India - Private Power Utilities (BSES) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16684 IMPLEMENTATION COMPLETION REPORT INDIA PRIVATE POWER UTILITIES (BSES) PROJECT (LOAN 3344-IN) JUNE 12, 1997 Energy and Infrastructure Operations Division Country Department lI South Asia Region 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 CurTency Unit Rupee (Rs.) Fiscal Year Rupees/US$ FY90/91 = 19.00 (SAR) FY91/92 = 36.20 FY92/93 = 31.20 FY93/94 = 31.46 FY94/95 = 32.30 FY95/96 = FY96/97 = Average rate during implementation 30.44 FISCAL YEAR OF BORROWER April I - March 31 WEIGHTS AND MEASURES 1 Ton (t) = I metric tone = 1,000 Kg 2,204 lbs. 1 Kilovolt = 1,000 volts (V) 1 Kilovolt ampere (kVA) = 1,000 volt-amperes (VA) I Kilowatt-hour (kWh) = 1,000 watt-hours I Megawatt-hour (MWh) = 1,000 kilowatt-hours I Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours ABBREVIATIONS AND ACRONYMS BMRD = Bombay Metropolitan Regional Development Authority BSES BSES Ltd. (previously Bombay Suburban Electric Supply Ltd.) CEA = Central Electricity Authority FGD = Flue Gas Deselphurization GDR = Global Depository Receipts GOI = Government of India GOM = Govermment of Maharashtra IBRD International Bank for Reconstruction and Development ICB = International Competitive Bidding IERR Internal Economic Rate of Return IFC International Finance Corporation IFI = Indian Financial Institution IPP Independent Power Producer MPCB = Maharashtra Pollution Control Board PFC Power Finance Corporation NERC = North American Energy Reliability Council NGO Non-Governmental Organizations PLF Plant Load Factor TEC Tata Electric Companies WREB Western Region Electricity Board WRIS = Western Region Interconnected System Vice President : Mieko Nishimizu Director : Robert S. Drysdale Division Chief : Jean-Francois Bauer Task Manager : Argun Ceyhan  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT INDIA PRIVATE POWER UTILITIES (BSES) PROJECT (LOAN 3344-IN) PREFACE TABLE OF CONTENTS EVALUATION SUMMARY ............................................. i PART I: PROJECT IPLEMENTATION ASSESSMENT .............................................I A. Project Objectives ......1....................................... B. Achievement of Project Objectives .......3.....................................3 C. Major Factors Affecting the Project .............................................6 D. Project Sustainability ............................................ . 12 E. Bank Performance ............................................ 14 F. Borrower Performance ............................................ 14 G. Cofinancier Performance ............................................ . 16 H. Assessment of Outcome ............................................ . 16 1. Future Operations ............................................ 17 J. Key Lessons Learned ............................................ 17 PART Il: STATISTICAL ANNEXES Table 1 Summary of Assessments Table 2 Related Bank Loans/Credits Table 3 Project Timetable Table 4 Loan/Credit Disbursements: Cumulative Estimated Actual Table 5 Key Indicators for Project Implementation Table 6 Key Indicators for Project Operation Table 7 Studies Included in Project Table 8a Project Costs Table 8b Project Financing Table 9 Economic Costs and Benefits Table 10 Status of Legal Covenants Table 11 Compliance with Operational Manual Statements Table 12 Bank Resources: Staff Inputs Table 13 Bank Resources: Missions APPENDIX A: Mission Aide Memoire APPENDIX B: Borrower Contribution to ICR APPENDIX C: Environmental Issues APPENDIXD: Financial Overview APPENDIX E: Abstract of Community Development Work Carried out by BSES at Dahanu Area. 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.   IMPLEMENTATION COMPLETION REPORT INDIA PRIVATE POWER UTILITIES (BSES) PROJECT (LOAN 3344-IN) Preface This is the Implementation Completion Report (ICR) for the Private Power Utilities (BSES) Project (the Project) for the Bombay Suburban Electric Supply Ltd. (BSES)* in India, for which Loan 3344-IN in the amount of US$200 million equivalent was approved on June 13, 1991, and made effective July 29, 1991. The physical components of the project were implemented, as planned, albeit with implementation delays caused mainly by late delivery of the main plant equipment. The loan closed as originally scheduled, on December 31, 1996. Final disbursement took place on May 15, 1997. In total, US$ 194,986,703.27 million were disbursed and US$ 5,013,296.73 remaining undisbursed in the Loan account were canceled as of May 15, 1997. The IFC cofinanced the project with investments of US$50 million equivalent. The balance of the financing requirements was met by BSES through syndicated loans and equity issues, as well as its own internal resources. This ICR was prepared by Mihir Mitra (Consultant) and Argun Ceyhan (Task Manager) of SA2EI of the South Asia Region, and reviewed by Jean-Francois Bauer, Division Chief, SA2EI and Kazuko Uchimura, Project Adviser, SA2DR. Preparation of this ICR started during the Bank's mission in November 1996. It is based on material in the project files and site-specific information garnered during the Implementation Completion Mission. The implementing agency, BSES, contributed to the preparation of this ICR for their part of the project, and provided timely input for the statistical data. BSES's comments are given in Annex B of the ICR. In September 1992, the Bombay Suburban Electric Supply Ltd. changed its corporate name to BSES Ltd. In this report, the acronym BSES is used for both corporate names.  I  IMPLEMENTATION COMPLETION REPORT INDIA PRIVATE POWER UTILITIES (BSES) PROJECT (LOAN 3344-IN) EVALUATION SUMMARY Introduction 1 . In end- 1980s and early-I 990s the Government of India (GOI) recognized that to satisfy the very high level of investment required to meet the ever growing demand for electricity, it had to harness more resources and managerial skills from the private sector. GOI's first actions in this direction were its guarantee of the IBRD loans requested by two existing private utilities--the Tata Electric Companies (TEC) and BSES . 2. BSES was one of five private power utilities in operation at appraisal in February 19912. It provided public electric supply, strictly as a distribution company serving the northern suburbs of Mumbai, and making all its power purchases from the Tata Electric Companies (TEC). Established in 1926, BSES was a well-established distribution company with a good record of performance and technical and commercial efficiency. Its financial position was then and has been strong compared to other utilities operating in India. Almost sixty percent of its capital was held by three major Indian Financial Institutions (IFIs)3 and nationalized banks; the balance was owned by about 9,000 shareholders and other corporations. BSES's license was extended by the Government of Maharashtra (GOM) up to 1993 on the condition that BSES install a 500 MW generation project in Maharashtra to fill the anticipated supply gaps. Project Objectives 3. The principal objectives of the Project were to: (a) provide additional generation, transmission and distribution capacity to meet the increasing demand for electricity in the Mumbai area; and I The IBRD Loan for TEC was made under the Private Power Utilities (TEC) Project (Ln. 3239-IN), approved in Junie 1990. The IBRD Loan for BSES was made under the Project. 2 The five private power utilities were: Ahmedabad Electricity Co. (AEC), the Surat Electric Company (SEC), the CESC Ltd. (formerly Calcutta Electric Supply Corporation), and BSES and TEC. In addition, there was only one local utility (Bombay Electricity Supply and Transport Corporation - BEST) which distributed electricity in Mumbai city. Furthermore, private captive generation, estimated to be about 15 percent of the public supplies but which did not enter into the main statistics, was extensive particularly in industry. 3 These Indian Financial Institutions were: Life Insurance Corporation (LIC), General Insurance Corporation (GIC) and its subsidiaries, and Unit Trust of India (UTI) -- (Part I, para. 3). R .1 .  - 11 - (b) maintain the high quality of service to BSES consumers. The institutional and sectoral objectives were: (a) to support GOI's endeavors to increase private sector participation in the supply of power; and (b) to assist in transforming BSES from a distribution company into an integrated power utility with responsibilities for generation, transmission and distribution. 4. The Project, as part of the least-cost development program for the Western Region Interconnected System (WRIS), included the following physical components: (a) a thermal power plant comprising 2 x 250 MW coal-fired units4 located at Dahanu, about 100 km north of Mumbai; (b) two double-circuit, 220 kV transmission lines, about 105 km long, to transmit power from Dahanu to BSES's license area in the suburbs of Mumbai, and three, 220/33 kV receiving substations; and (c) to strengthen and extend of BSES's 33 kV and 11 kV subtransmission and distribution system. 5. On June 13, 1991, an IBRD loan for US$200 million equivalent and an IFC investment of US$ 50 million equivalent lent from IFC's own resources (A Loan) were approved. The Guarantee and Loan Agreements for the IBRD Loan were signed on July 12, 1991, and the Loan became effective on July 29, 1991. 6. The development objectives of the Project have been achieved. (a) With regard to the physical objectives, almost all the components have been put into commercial operation and have been operated satisfactorily. (b) With regard to the institutional and sectoral objectives: (b. 1) the Project showed the Bank Group's support for GOI's intentions for lowering entry barriers and providing incentives for private investment in the power sector; (b.2) BSES has been transformed from a distribution company into a full-fledged utility with generation, transmission and distribution functions; 4 To cover for the possibility of availability of gas supplies in the Mumbai area in the future, the boilers of the Dahanu TPP were designed to burn coal and gas. However, in view of the unavailability (at appraisal and currently) of long-term supplies of gas, gas burners were not installed. The Dahanu TPP has been built and is being operated as a conventional, base-load, coal-fired plant.  - 111 - (b.3) BSES has also been transformed into a majority privately-owned company5; and (b.4) BSES's tariffs are adequate to ensure an acceptable return on investments. Implementation Experience and Results 7. Major factors affecting the Project were: (a) opposition of some Non-Governmental Organizations (NGOs) (Part 1, para. 16-18); (b) prompt actions by GOM and BSES in project start up (Part I, para. 20); (c) employment by BSES of competent consultants (Part I, para. 21); (d) efficient and timely procurement by BSES (Part I, para. 22); (e) advance procurement actions by BSES for the main plant equipment package (Part I, para. 22); (f) changes in the financing and consequently procurement plans (Part I, paras. 24 and 25); and (g) delays due to late deliveries by the supplier of the main plant equipment package (Part I, paras. 13 and 14). 8. During the preparation/ appraisal of the Project, based on IBRDIIFC recommendations, BSES prepared an Environmental Due Diligence Plan which it revised regularly during implementation. The Project which has been built complies with the environmental standards of GOI and GOM and with the applicable environmental policies and guidelines of the World Bank Group (Part I, paras. 11 and 26). 9. Project Costs. At appraisal, the project was estimated to cost US$ 653.3 million equivalent, inclusive of contingencies and Interest During Construction (IDC). The project was completed at a cost of US$ 613.6 million equivalent. The corresponding project cost in rupee terms was estimated at Rs. 14.0 billion whereas the actual cost at completion translated to about Rs. 18.7 billion. 10. Rate of Return. The internal economic rate of return (IERR) of the WRIS investment program, of which the Project is part, has been computed at 15.7 percent, compared with the appraisal estimate of 13.3 percent, both cases excluding the consumer surplus (Part I, para. 12). 11. Sustainability. The achievements of the Project are highly likely to be sustainable under the condition that fuel6 of proper quality and in required quantities is provided (Part I, paras. 29-32). 5 Following a shift in BSES's shareholders base, IFIs and nationalized banks currently hold about 34.7 percent of BSES's share capital, while the balance 65.3 percent is being held by 194,524 individuals, 1,164 Indian companies, 12 foreign companies and 90 foreign institutional investors (as of April 30, 1997). 6 Currently coal. The condition would also cover gas, if in future gas is made available (Footnote 4).  - iv - Summary of Findings, Future Operations, Key Lessons Learned 12. IBRD Performance. IBRD and IFC waited for the decision of the Mumbai High Court before formally appraising the project. The time was used to advantage to implement the preparation of the Project. The performance of IBRD in respect of project identification, preparation, appraisal and subsequent project implementation was satisfactory (Part I, paras. 33 and 34). 13. Borrower Performance. The Borrower's perfonnance was satisfactory throughout the Project from preparation to implementation and operation. BSES has to be particularly commended for its risk taking in initiating the procurement for the main plant equipment package, and for its performance in completing the evaluation of the bids for the said package in 3.5 months (Part I, paras. 35-39) 14. Cofinancier Performance. IFC cofinanced the Project to the tune of US$50 million equivalent. The project was appraised by ajoint IBRD-IFC mission. However, project supervision was carried out separately. IBRD sent all its supervision reports to IFC (Part I, para. 40) 15. Assessment of Outcome. The results of the Project are satisfactory. Most of the physical components of the Project have been installed and are in commercial operation; the institutional and development objectives have also been fully realized. IBRD encouraged and succeeded in transforming BSES from a small distribution company into an integrated utility and majority privately-owned company (Part I, para. 41). 