IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-46030) ON A LOAN IN THE AMOUNT OF US$ MILLION TO THE POWER GRID CORPORATION OF INDIA LIMITED

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No:ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-46030) ON A LOAN IN THE AMOUNT OF US$ MILLION TO THE POWER GRID CORPORATION OF INDIA LIMITED (WITH THE GUARANTEE OF INDIA) FOR THE SECOND POWERGRID SYSTEM DEVELOPMENT PROJECT January 22, 2007 Sustainable Development Unit South Asia Region 1

2 CURRENCY EQUIVALENTS ( Exchange Rate Effective 11/01/2006 ) Currency Unit = INR INR 1.00 = US$ US$ 1.00 = INR 45.0 Fiscal Year April 1 - March 31 ABBREVIATIONS AND ACRONYMS ABT Availability Based Tariff CAS Country Assistance Strategy CDP Community Development Program CERC Central Electricity Regulatory Commission EHVAC Extra High Voltage AC ERLDC Eastern Regional Load Dispatch Center ERR Economic Rate of Return ESPP Environmental and Social Policy and Procedures FIRR Financial Internal Rate of Return GDP Gross Domestic Product GSS Grid Sub-Stations GoI Government of India HVDC High Voltage Direct Current IBRD International Bank for Reconstruction and Development IDA International Development Agency IEGC Indian Electricity Grid Code IPPs Independent Power Producers JV Joint Venture L/Cs Letter of Credits LA Land Acquisition M&E Monitoring and Evaluation MoP Ministry of Power MoU Memorandum of Understanding NLD National Long Distance NPV Net Present Value OPGW Optical Fibre Ground Wire PAD Project Appraisal Document PAP Project Affected People PDO Project Development Objective 2

3 PMR Project Monitoring Report PSDP-I Powergrid System Development Project-I PTC Power Trading Corporation RA Rehabilitation Assistance RAP Resettlement Action Plan TPA Tri-partite Agreement TTL Task Team leader UI Unscheduled Interchange WRLDC Western Regional Load Dispatch Center Vice President: Praful C. Patel Country Director: Fayez S. Omar Sector Manager: Salman Zaheer Project Team Leader: Sunil Kumar Khosla 3

4 India Second Powergrid System Development Project CONTENTS 1. Basic Information 2. Key Dates 3. Ratings Summary 4. Sector and Theme Codes 5. Bank Staff 6. Project Context, Development Objectives and Design 7. Key Factors Affecting Implementation and Outcomes 8. Assessment of Outcomes 9. Assessment of Risk to Development Outcome 10. Assessment of Bank and Borrower Performance 11. Lessons Learned 12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Results Framework Analysis Annex 2. Restructuring Annex 3. Project Costs and Financing Annex 4. Outputs by Component Annex 5. Economic and Financial Analysis Annex 6. Bank Lending and Implementation Support/Supervision Processes Annex 7. Detailed Ratings of Bank and Borrower Performance Annex 8. Beneficiary Survey Result Annex 9. Stakeholder Workshop Report and Results Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 11. Comments of Cofinanciers and Other Partners/Stakeholders Annex 12. List of Supporting Documents Annex 13. Additional Annexes 4

5 1. Basic Information Country: India Project Name: Second Powergrid System Development Project Project ID: P L/C/TF Number(s): IBRD ICR Date: 01/22/2007 ICR Type: Core ICR Lending Instrument: SIL Borrower: POWERGRID Original Total Commitment: USD 450.0M Disbursed Amount: USD 441.2M Environmental Category:A Implementing Agencies Powergrid Corporation of India Limited Cofinanciers and Other External Partners 2. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 09/23/1995 Effectiveness: 11/21/ /21/2001 Appraisal: 01/18/1998 Restructuring(s): Approval: 05/03/2001 Mid-term Review: 09/01/2003 Closing: 06/30/ /30/ Ratings Summary 3.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Highly Satisfactory Low or Negligible Highly Satisfactory Highly Satisfactory 3.2 Quality at Entry and Implementation Performance Indicators Implementation Performance Indicators QAG Assessments (if any) Rating: Potential Problem Project at any time (Yes/No): No Quality at Entry (QEA): None Problem Project at any time (Yes/No): No Quality of Supervision (QSA): None DO rating before Closing/Inactive status: Highly Satisfactory 5

6 4. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Power Original Priority Actual Priority Theme Code (Primary/Secondary) Infrastructure services for private sector development Primary Primary Regulation and competition policy Primary Primary Other financial and private sector development Primary Primary Climate change Secondary Secondary Pollution management and environmental health Secondary Secondary 5. Bank Staff Positions At ICR At Approval Vice President: Praful C. Patel Mieko Nishimizu Country Director: Fayez S. Omar Edwin R. Lim Sector Manager: Salman Zaheer Alastair J. McKechnie Project Team Leader: Sunil Kumar Khosla Kari J. Nyman ICR Team Leader: Mikul Bhatia ICR Primary Author: Husam Mohamed Beides 6

7 6. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative) 6.1 Context at Appraisal (brief summary of country macroeconomic and structural/sector background, rationale for Bank assistance) Country Background By the second half of the 1990s, reforms in the areas of investment, trade and finance, initiated in response to the 1991 crisis, had stabilized. High economic growth - an average of 7% - was witnessed during However, high consolidated public sector deficit at about 9% of the country's Gross Domestic Product (GDP) remained a concern. The explicit and implicit subsidy on power itself amounted to 1.7% of the GDP during FY97. The 1997 Country Assistance Strategy (CAS) document proposed Bank group assistance in strengthening private sector participation across sectors. In the power sector, the CAS also supported institutional strengthening of central power utilities to enable much needed investments. Sector background In the first half of the 1990s, power system in India grew steadily and generation capacity reached 86,000 MW. However, demand continued to outstrip supply, with shortages estimated at 10 % of energy and 20 % of peak capacity, and projected to grow due to lack of sufficient investments. In addition, transmission system inefficiencies, inadequate coordination between regional power systems, lack of investments in transmission interconnections, an outdated bulk power pricing mechanism, absence of trading and regulatory reforms and the unsatisfactory financial performance of the sector as a whole were impediments in achieving full potential to meet growing demand. Therefore, the Government of India (GoI) initiated a comprehensive reform program for power transmission, system operation and bulk power pricing. The Power Grid Corporation of India (known as POWERGRID) was established to "move large blocks of power from central generating stations and surplus from state electricity boards, if any, to load centers with reliability, security and economy". GoI had also developed legislation for the establishment of regulatory commissions at centre and in states. In addition, GoI also opened the power sector to private investment in 1991, initially focusing on generation, but later expanding to distribution and transmission. Following the first Bank engagement with POWERGRID - the US$ 350 million Power System Development Project-I (PSDP-I, Ln IN), and transfer of transmission components of earlier IBRD loans and IDA credits from POWERGRID's predecessors, this Second Powergrid System Development Project (PSDP-II, Ln. IBRD 46030) loan brought the Bank's total funding to POWERGRID to about US$ 1.5 billion. The company had also secured funding for its investment program from various domestic and international sources during this period. The company's institutional growth since its inception in 1993 had been remarkable. It had consistently met or exceeded its annual performance targets set by the Ministry of Power (MOP) and its role in India's power sector was widely appreciated. Rationale for Bank Involvement Despite the progress made in course of the PSDP-I 7

8 loan, POWERGRID was still facing challenges in critical areas necessary to improve the overall efficiency of transmission systems and power markets, including (i) massive investments needed to enhance inter-regional transmission capacity and system coordination facilities, (ii) implementation of bulk power tariff reforms, and (iii) continuous enhancement of its institutional capacity and operational and financial performance. Therefore, the Bank's support to POWERGRID under the Loan was timely and essential for meeting urgent investment needs (including leveraging private sector investments), developing institutional capacity, and supporting sector reforms. 6.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) Project Development Objectives Key Performance Indicators (as approved) a) Regulatory Reforms: The government has established an Objective 1: To enabling legal framework and has also established the assist India in Central Electricity Regulatory Commission (CERC) to take restructuring the power over tariff functions from the Central Electricity Authority transmission sub-sector, and Ministry of Power. improve coordination in b) Tariff Reforms: Availability based tariffs have been power system notified for central thermal stations and new Independent operations, and promote Power Plants (IPPs). The new tariffs are fully operational and inter-regional and interstate power trading all transitional issues have been addressed. c) Institutional Reforms: CERC is operational and the through regulatory, tariff government has established an enabling legal framework for and institutional reforms private investment in transmission. Objective 2: To support POWERGRID's institutional development and promote satisfactory financial and commercial performance and the implementation of the POWERGRID investment and commercial policy a) Institutional Growth and Development: Establishment of environmental and social management department at POWERGRID corporate level and first independent power transmission company established and to begin project implementation. b) Financial Performance and New Financing Arrangements: Compliance with financial covenants (i.e. 20 % Self Financing Ratio and 4:1 debt equity ratio) by mid-term as well as end of Project. c) Commercial Arrangements: POWERGRID progressively reduce and maintain the accounts receivable below 4.0 months billing and 100% coverage by letter of credits (LCs). 8

9 Objective 3: To assist POWERGRID in the development of modern system coordination and control facilities and reinforcement of its transmission system towards a national grid Objective 4: To support POWERGRID in the facilitation of private investment in the power sector and in its possible of the Project. diversification into telecommunications Successful completion of investments financed by the Loan. (Expected outcomes from these investments included: Greater availability of power through inter-regional transmission; Improved grid parameters including frequency and voltage; Higher transmission line availability; and, Reduction in grid outages) First independent power transmission company established and to begin project implementation by midterm review. More private transmission ventures to be established by end 6.3 Revised PDO and Key Indicators (as approved by original approving authority), and reasons/justification The project objectives were not revised. The key indicator for Institutional Reforms was revised from "Some private transmission ventures in operation" to "Satisfactory implementation of the first joint venture", as POWERGRID no longer has the mandate to promote private participation in transmission. Instead, Government of India (GoI) has issued guidelines for private participation in transmission and also for tariff based competitive bidding. GoI has also constituted an Empowered Committee to identify and facilitate private sector participation in transmission. 6.4 Main Beneficiaries, original and revised (briefly describe the "primary target group" identified in the PAD and as captured in the PDO, as well as any other individuals and organizations expected to benefit from the project) POWERGRID is the borrower and the direct beneficiary of PSDP-II loan in terms of investments funded under the Project and enhancement of institutional capacity. Improvements in transmission systems and system coordination facilities benefit POWERGRID's clients namely generation, distribution and trading companies, and ultimately the end users of electricity. Improved system coordination and transfer of power across regions help reduce generation costs, system losses and unserved energy. Diversification into telecom has enabled telecom service providers to expand access to voice/data communications and internet services. 6.5 Original Components (as approved) The loan was designed to support a portion of POWERGRID's investment program for the time-slice, estimated at US$ 5.7 billion. In particular the Loan 9

