India - Second Farakka Thermal Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15243 PROJECT COMPLETION REPORT INDIA SECOND FARAKKA THERMAL POWER PROJECT (LOAN 2442-IN) DECEMBER 29, 1995 Energy and Infrastructure Operations Division South Asia Country Department II 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.  COUNTRY EXCHANGE RATES AND ABBREVIATIONS Currency Unit = Rupee (Rs.) Rs.l =Paise 100 RUPEE (Rs.)/USS EXCHANGE RATES AND CPI (Yearly Averages) Exchange Rate Consumer Price Index Fiscal Year Rupee/USS FY 80/81 = 100 February 28, 1986 (SAR) 13.00 148.0 FY 87/88 13.92 163.2 FY 88/89 16.23 176.3 FY 89/90 17.50 190.6 FY 90/91 22.74 216.3 FY 91/92 26.20 237.0 (estimate) FY 92/93 31.20 FY 93/94 31.46 Average Rate during project implementation period: US$1 = Rs. 21.80 Government of India and NTPC Fiscal Year: Apnrl I - March 31 Measures and Equivalents I Ton (t) = 1 metric tonne = 1,000 Kg = 2,204 lbs. I Kilovolt 1,000 volts (V) I Kilovolt ampere (kVA) = 1,000 volt-amperes (VA) 1 Kilowatt-hour (kWh) 1,000 watt-hours 1 Megawatt-hour (MWh) 1,000 kilowatt-hours 1 Gigawatt-hour (GWlh) 1,000,000 kilowatt-hours ABBREVIATIONS AND ACRONYMS The Act : Electricity (Supply) Act of 1948, as amended CA : Central Appropriations CEA Central Electricity Authority CPI : Consumer Price Index EREB Eastern Regional Electricity Board GOI : Government of India IBRD International Bank for Reconstruction and Development ICB : International Competitive Bidding IFC International Finance Corporation NTPC National Thermal Power Corporation PAP Project Affected Person PLF : Plant Load Factor QA Quality Assurance R&R : Resettlement and Rehabilitation SEB : State Electricity Board  FOR OFFICLAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation December 29, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India Second Farakka Thermal Power Project (Loan 2442-IN) Attached is the Project Completion Report (PCR) on the India: Second Farakka Thermal Power Project (Loan 2442-fN, approved in FY84) prepared by the South Asia Regional Office; Part II was received from the Borrower, the Government of India, and from both the implementing agency, the National Thermal Power Corporation (NTPC), and the current owner-operator of the transmission lines component (PowerGrid). The Loan, in the amount of US$300.8 million equivalent, was closed on April 30, 1994, more than two years after the original date. US$54.7 million equivalent were canceled after all the eligible expenditures had been submitted. It was the ninth Bank-financed operation to assist the power sector in India. The main objective was to provide additional least-cost thermal capacity in Eastern India to help eliminate power shortages. Another objective was to promote regional power systems leading ultimately to a national grid. The physical components consisted of construction of two 500 MW coal-based generating units for a total of 1,000 MV additional capacity and of 640 kms of high voltage transmission lines. The project was plagued with delays, most beyond NTPC 's control. There was an initial one year delay in effectiveness due to labor unrest on the plant site; then the delivery of construction materials was delayed by suppliers; finally, implementation was delayed by a heavy monsoon, a cyclone and difficult soil conditions on the plant site. The project's physical components have been substantially completed. The plant is not yet operational, however, because of problems with the equipment and civil works (overheating boiler and vibrating turbine). The PCR notes, however, that the project benefits will materialize after these problems are solved by the end of 1996. Given NTPC's and the contractor's experience, this is a reasonable expectation. The PCR anticipates a 17 percent rate of return. It rates the project as satisfactory and the sustainabilitv of benefits as likely since NTPC's tariff formula allows the recovery of capital and operating costs plus a profit, and sector policy reforms have strengthened NTPC's finances, including the collection of bills. The Operations Evaluation Department (OED) agrees with the PCR that the project outcome is satisfactory, that its sustainability is likely, and that its institutional development is partial. The PCR provides adequate information about implementation and construction delays. No audit is planned. Attachment 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 INDIA SECOND FARAKKA THERMAL POWER PROJECT (LOAN 2442-IN) PROJECT COMPLETION REPORT TABLE OF CONTENTS Preface Evaluation Summary ............... -i 1. PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE Project Identity 1. Background . . Project Objectives .2 Project Description .2 Project Design and Organization. 2 Project Implementation. 3 The Implementing Agency (NTPC) at time of Project Appraisal. 7 NTPC at the Time of Loan Closing .7 Financial Aspects .8 Comparison with Second Farakka Thermal Power Project SAR Forecasts .11 Environment, Resettlement and Rehabilitation .12 Project Reslts .12 Bank Performance .13 Borrower Performance .14 Project Relationship .15 Consulting Services .15 Project Documentation Data .15 2. PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. Comments by NTPC Project Objective ..16 Project Design ..16 Project Implementation ..17 Operating Experience ..18 Evaluation of Borrower's Own Performance . .19 Evaluation of Performance of the Bank and Cofinanciers . 21 Plan for the Operational Phase of the Plant . .21 Adequacy and Accuracy of Factual Information in Part-III. . 22 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 wiLhout World Bank authorization.  