India - Second Kothagudem Power Project

F*s rnes ~ ~~~~~~~~~R E S T R I C T E D Fff ~ ~~~~~~~Report No. P -43 5 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE SECOND KOTHAGUDEM POWER PROJECT May 28, 1965  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMIENT REPORT AND RECONYMDATIONT OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS A PROPOSED LOAN TO BIDIA FOR THE SECOND KOTHAGUDEI POWER PROJECT 11 I submit the following reDort and recormendation on a proposed loan to Inoia in an amount in various currencies equivalent to $14 million. The loan ';ould finance the foreign exchange cost of the second stage of a thermal power station at Kothagudem in the State of Andhra Pradesh. PART I - BACKGROUND 2, Beginning in 1949 the Bank hes made 32 loans to India, including the loan of $50 million to ICICI which was approved oy the Executive Directors on Hlay 27. I am now proposing two additional loans: a thermal power project at Kothagudem which is the subject of this report and a power trans- mission project. The proposed loans would increase Bank lending to India to $98101 million (net of cancellations). Through the consortium additional Bank lending of $205.5 million has been pledged but not yet committed to specific projects. 3. The status of previous Bank loans was as follows on April 30, 1965: ($ million) Total loans, net of cancellations 847.1 of which has been repaid 210.4 Total now outstanding 636.7 Amount sold 97.0 of which has been repaid 76.3 20.7 Net amount held by Bank 616,O h. The total of outstanding Bank loans on April 30, 1965, included an undisbursed balance of $91.6 million. For the majority of the loans dis- bursements h1ave been proceeding regularly. There are four loans, however, which have been affected by difficulties of various kinds; these difficulties have been summiarised in paragraph 5 of my recent Report and Recommendation on ISICI (P-433), dated May 19, 1965.  5. Since 1961 the Association has extended 16 credits to India totalling $1F35.0 million. All credits are now effective and $259.1 million had been disbursed as of April 30, 1965. 6. Pow^;er development projects account for $91.5 million (net of cancella- tions) of previous Bank lending to India and $56.0 million of credi-ts from IDA. T'hese nine projects are summari7ed in the following table: Year Number Purpose ($ million) 1950 Loan 23-IN DVC (Bokaro-Konar) 16.7 1953 Loan 72-IN Second DVC (Damodar) i 1005 195h Loan 106-IN Tata (Trombay) 13.9 1957 Loan 164-IN Second Tata (Trombay extension) 9.7 1958 Loan 203-IN Third DVC (Dur-apur-Bokaro) 22.0 1959 Loan 223-IN Koyna 1807 1962 Credit 19-IN Fourth DVC (Durgapur extension) 18,5 1962 Credit 2L-IFN Second Koyna 1705 1963 Credit 27-IN\ Kothagudem 20.0 a/ Multi-purpose project including some provision 'or irrigation facilities. 7. A third stage of power development at Koyna is being appraised, and a loan of $15-20 million for that project may be presented for consideration by the Executive Directors during Lhe summer. PART II - DESC-RIPTION OF- THE PROPOSE: LOAN 8. The main characteristics of the proposed loan are as follows: Borrower: India, acting by its President Amount: Various currencies equivalent to $14 million. Purpose: To continue assisting the Andhra Pradesh State Electricity Board by financing the foreign exchange cost of extending the Kothagudem thermal station to a capacity of 240 MW. Amortization: In 41 semi-annual installments be-inning December 1, 1971 and ending December 1, 1991. Interest: 52 per cent per annum. Comnitment Charge: 3/d of 1 per cent per annum.  PART III - Appraisal of thb Project 9. IAn appraisal report on the project (T0-L35a) is attached (No. 1). '0. The project consists of an extension of the Kothagudem thermial power station to a capacity of 240 MWtr by the installation of two 60 MWti steam turbo- alternators and associated equipment. Construction of the power station building to house four generating units was started in May 1963 with the assistance of a $20 million Credit from IDA. The first two 60 M14 units are being installed under that Credit, and the proposed loan would provide the foreign exchange required for the purchase of two additional units. The total cost of this two-stage development, including provision for trans- mission facilities and the Kinnerasani dam which is required to ensure an adequate year-round supply of circulating water, is estimated at Rs. 314 million ($66 million equivalent). Of this total, Rs. 109 million is included for the second stage project, of which Rs, 66 million equivalent would be provided from the proposed loan to meet foreign exchange requirements. The power station is located advantageously near the center of the large Singareni coal fields, and future expansions up to 1,000 Ng are already under study. 11. For several years the economic development of Andhra Pradesh, a state of nearly 40 million inhabitants covering over one hundred thousand square miles, has been handicapped by a severe shortage of power, Present annual consumption of electric power in the state is only 24 kilowatt hours per capita, which is barely half the all-India average and the equivalent of about two days per capita consumption in the United States. The shortage of power has restricted industrial and agricultural development, delayed railway electrification and hindered improvements in other sectors. To the extent that power has been available, power sales have grown rapidly, increasing from 595 million kilowatt hours in 1960/61 to 933 million kilowatt hours in 196h/65. Sales are expected to increase by about 30 per cent per aimum during the next six years, as new generating facilities are commissioned. 