10 supported the implementation of the following project components: Component 1 System Coordination and Control: This component included the establishment of regional system coordination and control centers at Mumbai (Western Region) and Kolkata (Eastern Region). The component was designed to facilitate unified and coordinated operations of the grids in the two regions, and to assist state utilities in improving their system operations and participate more effectively in power trade across the regional grids. POWERGRID was already constructing similar coordination and control centers for Northern and Southern regions under the NRTP and PSDP-I loans respectively, and for North-Eastern region funding from the Asian Development Bank (ADB). Component 2 Transmission System Development: This component covered (a) interregional transmission links to enhance the power transfer capacity between the regional transmission systems; (b) transmission projects to connect new power stations to the grid and/or to reinforce regional grids; and (c) various power system improvement programs. Component 3 Technical Assistance for Institutional Development: This component provided consulting support for POWERGRID's institutional development, system coordination and control schemes and proposed telecom diversification. Component 4 Completion of on-going Bank-financed Projects: This component was included to support the completion of on-going projects and activities financed by the Bank under the previous Loans 3237-IN and 3577-IN. Component 5 Additional Investment Projects: This component provided POWERGRID the flexibility to include other investments not covered by the above components, subject to eligibility criteria agreed between POWERGRID and the Bank. 6.6 Revised Components The project original components were not revised. 6.7 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) The loan was appraised in January 1998 and negotiations held in April Board consideration was originally scheduled for May 1998 but was indefinitely deferred due to the international sanctions against India in place at the time. It was finally approved on May 3, 2001 and became effective on November 21, Despite the delay, the objectives and scope of the Project remained unchanged. The Midterm Review and Closing Dates were changed to September 1, 2003 and June 30, 2006, respectively, and performance indicators updated to reflect the changed project schedule. 7. Key Factors Affecting Implementation and Outcomes 7.1 Project Preparation, Design and Quality at Entry (including whether lessons of earlier operations were taken into account, risks and their mitigations identified, and adequacy of participatory processes, as applicable) The project, which was a follow-on to the PSDP-I project (Ln.3577-IN), benefitted from 10

11 the ongoing programmatic relationship between the Bank and POWERGRID. This ensured good project structure, further progress on the ongoing capacity building initiatives and facilitated intensive implementation supervision. a. Soundness of Background Analysis The Project was developed after an appraisal of POWERGRID's investment program and an analysis of prevailing policy and regulatory environment, including initiatives being contemplated by GoI. The proposed investments were discussed with potential beneficiaries and stakeholders. Technical justifications, economic viability and compliance with applicable Government and Bank safeguards were conditions for approval of projects by the Government and the Bank. b. Assessment of Project Design The design of the Project was well aligned with the underlying objectives and focused on addressing the most critical regulatory, institutional and financial challenges, and on supporting POWERGRID's priority investment needs and capacity building. Project investments were evaluated based on feasibility studies conducted by POWERGRID. Independent international consultants were retained for advising on system coordination & control and telecom components. The projects were based on proven design and at the same time utilized cutting edge technologies (+500 kv High Voltage Direct Current (HVDC) and 765 kv Extra High Voltage Alternating Current (EHVAC) transmission lines). The time slice approach inherent in Project design provided POWERGRID the flexibility to take up priority investments necessary to meet the transmission system expansion needs. c. Adequacy of Government Commitment at entry The Government's overall commitment and support to the Project objectives was a key factor in ensuring successful commencement of the project. Alongside the project, recognizing the importance of power sector in the country's economic growth and social development, the GoI embarked on a comprehensive reform program that included establishment of independent regulators at central and state levels, a framework for attracting private sector participation, and mechanisms to promote financial discipline in the energy sector. d. Adequacy of POWERGRID Commitment at entry POWERGRID built on the experience of the PSDP-I Loan to design the implementation plan for the large transmission projects proposed under the PSDP-II Loan. Therefore, at the time of Project appraisal, POWERGRID was well equipped with adequate institutional and financial capacity to implement all Project components. By initiating project implementation even before the approval of the loan, and continuing implementation during loan deferment period, POWERGRID further established its commitment to the project. e. Assessment of Risks Risks for implementation of the investment projects were rated medium for the regional coordination center projects and low for the transmission expansion projects. To mitigate these risks: (i) support for the implementation of the regional dispatch centers by leading international consultants was provided to POWERGRID and was financed by the Loan; and (ii) advance procurement actions (including award of contracts) were undertaken by POWERGRID to ensure that the projects were successfully implemented and completed in time. Regulatory, commercial, and institutional risks were also identified and rated high to medium. Continued Bank dialogue with the Government and involvement with POWERGRID were very critical to addressing these risks. 11

12 7.2 Implementation (including any project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable) Despite the two year delay in the Bank's approval of the Loan due to the international sanctions against India at that time, and the consequent late start of the Project, the implementation of the Project components and the utilization of the Loan were highly satisfactory. The key factor behind successful implementation of policy and structural reforms in the sector was the follow-up by the Government of India (GoI) on its commitment to establish the Central Electricity Regulatory Commission (CERC), implement new bulk power tariff regime and introduce the securitization scheme. Further, GoI enacted the new Electricity Act 2003, introduced National Electricity and National Tariff Policies, and provided guidelines for private participation in power sector. Several of these reform initiatives had been implemented even before the mid-term review of the project in September POWERGRID's past experience in implementing Bank-supported projects, and availability of skilled and motivated technical staff were the ultimate factors behind successful physical implementation of project investments. POWERGRID's senior management and technical staff in the corporate level project monitoring unit constantly monitored implementation progress and promptly addressed any problem that arose. Intensive supervision by the Bank team, facilitated by availability of many task team members at the field office, was instrumental in ensuring successful and timely implementation of the project. 7.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Monitoring and Evaluation (M&E) Design: The M&E plan for the project comprised of targets that were linked to achievement of different project outputs over given timeframes. The plan included actual baseline data and focused on monitoring and regular reporting of the progress in achievement of PDOs and project outputs. It included targets for completion of investment projects; specific milestones pertaining to sectoral reforms in the Regulatory, Tariff and Institutional areas; milestones for institutional growth and development of POWERGRID; and, indicators pertaining to financial and commercial performance of the company, inline with the Project covenants. During the mid-term review, additional key indicators were agreed, to objectively measure improvements in power sector performance as well as POWERGRID's corporate performance. M&E Implementation: POWERGRID met in a timely manner all the reporting requirements agreed with the bank, including monthly reports on billing and collection, quarterly progress report, financial management report and the annual audited financial statement of the company. In addition, the Bank team periodically conducted site visits, to examine the facilities created, monitor compliance with environmental and social safeguards, and engage in discussions regarding benefits achieved from the investments. The Bank team also interacted regularly with various project stakeholders including the Ministries of Power and Finance, CERC, Power Trading Corporation (PTC) and the Private Sector Transmission Companies, in addition to POWERGRID officials, to discuss progress in sector reforms, sector performance as well as project implementation. 12

13 M&E utilization: M&E information was utilized to provide feedback to POWERGRID and GoI on issues pertaining to project implementation, sectoral performance, development of institutional capacity in POWERGRID as well as in Power Sector as a whole, and to review outcomes of the project. The information facilitated POWERGRID/GoI in maintaining focus on key outstanding issues, timely resolution of which has enabled successful achievement of project development objectives. For example, based on regular monitoring of the level of POWERGRID receivables (current and long-term), feedback was provided to POWERGRID and GoI on the key states where attention needed to be focused to ensure commercial discipline in the sector. Similarly, a high level of Loan disbursement was achieved through regular evaluation of implementation progress and attention to bottlenecks. The systematic monitoring of safeguards activities by the Bank team contributed to the development and mainstreaming of the corporate Environmental and Social Policy and Procedures. 7.4 Safeguard and Fiduciary Compliance (focusing on issues and their resolution, as applicable) Environmental and Social Safeguards The Project was rated 'Category A' on Environmental safeguards management. The environmental and social safeguards issues associated with the Project were addressed in accordance with the corporate "Environment and Social Policy and Procedures" (ESPP) developed by POWERGRID, which comply with the Bank's safeguards policies, and are applied to all projects irrespective of the source of funding. POWERGRID has also appointed a committee of independent eminent experts to oversee environmental and social management policies and their implementation. POWERGRID has reduced the impact on forests by avoiding forest land (including by deploying GIS and satellite imaging for line routing) and design of towers with higher clearance for trees. As a result, involvement of forests in POWERGRID projects has reduced from 6% before 1998, to about 2% since Apart from paying compensation and rehabilitation assistance to the project affected people, POWERGRID has also undertaken Community Development Programs, which include development of civic infrastructure (including roads, schools, drinking water facilities, street lights, community halls etc), economic infrastructure (like irrigation scheme in Sasaram, milk chilling plant in Kolar), community activities (like health camps) and skills development programs to improve earning potential. Details of the environmental and social safeguard measures are provided in Annex-13. Financial Management Financial Management (FM) arrangements under the PSDP-II project were implemented in a satisfactory manner. The Project Monitoring Report (PMR) format designed at the appraisal stage was found to be very bulky and was therefore simplified during project implementation. The project level audit reports were timely and did not have any major accountability issues. Many of the old audit observations appearing in the entity audit report were resolved during the project life demonstrating a substantial progress in this area. In , at the request of POWERGRID, the Bank benchmarked POWERGRID against its peers in the areas of corporate governance and financial accountability. The study concluded that while POWERGRID's FM arrangements ranked suitably with its Indian peers, with some 13

14 further enhancements of its norms, the company could compare well with its international peers also. An action plan for enhancing financial accountability environment has been agreed under PSDP-III project. Procurement Despite delays in effectiveness of the Bank Loan, POWERGRID proceeded with procurement and implementation of project components, following procedures consistent with the Bank procurement guidelines. In view of their sound "Works and Procurement Policy and Procedure (WPP Volumes - I and II)", and earlier experience with Bank procurement under the PSDP-I project, the procurement for the project proceeded satisfactorily in general. However, the procurement of Emergency Restoration System (ERS) could not be completed before the close of the Loan, and POWERGRID has requested for funding the package under the PSDP-III loan. There was a complaint by one of the bidders in this package, which in yet to be resolved. As a step towards increasing transparency, POWERGRID have launched a section on procurement on their corporate website, where all active tenders are being posted. As a part of the corporate effort to strengthen governance, along with similar committes in other areas, POWERGRID have also recently constituted an independent high level expert committee on Procurement, Project Execution and Financial Aspects. 7.5 Post-completion Operation/Next Phase (including transition arrangement to post-completion operation of investments financed by present operation, Operation & Maintenance arrangements, sustaining reforms and institutional capacity, and next phase/follow-up operation, if applicable) All the major investments financed by the Loan are being successfully operated and maintained. The few remaining works (about US$ 50 million) are slated to be funded under the Bank's new US$ 400 million PSDP-III Loan signed on May 02, All investments are expected to continue operating smoothly in the future as POWERGRID has past experience and robust arrangements for operation and maintenance of similar facilities. In line with the latest CAS (August, 2004), through a series of additional loans to POWERGRID and other sector entities, the Bank will continue to support the ongoing sector reform agenda and further strengthen POWERGRID's institutional and transmission capacities, brining it at par with global peers. 8. Assessment of Outcomes 8.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) The relevance of the Project's Development Objectives (PDOs) is rated high. The PDOs focused on addressing the key challenges facing the power sector in India during the late 1990s and on supporting the policy, regulatory and institutional reforms in the sector. The PDO on assisting India in restructuring the power transmission sub-sector, improving coordination in power system operations, and promoting power trading through regulatory, tariff and institutional reforms (PDO1) was directly responsive to the priorities of the energy sector reform process undertaken by the Government of India. 14