16. Future Operations. Since going into commercial operation, the Dahanu thermal power plant (TPP) has been operating at its rated capacity and successfully meeting the load demand in the WRIS. Future operations of the power plant will be monitored against the North American Energy Reliability Council's (NERC) standard for coal-fired power stations (Part I, para.42). Key Lessons Learned 17. Major findings of the project implementation experience and important lessons for future projects are summarized as follows: (a) A private company is better suited to making strategic decisions which might be considered risky by public concerns. Because it had the authority, BSES's Board took the bold decision to initiate the procurement of the main plant equipment package, before the decision of the Mumbai High Court had ruled on the court action by the NGOs, and IBRD and IFC had appraised the Project; (b) An utility should begin public consultations and dissemination of detailed information in respect of social and environmental impacts of any project at a very early stage of preparation. It is only through such transparent public consultations that undue apprehension in the public mind can be allayed and their support for the project enlisted. Due to BSES's proactive position in addressing the environmental  issues, the implementation of the Project was not affected by any court injunction, although the NGOs continued their court action during the early years of implementation. However, project preparation would have been on a much stronger footing and would have taken shorter time, had BSES begun formal public consultations during the very early stages of preparation. Had the support of the local population been ensured at the very beginning through such public consultations, there is a probability that the NGOs would not have taken GOI, GOM and BSES to court and appraisal of the Project would not have been postponed. It should be noted that in 1989-1990, formal public consultations were not fully established; (c) Priority and attention given by the Management of an utility to timely and satisfactory evaluation of bids, would shorten the evaluation period, without negatively affecting the quality of the evaluation, as was seen in the evaluations of the procurement packages under the Project, in particular in the evaluation of the bids for the main plant equipment package, which was completed in only 3.5 months; (d) Employment of competent consultants would help an utility to complete its project (from design to assistance to the utility in the evaluation of the bids, to supervision of implementation) satisfactorily and on time, and also help the utility keep the number of its staff to a minimum, a was demonstrated under the Project; (e) A single turn-key contract for main plant equipment (boilers, steam turbines and generators, as well as the associated auxiliaries and instrumentation and control systems) should be encouraged within the context of the financing strategy for any power project, wherever feasible, as this has proved under the Project to be much easier to coordinate and implement; (f) Evaluation of bids should also take into account an assessment of the existing backlog of potential suppliers to detennine if they have the capacity to deliver within the time frame indicated, to avoid the delays which occurred under the Project as the supplier of the main plant equipment contract was not able to deliver critical components of some major equipment because their order books were filled beyond capacity; (g) Coal supply and transportation by railways should be linked under commercially enforceable contracts to ensure timely supply of coal of adequate quality and in adequate quantities, for the optimum utilization of a power generation facility, because sustainable operation of a TPP cannot be achieved without the assurance of unconstrained supply of design fuel in as much as full economic benefits of the investment cannot be realized unless the plant is enabled to operate at its optimnum potential. A commitment by India "to ensure adequate supplies of suitable fuel for the economic operation of the facilities constructed under the Project' proved to be insufficient;  - vi - (h) Use of higher quality of coal (washed or imported) should be encouraged, as the economic, technical and environmental advantages from using such improved quality of coal, were successfully demonstrated at the Dahanu TPP; and (i) When a number of institutions are involved in the successful completion of a project, it is important to set up a high-powered coordination committee to ensure that each institution plays its part as demanded by the schedule, to avoid the kind of delay experienced under the Project, when the transmission line for startup power was installed on time but its connection to the substation owned and operated by another utility was delayed due to procedural wrangling.  IMPLEMENTATION COMPLETION REPORT INDIA PRIVATE POWER UTILITIES (BSES) PROJECT (LOAN 3344-IN) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES 1. Responsibility for the electric supply in India is shared constitutionally between the central government and the states. During the five-year period from FY89/90 to FY94/95, electricity generation in India increased by about 7.5 percent per annum, from 245,000 Gwh to 351,000 Gwh. However, the demand was much higher than the supplies. Power shortages are currently estimated at about 10 percent of total electrical energy and 20 percent of power capacity requirements. They are likely to increase in the coming years in several parts of the country as electricity demand is projected to grow at an annual average of approximately 7 to 9 percent through the year 2000. The supply gaps arose from the scarcity of public resources to develop new generation, transmission and distribution, and from the frequent breakdown of existing plants because of unavailability of spare parts, deteriorating quality of fuel and inability of the public sector utilities to take timely outages for maintenance. 2. The principal challenge facing the Government of India (GOI) and the state governments in the power sector for the 1990s is to improve the balance in sector development between efficiency improvement and supply expansion. This places great pressure on the finances of GOI and the state governments and poses many managerial and technical challenges for GOI, state governments and the State Electricity Boards (SEBs). In end-1980s and early-199Os GOI recognized that to satisfy this level of investment, it had to harness more resources and managerial skills from the private sector. GOI's first actions in this direction were its guarantee of the IBRD Loans requested by two existing private utilities--the Tata Electric Companies (TEC) and BSES . Then in mid-1991 (right after the IBRD Loan and IFC Investment (A Loan) for the Project were approved), GOI reversed its long-standing policy on private investment in the sector. Power was removed from the list of activities reserved for the public sector in the Industrial Policy Resolution. The Electricity (Supply) Act of 1948 was amended to lift many of the regulatory disincentives to private investment in the power sector. At the time, there were only five private utilities2 that together provided less than 5 percent of the public supply. 3. BSES was one of said five private power utilities. At appraisal in February 1991, BSES provided public electric supply, strictly as a distribution company serving the northern suburbs of I Evaluation Summary, Footnote 1. 2 Evaluation Summary, Footnote 2.  -2 - Mumbai, and making all its power purchases from the Tata Electric Companies (TEC)3. Established in 1926, BSES was a well-established distribution company with a good record of performance and technical and commercial efficiency. Its financial position was then and has been strong compared to other utilities operating in India. Fifty-nine point nine (59.9) percent of its capital was held by three major Indian Financial Institutions (IFIs) and nationalized banks4; the balance was owned by about 9,000 shareholders and other corporations. When its original license of 50 years from 1926 to 1976 expired, the Government of Maharashtra (GOM) had extended the license for 10 years on the condition that BSES install a 500 MW generation project in Maharashtra to fill the anticipated supply gaps. As BSES had initiated actions in this behalf, GOM had further extended the license initially up to 19935. 4. At the time the IBRD Loan and IFC Investment for the Project were approved, IBRD was following a three-pronged strategy in its lending operations in the power sector in India. As a means to effect sector-wide improvements, it supported agencies owned by GOI6 It also supported a selected number of SEBs whose management and state governments were committed to reforms. In addition, and in close cooperation with IFC, it provided support to existing private power utilities to improve their financial and economic efficiency, and to encourage GOI to lower entry barriers for new investors. IBRD involvement in the private sector in India comprised five loans to TEC for the staged development of the Trombay Thermal Power Station and the construction of a pumped storage facility at Bhira7. IFC loans of US$20 million equivalent to the Ahmedabad Electricity Co., and US$35 million equivalent to TEC had helped them strengthen their respective transmission systems. 5. The country assistance strategy discussed by the IBRD Board on June 20, 1995, shifted the emphasis of IBRD's strategy towards implementing state-level reforms and improving state finances. The IBRD accordingly supports India's attempts to reform the state power sector, especially since the pace of state power sector reform affects the sustainability of the country's overall economic stabilization program. Power sector lending therefore focuses on promoting domestic and foreign private investment; supporting the reform efforts of PFC, NTPC and 3 TEC generate most of their supplies from their own thennal and hydropower plants. The balance is bought from the Maharashtra State Electricity Board (MSEB). Thus, BSES also is dependent to on supplies from MSEB (Part I, para. 28). 4 The shareholdings of the Life Insurance Corporation (LIC), General Insurance Corporation (GIC) and its subsidiaries, and Unit Trust of India (UTI) were 21.4%, 19.9% and 18.1%, respectively, and amounted to 59.4% of BSES's share capital. In addition to this, nationalized banks held 0.5%. Thus shareholding by the public institutions was 59.9% of BSES's share capital. These financial institutions were represented in BSES's Board but did not intervene in BSES's day-to-day operations. 5 As a condition of the IBRD Loan, BSES's license was extended up to August 15, 201 1 (the maturity date of the said IBRD Loan). 6 The National Thermal Power Corporation (NTPC); the Power Grid Corporation of India Ltd. (POWERGRID); and the Power Finance Corporation (PFC). 7 The most recent (fifth) IBRD operation was the Private Power Utilities (TEC) Project (Ln. 3239-IN), approved in June 1990, and cofinanced with the Government of Switzerland, IFC, and the Industrial Credit and Investment Corporation of India Ltd. (ICICI). Other IBRD operations are given in Part II, Table 2.  - 3 - POWERGRID; and assisting states to implement credible plans to improve the performance and finances of their power sector. Support to a private utility like BSES is still an element of IBRD's strategy in the power sector. The IBRD and IFC participation in supporting BSES under the Project not only helped mobilize financing for the Project, but also improve the efficiency of the sector through greater private sector participation. 6. The Project's physical objectives were to: (a) provide additional generation, transmission and distribution capacity to meet the increasing demand for electricity in the Mumbai area; and (b) maintain the high quality of service to BSES consumers. Additionally, the institutional and sectoral objectives were: (c) to support GOI's endeavors to increase private sector participation in the supply of power; and - (d) to assist in transforming BSES from a distribution company into an integrated power utility with responsibilities for generation, transmission and distribution. 7. The Project, as part of the least-cost development program for WRIS, included the following physical components: + a thermal power plant comprising 2 x 250 MW coal-fired units8 located at Dahanu; * two double-circuit, 220 kV transmission lines, about 105 km long, to transmit power from Dahanu to BSES's license area in the suburbs of Mumbai, and three, 220/33 kV receiving substations; and * strengthening and extension of BSES's 33 kV and 11 kV subtransmission and distribution system. B. ACHIEVEMENT OF OBJECTIVES 8. Overall Results. The development objectives of the Project have been achieved. With regard to the physical objectives, except for the full commissioning of the second transmission line (para. 10) all the other components have been put into commercial operation and have been operated satisfactorily. With regard to the institutional and sectoral objectives, the Project showed the Bank Group's support for GOI's intentions for lowering entry barriers and providing incentives for private investment in the power sector. BSES has been transformed from a distribution company into a full-fledged utility with generation, transmission and distribution functions. At appraisal, 59.9 percent of BSES's share capital was held by three major IFIs and s Evaluation Summary, Footnote 4.  