contracts for Ramagundam I completed, they reflected only minor adjustments to the higher Ramagundam prices. However, it is worth emphasizing that some of the higher costs that materialized at Ramagundam and Farakka are related to events that usually are not covered by physical contingencies (e.g. the working environment at Farakka). Even so, the performance of NTPC and its contractors was remarkable, as they completed the construction of coal fired units at costs which were generally similar to, in some cases even lower than, those of comparable facilities in countries at a more advanced stage of development than India.J13 Table 3: Costs of NTPC Thermal Plants Project Capacity Actual Cost Cost Overrun Cost Overrun in in Constant in Rp. 1990 US$/kW Terms Amount of Total Cost Singrauli I 3 x 200 MSW 690 -112 02 Singrauli II 2 x 200 M1W 580 to 610 15 to 20% 41% 2 x 500 tMW Korba I 3 x 200 1AW 680 to 720 5 to 12% 352 Ramagundam I 3 x 200 BW 940 to 980 37 to 42Z 722 Farakka I 3 x 200 MW 1010 to 1040 502 78% 31. Table 3 and the two graphs of Attachment 5 show the development of availability and load factors of NTPC's thermal plants and compare them to the same indicators for SBs and TEC. They illustrate the fact that TEC's Trombay plant (partly financed by the Bank) and NTPC's facilities (also implemented with substantial Bank support) performed at a substantially higher level than the average SEB thermal plant, although the latter clearly shows improvement. Indeed, some of the better SIB performances, such as those in Andhra Pradesh have recently come quite near to those of NTPC and TEC. 32. The graphs in Attachment 5 illustrate an aspect of NTPC's performance that merits close attention. Indeed, whereas practically since its various plants started operation, NTPC's facilities achieved an availability in the order of the utility's norm which is 81% for coal-fired 200 MW units and 772 for 500 MW units assuming a notional 5% of forced outages, in most recent years the availability has clearly lessened. This is due in part to fuel shortages such as those at Ramagundam, where in accordance with NTPC's statistics, in FY 1991, the station could have generated over 40Z more than it did, had the required quantity of coal been available at all times. During its visit to India the OED mission found 113 This also applies to the Bank financed first 500 MW unit at TEC's Trombay plant (see Attachment 2). 12 that this problem persists, as the mine associated with the plant is, at the present stage, only able to provide an average of 18,000 to 20,000 tons of coal per day against a need of some 25,000 tone per day. This shortfall is related to the fact that the development of the mine, which is not under the utility's control, is several years behind schedule. Therefore, NTPC is taking measures to procure coal from other sources, which is especially important as the labor relations in the mine are difficult reflecting, inter alia, political instability in the region. Table 4: Thermal Plant Performance 114 Plant Load Factor (%) Availability SEBe NTPC SEBe NTPC FY1981 42.5 na 65.0 na FY1985 45.0 55.0 62.5 70.0 FY1990 53.0 66.0 71.0 82.5 FY1991 53.6 61.0 77.6 33. Another factor reducing NTPC'e performance indicators is the fact that, as discussed further in Chapter III, it has, at times, to curtail its output because of limitations in the grid (according to NTPC mostly in the SEBs' systems). OED was unable to obtain a clear view of the extent to which these limitations are due to physical constraints such as a lack of transmission and transforming capacity or to the unwillingness of many SEBes to use what they consider expensive power from NTPC when not absolutely necessary. 34. The analysis of NTPC's cash operating costs, and in particular those over which the utility has a good measure of control confirms the general impression of a good performance. Attachment 6 and its summary results in Table 5 below demonstrate that operations and maintenance costs, excluding fuel, per kWh sold continue to diminish in constant terms (Graph 2). The same graph demonstrates that the Bank appraisals estimated this development fairly well. The discrepancies between appraisals and actuals are somewhat larger for the total cash operating costs (Graph 1) which also show a tendency to increase in real terms in more recent years. However, this is mainly due to increasing fuel costs (Graph 3), which are not under the utility's control. 35. A similar analysis for TEC, of which the main results are also set forth in Table 5, suggests that non-fuel cash operating costs expressed in constant terms averaged at 6.8 1990 US mills/kWh sold and remained within a 10% band around this value. OED cannot provide a persuasive argument to explain why these costs are about twice as high as those of NTPC, as the differences in the type of operation of the two utilities and economies of scale for NTPC do not satisfactorily explain the discrepancy. The TEC resulto support the conclusions /14 Para. 7.2 of NTPC's comments in the Annex mentions that for FY 1992, NTPC achieved a PLF of 70.2% against an all India average of 55.3%. 13 about NTPC's efficiency as do the latest figures for the SEBs as a whole (see again Table 5). Though not enough to indicate a trend the SEB results suggest that the average cash operating costs per kWh excluding fuel stayed about constant in FY89 and FY90 in constant terms. The encouraging decrease leading to the FY91 value should be viewed with appropriate caution, as the last available data reflect estimated rather than actual figures. Table 5: Non-Fuel Cash Operating Costs in 1990 US millefkWh 1983 1984 1985 1986 1987 1988 1989 1990 1991 NTPC 11.8 4.2 4.1 3.0 3.2 3.1 3.0 2.9 2.7 TEC 7.1 6.3 7.3 5.9 6.3 6.3 7.3 7.6 n.a. SEBEs 13.8 13.6 12.3 D. Personnel Indices 36. NTPC's performance also appears good in relation to trends in employment. The number of employees per GWh sold, after an expected sharp decrease in the early years of operation, rebounded slightly in the period FY86 to FY88, when commissio.iing of new plant slowed down.L15 This indicator resumed its fast fall as soon as sales started to increase again in FY89 (see Graph 4 in Attachment). 37. The central utility's total personnel related cost per employee shows, a slow increase in real terms over the lant seven years followed by a jump from 1989 US$3200 to US$4800 per employee in FY90. This apparently alarming increase, however, seems to be explained by a change in the accounting for the social services (especially medical) in that year. Indeed, the remuneration and the directly associated benefits showed only a slow growth in real terms over the same period. This issue of overall personnel costs deserves follow-up since the transparency of annual reports on this matter is limited by NTPC's practice of capitalizing a varying portion of personnel costs. 38. For the SEBs, in contrast to the cash cost indicators which did not feature a clear trend (para. 35), the personnel indicators seem to have improved in average over the period FY86 to 89, in particular the number of employees per GWh sold decreased from 7.3 to 5.8. E. The Bank Contribution 39. Although the initiative for the establishment of NTPC came from the GOI, and its institutional development has been mainly shaped by the vision of its founders, the Bank has made a vital contribution to the company's success through its financial support, its role in key areas such as procurement and the use of consultants, and its influence on NTPC's corporate culture. The importance of early Bank support in making possible the establishment of NTPC, and the role of L15 See para. 8.3 of NTPC's comments in the Annex. 14 the Bank in helping ensure that NTPC was amply funded and thus able to develop as it wished, have already been discussed. In addition, being a "Bank project" and the ultimate recipient of a steady stream of Bank Group lending also conferred on NTPC a special statue that strengthened its management's hand and bolstered the operating autonomy and political support that were so important to its development. Moreover, GOI officials attest that Bank scrutiny of NTPC's projects was an important factor in building their confidence in the company and winning prompt planning approval for its investments. They also feel that the Bank's appraisals were instrumental in enabling them to secure co-financing. 40. The Bank contribution was more direct and overt in the area of procurement, which posed a majo. hurdle for a new company undertaking a massive investment program. International Competitive Bidding (ICB) and the Bank's close involvement in all phases of the procurement process, provided a framework and discipline that enabled NTFC to obtain not only competitive prices but also access to the latest technology. The transparency of the process, and the Bank's oversight, also helped importantly to insulate NTPC procurement from political and other pressures to select other than the lowest qualified bid. While BHEL, the domestic equipment manufacturer, secured a virtual monopoly of major orders, and foreign firms frequently disputed NTPC's awards, the Bank found its judgement to be sound in all but a few cases. 41. The Bank also contributed much through its emphasis on the use of consultants. There was initially a considerable divergence of view on this score, with the Bank feeling that NTPC, as a new company, should make extensive use of consultants in virtually all phases of its work. NTPC, being anxious to demonstrate its own capability was reluctant to employ consultants, especially foreign ones, except where it lacked specific skills. After the first Singrauli project, a broad compromise emerged under which NTPC would use consultants both to provide special skille, and also, in order to satisfy the Bankv in a "review" or "retainer" role under which they would provide general engineering backetopping in areas in which NTPC initially had no experience such as the design of 500MW units and construction management. While the role of consultants was more limited than the Bank initially wished, there can be no doubt that as a result of its efforts they played a greater role then otherwise would have been the case. NTPC made adroit use of consultants from a variety of countries to obtain access to the latest technology and most advanced utility practices, and today regards this as one of the major benefits accruing from its relationship with the Bank. 42. The Bank also contributed to NTPC's development in less tangible but perhaps even more important ways. With one or more loans being made each year for several yeas, NTPC was a full time assignment for at least two Bank staff. According to both sides, this continuing contact led to the development of uncommonly close and cooperative relationships at the working level. Bank staff, and particularly the senior engineers, were held in high regard and their views carried considerable weight in NTPC as much because of the professional and personal relationships they established as because they represented the Bank. In addition to themselves providing "technical assistance" in specific areas such as project management, quality assurance and the use of financial controle, Bank staff appear to have done much to help form NTFC's corporate culture through 1. 1 . ., . , 11 1 1 1 1 1 - ~ 1 1 .1, 1 ' 11. I - 15 their emphasis on the maintenance of high professional standards and on the need to develop the company along strctly commercial lines.J& F. Links to Other Sector Institutingg 43. NTPC's major links to the 001 have been with the Department of Power (DOP) of the Ministry of Energy (now Ministry of Power), the GOI's apex power sector agency, to which NTPC is responsible, and with the CEA, DOP's technical arm. The DOP's nurturing/aupporting relationship with NTPC bes been sustained over the years; the two institutions have generally shared the same technical and institutional objectives and worked together closely to accomplish them. DOP has been the senior partner but not a dominating onel indeed, major initiatives like the 1982 decentralization of NTPC and the 1983 Corporate Plan appear mainly to have originated in NTPC and been readily accepted by DOP. The CRA played an important role early on, having been responsible for design and engineering of NTPC's first project, Singrauli, and served as "retainer consultant" on Korba. While CRA apparently looked forward to continuing to serve as NTPC's technical godfather, NTPC had other ideas. Anxious to establish its technical self-sufficiency and institutional autonomy, it resisted any fur _r CEA role in executing its projects and worked to establish an arm's-length relationship with CEA. Today CEA monitors NTPC's performance and vets its investment proposals as it does with all other sector agencies. 44. NTPC'a special relationship with the DOP is reflected in the fact that, since 1987-88, this relationship has been governed by an annual Memorandum of Understanding (MOU) in which, in return for committing itself to specific performance targets, NTPC receives certain delegations of authority and promises of assistance from the DOP. Under the MOUs, which are largely drafted by NTPC, the corporation has agreed to meet both quantitative targets for plant commissioning, generation, operating efficiency and internal resource generation and qualitative targets in such areas as internal restructuring, environmental protection, corporate planning, and human resource development. In return, the GOI has committed itself to: provide a fixed amount of budgetary support; grant NTPC the right to incur without further approval expenditures in foreign exchange and rupees up to certain limits for project preparation and for maintenanct and miscellaneous expenditures; to expedite approval of new projects; and assist NTPC on reducing overdue payments from the SEBes. 45. The MOUs include an agreed system for rating NTPC's performance in meeting the quantitative targets and, by this measure, it has consistently earned an "excellent" rating. NTPC officials regard the MOUs as a major contribution to 'ts institutional development but point out that the GOI has not always been able to live up to its side of the bargain (e.g., with respect to expediting project approval and raising NTFC's rate of return), and feel that they need an even greater measure of autonomy. 46. Outside of the 001, HTPC's major links have of course been with its customers, the SEBs. Their relationship has turned on questions concerning the amounts of power sold, the tariffs charged, and payments, all of which have been 16 See also par&. 2.1 of NTPC's comments in the Annex. 16 highly contentious and are discussed in detail elsewhere in this audit. Suffice it to say here that NTPC's relationship with the SEBs has been fundamentally conditioned by the fact that the utility and its customers are public entities serving different sovereigns. The relationship has in many ways been more political than commercial; some of the SEBs have been unwilling to regard MTPC as a commercial supplier and NTPC has been unable to treat them as it presumably would treat commercial customers. The very difficult issues that have arisen have ultimately had to be dealt with not by NTPC and the SEBs on a utility-to-utility basis but between the GOI and the states through an essentially political process that has proved exceedingly slow and uncertain. G. Sustainability 47. NTPC is presently a strong institution with an impressive record of achievement and ambitious plans for future expansion and diversification. However, its future is clouded not only by the financial difficulties discussed later in this report but by a number of institutional problems that could, if not effectively addressed, make NTPC's future considerably less bright than its past. While NTPC is still a very lean organization by the standards of the Indian power sector, the company's own recent studies have confirmed the existence of over-staffing at the plant level, amounting to approximately 10% of plant employment. Moreover, given the continuing rapid rise in the number employed at the executive level in recent years, the existence of similar overstaffing elsewhere in the organization would not be surprising. Several present and former managers indicated that they were concerned that, in growing as large as it has, NTPC has lost some of the flexibility and ability to respond quickly to changing circumstances that were among its major strengths.117 48. NTPC will thus need to slim down a bit, and to resume progress toward decentralization in order to counter the effects of its size. Since it cannot, as a public enterprise, simply reduce staff directly, NTPC will have to attack the overstaffing problem over time by restraining recruitment while developing well targeted retrain7ing programs so that raiundant staff can be moved to positions where they are needed. In the wake of the lose of the transmission function, the key to meaningful further decentralization would appear to lia in transfezring large numbers of staff from Delhi to the regional directorates in order to endow the regions with the technical capability to effectively backstop project management in all areas. This would mean limiting Delhi to a true headquarters role centering on such activities as planning, corporate finance and other functions that must be performed centrally. 49. There are both an actual and a potenti 1 threat to NTPC's ability to carry out its expansion plans. The actual danger comes from the drastic slowdown in the project approval process in recent years resulting mainly from the lack of Bank and other (e.g. Soviet) external finance, and from the growing congestion in the environmental clearance process as discussed later in this report. Only four of the nineteen generation projects submitted by NTPC since 1987 bave won final government approval; the fifteen still pending projects, which have a /17 Par&. 8.2 of NTPC's comments in the Annex sets forth the utility's somewhat different view. 17 total capacity of more than 10,000 MW, would provide about half of the total expansion of capacity that NTPC is planning for the Eighth Plan period (1992-1997). 50. The potential threat to NTPC's investment program comes from the lose of its transmission function i.e. the construction of the lines necessary to the evacuation of power from its new plants, and the operation and maintenance of new and existing facilities. While transmission is still in the good hands of former NTPC staff, the fact remains that, from now on, NTPC will have no direct control over the delivery of its output.iis 51. The dearth of new projects has created a situation of substantial de facto under-employment in the ranks of NTPC's large design and engineering staff, and given rise to worrisome resource management as well as morale problems. In its pursuit of self-sufficiency, NTPC has sought to acquire the engineering capability to deal with the maximum expected workload. The difficulties it now faces raise the question of whether NTPC might not be better advised to plan for greater use of consultants and other outside services in order to be able to adjust to the inevitable workload fluctuations. 19 52. The need to keep its staff more fully employed is one reason NTPC has been seeking in recent years to diversify into a wide range of new activities. These include research and development; the repair and manufacture of spare parts; non-conventional energy sources (e.g., solar and wind power); engineering and management consulting at home and abroad; joint ventures with the private sector and even foreign investment projects. While some of these "new thrusts" are attractive substantively as well as means of absorbing excess capacity, NTPC will have to guard against the danger of scattering its efforts in ways that could distract from its main business and strain its management./Z0 53. Another of NTPC's problems is not new. It is the basic state enterprise problem of reconciling management's need for operating autonomy and commercial freedom with accountability to government and with political realities. There are some areas in which NTPC faces important constraints. One of these is management's tnability to adjust the wage structure and terms of employment without government approval, which has exacerbated labor problems in recent years. Another is government pressure concerning business decisions such as the opposition of other ministries and enterprises to NTPC's plans to expand R&D and begin manufacturing its own spares. Constraints also arise in the investment program area, where NTPC has not only experienced serious approval delays but IS Para. 9.5 of NTPC's comments in the Annex, in part, disagrees with the statements in this paragraph. IL9 See also para. 9.7 of NTPC9a comments in the Annex. LZO Para. 8.4 of NTPC's comments in the Annex sees the audit's reservations about some aspects of diversification as unfounded. 18 also has had to carry out major projects that may not have been chosen if technical and economic justification were the only considerations.121 54. NTPC is considering proposing that the GOI approve its investment program as a whole on the basis of consistent technical, economic, financial, and environmental criteria. This is a far-reaching proposal which could significantly streamline the present process under which each project must win a number of governmental approvals and clearances at each stage of its development. It could be a major advance in NTPC's institutional development. III. NTPC AND SECTOR CHANGE 55. While the Bank's primary objective in lending to NTPC was on the expansion of capacity and the building of a major new central institution, it continued, as already discussed, to pursue its broad sector objectives. The NTPC projects' role in this was two-fold. In the first place, the projects served as vehicles for the sector dialogue through which the Bank directly sought to promote sector-vide long term planning, integrated operations and SEB reform. Secondly, it was hoped that NTPC itself would, by force of example and otherwise, serve as an agent of change in the sector. In neither respect is there much of a success story to be told. A. Sector Dialorue 56. The story of the Bank's efforts to promote the preparation of a lon term national power plan is an unusually long and inconclusive one. Although the GOI agreed in 1976 during negotiations for the Fourth Transmission project (Cr. 604) to begin preparing such a plan, and funds were provided for consultants to assist with "system planning studies", there was no apparent action for several years. This led the Bank, in 1979, to suggest specific terms of reference and in 1980, during negotiations for the Second Singrauli project, to press for and receive assurances that CEA would prepare a plan in conformity with the Bank TOR by April, 1982. In September 1982, the Bank received the Long Term Expansion Plan, 1985-2000 which contained detailed region-by-region load forecasts and a least cost expansion plan designed to meet the forecast demand. The Bank regarded the plan as a "good exercise" that was "reasonably sound" technically and that substantially satisfied the TOR./22 57. After a few years, it became painfully apparent that there were substantial disparities between the power plan and what went into the GOI's Five Year Plans and also between annual investment programs on the one hand and the rate at which new capacity actually was being brought on-line on the other. This, as the SAR for the Rihand Transmission project noted, "undermined rational planning by necessitating rapid expansion of supply rather than long term least /21 Para. 9.6 of NTPC's coments in the Annex disagrees with this finding of the audit. jZ2 Central Transmission project appraisal BTO report, 11/8/82. 19 cost development".LZ3 It thus became clear that the planning effort, while laudable in principle, was dealing more with the symptoms of the sector's problems rather than their underlying causes --the perceived need to maximize the expansion of capacity, financial constraints, the weak implementation capacity of the SEBe and Centre-state conflicts. 58. In retrospect, the planning episode may also be seen as a missed opportunity to balance the G01's supply-s4de approach with some attention to demand management and energy conservation. The expansion of capacity in pursuit of ever-accelerating load forecasts is a losing game; the 1980 report of the Committee on Power laid considerable emphasis on the role of realistic pricing and of conservation measures in steaming the growth of demand.LU However, the CEA plan like the agency's previous planning efforts, was exclusively concerned with capacity expansion. The Bank TOR for the power plan did not call for the inclusion of demand side considerations and it was not until some years later that Bank documents began to mention the importance of integrating planning and pricing and of energy efficiency. 59. To promote integrated sector operations, the Bank not only financed the construction of extensive new transmission facilities, but also pressed for the formulation of a plan to guide the construction and operation of a national grid. Although CEA employed consultants financed under the Fourth Transmission Project for this purpose, the work bogged down owing in large part, it seems, to the GOI's belief that it would be "premature" to try establishing policies for grid operation since these touched on difficult Centre-state tariff and other issues. This led the Bank to abandon the idea of a separate plan and to incorporate instead an interconnection study in the TOR for the national power plan. Although the plan dealt with the physical aspects of interconnection, it said little about grid operation and the Bank seems not to have pressed the subject again until 1985 when, during negotiations for the Rihand Transmission project, the GOI agreed to undertake the preparation of a national long term transmission plan to be completed by June, 1987.Lg= CIA completed the plan in 1989 after incorporating comments by a Bank consultant. 60. Although Bank lending has done much to create the transmission links and other physical underpinnings of a national grid, there has been little progress toward integrated sector operation. Power interchanges between states and between regions are still minimal owing to a number of factors: the lack of the grid discipline on the part of the SBe necessary to make such interchanges technically feasible; a tariff structure that provides insufficient incentives LZ3 Rihand Transmission project, SAR, para. 1.07. /24 A 1979 letter from Mr. Rajadhyaksha, the Chairman of the Committee on Power, to Mr. McNamara pointed to the exceptionally high energy intensity of much of Indian industry and stressed the need to raise prices to economic levels "to both encourage conservation and for resource mobilization." .Lg. Rihand, op.cit. 20 for them to seek power from the least cost sources; and the weakness of the institutional arrangements for power pooling. The Bank long ago abandoned its original hopes for the achievement of integration regionally by 1985 and nationally by 1990 and recent Bank reports treat integrated operations as a distant goal, using much the same wistful language that was used 10 years earlier. 61. The lack of sector integration results in a costly under-utilization of generation and transmission capacity. A recent Bank study found that full use of the opportunities for inter regional trading afforded by existing transmission links would, in FY89, have made it possible to reduce dramatically the amount of unserved demand coating the country some US$550 million per year in foregone benefits.Lfgi Although it is the least cost producer in most circumstances, NTPC has been badly hit by the need to back down its generating plant in the face of insufficient demand from and operating difficulties with the grid. As Table 6 shows, the company estimates that grid factors have been mainly responsible for the sharp decline in its plant load factor (PLF) from a high of 79.6% in FY87 to 61.7% in FY91. 62. The Bank also pursued a variety of initiatives mainly centering on SEE reform and, especially, the reform of SEB finances. Such reforms required consensus between the Centre and the states which was usually possible only after long and painful negotiations. A major step was the 1980 Report of the Committee on Power which, as already noted, contained sweeping recommendations for SEE reform (and other sector reforms) and provided the Bank with a useful means for sharpening the dialogue. By the mid-eighties, a number of the specific actions sought by the Bank had been taken. These included the amendment of the Electricity Supply Act to enable the SEBe to operate more commercially and to require that they earn a 32 rate of return; the establishment of a uniform system of commercial accounts for the SEBe and legislation requiring the states to provide the SEBes with direct subsidies to compensate them for the losses they incurred because of the low tariffs (or no tariffa) they were required to charge agricultural consumers. 