15 The PDOs on supporting the institutional development, financial performance and investment program of POWERGRID (PDO 2, PDO 3) and supporting them in facilitation of private investment in power sector (PDO4) were direct recognition of the leading role POWERGRID assumed in implementing the electricity reform program and were also in support of its enormous investment needs for expanding the regional transmission grid and improving its operation and management through modern control centers. Therefore all the PDOs were necessary and relevant to the successful implementation of the reform process and operation of the regional transmission systems. 8.2 Achievement of Project Development Objectives (including brief discussion of causal linkages between outputs and outcomes, with details on outputs in Annex 4) The achievement of the Project Development Objectives is rated highly satisfactory. The achievement of individual objectives and their associated outcomes based on the performance indicators agreed upon at appraisal are outlined below: PDO-1: To assist India in restructuring the power transmission sub-sector, improve coordination in power system operations, and promote power trading through regulatory, tariff and institutional reforms. Overall Achievement of this objective is highly satisfactory based on the following achievements of the objective performance indicators: Regulatory Reform: Central Electricity Regulatory Commission (CERC) established in 1999 and has since issued several significant orders and developed secondary regulations. In addition, the Appellate Tribunal for electricity has also been established and is functional. Securitization Scheme implemented and Tripartite Agreements (TPA) signed with all states having outstanding dues with POWERGRID, resulting in significant reduction in POWERGRID's receivables, improved collection efficiency and improvement in overall financial performance. Energy Electricity Act 2003 enacted, accelerating the pace of the sectoral reforms including separation of trading from transmission and introduction of open access. Tariff Reform: New bulk power tariff regime (popularly known as Availability Based Tariffs - ABT in India) has been successfully implemented. The implementation of ABT could be considered the most significant development in the power sector in India in the last decade, which has resulted in significant improvements in the power system operations, including merit order operation of plants, more efficient use of generation resources and better demand management, resulting in improved quality of supply. Institutional Reform: Apart from the establishment of CERC and Appellate Tribunal, Institutional reforms have included a legal framework for private investment in transmission. The framework was first established by the Electricity Regulatory Commission Act of 1998, which specified POWERGRID as the nodal agency to promote private investment in transmission. Accordingly, POWERGRID formed the first public-private Joint Venture project (called Powerlinks) with Tata Power, which has now been commissioned. However, the 15

16 mandate for promotion of private participation in transmission is no longer with POWERGRID. Instead, under the new policy and regulatory framework, an Empowered Commttee would identify and faciliate projects for development by the private sector based on tariff based competitive bidding. PDO-2: To support POWERGRID's institutional development and promote satisfactory financial and commercial performance and the implementation of the POWERGRID investment and commercial policy. Overall Achievement of this objective which focuses specifically on POWERGRID performance is highly satisfactory based on the following performance indicators: Institutional Growth and Development : Between 1998 and 2006, POWERGRID's employee productivity improved by more than 65% in terms of network length to employee ratio. This was achieved through significant ramp-up in procurement and project implementation activities to augment network, without increasing manpower. On corporate governance front, to further enhance institutional capacity and foster greater transparency, POWERGRID has established several high level committees of independent experts, to advise on major functional and operational areas. POWERGRID has developed a Corporate Environmental and Social Policy and Procedures (ESSP) to deal with safeguards issues arising out of projects, irrespective of the source of funding. Financial Performance: By the end of the Project, POWERGRID met and exceeded all the financial targets and covenants established by the Project performance indicators. Commercial Arrangements: POWERGRID was able to reduce its receivables to less than one month of equivalent billing (compared to target of less than 4 months). Also, POWERGRID's LC coverage now stands at about 105% (gross) and 99% (net) of the average billing over the last 12 months. PDO-3: To assist POWERGRID in the development of modern system coordination and control facilities and reinforcement of its transmission system towards a National Grid. Overall Achievement of this objective is highly satisfactory based on the implementation and completion of the investment projects financed by the Project. The majority of the investment projects were implemented on schedule and within budget. The completion of the few balance works of the projects financed by PSDP-II loan, will be financed and completed under the next Bank project - PSDP-III loan - signed in May, Detailed descriptions of investments financed by PSDP-II Loan are provided in Annex-4. The implementation of the investments financed by PSDP-II Loan has had a significant impact on the operation of the regional power grids in India. Salient features of these projects are the completion of the last two regional dispatch centers (Western Region Load Dispatch Center - WRLDC and Eastern Region Load Dispatch Center - ERLDC) and the regional transmission interconnections. The Regional Load Dispatch Centers (RLDCs), which also integrate state transmission networks, have helped in real time monitoring, control and management of the regional transmission grids. The completion of the regional transmission interconnections have increased the power 16

17 transfer capacity between the regions (inter-regional capacity increased from 4350 MW in 2001 to MW in 2006, and power exchange increased from 8492 MU in 2001 to MU in 2006) and enhanced the system reliability (trippings per line per year reduced from 5.5 in 2001 to 3.5 in 2006, and system availability increased from 98.85% in 2001 to 99.64% in 2006). A major milestone in the grid operation was achieved by synchronization of the four of the five electrical regions of the country (except southern region), integrating them into a single grid operating at a common frequency. PDO-4: To support POWERGRID in the facilitation of private investment in the power sector and in its possible diversification into telecommunications. Overall Achievement of this objective is highly satisfactory based on progress in attracting private investors in power transmission and POWERGRID's success in diversification into telecommunications business. Achievements in these two areas are discussed below: Private Sector Participation in Transmission The first ever public-private joint venture (JV) project in transmission in India, the "Powerlinks" Tala-Delhi transmission line, has been commissioned. Five other joint-venture MoUs have been signed. Furthermore, with the change of the regulatory framework allowing development of new transmission facilities solely by private investors, through tariff based competitive bidding process, bid process for two segments of Western Region Transmission System Strengthening (WRSS-II) project, were identified for implementation by fully independent private power transmission companies. Diversification into Telecommunications POWERGRID has installed and commissioned a telecommunications network of about km covering more than 61 cities of which a total of 9218 km Optical Fibre Ground Wire (OPGW) was financed by this Loan. In addition to covering major cities, the network has also provided coverage to many remote areas of India where private providers are not willing to invest. The financial performance of the new business has been lower than originally envisaged, mainly due to delay in GoI investment approval for the project, leading to increased competition and reduced revenue realizations. Nevertheless, POWERGRID is expanding its market share and has obtained additional licenses for providing national long distance (NLD) services, and is expected to become cash positive in one to two years. 8.3 Efficiency (Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return) The economic and financial analysis of the project was carried out at appraisal for the entire time slice of investments, based on revenues from tariffs. The tariff regulations have since undergone a change, with rate of depreciation reduced from 6% to 3% per annum and rate of return on equity reduced from 16% to 14% per annum. In addition, POWERGRID's average cost of borrowings, which is a pass-through in tariff calculations, has also reduced from 12.5% to 10%. Further, with a shift in the time-slice from to , the underlying investments for the project have also changed. The detailed economic and financial analysis at project implementation 17

18 completion is presented in Annex-5. Economic Rate of Return By using the simple methodology adopted at appraisal, the ERR for the time slice of investments from has been calculated as 13.1% (greater than the hurdle rate of 12%), compared to 17.2% for the time slice of investments from calculated at the time of appraisal. The NPV for the investments at the close of the project is found to be positive at Rs.2808 million. Additionally, detailed economic analysis has been undertaken for each component of the bank-funded project, and despite the highly conservative assumptions, the ERR in each case is found to be higher than the hurdle rate of 12%, ranging between 13.6% for the telecom investment to 49.6% for the East-North-I interconnector. It is important to note that the economic multiplier of a healthy power sector is very high, especially in view of the impetus it can provide to economic growth. However, given the difficulties in quantifying such economic multipliers, the same have been excluded from this analysis and the ERR analysis is highly conservative. Financial Rate of Return The FIRR of the investment program which was calculated as 18.4% at the time of project appraisal, when the cost of capital for POWERGRID was 13.5%, is now found to be 14.9% against a cost of capital of 11.2%. At project completion, the investments continue to be financially sound, with financial rate of return comfortably higher than the cost of capital for the company. The reduction in transmission tariff has ultimately benefited retail electricity consumers, who now enjoy a lower cost of delivered power. Also, the reduction in regulated tariff has not affected POWERGRID's financial performance, which continues to be healthy. 8.4 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs, and efficiency) Rating: Highly Satisfactory The overall rating of the Project is rated highly satisfactory on the basis of its high relevance (as discussed in section 8.1), highly satisfactory achievement of all the PDOs (as discussed in section 8.2), and efficiency in implementation (as discussed in section 8.3). In addition, the Project's sectoral achievements and improvements in POWERGRID performance have contributed to further liberalization and development of the electricity trading markets in India. The highly satisfactory rating is also justified by the sustainability of the project components. Going forward, the role of the regional load dispatch centers will become more important with the development of electricity trading market envisaged by the Electricity Act of 2003 and the transmission facilities financed by the Loan will enable transfer of large quanta of power across and between the regions. 8.5 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development 18

19 Implementation of Community Development programs in each of the grid sub-station areas, has helped in the socio-economic development of the local population. Programs like community level irrigation scheme (in Sasaram), milk chilling plant (in Kolar) helped a significant number of local families in improving their economic livelihood. As an innovative approach to ensure that project affected people use rehabilitation assistance productively, Self Help Groups were used effectively with the help of an NGO and active involvement of a local bank. This approach proved quite useful in linking POWERGRID initiative with the on-going development programs of the government as well as with bank finance. This helped project affected people to take up income generation schemes that ensure sustained returns, without affecting their rehabilitation assistance provided by POWERGRID. (b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) The institutional development achievements of the Project, both related to the energy sector and POWERGRID, have been rated highly satisfactory as discussed in section 8.2. The impacts of these achievements include considerable improvements in the electricity regulatory regime in India and significant performance improvements and efficiency gains in all aspects of POWERGRID operations as illustrated by key indicators shown in the tables included in Section 8.2. Furthermore, the development and adoption by POWERGRID of the new corporate Environmental and Social Policy Procedures (ESPP), which are applied to all projects developed by the company, regardless of funding source, will ensure that environmental and social impacts associated with the new investments will be effectively managed and mitigated. In recognition of the POWERGRID's efforts on the social and environmental safeguards front, they have been awarded the "Annual Green Award" for 2006 by the Environment Sector Board of the Bank. POWERGRID have themselves instituted "POWERGRID Awards for Excellence" in the areas of Information Technology, Power Sector and Environment, to recognize significant achievements in these areas by Indian companies. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) There were no major unintended impacts or outcomes of the Projects, other than those assessed in Section Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes) A beneficiary assessment and stakeholder workshop was not carried out at Project Completion. However, given the highly satisfactory outcomes of the Project, POWERGRID agreed to develop together with the Bank team, an information brochure for communicating the achievements of the project to wider external audience. 19

20 9. Assessment of Risk to Development Outcome Rating: Low or Negligible The overall level of risk to the development outcomes is rated low on the basis of the sustainability of the structural reforms and physical investments. The CERC and Appellate Tribunal are functioning well; new bulk tariff regime (ABT) with the frequency-linked pricing for deviations is now well established in India and provides a stable framework for long-term contracts for bulk of the supply and for energy accounting and handling of defaults; and, the tariff based competitive bidding framework for private participation in transmission is in place. Also, the physical investments financed by the Loan are expected to be operated and maintained well by POWERGRID, which has a good track-record on this front. The investments have already improved the reliability of the regional grids and facilitated increased levels of electricity exchanges and trades between the regions. The risk level is also rated low based on the sustainability of POWERGRID's enhanced institutional capacity and performance which will enable the company to implement its future investment plans for transmission network expansion. The level of risk is, however, rated moderate for POWERGRID diversification in telecommunications as this investment has not yet yielded the expected financial revenues due to the high competition in the telecommunications sector and the decline in broadband tariffs. 10. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues) 10.1 Bank (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Highly Satisfactory At the time of Appraisal, the US$ 450 million PSDP-II Loan was one of the biggest loans the Bank had made to borrowers in the energy sector. The Bank performance during identification, preparation and appraisal of the Project was highly satisfactory. The Bank team had long experience in the energy sector in India and his previous work supporting the establishment of POWERGRID enabled the team to establish partnership and develop good working relationship with POWERGRID and government officials. Given the large size of the Project and wide range of investments considered for financing, the Bank team consisted of two power engineers, a telecommunications engineer and multiple financial, social and environmental specialists. In addition, assistance in the preparation of the projects was provided by consultants funded under the bank then ongoing loans, Japan PHRD Grants and ADB. During the preparation of the Project, the Bank team worked closely with POWERGRID in preparing its Environmental and Social Policy and Procedures (ESPPs) providing formal policy and framework for the identification, assessment and management of environmental and social issues at corporate and project levels. At the time of appraisal, the POWERGRID team included 20