nationalized banks. Following a shift in its shareholders' base, IFIs and nationalized banks currently hold about 34.7 percent of BSES's share capital, while the balance 65.3 percent is being held by 194,524 individuals, 1,164 Indian companies, 12 foreign companies, and 90 foreign institutional investors. The share of the largest private investor was reduced from 7 percent at appraisal to 5.759 percent of project completion. The Project itself reflects least-cost power development in the Mumbai area, and the environmental measures undertaken and monitoring of impact data on a continuous basis are adequate for the purpose of protecting the environment. BSES's tariffs are adequate to ensure an acceptable return on investments. 9. Physical Objectives. With the installation of the two 250 MW generating units at Dahanu, and one of the two 220 kV transmission lines and three substations to transmit power to BSES's license area in the suburbs of Mumbai, the principal physical objectives of the Project have been fully met. The reliability, as well as quality, of the service to BSES consumers has vastly improved following the commissioning of the power plant. Also, BSES is no longer totally dependent on purchased power. BSES continues to experience land access problems for the second 220 kV transmission line from Dahanu to its distribution areas in Mumbai. As the second line is to provide back up for the loss of the first line, delay in its completion does not affect the operational performance of the Dahanu TPP9. 10. Institutional and Sectoral Objectives. The Project has helped support GOI's endeavors to increase private sector participation in the supply of power. State power sector reform, which forms the principal element of IBRD's most recent strategy in the power sector (para. 5), generally includes the unbundling of the SEBs into generation, transmission and distribution companies. It is concluded that this kind of restructuring would provide answers to the prevailing problems in the power sector in India. Support for BSES's transformation from a purely distribution company into an integrated power utility with responsibilities for generation, transmission and distribution is justified by the fact that BSES was not and still is not affected by the said problems, as compared below. Prevailing Problems in the Power Sector in India Comments about BSES 1. Insufficient generation. Support for the Project partly answered the insufficient generation problem. 2. Poorly maintained equipment (generation, BSES's maintenance performance is satisfactory. transmission and distribution). 3. Inadequate tariffs and revenue shortfalls. BSES's tariffs have been adequate and BSES has not experienced revenue shortfalls. 4. Deep cross-subsidies. Although there are cross-subsidies between BSES's customer categories, the said subsidies are not "deep". 5. Widespread government interference. GOI and GOM do not interfere in the operations of BSES. When IFIs had a majority shareholding in BSES's equity, they did not interfere with the day-to- day operations of BSES. 9 When the existing line trips out, BSES is able to buy the required power for distribution in Mumbai from the TEC system and to sell the generation from Dahanu to the MSEB, Gujarat Electricity Board (GEB), and Madhya Pradesh State Electricity Board (MPSEB) through the load dispatch of the Western Region Electricity Board (WREB).  BSES has also become a true private company following the reduction of the total share of the IFIs and nationalized banks from 59.9 percent to 34.7 percent. Bank Group support for the Project helped BSES in mobilizing resources under more favorable conditions to complete the Project (para. 25). Therefore, expansion of BSES in generation and transmission with its consequent full privatization of BSES was and still is justified in institutional, economic and financial terms. The Bank Group support of this expansion was appropriate and timely. 11. Environmental Monitoring. In dealing with both private and public utilities in India, IBRD has also promoted more comprehensive and vigorous analyses of environmental inputs in project design and improved implementation of project components that support the environment. The system installed under the Project is satisfactory. 12. Rate of Return. The IERR for the WRIS investment program was estimated at appraisal to be 13.3 percent'0 and 22 percent excluding and including the consumer surplus". The capital costs of the investment program, covering the generation and transmission components together with incremental operating and fuel costs, as shown in Part II, Table 8, have been quantified. The benefits of the investment program relate mainly to the incremental consumption that they make possible. A minimum measure of benefits, ignoring consumer surplus, was derived from the incremental sales revenue based on the average tariffs of BSES prevailing in early-1996 (Rs. 3.63/kWh), representing the minimum willingness to pay for electricity. On this basis, the minimum IERR achieved for the WRIS investment program of which the Project is part, is computed as 15.7 percent (Part II, Table 8). As the post-project IERR is higher than the one computed at appraisal, the computation of the IERR taking into account consumer surplus was not deemed necessary. 13. Implementation Experience. Except for the delay of six months in commissioning, mostly due to factors outside the control of BSES, the two units were successfully placed in commercial operation. A comparison of actual vis-a-vis appraisal dates is as follows: JO Computed based on the then prevailing average tariffs of Rs. 1.50/kWh, and thus excluding consumer surplus from the benefit streamn. Estimated at Rs. 0.64/kWh in 1991 constant prices (SAR of May 15, 1991 -- Chapter V and Annexes 5.4 - 5.7).  -6 - SAR Projection Aetual Unit 1 Synchronization July 1994 January 1995 Commercial Operation January 1995 July 1995 Unit 2 Synchronization January 1995 March 1995 Commercial Operation July 1995 January 1996 Transmission Lines Line 1: Commercial Operation (*) January 1995 August 1995 Line 2: Commercial Operation (**) January 1995 Expected: Second-half I___ of 1997 * From Dahanu TPP to BSES's license area via MSEB's Boisar Substation. The Dahanu-Boisar section was completed in June 1993 and permitted BSES to obtain startup power from MSEB. ** From Dahanu TPP to BSES's license area, but does not connect at Boisar. 14. The said delay of six months was principally due to the failure of the supplier of the main plant equipment of the Dahanu TPP. The reasons given by the supplier were found reasonable by BSES so that BSES did not apply the clause of the contract for liquidated damages. However, when compared with the implementation periods of similar power projects realized by a GOI- owned entity, a delay of six months compares favorably for BSES . Due to delays in obtaining forest clearances for the transmission lines and land access problems to the tower sites, construction of the said lines took much longer than planned. The first line was completed in August 1995. However, the Dahanu-Boisar portion was completed in June 1993 in time to allow BSES to obtain start up power from the MSEB system'3. During the period from July 1994, when Unit I was synchronized, to August 1995, when the line was put into operation, BSES was able to sell the generation from the Dahanu TPP to MSEB, GEB and MPSEB via the WREB load dispatch. The second line has not been put into service (para. 9). Development of the distribution network in the license area was implemented without substantial delays. C. MAJOR FACTORS AFFECTING THE PROJECT 15. Opposition of Some NGOs to the Project. Since its inception, the construction of a thermal power station at Dahanu was challenged by some NGOs, constantly. In October 1989, two NGOs -- the Bombay Environmental Action Group and the Dahanu Taluka Environmental Protection Group -- took GOI, GOM and BSES to court, seeking an injunction to stop the project. The NGOs claimed that the project would cause severe destruction to the ecology of the area, including the coastal wetland, chikoo fruit plants, local farming and the fishing industry. The Mumbai High Court granted an injuction while it reviewed the case. At the time, BSES was only preparing the Project and had not yet committed any substantial funds. Thus 12 Unit 1 (210 MW) of the Dadri TPP implemented by NTPC was put into commercial operation with a delay of 10 months. The delays for the subsequent three units at Dadri TPP were 18,25 and 27 months, respectively. The Dadri TPP was funded under IBRD Ln. 2844-IN for the National Capital Power Project (ICR, dated September 13, 1996, for the said project -- Report No. 16003). Even though the transmission line for startup power was installed on time, the connection to MSEB substation was unnecessarily delayed due to procedural wrangling.  implementation was not affected by this injunction. At one stage of the court proceedings, the two NGOs tried to petition IBRD as a respondent, but the Mumbai High Court rejected this petition. Following a thorough review, the Mumbai High Court rejected the petition in December 1990, and in March 1991 the Supreme Court of India upheld this decision. The Supreme Court ruled that the thermal power plant should be built in accordance with GOI's environmental clearance. If there were any changes in the clearance, during the process the NGOs should be given "the opportunity to be heard". 16. Specifically, the two NGOs objected: (a) the use of make up water for the plant from a reservoir that would deprive agriculture; (b) plant gas emissions that would affect public health as well as chikoo plants; liquid discharge from the plant that would destroy aquatic life; and (c) a large work force implantation that would disrupt local life (mainly agricultural). 17. The following measures were taken to mitigate any actions on the above issues: (a) the allocation to BSES from the waters of the Surya Prakalp Reservoir was from the amount of water of the reservoir allocated for industrial uses; (b) a 275 meter stack was built and electrostatic precipitators of 99.8 percent efficiency were installed. Studies of possible effects on chikoo plant showed that this plant was resistant to the effect of sulphur dioxide (SO2, para. 26); (c) the power plant was constructed outside the 500 meter perimeter. From the high tide line (HTL), a liquid effluents treatment plant was installed, a cooling water discharge channel of about 3 km long was built, and 34 million mangroves were planted along the creeks surrounding the power plant site (para. 26); and (d) BSES was vigilant to prevent contractors in bringing in large numbers of workers and to prevent the construction of permanent settlements around the plant -- there is no evidence that the local life was substantially disrupted. 18. Regardless of the legal questions involved, during the preparation of the Project BSES adopted a proactive position in addressing the issues raised by the NGOs. The Dahanu site was selected after careful assessment of the proposed project's development impacts. There was no resettlement requirement at the Dahanu site. A more detailed discussion of the environmental aspects of the project is given in para. 26 and Annex D. 19. Postponement of the Appraisal Process. IBRD and IFC postponed the appraisal of the Project until the Mumbai High Court's decision. The Supreme Court's decision came during the processing of the project documents, thus negotiations and approvals of the IBRD Loan and IFC  - 8 - Investment were not delayed. Due to IBRD and IFC's cautious approaches during the preparation of the Project and BSES's proactive position in addressing the environmental issues, the implementation of the Project was only affected by the late deliveries by the suppliers, in particular of the supplier for the main plant equipment package (para. 14). 20. Project Startup. Loan effectiveness was contingent upon GOM extending the operating license of BSES up to at least to the maturity date of the IBRD Loan. GOM complied with this condition and extended BSES's license up to August 15, 2011. The loan was declared effective within 45 days from loan approval and 17 days from loan signing. 21. Employment of Consultants. Contrary to the practice of most public utilities in India, BSES was not reluctant at all in employing competent consultants when necessary. This helped the Company in its successful implementation of the Project. It also helped BSES keep the number of its staff at a minimum. 22. Procurement. In total, there were 51 contracts that were funded under the IBRD Loan. Ten contracts were subject to prior review for which the threshold value was US$2 million. IBRD and BSES agreed that domestic preference of 15 percent or the corresponding import duty, whichever is less, would be applied in the comparison of bids for equipment contracts. There was no case to apply this provision. Most IBRD-financed contracts were procured through international competitive bidding (ICB) in accordance with IBRD Guidelines. Local contractors won the contracts for most categories of equipment. Domestic suppliers benefited from the "deemed exports' benefits." Although these benefits were reduced over time in parallel with GOI's liberalization policies, BSES took timely and decisive actions, so that implementation was not affected by this reason. BSES's procurement cycle, between bid issue and contract award was within 6-7 months, which is the internationally accepted typical period. The said period for the main plant equipment package was only 3.5 months' . BSES's excellent performance in this point compares very well with the performance of the GOI-owned NTPC for similar units under IBRD projects'5. The said main plant equipment package and other major mechanical and electrical equipment packages were procured on a supply-and-erect basis. Some contracts also included civil works, which was done to ensure better contract coordination during implementation. 