B. Comments by POWERGRID Preface .................................. . 23 Environment, Resettlement and Rehabilitation . ........................... 23 Final Payments .................................. 23 Procurement .................................. 24 Evaluation of the Borrower's Own Performance .................................. 24 Annex I to Part II .................................. 25 Annex II to Part II .................................. 26 3. PART III: STATISTICAL TABLES Table 1: Summary of Assessments .. ....................... 27 Table 2: Related Bank Loans/Credits .. ....................... 28 Table 3: Project Timetable ......................... 29 Table 4: Loan Disbursements ......................... 29 Table 5: Key Indicators for Project Implementation ................................. 30 Table 6: Key Indicators for Project Operation . ........................................ 30 Table 7A: Project Costs ............................................ 3 1 Table 7B: Project Financing ............................................ 31 Table 8: Economic Costs and Benefits .................................. 32 Table 9: Status of Legal Covenants .................................... 33 Table 10: Bank Resources: Staff Inputs ................................. 34 Table 11: Bank Resources: Missions ................................... 34 Table 12: NTPC's Actual Income Statement Compared to SAR Forecasts ............................................ 35 Table 13: NTPC's Annual Fund Flow Statement Compared to SAR Forecasts ............................................ 37 Table 14: Summary of Sources and Application of Funds .. 38 Table 15: NTPC's Actual Balance Sheet Compared with SAR Forecasts .......................................... 39 ANNEX A: Site Selection, Commitment, Implementation ................................... 41 ANNEX B: Environment and Resettlement & Rehabilitation .............................. 43  INDIA SECOND FARAKKA THERMAL POWER PROJECT (LOAN 2442-IN) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Second Farakka Thermal Power Project in India, for which Loan 2442-IN in the amount of US$300.8 million equivalent was approved on June 14, 1984 (FY84), signed on June 29, 1984, and made effective August 30, 1985. The loan closed on April 30, 1994 vis-a-vis the original loan closing date of December 31, 1991. The loan in the amount of about US$246.1 mnillion equivalent was disbursed by September 13, 1994; about US$54.7 million equivalent was canceled as it was not required. Cofinancing was provided by the Kreditanstalt fur Wiederaufbau (KfW), Germany, Government of Italy, Bankers Trust Company, and the Exim Bank of Japan. The balance amount was met by equity contributions and loans from the Government of India (GOI) as well as by the National Thermal Power Corporation (NTPC) from its own internal resources. The loan, made to the GOI, was onlent to NTPC for implementation. The physical components of the project comprised the installation of two 500 MW generating units and about 640 km of associated, high voltage transmission lines. The main objectives of the project were to provide additional least-cost thermal capacity in the Eastern Region to help in gradually eliminating power shortages in., the region. Also, through participation in financing the project, the Bank had the opportunity to promote the development of regional power systems in India that would ultimately lead to a national grid,"and to assist in the development of the Indian power sector in such areas as organization and policies for the operation of regional and national power systems, and long-range national power development planning. The physical objective of the project was to assist in meeting the electricity demand in the EastOm Region of India through the addition of 1,000 MW of thermal capacity at the Farakka thermal power plant in West Bengal, where three generating units of 200 MW each, were already being installed with the assistance of the Bank (Ln. 1887-IN and Credit 1053-IN), along with associated transmission lines. The responsibility for the implementation of the transmission facilities was transferred to the Power Grid Corporation of India Ltd. (POWERGRID) in August 1991. The physical implementation of the power generation project is still incomplete because of delays in construction, as well as serious equipment problems, much of which is beyond the control of NTPC. Transmission lines and substations have been commissioned. The PCR (Preface, Evaluation Summary, Parts I and III) was prepared by the Energy and Infrastructure Operations Division, South Asia Country Department II, with input from NTPC. Part II (Project Review from the Borrower's Perspective) was prepared by GOI, NTPC and POWERGRID.' Preparation of this PCR started during the Bank's supervision missions of the project in February and June 1994, as well as a follow up mission in November 1994, and is based, inter alia, on the Staff Appraisal Report (No. 4967-IN), the Loan and Project Agreements, supervision reports, correspondences between the Bank and the Borrower, internal Bank memoranda and the Project Completion Report prepared by NTPC for its own internal evaluation and archives. l Conmnents by NTPC and POWERGRID were endorsed by GOI and sent to the Bank with GOI's letter dated August 16, 1995, which was received at Bank Headquarters in mid-October 1995.   