21 several employees responsible for procurement and financial management of on-going World Bank projects, who were experienced with the Bank's procurement and financial management guidelines. Quality at entry is therefore rated highly satisfactory. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Highly Satisfactory The Bank supervision team carried 13 supervision missions, including the project completion mission, over the five year implementation period. Intensive supervision and continuous involvement by the Bank's team were instrumental in ensuring that the project components were successfully implemented and the Project was closed as scheduled and with very high disbursement of the Loan. Effective supervision of project implementation was helped by the fact that the supervision team remained largely unchanged particularly since the mid-term review. Also, as noted above, most members of the supervision team (including the TTL) were stationed in the Bank's office in India for most part of the project, enabling prompt handling of critical issues, and close working relationships with GoI officials and POWERGRID staff. The team conducted regular site-visits to all the facilities financed under the loan both during implementation and after commissioning to assess implementation progress, quality of execution, and benefits from the project. Furthermore, over the course of the Project implementation, the Bank team continued to be actively involved in the reform process of the energy sector and one of its key engagements, for example, was supporting the enactment of the Electricity Act of Based on the above supervision activities, the quality of supervision, therefore, is rated highly satisfactory. (c) Justification of Rating for Overall Bank Performance Rating: Highly Satisfactory The rating for overall Bank performance is based on the highly satisfactory quality at entry and high quality supervision carried out by the Bank team Borrower (a) Government Performance Rating: Satisfactory Support from the government has been critical to the successful implementation of the project and achievement of project objectives - particularly on the policy and regulatory front. The government followed up on its reform commitment by establishing a fully functional Central Electricity Regulatory Commission (CERC), introducing the Securitization Scheme (including signing of Tripartite Agreement (TPA)) and enacting the new Electricity Act 2003 which has accelerated the pace of the sectoral reforms. The new Act provided the framework for several reform initiatives such as introduction of Open Access in transmission and private participation in transmission projects. However, considering the government's inability to nominate one third non-government members to POWERGRID board (this being the only unmet covenant under the Guarantees 21

22 Agreement), and the delay in GoI approval for POWERGRID's telecommunications investment (this has contributed to reduced financial returns from these investments due to increased competition and lower prices), the team feels that Government Performance can only be rated Satisfactory. (b) Implementing Agency or Agencies Performance Rating: Highly Satisfactory Implementing Agency Powergrid Corporation of India Limited Performance POWERGRID was the borrower and the implementing agency and its performance is rated highly satisfactory. This rating is based on POWERGRID commitment to the Project during all of its stages from identification to preparation to implementation, which was one of the main key factors for the successful implementation of the Project. POWERGRID was able to carry out and complete all the projects financed by the Loan on schedule and some projects were completed at costs below the allocated budget. In addition, POWERGRID's highly satisfactory achievements in meeting all the development outcomes related to its institutional, financial and performance targets also justify the high satisfactory rating. The Bank supervision team has rated the Project implementation as satisfactory in its final status report, mainly due to the delay in the implementation of the telecommunications network - which however was largely due to the time taken by the government in approving the investments. Therefore, this ICR has chosen a highly satisfactory rating for POWERGRID for the achievement of the project development objectives, successful implementation of all the projects financed by the Loan with high disbursement level at about 98% of the US$ 450 million and without the need for any extension. (c) Justification of Rating for Overall Borrower Performance Rating: Highly Satisfactory Overall borrower performance is rated highly satisfactory based on POWERGRID and Government performance. 11. Lessons Learned (both project-specific and of wide general application) The main lessons learned from the design and implementation of the Project as well as its achievements are the following: The project exhibited good rehabilitation and resettlement practices (R&R) and community development programs. Several good environmental practices have been institutionalized including technical innovations to minimize environmental 22

23 impact. Also, the Environmental and Social Safeguard systems were mainstreamed at the corporate level under this project. The safeguard practices follwed during the project and the development of corporate level ESPP offer models for replication in other sectors and entities. Details of Environment and Social safeguard practices followed during the project are provided in Annex- 13. The development of a close working relationship between the Bank team and POWERGRID and other power sector stakeholders was critical for achieving the project development objectives. That the team was largely country office based helped in faster resolution of critical issues and closer working relationship with client counterparts. The time-slice lending approach is an appropriate mechanism for lending to large power utilities, such as POWERGRID, with large investment needs to provide the utility with the flexibility of financing priority investment projects and to respond to changes in its investment program as the newly electricity markets evolve. 12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies Evaluation of the project by POWERGRID (as reflected in the completion report prepared by them) is consistent with that of the Bank, and assesses the project as Highly Satisfactory. POWERGRID and GoI have provided comments on the draft ICR which are included in Annex-10 of this ICR. The comments pertain mainly to minor errors in the draft ICR and an update on developments / further progress since the ICR mission. The comments have been appropriately incorporated in the final ICR. The Bank team's response to each comment is indicated in Annex-10. (b) Cofinanciers (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) 23

24 Annex 1. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) Project Development Objectives Key Performance Indicators (as approved) a) Regulatory Reforms: The government has established an Objective 1: To enabling legal framework and has also established the Central assist India in Electricity Regulatory Commission (CERC) to take over restructuring the power tariff functions from the Central Electricity Authority and transmission sub-sector, Ministry of Power. improve coordination in b) Tariff Reforms: Availability based tariffs have been power system notified for central thermal stations and new Independent operations, and promote Power Plants (IPPs). The new tariffs are fully operational and inter-regional and interstate power trading all transitional issues have been addressed. c) Institutional Reforms: CERC is operational and the through regulatory, tariff government has established an enabling legal framework for and institutional reforms private investment in transmission. Objective 2: To support POWERGRID's institutional development and promote satisfactory financial and commercial performance and the implementation of the POWERGRID investment and commercial policy Objective 3: To assist POWERGRID in the development of modern system coordination and control facilities and reinforcement of its transmission system towards a national grid Objective 4: To support POWERGRID in the facilitation of private investment in the power sector and in its possible diversification into telecommunications a) Institutional Growth and Development: Establishment of environmental and social management department at POWERGRID corporate level and first independent power transmission company established and to begin project implementation. b) Financial Performance and New Financing Arrangements: Compliance with financial covenants (i.e. 20 % Self Financing Ratio and 4:1 debt equity ratio) by mid-term as well as end of Project. c) Commercial Arrangements: POWERGRID progressively reduce and maintain the accounts receivable below 4.0 months billing and 100% coverage by letter of credits (LCs). Successful completion of investments financed by the Loan. (Expected outcomes from these investments included: Greater availability of power through inter-regional transmission; Improved grid parameters including frequency and voltage; Higher transmission line availability; and, Reduction in grid outages) First independent power transmission company established and to begin project implementation by midterm review. More private transmission ventures to be established by end of the Project. 24

25 Revised Project Development Objectives (as approved by original approving authority) The project objectives were not revised. The key indicator for Institutional Reforms was revised from "Some private transmission ventures in operation" to "Satisfactory implementation of the first joint venture", as POWERGRID no longer has the mandate to promote private participation in transmission. Instead, Government of India (GoI) has issued guidelines for private participation in transmission and also for tariff based competitive bidding. GoI has also constituted an Empowered Committee to identify and facilitate private sector participation in transmission. (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Indicator 1 : Regulatory, Tariff and Institutional Reforms Value (quantitative or Qualitative) Enabling legal framework to be established; Bulk power tariffs study done by the Consultant (ECC). Implementation awaited. Establishment of fully functional Central Electricity Regulatory authority; Satisfactory Implementation of the new tariff regime. Formally Revised Target Values Date achieved 03/31/ /30/ /21/2005 Comments (incl. % All targets have been achieved (100% achievement) achievement) Institutional development and satisfactory commercial performance of Indicator 2 : POWERGRID Value (quantitative or Qualitative) Date achieved Environment & Social practices to be assimilated in the corporate functioning Financial performance fragile with high accounts receivable (6.5 Months),Low (60%) L/C coverage for sales. POWERGRID to use Environment & Social policy for all projects irrespective of funding source. Maintain accounts receivables below 4.0 months billing and 100 % L/C coverage for current billings Actual Value Achieved at Completion or Target Years Comprehensive New Electricity Act promulgated; Regulator & Appellate Tribunal fully functional; Tariff policy notified; Country wide successful implementation of Bulk Power Tariffs. Env. & Social management dept. established at corporate and regional levels. A/cs receivables 0.4 month as of June 2006; current collections at 100%; Net L/C coverage at 99% (though total L/C coverage exceeds 100%) 03/31/ /30/ /30/

26 Comments (incl. % All targets have been achieved (100% achievement) achievement) (b) Intermediate Outcome Indicator(s) Indicator Baseline Value Indicator 1 : Regulatory Reforms Value (quantitative or Qualitative) No independent regulatory agency in place. Original Target Values (from approval documents) Establishment of fully functional Central Electricity Regulatory Commission. Formally Revised Target Values Actual Value Achieved at Completion or Target Years Fully functional Central Electricity Regulatory Commission and Appellate Tribunal in place regulating the central transmission and generation sectors. Date achieved 03/31/ /30/ /21/2005 Comments (incl. % All targets have been achieved (100% achievement) achievement) Indicator 2 : Tariff Reforms Value Bulk power tariff reforms study completed, Issuance of bulk power tariff Successful implementation of bulk power tariffs (ABT). Grid Availability=99.6% during (quantitative proposing major notifications for FY05-06; Frequency>95% of or changes in the bulk inter-regional the time within Grid code Qualitative) power tariff designs. Erratic Grid performance power exchanges from central pool range (Except NR due to acute shortages) UI nonpayment <7%. Date achieved 03/31/ /30/ /30/2006 Comments (incl. % All targets have been achieved (100% achievement) achievement) 26

27 Annex 2. Restructuring (if any) Not Applicable 27

28 Annex 3. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Components Appraisal Estimate (USD M) Actual/Latest Estimate (USD M) Percentage of Appraisal SYSTEM COORDINATION AND CONTROL : Eastern Region SYSTEM COORDINATION AND CONTROL : Western Region SYSTEM COORDINATION AND CONTROL : NLDC TRANSMISSION : East North Interconnector-I (Sasaram) TRANSMISSION : East North Interconnector-II (Tala) TRANSMISSION : East South Interconnector-II (Talcher) TRANSMISSION : Southern Region System Strengthening - III TECHNICAL ASSISTANCE Completion of Projects under NRTP and PSDP-I TELECOMMUNICATIONS Total Baseline Cost 1, , Physical Contingencies Price Contingencies Total Project Costs 2, Front-end fee PPF Front-end fee IBRD Total Financing Required 2, , (b) Financing Source of Funds Appraisal Type of Actual/Latest Percentage of Estimate (USD Cofinancing Estimate (USD M) Appraisal M) Borrower International Bank for Reconstruction and Development GERMANY: Supplier's KREDITANSTALT FUR Credit WIEDERAUFBAU (KFW)