23. Advance ProcurementAction by BSES. BSES initiated the procurement of the main plant equipment contract even before the Mumbai High Court decision on the environmental questions was available or IBRD and IFC had appraised the Project. IBRD gave conditional clearance to BSES on this package. IBRD alerted the Indian authorities and BSES that BSES 14 Bids were received on August 6, 1990. The evaluation report was received by IBRD in mid-November 1990. Following correspondence to clarify IBRD's comments, IBRD's conditional no-objection telex was sent on November 28, 1990. BSES could have signed the contract in early-December 1990, if it were not for the court action pending with the Mumbai High Court. Following the Mumbai High Court's decision in its favor, BSES signed the contract on January 29, 1991 (Para. 23, for Bank's "conditions" in the no-objection telex). 15 The bid opening-contract award periods for the turbines and generators, and boilers packages for the 210 MW Dadri TPP, built by NTPC, were 9 and 10 months, respectively.  -9- was assuming and had to manage all financial risks associated with any advance procurement, in the event the IBRD Board did not approve the Project. In the end, the advance of US$30 million equivalent paid by BSES to the winning supplier was reimbursed to BSES under the said IBRD Loan through retroactive financing. BSES obtained a bridge loan from commercial banks for the purpose. In addition to its bold decision on advance procurement for the main plant equipment package which cost about US$250 million equivalent, BSES completed the evaluation of the four bids received in 3.5 months (para. 22). BSES's excellent performanice in this respect should be taken as a model by GOI-owned utilities, SEBs and SEBs' successors being established under state power sector reforms'6. 24. Changes in the Procurement Plan. The procurement plan defined at appraisal assumed that the IBRD Loan would be mainly used to finance the above mentioned main plant equipment contract. However, the Indian Rupee vis-a-vis the US dollar was devaluated in July 1991 and February 1992, and then made convertible. This resulted that the main plant equipment contract was not going to cost in US dollar terms as much as estimated at appraisal. At the request of BSES, IBRD agreed to finance additional procurement of various items, such as electrical cables, hydrogen plant, system control and data acquisition equipment, fire detection system, etc. for the Dahanu TPP, as well as upgrading and expansion of the distribution system, which were part of the original Project and were initially planned to be funded from BSES's own or other resources. The additional contracts were procured through ICB in accordance with IBRD Guidelines. IBRD also financed the erection and construction management of the boilers by the supplier of the main plant equipment. 25. Changes in the Financing Plan. The financing plan defined at appraisal assumed that, in addition to the US$200 million IBRD loan and US$50 million IFC investment (A Loan), up to US$18 million would be obtained through a syndication comprising participation in an IFC Loan B and/or through parallel financing from other sources arranged by IFC. Pre-marketing inquiries in 1991 indicated that there was a difficult market environment for syndicating funds with commercial sources, stemming from the market's perception of the economic and political 17 difficulties experienced by India . While IFC waited for better market conditions, GOI took 16 BSES's actions in advance procurement warrant a comparison with the procedures NTPC has to follow for similar initiatives. Once the techno-economic clearance by the Central Electricity Authority (CEA) of GOI, and environmental clearances by GOM and GOI were obtained, BSES Board had the authority to decide whether to initiate such an advance procurement action, to sign a contract based on its expectations from the Courts (once the Mumbai High Court had decided in favor of BSES, the Company judged that the Supreme Court would upheld the High Court's decision and signed the contract) and to obtain a bridge loan to pay for the advance under the contract. However, NTPC Board is not authorized for similar actions. After it obtains the above mentioned techno-economic and environmental clearances, NTPC has to submit its proposals to GOI's Public Investment Board (PIB). To initiate a procurement action, NTPC has to obtain PIB's clearance under a process called "pre-PIB meeting". To make a commitment, thus sign a contract under a project, NTPC has to show to PIB and GOI's Cabinet Committee for Economic Affairs (CCEA) that it has finalized the financing plan for the project and obtain CCEA's final authorization. Only after that authorization that NTPC can sign a contract. In summary, shareholders of a private company authorize their board to make decisions in committing the company, while GOI as the owner of a public enterprise keeps that authority within a committee of its Cabinet. 17 Staff Appraisal Report, dated May 15, 1991 (para. 3.05).  - 10- decisive actions towards economic reforms, including opening up the power sector for further private sector participation. By end- 1993, the market situation had changed so much that BSES decided to advance by 3-4 months the issuing of the second set of convertible debentures'8. The issue was very successful19 and after that, BSES did not need the IFC syndication. Following the appointment of a new Management Team, BSES had its Corporate Plan prepared by Consultants and decided to expand its activities beyond its license area in Mumbai. The Global Depository Receipts (GDRs) issued by end-1995 to finance BSES's further distribution investments in the license area in Mumbai and new equity investments and operations in other parts of the country were oversubscribed almost nine times in international and Indian financial markets. This showed the credibility of BSES in the said markets. Funds obtained through the above convertible debentures and GDRs issues were of terms more favorable to BSES than the terms of commercial syndication would have been. 26. Environmental and Social Issues. BSES received environmental clearance from the Ministry of Environment and Forests of GOI on March 29, 1989. During the preparation/ appraisal of the Project, based on IBRD/IFC recommendations, BSES prepared an Environmental Due Diligence Plan that it revised regularly during implementation. The Project that has been built complies with the environmental standards of GOI and GOM and with the applicable environmental policies and guidelines of the World Bank Group. Issues that were followed during implementation are summarized as follows: (a) Land Acquisition in Dahanu. In Dahanu, BSES acquired 834.56 ha of land, 821.58 ha from GOM, and 12.98 ha from private owners. GOM and private land are adjacent to each other. The land on which the Dahanu TPP has been built was not particularly valuable from an environmental perspective either in local or regional contexts. GOM had previously leased part of this area to salt pan owners. Through GOM, the salt pan owners terminated their long-term leases against suitable compensation by BSES. Private land was purchased through negotiations and the price was mutually agreed between BSES and the land owners. Therefore, the Land Acquisition Act was not applied. (b) Resettlement and Rehabilitation. No person was living on the land purchased by BSES from private owners and acquired from GOM. Hence there was no displacement of people. (c) Construction of Structures within 500 Meters of the High Tide Line (HTL). The environmental clearance of GOI required that the power plant installations be built at least 500 meters from HTL. This was complied with. In the Loan Agreement with IBRD, BSES committed to complete the issue by June 30, 1994. It completed the issue in February 1994. 19 The rights issue to existing shareholders was oversubscribed by 1.3 times. The issue to the public was oversubscribed by 1.8 times.  (d) Flue Gas Desulphurization Issue. In regard to stack emissions, the environmental clearance initially stipulated that a Flue Gas Desulphurization (FGD) unit would be installed from the beginning and would be in operation when the power plant was commissioned. However, this requirement was revised by GOI in 1993 in light of favorable stack plume dispersion modeling results and high cost of FGD units (US$ 40-50 million). GOI decided that, after the power plant went into full load operation, sulfur dioxide (SO2) emissions would be monitored for a period of one year. If ground level concentrations were found to be in excess of permissible limits, then an FGD plant would be installed. Accordingly, space was provided between the electrostatic precipitators and the stack for the future installation of a FGD unit, if necessary. The required one-year data collection period, from January 12, 1996 (the date at which Unit 2 was declared in commercial operation) to January 11, 1997, has been completed and the results have been forwarded to the Maharashtra Pollution Control Board (MPCB) for evaluation. A final decision as to the need for an FGD plant will be made based on the monitoring data and MPCB's evaluation. A total of 16 monitoring stations, including a meteorological station, 5 ambient air quality measuring stations and 10 water quality measuring stations were installed for monitoring purposes and BSES continues to provide the data to MPCB for evaluation. During the period GOI processed the changes in the environmental clearances about the requirement for the FGD unit, NGOs were given by GOI the "the opportunity to be heard", in accordance with the decision of the Supreme Court (para. 15). Although the NGOs were not satisfied with the process, their further complaints were not accepted by the Courts. (e) Study of Possible Effects on the Chikoo Plants. BSES had its consultants study the effects of S02 on the chikoo plant. The studies were carried out under a controlled environment and using internationally approved techniques. It was concluded that the chikoo plant was resistant to the effects of SO2. It tolerated, without any sign of degradation, an exposure to SO2 of an order of magnitude of three over what was predicted by computer modeling to be the highest SO2 ground level concentration under full load operation, with the plant using the worst quality of specified coal. (f) Other Actions in the Dahanu Area. BSES has, since the inception of the Project, planted more than 4.1 million mangroves and 2.5 million trees of various species along the entire creeks surrounding the Dahanu TPP. Beautification of the BSES colony near the plant as well as the sea beach in Dahanu Town for public convenience has been carried out. On the social front, school buildings have been renovated and several scholarships to deserving students have been awarded. BSES has also open a college in the area. An abstract of the community development activities by BSES is given in Appendix E.  - 12- 27. Compliance with the Legal Covenants. Compliance with legal covenants under the Guarantee Agreement between India and IBRD, and the Loan Agreement between IBRD and BSES was generally satisfactory except for the following, which were not under BSES's control: (a) Under the Guarantee Agreement, India had committed that: (i) it would take or cause to be taken all such action as would be necessary to ensure the availability of adequate supplies of suitable fuel20 for the economic operation of the facilities constructed under the Project. As mentioned in paragraphs 29 through 31, supply of coal of adequate quantities and adequate quality was a problem during the first years of operation of the Dahanu TPP. With no control over the GOI's coal linkage policy, nor over Coal India to assure deliveries, nor over the Indian Railways for the allotment of wagons for transportation, BSES tried to reach a commercial agreement with Coal India for the timely supplies of coal. In the end, in January 1997, BSES was finally able to sign a coal contract with the South Eastern Coalfields Ltd., a subsidiary of Coal India. Thus, the covenant was complied with delay. It is also noted that a commitment in the Guarantee Agreement (which is not commercially enforceable) proved to be insufficient; and (ii) it would take or cause to be taken all such action as would be necessary to ensure that the State of Maharashtra would prepare and furnish to IBRD for its review by March 31, 1992, a tribal development program in respect to incremental support for development activities in the neighboring tribal communities near the site of the Project and carry out the Tribal Development Program in a manner satisfactory to IBRD. GOM's initial proposal in October 1991, and IBRD's consultants' report were not satisfactory. Although the commitment was originally a commitment by GOM, BSES undertook the responsibility for the preparation of the said plan and its implementation. BSES had its consultants prepare a Community Development Plan, covering tribal and non-tribal people in the Dahanu area. BSES is seeking international grant assistance of about US$3 million to implement the said plan. The covenant was partially complied with. (b) under the Loan Agreement, BSES had committed to enter, prior to the synchronization of the first unit, into a commercial agreements with MSEB and TEC for the interconnected operation of the Dahanu TPP and BSES's transmission system with TEC and MSEB's systems. The said contacts are yet to be concluded. The covenant has not been complied yet, but lack of these contracts has not negatively affected the operation of the Dahanu TPP and the 20 The commitment would cover supply of gas, in case gas is made available to the Dahanu TPP in future (Evaluation Summary, Footnote 5).  - 13 - transmission system. When necessary BSES buys power TEC and/or MSEB, and sells its generation from the Dahanu TPP to MSEB, GEB and MPSEB through the load dispatch of WREB. 28. Compliance with the above covenants was outside the control of BSES. Use by IBRD of the remedies agreed under the Loan Agreement would have penalized BSES which was complying with the covenants under its control, was doing its best to comply with the above three covenants, was implementing the Project satisfactorily and with due diligence, and was being supported by the international and Indian financial markets. IBRD opted to follow closely the actions taken by BSES and ensure that non-compliance with the above three covenants did not jeopardize the implementation and operations of the Project. D. SUSTAINABILITY OF PROJECT ACHIEVEMENTS 29. The achievements of the Project are highly likely to be sustainable under the condition that fuel21 of proper quality and in required quantities is provided. Since going into commercial operation, the plant has been running at a very high load factor, with a high level of performance. BSES has been transformed into a much stronger utility. Operational plans to ensure the continued sustainability of results achieved under the Project have been discussed and agreed with BSES management (Part II, Table 6). The Project reduced BSES's dependence on power bought from TEC, which in turn buys part of its power from MSEB. In view of the fact that the price of the power bought from MSEB is substantially higher that the cost of generation from the TEC plants and that of the generation from the Dahanu TPP, the Project would protect BSES from the operational and financial uncertainties which could stem from MSEB's difficult institutional and financial situation. The Project has its place as a base-load plant in the merit order operation in WRIS. 30. Coal Supply and Coal Quality Issues. Timely supply of coal of adequate quantity and quality is a very important issue which could affect the sustainability of operation and success of the Project. But this problem is not specific to the Dahanu TPP. It is a continuing problem affecting the performance of almost all of the thermal power stations in India. During the initial phases of operation, BSES had to keep one unit out of operation for a total of 72 days for want of coal22. In order to meet the coal requirements, BSES resorted to transport coal from Orissa by ship all around the subcontinent23 and importing coal24. Of late, however, indigenous supplies 21 Evaluation Summary, Footnote 6. Unit 2 was shutdown from March 20, 1996 to April 28, 1996 (40 days) and Unit 1 was shutdown from June 13, 1996 to July 14, 1996 (32 days) due to coal shortage. Unit I stoppage was also due to power evacuation problems. BSES used these periods to prepare then units for performance guarantee tests. 23 At appraisal GOI had allocated to the Dahanu TPP, coal from the Tb Valley coal fields in Orissa. Later, GOI changed the allocation to coal from the Korba coal fileds in Madhya Pradesh. IBRD did not object to this change as the transportation distance was being reduced from about 1,400 km to about 850 km, and that studies had shown that all the emission standards and requirements would also be fulfilled in burining coal from the Korba fields. Due to substantial experienced during the first years of operation, with supplies from Korba fields, BSES bought coal from the Talcher coal fields in Orissa, and to avoid problems in railway transportation, shipped the supplies around the country.  - 14 - allocated by GOI through its coal linkage committee have been adequate. BSES has been blending it with the imported coal at a ratio of 25 percent imported and 75 percent domestic, to improve overall coal quality. This has greatly improved the performance of the plant as well as the ambient air quality due to reduced emissions. 31. In order to maintain the quality of coal at the desired level, reduce the amount of coal to be transported by railways, and substitute importation, BSES has made arrangements with international companies competent in this field, for setting up a coal washing facility at the supply end (the Korba Coal Fields in Madhya Pradesh). The construction of this facility, one of the first of its kind in India, is scheduled to be completed over a period of eighteen months from its start date. It is expected that the quality of the washed coal would improve significantly with an ash content of about 30 percent without having to be blended with a better quality imported coal. Given that indigenous coal, earmarked for thermal generation, causes accelerated erosion of the power plant equipment, which is primarily responsible for the poor performance of most power plants in India, the decision of BSES to pioneer the use of washed coal in pulverized coal fired boilers is highly commendable. It will serve to demonstrate the economic benefits to be derived from coal washing. 32. In view of the above mentioned timely and correct actions by BSES with regard to supply of coal, it is concluded that BSES would be able to operate the Project in a sustainable manner. Thus the sustainability of the Project is not in jeopardy. E. IBRD PERFORMANCE 33. IBRD and IFC waited for the decision of the Mumbai High Court before formally appraising the project. The time was used to advantage to better prepare the Project. When the Project was approved, GOI had not yet embarked on a full scale liberalization of the economy, including privatization and amendments to the Industrial Policy Resolution, and the Electricity (Supply) Act of 1948. The Project represented strong support by IBRD for GOI's policy to promote private investment in the power sector. Specifically, IBRD encouraged and succeeded in transforming BSES from a small distribution company into an integrated utility and majority privately-owned company. The performance of IBRD in respect of project identification, preparation, appraisal and subsequent project implementation was satisfactory. A total of 13 supervision missions were fielded during which problems in project implementation were identified and satisfactorily resolved. 34. However, project preparation would have been on a much stronger footing and would have taken shorter time, if IBRD had insisted that BSES conduct formal public consultations during the preparation of the Project. These consultations at the project site, would disseminate information about the specifics of the Project, its environmental impacts and mitigation, as well as social benefits the Project would entail. Had the support of the local population been ensured at the very beginning through such public consultations, there is a probability that the NGOs 24 The first deliveries imported from Australia began in the fall of 1996. The imported coal is of high calorific value with very low levels of sulphur and ash content.  - 15 - would not have taken GOI, GOM and BSES to court and appraisal of the Project would not have been postponed. It is noted that in 1989-1990, formal public consultations were not fully established. On the other hand, during appraisal and negotiations IBRD should have assessed more closely the potential negative impact on the successful implementation of the Project of the covenants for which compliance was not under the full control of BSES (para. 27). In spite of the above weaknesses, IBRD's performance from preparation to supervision is still rated as satisfactory. F. BORROWER PERFORMANCE 35. The Borrower's performance was satisfactory throughout the Project from preparation to implementation and operation (Part II, Table 1). BSES has to be particularly commended for its risk taking (which proved to be a very reasonable decision) in initiating the procurement for the main plant equipment package (para. 23), and for its performance in completing the evaluation of the bids for the said package in 3.5 months (para. 22). BSES's excellent performance in the latter point compares very well with the performance of the GOI-owned NTPC for similar units 25 under IBRD projects . BSES's performance should be taken as a model by GOI-owned utilities, SEBs and SEBs' successors being established under state power sector reforms. Given that this was the first ever generation and transmission project undertaken by BSES, it has managed the complex undertaking with commendable fortitude and professional acumen. BSES complied with all the legal covenants under its control (para. 27). However, it is noted that BSES's approaches to Coal India for the supply of coal, and TEC and MSEB for the commercial agreements on interconnected operations, were rather those of a publicly owned utility rather than a private company insisting on having commercially enforceable contracts. 36. From time to time, BSES had been deploying its surplus funds in short-term investments for periods generally ranging from 15 days to one or two months through recognized financial services institutions with the idea of earning a higher interest on these funds. In 1992, such earning was an additional Rs. 220 million by way of interest on these investments. However, on some occasions this was done without adequate securities. During a financial services companies crisis in October 1992, BSES found itself with Rs. 490 million invested without securities in financial services companies which could not repay them. These funds have not been recovered, but BSES's financial situation remained strong enough to complete the Project. 37. BSES has submitted to the GOI an application for setting up at Dahanu a 1,000 MT/day fly ash utilization plant at an estimated cost of Rs 80 million (about US$2.35 million). In fact, the original environmental clearance for the plant had envisaged such ash utilization. Ironically, this worthy project is held up for want of clearance from GOI because the Dahanu area was declared by GOI as "ecologically fragile" in light of earlier protests by environmental groups (paras. 15-18; and Annex C). This is a very progressive undertaking in that it aims at using waste products from the power plant for beneficial purposes while reducing disposal requirements, and BSES is commended. 25 The bid opening-contract award periods for the turbines and generators, and boilers packages for the 210 MW Dadri TPP, built by NTPC, were 9 and 10 months, respectively.  - 16- 38. With the experience it gained during the implementation of the Project, and in view of the strong support it received from the international and Indian financial markets when, in 1994 and 1996, it issued convertible debentures and GDRs (para. 25), BSES is expanding its operations in the power sector beyond its license area in Mumbai. It has secured contracts for the management of a distribution system in Orissa, and for building naphta-based combined cycle power plants in Kerala, acquired controlling interests in a captive power company in Tamil Nadu, entered into joint ventures with a public utility in Eastern India to develop a coal-fired power project and NTPC for the construction of TPPs, and submitted bids to construct combined cycle power plants for other utilities. BSES is also making small and cautious investments in other sectors, e.g., telecommunications. All this reflects continued utilization of the managerial and technical expertise BSES has acquired through the successful implementation of the Project. 39. At appraisal, three large IFIs held 59.4 percent of BSES's share capital. Although they held a majority of the shares, IFIs were represented in BSES's Board but did not intervene with the Company's day-to-day operations. BSES was left to be managed by its Board and Management. During the first and second convertible debentures issues in April 1991 and February 1994, and GDR issue (completed in February 1996), the financial institutions opted to reduce their holdings. In the meantime, other financial institutions bought smaller amounts of shares. During the ICR preparation mission, the share of the IFIs and nationalized banks was 34.7 percent of BSES's share capital. Thus, during the implementation of the Project, in addition to its transformation from a small distribution company to a full-fledged utility, BSES was also transformed to a majority privately-owned company. G. COFINANCIER PERFORMANCE 40. IFC cofinanced the Project to the tune of US$50 million equivalent. The project was appraised by a joint IBRD-IFC mission. However, project supervision was carried out separately. IBRD sent all its supervision reports to IFC. H. ASSESSMENT OF OUTCOME 41. The results of the Project are satisfactory. * Most of the physical components of the Project have been installed and are in commercial operation; the institutional and development objectives have also been fully realized. * IBRD encouraged and succeeded in transforming BSES from a small distribution company into an integrated utility and majority privately-owned company. * The fact that the distribution of the electric energy generated at the Dahanu TPP is in BSES's hands has contributed to the success of the Project. This shows that private investment in generation is more efficient if distribution also is in private hands.  - 17 - However, if everything else remained the same in a state (as has been the case in Maharashtra), a private company responsible for generation and transmission to supply its distribution can perform satisfactorily as an "island" utility with satisfactory technical, institutional and most importantly financial situations. * The Project is likely to encourage similar participation by private developers in the future. This is consistent with the priorities set out in the Country Assistance Strategy discussed by IBRD Board on June 20, 1995 (para. 5). * The success of the Project and the strong support BSES received from the international and Indian financial markets during the issue of the GDRs, show that GOI's and IBRD's strategies to move towards private investments in the power sector are correct. I. FUTURE OPERATIONS 42. Since going into commercial operation, the Dahanu TPP has been operating at its rated capacity and successfully meeting the load demand of the western region. Future operations of the power plant will be monitored against the NERC standard for coal-fired power stations, which calls for a Plant Load Factor (PLF) of 63 percent in the first two years and 75 percent thereafter for the next 8 years of its operation. In its very first year of operation the power plant performed above the NERC standard. However, BSES must ensure availability of coal of proper quality and quantity to continue sustained operation of the plant. J. KEY LESSONS LEARNED 43. Major findings of the project implementation experience and important lessons for future projects are summarized as follows: (a) A private company is better suited to making strategic decisions which might be considered risky by public concerns. Because it had the authority, BSES's Board took the bold decision to initiate the procurement of the main plant equipment package, before the decision of the Mumbai High Court had ruled on the court action by the NGOs, and IBRD and IFC had appraised the Project; (b) An utility should begin public consultations and dissemination of detailed information in respect of social and environmental impacts of any project at a very early stage of preparation. It is only through such transparent public consultations that undue apprehension in the public mind can be allayed and their support for the project enlisted. Due to BSES's proactive position in addressing the environmental issues, the implementation of the Project was not affected by any court injunction, although the NGOs continued their court action during the early years of implementation. However, project preparation would have been on a much stronger footing and would have taken shorter time, had BSES begun formal public consultations during the very early stages of preparation. Had the support of the local population been ensured at the very beginning through such public consultations, there is a probability that the NGOs would not have taken  - 18- GOI, GOM and BSES to court and appraisal of the Project would not have been postponed. It should be noted that in 1989-1990, formal public consultations were not fully established; (c) Priority and attention given by the Management of an utility to timely and satisfactory evaluation of bids, would shorthen the evaluation period, without negatively affecting the quality of the evalution, as was seen in the evaluations of the procurement packages under the Project, in particular in the evaluation of the bids for the main plant equipment package, which was completed in only 3.5 months; (d) Employment of competent consultants would help an utility to complete its project (from design to assistance to the utility in the evaluation of the bids, to supervision of implementation) satisfactorily and on time, and also help the utility keep the number of its staff to a minimum, a was demonstrated under the Project; (e) A single turn-key contract for main plant equipment (boilers, steam turbines and generators, as well as the associated auxiliaries and instrumentation and control systems) should be encouraged within the context of the financing strategy for any power project, wherever feasible, as this has proved under the Project to be much easier to coordinate and implement; (f) Evaluation of bids should also take into account an assessment of the existing backlog of potential suppliers to determine if they have the capacity to deliver within the time frame indicated, to avoid the delays which occurred under the Project as the supplier of the main plant equipment contract was not able to deliver critical components of some major equipment because their order books were filled beyond capacity; (g) Coal supply and transportation by railways should be linked under commercially enforceable contracts to ensure timely supply of coal of adequate quality and in adequate quantities, for the optimum utilization of a power generation facility, because sustainable operation of a TPP cannot be achieved without the assurance of unconstrained supply of design fuel in as much as full economic benefits of the investment cannot be realized unless the plant is enabled to operate at its optimum potential. A commitment by India "to ensure adequate supplies of suitable fuel for the economic operation of the facilities constructed under the Project' proved to be insufficient; (h) Use of higher quality of coal (washed or imported) should be encouraged, as the economic, technical and environmental advantages from using such improved quality of coal, were successfully demonstrated at the Dahanu TPP; and (i) When a number of institutions are involved in the successful completion of a project, it is important to set up a high-powered coordination committee to ensure that each institution plays its part as demanded by the schedule, to avoid the kind of delay experienced under the Project, when the transmission line for startup power was installed on time but its connection to the substation owned and operated by another utility was delayed due to procedural wrangling.  - 19- PART II: STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantal Partial Negligible Not applicable Macroeconomic policies 0 0 O U Sector policies * O 0 0 Financial objectives * O Cl O Institutional development * 0 0 0 Physical objectives U O O O Poverty reduction O O O Gender concerns O 0 O U Other social objectives O * O O Environmental objectives * O O O Public sector management O O O U Private sector development * O El Other O O E l B. Project Sustainabitity Likely Unlikely Uncertain * O O C. Bankperformance HighlySatisfactory Satisfactory Deficient Identification O * O Preparation assistance O * E Appraisal E * O Supervision E * E D. Borrower performance Highly Satifactory Satisfactory Defieiet Preparation E * E Implementation E * E Covenant compliance E * E Operation D * E E. Assessmentafooutcome Highly satisfactory Satisfactory Deficient E O El  -20 - Table 2: Related Bank Loans/Credits Loan Tike Purpose Year of Status . . . . . .____ . .. __ - __. _. A pproval Preceding Operations First Trombay Thermal 106-IN Construct 2x62.5MW November 1954 Completed Second Trombay Thermal 164-IN Construct lx62.5 MW May 1957 Completed Third Trombay Thermal 1542-IN Construct lx500 MW April 1978 Completed Fourth Trombay Thermal 2452-IN Construct 1x500 MW June 1984 Completed Private Power Utilities (TEC) 3239-IN Pumped Storage at Bhira October 1990 Completed CCGT Plant, 1 80MW, etc ~~~~~~~~~~~~~~.......................................... ....................................................... ..................... ....................................................... ..................... .................................. .... Following Operaions (with private power utilities in India) None .................................................................. .......I............................I...............................I.................................................................................... Sectoral Objectives Common to the Above Projects In addition to the above project-specific objectives, the sectoral objective was to support increased private sector participation in the supply of power, assist private power utilities become more efficient in the process. Tsable 3: Project Timetable Steps In pr*jeydel Dateplanne Dat Identification January 1989 Preparation March 1989 Preappraisal September 1989 October 29, 1990 Appraisal November 1989 February 11, 1991 Negotiations April 1990 May 6-10, 1991 Board presentation July 1990 June 13, 1991 Signing July 12, 1991 Effectiveness October 12, 1991 July 29, 1991 Project completion: December 31, 1995 April 1997 Loan closing December31, 1996 December31, 1996  - 21 - Table 4: IBRD Loan Disbursements: Cumulative Estimated and Actual (US$ million) F9 F FY"P F9 F5 IF96 F Cumulative Appraisal 46.5 84.5 152.7 175.1 197.5 200.0 Actual Cumulative - 32.6 76.7 128.8 165.4 176.6 195.0 Actual as % of Estimate - 70.1 90.8 84.3 94.5 89.4 97.5 Date of Final Disbursement: May 15, 1997 Table 5: Key Indicators for Project Implementation Package Did'Iss Ewv,aon BankApprnva a ____________Coinpiele Awaxrd. Boiler, Planned 2/90 11/90 1/91 v Turbine, etc. Actual 2/90 11/90 1.9. 1/ i91 Civil Works Planned 1/91 3/91 3/91 .... .................. ............. , .......... ... .............. ............................................... ........................... Foundations Actual 1/91 3/91................_ 3/91 Electrical Planned 5/91 9/91 10/91 ............. ,1.................. ,............................................... .................................... ...................................... Transformers Actual 7/91 12/91 1/92 CW System Planned 3/91 6/91 8/91 ......................................... ...................... 1.374 i ................ .................. ..... .... ,................................. ..... ............. P~ .................. ........................... ______________ Actual 5/91 12/91 _ 1/92 1/92 Coal Planned 4/91 9/91 10/91 10/91 Handling *Actual 8/91 4/92 5/92 5/92 Ash Planned 5/91 9/91 10/91 10/91 ...................... ........... . ....... ........I.,......... i ..............I..... , .......I....................................... ........................... Handling Actual 12/91 6/92 7/92 7/92 XMN Line Planned 11/90 3/91 4/91 4/91 ~~~~~~~~~~..................... ... .......... .. ,..........................................,...... ...................................... and Towers Actual 1/90 5/91 5/91 B. Construction and Commissioning nat Component Sync Aon CTme Operaton Planned Actual Planned Actual Unit 1 7/94 1/95 1/95 7/ 95 Unit 2 1/95 3/95 7/95 1/96 220 kV Transmission: - Dahanu-Boisar (*) 6/93 6/93 1/95 10/94 - Boisar-Ghodbunder 7/94 1/95 8/95 - Ghodbunder-Versova 7/94 1/95 8/95 - Dahanu-Versova 7/94 1/95 Expected: I____________________ I____________ I___________ _ I second half-97 (*) Dahanu-Boisar section was completed early for startup supply.  - 22 - Table 6: Key Indicators for Project Operation Years in 1-2 Years 3-1G Years 11-20 Years 21-25 1 ~~~~~~~Years Operation Planned 1/ Actual2X Planned Planned Planned Total Generation (GWh) 1,930 1,670 2,600 2,490 2,190 Plant Availability, % 70 80.25 79 79 77 Plant Load Factor, % 63 73.19 75 72 65 1/ Based on expected generation in accordance with North America Energy Regulatory Council's (NERC) standard for coal-fired power plants. 2/ Calculated from date of commercial operation. Table 7: Studies Included in Project No study was included in the Project.  - 23 - Table 8A: Project Costs Appraisal estimate (US$M) Actual (UJS$M) Local Foreign Total Local Foreign Total 2x250 MW Plant 224.8 119.2 344.0 328.2 0.8 329.0 FGD Unit 14.0 14.9 28.9 - - - Transmission Lines and 23.0 23.1 46.1 76.9 76.9 Receiving Station Distribution 57.9 - 57.9 111.7 - 111.7 Total Base Cost 319.7 157.2 476.9 516.8 0.8 517.6 Physical Contingencies 22.4 8.0 30.4 Price Contingencies 12.5 14.3 26.8 Total Project Cost 354.6 179.5 534.1 516.8 0.8 517.6 Working Capital Margin 12.6 - 12.6 6.6 - 6.6 Interest During Construction 43.4 63.2 106.6 89.4 - 89.4 Total Financing Required 410.6 242.7 653.3 612.8 0.8 613.6 Note: In terms of Indian Rupees, financing requirement equates to Rs.14,000 million as estimated at appraisal. Actual cost is Rs.18,675 million at Rs. 30.44 to a dollar average exchange rate. Table 8B: Project Financing Appraisal Estimate Actual Source Rs. million US$ million Rs. million US$ million Internal Accruals 1,386 65.6 2,715 89.2 Special Reserves 1,000 47.5 1,000 32.9 Fully Convertible Debentures: -First Issue 1,000 47.5 1,150 37.8 - Second Issue 1,500 69.6 3,500 115.0 Global Depository Receipts - 1,740 57.5 Long Term Loans: - Indian Financial Institutions 3,270 155.1 1,100 36.2 - IBRD Loan 4,363 200.0 5,910 195.0 - IFC Investment 1,089 50.0 1,560 50.0 - IFC Syndication 392 18.0 - Total 14,000 653.3 18,675 613.6  - 24 - Table 9: Economic Costs and Benefits (Rs. Million) Year Capital O&M Fuel Total Cost Increasse Net .. .. . . . Expenditure _______ Sales Benefit 1990 40.7 40.7 - -40.7 1991 836.3 836.3 - -836.3 1992 1121.7 1121.7 - -1121.7 1993 2934.7 2934.7 - -2934.7 1994 4320.1 4320.1 - -4320.1 1995 4400.1 4400.1 - -4400.1 1996 3523.4 1115.0 790.2 5428.6 4942.4 -486.2 1997 1497.8 2486.4 3018.5 7002.7 7005.9 3.2 1998 2486.4 3018.5 5504.9 9438.0 3933.1 1999 2486.4 3018.5 5504.9 9438.0 3933.1 2000 2486.4 3018.5 5504.9 9438.0 3933.1 2001 2486.4 3018.5 5504.9 9438.0 3933.1 2002 2486.4 3018.5 5504.9 9438.0 3933.1 2003 2486.4 3018.5 5504.9 9438.0 3933.1 2004 2486.4 3018.5 5504.9 9438.0 3933.1 2005 2486.4 3018.5 5504.9 9038.7 3533.8 2006 2486.4 3018.5 5504.9 9038.7 3533.8 2007 2486.4 3018.5 5504.9 9038.7 3533.8 2008 2486.4 3018.5 5504.9 9038.7 3533.8 2009 2486.4 3018.5 5504.9 9038.7 3533.8 2010 2486.4 3018.5 5504.9 9038.7 3533.8 2011 2486.4 3018.5 5504.9 9038.7 3533.8 2012 2486.4 3018.5 5504.9 9038.7 3533.8 2013 2486.4 3018.5 5504.9 9038.7 3533.8 2014 2486.4 3018.5 5504.9 9038.7 3533.8 2015 2486.4 3018.5 5504.9 7949.7 2444.8 2016 2486.4 3018.5 5504.9 7949.7 2444.8 2017 2486.4 3018.5 5504.9 7949.7 2444.8 2018 2486.4 3018.5 5504.9 7949.7 2444.8 2019 2486.4 3018.5 5504.9 7949.7 2444.8 EIRR= 15.7% Assumptions: (a) Direct capital costs, inclusive of contingencies, for the thermal plant and associated transmission and distribution facilities; (b) O&M expenses 2.5% of plant capital cost; (c) Fuel cost Rs. 610/tonne and coal consumption 0.6 kg/kWh; (d) PLF based on NERC guidelines; (e) Average Tariff Rs. 3.63/kWh.  - 25 - Table 10: Status of Legal Covenants 4greemeniet AescFIpi*in co,me Section GA 3.03 (i) GOM to take no action to adversely affect BSES's operational None so far. performance and financial position, including BSES's area of supply at least upto last maturity date of loan (Aug.15, 2011). GA 3.03 (ii) GOl/GOM to allow BSES to accumulate certain special Yes. reserves. Includes special reserve for repayment of BSES's debt. GA 3.03 (iii) GOI/GOM to ensure audit of BSES's environmental Yes and continuing. monitoring program through MPCB. GA 3.03 (iv) GOI/GOM to formulate and furnish to IBRD for review, by Partially'. March 31, 1992, a Tribal Development Program and implement this program in a manner satisfactory to the Bank. GA 3.03 (v) GOI treat IBRD, IFC, and the Indian Financial Institutions' Yes. loans toward the project financing as loans from "approved institutionse in accordance with the Act. GA 3.05 GOI to ensure adequate supplies of suitable fuel for the Yes, but with delay. economic operation of the facilities constructed under the Contract signed on project. Jan.28,1997 2 LA 3.03 BSES to establish and maintain a project management Yes. structure satisfactory to IBRD. LA 4.07 BSES to conclude agreements with MSEB and TEC prior to No. However, plant the synchronization of the first unit of the Dahanu Power performance not Plant. . affected 3. I The commitment was made by GOIIGOM. GOM's proposals in October 1991, were not acceptable to IBRD. BSES had its consultants prepare a report, and is seeking international grant assistance to implement the recommendations. Timely compliance was outside the control of BSES. 2 Although BSES initiated actions in a timely manner, agreement on a contract which could be used as precedent for other independent power producers took much longer than anticipated. Timely compliance was outside the control of BSES. Although BSES initiated actions on this issue in a timely manner, it has not come to an agreement with TEC and MSEB yet. However, operation of the facilities has not been negatively affected. Compliance was outside the control of BSES.  - 26 - Table 10: Status of Legal Covenants (cont'd) Agreementl Description Comments Section LA 5.01 b (ii) Furnish its annual financial statements audited by auditors Yes. (1) acceptable to IBRD, within 120 days after the end of each of its financial years. LA 5.01 b (ii) Furnish the status of the Special Account for the IBRD loan Yes. (2) audited by auditors acceptable to IBRD, within 120 days after the end of its financial years. LA 5.02 (a) BSES to create an equitable mortgage in favor of the Bank. Yes. LA 5.02 (f) BSES to execute Power of Attorney in favor of the Bank. Yes. LA 5.04 (c) BSES to furnish financial performance and projections for Yes. current and next four financial years by Nov.30 each year. LA 5.04 (i) BSES to set tariffs at levels sufficient to achieve prescribed Yes. return on capital base. LA 5.04 (ii) BSES shall take from the Bank prior consent for any Yes. additional indebtedness if the principal amount of debt outstanding would be 2.5 times its equity. LA 5.05 BSES to complete by June 30, 1994, the subscription of the Yes. second debenture issue, underwritten to the extent offered offered to the public. LA 7.01 (a) BSES to execute security arrangements for the proposed loan. Yes. LA 7.01 (c) GOM to extend BSES's license at least up to Augustl5, 2011. Yes. LA 7.01 (d) GOI/GOM/BSES to ensure fulfillment of all conditions Yes. precedent to disbursement of the IFC investment. Table 11: Compliance with Operational Manual Statements There was no lack of compliance with applicable Operational Directive or Operational Procedures.  - 27 - Table 12: Bank Resources: Staff Inputs Stage of Project Cycle Planned Actual Weeks US$ Weeks US$ ('000) ('000) Through Appraisal 30 94.2 249.1 Appraisal-Board 6 21.1 66.2 Supervision 24 57.1 189.1 Completion 10.0 3.8 14.7 TOTAL 71.0 176.2 519.1 Table 13: Bank Resources: Missions Stage of Project Month/ No. of Days in Specialization Performance Types of Cycle Year Persons field Rating Problems Through appraisal Appraisal through Board approval Board approval through effectiveness Supervision 1 11/91 2 2 E, EC Supervision 2 2/92 2 3 E, FA Supervision 3 10/92 2 5 E, FA Supervision 4 6/93 3 6 E, EN, FA 2 Env, Studies Supervision 5 10/93 3 4 E, EN, FA 1 Env Supervision 6 2/94 5 4 E, FA, ENSP 1 Env Supervision 7 6/94 5 3 E, FA, EN 1 Supervision 8 11/94 3 3 E, EN 1 Supervision 9 7/95 2 2 E, EN I Supervision 10 11/95 3 2 E, FA 1 Supervision 11 3/96 2 4 E, EN 1 Supervision 12 10/96 1 2 E S Supervision 13 2/97 1 2 E HS Completion 11/96 1 5 E Legend: E: Engineer; FA: Financial Analyst; EC: Economist; ENSP: Environmental Specialist; Sp: Specialist 1 = No or minor problems; 2 = Moderate problems; 3 = Major problems I = Implementation delays; IN = Institutional Problems; PR = Procurement Delays H= Satisfactory; HS= Highly Satisfactory  - 28 - APPENDIX A MISSION'S AIDE MEMOIRE 1. An Implementation Completion Report (ICR) is required by the World Bank for each of it's lending operations, aimed at improving the quality and effectiveness of Bank loans and reinforcing the borrower's ability to design, implement and operate projects. In light of this requirement, an ICR (Implementation Completion Report) mission was fielded by the Bank from December 2 to December 6, 1996 for the Private Power Utilities (BSES) Project (Loan No. 3344-IN) ), the loan closing date for which is December 31, 1996. The mission included a site visit on December 3, 1996. This aide memoire records the findings of the ICR mission as well as agreements reached with BSES to facilitate completion of the ICR on time. The mission would like to take this opportunity to thank BSES for the courtesy and assistance extended to it during the mission to accomplish its tasks. 2. The mission noted that the principal physical,objectives of the project to provide additional generation, transmission and distribution capacity in the Mumbai area to meet the increasing demand for electricity, had been met albeit with a delay of about 11 months from the original commissioning dates due primarily to constant litigation by environmental groups and NGOs challenging the development, delay in receiving start up power from MSEB, and some equipment problems during commissioning. 3. The mission advised BSES that for withdrawal applications to be submitted to the Bank under the loan, goods procured should have been delivered, works completed and services rendered by the loan closing date and payment for such goods, works or services should have been made or should have become due under the relevant contracts prior to the loan closing date. Further disbursements from the loan would continue for another 4 months, up to April 30, 1997, in respect of eligible expenditures made before the loan closing date. Proceeds of the loan remaining unwithdrawn after disbursements have been made against withdrawal applications would be canceled, following which a revised amortization schedule would be furnished by the Bank. 4. The mission was impressed by the generating station at Dahanu for its overall cleanliness, excellent upkeep, effective management and the dedication of a highly motivated staff to make it a show-piece of a power plant. Both generating units were in operation at full load with a PLF of more than 90 percent. 5. The mission recommended that the Performance Guarantee Tests for the turbine generator be completed before December 31, 1996. It was noted that the boiler and ESP performance guarantee tests had already been successfully completed. 6. The mission noted that all legal covenants under the loan had been satisfactorily complied with except for the one requiring agreements to be reached by BSES with GOI for the availability and adequacy of timely supplies of suitable fuel for the power plant. However, with no control whatsoever either over GOI for coal linkage or over Coal India for supplies or the  - 29 - Indian Railways for transportation of coal, the mission was of the opinion that it was unrealistic to bind BSES into a legal covenant on the coal supply issue. 7. During the initial phases of operation in 1995, BSES had to keep one unit out of operation for as long as 3 months for want of coal. In order to meet the requirement, BSES has been importing coal and blending it with indigenous supplies that has greatly improved the quality of coal as well as performance of the plant and ambient air quality due to reduced emissions. The mission was informed that, of late, coal deliveries from Coal India have been adequate. The linkage now allows for 2 MT/yr from the South Eastern coalfields at a rate of 160,000 MT/month. 8. The mission noted that BSES had made all arrangements for setting up a coal washing facility at the designated supply end. The construction of this facility is to be completed over a period of 18 months from the start date. BSES expects the quality of the coal, after washing, would improve significantly with an ash content of about 30 percent. Given that indigenous coal, earmarked for thermal generation, wreaks havoc with the power plant equipment, which is primarily responsible for the poor performance of most Indian power plants, the mission commended BSES for their bold decision to pioneer the coal washing industry for power generation that would serve to demonstrate the ample economic benefits to be derived from improved coal quality. 9. The mission was informed by BSES that their other plan for setting up a 1,000 MT/day fly ash utilization plant at an estimated cost of Rs. 80 million, which would require collection of the ash in a dry form, was held up for environmental clearance from the concerned Ministry. It is unfortunate that procedural delays in the Government in providing expeditious clearance for such highly commendable projects should constrain progressive undertakings. 10. Environmental Clearances: BSES received environmental clearance from the Ministry of Environment and Forests on March 29, 1989. The Clearance stipulated a setback requirement from the high tide line. The stipulation to install flue gas desulfurization was deferred until monitoring data on incremental increase of sulfur dioxide would be available (April 2, 1993). Site clearance was granted by the government of Maharashtra July 7, 1988. The Maharashtra State Pollution Control Board granted a Consent Order to operate June 12, 1995. A Site work commenced in 1990; in 1991, a Coastal Zone Regulation (CRZ) was promulgated limiting development within defined coastal zone areas. Although the project had been cleared, in order to comply with this new regulation and the MOEF Clearance, the State Hydrographer was consulted for confirmation of the high tide line, and the location of the power plant buildings moved to comply. The Dahanu area was declared an ecologically sensitive area, and further industrial development prohibited in a notification from MOEF June 20, 1991. 11. Environmental concerns over the BSES development were raised by third parties, and the matter taken to the High Court and Supreme Court, both of which ruled in favor of BSES. Issues raised included compliance with the MOEF clearance in which both Court decisions clearly found in favor of BSES. The Court considered the complete site plans, including cooling water intake and outlet, and ash disposal area. The Court rulings clearly defined the intent of the MOEF Clearance to be limited to the power station buildings, and confirmed that the location of  - 30 - the buildings had been moved to comply with the Clearance. A Bank supervision mission in April 1993 confirmed with the Executive Secretary of the Maharashtra Pollution Control Board (MPCB) that the ash pond location had been considered in clearance for the project as well. 12. Environmental Management and Monitoring: BSES added an environmental generalist and community development specialist to their staff in 1990. A detailed environmental baseline monitoring program has been undertaken by BSES as agreed with the Bank. Data collection began in 1990, including ambient air quality, groundwater and water in the tidal creeks. Results have been regularly reported to the Bank in Quarterly Due Diligence Reports. These Due Diligence Reports are audited by the MSPCB, and the audit findings reported in three newspapers. BSES now conducts monitoring (10 surface water, 4 ambient air continuous computerized, one ambient air mobile, effluent and stack gas) as per their Consent Order, and MSPCB conducts their own monitoring of effluent and emissions. A plume dispersion model was used to locate the ambient air monitoring stations; this model should be validated against ambient air monitoring data, now that the power station is operating under full load. 13. Environmental Studies: Thermal plume modeling was conducted by the Central Water and Power Research Station, (CWPRS) Pune. The standard to be used for chlorine residual was confirmed with MSPCB, in consultation with the National Institute of Oceanography. 14. The National Environmental Engineering Institute (NEERI) completed a baseline study of the aquatic resources surrounding the power station site in July, 1993. BSES will be contracting with the National Institute of Oceanography for a follow up study, now that operations have begun, in order to assess impacts. 15. BSES contracted a consultant from the Department of Environmental Botany, University of Pune, to develop a site reclamation plan, and to study the effects of SOx on Chiku, a locally important fruit. The plant and colony site have been reclaimed from sterile salt drying pans over the years through these efforts. The mix of species chosen for reclamation of the site were chosen to reflect the large diversity of the local Thane district mixed deciduous forest, along with salt spray tolerance. Most notably, BSES has established mangroves (several million seedlings) of two local species along the 16. Creeks surrounding the power station. Some of the new mangrove communities are now two meters in height. There are no other mangrove communities in existence in the Dahanu creek area, and BSES should be commended for this effort which will have a definite positive impact on the aquatic ecology. The mission encourages BSES to continue the mangrove establishment effort surrounding the ash disposal area. 17. Several SOx sensitive species were established on the plant site to act as biomonitors of ambient air. The impact of SOx on Chiku was studied using internationally developed fumigation chamber techniques; the impact of ash deposition was also studied. The investigation revealed that Chiku is among the most resistant of the species studied to the effects of SOx and ash deposition. Tests were conducted of SOx concentrations over three orders of magnitude above ambient SOx concentrations.  - 31 - 18. Community development activities were to have been conducted by the Government of Maharashtra Tribal Welfare Department; however, the Department did not generate a Community Development Plan, and the grant availability lapsed. In the interim, since 1991, BSES has been conducting a number of community development activities of their own accord, including funding to establish a local Junior Science College, to begin with the next academic session in July, 1996. As an understanding with the World Bank, BSES has also funded (September, 1995) a Community Development Plan study undertaken by the Indira Gandi Institute, and recently completed. BSES should seek international grant assistance for implementation. 