12e The Kothagudem station is one project of a much larger program to improve power service in Andhra Pradesh. In addition to 80 I*J recently conm'issioned in smaller stations, one other large project is expected to add 120 megawatts new capacity during the next 18 months. Including the first 120 megawatts at Kothagudem, these projects, which have had the benefit of aid from Japan, Switzerland and the United States as well as from IDA, would provide installed capacity of over 500 megawatts by the end of 1966, as compared to barely 200 megawatts in 1961. The second stage development at Kothagudem, which is the subject of this report, together with extensions of other large stations already under construction should increase installed capacity to over 800 MW and provide firm capacity of nearly 600 MW by the end of 1968e 138 Transmission facilities are being strengthened considerably to ensure a high rate of utilization of new generating capacity. Wqhereas a few years ago the three regions of the State were served by separate systems, trans- mission lines now being constructed will permit the operation of all major  - 4 - stations on an integrated basis. To the 2,300 miles of 66 and 132 'V line in existence in 1961 nearly 19400 miles of high voltage line is being added (including over 600 miles of 220 KV capacity). These lines include strong links with neighboring states, especially Mladras, wJhich are expected to pur- clhase substantial quantities of power from Andhra Pradesh in future, and will be constructed partly with assistance under the proposed power transmission loan. In the two years since the first Kothagudem Project was approved a Regional Electricity Board has been formed to coordinate power development in the four southern states. We wvelcome the formation of this Regional Board and are particularly encouraged to note that Mr. S.A. Quader, wIho provided such vigorous leadership in the initial stages of construction at Kothagudem, has now undertaken to serve the Regional Board as its chief acministrative officer. 14. The Andhra Pradesh State Electricity Board was established in 1959 and in the last two years has assumed from state government departments the full responsibility for power planning and development throughout the State. To obtain the benefit of further operating economies, it is also proposed that the State Governmentfs interest in two inter-state projects be turned over to the Board during the next year or two. 15. Parallel with the development of plant the Board's financial position has improved notably. Earnings from power sales are expected to contribute substantially to the cost of the future expansion program. The revised tariffs, which have been in force throughout the State since March 1963, resulted in an increase in average revenues of about 26 per cent; although slight upward adjustments in tariffs may be necessary in the next two or three years, it is expected that a return of 11 percent on capital base will be achieved for the financial year 1969'70, and possibly earlier, without a major revision in power charges. 16. In accordance with the Government of India's usual procedure for financing power and other major development projects, funds are made avail- able to Andhra Pradesh in the form of annual interest-bearing advances repayable on terms which are reviewed periodically by the central GovernmentO. The interest rate on each annual advcance is based on the current borrowing rate of the Government and is now X per cent per annum. The State re- lends these funds to the State Electricity Board on similar terms, except for the addition of a small handling charge and a somewhat longer repayment period. Proceeds of the Bank loan will be released against evidence that the Board had made payments, through banks authorized to deal in foreign exchange, to cover the cost of imported equipment required for the project. 17. All goods to be financed by the Bank have been, or will be, open to international competitive bidding and procured through procedures approved by the Banic. There are no special engineering problems anticipated in the implementation of the proposed extension, which is technically sound and financially justified. The Board's staff is n!ell able to carry out the project effectively and will be assisted by consulting engineers.  - 5 - PART IV - LEGAL INSTRUMEMTS 13. A draft Loan Agreement between India and the Bank, a draft Project Agreement between the Bank and the Andhra Pradesh State Electricity Board and a draft supplementary letter on "Rate of Return" are being distributed to the Executive Directors separately. The Loan and Project Agreements follow the usual form for projects of this kind. PART V - ECONOMIC SITUITION 19. A memorandum on the economic situation in India was distributed on May 19, 1965, in connection with a proposed sixth loan to ICICI (R 65-75). The last report on the Indian economic situation was distributed to the Executive Directors in May 1964 (R 64-55). A mission fromn the Bank is at present engaged on a special study of the economy, and no further economic report will be prepared until after this study has been completed. 20. At the end of 196L India's outstanding external public debt; excluding consortium pledges not yet translated into com-1mitments, was in the rcgion of $5 billion. The service payments due on this debt during the Fourth Five- Year Plan (April 1966 - March 1971) range between $350 million and :i4CO million a year, representing close to 20 per cent of IndiaTs present foreign exchange earnings on current account. The total service due over the five year period is estimated at about A}1,900 million, of which almost two thirds wrould be on account of amortization and one third on account of interest. It is against this background tha-t I recommend postponing the start of principal repayments on the two proposed power loans until after the end of the Fourth Plan. PART VI - COMPLIANCE WTITH TIE ARTICLES OF AGREPE,\NT 21. I am satisfied that the proposed loan would comply with the requirements of the Articles of Agreement of the Bank. PART VII - RECOW,,ENDATION 22. I recommend that the Executive Directors adopt the following Resolution: R`SOLVED: THAT the Bank shall grant a loan to India, in an amount in various currencies equivalent to fourteen million United States dollars (U.S. $14,COO,OO0), to mature on and prior to December 1, 1991, to bear interest at the  - 6 - rate of five and one-half per cent (5-1) per annwu, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of the Loan Agreement (Second Kothagudem Power Project) between India and the Bank, and the form of the Project Agreement (Second Kothagudem Power Project) between the Bank and the Andhra Pradesh State Electricity Board, which have been presented to this meeting. George D. Woods President Attachment Tashington, D.C. May 28, 1965