63. These measures, while stepping in the right direction, fell far short of resolving the problem of the SEBe' finances. After an overall improvement in the mid-eighties when several SEBes achieved the required rate of return, the trend was soon reversed. Today, none of the SEBes turns a profit and in FY1990 their combinsd deficit totaled some US$1.8 billion compared with US$1.3 billion in FY81.Lz The problem is pricing. The SEB's tariffs do not cover their average supply cost and are equivalent to only about 50-60% of long run marginal cost. The Bank has sponsored a large number of pricing studies over the years but these have served as little more than academic exercises since neither the GOI nor the states accept the principle of cost based pricing. This reflects both political constraints and the traditional tendency in india to treat electricity as a L&6 Long Term Issues in the Power Sector, Draft, June, 1991, Vol. I, para. 1.22. Ln SAR, Private Power Utilities Project, MHay, 1991, paras. 1.05 and 1.06. 21 social benefit and a development tool rather than as a commodity to be bought and sold commercially. B. NTPC as an Agent of Change 64. The lope that the establishment of NTPC would stimulate reform in the rest of the sector hinged on the belief that the new utility coulds (i) provide a model of efficiency for the SEBes to emulate and (ii) by charging realistic wholesale tariffs, compel the SEBs to do the same at the retail level. Recent Bank evaluations have called attention to NTPC's contribution to the sector. The PCR for the Ramagundam project concluded that ".... lending operations to NTPC has (sic) proven to be more successful and beneficial to the sector than previous operations with central institutions...."128 Similarly, the SAR for the Private Power Utilities Project declares that, "IBRD helped NTPC to grow into one of India's model utilities and in the process IBRD also helped to improve operational efficiency nationwide."L29 While there is some justification for these claims, the record is patchy.130 Table 6: NTPC Operating Performance Plant Load Factor (PLF) - % Actual PFL Lose due PLF Lose Due Total PLF PLF to to Lost Coal Shortage Grid FY1983 63.6 nil 0.66 0.66 FY1987 79.6 nil 2.70 2.70 FY1991 61.7 5.69 8.46 14.15 Source: NTPC C. Operations 65. The SEB's operating performance has improved markedly over the past 10 years. As Table 4 in Chapter II shows, the average PLF of the SEB's thermal plants has risen from 42% to 53% while availability has increased from 65% to 71%. Other plant efficiency indicators, such as the use of oil e.g. for ignition purposes, have also shown considerable improvement. There is also some evidence, mainly anecdotal, of improved construction performance on the part of at least some SEBs. The SEBs, while not performing at NTPC's level, are clearly doing better overall. The question is whether NTPC has played any part in this; the answer is probably "some, but not much". 28 Report No. 8641, May, 1990, para. 9.01. /29 Report No. 9499, May, 1991, para. 1.23. /30 Paras. 3.0 to 5.0 of NTPC's comments in the Annex set forth the India view according to which NTPC's contribution is identifiable and important. 22 66. While some of the better SEBe have adopted certain of NTPC's construction management practices and techniques for monitoring and improving plant operations and maintenance, most observers agree that NTPC's management systems have not come into widespread use in the sector. Similarly, NTPC's recruitment methods and training programs have not been widely emulated by the SEBs. That NTPC's techniques have not proved more infectious reflects both the very different situation of most SEBe as regards management autonomy and financial means, and the absence of the overall corporate culture that has been so important to the development of NTPC's management tools. For these reasons, NTPC's impact as a role model has probably been less in demonstrating how to do it than in showing that it can be done. NTPC has proven that public sector power utilities in India can attain international standards of efficiency and in so doing has deprived the SEBs of their excuses for poor performance. 67. NTPC9s most direct contribution to improved sector efficiency has been in the realm of hardware. NTPC's quality assurance efforts gave it the ability to establish and enforce high equipment standards, while its financial clout and ICB requirement gave it much more leverage than the SEBe with domestic suppliers. This helped bring about a general improvement in the efficiency and reliability of a wide range of domestically manufactured generating equipment and transmission gear, much to the benefit of the entire sector, and particularly the SEBs, which can only buy domestic equipment. NTPC also has taken a leading role in the deployment of advanced technology. Several of the SEBe have followed NTPC's lead in adopting such technologies as RVDC transmission, tower-type boilers and gas-fired combined cycle generating plants. D. Finances 68. Soon after NTPC began selling power, the flaw in the hope that it could be used to lover an increase in SB tariffs became apparent. Increasing their tariffs to meet NTPC's charges was not the only option available to the SEBs. The other was to defer payments to NTPC. Letting the bills pile up has been the response of certain of the weaker SBs whose masters in the state governments have been politically unwilling or unable to permit adequate tariff increases. This might well have been expected in view of the fact that some of the SEBs were notorious for late payment (or even non-payment) for fuel and equipment, especially where the suppliers were other public sector entities. However, there is no evidence that either the Bank or the GOI anticipated this in setting NTPC's tariffs or making contractual arrangements with the SEBs. 69. The receivables problem is discussed later in this report. Suffice it to say at this point that not only has NTPC proved to be ineffective as a force for improving sector finances, but that this failure now threatens to undermine the relationship between the Bank and NTPC and, with it, the growth of the institution that the Bank has worked so hard to build. E. Overall Impact 70. NTPC has unquestionably had a positive impact in the sector. In addition to providing needed massive additions to capacity in a much more timely and cost effective manner than would otherwise have been done, it has emerged as a center of technical and managerial excellence. And, as NTPC's importance in meeting the 23 nation's power needs has grown so, tou, has the role of the Centre in sector affairs. On the other hand, as just discussed, the NTPC projects have not been a particularly effective vehicle for sector dialogue and NTPC itself has had only limited influence as an instrument of change. 71. The NTPC experience tends to confirm that new institutions established as enclaves flourish in their own right, but that their success is not necessarily replicated in the rest of the sector. In the case of NTPC, this inherent limitation was exacerbated by the Bank's hesitation in pressing to achieve its sector objectives and in using project conditions for this purpose. It was not until the fourth loan for NTPC that the Bank sought to commit the 001 firmly to preparing a power plan by a certain date, and not until the tenth loan in the NTPC series that it obtained a similar commitment to produce a transmission plan. These commitments, and the one requiring the submission of a plan for implementing the recommendations of the Committee on Power in the five priority areas selected by the Bank,=1 are the only three conditions calling for specific action on sector matters contained in the entire series of thirteen NTPC projects financed by the Bank with loans totaling nearly US$4.0 billion. Each of the conditions took the form of a statement in the Agreed Minutes of Negotiation rather than a loan covenant. 72. This slow and circumspect approach to the sector appears to reflect, in the first instance, the importance of the timely processing of these very large projects to both India's power sector investment program and the Bank's lending program. Any attempt to move ahead with sector conditions swiftly or on a broad front would have been almost certain to have provoked spirited resistance ftom the GOI, if not because it disagreed with the specific action the Bank was seeking, then because of its broad opposition to conditionality. However, the Bank's approach appears to have been even more deeply rooted in the conviction that, given the constitutional authority of the states in the power sector, basic reform could best be pursued through "a policy of persuasion rather than one of explicit leverage."/32 Pressing the GOI for action that it could take on its own account was difficult enough; pressing it to press the states to take action effecting their own prerogatives in the sector was much more so, as shown by the long and drawn out effort that it took to amend the Electricity Supply Act in matters affecting the finances of the SEBs. 73. While it is true that the constitutional aitzation poses a formidable obstacle to sector reform, it is also true that the inadequacy of the SEB reforms undertaken so far has put the sector in its present parlous financial state, and imperiled NTPC. This state of affairs has now led the Bank to adopt a much tougher stance on such matters. It seems likely that the present difficulties could have been mitigated, if not avoided, had the Bank tried to apply earlier on a more appropriate amount and style of leverage.33 /31 This condition was sought at the insistence of the Bank's top management; its acceptance by the GOI was regarded as a "major breakthrough". 132 SAR, Singrauli II, para. 1.35. /33 See also para. 11.2 of NTPC's comments in the Annex. 24 IV. INCREMENTAL COSTS AND TARIFFS 74. In India, as in many other countries, cost recovery and achieving better efficiency in the power sector through appropriate pricing have been perennial issues and major topics in the Bank's dialogue with the GOI and the sector. Most recently, with the GOI's fiscal deficit drematically increasing and the power sector accounting for more than US$1.5 billion of it, a solution to the issue has become particularly urgent. As in FY90 the SEBe' combined financial losses were of the same order of magnitude as the sector deficit/34, it is evident that the main problem is improving cost recovery in the state utilities. This is particularly important to the Bank since two of the main beneficiaries of its lending, NTPC and TEC, which, through their surpluses help limit the total sector losses, heavily depend on the SEBe as clients and/or suppliers. NTPC, in particular, is almost wholly dependent on the SEBs for revenue. 75. Until 1992 the dispatching of NTPC's power and energy was done on the basis of fixed allocations and tariff considerations were not a primary issue. However, the more the sector develops, L-s suggested by the GOI's policy declaration, towards a more cost-oriented oper-tion, the more there will be a need for NTPC's tariffs to reflect costs of providing power and energy. The adopted, but (in early 1992) not yet implemented, two-part tariff is a first but still modest step in the right direction.L:5 76. In the mid-eighties the SEBes charged tariffs to the ultimate consumers which were about 90% of LRMC for high voltage supply and 20 to 50% of LRMC for low voltage consumption, i.e, overall well below average economic cost and financial requirements./36 Taking into account that, at the present level of systems losses, the SEBe have to buy some 1.25 kWh from NTPC to deliver an additional 1 kWh to their consumers, they have to remit to NTPC about 90% of their incremental receipts (see Table 7). The remainder (i.e. some 10% of said receipts) is insufficient to cover the SEBE' associated subtransmission, distribution, and overhead costs. Under these circumstances, it is evident that there is substantial incentive for the state utilities to keep NTPC's tariffs low and to delay payment of the central utility's bills. In the most recent past, the cost recovtry issue at both bulk and retail sales levels has acquired a high profile in connection with the Bank's operations in the sector in general and in NTPC in particular. The tariff level aspect is discussed in the present chapter, whereas the deferment of payment is one focus of chapter V. L34 See Annual Report on the Working of the State Electricity Boards published by the GOI Planning Commission in September 1990. LS See also the discussion of retail tariffs and end use efficiencies in the draft 1991 report: India: Long Term Issues in the Power Sector. /36 See e.g. SAR Farakka II, para. 5.10. 25 A. The Pre-1983 Projects With NTPC 77. The Bank appraised the Singrauli I project, audited in 1986, as well as the four projects audited here (Korba I, Ramagundam I, Singrauli II, and Farakka I) in the period 1977 to 1980, i.e. long before the first unit at Singrauli was planned to be commissioned and NTPC to begin earning revenues. In this period, the Bank was mainly concerned about the utility's abilitys (i) to carry out the projects within the envisaged construction schedules and cost estimates and (ii) to build up its institutional capability in the technical areas, a concern that continued to dominate the Bank's approach to the follow-on projects in 1981 and 1982 (Korba II, Ramagundam II). The Bank keenly perceived the risks involved, as documented in the "Project Risk" sections of the SARs covering the seven projects approved before 1983./37 The Bank was less perceptive on the financial side, where no risks were initially anticipated despite the lack of specific advance agreement on tariffs and the financial weakness of some of the SEBes on which NTPC would have to depend for its revenues. The Bank presumably felt that it, and NTPC, were adequately protected by the standard revenue covenant, specifying a minimum rate of return on assets in operation, that had been agreed under the Singrauli I project. Furthermore, the SARs prepared in the period 1978-80 state that there was agreement between the parties on the allocation of NTPC's output to the various SEBs and on the principle of a two-part tariff for the utility's sales. Attachment 7 shows that this was misreading the situation. 78. During the years preceding NTPC's start of operations, the Bank addressed pricing mainly through its overall sector dialogue with the GOI and in a somewhat more concrete but not much more successful way, in connection with sector planning. Time passed with little change except for the enactment of the amendment to the Electricity Act which provides for the SEBs to earn a minimum return on assets, but fails to include the measures that would allow the SEBs to implement the required tariff adjustments. 79. Until then, the Bank seems to have relied on the abovementioned amendment to the Electricity Act and to some degree also on the prospects of "high" NTPC tariffs prodding the states and their utilities to adjust their tariffs. It did not anticipate the SEBs' reactions i.e. a fierce opposition to NTPC tariff adjustments and late payments of billed supply from the central utility. 80. Over time, the Bank came increasingly to recognize that NTPC's financial viability would bo at risk if the SEBe' performance did not improve. However, it was at a loss when it came to inducing the parties to implement the necessary measures in timely fashion. Presumably for this reason, it continued to portray the prospects for action in a favorable light long after it could have been seen that such action was unlikely in the absence of strong incentives and/or coercion. This is not to suggest that lending to NTPC should have been halted earlier, but that the growing financial risks and uncertainties should have been more frankly identified, evaluated, and set forth in the various SARa. LZ See e.g. SAR Singrauli II, paras. 3.16 to 3.18. 26 B. The Post-1982 Operations With NTPC 81. When in 1982, the Singrauli plant started generating, the need for firm arrangements securing NTPC adequate revenues became quickly apparent. By early 1983 the Bank had received drafts (that proved to have been prepared by NTPC but not yet discussed with the SEBs) for the contr&zts covering the sales from the first four NTPC plants; but the final agreements for Singrauli and Korba were still not available, because NTPC and the SEBe involved were unable to agree on the two-part tariff for the respective sales. Accordingly, billing for the Singrauli and later also for the Korba energy occurred on the basis of a provisional flat rate which was meant to be retroactively adjusted when final contracts would be agreed. The finalization of such contracts was made a condition of effectiveness of the Central Power Transmission Project approved in May 1983. 82. In early 1984, NTPC supplied "Memoranda of Understanding (MOUs)",L28 which were interim agreements between NTPC and the SEBe concerned. These documents, by and large, formalized the provisional flat rates mentioned before. During the negotiations of the Farakka II project, which also took place in early 1984, the meaning and legal status of the MOUs were clarified and the Bank accepted the documents as "correctly including all the factors which were of concern to the Bank."L39 Nevertheless, the two parties agreed that, by March 1986, NTPC would provide the Bank with what were called "revised" bulk supply contracts, even though such contracts had never been agreed.I40 83. The bulk supply contracts were not finalized as agreed, a fact that e.g. the 1987 project documents for the Talcher project fail to note. Indeed, NTPC tariffs continued to be based essentially on the original MOUs. This was complicated by the fact that these MOUs which had been valid for five years were lapsing one by one. The Bank had obtained assurances that, in the absence of new full fledged bulk supply agreements, the MOUs would continue to be applied. This occurred insofar as tariff adjustments to compensate NTPC for increases in L tel costs and for other effects of in.lation on cash operating costs continued to be implemented. However, the SEBe refused tariff adjustments reflecting the increased investment cost for plants that had started operating later and had cost more than anticipated (especially Ramagundam and Parakka).L41 This frustrating situation persisted through 1991, and was one of the reasons why the Bank felt unable to continue its financial support of NTPC projects.42 L38 These are HOUs aifferent from those discussed in para. 64. L19 SAR Combined Cycle Power Project, Annex 4.9 para. 1.01. /40 SAR Combined Cycle Power Project, Annex 4.9, para. 1.02. L4J See Chapter 5, para. 50. Lag The Region's comment was that "even when agreements were in force with clauses providing that power be cut off 15 days after bills were due, these clauses were never enforced." 27 84. The GO created the K.P. Rao Commission bringing together the Department of Energy, CIA, NTPC, and the SR8 to examine NTPC's tariffs and requirements. The commission's main conclusions, issued in 1990, were that the two-part tariff should be implemented essentially as contemplated in the early 1980s, and t' , in order to assure the financial viability of NTPC their level should be such &A to allow NTPC to earn a minlmm return on assets (by and large along the lines of the Bank's revenue covenant). OD understands thats (i) the state governments, not only the SEBs, have agreed to the principles set forth by the coaissions (ii) by September 1991, CIA was examining the proposed coefficients to be included in the formulas to calculate the bulk tariff in order to prepare a basis for a final decisions (iii) the bulk supply agreements are likely to become effective about the beginning of FY93 (i.e. April 1992), and (iv) NTPC was already billing but not collecting in accordance with the new tariff during the last months of 1991. OD further understands that there still are some steps to be taken before the NTPC tariff package can be implemented, but this immediate goal seems now within reach. Nevertheless, it is important not to lose eight of the fact that the solution for NTPC is sustainable only if the problem of the SEBes' ability to pay is resolved through increases in their tariffs, an issue that the K.P. Rao committee, in accordance with its terms of reference, did not address. C. Tariff Levels 85. Table 7 below shows the development of average revenues per kWh in various entities and groups of entities in the Indian power sector. It illustrates some of the major issues concerning tariff levels. This audit, with its major focus on NTPC, does not address the structural problems of the rates because this issue has lower priority than that of average levels, which is not yet solved. The two-part tariff which hopefully will become effective soon provides at least a basis for the discussion of NTPC's tariff structure in the context of a hopefully increasingly cost oriented approach to electricity pricing. 86. As further discussed in Attachment 7, the data in Table 7 are not strictly comparable. They nevertheless show the lack of coherence of the average revenues of different Indian utilities. This is especially apparent when the SIB tariffs are compared to those of TEC which, as a regulated private entity, is allowed to charge rates that cover its financial costs. Not only are TEC's revenues per unit sold much higher than the average SIB rate, they are also between 10 and 20% higher than those of the Mabarashtra SN (818) in whose general area TEC operates, although the SEB' costs must obviously be substantially higher, as it has to cater to the low voltage consumer, which TEC does not. 87. The relation between TEC's rates and those of MSBB creates a situation similar to that existing between NTPC and the SEBe, in general. Indeed, there is strong pressure to limit TEC's rates. Whereas a significant increase in the tariffs of both TEC and MSB has taken place recently the relation between their respective tariffs has not been reversed. 88. Graphs 1 and 2 of Attachment 7 further compare the actual average revenue per kWh achieved by NTPC with the projections in various SARe and show, as further discussed in Attachment 7, the increasingly unrealistic expectations reflected in successive SARs. 28 Table 7: Averaae Revenues per kWh sold Units 1983 1984 1985 1986 1987 1988 1989 1990 1991 NTPC 1990 36 35 34 32 33 33 33 33 32 millt TEC 1990 55 53 59 59 58 59 59 61 mills SEBs 1990 44 45 46 44 46 (43) mills MSEB 1990 48 54 53 50 54 (49) mills NTPC/SEB 0.74 0.73 0.73 0.74 0.73 0.74 TEC/MSEB 1.24 1.06 1.12 1.20 1.13 D. Average Incremental Costs and Tariffs 89. All appraisals of NTPC projects between 1977 (Singrauli) and 1987 (Taleher) in one form or another mention that the projected or actual NTPC tariffs are or will be near LRMC. In contrast, the 1990 draft SAR for the Regional Power Projectl43 states that NTPC's tariffs were, on average, only some 50% of LRMC. To understand what brought about this change, OED carried out the analysis set forth in Attachment 7, which suggests that (i) low estimates for the future investments resulted in incremental costs that were too low and (ii) optimistic assumptions about the tariff that would be charged in future kept average rates in the order of magnitude of the calculated incremental costs. Only when, by the second half of the 1980s, more realistic assumptions on both investment costs and rates were used as a basis for the appraisal estimates did the vast difference between tariffs and LRMC become apparent. 90. Attachment 7 illustrates two other phenomena. First, it shows that incremental costs are sensitive to the discount rates used in the calculations. As the 10% rate usually assumed to reflect the opportunity cost of capital is subject to substantial uncertainty, the results have to be taken with a grain of salt. Second, the SARa tend to assume optimistically that in the first and second year of the respective projects, large tariff increases in real terms would take place. Graph 2 in Attachment 7 dramatically brings home this point which also emerges from the comparison of columns (7) and (8) in Table 8. OED is aware that, in most cases, these adjustments corresponded to those needed tc lead to the tariffs allowed by the tariff formulas included in the MOUs but which were never entirely implemented. However, the SARs usually fail to discuss the /43 See Para. 1.08 of this draft SAR, which ultimately was not submitted for Board consideration. 29 likelihood that such increases would be implemented. Experience should have told that such likelihood was modest, at best. V. NTPC's FINANCIAL PERFORMANCE 91. The financial viability and sustainability of NTPC is evaluated in this chapter. The cut-off date for data collection for the analysis was the end of FY1991 (with partial updates for the first half of FY92), thus prior to the economic reform where subsidies to the public sector would be severely limited. Over the period FY85 to FY91, NTPC has grown very rapidly, in terms of both fixed assets and sales. These increases have not upset its financial performance and standing.j4 This chapter documents this achievement and points out some of the weaknesses in the utility's current financial policy. 92. NTPC 's Growth Indicators. NTPC's main indicators are very consistent over the FY85 to FY91 period. The additional fixed assets (+38% p.a.) are driving sales up (+39%), and in turn cash flows (+40%) (see Attachment 8, Table 1). The last two years exhibited more variance: on-going investments (or Works in Progress) slowed down (-41 p.a.) along with long-term borrowing (+15%) while self-financing through depreciation was boosted (+60%); cash flow generation (or Internal Cash Generation) was also more in line with reserves build-up (+42% and +431, respectively). During the last four years, electricity generation provided between 861 and 90% of NTPC's revenues. Transmission fees contributed only 8-10%, thus making the spinoff of transmission assets to the new NTPC less difficult to absorb. Consultancy which is designated as a key activity in the most recent corporate plan never provided more than 0.7% of total revenues, and usually less than half as much. Given this income structure, NTPC is and will remain for the foreseeable future essentially a power generating company selling wholesale to a limited number of clients. 93. Financing P..-i of NTPC. The financing plan of NTPC's capital investments since 1984 (FY85) showed the following patterns. The share of capital investments in the total uses of funds has grown rapidly but peaked at 911 in FY90. Despite recent alarm over the accounts receivable issues (see Attachment 8), current assets have absorbed a minor portion of total resources. The contribution of cash flowsL45 has increased steadily from 10% to 301 of total resources mobilized. The share of other long-term loans (mainly foreign) has peaked in FY88. NTPC has relied mainly on GOI through both equity and loans (mostly World Bank and IDA) to close any financing gap. Although erratic, the mobilization of domestic savings through the power bonds has been substantial (from 71 to 24% of total). L44 Attachment 8 is divided in 2 sections: (a) a detailed analysis of the accounts receivable situation, (b) statistical tables complementing the findings presented in the main text. 45 Defined as the Net Profits plus Provisions for Depreciation of Fixed Assets. I .I I 1 1 1 a IIL .. I I I . 30 94. Capital 7uvestments. NTPC has been carrying out heavy investments in the context of the Sixth (1980-85) and Seventh (1985-89) Plans. New investments, measured by the increase of fixed assets in operation and of works in progress (WIP), have plateaued in absolute terms since FY89 at around Rp 20 billion (US$780 million at end-1991 exchange rate of Rp 25.8). Measured in constant price, the leveling-off has started earlier (in the mid-eighties). Although due partly to constraints outside NTPC's control (see Chapter III), the slowdown in new investments in the -last three years has strengthened its balance sheet because there is now a greater proportion of revenue-generating assetc. Yet, the decline of outstanding IP in proportion of total gross fixed assets to below one third may lead to funding problems for NTPC beconse postponed investments will likely cost more at a future date. 95. Self-financln. Self-financing (SF) has improved steadily over recent years. The self-financing ratio after debt-service on principal (SF-OMS)I6 was 32.72 in FY91 (17.52 after corre.ition for increase in accounts receivable) (Attachment 8, Table 2). Another self-financing indicator, which favors NTPC's viewpoint rather than the lenders', uses cash flows prior to debt-servicings the Corporate SFLA has been increasing after a decline due to the trebling of investments in two years; in FY91, it reached about 402. After correction for the i:crease in cccounts receivable which reduces the available cash flows, the actual self-financing has been more erratic, dipping as low as 5.7% in FY90: the 7-year average corporate SF was only 12.5% as against 24.5% before adjustment. For this reason, a self-financing covenant would not be appropriate as long as the a-counts receivable issue has not been settled. Confusing the issue is the fact t.