29 Borrowing Country's Fin. Intermediary/ies (c) Disbursement Profile 29

30 Annex 4. Outputs by Component The majority of the investment components under the PSDP-II Project were implemented on schedule and within budget. A summary of the component-wise loan utilization is provided in table below. The few balance works will be financed and completed under the next Bank project, the PSDP-III loan signed in May, Table: Component-wise Loan Utilization Project Estimated Utilization (US$ m) Actual Utilization (US$ m) Remarks Component 1- System Coordination and Control Eastern Region System Coordination & Under Commercial Operation Control Project since Sept'05 Western Region System Coordination Under Commercial Operation & Control Project since Feb'06 Component 2 - Transmission System Development East-North Interconnector I Under Commercial Operation since Dec'02 East-South Interconnector II Pole-I Under Commercial Operation since Dec'02 High Capacity East-North Interconnector II and Pole-II since Mar' Commissioned in Aug'06, except one substation (expected by Mar'07). Component 3 - Technical Assistance for Institutional Development Consultancy Services Completed. (Left over man-days under ULDC-WR contract shall be utilised for NLDC work.) Component 4 - Completion of on-going Bank-financed Projects Transmission projects from previous Completed and commissioned loans Component 5 Additional Investment Projects Telecom Project Total of 9218 km OPGW and OFC financed by this Loan is installed expanding the size of operational telecom network to km. Installation of the remaining 435 km of OPGW expected to be completed by Nov 06. Transmission System Strengthening III in Southern Region Completion expected by Apr'07. 90% supplies completed and erection works are in progress. Spill over to PSDP-III loan. National Load Despatch Center Contract awarded in June Expected to be completed by May The project would spill over to PSDP-III loan. Total

31 Component 1: System Coordination and Control This component included the establishment of regional load dispatch centers (RLDCs) at Mumbai (Western Region) and Kolkata (Eastern Region). The RLDCs for the Northern and Southern regions were developed under the NRTP and PSDP-I loans and the RLDC for the North-Eastern region was developed by ADB funding. The RLDCs were established as part the Unified Load Dispatch and Communications (ULDC) schemes, which not only enabled coordinated operations of the regional grids but also assisted state utilities in improving their system operations and participate more effectively in power trade across the regional grids. In addition, a National Load Dispatch Center (NLDC) is currently being implemented under the follow-on PSDP-III Loan to control inter- regional transmissions, monitor grid parameters and issue necessary directions to RLDCs on real time basis. The ULDC schemes used in the five electrical regions of the country involved establishment of Control Centers at Regional and State levels for SCADA (Supervisory Control and Data Acquisition) and EMS (Energy Management System) functions and installation of Remote Terminal Units (RTUs) for data acquisition at all the 400/220 kv substations, generating stations and at important 132 kv Substations. The two RLDCs funded under the PSDP-II loan are: 1. Eastern region system coordination and control project: The scheme was completed at an actual cost of US$80 million - about 10% lower than the original estimate of US$ 88 million. It came into commercial operation from September The scope of the project included (a) establishment of the regional load dispatch center (RLDC) at Kolkata, central power coordination center (CPCC) at Durgapur and state/sub-load load dispatch centers (SLDC) at Howrah, Maithon, Patna, Hatia, Bhubaneswar, Jayanagar, Budhipadar, Meramandali and Gangtok; (b) installation of 197 RTUs and (c) installation of dedicated telecom network of 1700 km of fibre optic cables, 40 microwave hops, 334 power line carrier communication terminals and 57 PABX. Figure-1: Control Room at ERLDC 2. Western region system coordination and control project: The ULDC scheme in Western Region is the last of the five ULDC schemes, which was completed on August 31, 2005 and is under commercial operation since February 01,

32 POWERGRID established ULDC scheme in Western Region at an approved cost of US$ 52 million with a commissioning schedule of March 2006 and was completed seven months ahead of schedule and at US$ 12 million lesser cost. The scope of the project included (a) establishment of the regional load dispatch center (RLDC) at Mumbai, central power coordination center (CPCC) at Jabalpur and state/sub-load load dispatch centers (SLDC) at Bhilai, Gotri, Jambuva, Jetpur, Gandhinagar, Jabalpur, Indore, Bhopal and Panaji, (b) installation of 167 RTUs and (c) installation of a dedicated telecom network of 1489 km of fibre optic cable, 46 power line carrier communication terminals. Component 2: Transmission System Development This component involved financing of inter-regional transmission links to enhance transfer of power across regions necessitated by large dispersion of generation resources and load centers. Inter-regional links financed under this component included: 1. East North Interconnector-I (Sasaram Back-to-back HVDC) Project: Due to inadequate growth in demand in Eastern region, the power generated from existing power stations in the region was not being fully utilized, thus forcing the generating stations to back down their production. Therefore, the East-North Interconnector-I project was implemented for optimal utilization of existing power generation capacity and as an important inter-regional link in the formation of the National Grid. The project, commissioned in November, 2002, has power transfer capacity of 500 MW from Eastern Region (ER) to Northern Region (NR). The completed cost of the project was US$ 119 million which was about 20% lower than the approved estimate. The scope of the project included: (a) 400 kv double circuit line from Biharshariff to Sasaram (ER) km; (b) 400 kv double circuit line from Sasaram (ER) to Allahabad (NR) (including LILO at Sarnath) km; (c) 500 MW HVDC back-to-back station at Sasaram; (d) New 400 kv sub-station at Sasaram; (e) Extension of Biharshariff substation - Addition of two new bays of 400 kv; and (f) Extension of Allahabad substation - Addition of two new bays of 400 kv. (g) LILO of 132 kv single circuit Dehri-Karamnasa at Sasaram - 132/33 kv bays alongwith transformer at Sasaram - Additional works for utilization of Biharshariff-Sasaram-Allahabad 400 kv double circuit line for transfer of surplus power from Eastern Region. The commissioning of the interconnector has enabled transfer of power from Eastern region to Northern region and has also facilitated transfer of higher level of power to Western and Southern regions, which are connected to the Northern Region through Vindhyachal and Gazuwaka back to back HVDC stations. 2. East-South Interconnector-II (Talcher-II) Under this project, an asynchronous 2000 MW HVDC bi-pole ±500 kv link line was constructed for bulk transfer of power mainly from Talcher- II generating station in Eastern 32

33 Region to the deficit Southern region. The HVDC sub-stations at Talcher and Kolar for the Talcher-Kolar HVDC bi-pole transmission line were commissioned in November, 2002 and February, 2003 respectively. The cost of the project was US$ 688 million and the project was completed nine months ahead of schedule, with a cost saving of US$ 17 million. For the terminal packages, supplier's credit was provided by KfW, Germany. The scope of the project included: (a) Talcher-Kolar ± 500 kv 2000 MW HVDC bi-pole line km; (b) Kolar-Hoody 400 kv double circuit - 51 km (c) Kolar-Madras 400 kv single circuit km (d) Kolar-Hosur 400 kv double circuit - 69 km (e) Hosur-Palakodu-Salem-Udumalpet 400 kv single circuit km (f) LILO of Cuddapah-Somanhalli 400 kv single circuit at Kolar - 15 km (g) Talcher HVDC converter station - 2x1000 MW, with 22 new 400 kv bays, and 5 new 500 kv DC bays; (h) Kolar HVDC converter station - 2x1000 MW, with 24 new 400 kv bays and 4 new 500kV DC bays; (i) Repeater Station; (j) Electrode stations at Talcher & Kolar end along with electrode line; (k) New 400/220 kv substations at Hosur and Kolar; and, (l) Extension of 400/220 kv substations at Hoody, Salem and Udamaplet, Madras 400kV substation. The commissioning of this interconnector has not only provided additional power to the Southern Region, but also improved the performance of the regional grid in terms of improved voltage profile, improved frequency and reduced transmission losses. Figure-2:Valve Hall at Talcher HVDC Substation Figure-3:DC Filters at Talcher HVDC Substation 3. High Capacity East-North Interconnector-II This scheme was envisaged to strengthen the inter-connection between Eastern and Northern regions through a second link and to enable synchronous operation of the grids of the Northern, Eastern, Western and North-Eastern regions. The scheme, which was substantially 33

34 completed in August, 2006, would also facilitate transfer of surplus renewable power from Tala hydropower project in Bhutan and other hydro projects in the North-Eastern Region to the power deficit Northern Region. The project was divided into two parts, the sub-stations were financed and executed by POWERGRID, while the transmission lines were financed and executed by Powerlinks - POWERGRID's Joint Venture (JV) with Tata Power. The total cost of the project (including JV portion) was estimated at US$ 552 million of which the POWERGRID portion was US$ 194 million. The scope of the project under POWERGRID's funding included: (a) Gorakhpur (POWERGRID) - Gorakhpur (UPPCL) 400 kv D/C - 92 Ckt. Kms. (b) Lucknow (New) - Unnao 400 kv D/C -152 Ckt. Kms. (c) LILO of Dadri-Ballabhgarh 400 kv D/C line at new S/S in Delhi - 60 Ckt. Kms. (d) 40% Fixed Series Compensation (FSC) and 5% to 15% Thyristor Controlled Series Compensation (TCSC) on each Ckt. of Purnea-Muzaffarpur 400 kv D/C line (e) 40% Fixed Series Compensation (FSC) & 5% to 15% Thyristor Controlled Series Compensation (TCSC) on each Ckt. of Muzaffarpur-Gorakhpur 400 kv D/C line (f) New 400kV substations at Muzaffarpur, Gorakhpur, Lucknow and New Delhi (Gas insulated substation) with the required 400 kv bay extensions; (g) Substation extension at Gorakhpur, Unnao, Bareilly (all UPPCL), Madola, Siliguri, Purnea (all POWERGRID) and Muzaffarpur (BSEB). The transmission link between Tala and Mandola is already completed and the project is operational. The only remaining portion of the project - the new substation at Maharanibagh (New Delhi) - is expected to be completed by end March, With the commissioning of the transmission link from Tala to Mandola, the synchronization of the Northern Grid with Eastern, Western and North-Eastern Grids (already synchronized and together called as Central Grid) was achieved on August 26, With this, the whole country except the Southern Region is now operating at a common frequency. Figure-4 : Control Room at Lucknow Substation 34

35 Component 3: Technical Assistance for Institutional Development This component included financing the following two consulting services of a total cost of US$ 2.5 million: 1. Technical Assistance for Telecom Project: POWERGRID's plan for diversification into telecommunications was technically and economically assessed and recommended by a consultant study. The study envisaged the development of a broadband optic fiber backbone telecommunications networks to cover about 56 major metros and cities in India using the company transmission right-of-ways of the company's transmission lines. The consultants (IVO of Finland) for the study were appointed in July The consultants assessed various policy guidelines announced by GoI, reviewed regulatory framework in telecommunications and electricity sectors and conducted an overall market and SWOT analysis in order to arrive at an appropriate business plan for POWERGRID. Based on the recommendations of the consultants, POWERGRID decided to enter telecom business initially by leasing capacity on its fibre optic network, with a plan to add advanced/ higher value services at the appropriate time. 2. Technical Assistance for ULDC schemes in Eastern & Western regions: Leading international consultants KEMA -ECC provided support to POWERGRID for the design and implementation of the regional dispatch centers for the Eastern and Western regions financed under PSDP-II loan. The major activities undertaken by KEMA included, (a) Evaluation of existing facilities; (b) Development of specifications for EMS/SCADA, communication system, PLCC/PABX and auxiliary power supply packages; (c) Bid evaluation and recommendation for contract award (d) Review of vendor design, acceptance testing procedures and training plans under various packages; (e) Assisting POWERGRID in Factory Acceptance Testing (FAT) of various equipment/systems; and (f) Assistance during project implementation. Component 4: Completion of on-going Bank-financed Projects POWERGRID II loan also provided funding for completion of the balance activities of projects financed by earlier World Bank loans to POWERGRID (namely NRTP (loan no IN) and PSDP-I (loan no IN)). An amount of US$ million and US$ million have been utilized under PSDP-II loan for completion of the following projects financed by these two loans: 1. NRTP loan spill-over projects: Kishenpur-Moga transmission link, Nathpa- Jhakri transmission link and the regional load dispatch center project in Northern region 2. PSDP-I loan spill-over projects: The regional load dispatch center project in Southern region and the consultancy services for the regional load dispatch center 35