19. A recent petition by the Dahanu Industrial Association to relax the industrial development ban in the area has resulted in a renewal of the debate over industrial impacts in general and the BSES power station. The Supreme Court asked MSPCB for an opinion, and then NIEERI for an evaluation on industrial development. BSES has drafted very cogent responses to the largely negative NEERI report, pointing out factual errors, inadequate investigation techniques, and serious flaws in data comparison, interpretation and analysis. The mission congratulates BSES on their accumulation of a solid base of independently verified environmental monitoring data, and the in-house ability to respond to criticism in a technically proficient manner. BSES plans to enlist the services of the National Institute of Oceanography (NIO) for a follow up aquatic resources study at the Dahanu site. The mission encourages BSES to do so and suggests an international consultant be contracted to review methods, quality control/quality assurance, and data analysis in conjunction with NIO. A more detailed review of this NEERI report will be given in the Back to Office Report. 20. The mission encourages BSES to develop a documentary video to review the impacts of coal fired power stations, and the mitigation and pollution controls undertaken by BSES. The community development activities should also be included. This documentary should be developed by a professional organization in this business. 21. The mission requested BSES to start processing information required for the preparation of the ICR. To this end, the Bank had already handed over to BSES a copy of the proposed Statistical Tables (Part III) of the ICR. The schedule for the flow and exchange of information was set and agreed as follows: Draft Part III from BSES to Bank January 15, 1997 Draft Part II (Borrower's Evaluation) from BSES to Bank January 31, 1997 Draft ICR from Bank to BSES February 15, 1997 Comments and final input from BSES, March 10, 1997 Final Draft of ICR April 30, 1997 The ICR would be updated and finalized as disbursements under the loan are completed.  - 32 - 22. It was agreed that the Project Cost would be shown under the same categories as indicated in the SAR. Taxes and duties paid on procurement would be computed. IDC also would be shown. These figures would be updated for the final version of the ICR.  - 33 - APPENDIX B BORROWER'S CONTRIBUTION (*) Project Implementation Assessment Statement/Evaluation of Objectives 1. Electricity demand in India in the 1990s was projected to grow at an annual average of approximately 9 percent through the year 2000. The huge demand has cause supply gaps arising from scarcity of public resources on the one hand and frequent breakdown of existing plants on the other owing to nonavailability of spare parts, deteriorating quality of fuel and inability of the public sector utilities to take timely outages for maintenance. To meet the demand and improve the quality of power supply, the government of India (GOI) decided to harness more resources and managerial skills from the private sector. 2. Most private electricity generation in India is through captive power plants, which is equivalent to about 15 percent of total public supply. The Bombay Suburban Electric Supply Ltd. (BSES Ltd.) is one of five private power utilities in India. The other private utilities are: Ahmedabad Electricity Co. (AEC), Bombay Electric Supply and Transport, The Calcutta Electric Supply Co. (CESC) and Tata Electric Companies (TEC). 3. BSES was a well established distribution utility with a good record of performance and efficiency. Sixty percent of its capital is held by the Indian Financial Institutions, the balance is owned by about 6,000 shareholders and other corporations. BSES, well managed as a corporation, is technically and commercially efficient. Its financial position has been strong compared to other utilities operating in India. BSES has been in the business of electricity distribution since 1926. When its license of 50 years expired in 1976, the Government of Maharashtra (GOM) extended the license for 10 years on condition that BSES would install a 500 MW generation project in Maharashtra, because of anticipated supply gap. As BSES initiated action in this behalf, GOM further extended their license initially up to 1991, and later for another ten years i.e. up to 2001 to satisfy one of the conditions of the Bank loan. 4. The Bank's strategy in the Indian power sector, in close cooperation with IFC, included support to private power utilities to improve their financial and economic efficiency, and also to encourage GOI to lower entry barriers for new investors. Bank group involvement in the private sector comprised five loans to the Tata Electric Companies (TEC) for the staged development of the Trombay Thermal Power Station and the construction of a pumped storage facility at Bhira. IFC loans of US$ 20 million equivalent to the Ahmedabah Electricity Co. and US$ 35 million equivalent to TEC had helped them to strengthen their respective transmission systems. IBRD and IFC participation in the BSES project helped mobilize financing for the project, facilitating its satisfactory implementation. BSES's other comments sent to the Bank with their letter dated May 26, 1997, were included into the ICR. The letter has been included in the Project File.  - 34- 5. The project's physical objectives were to: (a) provide additional generation, transmission and distribution capacity to meet the increasing demand for electricity in the Mumbai area, and (ii) maintain the high quality of service to BSES consumers. Additionally, the institutional and sectoral objectives were to (c) support GOI's endeavors to increase private sector participation in the supply of power, and (d) assist in transforming BSES from a distribution company into an integrated power utility with responsibilities for generation, transmission and distribution. 6. However, since its inception, the project was constantly challenged in the Indian Courts of Law by the Bombay Environmental Action Group and Non-Government Organizations (NGO), claiming that the project would cause severe destruction of the coastal wetland and deprive the fisher folk and farmers of their livelihood. Specifically, the objections raised consisted of: (I) potential disruption of local life (mainly agricultural) due to large work force implantation (ii) use of canal water would deprive agriculture, (iii) plant gas emissions and their effect on public health as well as "chikoo" (Areas Sapota) crops; (iv)- liquid discharge from the plant on aquatic life, and (v) construction within 500 meters of high tide line. The Dahanu site was selected after careful assessment of the proposed projects development impacts. The power plant was designed such as to mitigate any adverse impact of the development BSES had to defend the viability of the project time and time again in the Mumbai High Court and the Supreme Court of India. In each case, the courts upheld BSES's position and allowed the project to be implemented. In the process, however, delays were caused. A more detailed discussion of the environmental aspects of the project and the fall out from objections raised is given in Appendix D. Achievement of Objectives 7. The overall objectives of the project have been achieved. With this private sector participation, BSES has been transformed from a distribution company into a full-fledged utility with generation, transmission and distribution functions, the project itself reflects least-cost power development in the Mumbai area, environmental measures undertaken and monitoring of impact data on a continuous basis are deemed to be adequate for the purpose of safeguarding all interests, and tariffs are adequate to ensure an acceptable return on investments.  -35 - APPENDIX C ENVIRONMENTAL ISSUES Background 1. In 1976, GOM, as a condition for extending the operating license of BSES, mandated that BSES should install and commission a 500 MW capacity generating station in the state of Maharashtra to supply power to its consumers by building its own transmission and distribution facilities. Fuel Choice and Site Selection 2. BSES carried out feasibility studies for fuel and site selection for the said power plant. As gas or naphta were not available, coal was selected as the fuel for the plant'. Site selection studies were condusted based on GOI Environmental Guidelines for Thermal Power Plants. Nine alternative sites were assessed. The first preference for a suitable site for the proposed power plant went in favor of a coastal area near Bassein, just north of Mumbai. However, the site was within the jurisdiction of the Bombay Metropolitan Regional Development Authority (BMRDA) of GOM. The other eight sites posed various constraints ranging from lack of cooling water, access, land acquisition and resettlement-related problems. Upon refusal by GOM to approve the Bassein site, BSES examined other sites north of Bassein, outside BMRDA's jurisdiction, and settled on Dahanu, approximately 1 10 km north of Mumbai. 3 . The plant site, located about 4 km south of the town of Dahanu, provided several advantages, including: (i) the feasibility of once-through condenser cooling, using sea water, that would minimize the burden on scarce fresh water resources; (ii) land away from densely populated areas; (iii) no need for resettlement since nobody was to be physically displaced from the site; (iv) availability of necessary amount of fresh water; (v) ease of receiving coal or gas supplies over the sea route; (vi) close proximity to the Indian Railway routes; and (vii) minimal disruption to land use since the land itself was unproductive for agricultural purposes. Environmental Impacts 5. In 1987, BSES completed an initial environmental assessment (EA) of the Dahanu project. The EA was subsequently approved by GOM and GOI. The major impact of the project on the terrestrial environment was perceived as the permanent commitment of the land, a total of 816 ha, for the installation of the proposed facilities. The land which was previously used by salt panners was not and could not be used for agricultural purposes. Route selection for the associated transmission lines also did not indicate any harmful impact on the environment. However, to cover for the possibility of availability of gas supplies in the Mumbai area in the future, the boilers of the Dahanu TPP were designed to bum coal and gas. In view of the unavailability (at appraisal and currently) of long-term supplies of gas, gas burners were not installed. The Dahanu TPP has been built and is being operated as a conventional, base-load, coal-fired plant.  - 36 - 6. However, if appropriate mitigating measures were not taken the site would present the following environmental issues: (a) the once-through cooling system could become a source of thermal pollution for creeks surrounding the site; (b) liquid wastes from the water treatment plant, the demineralizer plant, the waste water treatment plant, as well as from the ash disposal area could contaminate the creeks and ground water; and (c) the products of combustion, such as sulfurous oxides (SO, and nitrous oxides (NOJ), as well as Solid Particulate Matter (SPM) escaping from the stack, could pollute the atmosphere and cause damage to the chikoo plants, a delicate fruit that is a source of local income. Environmental Clearances 7. BSES received environmental clearance from the GOI Ministry of Environment and Forests on March 29, 1989. The clearance, inter alia, stipulated: (a) setting back the power plant 500 meters from the high tide line (HTL); (b) installation of a flue gas desulfurization system (FGD) with 90 percent efficiency; (c) cooling water discharge temperature no higher than 50 C at point of discharge; (d) no forest land to be acquired for the main plant or for ash disposal; (e) creation of a green belt all around the proposed plant; and (f) no further expansion of the power plant to be permitted at the proposed site. The requirement of the FGD system was, however, revised by GOI in 1993 with the stipulation that the SO2 emissions would be monitored for a period of one year after the plant was commissioned into commercial service. In case ground level concentrations of SO2 exceeded pernissible limits, then an FGD plant would be installed. Environmental Concerns 8. Concerns over the BSES development were raised by environmental groups active in the area (Bombay Environmental Action Group and the Dahanu Taluka Environmental Protection Group). Of specific concern to these groups was the danger of grave damage being done to the "chikoo" plants. They also complained that thermal pollution would potentially destroy the fish population and deprive local fishermen of their only means of livelihood. The development was challenged in the Mumbai High Court, as well as in the Supreme Court of India. It was also stated that BSES had not complied with the provisions of the environmental clearance in respect of the construction of the plant relative to the HTL. These allegations, however, were determined as unfounded as the power plant had been physically set back from the HTL by 500 meters, while the design of the power plant itself had incorporated adequate provisions for the mitigation of the environmental impacts. Based on this determination, both Courts ruled in favor of BSES and allowed the construction of the power plant to proceed. Mitigation 9. Provisions made to reduce the impact of the pollutants to within acceptable limits are discussed below: a. Once through cooling system - Modeling studies indicated that the use of a 3 km long, 200 meter wide, discharge channel before the water met the sea, would provide  - 37 - adequate residence time for the water to dissipate the heat gained in the condenser and that the fmal elevation of temperature of the water would be less than 3