-at Works in Progress is loaded with accounting items (the exchange risk on foreign borrowing, the capitalized costs of operations, and the capitalized financial expenses) which usually are not supposed to be financed by cash flows. In FY91 the tvo latter items represented 14.42 of outstanding WIP, thus decreasing the nominal Corporate SF from 46.12 to 39.52. Since TPC does not disclose the exchange risk as a separate item in its balance sheet, its additional effect cannot be assessedi this audit estimates, however, that the self-financing of actual capital formation expenditures was well above 50Z in FY91. Furthermore, since these items are cumulative, they burden the denominator of the ratio far more than the above 39.52 implies.L#_ 96. Domestic Bond Issues. A remarkable development for NTPC has been to issue domestic bonds so early after the corporation was established: Rp 20.82 billion were mobilized through six issues every year since FY86 (Attachment 8, Table 3). Starting with the second issue, NTPC was able to offer a tax-free interest option 1i Since NTPC is not showing loan maturities under one year as a separate item of current l!abilities, the time-series for this adjusted ratio could not be computed. The later PCRs reading with NTPC do nct provide any data about self-financing. L4J Defined as cash flows divided by the increase in totpl gross fixed assets (including Works in Progress) during the same year. LAL Over the last four FYs, capitalization of operating costs and of interest accounted for 14.52 of the increased in fixed assets. 31 which reduced the weighted average cost to 11.12. Although this is greater than its average return on fixed assets, the main attraction for NTPC is the balloon repayment feature which lowers the debt-service ratio. The drawback of these balloon loans is that, since they are not amortized, they need to be refinanced at maturity because their average maturity is substantially shorter than the depreciation life of the assets they financed. In the next three fiscal years (1993-95), NTPC will seek to refinance Rp 5.46 billion (US$212 million) or 311 of the bonds outstanding. NTPC has anticipated this major effort by using the sinking fund approach. By the end of FY91, Rp 3.78 billion (69.2%) had been set aside to facilitate the redemption of these bonds and an additional Rp 15.8 million (0.31) of the bonds issue held by the public had been already repaid. The last three issues have been private placements subscribed by commercial banks and other financial institutions attracted by NTPC's good credit rating. 97. Lon-term Borrowing. foreign BlWhange Exposure and Risk. NTPC has borrowed long-term from six foreign banks or consortia and from one local bank. At the end of March 1991, the outstanding commercial debt amounted to Rp 24,930 million (US$96f million) of which 96.7Z was foreign and 37.1% was guaranteed by GO. NTPC's success in mobilizing foreign loans carries a foreign exchange risk burden. Loans in hard currencies (Japanese yens and German marks, in particular) create additional liabilities. The accounting of accrued exchange risk is appropriate to the extent that it follows the Indian accounting rules, but the presentation could be more transparent. The foreign borrowing for which NTPC bears the exchange risk are revalued at the end of every FT at the prevailing exchange rates. The accumulated exchange risk is, however, not shown separately on the liabilities side of the balance sheet, thus preventing any analysis of the impact of NTPC's foreign exposure. Furthermore NTPC does not disclose the accumulated exchange risk as a separate item in its balance sheet.149 This audit estimated the risk accumulated between April 1988 and March 1991 at Rp 7,999 million (US$310 million) for five fully disbursed loans granted by foreign commercial banks and totalling Rp 19.1 billion (US$740 million). This 72.11 exchange risk is worse than the 49.81 depreciation of the rupee vis-&-vis the US dollar over the same period. NTPC has been hedging a portion of its debt, especially the Sterling Pound denominated one (Rp 7 billion or 291 of total foreign dabt excluding Bank funding), but has been limited in doing so by perceived constraints from the Ministry of Finance. 98. NTPC does not bear the exchange risk on Bank loans which are on-lent by GOI in Rupees. The implied subsidy is not negligible. The exchange risk disclosed by the Bank on the loans amounted to US$31.55 million or 2.51 of the corresponding outstanding principal as of end March 1991; the exchange risk on IDA credits is not disclosed. Part of the subsidy is, however, financed through the on-lending rate set by 001 (currently 141) which adds about 6 points to the fig NTPC claims correctly (Attachment 1 of Annex) that its choice of presentation has been approved by its external auditors. Yet, the point is to achieve more transparency. Other World Bank borrowers are requested - and do accept - to disclose the amount of exchange risk on the liabilities side of the balance sheet. Although IDA borrowings are transferred to NTPC in local currency, the external audit report could disclose in a footnote the exchange risk borne by the Government. 32 Bank rate. The additional liability (if the local currency has depreciated) due to the exchange risk on non-Bank loans can be offset either by an increase in another liability (another loan or equity) or by an increase in assets, preferably liquid ones (such as Cash and Banks) because the risk will eventually become a lose in the case of most development countries. In NTPC's balance sheet, the exchange risk on all foreign borrowing is entirely capitalized on the assets side under Works in Progress. The effect is to defer the financing of the risk until the corresponding plants are commissioned (which takes 3-5 years). The financing is then generated at the pace of depreciation which is set by law (20 yeai whereas foreign borrowing are amortized over much shorter maturities). This choice of accounting presentation leaves the exchange risk constantly underfinanced. This is acceptable only insofar as the risk is not an actual lose, that is, as long as the foreign debt is not due. This mismatch of maturities between exchange losses and their financing is not a desirable situation, although it currently advantages NTPC by lightening the debt-service burden, 99. Cash Flows/50. Despite being in the middle of major investments, NTPC has been able to generate substantial cash flows. To generate the major share of cash flows through profits is the mark of financial strength. Because the fixed assets base increased strongly in recent years, depreciation has accounted for a larger share of cash flows. Depreciation of fixed assets is stipulated by the "Electricity (Supply) Act of 1948" (1948 Act hereafter). This important source of cash flows is, therefore, not under NTPC's control except that it will grow at least at the same pace as fixed assets in operation (+44% and 381. p.a. over FY85 to FY91). In FY91, depreciation amounted to Rp 2,345.1 million (US$90.9 million)/1 which represented 2.54Z of fixed assets in operation by end of March 1991 or 2.89% of average assets in FY91. Recently, NTPC has been allowed to shift from straight-line to accelerated depreciation in order to increase its cash flows generation. The change was estimated to increase the depreciation rate from 3.60% to 5.28%, a 40% increase. 100. Capitalization of Expenses. For a corporation with a large investment program under way, it is standard practice (sanctioned by the supervisory Ministry) to defer selected cost items which are more related to the plant construction activity than to the operation of already commissioned plants. The principle is of not charging the full expenditure in the year when payment is made when the benefits from this expenditure will be recovered over several years. The definition of such allowed deferments is, however, sometimes stretched to exhibit improved profitability. In the case of NTPC, a portion of "corporate office expenditures" (overheads) and of "expenses common to operation and construction" is allocated to Works in Progress in the same percentage as the ratio of sales to annual investment expenditures (NTPC, Accounting Policy Statement, para. 4.3). In FY91, this percentage was about 901, plus or minus depending on whether sales are net of tax or investments are not of depreciation. /61 In this section, cash flows are not corrected for the increase in accounts receivable. 1I All data in US$ in this Section have been converted at the rate as of December 31, 1991 (Rp. 25.80). 33 This resulted in the deferment of Rp 1,032.8 million (US$40.0 million) or 8.1% of total non-financial costs in FY91./52 The capitalization practice varies considerably by cost category. 33.31 of labor coats were capitalized in FY91, steadily down from a high 48.1%, while only a constant 1-2% of generation costs was similarly deferred. In contrast, the practice allows massive capitalization of overheads: 105.4% in FY91, sharply up from 78.3% in FY88. Based on the comparison of depreciation in the income statement and the balance sheet, it appears that N".C is also capitalizing a portion of depreciation 13.2% in FY88 and 9.4% in FY89. 101. Depending on the presentation, this permits NTPC to appear to operate without either labor costs (i.e., the FY91 deferment is greater than the entire payroll) or overheads which is not intended, yet a benefit nonetheless. Since these capitalized costs are brought back into the Profits and Lose account only through the depreciation of fixed assets, the accounting convention is key in displaying a strong profit performance. In FY91, the above deferment contributed 9.1% to profits before financial charges, down from 12.4% in FY88. 102. Capitalization of Interest durine Construction (IDC). Deferment of interest charges contributed twice as much as deferment of non-financial expenditures, with 22.8% in FY91. As much as 40.7% of all financial charges of FY91 were capitalized as "interest during construction" under Works in Progress although the latter was only 31.7% of gross fixed assets. The same discrepancy was observed in FY90, but it is a recent pattern because there was no anomaly in FY88 or FY89 (Attachment 8, Table 8), which is due in part to the higher borrowing costs of funding the recent projects. 103. The capitalization of interest provides NTPC with greater cash flows. Given that the relative slowdown in new investments reduces the amount of interest which can be capitalized, it is understandable that NTPC would be trying to buffer the impact on its cash flows. If NTPC had followed closely the annual ratio of WIP over fixed assets (as it would be justified to do) in computing these interest deferments, it would have reduced its net profits by 7.0% in FY90 and by 25.1% in FY91. Overall, total deferments contributed 83.71 of net profits recorded in FY91, which is high.I53 152 NTPC claims that the percentage was only 521 that year as for every year. However it has been computed as 89.3% in FY91, and 90.71 in FY90 (see Attachment in the Annex). .53 NTPC claims (see Attachment 1 to the Annex) that it is following international accounting standards, yet they are subject to interpretation when doing the actual deferments. Furthermore, this does not contradict the fact that the practice improves self-financing as long as NTPC remains in heavy investment mode. The Region states that "NTPC's accounting practice of capitalizing construction costs including financial charges until an asset is put into commercial operation is fully in line with international utility practices. It is a matter of judgement on how overhead is allocated between operations and capital expenditure, but we do not believe that NTPC is unduly loading capital expenditure to show a higher profit. Given NTPC's accounting policies it is normal that the income statements do not include these deferred expenditures. This does not mean that interest due or realized foreign exchange losses are not paid out of internal cash generation." 34 104. Accounts Receivable. In practice NTPC has little recourse over its clients in arrears. It has drawn the maximum from the letters of credit (LCe) approach. To cut electricity is an extreme measure which NTPC is understandably reluctant to initiate. Besides affecting more harshly the end-users than the targeted SEBs, it would result in revenue losses for NTPC in order to force the recovery of previously billed revenues. If the purpose of the current covenant on accounts receivable is to ensure that proper attention is paid to the issue of recovery from the SEBs, the objective has been achieved. To enforce this covenant may, however, prove to be ineffective in improving SEBes' behavior, and risk being counterproductive inasmuch as it deprives the economy of one of the most cost effective source of electricity. NTPC's energy sales will not be handled in a strict commercial fashion until a political consensus to impose financial and commercial discipline in the SEBe emerges. In the meantime alternatives to the accounts receivable covenant ought to be considered. 105. Two alternative covenants are proposed. A current ratio covenant would allow NTPC to balance current liabilities and current assets rather than concentrate all efforts on one item that is only to a limited extent under the utility's control, though it represents 58.8% of current assets in FY91. This covenant would be appropriate to protect NTPC against adverse financial developments affecting its liquidity if it is the priority objective of the Bank. Given that the main problem facing NTPC is of servicing the debt that it will have to contract to carry out the planned investment program, having enough current assets to cover its current liabilities is more crucial for NTPC's medium to long-term sustainability than focusing on whether one item of current assets is recoverable or not. To take into account the persistent nature of the accounts receivable issue, this current ratio could be defined as current assets less arrears of over 6 months divided by current liabilities, and it should be well in excess of 1:1 as was the case in the last four fiscal years (Attachment 8, Table 9). Alternatively, a debt-service coverage ratio covenant would achieve the minimum result of ensuring that NTPC generates enough free cash flows to service its maturing debt. Similarly, this debt-service coverage ratio could be defined as to consider only cash flows after correction for increase in accounts receivable./54 The covenanted floor could even be set at a relatively high level (such as between 1.25 and 1.5:1) to avoid lax responses to liquidity crisis /55. 154 Earnings before Interest and Depreciation (EBID) less Increase in Accounts receivable divided by Interest and Principal Repayments. 15_ The Region interprets this suggestion for a new covenant as a suggestion for NTPC to increase its short-term liabilities to balance higher receivables, and states that "we have great objection to this recommendation which goes against sound utilities and financial management practices. It would also be totally out of line with the Bank's recently formulated policies for lending to the power sector, and be contrary to our efforts to operate the power sector in India on a commercial basis. A debt service ratio (normally defined after taking into account working capital requirements) is indeed a possible alternative, but we consider a self financing covenant more appropriate, because of the need to mobilize more resource from internal cash generation to help financing NT?C's investment program." 35 106. Financial Covenants of Foreign Financiers Although the Saudi Fund for Development (SFD) stipulated the onlending to NTPC through a subsidiary loan agreement, the 1985 loan is not listed in NTPC's balance sheet. Banker Trust (BTCO) prohibited NTPC to "materially change the scope or nature of its business", but it was not ascertained whether the bank was consulted when the Government ordered the spin-off of NTPC's transmission operations to NPTC in 1991. The Saudi Fund agreement was the only one to specifically address the issue of cost overrun financing by putting the onus of resource mobilization on GOI. All foreign financiers agreed to request audited accounts within nine months of the end of the fiscal year, except Banker Trust which stipulated no more than seven months. Also, they all insisted on being treated pari passu with all unsecured debtors. It should be noted, however, that the FY1991 report lists each of the six bond issues as secured by mortgages on all fixed and movable assets of Singrauli, Ramagundam, and Korba despite stipulations to the contrary in various co-financiers' loan agreements.L!6 107. Return on Assets. A rate of return of 9.5% on historical fixed assets in operation (ROA) was covenanted in the Bank's loan and project agreements. Observed rates have been consistently over the targets, which attests of NTPC's ability to generate cash flows out of recently commissioned plants (Attachment 8, Table 10). The return on investment defined by the OMS (ROI-OMS)121 has been around 151 throughout the period. If cash flows are corrected for the increase in accounts receivable, which reduces the available cash flows, the rates were, however, discounted by an average 5.2 points. A more comprehensive ratio, the return on all gross fixed assets whether in operation or not (or Corporate return on investment, ROI)/58 produced data also reported in Table 8 of Attachment 8. Despite a large on-going investment program, NTPC has been able to steadily increase the return on total fixed assets. 108. The gap between nominal and available cash flows is substantial and it is lowering the effective returns on either assets or equity. Yet, since they are late payments rather than uncollectibles to be written off (Attachment 8), the receivables will eventually lift the effective return close or even above the nominal rate whenever they will be resorbed. Given that one third of total fixed assets is still under construction, and assuming no worsening of the arrears situation the estimated ROI under full capacity would be in the 13-15% range, which is consistent with the current ROA. This also compares well with the 10% net return mentioned in the most recent amendment to the Electricity Act of 1948. 109. Return on Equity. The rate of return on equity (ROE) is defined as profits divided by the capital contributed by GOI, reserves and unallocated profits generated by NTPC. Given the low leverage of NTPC (the debt-equity ratio is maintained at about 1:1 by GOI) the ROE cannot be impressive, and thus it is not as good an indicator of performance as the ROI. Despite this caveat, nominal ROE have been above 101 in five out of the last seven years (Attachment 8, Table P56 NTPC's comments (Attachment to the Annex) do not contradict the audit's statement. /57 Operating Margin over Average Net Fixed Assets in Service. /58 Net Profit after taxes plua Depreciation plus all Financial Expenses charged to income divided by the Average Total Gross Fixed Assets (i.e., before depreciation). 36 11). On the other hand, returns corrected for the increase in receivables have been declining. As the respective averages show, the ROE has been affected by the receivables issue more than the ROI (discounted by 4.1 and 2.9 points, respectively) due to the lower equity base relative to fixed assets. GOI has increased recently the ROE allowed to private sector power utilities in order to attract investments into the sector. A consensus has also emerged among the authorities supervising NTPC to raise its ROE to 12%. This target rate would be more in tune with the 12% discount rate used by the Planning Commission for selecting investment projects. 110. Dividend Policy. NTPC has not paid any dividends back to the GOI despite accumulating Rp 23,532 million (US$912 million) of profits over the last seven years. This fact is noted in the Report of the Comptroller and Auditor General of India of 1990 (para. 11.4). GOI's position is that it is a matter of presentation. NTPC could distribute dividends but GOI would have to reinvest them back in the form of equity contributions. Avoiding these transfers simplifies accounting; yet, the drawback is that retained earning are accumulated in Reserves and Surplus whereas Government contributions go into its Capital. Furthermore, NTPC would gain in stature as a domestic borrower in the eye of the general public by distributing dividend in preparation for the eventual issuance of non-voting convertible bonds to better compete vith private borrowers. 111. NTPC's Financial Policy. NTPC has reached its large size (it is India's largest corporate entity in terms of fixed assets) in a record time without jeopardizing or compromising its financial viability, even in spite of the accounts receivable issue. This is a performance that very few utilities in the same situation are able to achieve. The performance is even more impressive since NTPC is still in a major investment mode. A good part of NTPC's above-par performance is to be credited to GOI's original design (e.g., debt-equity ratio set at a conservative 1:1; tariff formula to pass on all investment, operation, and financial costs).159 112. In accordance with the policies prevailing in the Indian power sector, NTPC's revenues have by and large been satisfactory from the financial point of view. However: (i) the pending increase of the minimum ROI required to 12% (or even beyond); (ii) the fact that with respect to international standards, the capitalized operating costs are unusually high, (iii) the desirability of increased transparency through the GOI's receiving a dividend on its investment in NTPC, and (iv) last but not least, a likely radical change in GOI policy towards the sector tbqt would imply the GOI reducing its contributions to the sector, suggest that there is a strong need for the tariff adjustments discussed in Chapter V and for full and timely payment of NTPC's bills. However, under the new government's envisaged policy, these improvements can only be expected if sector mechanisms and in particular the SEBs' financial performance change substantially for the better. L19 The Region emphasizes that "In FY91, NTPC was collecting may be 70 to 75% of the amounts billed; even though it was not necessary to write off the uncollected amounts the cost to NTPC (and the overall economy) in terms of additional working capital requirements and reduction of net internal cash generation or contribution to investment have been considerable. While NTPC has (fortunately) not gone bankrupt, it has certainly affected its overall financial viability." 37 113. Balance Sheet Structure. NTPC's balance sheet is exceptionally strong for a power utility in a developing country, which has impiemented a massive investment program without interruption for almost a decade. The performance has to be appreciated against the backdrop of a structurally weak energy sector in India. 114. Debt-Equity Ratio. The single most important reason for NTPC's good financial situation is the Government guaranteed debt-equity ratio of no more than 1:1, which essentially indexes the equity base onto the new debt mobilized. For every Rupee of new borrowings, the Government eventually transforms half into equity. The result is to reduce NTPC's debt service burden. This ensures that NTPC can display a balance sheet constantly under-leveraged, which enabled it to mobilize more loans. This amounts to capital subsidies to encourage investments and, to that extent, they are justified. This practice makes NTPC highly dependent on continuous capital contributions from the Government to maintain the 1:1 debt-equity ratio. The drawback is that the real cost of funding these investments is understated and thus not fully reflected in the tariffs. It is not proposed that the Bank insist on a change of policy as the present policy protects NTPC against possible debt-servicing problems in the future despite the drawback of under leveraging (see para. 117). However, it is, suggested that tariffs incorporate the true cost of funds as if NTPC had to service the debts, whether converted into equity or not, which are mobilized either directly by NTPC or by the Government on behalf of NTPC. This provision will be triggered whenever the cost of funds (including possible exchange risk) is greater than the guaranteed return on equity of 12%. Grants would not trigger the provision but concessionary resources could because the exchange risk over a long period could work out more than 12% p.a. compounded. 115. Between FY85 and FY91 (the last year for which audited accounts are available), the Government injected new capital every year (albeit not funded by taxes)160 and the subscribed capital increased threefold. During the same period, fixed assets, including plants under construction (WIP), increased 5.5 times. At the end of the period (March 1991), share capital had financed 47.0% of total gross fixed assets (68.8% of the portion in operation). With retained earnings and accumulated depreciation the self-financing ratio was 70.1%. This is a very high figure in both absolute and relative terms. It shows that NTPC was able to generate on its own half as much as the Government contribution. In such a short period, this result is remarkable. Taken year by year, this ratio has been on a declining trend given its unsustainable initial level (92.2% in FY84-FY85). For the last three years, the GOI contribution stabilized at 45-50% of gross fixed assets which was the original target. NTPC has been able to complement the Government capital subsidies with self-financing under its control. The self-financing of works in progress has increased continuously since 1985 from a low 19.8% to 73.0% in FY91. While this is partly due to the leveling-off of NTPC's investments in recent years (for reasons analyzed in 160 A document provided by NTPC shows the budget-financed support of GOI actually declining in the last three years, but other data in the same documents (cash flows, foreign borrowings and power bonds) do not tally with NTPC's audited accounts, hence the net budgetary contribution cannot be ascertained, although NTCP suggested to use audited figures (see Attachment to the Annex). 38 Chapter II) it aiso confirms that NTPC has been more and more independent of lenders for the financing of Its expansion program.L1 116. The capitalization of debts to maintain the debt-equity ratio at or below 1:1 is a clear process, although it was not entirely transparent to some foreign financiers, including the Bank, for several years. From June 1977 to December 1986, US$1,302.2 million of Bank loans and IDA credits which should have been entirely onlent to NTPC yere partly passed as grants in accordance with the 1:1 debt-equity ratio. This lasted undetected for several years although the Grants- in mechanism by the Ministry of Finance is quite clear about the practice. In 1986, the Bank requested GOI to stop transferring its loans as equity, which voided the test of debt-servicing ability. As a result, out of US$2,759.7 million disbursed (net of cancellations and repayments) between June 1977 and March 1991, NTPC's obligation is limited to US$1.0 billion (36.2%). Given the force of Bank loan agreements, the balance of US$1.76 billion should have been de-capitalized back into the loans pool. In 1986, the Bank requested GOI to onlend all Bank and IDA funds to NTPC. As of end March 1991, Bank loans and credits benefiting NTPC amounted to US$2,759.7 million which is equivalent to Rp 54,145.3 million. However, in NTPC's balance sheet, "Loans from GOI", which covers Bank funcs onlent by GOI, was only Rp 19,634.5 million. Assuming that GOI implemented the Bank request to onlend all funds to NTPC from January lst, 1987, Bank funds counted as loans should total US .457.5 million or Rp 28,596.5, thus leaving a discrepancy of Rp 8,962.0 million. It appears therefore that US$456.78 million of Bank loans were still converted to equity after 1987. The fact that these repeated breaches of Loan Agreements were not enforced is not mentioned in any of the PCRs reviewed. 117. The counterpoint of the favorable debt-equity ratio is that NTPC is under- leveraged. Since 001 equity is partly financed with budget resources, it is not an optimum allocation of tax rupees when NTPC is able to generate over 10.0% return on total fixed assets (including 32% of plants under construction and after discounting for the accounts receivable). This yield is greater than the cost of tax-free power bonds, and it would save on subsidies if NTPC was issuing bonds instead of getting tax-financed equity. The conservative financial policy followed by GOI was justified as long as NTPC was launching a series of ambitious investments. Now that expenditures are not as massive, consideration could be given to relaxing this limitation. Given the positive self-financing this would not jeopardize NTPC's financial equilibrium. It would have the advantage of recognizing all borrowings according to their nature of having to be repaid as well as their corresponding cost (although concessionary aid may be charged by GOI at market rates). The new GOI policy which limits more severely its assistance to the public sector offers the opportunity to test the feasibility of changes in NTPC's financing plan: namely shifting its reliance from GOI's injection of equity to internal cash generation end borrowing on the financial market. 