36 project in Eastern and Southern regions. Component 5: Additional Investment Projects This component included financing the following additional investment projects included in POWERGRID investment programs: 1. POWERGRID's Diversification into Telecom Business: Under this component, POWERGRID has developed a state-of-the-art commercial telecom network using advanced fibre optic technology connecting major cities in India to provide highly reliable, high-speed connectivity between important Long Distance Charging Areas (LDCAs). This includes links with high volume of Telecom Traffic and also some links in non-remunerative areas. The planned cost of the project was estimated at Rs 9342 million and is expected to be completed by January'07. POWERGRID has completed about 19,500 kilometers of the planned telecommunications network, of which a total of 9218 km was financed by PSDP- II Loan. The scope of work for the project included design, survey, supply and installation, testing and commissioning of: (a) overhead fibre optic cables and accessories; (b) underground fibre optic cables and accessories; (c) Optical transmission system (DWDM and SDH) including optical amplifiers/repeaters; (d) Underground and overhead Fibre Optic access links; (e) Integrated network management system; (f) Auxiliaries equipments; and (g) Test equipment. Figure-5 : National Telecom Control Center at Delhi 2. System Strengthening in Southern Region-III: The PSDP-II loan also financed POWERGRID's investment plan for strengthening the transmission system in Southern region to meet the anticipated peak demand projections of 35,000 MW. The plan is being executed and is expected to be completed within the planned cost of US$ 63 million. 36

37 The scope of the investment for strengthening the transmission system in the Southern region includes: (a) Gooty-Raichur 400 kv double-circuit transmission line km; (b) Neelamangala-Somanahally 400 kv double-circuit transmisson line - 50 km; (c) 400/ 220 kv Somanhally Substation expansion- 2 new 400 kv bays; (d) 400/ 220 kv Gooty Substation expansion - 2 new 400 kv bays; (e) 400/ 220 kv Neelamangla Substation expansion - 2 new 400 kv bays; and (f) 400/ 220 kv Raichur Substation expansion - 2 new 400 kv bays; 3. National load Dispatch Centre (NLDC) : To facilitate synchronous operation of the National Grid and uninhibited bulk exchange of power across the regions through proper coordination and control, a National Load Despatch Center is being established at New Delhi with a back up at ERLDC, Kolkata. The scheme is under implementation and is expected to be completed by May, The balance expenditure under the project would be funded under PSDP-III loan (Loan no IN) as spillover expenditure. Scope of the Project includes: (a) Control Centre to be located at New Delhi and Back up at ERLDC Kolkata. (b) Interface equipments like routers & hub for data acquisition from RLDCs at RLDC and NLDC/ back up NLDC. (c) Communication systems for data, voice and fax between regional tie line stations, RLDCs & NLDC through dedicated wide band networks (FO) with VSAT as back up communication. (d) Auxiliary Power Supply Systems, as required. 37

38 Annex 5. Economic and Financial Analysis (including assumptions in the analysis) ECONOMIC ANALYSIS The investments funded by the Bank under the Project form a part of a time slice of POWERGRID's overall investment program originally envisaged for , but actually implemented for the time slice. At appraisal, the Economic Rate of Return of the entire investment program of POWERGRID was estimated at 17.2% for the time slice, with an NPV of Rs.20,972 million. Using the same methodology used during project appraisal, the revised ERR for the program has been estimated, as shown in Table 1 below, at 13.1%, for the time slice (higher than the 12% hurdle rate), with a positive NPV of Rs. 2,808 million (using 12% discount rate, 2001 prices). Table-1: Economic Analysis of POWERGRID's Investment Program during using revenues from tariff as minimum valuation of benefits (All figures in INR million) Net Year Investment O&M Revenue Benefit (124) (335) (990) (2,197) (3,296) (4,308) (4,153) (8,391) (8,785) (15,401) (7,397) , , , , ,695 NPV at a discount rate of 12% 2,808 IRR 13.1% Assuming Depreciation of 6%, RoE NPV 11,323 of 16% and Cost of Borrowing of 12.5% IRR 15.9% The difference between the ERR calculated at appraisal and the once calculated in the above table is largely due to the methodology adopted, which uses financial revenues from regulated tariff as a minimum valuation of the benefits of the project. The revenues from tariff have reduced since appraisal due to changes in tariff regulations, including (a) 38

39 reduction in rate of return on equity from 16% to 14% per annum, (b) reduction in applicable depreciation rate from 6% to 3% per annum. Further, POWERGRID's average cost of borrowing - a pass-through element in tariff determination - reduced from about 12.5% estimated at the time of appraisal, to about 10% during implementation. Also, due to the shift in investment time slice from to , the underlying investments in the two analyses are also different. Using the earlier tariff regulations (16% return on equity and 6% depreciation), and cost of borrowing (12.5%), the ERR is estimated at 15.9% and the NPV of economic benefits is calculated as Rs.11,323 million. Despite the shortcomings of the above approach, it is seen that the conservative estimate of ERR obtained, is higher than the economic hurdle rate of 12%, and the NPV is positive. To further assess the economic benefits of each component of financed by PSDP-II loan a more detailed approach has been taken in this ICR. The results of such analysis - which used conservative assumptions - found that the ERRs for the Project's components are in the range of 13.6% (for telecom investments) to 49.6% (for East-North-I Interconnector) - well above the hurdle rate of 12% as shown in Table-2 below. In addition, the NPV of each of these components is found to be positive. Table-2: Component-wise ERR based on detailed analysis Component Name ERR A System Coordination and Control for Western 13.6% and Eastern Regions B Inter-regional Transmission Lines i. East-North Interconnector-I 49.6% ii. East-South Interconnector-II 35.8% iii. East-North Interconnector-II 35.8% C Transmission System Strengthening (SR-III) 19.1% D Telecom Investments 13.6% The economic evaluation for each component is summarized in the following subsections: A. System Coordination and Control for Western and Eastern Regions The value of System Coordination and Control component was US$ million, or about 17.7% of the Bank funding. Investments in system coordination and control have resulted in reduction in grid disturbances, improved grid parameters such as frequency and voltage, and improved demand-supply coordination leading to better utilization of existing generation facilities. The investments have also facilitated short-term trading through Open Access to transmission. Since the valuation of other benefits is difficult, only the benefit from reduction in grid disturbances has been used for ICR economic analysis. In the absence of extensive research on economic loss due to grid disturbances in the Indian context (though there are several such studies for developed countries), a conservative estimation of Rs.5.32 per kwh for the cost of unserved energy has been used as a minimum bound for benefits of reduction in outages. 39

40 Key Assumptions Reduction in Grid Disturbances The reliability of grid network in Western and Eastern regions improved significantly between 2001 and 2006, with no major or minor grid outages in 2006 in either of the two regions. The reduction in grid disturbances has been achieved through investments in control and coordination systems. The improvement has also been helped in part by strengthening of transmission systems and the introduction of Availability Based Tariffs (ABT), which encourages grid discipline. Unserved Energy in Event of Grid Failures The estimation of unserved energy in event of grid failures, based on typical load loss information provided by the load dispatch centers, is provided in table-3. The average annual reduction in unserved energy is found to be 165 MU for the two regions taken together. Eastern and Western regions were synchronized in April 2003, and therefore system stability for the two regions should be examined together. Table-3: Estimation of Reduction in Unserved Energy Eastern Region Western Region Units Area Affected Minor Disturbance A state or a part thereof Major Disturbance An entire region Minor Disturbance A state or a part thereof Major Disturbance An entire region Typical Load Loss 2,000 10,000 4,800 24,000 MW Typical Load Restoration Time Hrs Average Loss of Energy Supply MU Average Outages per year before RLDC Investments Nos Average Outages per year after RLDC Investments Nos Reduction in Outages Nos Reduction in Unserved Energy MU Cost of Unserved Energy For industrial and agricultural consumers, estimates of Cost of Unserved Energy used in the ICR analysis are based on TERI study "Cost of Unserved Energy" (Project Report No.98PG42), 2001 prepared for the World Bank and DfID. These estimates are based on 'Willingness to Pay' survey conducted in 1999, which has been adjusted to 2006 prices. For Domestic and Commercial consumers, the prevailing average tariffs have been taken as a minimum economic benefit derived by consumers from supply of power. The weighted average across these major consumer categories that is Rs.5.32 per kwh is used here. For simplicity, other consumer categories such as Public Lighting, Public Water Works, Railway Traction etc together constituting about 12% of the consumption have been excluded from the calculation of the economic benefits of this component. Another indication of the cost of unserved energy is obtained from the prevailing Unscheduled Interchange (UI) rate, which is Rs.5.70 per kwh. Average Cost of Generation The average variable cost of generation has been taken as Rs.0.80 per kwh, which is in line with the variable cost for most thermal power plants in 40

41 India. Results Table-4 provides the ERR calculations for the investments in coordination and control systems in Western and eastern regions. Based solely on a highly conservative estimate of benefits related to reduction in grid disturbances, the ERR is found to be 13.6% higher than the benchmark 12%. Table-4: Calculation of ERR for System Coordination and Control Investments Year Capex Benefit from Net Benefit (million Rs) reduction in (million Rs) outages (million Rs) NPV 2,125 ERR 13.6% B. Inter-regional Transmission Lines The value of this component was US$ million, or about 45% of the Bank funding. The inter-regional transmission lines funded by the Bank under the PSDP-II loan were (i) East- North Interconnector-I, (ii) East-South Interconnector-II, and (iii) High Capacity East-North Interconnector-II. The principal economic benefit from each of these is the availability of additional power in a deficit region (Northern or Southern) from the power surplus Eastern region. Due to the prevailing power shortages in the country (energy shortage of 8.3% and peak shortage of 12.3% in 2006 even under restricted demand), which are likely to continue at least in the medium term, any incremental power made available is either additional or replaces costly gas/liquid-fuel based generation. The economic benefit of the interregional transmission links is therefore calculated as the difference between marginal costs of generation across the two concerned regions. Key Assumptions Marginal Cost of Generation in various regions The marginal cost of generation in the power deficit Northern and Southern regions, where gas and liquid based generation is 41

42 frequently pressed into service is assumed to be Rs.3.62 / kwh, based on the cost of generation of recently commissioned Kawas-I (Rs / kwh) and Gandhar (Rs / kwh) plants. While liquid fuel based generation (costing about Rs.6-8 per kwh) is being pressed into service at present, a conservative gas based generation cost has been considered here. The marginal cost of generation in the Eastern region is assumed to be Rs. 2.0/kWh, based on the cost of power from new coal based generation plants. The annual exchange of power across these links, and the calculation of annual economic benefits from it are provided in Table-5. The exchange for EN-I and ES-II links is based on data for , whereas for EN-II which was commissioned in August 2006, data for September 2006 has been extrapolated. This is a conservative assumption since utilization of EN-II link would increase over the next one year with increase in generation from Tala Hydropower plant. Table-5: Calculation of Annual Economic Benefit from Exchange of Power East East East North-I South-II North-II Units Annual Net Power Exchange * MU Marginal Cost of Power in Receiving Region Rs./kWh Marginal Cost of Power in Source Region Rs./kWh Difference in Marginal Cost of Power Rs./kWh Annual Economic Benefit Rs. crores *Based on present exchanges, likely to increase further in future Results The ERR for the three inter-regional links is found to be much higher than the hurdle rate of 12% in all cases as calculated in Table-6. Year Table-6: Calculation of ERR for Inter-regional Transmission Links East North Interconnector-I East South Interconnector-II East North Interconnector-II Capex O&M Benefit Net Benefit Capex O&M Benefit Net Benefit Capex O&M Benefit Net Benefit

