India - Power Transmission Project

RESTRICTED FILE COPYRESTRICTED FILE COPY ~ ~~~Report No. P-434 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 The report may not be published nor may it be quoted as representing their views.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 A POWER TRANSMISSION PROJECT May 28, 1965  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELDOFMET REPORT AND RECi1MENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR A POWER TRANSMISSION PROJECT 1. I submit the following report and recommendation on a proposed loan to India in an amount in various currencies equivalent to $70 million. The loan would finance the foreign exchange cost of a program to construct and extend electric power transmission facilities throughout India. PART I - BACKGROUND 2. Beginning in 1949 the Bank has made 32 loans to India, including the loan of $50 million to ICICI which was approved by the Executive Directors on May 27. I am now proposing two additional loans: a power transmission project which is the subject of this report and a thermal power project at Kothagudem. The proposed loans would increase Bank lending to India to $981.1 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 cancellation 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 616.0 4. 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 have been proceeding regularly. There are four loans, hoTwever, which have been affected by difficulties of various kinds; these difficulties have been summarized in paragraph 5 of my recent Report and Recommendation on ICICI (P-433), dated May 19, 1965.  5. Since 1961 the Association has extended 16 credits to incia totalling $485.0 million. All credits are now effective and $259.1 million had been disbursed as of April 30, 1965. 6. Power development projects account for $91.5 million (net of cancella- tions) of previous Bank lending to India and $56.0 million of credits from IDA. These nine projects are summarized in the following table: Year Number Purpose ($ million) 1950 Loan 23-INl DVC (Bokaro-Konar) 16.7 1953 Loan 72-IN Second DVC (Damodar) a/ 10.5 1954 Loan 106-IN Tata (Trombay) 13.9 1257 Loan 164-IN Second Tata (Trombay extension) 9.7 1958 Loan 203-IN Third DVC (Durgapur-Bokaro) 22.0 1959 Loan 223-IN Koyna 18.7 1962 Credit 19-IN Fourth DVC (Dur-apur extension) 18.5 1962 Credit 28-IN Second Koyna 17.5 1263 Credit 27-IN Kothagudem 20.0 a/ M4ulti-purpose project including some provision for 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 the summer. PART II - DESCRIPTIONT OF THE PROPOSED LOAN 8. The main characteristics of the proposed loan are as follows: Borrower: India, acting by its President. Amount: Various currencies equivalent to $70 million. Purpose: To assist in the extension and inter- connection of electric power transmission facilities throughout India by financing the imported equipment and materials required to complete approximately 8,000 miles of high voltage lines and about 300 sub-stations. Amortization: In 41 semi-annual installments beginning November 15, 1971 and ending November 15, 1991.  -3- Interest: 5 per cen" per a:iur. Commitment Charge: 3/8 of 1 per cent per annum accruing from a date 60 days after the date of the Loan Agreement or from the time portions of the Loan become effective, whichever is later. PART III - APPRAISAL OF THE PROJECT 9. An appraisal report on the project (TO-462a) is attached (No. 1). 10. The project consists primarily of the construction of about 8,000 miles of transmission line for operation at 66 KV and higher voltages (including the first 400 KV or "extra high voltage" line in Asia outside the U.S.S.R.) and the construction or extension of about 300 sub-stations, The project will complete construction of transmission works incorporated in the Third Plan (1961-1966) and also includes some of the most urgent Fourth Plan schemes. The total cost of the transmission system expansion is estimated to be about $390 million equivalent. The total cost of all Third Plan power developments, including generation and distribution, was budgeted at around Rs. 10,000 million ($2,100 million equivalent). Although the individual State Electricity Boards and certain other agencies are responsible for implementing most aspects of the power development program, financial resources are being provided largely by the Union Government. 11. The project is designed to extend existing power transmission facilities, to tie together smaller systems within each of the states and to provide the first effective steps toward interconnection of state grids. Transmission facilities to be constructed by two major poiwer companies in the private sector are also included in the project as are small programs for the Union Territories and the state of Himachal Pradesh. This program is fully justi- fied in order to make the best use of generating facilities currently under construction and would provide the basis for more efficient utilization of electric power in India. The urgent need for such a program is strongly endorsed by an international group of technicians, working under the Govern- ment's Energy Survey Committee, which has recently completed an exhaustive study of the country's energy resources and requirements. 