118. Another weakness of the current financial policy is the costing practice of investment projects which implies built-in financing gaps. Government regulations demand that investment costs be reported without price contingencies, thus assuming no inflation, contrary to the reality. Since price increases are fl NTCP explains (Attachment to the Annex) that there is no discrepancy because the changeover to full onlending of Bank/1DA funds took effect only from 1987 on. 39 not factored into the initial financing plan, the latter is never closed, forcing NTPC to mobilize additional resources to finance what is considered "cost overruns" by Indian definition, but is not. Indeed, with external co-financiers such as the Bank, NTPC deals on the basis of costs including price contingencies and thus is left only with the problem of financing changes in project scope and delays. 119. Provisions for Arrears. Provisions are mostly to cover doubtful debts arising from arrears on sales payments. The provisions have increased rapidly (+72.9% p.a. since FY88), but from a low base and are still nominal relative to the amount of arrears. Compared to sales, accumulated provisions were above 1% for the first time in FY91, but the addition to provisions was half of the percentage of sales set aside the previous year (.3% ve .6% in FY90). Given the amount of Government contributions which have been and are still invested into NTPC through the capitalization of borrowings, it is not consistent to interpret the low provisioning of arrears as either imprudent or optimistic. Furthermore, the comprehensive audit of NTPC's accounts to ensure proper accountability for public funds (see para. 142) does not leave room for under-assessing the financial implications of risks. Last, NTPC's financial policy is too conservative (1:1 debt-equity ratio, positive self-financing) to leave any significant exposure uncovered. In other words, there is no reason to necond- guess a consensus of independent auditors (acceptable to the Bank), of Government evaluators, of commercial bankers, and of subscribers of bonds (lately mainly financial institutions) who concluded that NTPC is still a good credit risk. It might be better to focus on additional monitoring indicators which would ensure that NTPC is never in financial jeopardy. 120. Contingent Liabilities. They more than doubled in three years after having increased as much as 194% by March 1990. The main item was "claims against NTPC not recognized as debts" (around 90% of total). If included in the balance sheet, they would have added 3.8% to the current and long-term liabilities, which is not substantial. 121. Audit of NTPC's Accounts. There are two rounds of external audit. One is carried out by private auditors appointed by the Government but paid by NTPC. About 18 man-months divided among four teams needed to cover the wide geographical portfolio of power plants are devoted to this first audit each year. Findings are discussed with NTPC management and unresolved differences are incorporated as qualifications to the accounts. The FY89 report, for example, contained three qualifications concerning: a contingent liability for disputed taxes on two projects in the Madhya Pradesh state; discrepancies in the line materials consumption in the Northern Region; and the need to increase internal audit staffing. The audit report is then submitted to the Audit Board which is the Government body responsible for controlling public sector corporations. A 5-member panel, composed of three staffs from the Audit Department attached to the Ministry of Finance and two experts from the field (i.e., accounting in the power sector) specially appointed, reviews the draft audited transaction accounts. A consensus is reached between NTPC management, the Audit Board panel, and the external auditors on the final presentation of the accounts. This process has to be completed before the end of September (six months after the end of the FY), when NTPC's board is asked to approve the accounts. The field mission for this audit took place at the end of this process and it satisfied itself of its thoroughness. It could even be argued that the auditing of NTPC is more than adequate and somewhat redundant inasmuch as the second round does 40 not add much to the mandated external audit done by CPAs, except for specific accountability tests of public funds. 122. In addition, once every five years, public corporations are subjected tG a Comprehensive Appraisal which is comparable in substance to this audit. In 1991, it was the first time for NTPC given that it started operations on a large scale in FY85. The appraisal process carried out by the same Audit Board, which audits the accounts, started in 1990. It involved sending the draft report to the Ministry of Power, then to the Controller General, then to the President, and finally to Parliament. In all it takes two years and the field mission for this audit occurred before the last stage. Only six pages of the report were devoted to assessing NTPC's financial performance as the focus was mainly on accounting for the large investments carried out by NTPC since its establishment. 123. Conclusions on the Overall Financial Situation. NTPC's financial health was acceptable at the time of the field mission for this Audit.Lj2 NTPC is following a conservative financial policy of recognizing all financial costs according to standard accounting practices, and of passing them on through tariff adjustments. Whether the arrears threaten the sustainability of NTPC's operations depends on the horizon chosen. NTPC's creditworthiness is not currently in jeopardy -by the late payment pattern of some SEBs as shown by its current ratio. The structure of the balance sheet is favorable. Solvency is not an issue at this time. The process of central appropriation of funds earmarked to the states to pay for arrears of their SEBes is not sound since it is dependent on the fluctuations in public expenditures policies and as such introduces uncertainty in the financing of new investments, and the sustainability of NTPC's operations. NTPC will be much more on its own than in the past as far as resources mobilization is concerned. It is, therefore, recommended that the Bank obtain assurances that the corporate plan for the next decade is fully funded even after debt service and refinancing. Along with its increased financial responsibility, NTPC must be given additional leeway in the formulation and the financing of its investment plan and in the design and management of its sales contracts with the SEB9. 124. Conclusions on the Arrears Issue. The arrears allowed for covenant purpose might be increased to be better adjusted to NTPC's billing and collection cycle. A special category of arrears would be isolated: those corresponding to the 3-4 SEBes chronically in payment difficulty. The outstanding amount of these arrears of over 6 months should then be fully financed by either self-financed provisions, short-term loans from commercial banks, or by the Government-ordered reallocation of budget funds earmarked to the States of SEB residency. Whenever the SEBs would catch up with their arrears, NTPC would bring the excess provision into the income statement, repay the commercial banks, or park the Government offsetting funds into reserves. 125. Alternative Financial Covenants. The objective of monitoring NTPC's financial viability would be better served by covenants aimed at indicators which are under its control, such as the current ratio which can be rebalanced by raising cash through borrowings or sale of assets. To summarize NTPC's financial performance against an accounts receivable benchmark is inadequate Lecause it is too narrow. A current ratio covenant or, alternatively, a debt-service ratio L16 The statement that "NTPC is in good financial health" (para. 22) is not shared by the Region because of the low collection ratio. 41 covenant would be more appropriate. Given that the main problem facing it is of servicing its debt, having enough current assets to cover its current liabilities is more crucial for NTPC's medium to long-term sustainability than focusing on whether one item of current assets is recoverable or not. A current ratio, defined to exclude accounts receivable of over six months, should cover more than 1.2 times current liabilities to avoid lax responses to liquidity crises. Additionally, a 1.25 minimum debt-service coverage ratio would achieve the minimum result of ensuring that NTPC generates enough free cash flows to service its maturing debt. 126. Outlook on Resource Mobilization. The outlook for mobilizing resources, either new funds or refinancing, looks difficult because of the scarcity of domestic loan funds with the economy in an adjustment phase, the rise in interest rates and the disappearance of the U.S.S.R. as a major financier of power plants. Quality leveraging could be achieved by having NTPC borrowing abroad from commercial sources on the strength of its balance sheet. The benefit for the economy would be to free up scarce domestic resources which could be used to finance other capital expenditures. The drawback for NTPC would be to increase its exposure to the exchange risk which, if adverse, increases the total cost of funds. In exchange for the fungibility benefits accruing to the economy, GOI should lessen the uncertainty of the foreign currency risk by absorbing it against a flat premium. 127. Improvement of Financial Disclosure. Financial reporting could be improved by disclosing items which are relevant for assessing NTPC's exposure to risks and its cash flow generation capacity. The external audit reports of NTPC's accounts would acquire increased relevance if they identified on separate lines the following items - the outstanding exchange risk on foreign debts (not disclosed currently); - the accumulated interest during construction (IDC) on fixed assets (only the yearly increment is shown in the income statement); - the operating costs capitalized under the works in progress (same); - the debt falling due in the current liabilities (it is currently a footnote on the loan funds schedule). 128. Streamlining of External Audit. The external audit process could be lightened up by entrusting the current external auditors with the full responsibility of finalizing NTPC's accounts for public disclosure. If at all possible in the Indian context, the Audit Board could limit its intervention to a three-year overall evaluation on the model of its 1991 Report. The gain of time could be reflected in an earlier date for the issuing of NTPC's annual report or at the least for the circulation of the audit report to its financiers. 42 VI. ENVIROMMNTAL ISSUES A. Background 129. Of the thirteen NTPC projects which the Bank's Board of Director. approved between 1977 (Singrauli 1) and 1987 (Talcher) nine -- among these the four operations audited here -- had as their main physical component a stage of a mine mouth coal fired steam power plant, i.e. a facility that has a potential of seriously affecting the environment at and around the plant site. These operations also covered the construction of associated transmission facilities which were found both ex-ante and ex-poet to have limited detrimental environmental impact. The other projects includeds (I) three gas-fired combined cycle plants, which are relatively problem-free from the environmental point of view; (ii) a coal fired steam plant near Delhi for which the futl is to be supplied by rail from distant sources, and (iii) major transmission facilities not directly associated with a generation project. The latter installations were found to involve only minor detrimental environmental impact in the audited projects. B. Early Development 130. In the mid-seventies I.e at the early stages of the Bank's involvement in NTPC, environmental consciousness was still at an early stage of development. Within the Bank, the systematic consideration of the projects' environmental impact did not go back more than four years. Further, the socio-economic issues took a back seat with respect to the physical effects and hence the main focus was on avoiding negative impact through appropriate design of the physical project components and through proper operation rules. Therefore, it is not surprising that all SARs for the thermal projects approved until the mid 1980s listed as the main issues to be addressed: (i) plant location as a major factor affecting health and environment of plant personnel and their families; (ii) stack emissions; (iii) heat dissipation in cooling media; (iv) ash disposal, and (v) occupational safety and health of plant personnel.LL In all cases the SARe further state that the Indian National Committee on Environmental Planning and Coordination of the Department of Science and Technology, the GOI entity responsible at the time for environmental protection had given the green light and that NTPC was complying with the relevant, increasingly stringent environmental quality standards set by the above committee. NTPC satisfactorily carried out all the environmental measures agreed with the Bank. 131. At the time the four audited projects were appraised (i) no resettlement issues were identified and (ii) the Bank did not yet operate on the basis of guidelines for such measures. Therefore, it is fair to state that the NTPC projects reviewed here took into account what at the time was known about these issues and what could reasonably be expected to occur in the given environment. It is important to note that the dominant socio-economic issues that emerged in the context of the projects concerned (i) resettlement in the mining area and (i) public health in the agglomerations surrounding the plante, i.e. in areas over which ITPC has little control. Further, these impacts are (i) not related to the plants themselves but rather to the mines or even to further removed ,#, See e.g. SAR Farakka II, paras 3.15-3.161 all previous SAR. for NTPC thermal plant projects state the same points with adjustments to the plant and site characteristics. 43 facilities or (ii) the consequences of the influx of people only very indirectly related to the power plants themselves. As soon as the problems materialized, the Bank used its best efforts to secure suitable action by Indian authorities. 132. These developments showed that, on the one hand, the socio-economic impact in the areas adjacent to plants, needs a thorough assessment at the project * design stage and a careful control during construction and operation. On the other hand, the difficulties demonstrated, as discussed in the PCRe for Ramagundam I and Singrauli Illf4, that there is a limit to the infrastructure and services an organization like NTPC i. able to provide for the people that settle in the general area of the organization's facilities, but whose activities are essentially unrelated to construction and operation of the plants. Thus, there is an evident need for a transparent and balanced distribution between local authorities and the owner of the facilities of the responsibilities for limiting the negative socio-economic impact of regional development of which the above facilities only represent a minor part. C. Post-1985 Development 133. In the mid-eighties against a background of ever growing environmental awareness within the 001, NTPC, and the Bank, these organizations deepened their approach to environmental protection, in general, and to he issues related to NTPC's operations, in particular. In this context, , 1 GOY teansferred the responsibility for dealing with such issues to a new full ledged Department of Environment within the Ministry of Environment, Forests, and Wildlife, which soon made the preparation of an Environmental Impact Assessment an integral part of the preparation of projects such as those of NTPC, which have to be submitted to GOI clearance. Soon the states followed suit and created their own environmental units and procedures for assuring environmental compatibility of design and operation of major facilities on their territory. As a result of this plurality of responsible agencies, projects now need to obtain multiple clearances from a multiplicity of agencies having varying standards and different procedures. Thus, there is an urgent need for the organizations at GOI and state to strengthen coordination among themselves and to streamline their procedures. D. The Bank's Role 134. While the Bank, from the start of its involvement in NTPC, had a fruitful dialogue with NTPC and the 001 on the environmental issues raised by the developing utility's projects, its concern and support became especially intensive in connection with the difficulties encountered at Singrauli and Ramagundam. As a consequence, it helped induce NTPC to deal more comprehensively, at an early stage of project preparation, with environmental project issues, especially those related to resettlement. The 1987 Talcher project was the first Bank operation with NTPC that benefitted from this new approach. It was also under the auspices of the Bank that NTPC prepared an Environmental Action Program including full environmental impact assessments for existing and future plants as well as the implementation of the measures these assessments called for. The Bank sponsored in particular the study of the existing and planned developments in the Lake Rihand area at the border between Uttar Pradesh and Madhya Pradesh states, where NTPC's Singrauli (2000 MW), Rihand 164 See e.g. PCR Singrauli II in the Annex to the present report, Part I, para. 16. 44 (1000 MW with planned additions), and Vindhyachal (840 MW also with further units planned) plants and their associated coal mines as well as several further industries (power, aluminum, chemical, and cement plants, etc) are either already operating or at the planning stage. This concentration of facilities with a high potential for negatively affecting the environment made the assessment particularly urgent. Electricit4 de France (EdF) International and Groupe Charbonnages de France recently completed this study,15 which concludes that the direct environmental impact of existing and planned power facilities on air, water, and soil would be limited (indeed much more limited than had been feared at the inception of the study) in the short and medium term, but that the land use and socio-economic issues as well as the pollution genetated by new industries called for a more comprehensive planning at regional level. The report also sets forth the actions and strategies that would lead to reasonable environmental protection.Li6 135. Today, India's approach (both at GOI and state level) to environmental protection is still very much in evolution. The most recent Bank-sponsored study of "Long Term Issues in the Power Sector"Jk7 inter alia sets forth the GOI' dilemma rooted in the need to continue, even if energy conservation measures (of which at present only few are under implementation) prove successful, the fast increase of capacity burning coal, the most abundant fuel locally available. One measure identified to reduce emissions country-wide, would be to apply more strictly the existing ervironmental regulations. Furthermore, there is a vehement debate going on concerning the need to control sulphur dioxide (SO.). The Bank is also concerned that there still is little recognition in India for the problems posed by nitrogen oxide (NO.) and carbon dinxide (C02) emissions. The Bank-sponsored study of the Lake Rihand area (para. 134) should help increase awareness of the issues related to these pollutants. With respect to the sulfur dioxide emissions, more recent NTPC projects expressly allow for the installation of flue gas deeulphurization, should that become necessary. In any event, the NTPC plants in their present state would already comply with most of the additional regulations that can reasonably be expected and, where they would not, the necessary adjustments should not present unsurmountable difficulties. By contrast, it seems, at least in the Lake Rihand area, that the coal mines which are associated with the plants but not under the utility's control still present problems,i8 which the environmental authorities of the states and the Centre have to address urgently. The Bank should follow up on their resolution. 136. The audit mission, despite its efforts and those of the Bank's Resident Mission in Delhi, was unable to discuss the Bank's role with the GOI authorities directly responsible for environmental protection. However, OED understands from its own limited observations and from the testimony of GOI officers not directly involved in environmental protection as well as frow the discussions it had with /65 Environmental Study of Singrauli Area, July 1991, by Electricite de France and Groups Charbonnages de France. /66 Loc. cit. Main Report, pp. 16-17. Lf7 India: Long Term Issuf - the Power Sector, draft dated July 23, 1991, three volumes. L68 Environmentai Study of Singrauli Area, 1991, Main Report, pp. 99 to 101. 45 NTPC's specialists that the Bank's involvement in the environmental aspects of NTPC projects has helped and is appreciated. VII. CONCLUSIONS AND LESSONS 137. The Bank Group invested US$1.0 billion in the four projects that are the basis of this audit and a total of US$4.0 billion in the NTPC projects it has financed during the period 1977-1987. Has it gotten its money's worth? Insofar as the projects themselves are concerned, the answer is clearly yes in that the immediate physical and instituti.onal objectives sought by the Bank were substantially accomplished, as the PCRs point out. What was undoubtedly a highly innovative and high risk venture by the Bank and the GOI, involving the introduction of new technology on a massive scale by a new institution, has been carried through with a success that reflects much credit on the Borrower, the Beneficiary, and the Bank. 138. Yet, looked at in the sector context, the answer to whether the Bank's involvement with NTPC has been fruitful is an almost equally resounding no. As successful as it has been, NTPC remains an exception (and for how long?); the Bank's hopes that it would, by example and by strengthening the hand of the GOI, prove an effective vehicle for sector reform have been largely disappointed. Indeed, the reverse has happened; the sector's financial weakness is putting NTPC at risk, leading the Bank to refrain -rom lending te this utility since 1987 and raising doubts about the long term sustainability of project benefits. The audit concludes that the roots of the dichotomy between the Bank's succeas in project terms and its disappointment on the sector side lie principally in the division of responsibility for power between the Centre and the statcc. that largely impedes effective unilateral action from the Centre. A. Accomplishments 139. The two main objectives in the Bank's NTPC projects, i.e. (i) acceleration of the installation of generation and transmission plant and (ii) the creation of a strong central utility were achieved. 140. First, the growth rate of installed capacity in India increased from some 5% per year before 1975 to about 8% per annum in the 1v80s, when the energy generation capability grew even at 9% per year. NTPC's plant commissioned in the period FY82-FY91 represents some 30% of the sector's capacity additions over the period and 15% of the sector's total installed capacity at the end of the period.L69 Through the high availability and good efficiency of its plants, NTPC's performance had also a positive influence on the overall quality of supply in the country. 141. Further, the projects were a major factor in the creation of a strong and efficient central institution that by the start of the 1990s was in a position to plan, design, construct, and operate large thermal power plants and extensive high voltage transmission facilities. In the latter aspect, NTPC's performance was sufficiently convincing to permit the GOI tc separate the utility's /171 SAR, Power Utilities Efficiency Improvement Project dated January 3, 1992, Annex 1.1. 46 departments dealing with all aspects of primary transmission from the company and to set them up as the nucleus of the newly created central transmission utility (NPTC). 142. NTPC has become an example to follow (but until now actually followed only in a few inscances) in Indian power sector activities inter alia throught - the emphasis on corporate planning which allows management to take a long term strategic approach; - the systems approach as a primary management tool making it possible, at an early stage, to combine a high degree of centralization with adequate on-site authority, and, hopefully at a later stage, a reasonable measure of decentralization; - the establishment of a systematic quality assurance programs - the build-up of sufficient high quality in-house engineering capability to cover most of the company's needs, which permits the utility (i) to be fully accountable for its technical development and (ii) to identify technical innovation that it could apply to its benefit and that of the sector; - the implementation of a comprehensive manpower development program, that, although the remuneration NTPC can offer is not that much different from that in other GOI organizations, contributed to make the utility attractive for the best professionals, thus keeping the quality of staff at a very high level; and - the introduction of Memoranda of Understanding (MOUs) between the 001 and the utility representing a kind of contract defining the specific performance targets the utility would have to achieve over the next fiscal year on the one hand and the GOI's support to the company on the other. 143. With NTPC, the GOI has now a major asset which will strengthen its hand in its discussions with the states on needed institutional development discussed below (paras. 147-150). B. Shortcomings 144. The NTPC projects, together with those of other central agencies and of the SEBs, did not yet bring an elimination of power shortages in India within eight. Even an implementation of the projects within the original schedules would not have brought the sector substantially nearer to meeting demand. Further, expecting that NTPC should have been envisaged to grow even faster than planned in the mid-seventies, would have been utterly unrealistic, as the actual growth achieved already has been a major success. 145. A significant shortcoming of the operations reviewed was the underestimation of the cost of the projects following Korba 1, which masked the severity of the discrepancy between tariffs and aconomic costs of NTPC power (Chapter IV) and induced the Bank to assign for a long time low priority to the issue of NTPC's tariffs. At first sight (i.e. mainly from NTPC's point of view), the utility's recovery of financial costs seemed adequate. However, from the 47 point of view of the GOI, it should have been perceived as far less so. Indeed, inter alia, the important amounts of operating costs that India's accounting rules permit the utility to capitalize and the fact that NTPC does not pay dividends on the large 001 contributions tend to make tariff performance look better than it actually is, as they add to the financial burden, the GOI may in the future not be in a position to continue carrying in full. 146. The main shortfalls in the implementation of the Bank projects were with respect to the broad sector objectives not directly related to the projects, which the Bank made increasingly explicit in the succession of projects audited here and in those immediately following (see Chapter II)s (i) the introduction of long term system planning (and operation) on a nationwide least cost basis; (ii) improvements in sector organization and training, and, in particular, (iii) strengthening the finances of the SEBs. Even where NTPC did not perform as expected (especially in the areas of tariffs and accounts receivable), this inadequacy was largely related to the lack of progress on sector regulation and, in particular, on cost recovery in the sector as a whole both at bulk and retail level. In the 1970s and the early 1980s, the Bank's emphasis on adequate tariffs lessened, not so much in the objectives but in the enforcement of the measures agreed to reach these goals. Recently, the issue acquired again the high profile it deserves, a fact confirmed by the Board of Director's November 1992 approval of a sector policy paper.,LMQ In the context of NTPC, until the mid-1980s, the Bank had not stressed the issue, in part because (see para. 89) it had erroneously thought that the utility's revenue per kWh was near LRMC. More recently, Bank lending both to NTPC and other sector entities has been made contingent upon improvement in cost recovery. This should continue with the qualifications raised concerning NTPC's control of its accounts receivable (see para. 104). C. The Basis for Sector Ipprovement 147. As already discussed in Chapter III, a substantial part of the shortfalls of the NTPC projects with respect to their objectives (implicit or explicit) is related to the fact that the sector institutions have to work within a federal setup reflecting the Constitution transforming minor adjustments in the relations between central and state institutions into highly political issues. 