INDIA SECOND FARAKKA THERMAL POWER PROJECT (LOAN 2442-IN) PROJECT COMPLETION REPORT EVALUATION SUMM1ARY Introduction 1. At the time the project was initiated, consumption of electricity in India was growing at an average annual rate of 8 percent over-the past two decades. In the 1950s and 1960s, installed capacity and power generation managed to keep pace with the nation's demand for power. Since 1970, however, the situation started to deteriorate rapidly. Delays in the commissioning of new power plants, operating and maintenance problems (mostly due to lower than design coal quality), and insufficient investment under severe budget constraints led to a critical shortage of power. Specifically, the Eastern Region at the time was experiencing a severe shortage of capacity and energy, that had led to widespread rationing and permanent overloading of existing thermal units-a situation that resulted in increased operation and maintenance costs as well as high forced outage rates of these units. Objectives 2. The main objectives of the project were to provide additional least-cost thermal capacity in the Eastern Region to help in gradually eliminating power shortages in the region, and through participation in financing the project, to give the Bank the opportunity to promote the development of regional power systems in India. It was envisaged that this would ultimately lead to the creation of a national grid, and assist in the development of the Indian power sector. Implementation Experience 3. The implementation of the project is yet to be completed. At appraisal, commercial operation of the two units was set at May 1990 for Unit 4 and May 1991 for Unit 5. Even though Unit 4 was synchronized in September 1992 and Unit 5 in February 1994, it has not been possible to place the two units in commercial operation due to serious equipment problems. The main reasons for the delay are: (a) Vibration in the turbine-generator units, which took a long time to rectify; (b) Damage to the boiler superheater tubes of Unit 4 during commissioning, which required extensive modification in both boilers;  ii (c) Failure of Unit 4 Electrostatic Precipitator support structure, leading to reinforcement of the support steel in both units. Sustainability 4. In spite of the implementation delays and equipment problems, the project is clearly sustainable because the demand for the full output of the 2 x 500 MW power generating units exists. NTPC is addressing the equipment problems with the help of manufacturers of the equipment and hopes to resolve them satisfactorily in the near future. Power generated at the Farakka Superthermal Power Plant is already being shared by West Bengal and its neighboring states. There is, however, a need for further strengthening the subtransmission and distribution network in the region to absorb the full output of the plant. NTPC is addressing this issue with the help of the Power Grid Corporation of India Ltd (POWERGRID). The present tariff setting procedures for generation from NTPC stations should allow recovery of capital and operating costs and provide a reasonable profit margin for capital improvements. The new two-part tariff (Part I to cover fixed costs and Part II the variable costs), introduced with effect from November 1, 1992, should provide for incentives to operate the plants efficiently and with high availability; however, it is being administered by the Eastern Regional Electricity Board (EREB) in a manner that dilutes the two-part tariff to basically a one-part tariff because of the global accounting system that also acts as an impediment to merit order dispatching. The recent policy reforms implemented by GOI have significantly changed the commercial operations of NTPC and increased its financial strength such as to permit raising funds in both the domestic and international markets. Summary of Project Cost and Financing Arrangements 5. The actual project cost was Rs. 21,148 million (US$ 970.1 million equivalent), including the associated transmission components and interest during construction. In terms of Rupees, the project cost increased by almost 46 percent because of the devaluation of the Rupee with respect to the US dollar, while in terms of the US$ the project cost was lower by as much as 27.6 percent. 6. The Bank loan of US$246.1 million equivalent (US$ 54.7 million canceled from the original loan amount of US$300.8 million) provided about 25.4 percent of the total project cost. Financing was also provided by the Kreditanstalt far Wiederaufbau (KfW, Germany: DM 50.6 million equivalent), Government of Italy (DM 159.9 million equivalent), Banker's Trust Co. (DM 189.1 million equivalent), and Exim Bank of Japan (Yen 10,221 million equivalent). The balance of the project cost was met by GOI loans and equity contributions, as well as by NTPC from its own internal resources.  iii Implementation Time Table 7. Project implementation suffered due to: (a) delays in meeting the conditions of loan effectiveness; (b) delays in procurement; (c) persistent site labor unrest; and (d) serious equipment problems during the commissioning phase of the plant. The loan closing date had to be extended three times to permit disbursements to be completed against commitments under the loan. Summary of Performance of the Borrower and the Bank 8. The performance of NTPC was satisfactory in respect of compliance with the covenants of Ln. 2442-IN. The covenant requiring, NTPC's accounts receivable to be reduced to a level not exceeding an amount equivalent to the preceding two months of billing was not part of the conditions of this loan. The covenant was first introduced under Ln.2555-IN for the Rihand Power Transmission Project (PCR No.12640 dated December 29, 1993). As bill collection has been a persistent problem with NTPC because of the poor financial situation of many SEBs and the lack of an appropriate contractual framework for the sale of bulk power during the implementation of the Second Farakka Therrnal Power Project that affected the GOI-Bank-NTPC dialogue, it is also described in this PCR. GOI introduced a number of policy reforms in the power sector in FY93 which significantly changed the commercial operations of NTPC. As a result, better collection from the SEBs and payments by GOI through Central Appropriations (CA) on behalf of the SEBs helped NTPC gradually reduce the accounts receivable on the current billing to less than two months. 