43 % 35.8% 35.8% C. Transmission System Strengthening The project funded investments for the Southern Region Transmission System Strengthening-III scheme. System simulations by POWERGRID revealed that with the expansion of generation load supported by the transmission system, tripping of a certain line (Nagarjunsagar-Raichur) posed a very high risk of collapse of transmission grid in Karnataka due to cascading failures. The risk has been addressed through the Southern region system strengthening scheme-iii. The principal economic benefit of the scheme is therefore reduction in chances of grid disturbances due to tripping of the said line. The economic benefit of the investments has been valued in the ICR economic analysis based on the probability of such a failure occurring, and the consequential loss of power supply valued at the cost of unserved energy. The value of this component was US$ million, or about 5.4% of the Bank funding. Key Assumptions Loss of Energy Supply due to Disturbance in SR Grid from Tripping of Nagarjunsagar- Raichur (NSR) Line The probability of tripping of the NSR line has been assumed to be the same as that for an average line in POWERGRID's transmission network, which stood at 3.52 trippings per line during the year Assuming a restoration time of 12 hours in each case, the expected outage time of this line during the year is 28 hours. Consequent to the tripping of this line, the entire electrical system (parameters such as frequency, voltage, phase etc) in the Karnataka state would start to oscillate, eventually leading to collapse of the state grid. Prompt action by the load dispatch center may arrest the spread of grid failure to the entire region through load shedding. Therefore, the analysis conservatively assumes shedding of 50% of the state load thus preventing collapse of the entire state grid. Time taken for recovery is assumed to be 12 hours. The load shed during this period can only be reconnected once the NSR link is restored. Based on the above, the loss of energy is estimated at 89.4 MU per annum. The valuation of energy loss due to load shedding has been calculated using the Cost of Unserved Energy and Variable Cost of Generation, as estimated in 'Section-A' of this analysis. Results The ERR of the SR-III investments due to the reduction of the chances of line trip and thus load shedding is found to be 19.1%, with an NPV of Rs.595 million As shown in Table 7 below. 43

44 D. Telecom Investments Table-7: Calculation of ERR for Southern Region-III Investments Year Capex Economic Net Benefit (million Rs) Benefit (million Rs) (million Rs) NPV 595 ERR 19.1% The value of this component was US$79 million i.e. about 18% of the Bank funding. Total investments under this sub-project (including funding from other sources) stood at US$211 million. POWERGRID's diversification into telecom was intended to exploit the synergies between transmission and telecom businesses, and the strategic advantages of supporting the telecom network on the existing transmission towers. These synergies/advantages included (i) existing transmission network on which telecom network could be easily superimposed, (ii) process of obtaining right of way for telecom network is eliminated, (iii) faster implementation of overhead network compared to underground cabling, (iv) lower annual recurring costs of overhead network, and (v) communication network requirement related to the Unified Load Dispatch & Communication (ULDC) Schemes. Under the prevailing competition in the telecom markets in India, POWERGRID's telecom services can be replaced by similar services from other players, without any significant price difference. Therefore the economic benefit from these investments is estimated using the market prices for the telecom services provided. The market prices and capacity utilization by POWERGRID have been projected in the future. To evaluate the impact of these assumptions, scenario analysis has been undertaken by varying these assumptions. Key Assumptions Revenue Growth and Additional Capital Expenditure Despite stiff competition and falling prices, POWERGRID has been able to increase its telecom revenues at more than 50% per annum for the last two years. The company expects to maintain this growth trend over the next four years, leveraging the newly acquired National Long Distance (NLD) license and surge in demand for broadband services. After this, the revenue growth is 44

45 assumed to stabilize at 10% from POWERGRID already has a strong optical fiber network in place. Going forward, it would need to augment capacity through addition of terminal equipment, while using the existing optical fiber network which has a useful life of more than 25 years. The additional capital expenditure on terminal equipment is projected at about Rs.200 million each year, increasing to about Rs.400 million per year after 2012 when terminal equipment would have to be replaced each year in phases. Results Despite the reduction in the economic benefits from POWERGRID's telecom investments due to delay in implementation, based on the market valuation of telecom services, the economic rate of return is found to be 13.6% (see table-8). This estimate assumes sustained revenue growth rate of 45% between FY2009 and FY2011, compared to more than 50% over the last two years and also expected in the current year. The estimate does not include additional economic benefits such as network access to remote (and politically sensitive) areas in North-East and Jammu & Kashmir, and high network reliability even in face of natural calamities and digging. To analyze the impact of growth assumptions on the project ERR, a sensitivity analysis has been carried out, as shown in Table-9. It is seen that the ERR is higher than the hurdle rate of 12% in all cases, except when the growth rate between FY2009 and FY2011 is only 35%. POWERGRID finds this scenario unlikely, in view of the current high rate of growth; rapid increase in demand for broadband, NLD telephony services and shift from voice to data; acquisition of NLD license by POWERGRID; strategic tie-ups with internet and telecom service providers; and, an enhanced focus on marketing. Table-8: Calculation of ERR for Telecom Investments (Base Case) Year Capex O&M Revenue Real Net Growth Revenue Benefit (million (million Rs) Rate (million Rs) (million Rs) (Nominal) Rs) FY FY FY FY FY FY % FY % FY % FY % FY % FY % FY % FY % FY % FY % FY % FY %

46 Economic Rate of Return 13.6% Table-9: Sensitivity Analysis Revenue Growth Rate between and ERR 35% 11.2% 40% 12.4% 45% 13.6% 50% 14.8% E. Spillover from earlier projects The Bank also funded the balance works of NRTS (Loan No IN) and PSDP-I (Loan No IN) projects amounting to US$ million (13.6% of loan value) under the PSDP-II loan. However, bulk of these investments was funded under the previous loans and therefore, the ICR economic analysis does not cover them. FINANCIAL ANALYSIS The ICR financial analysis for POWERGRID's investment program during the time slice is provided in Table-10. The FIRR of the investment program which was calculated as 18.4% at appraisal, when the cost of capital for POWERGRID was 13.5%, is now found to 14.9% against a cost of capital of 11.2%. At project completion, the investments continue to be financially sound, with financial rate of return comfortably higher than the cost of capital for the company. Table-10: Financial Analysis of POWERGRID's Investment Program (All figures in INR million ) Net Year Investment O&M Revenue Benefit (105) (293) (896) (2,058) (3,196) (4,323) (4,314) (9,022) (10,117) (18,613) (9,360) (184) ,986 46

47 , , ,157 NPV with Discount rate 11.20% 11,819 IRR 14.9% NPV 12,438 Assuming Depreciation of 6%, RoE of 16% and Cost of Borrowing of 12.5% IRR 18.0% Reasons for Deviation from PAD Estimates: 1. POWERGRID's revenues are dependent on the prevailing tariff regulations which were revised in 2004, whereby the regulated return on equity was reduced from 16% to 14%, while the depreciation rates were reduced from 6% to 3%. 2. POWERGRID's average cost of borrowing reduced from about 12.5% estimated at the time of appraisal, to about 10% during implementation. Since the cost of borrowings is a pass-through component of tariff, this has resulted in a reduction in the company's revenue earnings. 3. Change in Time-Slice of Investments from to , because of which the underlying investments themselves have changed. With original tariff assumptions, an NPV of Rs.12,438 million and FIRR of 18.0% are obtained. The reduction in transmission tariff due to the above factors has ultimately benefited retail electricity consumers, who now enjoy a lower cost of delivered power, and the consequential economic benefits from consumption of power. 47

48 Annex 6. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/Specialty Lending Lennart Carlsson Sr Power Engineer SASEG Asger Christensen Lead Social Development Specia EASSO Mohinder P. Gulati Lead Energy Specialist EASTE Pratima Kochar Resource Management Analyst SARRM Ramon Lopez-Rivera Consultant EASEG Lars C. Lund Sr Social Scientist EASSO Kari J. Nyman Lead Specialist ECSSD Harvey Salgo Consultant ECSIE Vivi Scott Program Assistant SASEG Ritin Singh Senior Telecom Specialist CITPO Rajesh Sinha Senior Financial Analyst SASEI Tjaarda P. Storm Van Leeuwen Lead Fin. Analyst SASEI Samuel Thangaraj Consultant SASPR Sanjay N. Vani Lead Financial Management Spec ECSPS Yaacov Ziv Consultant SASES Supervision/ICR Ian Alexander Consultant FEU Regulation and Policy Sushil Kumar Bahl Sr Procurement Spec. SARPS Procurement Issues Husam Mohamed Beides Sr Power Engineer ECSSD ICR Preparation Mikul Bhatia Research Analist SASEI Finance, Policy and ICR Priya Chopra Program Assistant SASEI Team Assistant Minerva S. Espinosa- Apurada Program Assistant SASEI Team Assistant Mohammed Hasan Senior Social Development Spec SASES Social Safeguards Manoj Jain Sr Financial Management Specia SARFM FM Issues Judith K. Plummer Sr Financial Analyst SASEI Finance and Policy Mantena Satyanarayana Raju Consultant SASEI Technical Issues Sanjay Srivastava Sr Environmental Spec. SASES Environmental Safeguards 48

49 (b) Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD M) 1 06/08/2001 Satisfactory Satisfactory /26/2001 Satisfactory Satisfactory /24/2002 Satisfactory Satisfactory /19/2002 Satisfactory Satisfactory /23/2003 Satisfactory Satisfactory /24/2003 Satisfactory Satisfactory /13/2004 Satisfactory Satisfactory /27/2004 Satisfactory Satisfactory /11/2005 Satisfactory Satisfactory /14/2005 Highly Satisfactory Satisfactory /21/2006 Highly Satisfactory Satisfactory /30/2006 Highly Satisfactory Satisfactory (c) Staff Time and Cost Lending Supervision/ICR Stage of Project Cycle Staff Time and Cost (Bank Budget Only) USD Thousands No. of staff weeks (including travel and consultant costs) FY FY FY FY FY FY FY FY FY FY FY FY FY Total: FY FY FY FY

50 FY FY FY FY FY FY FY FY FY FY Total:

51 Annex 7. Detailed Ratings of Bank and Borrower Performance Bank Ratings Borrower Ratings Ensuring Quality at Entry: Highly Satisfactory Government: Satisfactory Quality of Supervision: Highly Satisfactory Implementing Agency/Agencies: Highly Satisfactory Overall Bank Overall Borrower Highly Satisfactory Performance: Performance: Highly Satisfactory 51