148. Most of what could be achieved in terms of sector structure and mechanisms with the traditional emphasis on central power has been achieved. However, it clearly emerges from this review that progress must be made to establish in the SEBs, the financial and commercial discipline which is needed to ensure the sustainability of the benefits derived from the Bank's huge investment in NTPC. The quest for more efficiency and transparency in the power sector is all the more important as the GOI is looking (i) for more self-sufficiency in the sector /Z The Bank's Role in the Electric Power Sector: Policies for Effective Institutional, Regulatory, and Financial Reform; Board Paper dated 10/15/92. 48 that would allow the GOI to reduce its financial obligations in this area and (ii) for more private investment in public electricity suply. 149. In view of the limited follow-up that the 1980 study, prepared by the Committee on Power, and discussions of sector issues have elicited, it is highly unlikely that further studies would by themselves lead to actual progress. Action has now to proceed, for some time, mainly at the political level. 150. The following has to be seen as a few very general ideas distilled from experience in other countries where regionalism is a major force. In India, the next steps could be taken in a forum bringing together the GOI and the state governments (not only the SEBs). This forum could be similar to that which recently adopted the conclusions on NTPC's tariffs set forth by the K.P. Rao Committee. A short term objectivewould be to secure consensus for institutional change, on the basis of a reasonably formalized and structured approach. Ultimately, this process should lead to a pact between the GOI and the states on the way the sector should work in the medium term and what intermediary steps should be taken in the short run. This political body would have to be assisted by a "technical" group that would ensure the operational feasibility of the solutions contemplated in the forum. 151. Besides immediate issues, the forum would have to deal with: - a confirmation or re-definition of the set of economic and management objectives for the sector at national, regional, and state level, with emphasis on consistency and comprehensiveness; and - a review of the setup and mechanisms of the sector to achieve the above goals and the ways to improve them especially in terms of efficiency and transparency; it seems of special importance to clarify& (i) where and how social criteria should be introduced; (ii) the balance between rights and obligations of the sector entities, in particula? that between the autonomy of the utilities and their accountability; (iii) the principles for measuring performance, the incentives to be applied, and (iv) the role of the REBs which is bound to increase. D. Lessons Learned 152. The principal lessons are as follows: - Enclave Projects: Where favorable conditions exist, as they did in India, the establishment of new institutions free of established sector constraints can be a highly effective means of getting particular jobs done. However, even if successful, the enclave is unlikely to serve as a model for sector reform and will not long escape the effects of inadequate policies determining the performance of the sector at large. - Support for Central Institutions: Bank support for NTPC has proved ineffective as a vehicle for sector reform, largely because it has not provided leverage with the states. Support for the Centre will help achieve sector objectives only if directly linked to SEB reform. - Public Sector Utilities: When free to do so, public utilities in India can make effective use of the latest technology and management techniques 49 and achieve high standards of efficiency in design, management, and operation of major power projects. Supply Side Stratega Massive and efficient investment by NTPC, cannot alone eliminate India's power shortages. India needs a strategy that gives at least equal priority to demand management and to increasing resources use efficiency. Shared Views on Main Issues: A pre-requisite for success seems to be a broad vision shared by all parties of the desirable development to be achieved and the means to achieve it. Conditionality should complement but cannot replace such a broad common outlook. The success of the build- up of NTPC where the views of the parties coincided and failure to achieve the sectoral objectives where there was substantial divergence between the GOI's and the Bank's outlook, are cases in point.LLI The Bank's Pervasive Optimism: PRa, SARs, and documents addressed to Senior Management tended to project a pervasively optimistic view of the project, of its sectoral environment, of the difficulties the proposed or on-going operations were facing, of the risks involved, and of the tima and cost required to implement measures (especially at the sector level) crucial to the success of the project.fl It is evident that, without a good dose of optimism, very little can be achieved in a difficult context. Further, an official document of the Bank which over- emphasizes some risks, may enhance their materialization. e.g., stating that sub-soil conditions represent a major potential obstacle to timely project completion provides ex-ante an excuse for delays and may weaken the commitment to avoid such delays; emphasizing that the environment in a country is unfavorable to tariff adjustments add an obstacle on the way to reach the objective. This stated, there is a world of difference between a reasonably supportive and optimistic outlook and the unrealistic one found in several of the presentations for the projects audited here. 71 See also para. 11.3 of NTPC's comments in the Annex. 1L. See in particular Section 2.3 of Colombia: Power Sector and the World Bank (1970-1987), OED, June 1990 Report No. 8893. 51 Attacbaant 1 UIDIA: 90ER PECTOR OPERATIONS L/C No. Project Amunt Diab. Appr. Closing Eval. ---Illion US$--- Date Date Statue 1 23 First DVC: Bokaro-Konar 18.5 17.6 Apr-50 Feb-56 Pro-OED 1 72 Second DVC Malthon-Panhot 19.5 10.5 Jan-53 Dec-60 Pre-OED 1 106 Trbay (TEC) 16.2 13.9 RØV-54 Sep-66 Pre-OED 1 164 Trmbay Extenoion (TEC) 9.8 9.7 May-57 Sep-66 Pre-OED 1 203 Third DVC, Durgapur 25.0 22.0 Jul-58 Jun-65 Pre-OED 1 223 Koyna Pover 25.0 18.7 Apr.59 Apr-65 Pro-OED c 19 4th DVC, Durgapur 21.9 19.9 Feb-62 De-69 Pre-OED c 24 2nd. Ko7ma 21.1 21.1 Aug-62 Sep-70 Pre-OED c 37 Kotbagudem 24.1 24.1 Bay-63 Dec-68 Pre-OED 1 416 Tranam ion 70.0 50.0 JuM-65 Dec-70 Pre-OED 1 417 Kothagudm II 14.0 13.8 Jun-65 De-70 Pre-OED c 89 Bea Equipænt 26.6 26.3 Jua-66 Jua-74 Bo Eval. c 242 Transmi.ion II 75.0 72.9 Apr-71 Mar-77 PPAR 3006 c 377 Transmi.oion III 85.0 85.0 Nar-73 Sep-78 PCR 7652 c 572 Rural Eectrification 57.0 57.0 Jul-75 Dee-80 PPAR 6307 c 604 Trani.uion IV 150.0 149.9 Jan-76 Jua-83 PCR 7654 c 685 Singrauli I (WTMC) 150.0 150.0 Har-77 Jua-84 PPAR 6784 c 793 Korba I (MTMC) 200.0 199.9 Apr-78 Nar-86 1CR 6855 1 1549 Trombay III (TEC) 105.0 105.0 Apr-78 Dee-84 PCR 6253 c 874 Ramaguadom I (MTPC) 200.0 200.0 Jan-79 Des-85 PCR 8641 1 1648 Ramagundam I (NTC) 50.0 45.6 Jan-79 Jua-84 PCR 8641 c 911 2nd. Rural Electrification 175.0 171.7 ay-79 Nar-84 PPAR 6307 c 1027 Singrauli II (KTMC) 300.0 300.0 Kay-80 Jan-89 PCR 9162 c 1053 Farakka I (NMTC) 225.0 225.0 Jun-80 Des-88 PCR 9168 1 1887 Farakka I (HTMC) 25.0 2.5 Jun-80 Jun-89 PCR 9168 c 1172 Korba II (NTMC) 400.0 380.3 Jul-81 De-90 1 2076 Ramaguna.~ II (NTHC) 300.0 290.4 Dec-81 Jua-90 1 2165 Third Rural Electrification 304.5 295.5 JUn-82 Jun-88 c 1356 Upper Indravatt Hydro 170.0 161.3 Way-83 Jun-91 1 2278 Upper Indravatf Hydro 156.4 156.0 Nay-83 Jon-91 1 2283 Central Transa.~eion (UTC) 250.7 118.4 Way-83 mar-91 0 F020 Indira Sarovar Hydro 13.0 0.7 May-84 Jun-92 1. 2416 Indira Sarovar Hydro 17.4 5.0 May-84 Jun-92 1 2442 Farakka II (NTC) 300.8 180.1 Jun-84 Jan-91 1 2452 Trombay IV (TEC) 135.4 124.6 JUa-84 Jun-91 1 2544 Chandrapur Themal 300.0 174.4 Kay-s Dec-92 1 2555 Rh.a Tranmmi.sion (VTMC) 250.0 190.9 may-ss Dec-90 a 1613 Indira Sar=var Hydro 13.2 0.0 Jua-85 Jun-92 1 2582 Kerala 176.0 37.4 JUa-85 Sep-91 1 2674 Ccabined Cyele (NTC) 485.0 448.4 Apr-86 Dae-91 1 2827 Karataka 330.0 40.7 Jua-87 Jaa-95 1 2844 National Capital (MTMC) 485.0 185.7 Jun-87 Jan-95 1 2845 Talcher (NTPC) 375.0 47.7 Jun-87 Har-96 1 2938 2ad. Karnataka 260.0 26.7 may-88 Des-96 i 2957 Uttar Pradeah 350.0 47.1 JUa-88 Des-96 1 3024 Nathpa Jhakr± 485.0 36.7 Kar-89 Des-97 1 3096 aharaøhtra 400.0 23.4 JUn-89 De-96 1 3237 Northern Reg. Tranam. (NUIC) 485.0 22.3 Jan-90 Sep-98 1 3239 Private Pover Util. (TEC) 98.0 0.0 JUn-90 Jan-95 1 3344 Private Pover Util. (0>ba) 200.0 32.6 JUn-91 Des-96 NTC and TEC projects are characteise" as such in the Project columm. NTPC Organisation Structure - Initial Phase CHAIRMAN & bMAGINM CIRECICR1~EC CORPOIRATER LANNING CORPIRATE I~EI X AONSERVIES PER AONICNc ADMINISRMTION Iz. BADARPUR SINGRAUU KORBA RAMAGUNDAM FARAlA TIERMAL SuPER SUPER SUPER sum TRANSMISSION POWER THERMAL I7ERMAL THERMAL THERMAL SvATMS STATION POWER POWER POWER POWER 0IVISION anoa/ PRRCTPROJC PCECT PROJECT Initial Site Organisation GENERAL MANAGER T0 PLANNING & SYScTE lE "S. PERSONNEL FINANCE MPVAATION ISSION CORCTVION &A"WITI FIELD ENGG AND AND MATLRIALS VIGILANCE ANDLIEWS QUALITY ADMINISTRAT., ACCOUNTS MAtNTENANCEO SURVE&LANCE REGIONAL HEADQUARTERS CORPORATE HEADQUARTERS L r-Il I. alp E jo qÉe Z 1.52*Dyli NTPC Organisation Structure - 1991 CHAIRMIAN & M4AN4AOING- [Z DIRECTRM ~AE.CGN. SO.f<J MER.IO OC P ER0t64E~L. FO tø~ . FI 8 c NWR r R sg O A LVCO F 0A I G +R.,.---~~ ~~ I"ý FA e-«S- Is----P + - C. EX P. CDIRci. EXE UIR . EC I.-EXECDi..E.CIR P D A A y K v G R U 0 F A T R L N4 D H N N . L R A u A A 9 c D DA A 6 A A C c A R N R N s A o Y V> A v A A DA A U K L A G E P 6 G A u N u c S Ci C R 0 R AA R R S 5 B B T P B A G A A E E A T A P P L A m M T T ST s B s T 4 F, T r i I 5 P P FPPF F,F F P P L i - F 1 55 Attachment 3 Page 1 of 5 INDIA: BANK GROUP SUPPORTED NTC AND TATA THERAL POWER PROJECTS ANALYSIS OF TIME SCHEDULES 1. The table on Page 2 of the present attachment sets forth the main data permitting to compare the planned with the actual implementation times of a series of NTPC and TATA thermal plants in India with unit sizes of 200 and 500 MW. The last block presents the corresponding data for a Bank project in Indonesia, where 400 NW units were installed. The list only shows plants that were parts of Bank Group supported projects. The picture would change somewhat with respect to the construction times proper, if the data for NTPCs Rihand (2x500NW) and the Vindhyachal (6x2lONW) projects, supported by UK and USSR respectively, were included. Indeed, both projects suffered delays during project execution which were substantially longer than those that occurred in connection with the great majority of the Bank Group supported projects. However, the list excludes the non-Bank projects, as some of the key data that would have allowed the same comparisons as those carried out here were missing. The definition of the main columns are as follows: - Columns 3 and A list the dates of construction start defined as those of the award of the main contracts (i.e. those for the boilers and the turbo- generators). If the award for the two contracts took place at substantially different points in time, the later date is considered as the start of construction. - Columns 5 and 6 set forth the dates the units were considered as completed. As the SARs are not always clear about the definition of this date, i.e whether the unit is considered completed when successfully synchronized for the first time or when commercial operation starts, or at any point in time in between, the present comparison assumes that a unit is completed at first synchronization with the grid. Imlementation Time 2. NTPC's claim that it is highly successful in implementing its projects in accordance with its time schedules has been often repeated, (see e.g. para. 3.18 of the SAR for Farakka II). As this, at first sight, does not agree with the project results, which in many cases show that there were substantial delays with respect to the appraisal schedules, OED carried out the more detailed analysis set forth in the present attachment, which also covers the TEC projects and the first stage of the Suralaya project in Indonesia to permit a measure of comparison. 56 Attachment 3 Page 2 of 5 Por.11ants 3. Except at Farakka, where the contractor's labor relations problems and the civil unrest in the region led to substantial delays, NTPC was able to install * the 200 MW units included in Bank Group projects about in the time foreseen at appraisal, i.e. within 48 months of the award of the main contracts for the first unit and at intervals of six months for subsequent units. This seems also to be the case for the four 210 MW units included in the National Capital Power Project (Loan 2844) to be completed between late 1991 and mid 1993, but a similar performance was not possible for the Vindhyachal units installed under cooperation agreements between India and the Soviet Union and where planned installation times were exceeded by 5 to 14 months. 4. NTPC succeeded in installing most of the 500 MW units included in Bank Group projects in a time substantially shorter than the 60 months from main contract award anticipated for the first unit and the 72 and 84 months envisaged for the follow-on units of a sequence.L1 However, in the case of the Rihand power plant constructed under a cooperation agreement between the governments of UK and India, delays of the order of one year were incurred during the installLtion of the two 500 MW units. In the case of TEC projects, the installation times were 64 and 63 months respectively compared to an estimate of 51 to 52 months calculated from the award of the boiler contract, the longer time for the first of these units being largely related to factors not under the utility's control (deficient supplies like bent tubes, wrong sequences of delivery, fire aboard a ship transporting vital equipment, etc). Thus, it would seem that the 60 months of basic construction time assumed at the appraisals of the NTPC projects were on the high side taking into account normal time contingencies. However, it appears that the times assumed in the SARs for the TEC projects were definitely too short. 5. The combined cycle plants at Anta (413 MW) and Auraiya (652 MW) were installed under turnkey contracts well within the program set forth in the SAR for the project associated with the Bank's Combined Cycle Power Project (Loan 2674-IN). Indeed, it seems that at appraisal, the interval between completion of the last gas turbine and that of the last steam unit was overestimated by at least three months. 6. The main reason why, in spite of the reAsonably good performance outlined in the previous points, the NTPC generation projects supported by the World Bank Group except the Anta and Auraiya plants (and, hopefully, the Dadri plant included in the National Capital Power Project), are late with respect to the schedules set forth in the SARs, lies in the fact that final design, preparation of the bidding documents, tendering, bid analysis, and the award of the contracts has most of the time taken much longer than anticipated at appraisal. In the case of the first unit installed under TEC's Trombay III project, practically no Ll It is, however, evident that installation times will be more than a year longer than planned at appraisal for the two 500 MW units included in the Farakka II Project. The reasons are those given in para.3. 57 Attachment 3 Page 3 of 5 delay was incurred in this phase; however, for the further unit installed under the Trombay IV project, slow progress on contract agreements and approvals compounded by a substantial postponement of the effectiveness of the Bank loan resulted in a three years' delay in starting project execution proper. 7. The conclusions from the above seem to be: * NTPC was by and large highly successful in constructing its power plants within the adequate time schedules that it adopted at the planning stage and that apply for even more developed countries. Further, it seems to have been more successful in this field when it cooperated with the Bank than when it did so with bilateral agencies. - TEC's -erformance was also reasonably good in the construction phase proper, in particular taking into account that the first of the two units which the Bank helped finance was the first 500 MW set ever to be installed in India. - Both NTPC and TEC have to concentrate on shortening the procedures leading to the award of the contracts as far as such procedures are under their control. In the context of the audited projects the GOI contributed to the pre-construction delays by its reluctance to grant the necessary import permits, a problem that was solved in the context of the later projects. Transmission Lines 8. OED found that little can be learned from an analysis of the implementation of transmission facilities associated with the Bank Group supported generation projects. Indeed, the delays incurred in the completion of these elements are, in part, related to the delays in generation plant implementation discussed above and, to a substantial extent to the availability of SEB facilities that were to take over the output from the NTPC plants. In any event, the measured output of the NTPC plants during their early operation suggests that in the vast majority of cases NTPC completed the transmission lines and substations in time to allow a maximum use of the completed plants. 9. A somewhat different picture seems to emerge from the results of the Bank supported NTPC projects that included mostly transmission facilities, as illustrated by the Central Transmission Project (Loan 2283-IN), which suffered delays in excess of four years, largely because (i) major changes in the generating plant programs for the regions covered by the project induced drastic modifications of the corresponding transmission system development and (ii) NTPC was reluctant to start major transmission work not directly related to its power plants without a firm agreement with the beneficiary SEBs on the charges these would have to pay for NTPC transmission services. Less dramatic but still substantial (about 18 months) were the delays NTPC incurred on the implementation of the 500 kV direct current link between Rihand and Delhi, which, in part, was due to slow approval of the routing by the environmental protection agencies. 58 Attachment 3 Page 4 of 5 10. In the case of TEC's Trombay III project, the transmission component was limited to the switchyard at the plant, the construction of which was completed in time for the synchronization of the 500 MW unit. This also seems to apply to thA substantially delayed Trombay IV project. a&Mul8 0 Tlg SCEUL 01 1T am o 231 TS TIE5~fA 7~IE mL^T Project Unit Construction Csi9onng Constructumn Dulay Delay obevatione Stagt (Symbrom.L Tim .. im Start Coet. months =uht@ aanthe Appt. Act. Appr. Act. Appr. Act. <1> <8> <8) <4) <3> <6> <7> <8> <9> <10> <11> si~ i 1 09177 0278 981 08182 40 48 5 0 aam m89 11 03108 1Hift sa 57 3 ånE 0982 08183 60 61 i Stagramli II It 08379 08379 08383 11183 48 så 0 3 (1) MMTC eereleod the. otion offered c aei equipment la co~ktIon with 2AM00M ' 0384 0284 54 54 0 the firat thre. umite <fl ( eyl damaged (M elnerane. bmcc, delpy. 031i. 05380 0l8f :186 12186 39 7 4 Lat appontatnet of co ultamte delayed procurem~nt. Sa M 50 2VI0187 13197 Il 70 9 200 1 1 09178 03179 09183 08188 48 40 6 0 Delaye incurred la preparötiom of biddig docuete and of amord. ZU0388 838 34 SS it 09183 03184 60 60 0 5 1re fl IV 1081 1182 10#86 05817 60 S4 13 -6 Contrec for turbo-gemerator. marded 3 mo=he later thmn thati for 0 M 10387 08 7 . 7on.r.. ba. e.ter mate cosiderun for ..trctio. tert. tos U0l0 f 088 94 75 .9 1 07379 0I80 07183 11183 48 45 7 - Bid evaluation *lom Cook 7 aotli. 5 1 11 0104 011#4 54 81& .3 ' Il 07384 1284 60 38 .3 tv 29 10382 8038a 10187 0638 60 %4 12 .4 3 1aT88 03189 72 62 -10 VI 10389 101l9 84 69 -I3 var~hh 1 8 18180 03381 09304 016 48 55 8 10 UAt alre M auyed ard of ila coutrete 14 moe~h efter bid cpen~ag. & a 200 0 86 ff 1 Conetr en affered frme aor dispotes emd civil mreet. lix etta N1987 87 74 17 IareMa fl IT 0/835 06386 0390 06192 60 75 13 IS Copletion date teutative. Comtructiom still auffero free major 3 a 300 l1 08391 08393 73 84 t2 umcertsatiec,meetated with sh. arse. ~anecob.7le) 1 12186 13386 86389 01389 20 IS 0 -8 U l 06389 0389 0 237 .3 Ia 149 m lit 089 08389 3 9 .3 n9 10389 03190 44 39 .7 ämråt temb.ce3)> 1206 I2ga6 0389 03189 27 27 0 0 4 a i 03 89 07388 89 31 2 S a Mu r 1) iil 07389 08389 8 2 1 19 0989 0989 8 33 0 0990 13389 45 36 -9 VI 12390 06390 48 42 -6 TATA x 09378 10378 12182 01184 S1 64 0 13 inserug took longer. 1 dofic.cot. Fire aboard delivering *hp. 2 z 300 $ f II 10381 1234 0283 03190 532 63 38 at Detyo im effectiveuffe of an m and subequently ta coPtreettmg. Surle 9~a19) 1 OS80 06180 084 12184 46 34 8 8 Civil worke (piling) took loneger then enpectd. > fl a <co.!M 1 03800 06S80 0413 07303 st då 8 5 ccl Colmn 7 - Colmm 5 - Colmin 3 Colum 8 - Colum 6 - Colum 4 Col 9 - Colicn 4 - Colmn 3 Columa 10 - Co 8 - Columm 7 0 ID t-% : 60 Attachment 4 Page 1 of 4 INDIA: COST ANALYSIS OF NTPC AND OTHER PROJECTS 1. Cost analysis in PCRs usually is li-ited to a comparison of actual cost in current terms with the corresponding estiL ;.ted costs including physical and price contingencies. A more qualitative evaluation of the reasons for the differences usually complements this comparison. This also applies to the PCRs reviewad here, which highlight the large increases in Rp. terms suffered by all the projects anlayzed. L1 This reflects to a substantial extent higher local inflation than anticipatea at appraisal and, in some cases, a higher foreign exchange content than expected translating into higher Rp. costs due to the depreciation of the Rp. 2. For some years now, OED, in ths context of the preparation of the Annual Review has carried out an analysis of power and telecommunications projects' costs, which - - though still rathe:: crude - - leads to a somewhat more quantitative judgement on the accuracy of the cost estimates included in the SARs. It uses the actual costs as incurred over tima (if only the total cost is available in the PCR, a gross estimate of annual expenditures may still be much better than nothing), segregated in local and foreign components, and deflates them to the base year of the appraisal cost estimate using e.g. the GDP deflator for the local component and the Manufacturing Unit Value (MUV) index for the foreign component. The result is called here "actual base cost" and compared with the item "base cost plus physical contingencies" of the original es- timate./I The difference between the two values is a rough measure for the accuracy of quantities and unit prices in the original estimate. The increase resulting from inflating "estimated base costs and physical contingencies" using the above indices, leads to a value that, -hen compared to the estimated price contingencies provides a measure to judge the adequacy of the assumptions on inflation and exchange rate developments underlying these allowances. Finally, the difference between these inflated estimated costs (including physical contingencies) and the actu total costs in current terms, often allows drawing some general conclusions ab .t the impact of delays on costs. It is crucial to emphasize that this is mota art than science, but the method is simple and permits, in many cases, to draw at least a few very general semi-quantitative conclusions concerning the relation between estimated and actual project costs. 11 The PCR figures for the percentages of cost overrun differ somewhat from those set forth in Column 8 of Attachment 4 uecause the latter refer to the generating units proper whereas the PCRs show the results for the entire projects. /2 Strictly speaking, tha comparison should be with the estimated base cost- proper (i.e. excluding physical contingencies), but, as the physical contingencies often include an indefinite amount for unspecified cost expected co be actually incurred, this analysis uses estimated base cost increased by the physical contingencies as the basis for comparison. 61 Attachment 4 Page 2 of 4 3. The table on page 4 of the present attachment sets forth the results of the above analysis for the six projects for which, by late 1991, actual costs were available. The table suggests the following conclusions: Singraulf is the only project in which "actual base cost" was lower than estimated base cost plus physical contingetacies. As soon as the possibility of a cost underrun appeared, i.e. when the bids for the main contracts for Singrauli I were in, NTVC and the Bank reduced the cost estimates for the 200 KW units of follow-on projects Korba I, Ramagundam I, Singrauli II, and Farakka I. It seems that, except perhaps in the case of Korba I, these adjustments were too large. Actual costs for 200 MW units came out t .ween 1990 US$ 600 and 700 per kW, when no unexpected events occurred as in connection with Singrauli I and II, as well as Korba I. In the case of Ramagundam and Farakka, the costs resulted in the order of 1990 US$ 900 to 1000, in the former case essentially because the bid prices were substantially higher than anticipated, and in the latter case because of the implementation difficulties experienced, to a good part related to the contractors' industrial relations problems and civil unrest in the region. Even the higher values compare favorably with the costs of units in a stailar range in Indonesia and Egypt. In the latter case the comparison is with oil and ,as fired units, which normally are less expensive than coal fired sets like those of NTPC discussed here. From the Singrauli II PCR it appears that calculating the actual cost of 200 MW units at some 1990 US$ 700/kW 1 as suggested by the results set forth above, the cost of the 500MW units were in the order of 1990 US$ 600/kW, which is the same order of magnitude achieved in the case of the first 500 MW unit at TEC's Trombay plant. Again, the estimated base costs for the follow-on 500 MW unit have been increasing, in part due to higher requirements (e.g. with respect to the environmental impact), in part due to a less optimistic evaluation of the circumstances under which the plants had to be built (e.g. in the case of Farakka II). The estimate for the unit installed under TEC's Fourth Trombay project shows the same trend. Unfortunately, final costs for the 500 MW sets installed after the first two such units at Siagrauli were not yet available to the audit. The present analysis was made in Rp. Therefore, the actual cost increases calculated in columns (7) and (8) of Attachment 4 reflect the fact mentioned earlier that inflation in India was higher than expected at appraisal of the audited projects and that the RP. suffered a substantial depreciation with respect to most currencies in which the foreign cost accrued. If calculated in US$, the figures provide a different and somewhat misleading picture, as the construction period of the audited projects covers the early 1980s when the US$ temporarily appreciated with respect to the other main currencies, thus reducing the US$ amounts fL Neither the SAR nor the PCR for Singrauli II break down the cost estimates along 200 MW and 500 MW units. 62 Attachment 4 Page 3 of 4 accruing in these years. Therefore, the comparison between columns (6) and (7) in Attachment 3 is not so much between assumed and actual inflation than between estimated inflation, which usually does not allow for a distortion of the exchange rates and actual inflation including the effects of exchange rate distortions. 