12, For the most part State Electricity Boards, working under the general supervision of the Union Govern mentMs Ministry of Irrigation and Power, will be responsible for implementation of the project. Regional Electricity Boards, which were formed recently, will assist in the planning and coordina- tion of inter-state programs. Personmel available to the various Boards and agencies are well able to carry out the transmission program effectively and will be assisted by consulting engineers wherever necessary. There are no special engineering problems anticipated in the implementation of the project, which is technically sound and financially justified. Cost studies indicate that transmission facilities included in the project will be constructed at  -14- a cost per mile which is relatively low Ly wor.d standarc's. qu4 pment financed by the Bank will be open to international competitive bidding and purchased through procedures approved by the Bank. 13. In the past opportunities for Bank lending to power projects in India have been severely limited by the low rate of return in many State Electricity Boards, which account for a major portion of generating capacity and an even larger share of current investment programs. For several years the Government has also been concerned to improve the financial performance of state-owmed electricity undertakings, For instance, in 1961 the Third Plan document summarized the Governmentts general policy objective as follows: "It is essential that electricity undertakings in the public sector should earn reasonable surpluses and provide resources for financing future develop- ment." However, in the intervening years this objective has been translated into action only to a very limited extent. To define "reasonable surpluses" the Planning Commission set up a working group, which in 1963 recommended that, after due allowance for the somewhat smaller risk of investment in electric power compared, say, with manufacturing, "electricity rates should yield a return on capital investment, which on the average compares well with the return made by other industries". The working group mentioned a target of 12 per cent, but the implementation of its recommendations was again limited by certain financial provisions of the Electricity (Supply) Act, un- certainty about the central tax liability of state Boards and the very rudimentary stage of development of most state power systems, 14. In January 1964, at a conference of state ministers of power, the Union DMinister of Irrigation and Power renewed the effort to work out a national policy for improving revenues of the various State Electricity Boards, and on the basis of a decision taken by that conference a Power Tariff Policy Committee was formed. The Committee's report, which has been approved by ministers of power in each of the states and by the National Development Council, was accepted by formal resolution of the Government of India on March 3, 1965. The Committee's main recommendation was that Boards should immediately take whatever steps were necessary to reach a return of 11 per cent within the next few years. The Government is now in the last stages of obtaining specific programs from each of the states, setting out a schedule for the full implementation of this financial policy. During negotiations we have agreed on a form of undertaking satisfactory to the Bank which each Board must enter into, confirming these financial policies. 15. Appropriate financial control also requires a rapid improvement in accounting procedures in each of the State Electricity Boards and accelera- tion of recent efforts to convert from departmental to commercial forms of accounting. The Government has confirmed that the transition to commercial accounting, at least with respect to year-end accounts, will be completed in all Boards by the start of the next fiscal year (April 1, 1966) and that earnest efforts will be made to use a commercial system also with respect to initial accounts.  16. The firming up of government financial and accounting policies in recent months has made it possible to consider an all-India approach to financing the transmission program. Bank financing is particularly appro- priate in this case, since procurement of several types of equ-pment is expected from widely varied sources of supply, based on numerous orders from 15 Boards and from other agencies participating in the project. Bilateral assistance from governments, especially where tied to specific - and usually large - projects, is not easily adaptable to this sort of program. Therefore, given the general shortage of free foreign exchange, it would be difficult to implement a transmission program of this scope unless a Bank loan or some other source of untied funds becomes available. 17. In accordance with the Governmentts usual procedures for financing power and other major development projects, funds are made available to each of the states through annual interest-bearing advances, repayable on terms which are reviewed periodically by the Government of India. The interest rate on each annual advance is based on the current borrowing rate of the Government of India and is now around 51 percent per annum. Each state relends a portion of these funds to its State Electricity Board on broadly similar but not identical terms. The proceeds of the Bank loan would be released against evidence that Boards and other participating agencies had made payments through banks authorized to deal in foreign exchange, to cover the cost of imported equipment and supplies required for the project. These arrangements are acceptable. PART IV - LEGAL INSTRUMENTS 18. A draft Loan Agreement between India and the Bank is being distributed to the Executive Directors separately along with a draft supplementary letter on "Rate of Return". The Loan Agreement follows the usual form, but has some unusual features. Since the project is to be carried out by a number of State Electricity Boards and other agencies, it is not feasible for the Bank to enter into project agreements with each one of these Boards and agencies. For this reason items which would normally be the subject of covenants in a project agreement between the Bank and the beneficiary are, in this case, incorporated into the Loan Agreement in one form or another. Section 5.02 contains a list of requirements which the Borrower shall cause the Boards and agencies to fulfill. Sections 7.03 and 7.04 stipulate conditions which must be fulfilled by each one of the participating Boards and agencies before the portion of the Loan earmarkea for such Board or agency becomes effective. In the case of the Boards these conditions include an undertaking to have in operation not later than April 1, 1966 a commercial system of accounts such as that prescribed by the Comptroller and Auditor General of India in July 1963 and a further undertaking regarding the financial year for which a return of not less than 11 percent is to be achieved; in some cases an interim date for achieving a 6