9. The Bank remained intimately involved in the implementation of the project, from preparation through completion. It maintained good relations with NTPC throughout the execution of the project. The Bank was instrumental in helping NTPC correct a number of shortcomings of broader sectoral concerns in their operations, such as, the introduction of a more comprehensive approach towards environmental protection and resettlement and rehabilitation (R&R) issues, liquidation of accumulated arrears of SEBs, as well as establishment of a training institute to help develop human resources. However, the Bank should have addressed NTPC's unsatisfactory accounts receivable problem and its failure to meet the associated loan covenants in other projects much earlier on and acted more firmly by invoking remedies under the loan agreements of those projects to correct the situation. Project Outcome 10. The prirnary objectives of the project have been accomplished; viz., additional least-cost thermal capacity in the region has been installed through the construction of the project, regional power systems have been established, and long-range power development planning capability through attendant organizational changes in the NTPC has been achieved. The improvement of financial discipline in NTPC's operations has increased its credibility and potential to borrow from commercial sources. However,  iv the project has not yet been successful in meeting its physical objectives; the 2 x 500 MW generating units are yet to be stabilized and placed in commercial operation. Findings and Lessons Learned 11. Major findings are as follows: (a) Site selection for a power plant must be free of any political influence and should be based purely on technical and economic merits (Part I, para 6); (b) Prequalification of bidders should be done ftor large and complex procurement. This ensures that invitations to bid are extended only to those who have adequate capabilities and resources. Also, the Bank should present a power project proposal to its Board of Directors for approval only after tender documents for the long-lead, main packages have been prepared (Part I, para. 10); (c) The procurement cycle, starting from issuing of bid invitation to contract award, should be significantly shortened. Delays in the procurement cycle caused slippage of the project implementation schedule as compared to the schedule set at appraisal. Being an autonomous corporation, NTPC should also make its own procurement decisions independent of any external involvement in the process (Part I, para. 14); (d) A sound financial health is a key element to the success of a utility. The project helped improve NTPC's financial position with the improvement of financial discipline in their operations. The financial strength of NTPC has put them in a position to raise funds in both domestic and international markets. NTPC could exploit its current financial capability to accelerate implementation of its investment program (Part I, para. 34); (e) It is necessary to set the tariffs appropriately based on merit order dispatch so that the relative efficiencies of the power plants are reflected in their operation and the SEBs feel comfortable tapping from the most economical sources (Part I, para.40); and (f) The R&R aspects of a project need to be addressed as a part of the Environmental Impact Assessment and detailed during project preparation. The R&R issues had to be revisited again based on Bank guidelines that require the Project Affected Persons (PAP) to be compensated for their losses and rehabilitated such that their former living standards and income capacity were at least restored. These guidelines were agreed between the Bank and NTPC in 1993, towards the end of the project (Part I, para. 41).  INDIA SECOND FARAKKA THlERMAL POWER PROJECT (LOAN 2442-IN) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE Project Identity Project Name Second Farakka Thermal Power Project Loan Number : Loan 2442-IN RVP Unit : South Asia Region Country : India Sector Energy Subsector Power Background 1. In India, responsibility for electricity supply is shared constitutionally between the Government of India (GOI) and the States. The State Electricity Boards (SEB) and the Regional electricity Boards are controlled by the States; the Ministry of Power of the GOI administers the Central Electricity Authority (CEA), the National Thermal Power Corporation (NTPC), the National Hydroelectric Power Corporation (NBPC), the Rural Electrification Corporation (REC), and the Power Finance Corporation (PFC). The SEBs, NTPC, NHPC and POWERGRID are charged with the responsibility of promoting the development of the power subsector under the Electricity (Supply) Act of 1948. 