4. In summary, the quality of the apraisal cost estimates has been reasonably good for Singrauli I, Korba I, Trombay III, and to a certain extent also Singrauli II, whereas later they became too optimistic. Although the 1980 estimates for Singrauli II and Farakka were prepared with the bidding for the main contracts for Ramagundam I completed, they reflected oaly minor adjustments to the higher Ramagundam prices. However, it is worth emphasizing that part of the higher costs that materialized at Ramagundam and Farakka are related to events that usually are not covered by physical contingencies (e.g. the working environment at Farakka). Further, the performance of NTPC, TEC and their contractors were remarkable, as they brought the construction of coal fired units at costs which were generally similar to, in some cases even lower than those of comparable facilities in countries at a more advanced stage of development than India. INDIA: EMP AND TKC TOWAL PIAMT COST ANALYSIS Etimated Effect of Increase Project C-pacity Base Cost "Actual * Increase A c t a a 1 Io Rp. Amount *Phys.Cont. Base Cost in Base Price Inflation of Total Cost 3CC ABC Cost Contingences on BCC I Rp. In 2 of Total A990 US$1kW 1990 US$1kW 2 of BCC 2 of B00 3 of BCC Estimated cost (1) (23) (3) (4) (5) (6) (7) C() Stagral 3 a 200 W 770 690 -11 20 41 0 Stagreali II 2 a 200M HR S to 520 580 to 60 15 to 20 28 48 41 2 a 500 W Korba I 3 a 200 W 620 to 650 650 to 720 5 to 12 19 35 35 memageods I 3 z 200 W "0 to 690 940 to 980 37 to 42 17 33 72 WarakkaI 3 x 200 W 675 to 715 1010 to 1040 so 30 45 70 Trombay III l M500W 560 580 7 12 43 33 Rerba II 3 x 500 r1l 606 stagnandsa II 3 x 500 MW 627 Farakka II 2 z 500 MW 965 Trambay 1 I x 500 W 720 Column (3) Extracted from SAes the uncertainty reflects the vagueness of the point to time to which the cost estimate refers; this Itom also includes the contractor*s price contingencies when the etimate assumes that contract. will be let on a fixed price be&@. Column (4)9 Actual coste extracted from PCR. Distribution@ if not specified in PCR, assumed in accordance with actual work progress. Annual amount discounted (separately for local and foreign currency) to the referencs date of the appraisal estimate using GDP deflator, HUV index, and average annual exchange rates. Colim (5) ((4)-(3))I(3). Where only one figure appears, it represents the center of the area in which the actual value is most likely 1 to be round. column (7) This column abovs the price contingencies tht would have been needed, if BCC bad been correct and submitted to the Inflation (and the shifts in the exchange rate) that actually occurred. Column (8) (Total Estimated Cost, i.e. estimated base cost plus all the contingencies - Total Actual Cost in current terms) I Total Estimated Cost. For iorba li, Ramagundam 11, Farakka II, and Trombay W9 no final cots were available to 10191. 64 Attachment 5 Page 1 of 2 INDIA: PLANT AVAILABILITY AND LOAD FACTORS 1. The two graphs, at the end of the present attachment illustrate the latest development of availability and load factors of thermal plants of SEBs, TEC, and NTPC. They show that TEC's Trombay plant (partly financed by the Bank) and NTPC's facilities (also implemented with substantial Bank support) performed at a substantially higher level than the average SEB thermal plant, although the latter clearly shows improvement. Indeed, some of the better SEB performances, such as those in Andhra Pradesh have recently come quite near to those of NTPC and TEC. 2. The behavior of TEC's Trombay plant appears more erratic than that of NTPC's facilities because the number of units is small and therefore the outage of a single unit substantially affects the overall availability and the load factor. Indeed, a longer overhaul planned for FY 1991 is likely to have reduced availability and plant load factor to a level below the 60% mark for this most recent year. 3. The mentioned graphs also illustrate an aspect of NTPC's performance that merits close attcntion. Indeed, whereas practically since its various p".ants started operation NTPC's facilities achieved an availability in the order of its norm which is 81% for its coal fired 200 MW units and 77% for the 500 MW units assuming a notional 5% of forced outages, in most recent years the availability has clearly lessened. As discussed in Chapter III of the main text of this report, this is due in part to fuel shortages. 4. Another factor reducing NTPC's performance indicators is the fact that, at times, though the energy could be generated and the demand at the level of the ultimate consumer would exist, the power cannot be delivered because of limitations in the grid (according to NTPC mostly in the SEBs' systems). OED was unable to obtain a clear view of the extent of limitations due to physical constraints such as a lack of transmission and transforming capacity or, in particular, to the unwillingness of many SEBs to use what they consider expensive power from NTPC. 65 ATTACHMENT 5 Graph 1 Page 2 of 2 ni l: Therm ! Power P!Int; ______ ______ Avaddaulty _ _ __ _ 1 O78 0.92 0.72 0.84-__ 0.21 1881 198 1986 1987 1988 iG 190 1991 SEM 4 TATA 4 NTPM A NTPC(Nom) Graph 2 India: Thermal Power Plants Plant Lad Foeoer 0.7 0.4 Ig11 1988 1989 1990 1981 0 SE5. 4 TATA 0 NTC NTC(Norm) 66 Attachment 6 Page 1 of 4 India: NTPC Non-Technical Performanc Indicatgrs 1. The graphs showing the development of operating costs per kWh sold in real terms, sets forth the actual values derived from data presented in NTPC's Annual Report on the one hand and the corresponding projected values calculated on the basis of the information contained in various SARs. P.Ko, P.Ra, and P.Fa refer to the SAR for the Korba, Ramndam, and Farakka projects, respectively. 2. In Graph 5 showing personnel related costs, the curve named "Total" reflects all the personnel related costs, i.e the salaries and directly related benefits (such as contribution to personnel funds) shown separately through the curve named "direct" and the indirect benefits such as social services (medical, etc.). 3. In Graph 6, the curve denominated "Adjusted" assumes that the sharp increase shown in the curve "Act." for FY90 is distributed over the period FY88 to 90. 67 ATTACIO!ENT 6 Graph 1 Page 2 of 4 !NDIA: NTPC Total CaUh 0orting Cost Par Wh $old jo 29- 24 1 23 - 22 i 13 12 1962 1963 1884 19 1966 1967 1m 199 im0 Fesdl Yr ning Ma~ch 31 A At. 4 P.Ko 0 P.Ro a PFa Grah 2 INDIA: NTPC 1O4r. and MaLnt. Ct por kWh Sold 12 - 11 - 5 -- ---- -- - -- 7- 2 te3 1983 1984 18 -om -ov 1- m -069 -000 -99e . . P.KO - P- Pia 68 n 6 Graoh 3 Page 3 of 4 NDA: NTPC Fucl Cost oer kWh Sold 15. 19t2 19 198 90 18 1198 198 199 199 Graph 4 INDIA: NTPC F.~ woee per Of Sold 1.7 1. 9 *1 1962 1963 1964 19 7 198 19 96 196 16010 RecOeier endig Mcrch 31 Ca At. Gara| p'"P'lh 4r 1 69 ATTACIOMT 6 Gravh 5 Page 4 of 4 INDIA: NTPC Per~ondl Rolated Cost per Emploe_ .4 j.G 3.0 1964~im 1l6 1M6 7 i=818910 F~a Y*wr onding M~re 31 Graph 6 INDIA: NTPC Perosnel Cmst p« kWh «Ml 3.6-4 _ _ _ _ _ _ 2.6-__i____ ____ 1.¶94 im5 ION 197 o in w 194 195 8 1987 1957 160 10 F~sca Yer nn m 31 ATo At II 1h 70 Attachment 7 Page 1 of 7 = _ INCRE_NTAL COSTS AND TARIFFS The Dearee of Axr2MRt between the Bank and India on Tariffs 1.- The SARs prepared in 1978-80 state that there was agreement between the parties on the following principlest1 Each of NTPC's plants would supply the SEBs loosely associated in the Regional Electricity Board (REB) of the region in which the plant was located, i.e. Singrauli in the Northern, Rorba in the Western, Ramagundam in the Southern, and Farakka in the Eastern region. 851 of the output of each plant would be allocated to the SEBe in the corresponding region in accordance with a fixed formula, whereas the remaining 15% would be sold in accordance with priorities establishea by CEA. - The tariff would ideally consist of a demand and an energy charge responding to the principles of marginal cost pricing, but adjusted to meet NTPC's financial requirements reflected in the rate of return covenant. 2. These points suggest a substantial commonality of views between the 001 and the Bank. However, ORD identified signs that the understanding between the two sides was never as broad as suggested. The first point implies a strengthening -- though very modest -- of the Centre as the GOI, through CIA, would inter alia have reasonably free hand in allocating at least 151 of NTPC's outputs actually, when NTPC started operating, this energy was by and large also distributed among the SEBe of the region supplied by the given station in accordance with a rigid formula. The second point refers to marginal cost pricing as a Zool to be utilizedl however, there is strong evidence that for a long time the serious consideration of such pricing in India was anathema. Even now, long after most Sn. have carried out tariff studies which determined LRMCs, OD found that there is little evidence that the 001 and the sector consider electricity pricing at economic cost desirable in principle, and even less evidence of any intention to put it into practice. However, in recent years, concern about cost recovery and the financial plight of the sector has doubtlessly been growing. 3. During the year. preceding NTPC's start of operations, the Bank addressed pricing mainly through its overall sector dialogue with the 001 and in a somewhat more concrete but not much more successful way, in connection with sector planning. However, time passed with little change of real substance in the area of electricity pricing except for the enactment after several years of a SAR Korba I, paras. 2.05 to 2.08. 71 Attachment 7 Page 2 of 7 maneuvering of the amendment to the Electricity Act which provides for the SEBs to earn a minimum return on assets, but fails to include the measures that would induce the states to allow their SBs to implement the required tariff adjustments. 41 Until then, the Bank seems to have relied on the above amendment to the Electricity Act and to some degree also on the prospects of "high" NTPC tariffs prodding the states and their utilities to adjust their tariffe. Although the Bank must have recognized the high ratio between NTPC's tariffs (planned and actually charged) on the one hand and those billed at retail by the SEBs (para. 15) on the other, it did not really acknowledge, at least not in an official document, that the above ratio could not but lead to a "tariff uprising" within the SEBa, i.e. to a fierce opposition to NTPC tariff adjustments and to late payments of billed supply from the central utility. One can perceive such an acknowledgement in the fact that, at the preparation of the Singrauli II project in 1980, the Bank spelled out a strategy relating Bank Group involvement in the power sector to "strengthening of the finances of the institutions involved in the sector, particularly the 88s."2 The Bank's evolving approach is also documented by its insistence, during negotiations of the Korba II and Ramagundam II projects in 1981, on receiving "more comprehensive information on the sector".2 The Bank felt encouraged in its outlook and approach by developments that had taken place earlier on the basis of the 001's traditional way of dealing with the states by "seeking consensus through persuasion rather than coercion", in particular: - the establishment of the REBs; - the re-organization of CEA; - the amendment of the financial provisions of the Electricity Act mentioned aboves - the partial implementation of plans to restore in the Northern Region the compliance of the S8Be with the revenue covenants established in connection with IDA's Transmission IV project (Credit 604-IN); - the completion, in most states of tariff studies using the concept of LRMCs 5. A closer analysis shows that these developments were in part not new and that only what Chap%ter discusses under the label "the Bank's pervasive optimism" allowed the PRe and SARe for the pre-1983 projects to be as positive as they were a President's Report Singrauli II, paras. 38 and 39, as well as SAR for the same project, paras. 1.37 to 1.38. 3 SAR Korba II, paras. 1.54 and 1.55. 72 Attasbment 7 Page 3 of 7 about the evolution of the tariffs in the SEBe and the repercussions on NTPC's finances. First, the REBs, whose establishment was mentioned as such a positive development, were created back in 1966 and, while undoubtedly providing a forum in which SEB issues could,be discussed and brought closer to a solution, until the early 1990s, had neither the means nor the power to monitor, appropriately, let alone control operations in the regional systems.' Second, the re- organization of CRA which followed the creation of the Ministry of Energy in 1974 was not new either and by 1980 had not yet led this organization to play the regulatory function the Bank had ex-ected it to assume in the w3ctor. Third, the amendment to the Electricity Act, as important as it was as a step in the right direction lacked teeth (see above); and, fourth, the implication that the introduction of marginal cost pricing was under serious consideration was at the very least premature (see para. 97).5 The Development of Incremental Costs 6. The analysis of NTPC's incremental costs and tariffs, which OED carried out in the context of the audit, was intended at understanding why some ten years all Bank document stated that NTPC's tariffs were projected and, later, were in average at about the level of LRMC, and all of a sudden in 1989-90, similar documents state that tariffs were only about 502 of LRMC. The investigation included the following steps: (i) Computation of average incremental costs using projections and actual results for investment and sales set forth in the SARs for Korba 1 (1978), Singrauli II (1980), Ramagundam II (1981), Central Transmission (1983), Rihand Transmission (1985), Combined Cycle Plants (1986), and Talcher (1987) as well as the PCRe for Korba 1, Ramagundam I, Singrauli II, and Farakka II. (ii) Compilation of the actual average revenues per KWh sold and of the similar unit rates projected in the SARe for the two years subsequent to project approval. (iii) Conversion of all cost and tariff figures to USmills/kWh in constant terms of FY90. 7. For the conversion of actual figures, the computation used the MOV index for foreign exchange costs and GDP deflator for the local currency amounts. Projected figures were converted into values of the year on which the SAR estimates were based using the escalation coefficients indicated in the SARs and then, in a second step, translated into US currency of 1990. A See e.g. India: Long Term Issues in the Power Sector (1991 Yellow Cover Report) Volume I, para. 1.25. See also para. 10.1 of NTPC's comments in the Annex. 73 Attachment 7 Page 4 of 7 8. The table on pages 3 and 4 of the present attachment sets forth the results of the above analysis as followes - Column 1 sets forth the discount rates used for computing the incremental costs (7%, 10% and 13%). - Column 2 lists the average incremental cost in 1990 USmills per kWh. - Column 3 shows the actual average revenue per kWh sold for the last year for which antual figures -mere available to the appraisal team. - Columns 4 and 5 set forth the projected revenues per kWh for the first and second year of the SAR projections. 9. The figures in the block labeled "actual" correspond to the results of the analysis using only actual investment costs and actual sales for the period 1977- 90 extracted from the PCRs for the Korba I, Ramagundam I, Singrauli II and Farakka I projects as well as the SAR for the Talcher project. 10. Figures 1 and 2 on page 5 of the present attachment both set forth the projected revenues per kWh sold as they appear in the SARs for the projects audited here against the actual figures. In Figure 1 the label Act. corresponds to the curve showing the actual values, whereas T. Ko, P.Ra, and P. Fa refer to the projections in the SARs for the Korba I, Ramagundam I, and Farakka I projects, respectively. In Figure 2 Act. again stands for actual values derived from the PCRs, whereas CPT, Rih, and Tal refer to the curves corresponding to the projections in the SARe for the Central Power Transmission, Rihand Trensmission, and Talcher projects. Figure 2 dramatically shows the sharp departures from prevailing trends the assumptions in the various SARe implied. 74 Attachuent i Page 5 of 7 Conparison of Tariffe vith Ineremeutal Coste Col. i Col. 2 Col. 3 Col. 4 Col. 5 Iner.Cost Actual Proj. Proj. Year 0 Year 1 Year 2 Data fro torba I SR 1982 1183 1984 LIC i:z l1OU8mills/kVb 22 Pase/kib 22 22 22 LRIC 1:101 1990usmillgikvb 28 1971 Paige/kWh 11 11 11 LRIC i:131 1990uSill8/kvb 36 1990 Usele/kvh 29 IQ. 29 Iecr. 0 0 Data fros Biagratli II SfR ------------- ...... 1982 1983 1984 LRIC i:7% 1990Usaille/kwh 26 Paie/kih 29 29 30 LRIC i:101 1990U8illu/kWh 33 1971 Paise/kb 21 20 19 LBIC i:13% 1990U8ille/klh 41 1990 UBEISkVh 36 34 33 SIfer. -5 -4% Data fro Raasuadam II SfR -- - - - - - . .....1182 1983 1984 LIC iM 199U&ills/kwh 26 Paisekvh 32 3t 32 LBIC i:101 199098&ill/kvh 32 1911 PaiselkTh 20 20 20 LRIC 1:131 19908ill8/kNb 39 1990 USsI/kh 34 34 34 Ior. 0 0 Data fro& Central Power Traeaiesion SkR --------------- 1983 1984 1985 LRIC :7% 199OUB§illu/kwb 32 Paiee/kwh 32 34 36 LRIC 1:10 199tSmille/kWb 39 1982 Paiselkb 30 29 21 IC i:13x 1990uSaille/kwh 47 1990 USels/kwh 31 31 30 %Ilaor. -3% -15 Data frs farakka II SR ------------------------.1983 1984 1985 LRIC 1:1% 19900Sille/kwh 29 Paise/k¥b 34 31 40 LRIC i:10& 1990030ill8/kWh 36 1983 Paise/kgb 34 35 35 LRIC 1:131 1190eUilleik1b 44 1990 USaIS/kvh 33 32 31 %Mor. -5% -11 Data fro Rikad tranemissioa SR ------------------ - - - - - - -- -. 1984 1985 1986 LRIC i:% 19900sill/kub 34 Paise/kib 36 41 48 LIWC 1:10 199eusmille/kvb 41 1984 Painekb 36 40 41 LRIC 1:139 1990D8ills/kvb 49 1990 USalS/kWh 33 36 31 1Mi. 8% 4% Data fron Combined Ciele Plaate SR ---------- - - - - - - - -- - - - - . 1984 1985 1986 LRIC 1:% 199usille/kh 31 Paise/kgb 36 41 48 LRIC 1:10% 19900sllig/kVh 44 1911 Paise/kgb 19 20 21 LRIC 1:139 199DUSmills/kVb 52 1990 USlsi/kvh 33 35 36 Mer. 6% 2% 75 Attachment ? Page 6 of 7 Col. 1 Col. 2 Col. 3 Col. 4 Col. 5 Inor.Cost Actual Proj. Proj. Year 0 Year 1 Year 2 Data from Talcker SA (projections only) -- - - - - ................1986 198? 1988 LRIC 1:7% 1990mSaiIls/khb 31 Paise/lkb 40 51 57 LUIC 1:10% 1990USaills/kVb 38 1986 Paise/kb 40 48 51 LRIC L:135 lS9OUSailla/kVb 46 1990 USals/kVh 30 36 38 laor. 21% 5 Data from Talcler BAR (actuals and projectionsl -.--. -.. - ............. ..1986 1987 1988 LIC i:S1 ll9908ill/kM 43 Paise/kb 40 51 57 LIRC 1:105 19900si811/kh 50 1986 Paise/ik 40 48 51 LUIC 1:13% 199058tills/kVh 58 1990 USals/kVk 30 36 38 laer. 21% 51 Actual FT1IS1-1990: Data trom Iorba, Iasagundas, and Farakka PCls, and from Talhe Ia. in aa- Iax. Sales logy to Sales 45th Korba 45th red.op. SA coot LUIC iW 9OU8aills/kVk 32 3? 34 LIC i=105 19900S illsi/kb 42 50 45 LBIC 1:13 ISSOUSaills/k 56 66 58 76 eATTACIMEIIT 7 Page 7 of 7 Graph 1 NTPC: Revenues per kWh :old (inc. Tax Actual and Pmfcted In SARs 42 ______- 747 419 i8 i04 180 t8 1I 168 18 eo -ie tAc.--- P.K = P. -a F 30- -1 -- 30- 19"2 19 184 1900 199 1887 1600 1988 1 88 Flusat Yea ending Marh 31 At. P.KG P Rh 1 T.Fa GraDh 2 NTPC: Rýevenues per-kWh 5.'%-ld (excl.TaxN 18318 7e18 l7 i CP T Ri T* d 77 Attachment 8 Page 1 of 8 Sections A Accounts Receivables 1. It cannot be denied that NTPC is being paid late by some clients. There is a need, however, to put the recent trend in the broader perspective of NTPC's relatively short corporate life. This Audit ascertained that the arrears situation is a concern which is drawing appropriate attention from NTPC management. What is realistically under its control has been tried and is being pursued. Requiring its clients to open letters of credit (LC) is the best tool available to NTPC to collect its revenues directly because payment is guaranteed by a third party. Starting in 1984 on the advice of the Bank, 17 out of 25 SEBs had opened LCs as of August 1991. It cannot be expected, however, that LCs would cover 100% of the most recent monthly sales to a given SEB because the commercial bank granting the LC requires a multiple of revenues as collateral. As a result, LCs will always lag behind actual NTPC sales. This lag should be more pronounced when sales are surging as in FY90 when they almost doubled, yet, as shown in Table 17, this did not happen. 2. The current assets item reported as "Sundry Debtors" ("arrears" or "receivables" herein) has increased faster than sales over the recent years. The gap between growth rates worsened over every sub-period except during last year (see Tables 2 and 3 below). The most recent upsurge in arrears occurred when sales doubled in FY90. Table 1: Letters of Credit FY/ 85 86 87 88 89 90 91 Amount (million Rp.) 75 175 259 303 481 991 1223 In Z of billing 25.8 38.1 45.2 36.9 40.7 50.3 51.3 Table 2: Growth of Sales and Receivables In Z /' FY91/FY85 FY91/FY88 FY91/FY89 FY91/FY90 Sales (flow) + 39.0 + 40.7 + 39.2 + 17.9 Arrears (stock) + 45.0 + 55.0 + 58.9 + 30.6 3. Although one year is usually insufficient to confirm a break in a trend, the slowdown in sales growth is significantly correlated with that of arrears to conclude that, as of the early nineties, the growth of arrears has markedly decelerated. 1 Compounded rate per annum. 78 Attachmn (0 Page 2 of 8 Table 3: Deceleration of Arrears Build-up 85 86 81 88 89 90 91 FY/Z changes of growth rates Sales 128 54 21.9 33.6 24.7 91.4 17.7 Accounts 25.8 -16.1 -17.3 126.1 56.3 190.2 -36.5 receivable' 4. The data in Table 3 compares variations of a flow (sales) to variations in another flow, that is the yearly increment of the stock of receivables. The comparison of these two flows is the key to assessing whether the buildup of arrears is unsustainable or not, thus making the above variations comparable indicators. The data shows a much greater volatility of year-to-year variations in receivables than in sales: because sales and accumulated receivables are of close magnitude (sales were 1.6 times receivables by the end of March 1991), a slowdown in sales growth in FY86 and FY87 coincided with a reduction in the yearly flow of receivables. Similarly, the doubling of sales in FY90 was followed by a sharp rise in receivables and the reverse occurred when the sales growth rate (17.7Z) fell well below the 5-year average (45.1%). It seems therefore that, if sales growth stays moderate (in the 15-30% p.a. range), the flow of receivables would decrease. The straight comparison of the flow of receivables and sales confirmed that the propensity of new sales to generate new arrears has come back towards the medium-term trend of less than two months of sales after the expected surge in FY90 (Table 4). Table 4: Relationshi, between Sales and Additional Receivables FY/2 84 85 86 87 88 89 90 91 Flow of 41.4 22.8 12.4 8.4 14.3 17.9 27.1 14.6 receiv/Sales Same in months 5.0 2.7 1.5 1.0 1.7 2.2 3.3 1.8 of Sales 5. An analysis of the available data on the age structure of arrears confirmed the above conclusion. Although the trend worsened in FY90 when sales doubled, it turned around the following year. The additional stock of "old" receivables of more than either 6 months or 12 months has increased more slowly than sales during last FT (Table 5). 2 Percentage change of the growth rates of incremental receivables. 79 Page 3 of 8 Table 5S Agia of Arrears FY/in 2 of sales 1989 1990 1991 lIcreased receivables of over 6 monthe 5.3 19.7 8.4 Same: receivables of over 12 months na 11.0 3.0 6. A confusion between what is bad debts and late payments has clouded the arrears issue. Bad debts are defined as unlikely to be collected and thus must be provisioned for as required by the accounting rules in force in India. At the end of March 1991, these provisions amounted to Rp 246.7 million (US$9.6 million) or 3.12 of arrears of over 6 months. Provisions were increased by 492 last FT and by more than fivefold in two years. This is not the sign that the arrears situation has worsened dramatically, however. First, while the ratio of provisions over arrears of more than 6 months has increased (from 2.4% in FY1989 to 3.11 in FY91), it has remained confined in relative terms given the doubling of NTPC sales in FY90. Second, a more significant indicator, the ratio of the some provisions over arrears of more than one year, has actually remained stable as shown in Table 22 below. Furthermore, the increase in provisions over sales decreased from 0.6Z in FY90 to 0.3% in FY91. 7. Penalty interests on arrears continue to be billed by NTPC to its clients in arrears, but they are not recorded in the balance sheet because of their low probability of being collected. This shows the conservative accounting policy followed by NTPC with the support of its external auditors. 8. During the last three years, accounts receivable rose faster than any other financial items driven by sales (e.g., cash flows, cash and banks) except depreciation and short-term borrowings. As a result, receivables rose sharply relative to total current assets. Table 7 shows the relative problem of receivables. The financing of receivables by current liabilities has decreased markedly during the last three years, which reflects a sensible financial policy that does not rely on expedients. Table 6: Provisions for Unpaid Billing FY/Rp. million 1988 1989 1990 1991 Provisions for bad debts 47.7 44.5 165.6 246.7 In 1 of 6 months arrears 3.6 2.4 2.8 3.1 In Z of 1 year arrears na 6.2 5.6 6.7 80 Attachment 8 Page 4 of 8 Table 7: Receivables in relation to Other Indicators FYI 1988 1989 1990 1991 Receivables/Current assets 30.5 37.9 51.1 52.8 Cash & banks/Receivables 163.4 75.4 48.2 38.9 Current liabilities/Receiv. 195.0 145.2 108.4 98.6 Considered "good"/Total 98.8 99.3 98.6 98.4 Receivables Reveiv. > 6 months/Receiv. 32.1 31.2 50.6 56.2 Receiv. > 1 year/Receiv. na 15.9 29.4 28.0s 9. There are several conflicting trends within the arrears category. They increased in Rupee terms (+45% p.a.) and they aged (the proportions of 6-month and of 1-year arrears almost doubled since FY89). The focus has been on the few- SEBes which are at the core of the problem. To tag all the arrears problem onto the SEB of Utar Pradesh (UPSEB) is simplistic. Three SEBes (GEB, MSEB, TNEB) with low 6-month arrears ratios' (18.8%, 35.1%, 28.2% respectively on January 1991) together had 26.82 of all arrears 0f over 2 years while UP had none. If good payers are measured as having no arrears of over 6 months, only four SEBs (Goa, Pondychery, HPEB, UTC) were paying on time. This implies that the 2-month benchmark stipulated in Bank's loan agreements essentially ranks most NTPC clients as bad payers which is not the intent of the receivables covenant. 10. It can be assumed that GOI would not be prepared to accept a deterioration in the financial position of NTPC without taking the appropriate steps to safeguard its substantial and successful investment. The framework agreement between NTPC and the SEBEs is therefore twofoldt to secure payments through LCs whenever possible (which presuppose that commercial banks have room to undertake the required factoring) and, in the last resort, through the central appropriation mechanism when defaults accumulate such as in 1991. The mechanism of central appropriation which transfer central government funds earmarked to states directly to NTPC essentially so far has made NTPC a secure creditor of SEBEs. Last, while a great deal of attention is paid by NTPC's management to the arrears issue, it should not distract from the challenging issue of financing the ambitious corporate plan. 3 Data on this line are from NTPC documents dated, respectively, January 1980, April 1990, and January 1991. 4 In percentage of their total arrears. 81 Attachment 8 Page 5 of 8 Sectiomt B Table 8S TPC's Growth Rates in 2 FY1991/FY1985 FY1991/FY1989 (Compounded rate per annum) Gross Fixed Assets + 38.0 + 43.7 Deprttiation + 43.9 + 60.4 Interest (net) + 38.4 + 39.2 Work in Progress + 24.9 - 4.0 Sales of Energy + 39.0 + 37.9 Earnings before Interest + 40.4 + 43.4 Net Profits + 41.4 + 45.6 Cash Flows + 39.7 + 42.0 Reserves + 61.0 + 43.2 Paid-up Capital + 20.4 + 20.0 Long-Term Loans + 36.0 + 14.7 Short-Term Loans + 90.7 + 257.0 Working Capital + 34.0 + 33.7 Table 9: Financing Plan in Rp. million FY/million Rp. 85 86 87 88 89 90 91 Sources of funds Cash flows 1140 2207 2566 3691 4314 6856 9355 Equity 4859 6808 5909 6879 3683 6594 12811 001 loans 4392 3898 2989 2947 5133 3230 2356 Power bonds 0 1634 4300 4394 1500 5000 4000 Other Lf loans 243 1833 2876 7784 6091 1121 4699 Current liabilities 645 -853 -160 1343 -536 3961 2416 Uses of funds Fixed assets 4166 2684 4642 9819 14280 25188 22450 Works in progress 3739 9002 13801 5998 5774 -4917 1244 Construction stores 2150 1758 -649 1890 -897 216 2434 Current assets 1366 3143 2830 4343 2410 6913 6002 82 Attachment 8 Page 6 of 8 Table 10s Financing Plan in Percentages FY/% of total sources 85 86 87 88 89 90 91 Sources of fmnds Cash flows 10.2 14.2 13.8 20.0 20.2 24.9 30.0 Equity 43.7 43.7 31.7 37.3 17.3 23.9 41.1 GOI loan. 39.5 25.0 16.0 16.0 24.1 11.7 7.6 Power bonds 0 10.5 23.0 23.8 7.0 18.1 12.8 Other LT loans 2.2 11.8 15.4 42.2 28.6 4.1 15.1 Current liabilities 5.8 .-5.5 -0.9 -7.3 2.5 14.4 7.7 Uses of funds Fixed assets 37.4 17.2 24.9 53.2 66.9 91.3 72.0 Works in progress 33.6 61.6 74.0 32.5 27.1 -17.8 4.0 Construction stores 19.3 11.3 -3.5 10.2 -4.2 0.8 7.8 Current assets 12.3 20.2 15.2 23.5 11.3 25.1 19.2 Table 11: Trend in Capital Investments FY/million Rp.; 2 85 86 87 88 89 90 91 Investments 5230 12285 18523 15817 20046 20270 23694 Same in constant 100 223 317 249 296 271 289 prices s Outstanding Worke 11315 20917 34798 40796 46565 41648 42892 in Progress Same in constant 100 175 275 297 317 257 242 prices In I of total 45.8 56.6 62.7 57.2 51.0 37.3 31.7 fixed assets ' Deflated by the wholesale price index for India (IMF, International Financial Statistics). 