52 Annex 8. Beneficiary Survey Results (if any) 52

53 Annex 9. Stakeholder Workshop Report and Results (if any) 53

54 Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR Comments from POWERGRID / GoI on the Draft ICR Reference in Draft ICR Page No. 9, Point No. 6.3 as under the new Electricity Act 2003, POWERGRID no longer has the mandate to promote private participation in transmission. Page No 10, Point No. 6.5, Component 3, joint ventures with private sector and proposed telecom diversification. Page No. 10, Point No. 6.7.The Midterm Review and Closing Dates were changed to March 2003 and June 30,2006, respectively. Page No. 14, Point No. 7.4, sub-heading - Procurement,...The implementation of the recommendations of the assignment is still awaited. Page No. 16, Point No. 8.2, PDO-1, sub-heading- Institutional Reform Subsequently, under the new Electricity Act of 2003, the mandate for promotion of private participation in transmission is no longer with POWERGRID. Instead, a new policy and regulatory framework based on tariff based competitive bidding has been established. Page No. 17, Point No. 8.2, PDO-3, Paragraph No.3, line No MW line No MW line No MU Page No. 17 Point No. 8.2, PDO-4, Subheading - Private Sector Participation in Transmission POWERGRID's observations Since there is no such mandate mentioned in Electricity Act 2003, this paragraph may be modified. and telecom diversification..the Midterm Review and Closing Dates were changed to September Some of the recommendations as suggested by the expert Committee have already been implemented and the balance would be implemented progressively. The details of recommendations as implemented is given below. Since there is no such mandate mentioned in Electricity Act 2003, this paragraph may be modified. The figures may be corrected to : 4350 MW MW MU Five other joint-ventures.. Bank Team's Response Incorporated Incorporated Incorporated The ICR has been modified to reflect the initiatives taken by POWERGRID Incorporated Incorporated Incorporated 54

55 Three other joint-ventures.. Page No. 26 Annex-1, Sub-heading Revised Project Development Objectives as under the new Electricity Act 2003, POWERGRID no longer has the mandate to promote private participation in transmission. Page No 26 & 27 Annex-1, Sub-heading Revised Project Development Objectives, (a) PDO Indicator(s), Indicator- 1 and Indicator 2. (b) Intermediate Outcome Indicator(s), Indicator 1 and Indicator 2 against Row Date achieved and Column-Actual Value Achieved at Completion or Target Years 06/30/2006 Page No. 26 Annex-1, Sub-heading Revised Project Development Objectives, (a) PDO Indicator(s), Indicator-2, against Row -Value (quantative or Qualitative) and Column-Actual Value Achieved at Completion or Target Years A/cs receivables 0.4 month; Since there is no such mandate mentioned in Electricity Act 2003, this para may be modified. Achieved before 06/30/2006 A/cs receivables 0.24 ( as of November, 2006 ) month; Incorporated The project portal system does not allow text to be added to the date under this field. The date has however been changed to 07/21/2005, consistent with the Appellate Authority becoming functional. The A/cs receivables stood at 0.4 months as of June 2006, when the project came to a close. ================================================================ Note from POWERGRID on Details of Initiatives taken by POWERGRID in the area of Procurement A. Towards transparency and integrity 1. Posting of NITs and bidding documents on its website. 2. Posting particulars of contract awards mentioning therein that in case any bidder who wishes to ascertain the grounds on which its bid was not solicited, should request an explanation from POWERGRID, on the website. 3. Negotiations have been restricted in line with CVC's guidelines and the procurement guidelines of the funding agencies. 4. Interactions are being held with vendors specially called "Interactive Sessions" 55

56 and regular meetings to educate them on POWERGRID' initiative. B. Competition and Efficiency 1. Cost estimation procedure is being spelt out in POWERGRID's Works and Procurement Policy which is current being reviewed by consultants. 2. Preference in bid evaluation is being given only as per Govt. guidelines and guidelines/approval of the funding agency C. Moderninsation Areas for e-procurement are being explored. To start with, besides posting NIT/Bidding document on website, it is being planned to provide the bid data sheets to the bidders on CD. D. Skill Development People handling procurement are being deputed to attend training Programmes, both within POWERGRID as well as reputed outside Institutes viz Indian Institute of Management and Administrative staff College of India on regular basis to develop & sharpen the skills. 56

57 Annex 11. Comments of Cofinanciers and Other Partners/Stakeholders 57

58 Annex 12. List of Supporting Documents Project Completion Report for Unified Load Despatch & Communication Scheme in Eastern Region (ULDC-ER) Project Completion Report for Unified Load Despatch & Communication Scheme in Western Region (ULDC-WR) Project Completion Report for East North Interconnector I (Sasaram) Project Completion Report for East-South Inteconnector-II (Talcher II) Report on POWERGRID Diversification into Telecom (PDT) Project Completion Report Prepared by POWERGRID Financial and Economic Analysis at Project Completion 58

59 Annex 13. Additional Annexes 13.1 Environmental and Social Management at POWERGRID POWERGRID has taken pro-active approach to sustainable development and developed a comprehensive Environmental Social Policy & Procedures (ESPP) in April'98 for the World Bank funded project PSDP I. As part of PSDP II, the ESPP was strengthened, modified and broadened after consultations with stakeholder communities, Ministry of Power, Ministry of Environment and Forests, CEA, State Electricity Boards, academia, NGOs and other multilateral funding agencies. The ESPP is based on the principles of Avoidance, Minimization and Mitigation and outlines POWERGRID's commitment to deal with environmental and social issues relating to its transmission projects, and lays out management procedures and protocol to address them. The ESPP is being implemented in all POWERGRID's projects regardless of funding sources. Public Consultation on the Environment and Social Policy and Procedures (ESPP) In addition, POWERGRID has taken several steps towards avoiding, minimizing or mitigating environmental and social impact of projects, as described below: ENVIRONMENTAL MANAGEMENT Use of technology for environmental conservation. POWERGRID adopted use of multi circuit, ± 600 kv/ ± 800 kv HVDC to minimize right of way in transferring power from natural resource rich North-Eastern/ Eastern region to far away load centres at Northern and Western regions. It has adopted sophisticated technologies such as Geographical Information System (GIS) and satellite imagery for transmission line survey, substation, automation, etc. POWERGRID has upgraded existing 220 kv lines with multi-circuit towers to carry both 220kV and 400kV lines within the existing corridor in protected sanctuary/forest areas. It 59

60 has also reduced the involvement of forests in its projects - about 6% of total 27,000 Ckt. Km. line till 1998, which has come down to 2% with proactive and systematic approach in 20,500 ckt. Km. line constructed during last 6 years. To achieve this, in some cases line length had to be increased to avoid forest areas and extended towers had to be used to limit the tree felling. Compensatory Afforestation has been undertaken through Forest Department involving plantation over twice the area affected by any project. POWERGRID have contributed about US $ 50 million (Rs. 220 Crores) to different State forest authorities towards afforestation on more than 20,000 hectare of land over the last decade. Efforts would be needed, however, to verify the efficient use of CA money by Forest department and results on the ground. Plantations in sub-stations have been undertaken and about 2 to 4 acre of land is being afforested with suitable species of plants in consultation with local forest department in almost each commissioned sub station. A separate fund is also earmarked for this specific purpose. Although it is not a mandatory obligation required for clearance of project/sub-station site. Plantations at Substations Land management at sub station POWERGRID has tried to minimize the land requirement for sub-stations to the barest minimum. Generally 15 to 20 hectare of land is required for constructing a substation depending upon the type and voltage level. As a priority, POWERGRID tries to locate sub station on Government land as far as possible. CFC Free. A policy decision as per the requirement of Climate Change treaty has helped in making all the offices and other installation CFC free. In this direction decision has been taken to phase out existing equipments having CFC as well as procure only CFC free equipment to achieve the goal of completely CFC free 60

61 organization in near future. Rain Water Collection & Harvesting has now become inherent part of design of in POWERGRID's Sub-stations depending upon water table around in the area. These have been done in Kolar, Hosur, Bhiwadi, Mopusa etc. It has been observed that water table has risen up 0.5 to 1 meter in most places. Adoption of innovative tower design like multi-circuit and very tall towers to protect wildlife, trees in ecologically sensitive (In Tehri transmission line tree felling is reduced to against earlier estimated trees in Rajaji National Park due to placing of 85 m high towers) areas and providing financial assistance to State Government/ Institutions for conservation of flora and fauna. Old Tower Design New Tower Design Innovative Tower Design to Protect Forests Eliminating risks of Poly Chlorinated Biphenyls (PCBs) a known carcinogen has potential to be found in transformers and capacitors. POWERGRID, in association with NGC, UK has setup a Regional testing laboratories for PCB traces in oil, and ensures that all its equipment are free of PCBs. In order to demonstrate its corporate social responsibility, POWERGRID had demonstrated its capabilities in restoring the transmission with the help of Emergency Restoration System (ERS) and substation of other utilities as well. Notable among these are restoration works undertaken after the super cyclone that had ransacked Gujarat and Orissa Coast in June'98 and Oct.'99. POWERGRID has adopted an Integrated Management System for management of environmental; health; safety and quality aspects of its operation. These Internationally accredited Management System are certified by a third party and 61

62 include ISO for Environment Management, for Occupational Health & Safety and ISO 9001 for Quality management. The experience of implementation is slowly starting to show good results by improving communication, shared understanding; and strengthening of monitoring and supervision of environmental measures. Establishment of an independent Environmental Committee comprising of eminent citizens and subject experts in environment, wildlife, forestry issues reporting directly to the Chairman and responsible to oversee implementation of Environmental and Social Policy Procedures (ESPP) including advice on best practices Augmentation/Development of Common Property Resources (CPR): 3 Ponds have been developed at Sasaram in the Beniapokhar, Sadhu & Mosmat villages. SOCIAL MANAGEMENT Compensating losses: PDSP II which envisaged development of 7 grid substations (GSS) neither involved any physical displacement of local inhabitants not had any adverse impacts on the tribal communities. Of the 7 GSS, 2 did not involve any land acquisition (LA). In the remaining 5 GSS, planning and implementation of LA and resettlement plans (RAP), including payment of compensation and rehabilitation assistance (RA) to the project affected people (PAP), have been completed. Since LA is the responsibility of the District Administration (DA), RAP implementation faced problems, particularly in areas when there was inadequate coordination between DA and POWERGRID. While in most cases PAPs preferred receiving RA in cash, in a number of cases POWERGRID helped PAPs through land-for-land, allotting shops, involving local banks to help PAPs in taking up self employment/income generation activities, awarding petty contracts, etc. Community development programs (CDP): Besides LA and RA, the RAP includes CDP mainly to help improve the socio-economic development of the population in the vicinity of the project area. CDP activities that are planned and implemented with the active involvement of local communities included: civic infrastructure development (including roads, drinking water schemes, drains, street lighting, improving/constructing school and community buildings, etc.) in most of the project areas; economic infrastructure (like irrigation scheme in Sasaram GSS, milk chilling plant in Kolar GSS); community activities (like health camps, environmental awareness); and skill development to improve the economic earning. CDP activities helped in improving the relationship between the local people and POWERGRID project staff. Making public consultation an inherent part of business. More than 350 Public consultations have taken place after implementation of ESPP (98) en-route lines and Sub-stations. Glimpses of some are depicted below. Apart from these video with voice recording has also been captured and records available. 62

63 Public Consultations Grievance redressal mechanism: An Expert Committee on social aspects consisting of eminent social experts constituted by POWERGRID to over see implementation of social management plans serves as one level of redressing grievances faced by PAPs and local people. The visit of this committee helps to improve implementation of RAP and CDP at the sub-project level. Impact evaluation: POWERGRID undertook impact evaluation of RAP implementation through external agencies. So far, impact evaluation in respect of three RAPs relating to Sasaram, Hosur and Kolar has been completed. These evaluations reveal that by and large RAP implementation has been satisfactory and in most cases the socio-economic conditions of PAPs improved over the preproject level. Experience sharing: To improve the capacity of the project staff to address social issues, consultative cum review meetings are held with Nodal officers from all projects. This helps both Corporate and Regional Offices to better appreciate the social issues, improve effective implementation of social management plans and address any implementation problems. Recognizing social responsibility, POWERGRID organizes regular health camp and blood donation camp for free medical check-up of villagers and free medicines, in collaboration with leading medical institutes. Apart from this women organization of POWERGRID also organizes various welfare camp for the welfare of communities by providing vocational training and distribution of articles like sewing machines, cycles etc. Vocational Support and Health Camps 63