2. The performance of SEBs was vitiated by poor quality and persistent unreliability of power systems. Chronic power shortages in the 1970s and the adverse effect these were having on the productive sectors of the economy prompted the GOI to intensify its efforts to balance the demand and supply of electricity. The strategy developed for this purpose was to supplement the efforts of SEBs by installing large power plants, along with associated high voltage transmission lines, in different parts of India where power shortages were acute. The emphasis was on: (a) accelerating the development of hydropower potential and large coal-fired power plants at pit- head locations and in the proximity of load centers; (b) improving the efficiency of the thermal power plants and reducing losses in the transmission and distribution networks; (c) expanding the rural electrification program; and (d) strengthening the organization and management capabilities of the SEBs. 3. Based on a feasibility report in 1978 supporting the location of thermal power plants near coal mnines, GOI decided to construct four large thermal power plants of 600 MW each at Singrauli, Korba, Ramagundam and Farakka. The study had concluded that the Farakka site could support as much as 2, 100 MW of power generation (3 x 200 MW + 2 x 500 MW + 1 x 500 MW)  2 to be built in three phases. The first 3 x 200 MW generating units of the Farakka Thermal Power Project were installed as a part of the initial program of development. The 2 x 500 MW units thus came to be installed in the second phase of the project. Appraisal of the project was made by the Bank in November/December 1983. Project negotiations were held in Washington from April 27 to May 8, 1984 and the loan of US$300.8 million equivalent was approved by the Board on June 14, 1984. The loan became effective on August 30, 1985. GOI was the Borrower of the loan; NTPC was the implementing agency with the Borrower's assistance, under a subsidiary loan agreement. Project Objectives 4. The primary objective of the project was to provide additional least-cost thermal capacity in the Eastern Region to help in gradually eliminating power shortages in India in general, and in the Eastern Region in particular which was experiencing severe power shortages, widespread rationing, and permanent overloading of the existing thermal units. The participation in financing the project was to give the Bank the opportunity, through its continuing dialogue with the GOI, to help establish regional power systems that would ultimately lead to the creation of a national grid, and to assist in the development of the Indian power sector in such areas as: - development of sector organization and policies for the operation of regional and national power systems; and - long-range national power development planning. Project Description 5. The project comprised the following components, as established at appraisal: (a) Construction of 2 x 500 MW thermal generating units, including boilers, turbine- generator sets, electrical and mechanical auxiliary equipment, associate civil works and common services and facilities; (b) about 640 km of three, 400 kV double-circuit transmission lines, connecting Farakka with Jeerhat, Biharsharif and Durgapur; and (c) technical assistance for engineering and design of the power station. Project Design and Organization 6. The feasibility report of the project was prepared jointly by NTPC and its consultants in 1978. The project was conceived for a total installed capacity of about 2,100 MW, using coal as primary fuel for power generation. The first three generating units, 200 MW each were installed during the implementation of the first phase of the project under IDA Credit 1053-IN and IBRD Ln.1887-IN from 1981 to 1990. These units are already in operation. The Second Phase under the project loan included the two 500 MW units and associated 400 kV transmission lines. There is provision for a third 500 MW unit to be installed on the same site, which would bring the plant to its ultimate design capacity of 2,100 MW. However, there are serious questions about the  3 suitability of the selected site. Of the three most important factors that influence the selection of a coal-fired power plant site, viz., availability of fuel, abundance of cooling water and proximity to the load center, none appears to have been adequately satisfied in this case. The plant is far away from the coal fields, there is no certainty that the cooling water drawn from the Farakka barrage could be sustained over the life of the power plant, and the place is far away from the load center. Technical and economical merit appears to have been relegated in favor of extraneous considerations in the selection of this particular site. 7. NTPC, at the time of appraisal, had a three-tier organization structure: Corporate level, Regional level and Project level. The organization changed over time to answer NTPC's changing responsibilities, from a fully investment-oriented enterprise towards a public utility. The Corporation is headed by a Chairman and Managing Director (CMD), who is assisted by five full- time functional Directors in the following areas: Projects, Technical, Operations, Finance, and Personnel. At the corporate office, Corporate Planning, Central Procurement and Vigilance functions are headed by Executive Directors reporting to the CMD. For the purpose of administration and execution of work at the sites, the Corporation is divided into five regions- North, West, South, East and National Capital-whose headquarters are located at Allahabad, Nagpur, Hyderabad, Patna and Delhi, respectively. These regions are under the control of Regional Executive Directors who are responsible for the implementation and operation and maintenance of power plants in their respective regions. Each power plant is headed by a General Manager, reporting to the Regional Executive Director. 