83 Attachment 8 Page 7 of 8 Table 128 CorporatD Self-finann PY4" 85 86 87 88 89 90 91 Average SF (OtS) n.a. 32.7 Adj. for receivable n.a. 17.5 Corporate Self- 21.7 18.0 13.9 23.3 21.5 33.8 39.5 24.5 financing Adjusted for 6.8 12.6 10.9 15.6 11.9 5.7 24.2 12,5 Receivables Table 13: Domestic Bond. apse Isse /FT Purpose Amount (Rp billion) Interest let maturity Amount 1 86 Stagrauli 1.63 142 3129193 1.63 2 87 Korba 4.30 14/10X 3/12/94 2.82 3 88 Ramaguandam 4.39 13/9X 3/30/95 1.02 4 89 Ramagundam 1.50 92 6/29/98 1.50 5 90 Xorba 5.00 92 7/11/99 5.00 6 91 Korba & 4.00 13Z 1/12/98 4.00 Singrauli Table 14s Caih Zlo FT/Rp. million 85 86 87 88 89 90 91 total '88-'91 Cash flows 1140 2207 2566 3691 4314 6856 9355 24215 Net profit in 2 76.8 82.9 82.6 81.9 76.7 78.3 74.9 Table 15: Capitallsation of Interest Capitalised interest: 1988 1989 1990 1991 In 2 of total interest 55.1 53.3 48.0 40.7 In Z of Profit before int. 35.9 40.1 31.1 22.8 Works in Prog./Fix. Assets 57.2 51.0 37.3 31.7 6 Ten percent for tax-free holdingi the maturity is also three years longer. 84 Attachment 8 Page 8 of 8 Table 16s Current Ratio Times current liab. 1988 1989 1990 1991 Total current assets 1.68 1.81 1.79 1.90 Lees over 6 months rec. 1.52 1.60 1.33 1.33 Table 17: Rates of Return on Assets FYZ 85 86 87 88 89 90 91 average Covenanted 12.7 16.8 17.0 16.4 14.8 17.9 17.0 16.1 ROW' ROI-OMS 13.0 17.0 17.0 18.6 15.1 15.9 14.5 15.9 Adjusted for n.a. 12.3 13.8 13.4 9.6 5.3 9.7 10.7 Receivables Corporate ROI 7.9 9.0 7.4 7.7 7.4 9.5 10.4 8.5 Adjusted for 4.1 9.0 6.3 5.7 5.0 3.8 7.5 5.6 Receivables Table 18S: Rates of Return on Equity FY/ z 85 86 87 88 89 90 91 average Return on equity 8.4 10.4 9.8 11.0 11.5 15.5 16.4 11.9 (ROB) Adjusted for 4.4 80 8.3 8.2 7.8 6.3 6.3 7.8 Receivables ' Data from the PCR for the Farrakka Thermal Project for FY85-89. 85 Page 1 of 8 The Bank's Involvement and Obectives in the Power Sector A. Bank Involvement in the Power Sector 1. As shown in Attachment 1 listing all the Bank Group operations in the Indian power sector, the Bank started lending to the sector at a very early stage of its own development and has continued its involvement over all the years since. Accordingly, between 1950 and 1970, its Board approved 12 lending operationst four for generation and transmission facilities of the G01-owned Damodar Valley Corporation (DVC), two for similar installations of the private TEC group, two for a Maharashtra SEB hydroplant (TIC purchasing most of the output), two for a thermal plant in the Andhra Pradesh SEB's system, and one for construction equipment to be used in the development of the Beas River, an undertaking the Bank had agreed to support in connection with the implementation of the 1960 Indus Settlement. 2. In 1965, the Bank made a loan for strengthening interconnectior, in India, in general, through transmission lines not directly associated with generating plants. In this operation, it used for the first time a concept it was to apply systematically through the period 1970-76. In all the operations taking place in this period (four credits totaling US$367 million, three for further transmission projects and the foarth for rural electrification) the SEBs were the executing agencies and main beneficiaries, while the Centre, through CIA and the GOI-owned Rural Electrification Corporation (REC), was responsible for coordinating and supervising project implementation. In the context of these projects, the Bank dealt with the beneficiaries at arma's length, ease tially through the coordinating entities, CIA and REC. 3. In the mid-1970., when it realized that che results of the above described projects were likely to be disappointing, the Bank modified its approach to the sector, and, for the period 1977-82 -- except for a further loan to TEC (for the Third Trombay Thermal Project) and a second rural electrification project -- lent exclusively for the development of the GOI-owned NTPC. In this phase, the new utility became the beneficiary of six credits (US$1,575 million) and 3 loans (US$375 million), to support seven projects: Singrauli I and II (2000 MW) mainly for the Northern Region, Korba I and II (2100 MW) for the Western Region, Ramagundam I and II (2100 MW) for the Southern Region, and Farakka I (600 MW) for the Eastern Region.1 The operations supporting Korba I, Ramagundam I, Parakka 1, and Singrauli II are the main subject of the present audit, OD having already audited the Singrauli I operation in 1986.2 In the present report the NTPC projects are referred to using an abbreviated title such as Singrauli I for "Singrauli Thermal Power Project" and Singrauli II for "Second Singrauli Thermal Power Project". 2 See also Section 2.0 of NTPC's coments in Annex. 86 Page 2 of 8 4. Around the time NTPC started operatlone with the commissioning of tha first unit at Singtauli in 1983, the Bank's approach to the sector evolved again in response to the continuing weakness of the 88B. which threatened the viability of the entire sector and hence posed an increasing danger to NTPC. Indeed, the institution concluded that it could only oefficiently assist the 001 in improving sector performance by dealing directly with the SBe. Therefore, in the period 1983-87, while still supporting TPC at an unprecedented level with six loans for a total of US$2,146.5 million, the Bank further provided three credits (US$313.1 million) and five loans (US$1,119.8 million) to the 001 for the implementation of projects in selected sBe. In this period also fall the Fourth Trombay project with TIC and the Third Rural Electrification Project, which followed the pattern of previous such projects in the context of which Bank and SB dealt with each other at arm's length. 5. Since 1987, the power sector's financial performance has deteriorated, creating major problems for the 001, VTPC, and the Bank. Growing losses in a number of SEBs pushed the sector's overall deficit up to US$1.8 billion by 1990, greatly adding to the government's fiscal burden. For NTPC, the SEB's plight meant a rapid rise in receivables that has reduced internal cash generation and necessitated greater recourse to borrowing to finance the investment program. Consequently since 1987, the Bank has refrained from further lending for NTPC, which by then had become the largest beneficiary of Bank Group lending through sixteen operations with US$4.0 billion of lending.' However, it still made seven loans (three to support SIBe) totaling US$2,278 million. Particularly interesting Is the operation for which the main beneficiary is the Nathpa Jhakri Power Corporation, a joint venture between the 001 and the government of Himachal Pradesh, signaling a promising development in the relations between the Centre and the states in the power sector. The US$485 million loan made in 1990 for the Northern Regional Transmission Project was the first to VHPC, the sister organization to NTPC. Unfortunately, the increasingly difficult economic situation in India, the numerous defaults of beneficiaries with respect to covenants agreed with the Bank, and the lack of progress at the sectoral level have forced the Bank to re-evaluate its involvement in India. The review resulted in major cancellations of lending to the sector and in the suspension of disbursements from other loans and credits for power. New lending was channelled to performing SEs. 6. Bank support for the creation of NTPC may be viewed as the culmination of its strategy in the Seventies of seeking to strengthen central institutions as vehicles for sector reform. However, it also represented a sharp shift in the Bank's view of the role of the central institutions, which it had heretofore viewed as mainly to plan, guide and coordinate, and channel funds to projects and programs carried out by the 888s. This shift reflected the Bank's growing disappointment with the SiB-implemented projects it was supporting, particularly in transmission and rural electrification. These projects were experiencing 3 Ten loans for roughly US$2.5 billion and six credits for about US$1.5 billion. 87 Attachment 9 Page 3 of 8 serious delays and cost-overruns and the numerous beneficiaries were proving hard to supervise and effectively out of the Bank's reach. Moreover, there was little evidence of any of the hoped-for improvement in the operational or financial performance of the SBs. This experience led the Bank to support the emerging 001'. view that the Centre could only play an effective role in resolving sector problems by becoming itself a major player in the sector. B. Bank Obiecties - NTP 7. The sector's major problem seemed clear enough to both the Bank and the GOI: supply was failing to catch up with the rapid growth of demand, resulting it chronic power shortages that were a major drag on the growth of the economy. The 1979 CPP leaven no doubt that the supply problem dominated the Bank's thinking abeat the sector: ".....Although there are some pricing and institutional issues contributing to power problems, the main problem is managing the supply of power --not so much managing supply from existing capacity (although improvements are needed) but in managing an investment program to keep pace with the rapidly expanding generation and transmission needs of the economy."4 While the documents for the first several NTPC projects contain no explicit statement of Bank objectives, this is probably because the principal objective was considered self-evident --to accelerate the expansion of generating capacity and associated transmission facilities. 8. The severity of the supply shortage seemed to call for radical solutions on both the technical and institutional sides. Technically, the only solution that promised a breakthrough in capacity expansion was the construction of very large, mine-mouth generating plants that would take maximum advantage of India's coal resources and provide significant economies of scale. Institutionally, this implied the need for an equally radical solution, to make the construction of such "super thermal" plants a do-it yourself activity by the Centre. This was not only because the demonstrated operational and financial weakness of the SEBs made it abundantly clear that they could not be antrusted with such projects. There wa, in addition, a strong case for a central venture because coal is a resource for which the Centre is responsible and because projects on the planned scale would have to serve regional neede, not just individual states. Thus, the Bank's second major objective was to assist in creating a new central institution that could efficiently construct and operate the new Cacilities. C. Bank Obiecties - Se2toral 9. While the Bank's paramount concerns in supporting NTPC were the expansion of capacity and building of a strong central institution, it also continued 4 India CPP, January, 1979. 88 Attachment 9 Page 4 of 8 to pursue the broad sector objectives -- long-term national planning, integrated sector operations and SEB reform -- that it had been seeking through previous projects. Until the mid-Seventies, planning in the sector, such as it was, consisted largely of the efforts of individual SB8 to identify and prepare the "next project" required to meet their states' needs. The Bank felt strongly that the massive additions to capacity required could only be accomplished on a least-cost basis if power planning was put on a national basis and set in a long-term framework. Indeed, the Korba SAR begins by calling attention to the need for "a more sophisticated approach to planning", and goes on to describe the 15-20 year plan to be prepared by CRA with the assistance of consultants provided under the 1976 Fourth Transmission Project (Cr. 604) as "an essential pre-requisite for formulating sound policies for future development of the sector."' 10. The Bank wished to see sector operations, as well as sector planning, conducted in a national, least-cost framework rather than on the existing state-by-state basis. Despite the creation of the REBs, there was very little trading of power between the states; each SEB tended to maximize the use of its own facilities to meet its needs, with the result that high cost plant might be operating flat-out in one state while lower cost capacity was being under-utilized in a neighboring state. In part, this was the result of the inadequacy of the existing transmission links between states, and the Bank saw the extensive 400kV transmission facilities to be built by NTPC as critical to the development first of regional grids, and then of a true national grid. Under the 1976 Fourth Transmission Project the Bank was providing consultants to assist CEA with the detailed planning for a national high voltage network. The Bank' s objective, as formulated in the 1978 Korba SAR, was that ".... eventual operation and control of the national power system should logically pass to the Regional Electricity Boards with overall control by CRA, whose function would be to optimize the operation of generating plant nationwide on a merit-order basis".' 11. By empowering the Centre through the creation of NTPC, and by centralizing sector planning and operations, the Bank also hoped to see more in the way of SEB reform than it had been able to bring about by financing their operations. It was thought this could be accomplished, in part, as a direct result of the strategic position NTPC would occupy as a major power supplier. This was most importantly the case in the critical area of SEB finances, where it was explicitly stated that the Bank believed that, by charging marginal cost-based tariffs, NTPC would "encourage" the SEBes to follow suit and modify their own tariffs accordingly.' In addition, while not explicit in the project documents, it is clear from interviews with the staff concerned that the Bank hoped that NTPC would, by force of example, help to stimulate reform in the sector. By S Report 1783b-IN, paras. 1.01 and 1.16. 6 Op. cit., para. 1.18. Op. cit., para. 2.07. 89 Attachment 9 Page 5 of 8 demonstrating that generation and transmission facilities could be constructed and operated much more efficiently than was currently done, NTPC would, it was expected, provide the SEBe with a model that they could follow, or be made to follow. D. The GOI View 12. The initiative for the creation of NTPC came from the 001; as important as it was, the Bank's role was essentially a supporting one. It had long been evident that the SEBs were losing the battle against power shortages and by the mid-Seventies, through the appointment of the usual high level committees and the impact of their reports, a consensus in favor of a leading role for the Centre had been built up within the GOI. The states did not strongly oppose an initiative which promised them access to low cost capacity without having to invest their own funds, and their concurrence was assured by the GOI1's agreement in effect to give the SEB9 the "right" to fixed shares of NTPC's output allocated according to then existing formulae. 13. This consensus on the Indian side, together with the close fit between the GOI's objectives in creating NTPC and its own view of the sector's problems and their solution, led the Bank readily to support the government's initiative despite its involving a major long-term commitment of funds to a new venture. Such a commitment was reportedly made as early as 1976, when at the Annual Meeting in Manila the President of the Bank agreed in principle to the GOI's request for Bank financing of the four super-thermal projects that NTPC would undertake. 14. In principle, the GOI also shared the Bank's sector objectives. However, there were subtle, yet important, differences between the approaches of the Bank and its borrower to sector reform. While the SARe were correct in stating that the GOI "accepts the need" for central planning and operations, and for SEB reform, the GOI tended to regard them as more distant objectives to be pursued on separate, if parallel, tracks and less closely related to the success of the projects than did the Bank. Interviews with GOI officials who were major players at the time indicate that only the establishment of a national grid was regarded as a major sector objective relevant to the projects and, even here, the GOI felt it was premature to try to formulate agreed policies for the operation of the grid, as the Bank wished. National power planning was considered important, but something quite apart, while the notion that NTPC could, by example or otherwise, help induce the necessary changes in the SEBa does not seem to have entered into the GOI's thinking at all. 15. While at the beginning these differences were barely visible and of no practical importance, the fact that the Bank had a broader vision than the G01 of what the creation of NTPC should mean in the sector was to become of increasing importance. 90 Attachment 9 Page 6 of 8 R. Evolution of Bank Objectives 16. While, at the beginning, support for NTPC was presented with the Bank's sector objectives in the background, these objectives began to come to the fore in successive projects. Thus, the SAR for the 1979 Ramagundam project (the third in the NTPC series after the Singrauli and Korba projects) included a lengthy new section on "future integrated sector operations" in which the Bank sought to spell out how and when it felt this objective could best be reached, (on a regional basis by 1985, and nationally after 1990). The Bank's disappointment with progress to date, and particularly with the GOI's reluctance to make the requisite policy decisions on technical, economic, and institutional issues, emerges clearly from this section. Although these matters were discussed during negotiations, no agreements could be reached and the SAR could only promise that a "continuing dialogue" on the subject would be maintained. 17. The trend toward higher visibility for the Bank's sector objectives was even more marked in the SARo for the next two projects, the 1980 Singrauli II and Parakka projects. They contained, for the first time, an explicit statement of the Bank's main such goals, which were listed ass - accelerating the expansion of capacity and improving plant operations so as to gradually eliminate power shortages; - introducing long-term system planning on a nationwide basis; - promoting improvements in sector organization and training, and - strengthening the finances of the SBs.' Progress to date in these areas was described as "encouraging", but the Bank was said to be still very much concerned about long-term planning and SEB finances and determined to focus its attention on them. The GOI's "agreement" during negotiations to prepare a least cost development plan based on Terms of Reference suggested by the Bank, and its statement that it "envisaged" completion by April, 1982, was hailed as the first fruit of this strategy. It marked the first time that a specific sector condition had been agreed, however vaguely, in the context of an NTPC project.' Report 2745b, para. 1.36. The omission of integrated sector operations from the list is hard to explain, but the view is expressed elsewhere in the SAR that lack of a power plan was the chief obstacle to achieving this goal. * Op. cit., para. 1.40. The "agreement", contained in the Agreed Minutes of Negotiations, was less explicit than implied in the SAR. 91 Attachment 9 Page 7 of 8 18. This evolution toward more explicit reformulation of the Bank's sector objectives and further efforts to advance them through project conditions continued in the NTPC projects Immediatel' following those being audited. In the 1981 Second Korba project, the Bank*s objectives were reformulated in accordance with the report of the G01' Committee on Power (the "Rajadhayaksha Committee") which in September 1980 made sweeping recommendations for sector reform. The Bank found them to be largely in accord with its own thinking and decided to give highest priority to the Committee's recommendations fors - improving thermal plant performance; - demand management measures to limit growth to realistic projections of available supply; - intensifying hydro development; - strengthening the role of the Centre in generation, and high voltage transmission, and - improving SB finances.10 The GOI agreed that by April, 1982, (when the long-term plan was due) it would also provide the Bank with an implementation plan outlining the steps it intended to take to carry out the Comittee's recommendations in these areas. 19. While there was little further evolution in the NTPC projects approved during 1983-86, the Bank continued to express at least mild satisfaction with the progress being made toward the accomplishment of its sector objectives. This began to change in the mid-Eighties when Bank documents came increasingly to reflect disenchantment with the prospects fcr reforming SB finances, with the efficacy of the planning effort and, generally, with the GOT's failure to identify clearly defined strategies for dealing with the long-term institutional and financial problems of the sector. In the SAR for the Talcher project, the Bank declared that it would, henceforth, focus on lending directly to those SEBe that were willing to change, while continuing to support the expansion of the Centre on the grounds that increasing the States' reliance on the Centre was the best means of inducing them to take national policy into account and, particularly, to move toward realistic tariffs." Thus, it became clear that, with the progressive increase in the Importance the Bank attached to the achievement of specific sector objectives in supporting NTPC, what had initially been more a difference of degree between the Bank and 001 had become a very real difference in kind. 10 Report 3397a, para. 1.57. Report 6402, para. 1.16. 92 Attachment 9 Page 8 of 8 F. Institgtional Issues 20. The Bank's increasing concern with sector objectives was paralleled by a shift in its institutional goals. In the mid-Seventies the Bank, out of frustration with its inability to reach the SEBs, turned to creating a powerful new role for the Centre and the building of a wholly new sector institution as the best means both of ensuring a more rapid expansion of capacity and of stimulating sector reform. Ten years later the Bank had, out of frustration with the slow pace of sector reform, come almost full circle and decided to focus again its efforts principally on strengthening the SBs. This audit, therefore, provides a good opportunity to shed some additional light on two long-standing issues in Bank lending (see chapters III and IV)s - the efficacy of the enclave approach to institutional development, and - the use of project lending to accomplish sector objectives. 93 Page I of 21 COMMENTS FROM THE BORROWER FROM: SHRI M. .ARANGI, .IRECTOR, MINISTRY OF POWER, SHRAM SHAKTI BHAVAN, -NEW DELHI - 110 001. TO : MR. YVES ALBOUY, CHIEF, INFRASTRUCTURE & ENERGY DIVISION, OPERATIONS EVALUATION DEPARTMENT, THE WORLD BANK, 1818 H STREET N.W., WASHINGTON, D.C. 20433, U.S.A., FAX NO. 001-202-477-6391. NO. 4/2/92-US(CT)(.) REFERENCE OUR TELEX OF EVEN NUMBER DATED 20TH JULY 1992, REGARDING COMMENTS ON THE DRAFT PROJECT PERFORMANCE AUDIT REPORT FORWARDED WITH YOUR LETTER CF 28TH APRIL 1992(.) WE INVITE YOUR ATTENTICN TO SOME RECENT OEVELOPMENTS SUCH AS:- i) THE iECISION TO ALLOW ACCESS TC PFC FUNDS TC CNLY SUCH STATES THAT WOULD SIGN OFAP TO ENSURE THE STATUTORY 3% RATE CF RETURN; ii) THE COASENSUS TO FIX THE .M"INUMUM AGRICULTURAL TARIFF AT FIFTY PAISE PER KWH; iii) THE FACT THAT SEVERAL 'JEBs HAVE IN THE LAST YEAR RAISED TARIFFS AND SOME AMONG THEM HAVE BEGUN EARnJI-NG A 3% RATE OF RETURN; iv) THE DECISION TO SET UP REGICNAL AND NATI'JAL TARIFF ADVISORY BOARDS; v) AMENDMENTS IN THE LAWS WITH THE CONCURRENCE LF STATES TO PERMIT PRIVATE SECTOR PARTICIPATI..N, AND vi) THE AGREEMENT 'IN PRINCIPLE' TO ALLOW THE .'TPC TO PARTICIPATE IN JCINT VENTURES(.) 94 Page 2 of 21 THESE HAVE ALREADY BEEN BROUGHT TO THE NOTICE OF THE UORLD BANK EARLIER AND SHOULD HAVE BEEN CONSIDERED BY LPERATIONS EVALUAT:ON DEPARTMENT(.) THE COMMENTS OF NTPC ON THE PROJECT PERFORMANCE AUDIT REPORT ARE CONTAINED IN ANEXURE-I(.) THE FACTUAL ERRORS HAVE BEEN POINTED CUT IN ANNEXURE-II(.) N.T.F No. 4/2/92-US(CT) DATED: 30.7.92 (. - AGI) DIRECT&. (THERMAL) MI-JISTRY OF POWER NEU DELHI. To THE FAX OPERATOR, MINISTRY OF POWER. *o 95 * e. ...e... * * ** **r * (A Government of Indi.. Entf.' 1r- 'nowet wrw Tr '. /CORPORATF.^"NTE. NEb C ELHI P.K. VARMA E.ECUTIVIDIREC-C's :oo att £A*dt' Page 3 of 21 Dateds 11-07-1992 Mr. Yves Albouy Chief, Infrastructure & Energy Division Operations Evaluation Department IBRD, 1818 H Street, NW Washington, D.C. 20433, U.S.A. Sub: Draft Project Performance Audit Report for Korba (Credit 793-IN), Ramagundam (Credit 874-IN/Loan 1648-IN); Parakka (Credit 1053-I.N/Loan 1887-IN); and Second Singrauli (Credit 1027-IR) Prolect Dear Sir: This is with reference to your letter dated April 28, 1992 seeking our coments on the draft Project Performance Audit Report (PPAR) enclosed therewith for the projects mentioned above. As we have already pointed out in our letter dated June 25, 1992 the report provides good insight on various issued related to the development and operation of TPC in the Indian Power Sector environment. We have completed review of the PPAR and our coments have been provided to the Department of Power (DOP), 001, with the request to send 001's comments formally to the Bank. In the meantime, we are enclosing an advance copy of our comments for your ready reference please. Thanking you, Yours aith 11y, arma) Executive Director (CP) 96 Page 4 of 21 comments Ah& dzatt fq Pro*I9t Performancs Andit R=or 1.0 Introduction 1.1 National Thermal Power Corporation (NTPC) was estab- lished in 1975 with the objective of setting up regional super thermal power stations in the Central Sector to sup- plement the efforts of the State Electricity Boards (SEBs) in meeting the country's growing need of power. Later with the easy availability of natural gas in the early eighties, the company undertook task of adding gas based combined cycle plants also. NTPC has today grown into one of the largest public sector enterprises in the country with an approved investment of over Rs.225 billion and an authorised capital of Rs.80 billion. The corporation is presently executing Super Thermal Power Projects at 10 locations and Combined Cycle Gas Based Projects at 5 locations. Management of. the associated transmission lines has been vested with NPTC since August, 1991. With effective project management, appropriate financial controls, advanced engineering inputs and detailed manpower planning, it has been possible to commission, so far, a total capacity of 11570 MW, about 16% of the country's power generating capacity making NTPC the single largest power utility in the country. The performance levels of these units, since commissioning, have generally been much above those achieved by similar units of the other organisations in the country. During 1991-92, NTPC's genera- tion amounted to 29% of the country's thermal electricity generation. 1.2 The audit report points out that the reasons for what made NTPC bloom in a sector that was, and is, so much of desert lies inter-alia in NTPC's 'Internal Strengths'. This includu factors such as starting with clean slate, dynamic 97 Page 5 if 21 leadership, emphasis given to organisation and management systems development and Corporate Planning, attention paid to recruitment and training, high priority accorded to quality assurance, and drive for technical self-sufficiency and technological innovation. It may be noted that despite NTPC's phenomenal growth and its becoming country's largest power utility, there has been no dilution in terms of these *Internal Strengths'. As a result, NTPC today occupies prominent position not only in the Indian Power Sector but in the Power Sector world over. 2.0 RelationshiP zih W.l DAk 2.1 The World Bank has been closely associated with the Corporation since its creation and has over the past con- tributed substantially to its development. In financing terms, starting with NTPC's first project, the Singrauli Thermal Power Station, the Bank and IDA have provided, in the last over 15 years, six credits and nine loans for a total amount equivalent to about US $ 4 billion. These operations have provided financing to support the construc- tion of seven thermal power stations, totaling 11350 MW (partly under implementation), as well as extensive high voltage transmission systems. The Bank's association with NTPC has also contributed significantly towards the institu- tional development of the Corporation. Further, it has been correctly pointed out in the audit report that Bank has made vital contributions to the company's success through its financial support, its role in key areas such as procurement and use of consultants, and its influence on NTPC's corpo* rate culture. 