8. NTPC underwent a major organizational change on August 16, 1991, following GOI's decision to entrust the transrnission assets (operation and maintenance of existing facilities, as well as those under construction) to the National Power Transmission Corporation, later renamed as Power Grid Corporation of India, Ltd. (POWERGRID). Subsequently, on January 8, 1993, the NTPC, NHPC and NEEPCO (Acquisition and Transfer of Power Transmission Systems) Ordinance, 1993, promulgated by the President of India, provided for the transfer of transmission systems of these entities, including all the rights, titles and other interests related to the transmission systems of each of the corporations retroactively to POWERGRID with effect from April 1, 1992. Project Implementation 9. Loan Effectiveness and Project Startup. Ln.2442-IN was approved by the Board on June 14, 1984; the Loan Agreement was signed on June 29, 1984. Copies of signed contracts for the sale of power by NTPC to the States of the Southern (Ramagundam) and Eastern (Farakka) regions, and the conclusion of a subsidiary loan agreement between the GOI and NTPC, satisfactory to the Bank, were conditions of loan effectiveness. While a satisfactory subsidiary loan agreement between GOI and NTPC was signed on September 21, 1984, bulk power supply contracts between NTPC and the SEBs of the Eastern and Southern regions for the sale of electricity by NTPC, took a long time to finalize. The last date of effectiveness of the loan had to be extended four times to enable NTPC to satisfy this condition. The loan finally became effective on August 30, 1985.  4 10. Implementation Schedule. At appraisal, it was estimated that contract awards for the major pieces of equipment (boiler and turbine-generator) would be signed by March 1985. The Bank mandated that a proper prequalification should be conducted for the procurement of turbine-generators to ensure that only those who had adequate capabilities and resources would participate in the bidding. NTPC agreed to do so after some initial resistance. The process of complying with this requirement caused a delay of one full year in the implementation of the project. The contract award for the turbine-generators was made in March 1986. Commnercial operation of the first unit (Unit 4) was set at appraisal for May 1990, to be followed by the second unit (Unit 5) one year later, in May 1991. The overall project implementation schedule, from contract award for the main packages (boiler and turbine-generator) to commercial operation, called for an elapsed time of as much as 63 months, which was far above the industry standard of about 48 months. At this point, however, this matter is of academic interest only since the two units are yet to be placed in commercial operation. On its part, the Bank should not have gone to the Board for project approval before the tender documents for the long-lead, main packages were ready. 11. Labor unrest and unlawful practices, to the point of being a threat to the safety of the project staff, were also major factors in the delay suffered by the project. Laborers who worked in the construction of Stage I of the project, insisted that they must all be rehired for Stage II. Project Affected Persons (PAP) demanded a much higher rate of compensation for the land acquired by the project. These gave rise to serious law and order problems. NTPC officers were insulted, harassed, physically abused and constantly threatened. 12. Additionally, delayed delivery of construction materials by several contractors, heavier than normal monsoon, soft soil conditions at the site and a severe cyclone that caused three piling rigs to collapse, and finally, persistent equipment problems, were responsible for numerous implementation delays. 13. Serious operating difficulties were experienced during the commissioning of Unit 4, the more important of which were as follows: (a) Excessive vibration in the turbine-generator during initial operation. The machine was dynamically balanced, (b) Boiler superheater tube failure due to overheating. Operating procedures were modified to overcome this problem; however, spray water injection to control the superheat temperature is still excessive; (c) Collapse of one of the passes (Pass D) of the electrostatic precipitator under the load of ash. Foundation and supports are being reinforced at this time. 14. Procurement. All Bank-financed contracts were procured following ICB procedures. Consultant services were also funded under the Bank loan. The procurement cycle, starting from issuing of bid invitation to contract award, was generally too long. Also, there appears to be an overemphasis on approvals and clearances by different agencies. NTPC, being an autonomous  5 corporation, should make its own decisions for procurement independent of any external involvement in the process. 15. Serious difficulties were experienced in the procurement of Generator Transformers (200 kVA, Single-phase, 400 kV) which were ordered on the lowest evaluated bidder from Yugoslavia (M/s Rade Koncar, Zagreb). Because of political turmoil in that country, the contractor was unable to perform and fell behind schedule with respect to the promnised delivery. The contract for three out of seven transformers had to be canceled. The award for the three transformers was then placed with M/s TELK of India, but they also failed to deliver on time because of delays in the import of raw materials needed for the manufacture of the transformers. 16. Transmission Lines and Associated Substations. Even though not funded under the Bank loan, the associated transmission lines were a part of the project. The following 400 kV lines were included under the project for the evacuation of power from the Farakka plant: Line Actual Length (ckt. Km) Date Commissioned Farakka-Jeerhat, S/C 236 March 1993 Farakka-Biharsharif, D/C 296 September 1991 Farakka-Durgapur, S/C 146 April 1992 Durgapur-Jamshedpur, S/C 190 March 1994 Substations. 400 kV AC Biharsharif July 1991 Jamshedpur September 1992 Durgapur January 1994 Jeerhat (WBSEB) November 1994 The Durgapur-Jamshedpur line was added after project appraisal and financed by NTPC from its own internal resources. Since August 1991, the transmission facilities implemented under the project are being managed by the newly created POWERGRID Ltd. (para. 8). 17. Project Costs. At appraisal, the total cost of the project, including the transmission component, contingencies, taxes and duties, interest during construction, and a front-end fee, was estimated at about Rs. 14,477 million (US$1,340.5 million equivalent at an exchange rate of US$= Rs. 10.80), of which Rs. 5,627.6 million (US$521.1 million) represented the foreign exchange cost. The actual cost of the project, including the transmission component and IDC, was Rs. 21,148 million (US$ 970.1 million equivalent at an average exchange rate of US$=Rs. 21.80), representing an increase by about 46 percent in rupee terms. An increase of Rs. 9,754.2 million was due to the devaluation of the rupee with respect to the US dollar. The cost in dollar terms, however, was about 27.6 percent lower than the appraisal estimate. 18. Taxes and duties were estimated in the SAR at Rs. 745.2 million (US$69 million equivalent). It is estimated that taxes and duties paid on the project amounted to Rs. 1,087  6 million (US$ 49.9 million equivalent) including those for the Transmission System. The estimate in the SAR for interest during construction was Rs. 1,650.8 million (US$148.7 million equivalent); the actual amount was Rs. 2,025 million (US$ 92.9 million equivalent). 19. Disbursements. Pursuant to GOI's request, US$ 22 mnillion was canceled from the loan amount on 5 December 1991 as it was deemed to be in excess of the requirement for project completion. Another US$ 32.7 rnillion equivalent was canceled at project completion as left over after disbursements against eligible expenditures were completed. Thus a total of US$ 54.7 million equivalent was canceled from the original loan amount of US$ 300.8 million. The estimated and actual disbursements under the loan are given in Part III, Table 4. The delays that occurred at the start of the project, coupled with equipment problems experienced in the power plant that delayed contract closeout, adversely affected the disbursements. The actual disbursements were thus later than the appraisal estimates which projected that the loan would be closed by December 31, 1991. The closing date of the loan had to be extended three times, byone year each time for the first two extensions and by four months for the last extension, to April 30, 1994, to allow for completion of procurement and disbursements. The revised loan amount of US$246.1 million equivalent was fully disbursed by September 13, 1994. 20. Project Financing. The original Bank loan of US$300.8 million equivalent was envisaged to provide for about 27 percent of the total project cost of US$ 1,122.8 million, net of duties and taxes and IDC, but including the capitalized front-end fee. The Bank loan was expected to cover about 74 percent of the estimated foreign cost of the project to be applied to the CIF and/or ex-factory costs of the turbine-generator units and associated equipment, power cycle equipment, cooling water system, coal handling and transportation equipment, electrostatic precipitators, water treatment plant, ash handling system, condensate polishing equipment, air compressors, stack elevator, fire fighting equipment, a combustion turbine generating unit for standby power, instrumentation and control systems, electrical equipment, transmission line materials, as well as consultants' services. The balance of the foreign exchange financing requirement, amounting to US$ 105 million, as well as the local components of some foreign contracts, such as the boilers and high pressure piping, were to be met through cofinancing,. The remainder was to be arranged by NTPC through internal cash generation plus equity and loans from GOI. Financing remained basically in line with the one envisaged at appraisal (Part III, Table 7B). The final project cost was of US$ 970.1 million equivalent, inclusive of contingencies, taxes and duties, as well as interest during construction. An equivalent of US$ 54.7 million was canceled from the loan. The share of the revised Bank financing of US$246.1 million equivalent translated to 25.4 percent of the total project cost. About US$ 196.9 million equivalent of the Bank loan was utilized for imports, and the balance of US$ 49.2 million equivalent was used for financing expenditures in local currency. Cofinancing was provided by (a) Kreditanstalt fur Wiederaufbau (KfW), Germany (DM 50.6 million or US$ 29.1 million equivalent); (b) Govermnent of Italy (DM 159.9 million or US$ 91.9 million equivalent); (c) Bankers Trust Co. (DM 169.1 million or US$ 108.7 million equivalent); (d) Exim Bank of Japan (JPY 10,221 million or US$ 76.6 million equivalent); (e) Other Domestic Loans (Rs. 4708.8 million or US$  7 216 million equivalent); and (f) NTPC's Internal Resources (Rs. 4,397.2 million