3.0 Achievemnt Ba&nk Obj_ective 3.1 Retracing the early. years of formation of NTPC a0g4 considering the then prevailing power sectoz environment, the auditors have explicitly recorded "yet, despite the 98 Page 6 of 21 odds, NTPC has been an all-to-rare institutional development succesp, achieving virtually all that was expected of it and in some areas, more." The report describes the main short- fall in Rchieving the objectives of Bank's operation in the Indian Power sector until now is to be found in the area of broad sector objectives relating to long term national power plan, integrated systems operations and SEB reform. It may be noted that NTPC has played the role of a model utility in implementing projects and achieving optimal performance of its power stations. The achievement or otherwise of the sector objectives through implementation of NTPC projects needs to be examined in the wider context of Indian power sector which is characterised, so far, by generally a low level in project implementation, station oreration, finan- cial and institutional performance. NTPC's performance has been, in contrast to this, very impressive and NTPC has demonstrated to the Indian Power Sector, that a utility can be successfully developed in the environment which appeared to others to be non-conducive. In fact, presence of NTPC has been one of the major factors responsible for holding to- gether the Indian Power Secor. The company has provided more and more electricity to the grid from its regional stations to meet growing requirements of the State grids. The influence of NTPC is more pronounced in the areas of project implementation, operation and maintenance etc by way of demonstration effect which is evident from the perform- ance levels achieved by some of the SEBs in the recent years in these areas. NTPC has also influenced SEBs to increase their tariff. In the last few years, a fumber of SEBs have revised their tariff upward. In fact, NTPC has contributed significantly towards the improvement/development of the Indian Power sector. Some of the areas of NTPC's contribu- tion are listed in Para 4.0 below. It may be noted that NTPC has been doing its best for all round development of the sector. However, there is a limit to its area of influence and NTPC cannot force constituents of the sector to follow it. Actual improvement need.s to be brought about by SEBs 99 Page 7 of 21 themselves. It is not clear as to what more could NTPC have done in this regard. Further, bringing about sectoral reform through Bank's operation with NTPC is a matter between the GOI and the Bank. Accordingly, we feel that it is for the Bank and the GOI to decide as to how these reforms have to be brought about. However, with the Union Government having taken initiatives recently towards liberlisation of the Indian economy and all round improvement seen in the indus- trial environment in the country, it is expected that the operation of Power Sector would improve and would become more commercial in the days to come. Further, looking at the changing political and economic environment in the country, there should be no doubt that power sector would witness major reforms. 4.0 NTPC_s contribtion gr tor 4.1 NTPC has played significant role in the growth of Indian power sector by adding large capacities in relatively short time. The company has developed improved systems for project implementation and contract management. With effi- cient operation and maintenance management techniques, NTPC has been able to operate its plants at very high level of performance. The organisation has also contributed to the bringing in of latest technology in power generation and transmission fields. The spin off benefits of these efforts have been felt in the entire sector. 4.2 In the field of Quality Assurance, NTPC has developed stringent quality plans to be adhered to by suppliers/con- tractors. NTPC has been creating a high level of quality consciousness within the organisation as well as in the industry thereby setting standards for the benefit of the power sector as a whole. 4.3 NTPC has a great depth of technical and managerial talent and increasingly this talent pool is being tapped for 100 Page 8 of 21 upgrading the performance of other organisations in the Power Sector. NTPC has been training executives of other power utilities in order to develop their capabilities in different fields. 4.4 NTPC is the first utility in the sector to bring sale of power under commercial agreement, thus introducing a new concept in the sector. 4.5 The Government has expressed its confidence in NTPC by ausigning it a prominent role in the thermal power capacity additions programme. The organisation's privileged position as a leading utility has gained for it significant leverage. The Corporation is today in a position to influence policy decisions for effecting improvements in the power sector of the country as well as to obtain for the nation the benefits of international assistance and latest technologies at the most competitive prices. Further, as a premier power utili- ty in the country, NTPC recognising its obligation has reached out and assisted other utilities in the sector with the objective of bringing about overall sectoral improve- ments. 5.0 HEEn. A fD , .. 5.1 Contrary to the Bank's perception as brought out in the Audit Report, NTPC's role as an "agent of change" in India's power sector is acquiring increasing relevance, as explained above. In the light of continuing institutional shortcom- ings amongst the country's SEBs, NTPC is recognised as one of the few vehicles GOI has to effect meaningful sectorwide improvements. 6.0 Project IMlmentation 6.1 The Corporation has an impressive record of commission- ing its projects as per schedule and in several. cases ahead 101 Page 9 of 21 of schedule notwithstanding the fact that NTPC follows a tight commissioning schedule of 48 months for 200 MW units and 60 months for 500 MW from the date of order of main plant equipment. 6.2 For timely implementation of its large projects, whicb cal.s for co-ordinated working of the various functions within NTPC and the outside agencies involved, NTPC has developed an Integrated Project Management and Control System, inhouse, covering all facets of project-management including engineering, contracts, and construction. This system has proved to be very effective and has enabled NTPC to achieve commendable results in effective project imple- mentation. 6.3 The audit report also brings out that "NTPC's perform- ance in constructing and operating its generation and trans- mission facilities confirms that it has, by most measures, achieved levels of efficiency that not only far exceed those in most of the rest of the Indian Power Sector but also compares with those best performing utilities in the de- veloping world". In fact, NTPC's performance compares with best performing utilities in the developed world too. The audit report has correctly pointed out that certain delays occurred during pre-construction phase, once main contracts were awarded, NTPC was by and large highly successful in constructing its power plants on schedule, even though its schedules called for substantially shorter construction times than those generally prevailing in India. It is perti- nent to note here that pre-construction activities, of which investment approval forms significant portion, are out of NTPC's control. The reasons for certain delays during the pre-construction phase with respect to the SAR estimates have been brought out in the concerned PCRs. These delays occurred mainly on account of the factors unforeseen at the time of the finalisation of the SAR. Further, some of the delays during pre-construction phase have also occurred on 102 Page 10 of 21 account of the fact that the procurement cycle took more time than what was envisaged in the SARs because of certain unforeseen circumstances. However, it is NTPC*s constant effort to cut down the procurement time by improvement in the procurement systems based on the experience gained so far. NTPC has recently finalised updated Model Bidding Documents for supply-and-erection contracts with the Bank taking into account the experience of both NTPC and Bank with a view to streamline procurement procedure. This is expected to result in substantial reduction in the procure- ment time. In some cases, to cut down procurement delays, NTPC issued NITs with Department of Power's permission pending GOI's formal investment approval. 7.0 Oneration PerformInge 7.1 NTPC has established higher norms in the sphere of Operation and Maintenance of power stations. The operating performance of NTPC units has been considerably above those of similar units elsewhere in the country. 7.2 NTPC has been achieving an exemplary operating perform- ance for its units under commercial operation. NTPC recorded an average PLF of 60.9% during 1990-91 compared to all India average of 53.8% for thermal stations. During 1991-92 also, NTPC achieved a PLF of 70.2% against all India average thermal PLF of 55.3%. 8.0 HMAn Resource Development 8.1 One of the main strategies adopted by NTPC in its endeavour to realise its goal of augmenting power generating capacity is effective development of human resources. By means of a systematic approach beginning with the induction process itself and through entry level and mid-career train- ing programmes, the Corporation has created a pool of power professionals, who woule develop to take up future chal- ' AN10N3 Page 11 of 21 lenges of Power Sector. 8.2 The audit's viewpoint that in growing as large as it has, NTPC has lost some of the flexibility and ability to respond quickly to changing circumstances appears to be a general observation not supported by the facts. In this connection, it may be noted that NTPC has been fully con- scious of problems associated with rapid growth of an organ- isation and has been undertaking organisational studies, including studies of diagnostic nature, periodically, both through internal and external resources with a view to take suitable and timely corrective action. It is pertinent to mention here that in the recent past, NTPC has been able to successfully complete the proceedings for taking over of Feroz Gandhi Unchahar Power Project from Uttar Pradesh Rashtriya Vidyut Utpadan Nigam (UPRVUN) within shortest possible time. The takeover of Unchahar plant with over 1000 employees at a cost of over Rs.9 billion involved dealing with a multitude of agencies including GOI, UPRVUN, UPSEB, Government of U.P. etc. 8.3 The Man/MW ratio in NTPC are by far the best and com- pares very favourably with other utilities like SEBs etc. Whereas man/NW ratio for O&N in the power sector at national level averages to 3 to 4, in the case of NTPC the same is only 0.8. Optimum utilisation of manpower being a philoso- phy of NTPC, constant efforts and endeavours are made to further improve the man/MW ratio tending to compare with the best at international level. As already explained, periodi- cal exercises are carried out through internal and external resources to review the manning pattern in NTPC. 8.4 The Bank's viewpoint that NTPC has been seeking in recent years to diversify into a wide range of new activi- ties on account of the need to keep its staff more fully employed does not appear to be based on correct assessment. In fact, as a growing organisation, there is a need for NTPC 104 Page 12 of 21 to diversify in its areas of specialisation for its further growth and survival. Many power utilities wrld over (such as BEI, EdF, EPDC etc.) have also diversified their activi- ties. NTPC's diversification into consultancy area reflects its desire and interest to share rich experience. gained by it over the years with others both within and outside the Power Sector and country. The expertise and experience gathered by NTPC so far is being channelised through con- sultancy for bringing about improvement in the country's power sector. similarly, coming together of SEBs, NTPC and enterprises from private sector under joint venture projects would benefit the country's power sector as a whole as NTPC would be able to provide its varied expertise to such joint venture projects. Power generation through non-conventional energy sources is the need of the future, in view of the increasing trend of environmental consciousness and concern for the 'greenhouse effect' of power generation based on fossil fuel and endeavour world over is to achieve major breakthrough in this field. Development of inhouse R&D expertise has become necessary considering large operating capacity and to undertake indepth studies of problems en- countered in day to day operation of the plants with the ultimate aim of improving plant performance. 8.5 NTPC is fully aware of the danger associated with diversification by scattering its efforts in ways that could distract from its main business. In fact, NTPC is moving in slow and steady manner in this area to guard against any potential danger. 9.0 Future Strateaies 9.1 The audit report quite correctly points out one of tha reasons for NTPC's success is early establishment of a high profile Corporate Planning unit and key role assigned to it, which reflected management's determination to see the new organip%tion develop in a long-term framework. The report 105 Page 13 of 21 further points out that the emphasis on Corporate Planning allows management to take a long-term strategic approach. 9.2 NTPC attaches considerable importance to the long-term strategic planning. The first Corporate Plan of NTPC, which incidentally was the first such exercise taken up by any power utility in the country, was prepared in 1983 covering a time horizon of fifteen years (1985-2000 AD). This plan had defined the objectives of the organisation, and set challenging goals before it. The plan had also identified key result areas and had outlined strategies in each of these areas for achievement of desired objectives. 9.3 While NTPC has achieved a large measure of success in the implementation of the initial phase of the Corporate Plan, significant changes in the business and economic environment in the country during the intervening period necessitated an updation of the plan along with a review of the focus of Corporate Mission and objectives. NTPC pre- pared an updated Corporate Plan covering the period from 1992 to 2007 AD (fifteen years). As a premier power utility in the country, NTPC recognises that it would have to play an important role in the overall improvement of the power sector and proposes to reach out and assist other utilities in this task. According to the company's future growth plans, the corporation would be among the largest utilities in the world by the turn of the century. To ensure that the company's performances compares with the international industry standards, NTPC proposes to- adopt a global perspec- tive. NTPC is also contemplating, on case to case basis, integrated development of power project which would include exploitation of captive coal mines for the power project. 9.4 NTPC's Corporate Planning group has also developed a long-term computerised model for financial projection through the cooperation of different units within the organ- isation. Over the years, this model has proved to be of 106 ANNX Page 14 of 21 immense importance and is now being extensively used as a tool to assist in decision making. The Corporate Planning group is also focal point for co-ordination with various international financial institutions including the World Bank in the areas of financing, Supervision Mission etc. 9.5 NTPC does not see any reason to believe that transfer of transmission functions to NPTC is a potential threat to NTPC's investment programme. It is true that NTPC would not have inhouse control over the construction of lines neces- sary to assure evacuation of power from its new generation plants. However, it may be noted that there would be ade- quate coordination between NTPC and NPTC in this regard. Further, GOI's approval and monitoring agencies would pro- vide additional safeguard to ensure. availability of matching power evacuation arrangements. The operation and maintenance of both new and existing facilities would also be carried out as per the present practice based on the programmes finalised by the REBs and transfer of transmission assets would not, in any way, affect the same. Further, analysis has shown that NTPC would be a viable organisation both with and without transmission systems under its control. 9.6 Regarding the Audit Team's observation that NTPC had to include amongst its proposed investments major projects that it probably would not have chosen if technical and economic justifications were the only consideration, it may be noted that NTPC's projects are selected from the shelf of projects identified by the CEA based on the recommendations of the site selection committees appointed by the GOI and subsequent studies carried out by CEA to establish suitabil- ity of project from the point of view of least cost solu- tion. Further, the investment programme needs to be cleared by CEA from techno-economic considerations before GOI ap- proval. Hence, it is untrue that NTPC's investment programme includes projects not justified on technical and economic grounds. 107 Page 15 of 21 9.7 As brought out in the audit report, it is a fact that there is a potential threat for NTPC to carry out its ambi- tious expansion plan on schedule due to delay in approval of new projects, on account of several factor beyond NTPC's control (including the environmental clearance process which is still evolving). The country is passing through financial resources problem. Further, the World Bank has also not extended financial assistance to NTPC after 1987 because of NTPC's accounts receivable position, and thus affecting NTPC's growth. This, coupled with increased fund require- ment because of all round increase in costs makes it very difficult for NTPC to carryout its expansion plan. NTPC is of the view that the Bank can consider relaxing the crite- rion of limiting accounts receivable to two months' sale. The audit report also accepts that the accounts receivable has limited influence on the financial viability of the Corporation and could, at best, be identified as a cash flow problem and needs to be treated in the same manner. 9.8 Regarding approval of NTPC's investment programme as a whole, as pointed out in the report, it may be noted that NTPC expects that this approach would take care of some of procedural delays in project approvals. However, NTPC has not yet posed this proposal formally to GOI. 10.0 Tarift 10.1 NTPC's commercial activities includes setting of appro- priate tariff and collection of revenue from the benefici- aries for the bulk power supplied. NTPC's clients are pre- determined. NTPC was the first public sector utility in the country to enter into commercial bulk power supply agree- ments (BPSA) with its clients (beneficiaries). NTPC has been supplying its power on the basis of a flat rate tariff based on the normative parameter (representing very high level of performance) under the BPSA. Tariffs normally are 108 Page 16 of 21 fixed for five years and include provision for fuel cost escalation, but are not adjustable to reflect the replace- ment cost. While a power station is relatively new, the station's tariff is close to NTPC's marginal cost of supply. However, in an inflationary environment, the tariff deterio- rates in real terms and diverges from NTPC's marginal costs of supply. In fact, the adverse impact of using historic iccounting data for tariff formulation has been partly offset by increasing rate of depreciation and return on equity. GOI has increased depreciation rate from 3.6% to 5.28% and the return on GOI equity contributions from 10% to 12%. The rate of return for projects being accorded invest- ment approvals after March 30, 1992 has been further revised to 16%. 11.C Future lendina tg 'MC 11.1 NTPC envisages to add substantial generating capacities during the years to come. While it has plans to add about 6000 NW capacity during the Eighth Plan period, it expects to add about 9000 MW during Ninth Plan period. In order to achieve such ambitious targets, NTPC would need to mobilise substantial financial resources both from within and outside the country including the World Bank. 11.2 The audit has suggested that progress must be made to establish in the SEBs the financial and commercial disci- pline which is needed to ensure the sustainability of the benefits derived from the Bank's huge investment in NTPC and such progress should be a condition of Bank's further in- volvement. In this context, it may be noted that the re- source crunch being faced by the country would severely curtail the national generating capacity addition, if Bank's assistance to a well established Institution such as NTPC is denied at such a crucial juncture on account of one reason or another. This would in turn lead to an irreversible negative growth in the industrial and agricultural sector 109 Page 17 of 21 resulting from widespread power shortages. Further, all other efforts being made by the GOI and being supported by a host of Financial Institutions such as IMF/World Bank etc. to reform the Indian economy could be non-starters for want of adequate amount of energy. Under the above situation, there would probably be no alternative except NTPC as a viable institution to go ahead with a .substantial project implemen- tation programme. 11.3 Based on the experience of operation with NTPC and many other operations in the past several years, the audit has suggested that a pre-requisite for the success of complex operations or major components of such operations seems to be a broad vision shared by all parties of the desirable development to be achieved and the means to achieve it. In this connection, it may be noted that NTPC, as a new strate- gy based on its experience, is already moving towards a Ocomposite approach' of consulting with its beneficiaries in the setting up of new projects and agreements for sale of power from its power stations. 12.0 Einancial Performancn 12.1 NTPC has presently a favourable financial position as a result of prudent financial management practices followed eince its creation and adoption of appropriate financial control systems and standard accounting practices followed internationally. The financial performance of NTPC has also been impressive, with the organisation generating profits ever since the beginning of commercial operation. The profit in the year just concluded (FY 92) was about Rs. 10 billion. NTPC is one of the largest profit making public sector enterprises. 12.2 NTPC's specific comments/additional information/modifi- cations on some of the points concerning financial perform- ance are given in the attachment 1. Page 18 of 21 Table 1 - NTPC Employment FY 80 813 3878 4691 FY R5 3324 10486 13810 FY 90 6373 15379 21752 Average Amnal Inrease (%) FY 1980-1985 33 22 24 FY 1985-1990 14 8 9.5 en1 111 Page 19 of 21 LONG-TERM BORROWING;FOREIGN EXCHANGE EXPOSURE AND RISK The exchange risk on foreign borrowings is disclosed in the accounts of the corporation as per the accepted Accounting Standards which stipulate that loan liability to be increased on one side and corresponding assets to be revalued at the end of each fiscal year. This presentation has been accepted by the external auditors as Comptroller & Auditor General of India. It does not prevent in any manner the analysis of the impact of foreign exposure of the Corporation. Further, since IDA credits, which are given to Govt. of India, are onlent to NTPC in Rupees, the exchange risk on such IDA loans cannot be disclosed in the Corporation's Accounts. The exchange risk can be capitalised till the plants are commissioned and this is an internationally accepted Principle of Accounting which the Corporation is following. It is not the presentation which leaves the exchange risk under finance but the repayment schedules being shorter than the depreciation cycle of the plant which leaves exchange risk under financed. This supports the view that maturity period of loans should be more than 20 years instead of 15 years as being enforced now by IBRD/IDA. CAPITALISATION OF EXPENSES The capitalisation of expenses before commissioning of the plant is an internationally accepted Principal of Accounting. The contention of the audit that in fiscal year 1991, about 90% of the expenses were capitalized,is incorrect as during that year only 52% of the expenses were capitalised and every year this percentage has been more or less around that figure only. In the presentation, one may conclude that the Corporation is operating either without labour cost or overheads but the fact remains that only certain percentage of the labour cost is capitalised (in fiscal year 1991 this percentage was 33%),rest all is charged against the income. In the stations which are not yet commercial, the expenses including depreciation on construction assets have to be capitalised till the plant is declared commercial and this practice has been accepted by the external auditors. There is no discrepancy as far as capitalisation of interest during construction is concerned as IDC is calculated on project to project basis. The projects under construction beyond 1989 have a higher capital cost than the projects which were implemented earlier. Moreover, the cost of borrowing funds in the later 112 AMS Page 20 of 21 projects has been much higher as compared to projects taken in the initial years of the Corporation. This results in higher quantum of interest being capitalised. The contention of Audit that NTPC is over capitalising expenses and IDC is not correct. Also that NTPC is trying to create a buffer with more cash flow in order to show higher Capital Cost appears to be not justified since this Corporation has been following all the international standards of accounting while compiling its accounts. Page 56 Note In the absence of reference of NTPC document, it cannot be ascertained as to how the data is different in two documents but, however, it may be relevant to add that the statement Financing of NTPC outlay included in the Annual Report indicates the figure of Net Budgetary Support on a year to year basis. FINANCIAL COVENANTS OF FOREIGN FINANCIERS The disbursement from loans like World Bank and Saudi Fund for Development (SFD) which are primarily taken by GOI and are thereafter passed on to NTPC are not our direct loans and as such do not appear in Balance Sheet of NTPC a& loans from World Bank or loans from SFD. As such, the existing presentation in our balance sheet is correct and positions as stated in Para 148 does not reflect the correct position. Since the SFD loan is for a specific project of NTPC, it is also a source of International Assistance made available to NTPC for construction of project. Accordingly, the same has been shown in the annual report (P-23) for 1990-91 along with other International Assistance. CONVERSION OF LOAN INTO EQUITY The project financing has to be in the debt equity ratio of 1:1 was quiet clear and transparent to all the financiers including Bank. The fact that IDA credits were not being onlent as loan was known to the Bank and Bank insisted for onlending as loan and made the repayment schedule more stiffer with higher rate of interest after 1986. Despite the policy of th' Government which was issued in 1979 regarding debt equity of 1:1 Government went ahead with onlending after 1986, as per the advice of World Bank, the credits as loans thereby violating its own policy of maintaining the debt equity ratio of 1:1. NTPC had based all its cost estimates and tariffs on the debt equity of 1:1 which is now affecting adversely the structuring of tariff with the Banks' insistence of onlending the credits as loan. 113 AWX Page 21 of 21 There is no discrepancy as pointed out by the Audit regarding Bank loans to the tune of Rs.8962 million, because NTPC has adopted the policy of 1:1 till 1986 and after that the disbursement was made as loans as per the advice of World Bank. As regards conversion of loans into equity to the tune of USS 456.78 million, it may be clarified that all these loans were taken by NTPC before the condition of onlending as loans was introduced and after 1987, all loans sanctioned by World Bank have been disbursed as loans only which is contrary to the Government's policy of maintaining t'- debt equity of 1:1. COST ESTIMATES The audit report mentions about under-estimation of the cost of the projects following Korba-I. In this connection, it may be noted that the appraisal estimates were based on the most authentic latest costs then available. The reasons for increase in completion costs have been explained in the concerned PCRs. Most of the increases are generally attributable to (i) customs duty for which allowances were not made in the original cost estimates, (ii) depreciation of rupee, (iii) higher than anticipated increase in the price of equipment and materials, (iv) changes in the scope of project to inter-alia cover expenses for trial and pre-commissioning.
Группа Всемирного банка · Project Performance Assessment Report
India - Thermal Power Projects
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