or US$ 201.7 million equivalent). Financing of the Project Sources SAR Actual (US$ million) percent (US$ million) percent I IBRD 300.8 22.4 246.1 25.4 II KfW ] 29.1 3.0 III Government of Italy] 955.7 71.3 91.9 9.4 IV Bankers' Trust Co. ] 108.7 11.2 V Exim Bank ofJapan ] 76.6 7.9 VI Domestic Loans 216.0 22.3 VII NTPC Own Resources 84.0 6.3 201.7 20.8 Total 1,340.5 100.0 970.1 100.0 The Implementing Agency (NTPC) at the Time of Project Appraisal 21. NTPC was formed in 1975 to construct and operate large power stations and associated transmission facilities. It sells bulk power to the SEBs for distribution. At appraisal, NTPC was in the eighth year of an investment program under which it planned to construct and commission by 1999/2000, several large power plants with an aggregate capacity of about 26,000 MW and about 24,000 km of high voltage transmission lines. 22. NTPC's net earnings in 1983/84 exceeded forecasts and yielded a rate of return (ROR) of about 11 percent based on historically valued assets. The equivalent ROR on revalued assets, calculated on a proforma basis, was slightly more than 5 percent. Cash generation measured as a percentage of average annual capital investment requirements was, however, only about 3 percent, primarily because of the scale of existing operations and a very large investment program. NTPC's debt-equity ratio at the end of FY84 was 26:74; however, it had serious bill collection problems at the time. By and large, its overall financial performance in 1983/84 and its financial position at year end were satisfactory. NTPC at the Time of Loan Closing 23. By end FY94, it is estimated that NTPC operated about 18 percent of India's total installed generating capacity and 26 percent of the thermal capacity. Its share in India's total power supplies reached about 22 percent of total generation. NTPC has demonstrated that Government-owned power utilities can also be operated at acceptable efficiency levels. 24. As a part of the Bank's ongoing dialogue with GOI and NTPC, the Government has introduced a number of policy reforms aimed at increasing commercialization and efficiency of NTPC's operations, as well as fostering private sector participation in the generation of power. These reforms include: (a) improvement of generating efficiency; (b) transfer of NTPC's  8 transmnission systems and corresponding liabilities, including associated personnel, to the POWERGRID, created in 1989; (c) introduction of commercial and investment policies that permit NTPC to cut off power to consumers, whenever physically and technically feasible, for non-compliance with agreed terms of bulk power supply agreements, while delaying investments in non-complying states; (d) undertaking projects in one region with a substantial part of the output allocated to other regions; (e) entering into undertakings with foreign and local private partners to develop power projects either from its own resources or those offered by others; and (f) introducing two-part bulk tariff, comprising a fixed-cost part and a variable-cost part, which allows NTPC to set its tariff under the fixed cost part well in line with the LRMC and pass fuel price variations to the consumers under the variable part. The fixed-cost part of the tariff will, however, slowly (in line with inflation) fall below the LRMC as assets are not revalued. Financial Aspects 25. NTPC's operating data, summarized in Table 1, reflect the high rate of growth the Corporation experienced. During the last seven years, from FY88 to FY94, generating capacity was added continuously at an average annual rate of 26 percent and the value of average net fixed assets grew at an average annual rate of 29 percent. The level of capital investment, however, has been stagnant since FY91 (except for an increase in FY92 due to the transfer of Unchahar assets to NTPC). Table I - NTPC's Operating and Financial Performance, 1988-94 Comparison of Actual Data and Second Farakka Thermal Power Prolect SAR Forecasts 1988 1989 1990 1991 1992 1993 1994 DESCRIPTION SAR Actual SAP, Actua SAR Actua SAR Actua SAR Actual SAR Actual SAR Actual Forecast Fore-cast I Forecast I Forecast I Forecast Forecast Forecagt Net Fixed Assets in Operation (Rs 54,225 28,439 84,177 41,716 104,589 65,418 114,976 85,546 135,894 120,344 147,293 105,839 148,989 112,12 Million) Capital Works in Progress (Rs NMillion) 50,615 52,187 44,007 57,062 46,335 52,360 54,129 56,039 47,385 70,080 43,849 68,865 44,333 80,79 Installed Capacity (MW) -_ 3,600 -- 5,220 - 7,418 -- 9,205 -- 11,333 - 13,054 .- 14,52 Electricity Sales (Gwh) 17,278 17,533 24,940 24,875 35,153 35,421 46,853 40,306 55,581 58,657 62,670 60,497 68,845 70,28 Average Bulk Tariff (P/kWh) 42 41 43 46 45 52 46 53 48 61 50 74 51 8 (Generation) Net Profit after Tax & Provision (Rs 1,739 3,024 1,940 3,308 2,292 5,366 3,948 7,009 5,233 10,176 6,608 9,177 8,720 11,03 Million) Average Net Fixed Assets (Historic) 42,351 23,856 69,201 35,078 94,383 53,567 109,783 75,482 125,435 102.945 141,594 113,092 148,141 108,97 RateofReturnonHistoricAssets(%) 8.4 16.4 7.3 14.8 7.9 14.9 9.7 12.8 10.5 15.3 11.0 12.8 12.3 16. ReturnonCapitalEmployed(%) 6.4 11.5 5.9 10.6 6.9 10.6 8.9 9.7 9.3 11.9 10.1 9.7 11.6 11. OperatingRatio(%) 55.7 54.7 57.9 59.3 57.8 61.1 56.5 60.2 56.6 60.6 56.4 69.0 55.3 69. Debt:Equity Ratio 29i71 43/57 31/69 47/53 32/68 47153 36/64 43/57 34/66 48/52 31169 46/54 28/72 43/5 Current Ratio 2.59 1.68 3.78 1.81 5.25 1.79 7.69 1.90 9.80 1.54 13.06 2.47 18.37 2.5 AccountsReceivable (ofdays) 67 177 68 175 68 210 69 233 69 154 70 167 70 13 Contrto Construction (Annual) percent 8.6% 39 8